Why Circular Business Models are Superior in the 2030s

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This article originally appeared in The European Business Review and is reprinted by permission.

 

  • The “born-circular” are companies designed for circular economy business models and have brought circularity into all the steps of product life and usage cycles.
  • Just as “born-digital” companies have disrupted incumbents stuck in their bricks-and-mortar legacy, we will see born-circular quickly erode the market position of traditional businesses stuck in their linear-economy legacy.
  • To remain competitive in the 2030s, in which the circular economy will be the only economy, incumbents must start adopting circular-economy business models.

Historically, we have seen many leading companies failing to observe how new, superior business models were changing the competitive landscape, and failing to adapt in time to prosper.

(Carr, 2003) describes how smart manufacturers at the end of the nineteenth century saw that one of the great advantages of electric power was that it could be brought directly to workstations. They wired their plants and installed electric motors in their machines and gained an efficiency advantage over their slower-moving competitors. A similar understanding of the advantages of railways over steamships on rivers created mass-production sites and crushed the small, local plants that had dominated manufacturing up to that point.

Today, the emergence of digital business models challenges many incumbents, as they have difficulty in transforming their bricks-and-mortar legacy and so find themselves with a new, digital-born industry leader (Close, Grebe, Schuuring, Rehberg, & Leybold, 2020).

The circular economy – the next superior business model

In today’s linear economy, raw materials are extracted from resource-rich countries, transported to manufacturers, and processed into products. The finished goods then get shipped – often a great distance – to where they are used, discarded at their end of life, and eventually replaced by newer iterations.

However, a circular economy changes that. Globally, the circular economy concept is increasingly seen as the way forward to achieve the necessary transformation into a resource-efficient economy, and the only way to achieve climate neutrality by 2050. In the circular economy, resources are used, but not used up. By applying suitable strategies to products, components, and materials during use and after the end of their lifecycle, companies can keep resources in the system.

The circular economy ensures that we can move to a resource-efficient and profitable modern global economy and continue the economic growth that has lifted billions of people out of poverty.

We can expect that the transition to circularity will come faster than previous transformations. The circular economy has political support; the EU aims to transition to a circular economy to make Europe cleaner and more competitive (European Commission, 2020). Moreover, it offers superior business models, in contrast to previous shifts that often encountered public resistance due to the derived societal change there is pressure from the public for companies to become climate neutral (European Commisson, 2021).

If you are not circular, you are not competitive. It may be too optimistic but experts like Gartner predict that by 2029 (Johnson & Steutermann, 2019), supply chains will not be allowed to produce waste, as it will be viewed as unacceptable by customers and many governments. It is, however, realistic to expect that in the 2030s, the circular economy will not only represent the mainstream economy, it will be the only economy.

Just as the born-digital disrupted those born-bricks-and-mortar organisations who adopted a wait-and-see strategy, we will see the born-circular disrupt the born-linear, that is, those not able to adapt to this decade’s superior business model (Jensen, Blockchain — The incumbent’s weapon against disruption, 2018). Incumbents must embark on a focused transition to circularity. This requires abandoning current competitive advantages, writing off important assets, changing the profit model and customer relationship, and changing well-functioning supply chains, while making investments in building circular business models, for example ecosystem digitisation will be a key advantage in a circular economy (Jensen, Why digitalization is critical to creating a global circular economy, 2021).

At the same time, they must be able to protect their existing linear business during the transition, in a similar way to how, during the transition to e-business, manufacturers enabled direct digital sales channels while protecting their existing reseller channels.

Born-circulars will be the new industry leaders of the 2030s.

Why are circular economy business models superior?

The Circular Economy Handbook’s (Lacy, Long, & Spindler, 2020) five circular business models demonstrate why born-circular is a superior business model.

Circular inputs

In a circular economy, renewable, recycled, or highly recyclable inputs are used in production processes, enabling the partial or total elimination of waste and pollution. Waste is then an asset, not a liability that you pay to get rid of.

Born-circular manufacturers can expect lower costs for their production input. Their input does not have to be mined from scarce resources; it comes from other manufacturers’ excess materials, by-products, and recycled materials. Born-circular-designed products do not become end-of-life; instead, they become the end-of-current-usage loop prepared for the next loop, which uses them as input. Born-circulars will benefit from high rates of material and component recovery in original quality, and see reduced cost and increased control of material flow.

It is not sufficient just to optimise the linear economy’s waste thinking, where products are not designed with end-of-life value recovery in mind, so that waste handling is an afterthought that makes it difficult to reach high value-recovery rates (The World Bank, 2018). For example, it is significantly better to recycle used tyres into rubber floor tiles, ink, carpets or car parts (World Economic Forum, 2021), than to export them to India, increasing one of the world’s worst pollution crises (Monbiot, 2019). But, in both cases, we see a loss of value, as the high-strength steel, Kevlar, and fibre are gone forever. Instead, in the 2030s, a born-circular’s business model will benefit from the tyre throughout its usage cycle. When the tyre reaches its recycling phase, the born-circular extracts all the materials in their original quality and uses them to produce new tyres (genan, 2019).

Sharing economy concept

Born-circular maximises how idle assets are used across a community, while providing customers with affordable and convenient access to products and services. This also includes sharing industrial assets like conveyor belts, forklifts, machinery, and warehouses.

Access to an asset no longer requires buying or renting from traditional suppliers, but is instead provided by a multitude of individual people and companies. Born-circular has a higher percentage of utilisation of expensive assets, a continued interaction with the product users, and a continuous income throughout the product’s usage cycles.

