In a Circular Economy, growth is decoupled from the use of scarce resources through disruptive technology and business models based on longevity, renewability, reuse, repair, upgrade, refurbishment, capacity sharing, and dematerialization.
The growth model favored by economies and indeed most companies for the past 250 years—based on the availability of plentiful and inexpensive natural resources—is living on borrowed time and, so are companies that rely on it. However, we are rapidly approaching a point at which the linear model is no longer viable: when, due to rising global affluence, the availability of many non-renewables (including metals, minerals, and fossil fuel) cannot keep up with demand, the regenerative capacity of renewables (such as land, forests, water) becomes strained to its limits, and the planetary boundaries become threatened as never before.
As shown by the IPCC, US National Climate Assessment, and many others, negative effects of the current growth model are already being reported on all continents. Publications from top-tier research centers like the The Cambridge Centre for the Study of Existential Risk (CSER) report the risk for the initiation of mass extinctions in the coming century and therefore unless the current trends are reversed, resource supply disruptions coupled with rising and increasingly volatile prices will in the next two decades translate into trillion-dollar losses for companies and countries whose growth remains tied to the use of scarce and virgin natural resources.
Business driven studies demonstrate significant material cost saving opportunities from circular economy approaches and a potential to boost EU GDP by up to 3.9%.
In the EU, it is estimated that resource efficiency improvements all along the value chains could reduce material inputs needs by 17%-24% by 2030 and a better use of resources could represent an overall savings potential of €630bn p.a. for the EU industry.
For businesses and their top executives, responsible for setting the direction of their firms, this leads to one inescapable conclusion: Continued dependence on scarce natural resources for growth exposes a company’s tangible and intangible value to serious risks.
The challenge for companies is to concentrate on rethinking products and services from the bottom up to “future proof” their operations to prepare for inevitable resource constraints – all the way through to the customer value proposition. This implies eliminating waste, creating step changes in resource productivity and at the same time enhancing the customer value proposition on dimensions such as price, quality and availability.
At a conceptual level, then, there is a strong and intuitive business case behind the circular economy both in the short and long-term. But at a practical level, it’s not easy. The fact is most companies today are simply not built to capitalize on the opportunities the circular economy presents. Their strategies, structures and operations are deeply rooted in the linear approach to growth—it’s in their DNA.
That’s why companies seeking the circular advantage will need to develop business models that are free of the constraints of linear thinking. These models are not just about doing ‘less bad’, but they are about driving positive impact ‘through growth’. That is a concept business and economies can get behind. There are five underlying business models that Accenture has identified in its analysis of more than 120 case studies of companies that are generating resource productivity improvements in innovative ways:
1. CIRCULAR SUPPLY-CHAIN
The Circular Supplies business model is based on supplying fully renewable, recyclable, or biodegradable resource inputs that underpin circular production and consumption systems. Through it, companies replace linear resource approaches and phase out the use of scarce resources while cutting waste, and removing inefficiencies. This model is most powerful for companies dealing with scarce commodities or ones with a major environmental footprint. Royal DSM is one player at the forefront of adopting the Circular Supplies business model to fuel its shift from a virgin material supplier to a company that reuses materials and provides new eco-friendly ones. One example: The company developed cellulosic bioethanol, a byproduct of co-fermenting sugars derived from crops. Such biobased chemicals have great potential to reduce waste and net CO2 emissions compared with fossil fuels. The cellulosic bio-ethanol has created a new revenue stream for DSM from a feedstock that was previously considered very low value, and the company anticipates it could eventually create upwards of 70,000 related jobs.
2. RECOVERY & RECYCLING
Recovery of embedded value at the end of one product lifecycle to feed into another promotes return chains and transforms waste into value through innovative recycling and upcycling services. Having its bedrock in traditional recycling markets this business model leverage new technologies and capabilities to recover almost any type of resource output at a level of value equivalent to, or even above, that of the initial investment. Solutions range from industrial symbiosis to integrated closed loops recycling and Cradle-to-Cradle® designs where disposed products can be reprocessed into new. This model, which enables a company to eliminate material leakage and maximize economic value of product return flows, is a good fit for companies that produce large volumes of by-product or where waste material from products can be reclaimed and reprocessed cost effectively. In the food sector, the Resource Recovery business model allows US grocery chain Kroger to convert food waste into renewable energy. The 150 tons of food waste the company produces each day at its Ralphs/Food 4 Less Compton distribution center — which used to be seen as a major cost in terms of lost revenue, disposal fees and emissions — now provides inexpensive, clean energy. That energy in turn powers a 49-acre campus that houses Kroger’s offices as well as the distribution center. The company relies on an “anaerobic digestion” system that converts food waste into biogas that runs the campus’s microturbines and boilers replacing virtually all of the natural gas previously used. To date the initiative has yielded an 18 percent on Kroger’s investment.
