Businesses can turn a profit from the circular economy
So what exactly is the circular economy? It starts with the view that we need to move away from the current linear approach, of take, make, use and dispose – where raw material comes out of the ground, is made into products and then ends up back in it as landfill. Instead we should be looking at an approach, where materials and products are designed for recycling, remanufacturing and reuse – from ‘cradle to cradle’. The Ellen MacArthur Foundation has been the leading driver of work on this topic. Dame Ellen became very aware of the need for self-sufficiency when she was alone on her yacht for 71 days. And when she returned to dry land, she realised our global economy was no different, and was inspired to do something about it.
Transforming theory into practice
On a planetary scale, we need to find ways to make better use of scarce resources – thinking about how to make production processes circular, mirroring how biological ecosystems work and building a restorative, sustainable economy. But we’re certain these approaches can open up viable new business models, new ways to compete, win and make money, and can appeal to a wider range of consumers – not just those who will change their buying behaviours to save the planet.
The circular economy in action
It’s important to recognise this is not just about recycling – it enables a much broader range of new business models. For example, reclaiming the raw materials in a mobile phone will typically capture 0.1% of its value, whereas refurbishment and sale into a secondary market can unlock 40% of the value. Google’s Project Ara is building on that by developing a modular smartphone that can be upgraded and targeted at the 5 billion people who don’t yet have a smartphone. Another approach is being taken by a European IT services company that will heat your office for free. They put servers in your office and pay for electricity and the internet. You get free heat from the servers and they get free cooling (a significant cost for IT providers) and free floor space. Or there are service-based models such as Philips’ ‘lighting as a service’, where they pay the upfront installation and support costs of office lighting systems, and secure revenue over the lifetime of a performance-based maintenance contract.
These examples show how businesses are moving away from transactional relationships based on selling a product to consumers who then own it, to ongoing relationships where consumers pay for a service to get the benefit. Critically, as the business retains ownership of the asset, they have a commercial incentive to maximise the use of the assets and resources they contain over their lifetime. So recycling, remanufacturing and reuse become critical business processes. This then means they can reduce their dependency on raw materials and their exposure to fluctuating costs, changing the economics of doing business.
However, to do this successfully businesses do need to transform themselves so they can operate in very different ways.
Design new service propositions, educating the market and customers about the benefits of long-term relationships and service payment structures
Design the underlying products and technology so they can meet the need for component replacement, reuse, upgrading and repurposing. For some, this is not new. The iconic Land Rover Defender for instance is a product designed for easy upgrade and maintenance – a design pattern that has endured since 1948
Develop new capabilities, processes and skills to sell, design and manage services
Change financial considerations, including retaining and funding asset ownership on providers’ balance sheets, and secure the capability to forecast and manage profit and risk over a service contract lifetime (particularly important when pricing at the sales stage) and different cash flow patterns
Set up two-way distribution and supply chains, so that products and components can flow back to the business, and potentially back up the supply chain for remanufacture.
Get these right and there are real profits to be made. We are excited by the opportunities the CE presents, and are bringing together our capability and insight in both business design and transformation, and in product and technology development and manufacturing.