Chapter 9: Circular Economy PDF

Chapter 9: Circular Economy Sustainable Business Management Introduction – The case for a circular economy • There are different reasons why we need to transform from a linear to a circular economy 1. Finite nature and increasing scarcity of non-renewable resources • The earth is running out of r...

Chapter 9: Circular Economy Sustainable Business Management Introduction – The case for a circular economy • There are different reasons why we need to transform from a linear to a circular economy 1. Finite nature and increasing scarcity of non-renewable resources • The earth is running out of resources • We already use 1,7 earth per year (and in 10 years, this will be 2 earths) • We need to distinguish between renewable and non-renewable resources • Renewable resources can be replenished in a person’s lifetime: wind, water, animals,… • Non-renewable resources cannot be replenished in a person’s lifetime: gas, coal, minerals… • Demand for non-renewables has increased with 450% over the last seventy years • We will run out of precious resources in the next 50-100 years Sustainable Business Management Introduction – The case for a circular economy Sustainable Business Management Introduction – The case for a circular economy 2. Increasing stress on renewables • We are not only depleting non-renewables but also putting a stress on renewables • The amount of fresh water is diminishing • This will lead to a stress on other renewables, mainly food • Overfishing has led to a decrease of fish in the sea 3. Transgression of key planetary boundaries • Most of the planetary boundaries have to do with resource depletion or waste disposal • Most of the planetary boundaries are (close to being) overstepped today Sustainable Business Management Introduction – The case for a circular economy 4. The linear model generates a massive volume of waste • Mass production and mass consumption leads to high volumes of waste because replacing has become cheaper than repairing • Convenience has also led to individual packaging • Municipal waste is expected to increase with 75%, industrial waste with 35% in the next decade • Waste leads to a high loss of value • Food waste, precious metals • Waste leads to a loss of 1trillion dollars a year • Recycling is a solution valid under old assumptions, truly innovative would be to come up with solutions that avoid waste • Recycling still costs a lot of money (= lost value) Sustainable Business Management Introduction – The case for a circular economy 5. The pressure on resources leads to pressure on the households • For businesses, the scarcity of resources means that they become more expensive or unavailable which leads to higher production costs or unstable production • Prices will increase, affecting the buying power of the households • Scarcity leads to inequality Sustainable Business Management Introduction – Definition of circular economy • Circular economy vs. Linear economy • Circular economy is based on the natural cycle of life A circular economy aims to redefine growth, focusing on positive society-wide benefits. It entails gradually decoupling economic activity from the consumption of finite resources and designing waste out of the system. Underpinned by a transition to renewable energy sources, the circular model builds economic, natural and social capital. It is based on three principles: • Design out waste and pollution. • Keep products and materials in use. • Regenerate natural systems. Sustainable Business Management Introduction – Definition of circular economy • Linear economy • Business models are built around maximising sales • Minimal interaction between customer and business • Decoupling between company that sells the product and the one that manages the waste Sustainable Business Management Introduction – Definition of circular economy • Circular economy • Resources stay in the cycle forever • Production and distribution are handled differently to avoid waste or loss of resources • When the lifecycle of a product ends, the producer will repair or re-use the product • Producer is responsible for the entire lifecycle • More interaction with the customer • Investment in service and maintenance • Business model will have to change Sustainable Business Management Introduction – Cradle-to-grave vs. Cradle-to-cradle Cradle-to-grave • Linear economy • Cheap and abundant resources • Ever-increasing throughput of goods • Environmental impact unaccounted for • No attention for waste and end-of-life Cradle-to-cradle • Circular economy • Biological renewable materials (return to the biosphere) and technical materials that will go back and forth between production and consumption with minimal value loss • Value creation in the whole value chain • Focus on waste and end-of-life Sustainable Business Management Introduction – The principles of circular economy • Materials cycles: materials are recollected and recycled to achieve the highest utility possible. • Renewable energy: fossil fuel consumption is replaced by the use of renewable energy sources. • Water management: water is extracted in a sustainable way and is returned to the biosphere as much as possible. • Biodiversity: biodiversity is supported and maintained throughout the design and production process. • Social value: the circular economy maximises social and cultural value. • Health: the health and well-being of humans and all living species are guaranteed. • Shared value creation: the circular economy creates value beyond financial value