According to a report by the World Economic Forum, 20th century industrialism has led to the prevalent use of a one-way or linear model of production and consumption. Organizations that adapt this linear model provide products manufactured from raw materials which are then sold, used, and discarded or incinerated as waste.
As the volatility of commodity prices and the depletion of finite resources begin to affect major industries and economies, organizations have started to realize that the linear model increases their exposure to these risks. Businesses notice that resource efficiency and sustainability are vital components of maintaining competitive advantage. They also realize that the future economic success of their business is dependent upon their ability to regenerate their natural resource capital.
This is why organizations turn to the circular economy model: to replace the linear model’s “end-of-life” concept with a more restorative and regenerative business model. According to a report by the Chatham House, an independent policy institute in London, the circular economy concept is associated with other concepts such as the “cradle to cradle” design and industrial ecology. These theories were first developed by environmental academics in the 1970s and are still referred to today. The circular economy drives the remodeling of industrial systems to recognize the efficiency of resource cycling in the natural environment.
The Circular Economy and the Business Industry
Most businesses adapt the circular economy model because of its potential to help reduce waste, use resources more efficiently, and promote sustainable development. Applying the circular model helps organizations shift towards the use of renewable energy, eliminate the use of toxic chemicals, and aim for waste elimination through the use of more sustainable materials, products, and systems.
Research conducted by Accenture shows a high potential for a circular economy to become a trillion-dollar opportunity in the future. The research concludes that adapting the circular economy approach is beneficial to organizations since it reduces resource constraints and could potentially augment the value of the global economy by over five times by the year 2030.
The same research reports that a circular economy enables industries to have lasting resources that can be regenerated over time. It also allows for long life cycles, where products are made to last, and support-linked value chains, where zero waste is generated from production to disposal.
A Chatham House report notes that there is a growing interest surrounding the circular economy as a result of several factors. The first is that it offers a new form of value creation that is appropriate for today’s high and volatile resource prices. In fact, McKinsey Quarterly’s research shows that the demand for energy, food, metals and water is set to rise in the next two decades as the global economy enters an era of high commodity prices.
Innovations in technology also open up avenues to optimize the resources of global supply chains. The circular economy provides a driver for businesses to “do more with less” by becoming more resource-efficient and innovative within their natural resource limits.
There is growing support and increasing interest from policymakers regarding policies related to sustainability and resource efficiency. A report from the United Kingdom parliament highlighted its efforts to support circular economy innovation. This includes the establishment of a business-led Circular Economy Task Force that brings together voluntary initiatives from different sectors such as retailers, suppliers, NGOs, members of academia, and government representatives. The UK government is also funding research on business models and is closely working with the Technology Strategy Board on design challenges to promote resource efficiency and supply chain innovations.
The Five Business Models of Circular Economy
Tim Jackson, the UK's first Professor of Sustainable Development at the University of Surrey's Center for Environmental Strategy, explains that a circular economy provides opportunities for new business models that use resources more efficiently to help people consume less. Additional research by Accenture supports this and identifies five business models that drive the circular economy. Their research involved the analysis of more than 120 case studies from companies that used innovative resource productivity improvements with their products and supply chains.
Here are the five circular economy business models:
The Circular Supplies business model is adopted by companies that deal with scarce commodities. Companies use this model to replace the linear approach by eliminating the use of scarce resources, while cutting waste and removing operational inefficiencies. This model is based on delivering fully renewable, recyclable, and biodegradable resource inputs to strengthen an organization’s circular production and consumption systems.
The Resource Recovery business model relies on new technological innovations to recover and reuse any kind of resource by ensuring that waste materials are reprocessed in a cost-effective manner. It enables organizations to eliminate material leakage from their product's production value. Companies that produce large volumes of by-products are well-suited for this model. The Resource Recovery model also adapts several solutions that range from industrial symbiosis to closed loops recycling, such as Cradle-to-Cradle design models where waste products are reprocessed to make new products.
