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Monday, April 29, 2013

5 Business Models That Are Driving The Circular Economy 04-29

5 Business Models That Are Driving The Circular Economy

We need to move from a system of waste to a system of reuse--an economy that’s a circle and not a line. Some businesses are getting closer to this ideal than others.

Since the Industrial Revolution, humanity’s use of natural resources has been basically the same: take, make, throw away. The World Bank’s predictions for global waste generation are chastening: on current trends it will double between now and 2025 to 6.5 million tons of solid waste every day. For sure, we are better at using virgin resources more efficiently while second-hand markets and recycling rates have both improved. But this hasn’t altered the fundamentals. Many companies’ business models are not set up to do much else than earn money from volume. The fact that few businesses are vertically integrated makes it more difficult for businesses to reform the model for “closed” product loops even if their CEOs want to.

When you add to this the OECD’s estimate of an extra two billion middle class consumers before 2030, commodity price volatility and new environmental regulations, you start to see the scale of the challenge. The good news, though, is that circular economy thinking--building an economy that doesn’t create waste--can make business-sense.
It often requires product vendors to think of the resources in their products as assets rather than inputs and their customers as users rather than buyers. The question then becomes how to maximize value along the chain and, crucially, how to enable the assets to be continually re-introduced to markets. Once a material is seen as an investment and customers as users, one appreciates how little business-sense it makes to discard product assets after only a few months instead of maintaining the customer relationship during multiple cycles.
Of course, this “circular” thinking may be easier said than done. There are five fundamental considerations for nearly every sector when thinking about how make their business model more circular:
  • How can we design our products with asset recovery in mind?
  • How can we develop product lines to meet demand without wasting assets?
  • How can we source material in regenerative loops rather than linear flows?
  • How can we develop a revenue model that protects value up and down the chain, and
  • How can we get our customers to cooperate with us?
Complex organizations with multiple stakeholders and relationships with customers that are generally "point-of-sale" may need to change their mind set and think of themselves as service providers.
We have identified five business models that are contributing to making circular businesses a reality:


In products as services, goods vendors embrace the idea of themselves as service providers: leasing access to and not selling ownership of a service. In some cases this has led not only to an effective hedge against cost volatility but also to a stickier customer relationship and increased upsell. Vodafone’s Red-Hot plan is a good example. You can rent the latest phone for a year and keep on exchanging it for a newer version. Assuming Vodafone is engaged in collecting the old phone, not only does this act as material collection and pooling but from a business standpoint also creates deeper customer relationships.


Next life materials and products work when a company can efficiently recover and re-condition its products after use and then put the same products into the market to earn a second or third income. Tata Motors Assured is a good example here. It’s more than a second hand car dealership. Cars are handpicked and refurbished in Tata workshops and then undergo a certification process. Customers are even offered financing options and warranty.


Not all products can be reconditioned in their entirety but most products have certain components that carry a high value. Not just products, but often materials themselves have an embedded energy component that makes them even move valuable then their virgin source. With the right design and remanufacturing capabilities, they can be put together to form new products. This is product transformation. For BMW, it can mean a 50% cost saving for customers buying remanufactured parts as compared to new ones. You get exactly the same quality specifications as a new BMW part subject to the same 24-month warranty.


Not to be forgotten is that innovation in recycling technology (Recycling 2.0) is rapidly evolving and enabling production of high-quality products with fantastic sustainability performance. Starbucks, for example, is actually aiming to turn thousands of tons of its waste coffee grounds and food into everyday products by using bacteria to generate succinic acid which can then be used in a range of products from detergents to bio-plastics and medicines.


Lastly, social media exchange platforms are rapidly transforming industries by collaborative consumption. Airbnb (the online service that matches people seeking vacation rentals with hosts who have space) now has over 200,000 listings in 26,000 cities. Check out ThredUP the next time you need new clothes for your kids, you can browse like-new clothing at significant reductions from families whose children have outgrown their old clothes.
Of course, moving to a truly circular economy could require a mixture of all these five business models and a great deal of product and service innovation. Consumers and policymakers have a central role too. But what these business models demonstrate is that it is possible to rethink how we make and use things. The companies that are starting now may well define the future of sustainable business, enabling global prosperity on a crowded planet with finite resources.

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