Sustainable Business Management Introduction – Transformation from linear to circular? • How easy is a transformation from linear to circular? • We cannot simply adapt the linear economy to become more circular • In an adapted version, we would still need too many resources • A need to rethink production processes and start of a new R&D cycle for most products • Business model needs to change • Adapting the linear model would still produce a lot of waste • Fundamental change is needed! Sustainable Business Management The true potential of circular economy 1. More efficient use of resources • Circular economy will also lead to cost savings for companies • Initial investment is quite high • Increased effeciency will not lead to more production for the same cost • Value creation should be the main driver 2. True value is created on the demand side • • • • Value will need to be created in new ways Huge potential for social and ecological value True connection with the customer Loyalty will increase Sustainable Business Management The true potential of circular economy 3. Sustainability is no longer a trade-off • Today the customer often needs to compromise when buying sustainable products • In a circular model, products will be of the highest quality • Products will be more expensive but will last a lot longer 4. Digitalisation makes the circular economy easier • Digitalisation will help companies to make the transition faster Sustainable Business Management The true potential of circular economy Sustainable Business Management Circular solutions – Circular frameworks • Transformation to circular economy needs to happen across the value chain • Legal framework is necessary: EU and local governments are setting up rules and regulations • Standards need to be created • • • • • Cradle-to-cradle certification Designing cricular buildings Biowaste Data-driven circularity Packaging Sustainable Business Management Circular solutions – Circular frameworks • Cradle-to-cradle certification • Certify designs for a circular model so that partners know that the products are really circular • Certfication is based on 3 principles 1. 2. 3. Eliminate the concept of waste: use as many biodegradable components as possible and recover any materials that are not for reuse. Next to the regular concept of waste, pollution is also seen as waste and should be avoided: water use should be managed and CO2-emission should be avoided Use renewable energy: as already mentioned before, there is huge potential in replacing fossil fuel sources by renewable energy sources such as water, wind, solar, biomass and geothermal energy sources Celebrate diversity: when applying the principles of cradle-to-cradle design, try to create as much ecological and social value as possible. Sustainable Business Management Circular solutions – Circular frameworks • Cradle-to-cradle certification • There are 5 categories that are evaluated: • • • • • Material Health Product Circularity Clean Air and Climate Protection Water and Soil Stewardship Social Fairness Sustainable Business Management Circular solutions – Circular frameworks • Designing Circular Buildings • Engineering and consruction are the world’s largest consumers of raw materials, design of the buildings has a big impact on energy use afterwards • Designing circular buildings in new projects and renovations • DGBC (Dutch Green Building Council) • Developed a standard for circular buildings • 7 key points: 1. 2. 3. 4. 5. 6. 7. Prioritise regenerative resources Preserve and extend what is already been made Use waste as a resource Rethink the business model Design for the future Incorporate digital technology Collaborate to create joint value Sustainable Business Management Circular solutions – Circular frameworks • The circular potential of biowaste • Waste of food and organic materials is a big part of the waste problem • Reusing these resources creates great potential for circularity • Renescience • Converts household waste to energy • Collects the waste and burns it to create energy • CO2 neutral because the release of CO2 is equal to the absorption of CO2 during growth • More on this in chapter 10 Sustainable Business Management Circular solutions – Circular frameworks • Data-driven circularity • Digitalisation can also support circularity • Collection and processing data from sensors and material flows can provide insight in energy use and waste disposal • Better documented products can facilitate re-use and recycling • Maersk triple-E • Every component in the new vessels of Maersk has a digital materials passport containing all information on the material • Waste is reduced • Dependency on suppliers of materials is reduced Sustainable Business Management Circular solutions – Circular frameworks • Circular strategies for packaging • Plastic is the most used form of packaging which leads to a great amount of resources that is needed and a great amount of waste that is created • New plastics economy – Ellen McArthur Foundation • An initiative to eliminate plastics we don’t need, innovate to create reusable plastics and circulate the plastics created • The initiative relies on 5 targets 1. 2. 3. 4. 