One step towards Sustainable Future – The Circular Business Model

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Yesterday evening, I was listening to the news about temperature records, the gulf Mexico fire, and the rise of the delta variant. Like many of us, I wonder what we can do to change. Yet, as the global population increases and the demand for raw materials expands exponentially, the supplies are decreasing, and the planet is warming us about the limits of our linear model.

For that purpose, we have to move towards a “humanity model” of lifestyle in which we progressively eliminate waste. So I decided to pin my pen again and continue sharing this movement towards the circular economy.

There are many alternatives to driving this “humanity” transformation; let’s focus today on the “circular business.” This model articulates how an organization creates, captures, and delivers value to a broader range of stakeholders while minimizing ecological and social costs. Unlike the circular business model, the linear model is based on a logic where organizations take natural resources and create products for consumers that eventually become waste.

There are three fundamental principles of circular business model contributing to a circular economy:

  1. Regenerate the natural systems
  2. Ensure materials and products are in use
  3. Design elimination of waste and pollution

Keeping the planet healthy

While industrial and residential progression will continue for the years to come, there has to be a solution that breaks free of such destructive industrial practices. A circular economy model shifts the dependency from high sales volumes and fast-paced consumption towards the regeneration of products and waste reduction.

The shift is set to eventually impact every industry and organization, posing a major challenge for start-ups and incumbents. They will have to develop new strategies contingent on circular business models that are financially feasible, ecologically safe, and sustainable.

A healthy ecosystem with a strong and sustainable economy is enabled by smart use of resources allowing us to enjoy a prosperous life. And here’s why we need a circular economy for our planet.

1.     Consumption of resources is increasing exponentially

It needs no saying that the global population is set to multiply fast and is forecasted to exceed approximately nine billion by 2050. As a result of this expansion, the supply of raw materials cannot meet the growing demand. Essential resources like food, water, shelter, clothes, electrical goods, to name a few, are needed in massive amounts as the years go by. Unfortunately, the world is currently facing a shortage.

2.     The environment is at risk

With the advancement in development picking up pace worldwide, the construction of cars, trains, and planes is simultaneously increasing. Consequently, there is a huge surge in demand for fuel extraction like diesel, petrol, and kerosene. This extraction and consumption of natural resources have harmed the environment as an increase in carbon emissions takes a toll on global warming. Not to mention other industries that are following the same path.

How can we reinvent our existing business models into circular economy business models?

The path is not easy, and it requires a lot of focus and collaboration. Let’s start with two strategies to carry out the transformation of your organization’s business model. We’ll first discuss an innovation strategy addressing the extent to which circularity of the economy is achieved with internal or external stakeholders. Next up is the resource strategy tackling how companies deploy circularity by narrowing, slowing, or closing down the resource loops.

A healthy combination of both is used to design competitive circular business models. Let’s explore in detail.

Innovation strategy for circular economy

It is important to remember that corporate innovation is not something “out-of-the-box.” It takes on a different approach for every organization.  In developed business models, the innovation strategy refers to the division between “closed” and “open” innovation.

In a closed innovation, the corporation relies on the internal reserve of resources. The entire innovation process takes place exclusively within the company, from idea generation to development and marketing. A closed innovation strategy concerning the circular business model is about organizing circular principles within the firm’s boundaries. For example, the reuse and improvement in the quality of the internal resources increase their lifespan. Similarly, a good example of closed innovation is a company-driven initiative encouraging customers to return used products, benefiting from monitoring resource efficiency, reuse, and recycling. The firm also directly reaps economic benefits from such initiatives.

Open innovation is where an organization relies on external and internal sources to invent. Besides using resources from within their organization such as staff or R&D, large corporations leverage other companies’ external help as start-ups, partnerships, published patents, competitors, and the public.

On the other hand, open innovation strategy refers to connecting with external partners and user communities to boost the circularity of the business model. For example, selling firms’ products in second-hand markets such as vintage and engaging with communities and respective platforms is an open innovation strategy. Some prominent benefits of open innovation include rapid scale-up of material reuse and new ways to utilize excess resources at other platforms.

While that was about it for innovation strategy, let’s come next to the second strategy advocating for a circular economy.

Resource strategy for circular economy

When a company aligns its environmental goals with a circular business model, it aims to incorporate resources strategy on the go. There are three ways of dealing with the right circularity strategic approach: narrowing, slowing, and closing resources, as explained in the paper written by Nancy Bocken and Paavo Ritala.

1. Narrowing – saving costs and resources

Narrowing resource strategy involves creating value with different types of innovations by saving resources and costs within the company’s boundaries. It is typically one of the most common industry practices nowadays. Organizations capture value by direct cost savings and contributing the savings to the symbolic aspects of the customer value proposition.

The focus is to save cost and resources; several opportunities enable environmentally sustainable products and processes integrated into the business models, including using combined heat and power to recover and reduce energy use—direct reusing of manufacturing waste or scraps within the factory’s boundaries. Moreover, light-weighting and reducing material used per product further supports environmental sustainability with narrowed strategizing.  It includes examples as reducing packaging, minimizing the use of some materials, or replacing technology with cleaner options.

2. Slowing – creating lasting value with less

The slowing resource strategy is to create more value from lesser resources by focusing on lasting designs and developed services. The value propositions of this strategy revolve around high-quality offerings, increased customer satisfaction, and increased customer loyalty. Companies exhibit quality leadership to capture value, for example, developing long-lasting products, offering customer warranties and repair or maintenance services.

As evident, multiple brands nowadays selling anything from outdoor gear to cookware, socks, or furniture offer some lifetime warranty to extend the lifetime of their products and slow down the loop.  A good example is an H&M collaboration on the second-hand clothes market or Patagonia offering repair services.

3. Closing – narrowing post-consumer recovered products

Albeit similar to the narrowing category of the strategy, “closing” creates value by efficiency and cost-saving of post-consumer recovered materials. For example, any company with a business model allowing recovery of the materials and fully closing the loop after a consumer or another business has used the offering is working with the closed-closing category.

The MUD Jeans brand is a good example of this strategy. It offers a leasing and take-back model for the jeans to recover and reuse the materials for a new pair of jeans or another clothing article.

Are there any bigger opportunities?

According to analysis, an estimated $4.5 trillion in economic growth can be achieved by 2030 if companies switch from a linear economy to a circular economy business model. Organizations making the reposition can expect to enjoy better stability and efficiency among their competitive supply chains. But overall, this is about “humanity” and the legacy for future generations.

We might have discussed different strategies to adopt a circular business model. However, it is yet quite vague as to what strategic choices the organizations must make to seek a feasible business circularity in the value proposition, value capture, value creation, and delivery.

The circular business model is the next big thing of the future. It improves resource consumption in a financially and environmentally feasible method. Moreover, it works out a lasting solution to the global ecological crisis that meets the growing demands of the present day.

So, what ways have you devised to achieve circularity in your business model?

Download free “8 Reasons to Adopt Circular Economy” In this eBook, you will get an inside overview of the circular economy principles and its outstanding benefits. 

Notes

Previous articles of the circular economy series:

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