The Product Life Extension model helps organizations extend the lifecycle of their products and assets. By repairing, upgrading, re-manufacturing or re-marketing their products, organizations are ensured that their goods remain economically useful. As products are upgraded in a targeted manner, additional revenue is generated for the organization.
The Sharing Platforms model provides a platform that lets individuals and organizations collaborate with various product users. Organizations that adopt this model help facilitate the sharing of excessive or underutilized products to help increase value creation and productivity. Companies whose products and assets have a low utilization or ownership rate benefit from this model by maximizing the use of the products they sell.
The Product as a Service model is the alternative to the traditional “buy and own” concept. Through this business model, organizations let their customers use their products through a lease or pay-for-use arrangement. Companies that manufacture products with high operational costs use this model to give them an advantage in selling services and recapturing residual value at the end of their product’s life cycle.
The Emerging Leaders in the Adaptation of the Circular Economy Model
Organizations that veer away from the linear model of consumption and choose to adopt the circular economy model demonstrate that they are actively managing the global business risks of resource depletion as well as its potential opportunities. The World Economic Forum report notes that the resurgence of the circular economy in the business industry provides a niche approach that serves as a driver for innovation and value creation in the 21st century global economy.
Here are five examples of companies that are pioneering the promotion of the circular economy model in their respective industries:
Google's Project Ara initiative addressed the challenge of outdated mobile phones by reinventing consumers’ smartphone usage. By breaking down a phone into replaceable parts that can be assembled and customized according to user requirements, consumers easily alter their phone with simple skills and tools. Phone repair is done more easily and inexpensively by replacing only what is broken instead of the entire phone. Google found a way to maximize a phone's lifetime usage and reduce the need to use new resources for new phones, while minimizing the amount of its generated e-waste.
In Europe, Philips has 22 service organizations that are collecting 40% of lamps that contain mercury. The company has a recycling rate greater than 95% in the market. Philips also started to sell lighting as a service to enhance the collection of their lighting equipment. They aim to reach more customers as the company retains ownership of the lighting equipment so customers don’t have to pay for lighting upfront. In addition, Philips guarantees comprehensive environmental management pertaining to the recycling of their lighting equipment.
Vodafone's New Every Year/Red Hot and Buy Back programs strengthen their relationship with customers by allowing them to exchange their mobile device for cash and other benefits. Vodafone launched the New Every Year/Red Hot program in 2013 and received positive feedback from customers. The Buy Back program is launched across all Vodafone markets, while New Every Year is currently available in the UK, Greece, Netherlands, and Ireland.
H&M launched a global in-store clothing collection program in 2013 to encourage customers to bring used clothes in exchange for a voucher. They collaborated with I:CO, an apparel reverse logistics service provider, to manage the downstream processing of the collected clothes. I:CO handles the manual sorting of the clothes for re-wear, reuse, recycling, or energy generation.Â The H&M surplus from the collection program were donated to the H&M Conscious Foundation, to fund innovations in reverse capabilities and other areas linked to closing the loop on textiles.
Carlsberg Group collaborated with its global suppliers to develop the next generation of packaging materials optimized for recycling and reuse while improving their quality and value. The global supplier collaboration has been formalized through the “Carlsberg Circular Community.” The community has set targets to include 15 partners and have at least three products Cradle-to-Cradle certified by the year 2016.
First Carbon Solutions' Strategies for Organizations
FirstCarbon Solutions, a leading sustainability solutions provider offers expert advice to help improve your organization's circular economy-inspired sustainability plans. FirstCarbon Solutions provides consulting to various industries and organizations to increase their profitability and ROI by measuring carbon footprints and achieving sustainable supply chains. FirstCarbon Solutions helps organizations manage their carbon intensity and implement energy management plans through the execution of in-depth life cycle assessments (LCA) to help reduce waste, as well as energy and resource consumption.
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