5. Eliminate unnecessary and problematic plastic packaging through redesign and innovation. Move from single-use to reuse. Ensure all plastic packaging is reusable, recyclable or compostable. Increase the reuse, collection and recycling or composting of plastic packaging. Increase recycled content in plastic packaging. Sustainable Business Management Circular solutions – Business Models for circular economy Sustainable Business Management Circular supply-chain - Definition • At its core, the circular Supply-Chain business models offers access to fully renewable, recyclable or biodegradable inputs as substitutes for linear ones. For example: • Renewable energy • Bioplastics or biochemicals • Metals that can be infinitely reused without quality loss • It’s not about minimizing bad materials but doing right from the start! • All materials must be non-toxic to realize the circular economy’s goals Sustainable Business Management Circular supply-chain - Economical advantages • A provider that adopts a circular supply chain will be • More predictable • Long-term • Cost-effective • This means that customers will reduce risk, ensure long-term supply and secure stable pricing • A large majority of consumers would choose a sustainable alternative if it is comparable to a traditional one in price and quality Sustainable Business Management Circular supply-chain - Variations • There exist 2 variations of the business model 1. Companies develop circular supplies for others to use to produce goods and services • Example: Stonecycling creates bricks from waste 2. Companies develop circular supplies for others and themselves, therefor creating partnerships in their value chain • Example: H&M collects used textile to recycle and reuse in their production and in other industries (automotive) Sustainable Business Management Circular supply-chain: Challenges • Long research and development cycles and major capital is needed to get production at scale • Collaboration with R&D institutes or universities • High costs are involved when changing linear production lines • Reuse of existing infrastructure • Centralized production makes it more difficult to be fully circular • Suppliers of circular resources are still limited • Make sure the design of the product really allows circularity Sustainable Business Management Recovery and Recycling - Definition • Within the recovery and recycling model, a company looks for value not just when considering its end product, but all material streams that run through its business. In other words, every by-product and waste stream is optimized to maximize its revenue potential. • Waste is revived for other uses • Eliminating not only waste but also the concept of waste • Recycling and upcycling Sustainable Business Management Recovery and Recycling - Definition • Upcycling: converting an old product of material into something more valuable • Two-way supply chain: moving goods to customers and bringing end-of-life goods back • Methods • Industrial symbiosis • Closed loop recycling • Cradle-to-cradle designs • Next step: not just waste management but making waste obsolete Sustainable Business Management Recovery and Recycling – Economical advantages • Reduced costs of compliance and waste management • Increased revenue from selling unwanted outputs • Diminished environmental impact • Convenient options for customers to dispose of unwanted products • Lower costs for materials • Better insight in waste that can be used in the design and product development Sustainable Business Management Recovery and Recycling - Variations • There exist 2 variations of the business model 1. Recovering end-of-life products to recapture value in closed loops (a company’s own products) or open loops (any company’s products) • Example: Ricoh collects used cartridges and replaced parts to disassemble them for reuse 2. Recovering waste and by-products from a company’s own production process and operations to recapture value • Example: P&G created over $1 billion in value by operating on a zero-waste basis Sustainable Business Management Recovery and Recycling - Challenges • The quality of recovered resources needs to be maintained • Paper vs metal • The company needs to ensure ownership of the resources • Control of the return flow • Taking back products is much easier in B2B than in B2C • Suppliers have contracts with their customers which can include return policies • The taking back process must be efficient and low-cost • Transition from waste removal to partnerships (ecosystems) Sustainable Business Management Product life-extension - Definition • The product life-extension business model lengthens products’ useful lifecycle by generating revenue through longevity instead of volume • Instead of focusing on volume and new models, the goal is to have products that last for as long as possible • Typically, the upfront cost would usually be higher as less revenue comes from replacing the product • The revenue model needs to be changed • Example: Kindle – get revenue from the digital content instead of the hardware Sustainable Business Management Product life-extension - definition • 6 activities that can increase the value and utility of products 1. 2. 3. 