Product as a service

The customer purchases a service for a limited time, while the provider maintains ownership of the product and remains incentivised with regard to the product’s ongoing maintenance, durability, upgrade, and treatment at the end of use.

Born-circular shifts focus from volume to performance, thus maximising the usage factor and useful life.

They increase resilience by retaining control of products and materials, thereby saving material costs, protecting against material price shocks, and possibly hedging against issues of materials scarcity.

The born-circular benefits from continued customer contact, and so gets insights into how its products are used.

The born-circular gains access to potential untapped opportunities for businesses, for example, a new remanufacturing/refurbishment market.

The provider now has a responsibility and an economic incentive to implement safer disposal mechanisms, a responsibility that previously resided with the end user, often without a financial incentive.

SKF’s oil as a service (RecondOil) (SKF, 2020) changes the use of industrial oils to a circular business model. Traditionally, removing contaminant particles smaller than a micron from industrial oil has been nearly impossible, so that the quality of lubrication oil is continuously degraded. RecondOil performs a kidney function to keep the oil in circulation continuously clean by capturing and separating particles and other impurities down to nanosize from the oil.

Product use extension

The born-circulars design their products for repairability, upgradability, reusability, ease of disassembly, reconditioning, remanufacturing, and recyclability of all components.

A well-designed born-circular logistics company can increase the flexible use of its distribution centres by enabling value-adding adjustments and urban mining of returned products.

Wind power is one of the fastest-growing sources of renewable energy in the world. This also means that demand for wind turbines is growing so rapidly that it can take up to two years for manufacturers to fulfil orders. However, existing wind turbines can be remanufactured and delivered in as little as four months. Remanufactured turbines meet or exceed the original specifications and can keep wind farms at peak capacity by extending turbine life by up to 20 years, thereby improving the return on the original investment (World Steel Association, 2022).

In the linear economy, you sell your product to the next in line, so you are interested primarily in selling as many new products as possible, whereas the born-circulars design their business models so that they and their partners have a continuing income stream throughout the product’s usage cycles (IKEA, 2022).

Today, retail is primarily focused on selling new products. However, born-circular retail stores understand how to facilitate a product-as-a-service model or the sharing economy, or use their prominent high street position to collect products that need repair, upgrade, reconditioning, etc., and have more income sources and greater customer intimacy than retail stores with a linear business model.

Resource recovery

Resource recovery focuses on the end stages of the usage cycle, namely the recovery of embedded components, materials, energy, and resources from products at the end of use that are no longer functional in their current application.

The born-circular has a direct economic interest in the extraction of all their product’s recoverable value. Their design focuses on making material recovery easy and effective. Their business model ensures that users are incentivised to return the products, for example contractually, through deposits, or in the product-as-a-service model.

The future material flows are controlled by the born-circular, not by the mining industry. Current recycling practice often results in the quality of the materials being degraded. The born-circular ensures that resources are recovered, so that it maintains the highest-possible quality.

Today’s logistics are designed for the linear economy, which means that empty or half-empty trucks fill our roads and impact our climate. Traditionally, last-mile logistics, where the products are delivered to the end consumer, have been a major challenge.

The circular economy adds a new dimension: first-mile logistics, getting a product that is out of current usage from the current user to its next usage cycle, via a collection and value-adding point.

Today, first-mile logistics is typically handled by the garbage truck or not at all. For example, every year, 23.9 kg of waste electronics (e-waste) and equipment are generated by every person in the UK. On top of this, each UK household hoards an average of 20 unused devices (Malloy, 2021).

Logistics companies that understand how to combine forward and return logistics to reduce empty spaces, as well as adding value at the collection point, will be more competitive than logistics companies focusing on only a linear business model. For example, one tonne of iPhones delivers 300 times more gold than a tonne of gold ore and 6.5 times more silver than a tonne of silver ore (Nogrady, 2016). A well-designed born-circular logistics company can increase the flexible use of its distribution centres by enabling value-adding adjustments and urban mining of returned products. For example, the Royal Mint recovers gold and other precious metals from e-waste to provide a stream of gold directly into the business (Moore, 2022). Effective e-waste return logistics strengthens the Royal Mint’s business case.

Vodafone’s trade-in service (Vodafone, 2022) encourages customers to return their old mobile and tablet devices in exchange for a discount on a new gadget or store credit. The returned items are refurbished and resold or the components stripped and recycled.

A “do nothing” strategy is insufficient

For many companies founded in the linear economy, the shift to a circular economy will be just as difficult as bricks-and-mortar’s transition to digital business. We will see many incumbents that, due to their legacy, are unable to adapt in a timely way. They will therefore lose to born-circulars, which have lower costs and recurrent income sources throughout usage cycles, are more climate-friendly and therefore have more attractive products (Whelan & Kronthal-Sacco, 2021), higher customer intimacy, and increased resilience due to better control of material flow.

A “do nothing” strategy is not sufficient. The incumbent must adopt circular elements in their business models, start pilot initiatives, and build a transition strategy with the circular economy concept as a driver.

References

About the author

About the author

Henrik Hvid Jensen is Chief Technology Strategist at DXC Technology. He is convinced that the next wave of digital innovation will come from businesses focusing outwards to digitally optimise the business ecosystem they are part of. He has published a book and several articles on the importance of a digital ecosystem and has designed such solutions within the public sector and for global trade. Henrik leads an initiative to accelerate reaching the global climate and environmental goals by digitising circular economy ecosystems.

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