8 ways the Circular Economy outperforms traditional business models

History has a way of repeating itself. In recent years, ‘born-digital’ start-ups have disrupted legacy organisations with traditional brick-and-mortar business models. Those legacy firms able to adopt new digital business models survived. Those that didn’t, faded away.

Now it’s about to happen again, this time with ‘born-circular’ companies and their new competitive business models.

Novel organisations are emerging with ‘circular economy’ business models that threaten to erode the market positions of traditional businesses operating with older models. As we saw with the digital revolution, those legacy businesses that can adopt the new business models—this time, models based on a circular economy—will survive. Those that cannot, will fade away.

What’s more, this is happening quickly. By as soon as 2030, if your business model isn’t circular, you won’t be competitive. 

8 superior elements

A circular economy represents a stark challenge to the more traditional ‘linear’ economy. There, business models are designed around products that are made, used and then discarded. By contrast, a truly circular economy creates a virtuous circle around use.

This includes attractive business models for making, returns, repairs and refurbish, re-use and recycling. (For more, see the first blog post in this series, The Circular Economy: What is it is, why it matters, and how it can help your organisation.)

Circular business models will outperform traditional ‘linear’ models in 8 important areas:

• More attractive products: With circular business models, waste becomes an asset rather than a liability to discard. Renewable and recyclable inputs become essential parts of production, lowering or even eliminating waste, pollution and biodiversity loss. And as customers and governments increasingly view waste as unacceptable, climate-friendly products will gain their support.
• Greater customer intimacy: Circular organisations will offer Product-as-a-Service, in which a customer pays for the use of a service over a limited time. The provider maintains ownership of the product and remains incentivized for the product’s ongoing maintenance, durability, upgrade, and treatment at the end of its use.

The sharing economy maximises how idle assets are used across a community while providing customers with affordable and convenient access to products and services. These two circular business models, together with new recovery models, will offer more customer touchpoints, including during repairs, returns and upgrades. The increased intimacy enables a consistent dialogue that helps providers understand customer usage patterns and perceptions.

• Lower costs: Circular products are designed to be reused, repaired or refurbished—often to similar or better quality than the original—then ultimately disassembled. Similarly, circular components are designed to be reconditioned, remanufactured and ultimately recycled. As a result, materials and components will cost less, and the desired service from the product will cost less due to the increased utilisation of each product

For example, Sweden-based bearings supplier SKF now offers Oil as a Service with its RecondOil offering. SKF uses an approach known as Double Separation Technology (DST) to remove even the smallest contaminants from oil. This allows oil to be cleaned and reused. Oil as a Service requires no downtime and also use high-quality oil. In the past, seven years of production would typically require 30 oil shifts with the accompanying loss of production time. Now, with Oil as a Service, that same seven years can be completed with no additional oil or logistic costs, and no lost production time.

• Recurrent income sources: Circular business models involve recurrent selling not only in the Product as a Service and sharing-economy business models products, but also the recovered components and materials. These generate income every time they’re resold. Related services like repairs, redistribution and refurbishment also bring recurrent income. Waste and by-products can be treated as assets, too.
  
• Greater resilience: Once a circular product is no longer functional in its current application, the product’s embedded components, materials, energy and other resources can be recovered. In fact, in a circular product, they’ve been designed this way. Also, users are incentivised to return the products, either by paying deposits or by the terms in their Product-as-Service contracts. Organisations that control their production input by recovering components and recycling their materials (rather than disposing of them) can better withstand unstable supply chains, product shortages and finicky suppliers, and they can also protect themselves against price fluctuations. 
  
• More extensive utilisation of products and components: Circular products are designed to be reused, repaired, upgraded and ultimately disassembled. Similarly, all components are designed so that they can be reconditioned, remanufactured and ultimately recycled. Product-as-a-Service and sharing economy models ensure that products and component utilisation is increased, enabling higher income per unit. Also, components can be extracted, then re-used in other products.
  
• Reduced production times: Products and components that stop working can be refurbished to as-new condition, eliminating the need to manufacture many components of a new product. One example can be seen in wind power. Demand for wind turbines is currently so strong, fulfilling orders takes some manufacturers as long as two years. By contrast, an existing wind turbine can be refurbished and delivered in just four months.
  
• Less impact on the climate and environment: Recycling, repairing, refurbishing and re-using ‘circular’ products requires less energy and have less impact on the environment than conventional methods. This includes biodiversity loss, foresting and mining, component and product manufacturing, and the transport of raw materials. Also, organisations that adopt safe disposal methods can lower their environmental impact.
  

One example is telecom supplier Vodafone’s trade-in service. To discourage UK customers from throwing old phones in the trash, the company instead encourages them to return selected used Apple and Samsung mobile phones in exchange for a payment, credit or discount. Vodafone says 97% of returned phones are refurbished and resold; the remaining 3% get recycled. Customers can also donate their phones to Vodafone’s Great British Tech Appeal, which gives phones and free calls to people in need.

With so much change afoot, traditional ‘linear’ organisations cannot afford to adopt a ‘do-nothing’ strategy. Instead, to remain competitive in the 2030s, their leaders need to adopt circular business models, launch pilots and build a strategy for transitioning to the new next economy—the circular economy.

The circular economy will offer new opportunities for providers of logistics. That will be the focus of the next blog post in this series…