Realigning Business Models: The Circular Economy

A few months ago, I outlined the need for responsible consumption and production practices to lessen the harsh effects of widespread consumerism. Many developed countries, and especially the U.S., have promoted an environmentally harmful culture of excess consumption that has reached a level the Earth cannot sustain. Buying fewer products and better-quality ones is a key towards reaching a future the Earth can support. While much of that blog focused on consumer action, businesses play a role in this as well by producing responsibly and not promoting the throwaway culture society has built. There is another way that offers businesses a chance to realign production practices to something that can be sustained: the circular economy.

The United Nations defines the circular economy as “an economy in which waste and pollution do not exist by design, products and materials are kept in use, and natural systems are regenerated.” This relates closely to the U.N.’s Goal 12 of Sustainable Development: sustainable consumption and production. In contrast to the current “take-make-waste” linear economy of ours, the circular economy provides a way to implement sustainable production methods through hyper-efficient resource usage and reworking existing business models. Under such a model, we would draw less from the natural environment, therefore improving environmental health while still being able to meet consumer demand. Making the shift towards a circular economy will take a fundamental change in how companies undertake business, but with depleting natural resources and an ever-increasing global population, it offers a path towards a business landscape that will be feasible in the long term.

The goal of this blog is to outline the principles of the circular economy so that businesses can tailor their activities towards this more sustainable model. There are two key components of the circular economy that will allow businesses to maximize resource efficiency and limit waste and pollution. These components are closed-loop manufacturing and reworking business models to provide services rather than goods.

Closed-Loop Resource Usage

Closed-loop systems are the first feature of a circular economy. Under closed-loop manufacturing systems, production components and materials that cannot break down are endlessly recycled into new products, rather than sitting in a landfill after products reach the end of their useful life. In one of the earliest and most important pieces of literature regarding the circular economy, Lovins, Lovins, and Hawken make the distinction between natural nutrients and technical nutrients in production. Natural nutrients are those that can be returned to nature after use without adverse environmental effects (i.e. food scraps that will break down.) Technical nutrients, conversely, are those that will be hazardous if left to break down and/or environmentally costly to extract and should therefore be endlessly recycled back into a useful production material (i.e. heavy metals in electronics). Such a system enables the conservation of scarce materials that are becoming increasingly difficult, expensive, and environmentally harmful to acquire.

Via: ellenmacarthurfoundation.org

Some corporations have already begun to implement closed-loop production practices into their business operations. Levi’s Jeans are a prime example in the clothing industry. Levi’s has a goal to be circular-ready by 2025. So far, they have released a “WellThread” line of jeans that use circulated fabrics and are aiming at expanding circular production capabilities for a greater range of products. Timberland is another clothing company aiming to go fully circular by 2030, with a goal of being totally net positive to the environment by that time. Their boot, the Earthkeepers 2.0, is built to be “fully disassembled and recycled” upon the end of its useful life; the company also sources its raw materials from regenerative agriculture that can be sustained going forward.

There are examples of circular production practices in the technology sector as well. Energizer has worked to design their EcoAdvanced batteries, which contain materials from recycled batteries. Dell and Cisco also have taken strides in using recycled and remanufactured materials in their electronics and product packaging. Given the environmental costs of electronic waste, this is an area with much progress yet to be made.

Reworking Business Models

Another key feature of the circular economy will involve the difficult task of rethinking business models. To implement closed-loop manufacturing, companies must be able to control products once their useful lifetime is finished in order to reuse the technical nutrients of the product. Under our current system, consumers are most often tasked with disposing of products after they are no longer needed. Even if we give consumers the benefit of the doubt on their recycling practices, this is not nearly enough to drive systemic changes in product disposal.

Two business models already exhibit features of a circular economy and should be further promoted: rental and resale. Renting allows businesses to maintain ownership and control of a product after the consumer is done with it, while the consumer fulfills their need for a product without owning it. There is much potential for expansion of this business model of providing a service rather than a tangible good. Philips has used the rental model to provide lighting to companies while maintaining control of those lights after their client has no use for them. Ridesharing services are another way that markets can align to provide a service to customers (transportation) without providing ownership of a good (a vehicle).

The resale model also has great power in the circular economy as it takes functional products that the owner has no use for and puts these products into the hands of those who do have a use, eliminating the need for producing a new good. There is momentum in the resale industry, with clothing being a main industry where reselling has grown. In fact, the clothing resale market is expected to double in the next five years to $77 billion annually; high-end clothing resale market Rent the Runway recently received a $1 billion valuation. Levi’s has also made strides in this area, with the company offering Levi’s Authorized Vintage line, in which the company resells used pairs of their jeans. With technology improvements and inventive entrepreneurship, it has become easier than ever to connect buyers and sellers of used products, ranging from huge markets such as eBay, Facebook Marketplace, Craigslist, Poshmark, and Shopify down to smaller, niche markets that can help buyers find specific products. Used products offer a chance to consume without such harsh environmental harms; it offers an opportunity for businesses to enter into the secondhand market.

Calls to Action

Businesses must be the players to drive the economic rearrangement that is the circular economy. Procurement and supply chain departments are positioned strategically to drive such a shift through their sourcing, production, and waste disposal policies and procedures. Managers involved in these roles must take stock of the environmental footprint of their entire value chain and product life cycles; this is the only way to measure and drive sustainable business action. While procurement and supply chain people can tailor production practices towards closed-loop manufacturing, top leadership play a large role as well. These are the individuals who are placed in a position to rework company business models and make the strategic decisions that affect how companies interact with the outside world. Top executives are also in the position to rework company business models and should consider how their company can rearrange business activities in line with a service model that fits within a circular economy. While a business will not achieve circular production overnight and may not be able to reach a 100% closed-loop system, steps in this direction are needed and feasible for many. Overall, a fresh view on resource usage and efficiency along with a willingness to cater business operations towards a purpose-driven new model will make a great difference in the business sustainability landscape.

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Volume 2, Number 3. Copyright © CB Bhattacharya, 2022. All rights reserved. Research assistance for this blog was provided by Nathan Dobb.

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