By Dr. Maja Berden Zrimec, researcher and content writer
The circular economy is a relatively new business approach. Nevertheless, many companies are already trying to adopt it so they can detach from the linear take-make-dispose strategy. Indeed, there are many drivers that make the transition to circular business models appealing, including creating value on multiple levels. So why isn’t everybody doing it? The reason are many internal and external barriers that exist in the companies, some of them still without a plausible solution.
Drivers of circular economy
Circular economy has already gained a very important place in EU politics. Consequently, many countries have adopted accompanying regulations and tax measures, for example, to support repair and reuse of products instead of disposing and recycling their parts. The policy is also trying to extend the warranty period for products to discourage their low quality and short-term usage. Boosting the circular economy plan in EU, supported by the Commission’s EU Circular Economy Action Plan (March 2020), includes measures along the entire life cycle of products promoting circular economy processes, fostering sustainable consumption and guaranteeing less waste. The main focus is currently on the food chain, textiles, packaging and plastics, construction and buildings, batteries and vehicles, electronics and ICT.
Social drivers are result of the customer needs. One of the most successful services in this area is car sharing for people that don’t need to own a car but would still like to use it occasionally. The social aspect also includes services like repair, maintenance and remanufacturing, which strengthen the relationship between the providers and customers and even the communities by generating new local jobs.
Economically, the main driver is fluctuating prices of resources, most recently due to the covid and Ukraine situations. Instead of used products going to waste, producing companies strive to get them back for repair, remanufacture and recycling. This enables them to reduce their dependence on external resources, like parts or materials their products are made of. Remanufacturing or refurbishment not only lowers the cost of production, but also makes companies more resilient to the market volatility.
Caring about the environment is becoming more realistic because customers take into consideration companies’ environmental aspects when choosing a service or product. Circular business models support the prolonged lifetime of a product by following the 4R principle of repairing/maintaining, reusing, remanufacturing, and recycling (Hansen 2020). Consequently, waste is reduced or used as a secondary raw material, which in turn reduces the need for mining of primary new materials. The influence on the environment is also increasingly considered by the regulations, making legislation another important driver of circular business models. Companies are thus improving the design of their products to prolong warranties, durability, make the repair easier and reduce the usage of toxic compounds. EU has adapted the Green Deal with ambitious goals to achieve a climate-neutral and sustainable Europe. For the EU to reach the 2030 target, the Commission proposed a package of new and revised legislation known as Fit for 55 in 2021, comprising 13 interlinked revised laws and six proposed laws on climate and energy.
To enable the necessary changes for the transition to a circular economy, technological development is one of the crucial drivers. New technologies will enable the circulation of energy and materials, improve resource efficiency and utilisation of secondary raw materials, including what has been until recently considered as waste. Digitalisation plays a very important role here. The new digital environment supports a broad range of platforms that connect suppliers of goods and services to potential customers. Thanks to digitalisation, some services have been completely dematerialised, most pronouncedly access to music.
Despite numerous drivers, companies are reluctant to adopt circular business models due to a range of barriers, which often depend on their product or service as well as the companies’ size and location. The barriers can be internal. For example, it is important how a firm judges the value of the investment in circular solutions. If a company doesn’t have practices to justly evaluate new value streams of an innovative business model, the advantages of investment might not prevail over the initial costs.
External barriers are difficulties coming from outside the company, like regulations and policies. Inappropriate or non-existing regulations can prevent circular business model execution. Policies currently incentivise recycling, incineration, or disposal over other circular strategies, such as reuse and refurbishment. This can negatively affect companies that would like to base their value proposition on the product’s life extension. Additionally, there can be competition between recycling companies and the new market activities of producers which are based on repair and reuse.
4R approach can be expensive and labour intensive, not supported by taxes and labour regulations, which makes it non-appealing to companies. 4R activities additionally require skilled employees, which can be a challenge especially in countries with high taxes on labour. Change to the circular business model often requires substantial investment and additional resources, influencing a firm’s cash flow and lengthening the time of return on investment. This creates economic barriers, including greater upfront investment and uncertainty in the return on investment. Like any business model innovation, circular business models do not guarantee return on investment. Remanufacturing and resale of existing products may also lower new product sales. Additionally, low prices of virgin materials might temper the high cost of product take-back.
Customer acceptance can be a barrier from the social aspect. Customers may prefer purchasing a new product instead of a remanufactured one if they believe the latter is inferior or less safe. Sometimes, customers are open to circular offerings but are simply unaware of their existence. Rising awareness is thus an important part of such offers.
Underdeveloped or non-existing technology is another barrier that can hinder a company’s ability to adopt the circular approach. It may not be technically possible to reuse, refurbish, or remanufacture existing products to meet current performance demands. Concerns also exist about the technical performance properties of recovered and recycled materials.
One of the main goals of circular business models is to replace primary production and enable environmental sustainability. Still, there can be situations when circular offerings do not deliver environmental benefits. Recycling and remanufacturing of products can be very energetically demanding. Circularity thus doesn’t inherently imply sustainability and must be actively driven in this direction.
Legal issues differ among countries and must be taken into account. When product ownership is not transferred to the customer, but is rather treated as a service, the company must take some liability for their products’ performance. Some companies may hesitate to extend responsibility from beyond the point of sale.
Value Chain Generator (VCG.AI)
Whatever the case might be, companies need all the help they can get to transfer to a circular business model. As already mentioned, digital technologies can play an important part in the transition. For example, (bio)links between complementary businesses can be found based on the companies’ input and output, be it materials, parts or services.
Value Chain Generator is a value chain development platform that uses AI and machine learning to help connect companies across sectors and countries into circular and resilient value chains. VCG matches companies on the levels of their products, residuals and waste, to create value chains that use resources more efficiently and allow companies to turn waste from cost to revenue generating resources.
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