3. PRODUCT LIFE EXTENSION
Product Life Extension allows companies to extend the lifecycle of products and assets. Values that would otherwise be lost through wasted materials are instead maintained or even improved by repairing, upgrading, remanufacturing or remarketing products. And additional revenue is generated thanks to extended usage. Using this model, a company can help ensure that products stay economically useful for as long as possible and that product upgrades are done in a more targeted way (for instance, an outdated component is replaced instead of the entire product). This model is appropriate for most capital-intensive B2B segments (such as industrial equipment) and B2C companies that serve markets where pre-owned products (or “recommerce”) are common or whose new releases of a product typically generate only partial additional performance benefits for customers over the previous version. By embracing the Product Life Extension business model, Google is addressing the obsolescence challenge in the mobile phone arena: What to do with devices when they no longer suit a customer’s needs? The company’s Project Ara initiative focuses on reinventing the smartphone by breaking it down into replaceable modules that can be assembled and customized according to user requirements. With the ability to swap modules, users can easily alter their phone with basic skills and tools (thus keeping the phone relevant for a longer period of time) and repair the phone more easily and inexpensively by replacing only what is broken instead of the entire phone. By maximizing a phone’s useful lifetime, Google reduces the need for virgin resources to make new phones while minimizing the amount of E-waste generated. A possible complement to this design principle could be an online marketplace where users can trade phone modules to extend the lifecycle of components and recapture residual value. An example of a company that is recovering residual value potential in post-consumer product waste is carpet manufacturer, Desso. The company developed a separation technique called Refinity®, which enables separation of yarn and other fibers from carpet backing. After a purification stage, this allows the yarn to be returned for the production of new yarn in a Cradle-to- Cradle® system.
4. SHARING PLATFORMS
The Sharing Platforms business model promotes a platform for collaboration among product users, either individuals or organizations. These facilitate the sharing of overcapacity or underutilization, increasing productivity and user value creation. This model, which helps maximize utilization, could benefit companies whose products and assets have a low utilization or ownership rate. However, today it’s most commonly found among companies specializing in increasing the utilization rate of products without doing any manufacturing themselves, putting considerable stress on traditional manufacturers. Ride-sharing company Lyft, Inc. is revolutionizing one segment of the travel market with the Sharing Platforms business model. Lyft’s co-founders realized that cars making trips within cities were vastly underutilized; they estimated 80 percent of seats were empty. The company helps fill those seats by enabling, via its mobile app, individuals who need a ride somewhere to request one from someone who has a car. Pickup and ride fee (typically 20 percent to 30 percent lower than a comparable taxi fare) is paid through the app, of which Lyft takes a 20 percent cut. The business model appears to resonate not only with customers but with investors as well: The company in April 2014 announced a new round of funding worth $250 million (for a total of $333 million thus far).
5. PRODUCT AS A SERVICE
The Product as a Service business model provides an alternative to the traditional model of “buy and own.” Products are used by one or many customers through a lease or pay-for-use arrangement. This business model turns incentives for product durability and upgradability upside down, shifting them from volume to performance. With a Product as a Service business model, product longevity, reusability, and sharing are no longer seen as cannibalization risks, but instead, drivers of revenues and reduced costs. This model would be attractive to companies whose products’ cost of operation share is high and that have a skill advantage relative to their customers in managing maintenance of products (giving them an edge in selling services and recapturing residual value at end of life). Michelin, one of the world’s leading tire manufacturers, has made significant strides toward adopting the Product as a Service model to create an innovative program in which fleet customers can lease instead of purchase tires outright. Under this program, Michelin effectively sells “tires as a service.” Customers pay per miles driven. They don’t own the tires. And don’t have to deal with the hassles of punctures or maintenance of any kind. By adopting a Product as a Service model, Michelin is incentivized to develop longer lasting tires. And, by getting wornout tires back, the company is motivated to mae sure through design and material selection that they can be reprocessed into a valuable input for new tires or something completely different.
These business models can be enabled by ten technologies, divided among digital, hybrid and engineering that are allowing speed & scale in ways not seen before.
Most important benefits already available today
The Circular Economy thus represent a big challenge to be pursued and an opportunity to cope with the natural resources’scarcity and the increasing natural resources’cost and volatiliy, representing a genuine source of competitive advantage for companies through new business opportunities and a solution for economies to be more competitive and resilient in the future.