If you needed a clear signal that circular economy thinking has moved fully into the business mainstream from its origins in CSR, you need look no further than the annual meeting of the world’s top decision makers in Davos this past February. In advance of the gathering, the World Economic Forum announced it is launching the search to find value in "100 million tonnes of material waste, with the potential to create 100,000 jobs" center stage of its proceedings.
Early last year, we took a hard-nosed look at the concept of zero-waste thinking and argued that there were five distinct business models enabling profit making companies to harness zero-waste principles in practice. This year, after analyzing how more than 100 companies are faring when it comes to putting theory into practice, we can report that we’ve found another business model and also discovered more about what motivates companies to adapt to a circular business model.
But first, let’s re-examine the original five models:
- Selling access to a services rather than to goods: e.g. laundry services rather than washing machines, or miles rather than tires.
- Companies like Tata motors that refurbish their own old products and then re-introduce them to the market with guarantees.
- Removing the valuable parts of a used product in entirety for re-use
- New recycling techniques that are opening up entirely new vistas for material re-use
- The sharing economy. Think Airbnb or carpooling.
So what did we miss? Primary inputs being designed, commercially, for circular use. We’ve called this model Circular Inputs because the very resources, so unlike their petrochemical and hard-to-recycle alternatives, are designed/grown to be returned safely and profitably to the value stream. An excellent example of a company doing this is Ecovative, which uses mushrooms to create fully compostable packaging materials. The process combines agricultural by-products with mushroom mycelium to yield cost-competitive and environmentally responsible materials that perform as well of polystyrenes.
On a larger scale, AkzoNobel, a multinational paints and coatings company and the owner of Dulux, is ramping up coordination with its suppliers with the aim of growing its portfolio of eco-premium solutions to at least 30% of its total revenue by 2015. The company acknowledges that this is difficult as it defines eco-premium products as those that "provide the same or better customer functionality alongside having a clear eco-efficiency benefit over the most common alternative in the marketplace," and so it’s a moving target. Secondly, close cooperation with suppliers is unavoidable. Some 94% of the total energy embedded in its AkzoNobel products, for example, comes from upstream or downstream sources like suppliers and customers.
Practically all of our interviewees agreed that cutting material costs for them and their customers was a major driver, but the primary reason for their adoption of a circular business model was differentiation. Coupled with new consumer trends which favor more sustainable products, especially in high growth markets in developing countries and among younger consumers, you can see why brands are interested. As Eben Bayer, Ecovative’s CEO, notes: "Our products are already performance and cost competitive but what creates the real pull is the additional differentiation they offer."
But it’s not just consumer facing brands (or the companies that serve them) that are taking circular advantage seriously. Consider SKF, a more than a century old bearings and precision manufacturing company headquartered in Sweden with over 45,000 employees.
Several years ago SKF changed its business model from being a product supplier to being a comprehensive solutions provider aimed at improving its customers’ asset efficiency. Now, as well as continuing to produce precision products, SKF offers Asset Efficiency Optimization services. This has developed into industry specific "full life cycle" offers with much closer cooperation with end-users of SKF products and services. The aim is to reduce material inputs and optimize the products’ useful lives, helping its customers save resources too.
Vartan Vartanian, President of SKF Industrial Market, Regional Sales and Services, notes that this is helping the company enjoy first mover advantage. It is also an opportunity for companies to develop relationships with customers to counter unsustainable "low-price" offers.
Without doubt, scaling up is an important part of the strategy here.
Of course, when circular advantage is the norm, the differentiation "card" will lose its bite. But who cares? What successful companies like Spotify have shown us is that circular models can rapidly become the norm. Although differentiation is a benefit now, ultimately it will be the sustained cost benefits that really drive growth. The combined effect of these models at scale could transform the global economy.