By Dr. Maja Berden Zrimec, researcher and content writer
When thinking about the circular economy, your first thought might be about recycling of materials, reusing of products or car sharing. You would be right in all cases, because circular economy is an economic system where products and materials are kept at their maximum value and functionality. While current business models focus on product sales, the circular economy market approach stems towards longer use and reuse. To enable this, we need a dynamic system with interlinked products, material use, value-chain actors and customers.
There are several key strategies to achieve sustainable management of materials, mainly by prolonging the resources and products’ value in the value chains by closing, slowing and narrowing the loops. This means that the product should have a longer lifetime, resources should be efficiently used and the materials recycled as much as possible. But the real value lies in the functionality and complexity of products. From the perspective of product value, the goal should be to keep the products functional as long as possible before disassembling them and recycling their basic materials.
Innovations in circular business models
To switch your business to the circular approach, you’ll first need a new innovative business model. Innovations are needed to reorganise value-creating processes by narrowing, slowing and closing the loops in the value chain (Bocken et al. 2016). The goal is to achieve more with less. But what does this mean in practice?
Narrowing of the loops is achieved by reducing the amount of materials needed for a product or service. This also means that the costs will become lower. Such approach is already well known in the linear economy, but it doesn’t include what happens to the product in the-end-of-life stage.
Continuous reuse of products results in slowing the loops. The products should have an extended lifespan and be useful to customers for a longer time. This might result in the need for more expensive production materials, so to be economical it makes sense that in return the products should be easy to maintain, reuse, and remanufacture. This also reduces the need for new resources . The companies can offer repairing, upgrading or refurbishing the product to prolong its lifetime as well as customer interest (which might be the hardest step). Finally, after many reuses, it is time to close the loop and recycle the materials.
Value creation in circular business models
In circular business models, the value is created in a different way than in the linear approach. Circular business models have to enable commercialisation of innovations based on the product life cycle. Conversion to circular business models also requests more intense interconnection of producers, service providers, users, and recovery organisations (and related infrastructure) through repeated restoration cycles (CEID et al. 2021). According to the report on “Circular Business Models: Overcoming Barriers, Unleashing Potentials”, there are four crucial levers for advancing the circular economy: (1) skills in circular product design, (2) business model innovation, (3) building and managing reverse cycles, and (4) enabling cross-cycle and cross-sector performance (CEID et al. 2021).
Value creation in the circular economy is directly linked to the circular strategies such as repair, reuse, remanufacturing, and recycling — as well as the necessary redesign for circularity (and related ‘design-for-x’ practices such as design-for-disassembly, design-for-reuse, and design-for-recycling), together with defining the necessary activities and actors to make the value chains viable (CEID et al. 2021). These circular strategies address how value is created and define the operational activities enabling them to close loops.
Value can be delivered at different stages due to various services of complex value network, and diverse customer relationships. It can be captured on multiple levels, from product sales to resource recycling. Value and its delivery differ depending on the product, its characteristics and related services. Due to various value creation options, more intensive collaboration between firm and customers is expected in a circular business model (CEID et al. 2021).
The role of digital technologies in circular business models
Circularity requires creativity and cooperation among all value chain actors (UNEP circularity platform). Value creation, transfer, and capture in circular business models can be facilitated by cross-cutting practices and technologies. In particular, digital technologies have high potential to significantly transform circular value creation, transfer, and capture, or for making these possible in the first place (CEID et al. 2021). They can enable smart circular strategies such as smart repair, reuse, and remanufacturing and also contribute to service offer. Although digital technologies have been mainly used for improving production processes and their efficiency, they can play an important role in overcoming barriers to CBMs and enabling the operationalisation of circular material, component, and product flows (CEID et al. 2021). They enable connection between value cycle partners and related stakeholders through data sharing and increased transparency (CEID et al. 2021).
Value Chain Generator
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.
Sources and further reading
Amato, A. (2022): The Circular Economy Challenge: Towards a Sustainable Development. Sustainability 14:3458; https://doi.org/10.3390/su14063458.
Bocken N.M.P., de Pauw I., Bakker C., van der Grinten B. (2016): Product design and business model strategies for a circular economy. Journal of Industrial and Production Engineering 33(5):308–320; DOI: 10.1080/21681015.2016.1172124
CEID (Circular Economy Initiative Deutschland), Acatech, SYSTEMIQ (2021): Circular Business Models: Overcoming Barriers, Unleashing Potentials
Circle Economy (2022): Circularity Gap Report 2022.
Coursera course on Circular economy — Sustainable Materials Management.
Ekins P., Domenech T., Drummond P., Bleischwitz R., Hughes N., Lotti, L. (2019): The Circular Economy: What, Why, How and Where. Background paper for an OECD/EC Workshop on 5 July 2019 within the workshop series “Managing environmental and energy transitions for regions and cities”, Paris.
Ellen MacArthur Foundation (2019): Completing the Picture: How the Circular Economy Tackles Climate Change; www.ellenmacarthurfoundation.org/publications.
European Circular Economy Stakeholder Platform: https://circulareconomy.europa.eu/platform/
European Comission: Sustainable, circular and innovative value chains; https://ec.europa.eu/info/research-and-innovation/research-area/agriculture-forestry-and-rural-areas/sustainable-circular-and-innovative-value-chains_en
Oghazi P., Mostaghel R. (2018): Circular Business Model Challenges and Lessons Learned — An Industrial Perspective. Sustainability 10:739; doi:10.3390/su10030739
Rizos V., Behrens A., Kafyeke T., Hirschnitz-Garbers M. & Ioannou A. (2015): The Circular Economy: Barriers and Opportunities for SMEs. CEPS working document 412, ISBN 978–94–6138–479–9
UNEP (United Nations Environmental Programme) circularity platform; https://buildingcircularity.org.
UNIDO (United Nations Industrial Development Organization) (2017): Circular Economy; https://www.unido.org/sites/default/files/2017-07/Circular_Economy_UNIDO_0.pdf