4. Build to last: create high quality, extremely durable products Refurbish: restoring used products to their original Take back/trade in/buy back to remarket: collecting pre-owned goods to resell Upgrade: adding new features, functionality or fashion instead of replacing the core product 5. Refill: replacing a function that is depleted more quickly than the product itself 6. Repair: fixing a product that’s broken Sustainable Business Management Product life-extension – economical advantages • Less use of resources • Less waste • Partnership with the customer deepens • More customer loyalty and satisfaction Sustainable Business Management Product life-extension - Challenges • Moving from a product-oriented to product-and-customer oriented company • Create an effective network of field service partners • Set up a decentralized community of buyers and sellers • Field service providers need to be both technology leaders and provide topnotch customer experience • Not all products and situations are suited for this model • Works best with products that have a life cycle over 5 years • Works best in B2B context Sustainable Business Management The sharing platform - Definition • The sharing platform business model provides a platform to connect product owners with individuals or organizations that would like to use them. Rather than accepting that products sit idle, the platform boosts their productivity by allowing co-access or co-ownership. • Multiple customers use the same resource so the demand for manufacturing is reduced • Customers have access to thousands of products at various price points and locations Sustainable Business Management The sharing platform - Definition • Differences sharing platform and sharing economy? • Sharing economy focuses on human relations including sharing skills and financial assets • Circular economy (and the sharing platform) focuses on production and consumption relations and underutilization that has an impact on natural resource use • Example: a car-sharing platform can be part of the sharing economy but depending on the materials and energy used, can or cannot be part of a circular economy Sustainable Business Management The sharing platform - Definition • The revenue is generated by matching supply and demand for idle resource capacity • Charging a percentage fee over all transactions that happen on the platform • For example: FLOOW2 • Selling user data, using analytics to market complementary products or supplying insurance • Sharing is not new, what’s new is the digital technology that supports it Sustainable Business Management The sharing platform – Economical advantages • Sharing reduces the need for manufacturing, thus reduces resource use and waste • Efficient use of assets: generate revenue from assets that would sit idle • The service itself has often an environmental advantage: sharing rides means less cars on the road • Convenience for the customers: bikes and steps in the city • Cheaper access to products: customers do not need to own/rent products • Tailored experiences are easier to provide as the offer is so big Sustainable Business Management The sharing platform - Challenges • A sharing platform requires trust so insurance is a must for many platforms • The perception exists that a sharing platform needs to have an altruistic motive • Working conditions need to be addressed • Example Uber • There are fears that the sharing economy is threatening the regular economy • Taxes paid are differently • No unions • When the manufacturers go out of business, what will we share? Sustainable Business Management Product as a service (PaaS) - Definition • In the PaaS business model, companies offer the physical product and services to maintain a product’s use through design, use and maintenance, reuse, manufacture and recycling. All is done in close collaboration with the customer, who becomes more of a user of the service as opposed to a consumer of the product. • Customers do not want the product but the end result • They don’t need a car but mobility • They don’t need light bulbs but cost-efficient lighting Sustainable Business Management Product as a service (PaaS) - Variations • Pay for use: customers by output rather than a product and pay based on metrics (miles driven, hours used,..) • Leasing: Customers buy contractual rights to use a product over a longer time, typically with exclusive access • Rental: Customers buy the rights to use a product for a short time • Performance agreement: Customers buy a pre-defined service and quality level and companies commit to guaranteeing a specific result. For example: “a healthy indoor climate” Sustainable Business Management Product as a service (PaaS) – Economical advantages • Lower risks for the customers • Cost savings for the customers when the product is only needed for a limited time • Cheaper access to the latest model • Performance improvement when the supplier guarantees uptime, availability,… • Many users can use the same product (Spotify, Netflix,…) Sustainable Business Management Product as a service (PaaS) - Challenges • When the product is not fully digitalized, the company will need an efficient network to provide the product and help the customers when needed • It is important to keep an up-to-date status on the location and condition of all products • When products are taken back, they need to be checked and repaired if needed • Convince the customer that cost of ownership is higher than cost of the PaaS arrangement • Contract management is important • Big investment up-front Sustainable Business Management Case: MUD Jeans (p.286-287) • Which of the five business models is relevant for MUD Jeans? • Take a look at the website of MUD Jeans, do they support all seven pillars of the circular economy? • Do you think that there are additional opportunities for MUD Jeans to become even more circular? Sustainable Business Management Case: De Clique (p.287-288) • Which of the five business models is relevant for De Clique? • How could De Clique deal with the challenges they meet in their line of business? • What would be the prerequisites for a business and yourself to use the services of De Clique? Sustainable Business Management