Making the circular economy a reality

The circular economy works on paper, but implementation seems far off. Business models need to evolve and value chain partners must collaborate.

Ellen MacArthur set a new record for solo circumnavigation of the globe in 2005, squarely beating all her male counterparts. This petite woman from Derbyshire seemed guaranteed a bright future as a sailor. Just five years, she completely changed her focus. After seeing how destructive human activity is for albatrosses in South Georgia, she felt compelled to take action.

So the record holder became the leading ambassador for the circular economy. She now focuses on convincing large corporations to build an economy that maximises use of raw materials and minimises waste – a change that is urgently needed. Her Ellen MacArthur Foundation estimates that the oceans will contain more plastic than fish by 2050 given the current rate of pollution.

MacArthur has been hugely successful in focusing global attention on the circular economy. She has gained the support of leading multinationals such as Unilever, Philips, Google, Danone, Nike and H&M. ING also supports her cause through the Circular Economy 100 initiative (CE100).

The conviction that our future must be circular is gaining traction. In the CEO guide to the circular economy, leaders of large multinationals point out the huge opportunities offered by the circular economy but describe the transition as “the greatest economic challenge since the Industrial Revolution”. That the process will be difficult is certain; today’s economy is as linear as a laser beam. More than 90% of raw materials are not fed back into the economic system. Only 9.1% of the world economy can be considered circular; we still have a huge ‘circularity gap’ to bridge.

Still much to do

Awareness of the need for a circular economy has spread throughout the world. But, according to Professor Jan Jonker of Radboud University in the Netherlands, this interest is not reflected by a transition within organisations. Like MacArthur, he wants to speed up the process: “Ellen MacArthur has successfully promoted the idea of the circular economy at boardroom level. But its practical application is still a long way off. The key thing now is to transform the concept into a practical economic model.”

Jonker encourages businesses to develop circular business models, including through a free work book (see box), which includes strategies and building blocks to help businesses implement a circular model. The book gives us an inkling of the scope of the effort that lies ahead. Simply ramping up existing recycling activities will not be enough. The circular economy is much more than that. In this new economy, the aim is to minimise waste. Raw materials need to be kept in circulation and used optimally. This requires business models that differ fundamentally from those currently in use. For example, business models that encourage companies to develop nearly indestructible products that can be disassembled and repaired.

Circular economy on the up

Product-as-a-service is a circular business model that existing companies find attractive. Rather than selling the product, the manufacturer retains ownership. Customers pay for use of a product via a lease contract or a pay-for-use arrangement.

The product-as-a-service concept is gaining popularity among companies selling office supplies. A well-known example is Philips Circular Lighting, which does not sell bulbs but offers light as a service. A similar model operates in the elevator industry. Mitsubishi Elevators Europe’s customers pay a usage-based annual amount for the maintenance and use of a lift. As the owner of the lift, it is in Mitsubishi's interests to prevent breakdowns and achieve a long service life. The company designs the lifts to ensure that parts can be disassembled and repaired. Maximising its ability to recycle and reuse lift components is a further area of focus, according to the company.

In the flooring sector companies are also reusing materials, using residual waste flows and recycling. For example, Tarkett, a French company, has set up a large-scale collection system for used flooring materials in North America and Europe and uses these materials in production. In addition, they purchase residual materials and waste for use as raw materials. Their company in Brazil, uses old medicine blister packs in its vinyl floor tile production process. And Tarkett subsidiary Desso uses lime, a by-product from drinking water production, in its production of carpet tiles. Each of these initiatives is a step towards a fully circular business model.

Obviously, starting out with a circular business model is even better. Dutch start-up Black Bear Carbon offers a solution for the billions of car tyres that reach the end of their useful life each year. In the best-case scenario, these tyres find their way to an incineration plant. That has a major impact on the environment. Black Bear collects tyres locally and recovers carbon black from them. This upcycled raw material is used to produce new car tyres, technical rubber, plastics, inks and coatings. As a result, less carbon black has to be produced from oil. Even though this company started from scratch, implementing a circular business model has proven to be far from simple. This is because regulation is based on linear thought processes; there is significant room for improvement how partners in the value chain collaborate. Organising that collaboration is also extremely labour-intensive.

Running closed-loop recycling schemes

Mitsubishi, Tarkett and Black Bear show that circular business models require ‘outside-the-box’ thinking on many fronts. Companies not only need to innovate technologically, they must also rethink their business models and develop new forms of collaboration.

Jonker believes that social innovation plays a more important role than technical innovation in this process. The professor is convinced that true economic value lies in large-scale collaboration around major raw material flows: “Only then do you achieve critical mass and have a noticeable impact.” This means that businesses need to network extensively with other parties. “In addition to managing the core business, each entrepreneur will also have to run one or more closed-loop recycling schemes.”

People may become dismayed once they understand how extensively business models need to change. But Jonker remains optimistic. “Do not forget that the circular economy only recently became a topical theme. We are slowly discovering that waste is a valuable commodity. Just look at CO2. We have now discovered that it can be put to use in a financially viable manner for all kinds of useful alternatives. If enough companies see an opportunity and start to collaborate, things can change very quickly.” 

Towards a circular business model

According to Jan Jonker, a circular business model comprises seven building blocks:

  1. Closed-loop recycling schemes: Organising closed-loop recycling schemes so that products, parts or raw materials can be reused multiple times is key to circular entrepreneurship.
  2. Value creation: A circular business model aims to create value on multiple fronts, such as socially, ecologically and financially.
  3. Strategy: A successful circular business requires a strategy that focuses on efficient handling of raw materials and collaboration in creating closed-loop value chains.
  4. Organisation: Jointly organising multiple value creation is a prerequisite for a circular business model. The organisation set-up has to allow for this.
  5. Earnings model: Circular businesses require a suitable earnings model, such as the product-as-a-service approach.
  6. Parties: Circular business models are only possible if other parties are prepared to collaborate in closing recycling loops.
  7. Results: The results of multiple value creation – in other words, more than just the revenues – must be visible and measurable.

What are the implications of a shift to a circular business model?

  • According to an�ING report, circular business models provide entrepreneurs with prospects to reinvent their existing business and to explore new activities. In doing so they can enter new markets, gain market share, create a competitive advantage and ultimately increase revenues.
  • However, circular business models, such as product-as-a-service, have significant implications: product longevity, reusability and sharing are no longer seen as cannibalisation risks, but instead drivers of revenues and costs reduction.
  • With pay-per-use models, value is in the continuation of the contract instead of a one-time sales value in the linear business model. The cash flows from the contract become more important than the underlying asset value.
  • The earnings model becomes an important tool for entrepreneurs to assess the riskiness and bankability of their business models. Entrepreneurs might charge higher fees in the first year(s) of the service to shorten the payback period.

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