Why would companies want to transition to circular economy? Five business models to bring about this change.
Written by Nora Sohns
What is circular economy? It is this little business opportunity that could generate 4,5 trillion (yes, that’s with a t) dollars of additional economic output by 2030.
Circular economy refers to a method of production that considers the entire product lifecycle. In short, it is planning for the reuse and repair of the product before you produce it. In that way, as you keep on repeating the process no waste is generated. This contrasts with the linear economy that some have called the “take-make-dispose” economy. But achieving this transition requires unprecedented collaboration given that today, only 8.6% of the world is circular!
Let's now move into why companies would want to transition into a circular model. There are three main reasons.
The first reason is that we’ve got to make more products with less resources available, and we are going to be a lot more people on this Earth. We saw commodity prices overall rise by almost 150% between 2002 and 2010, which erased the real price declines of the last 100 years. In other words, we had price declines because of efficiencies in making products and technology, but because resources are becoming scarce, prices are going back up. You add on to that the fact that we are going to have 3 billion more middle-class consumers by 2030... It translates into needing 50% more food, 45% more energy, and 30% more water to ensure that the global population has the same access to basic necessities.
The second reason is that it is a major business opportunity. A shift to circular economy could generate by 2025 an estimated 1 trillion dollars annually in economic value, create more than 100,000 new jobs, and prevent 100 million tons of waste within the next five years. Plus, all these new jobs would come while we would restore the natural capital and ecosystem services that are the foundation of healthy societies and economies globally.
The third reason is that transitioning to a circular economy can improve customer relationships. Consumers would get a better product that they would likely be more satisfied with because it would last longer. And given that companies often come back at the end of the product lifecycle, that would increase their interaction with the consumer and further strengthen that relationship.
The major consulting firm Accenture has identified 5 circular business models that companies can leverage singularly or in combination, to use resources more efficiently. This change would result in lower costs and more revenue while enhancing customer value.
Number 1 is a circular supply chain where you replace scarce resources with fully renewable recyclable or biodegradable resource inputs. An example of this would be a water bottle created with fully biodegradable materials instead of PET.
Number 2 is recovery and recycling. You recover and reuse resources at the end of the product life. An example would be transforming organic waste into renewable energy.
Number 3 is product life extension. Here you extend the lifecycle of products, like our iPhones, via remanufacturing, repairing, upgrading, or re-marketing.
Number 4 is called sharing platform. In this case, products and assets have a low ownership or utilization rate. Products are therefore shared. A good example is carsharing or AirBnB.
Number 5 is selling a product as a service. Customers would use products through a lease or pay for using arrangement versus the conventional buy-to-own approach. This model can be applied to expensive work tools that you would exceptionally need.