Five steps towards circular business model success
In my last blog on how businesses can turn a profit from the circular economy (CE), I explored what the CE is, the benefits it brings and how leading businesses are implementing circular models. With an estimated €1.8 trillion in value in Europe alone on the table by 2030, many businesses see the compelling case to transition to the CE. The opportunity has driven the likes of Renault to set targets to increase the economic potential of the group’s circular activities by 100 million euros by 2022 – and seen innovative start-ups such as Dunnet Bay Distillers revolutionise the spirits industry with their recyclable refill pouch.
But many businesses still find it difficult to transition to circular business model success. Identifying the right model, or combination of circular practices, and switching from ‘how we’ve always done things’ to ‘how we’ll do things now’, is difficult. To further complicate matters, circular models are reliant on longer term system-wide collaboration. Getting all these different parties working to common goals and contributing to a circular system requires dynamic leadership that guides people out of their traditional self-focused mindsets.
To help leaders overcome these challenges, we’ve identified five practical steps that’ll enable your organisation to select, design and pilot the right circular business model.
1. Choose where to play in the market
Start by understanding which circular models are applicable for your business and the relative value they offer to your organisation’s value chain. The main business models to consider are:
- sharing platforms, such as Fat Llama’s marketplace for buying, selling and renting consumer electronics
- Product as a Service, where products are used by one or many customers by means of a lease or pay-for-use arrangement, such as HP’s Instant Ink service
- product life extension, extending a product’s lifecycle through initial product design and refurbishment or remanufacture, enabling resale such as Apple’s trade-in programme and certified refurbishment range
- resource recovery, upcycling or recycling products such as Artisanal network Rede Asta in Brazil which recovers discarded materials and transforms them into valuable corporate gift collections
- circular supplies, redesigning products and supporting operations, for example Google’s approach to its server hardware in its data centres.
The right model/s will be informed by the resources used and the value that’s lost in your existing business, and the potential value you can create and save by adopting a circular model. In this context, value means more than monetary transactions. It encompasses new value for an internal and external perspective, such as stronger, deeper relationships with customers, value from new data sources, and/or improved reputational value.
Understanding the full range of benefits will enable you to make better choices, limiting any negative external impact while providing value for people and planet. For example, the French company Schneider Electric created several circular engineering products, including leasing and pay-per-use options and take-back schemes. These new services now account for 12 per cent of the group's revenues and are projected to reduce 20,000 tonnes of primary resources and cut CO2 emissions at the customers’ end by 120 million tonnes by 2021.
2. Develop collaboration value
Once you’ve identified the right model or combination of models, map the different stakeholders you need for your circular business model to the value each could gain from their participation. This can include consumers, suppliers and infrastructure providers. It’s important to consider the goals of each stakeholder within your system and create shared goals where you work together for mutual benefit. To succeed, you’ll also need your partners to succeed.
Swedish home improvement chain Clas Ohlson recently launched a ‘tool as a service’ model which enables mutual value for themselves and their customers. Their customers pay a daily fee that provides them access to tools. Clah Ohlson gets guaranteed revenue through the subscription model and can reduce the overall number of tools in circulation, reducing waste.
3. Understand what you need operationally
Third, you’ll need to consider the operational changes required to enable the business model. Start by identifying your organisational capabilities – what is it you need to do that is new or different in a circular model. Do you have the people, technology, data and infrastructure in place to support the model? Do you need to adapt your existing capability, or do you need to create a new capability?
The modular headphone company Gerrard Street develop listening devices that can easily be refurbished or have components replaced if required. For this to work, they had to develop cost-effective ways to collect, refurbish or maintain parts, working with existing industry partners to scale across Europe.
4. Ensure financial viability
Once you’ve identified your business model, the partners and operational requirements, it’s time to choose a revenue model that enables your model to be profitable. There are various strategies you may want to consider such as subscription, end-of-use return, reselling or shared pricing models.
Swedish steel company Sandvik introduced buy-back into their sales pitch. They buy back any of their customers’ waste steel. This is a differentiator for customers to choose them, and also enables the recovery of valuable resource that they can remanufacture and resell.
5. Implement the model successfully
Make sure you plan your implementation in detail, together with the risks and challenges that may arise. To minimise the risk, we recommend you think big, start small, and scale fast. This will allow you to iterate, test and learn rapidly.
The CE is a unique opportunity. If you follow these steps, you will create value not just for your business but also your partners, the environment and wider society.
Creating value in new ways with the circular economy