The world has moved into a new era in the past thirty years. We have progressed from the Industrial Age to the Information Age. The rate of both cultural and technological change has never been faster. Businesses that succeed have always been the ones that are controlled by individuals that produce new goods and services that would employ the energy existing in emerging trends, but these skills are more vital than ever in an environment where the pace of chance is so swift.
What this all means is that critical thinking abilities are essential. The companies that are successful now are those that possess managers who are able to “think outside the box” and see future possibilities, and resolve issues related to uncertainty. The main issue being resolved in this paper is “how to get more from fewer resources”.
We live in a world in which temperatures are rising, there are more frequent water shortages, scarcity of food supplies are rising, along with the gap between poor and rich. Demand for goods and services continuously grows as a result of increasing populations, technological improvements, and growth of the middle class in developing markets. These changes will pose a noticeable threat to businesses because of commodity cost inconsistencies and no market stability as raw materials get harder or more costly to source.
Research shows that only a limited number of companies have a diverse strategy to address supply risks in a world with scarcity. Simultaneously, substantial waste is widespread across the global value chain. For instance, “in Europe, material recycling and waste-based energy recovery capture only 5% of the original raw material value, one-third of food is wasted and an average office is used only 30-50% of the time, even during working hours” (Amélie, 2016).
Businesses have to innovate and adapt to respond to the imminent risks and chances presented by these challenges. This will involve making new goods and services to satisfy the requirements of an increasing population in a world with scarcity and switching from the present linear “take-make-dispose” economy approach to a circular economy model.
“In simple terms, a circular economy ensures products do not quickly become waste but are refused to extract their maximum value before safely and productively returning to the biosphere. It covers models such as refuse, remanufacturing and recycling” (Amélie, 2016).
“In a circular economy, the value of products and materials is maintained for as long as possible; waste and resource use are minimised, and resources are kept within the economy when a product has reached the end of its life, to be used again and again to create further value” (European Commission, 2015).
A circular economy is restorative and diminishes waste by design with better products, materials and systems design, empowered by innovative business models. Circular economy essence is to uphold systems thinking, embed biodiversity, design out waste and run closed loop systems on renewable energy.
The circular economy provides a chance to inspire companies to behave in new sustainable ways, making use of various familiar concepts such as reuse, reproducing and recycling. It brings many value creation mechanisms which are disassociated with the consumption of finite resources
The benefits of a circular economy
- Reduction in price risks (eg, savings on material costs) and supply risks (adding to the maintainable fossil energy and raw material supply);
- Reduced dependency on resources (eg, energy) and increase in business resilience;
- Contributing to local economy, operation license and improved acceptance by stakeholders;
- Aiding new innovations and new opportunities for profit with new methods of thinking.
- Reduction in GHG emissions as well as other bad externalities and their impacts on the business financially.
A circular economy brings a different angle that companies can seize at a period when there are changing consumer behaviours, adapting to trends, technology, shared assets, and getting prepared for new alternative business models. Improved technologies such as analytics and big data lets circular economy opportunities swiftly scale up since it is an economy of flows, an action that was not possible previously.
“For sustainable development to be achieved, it is crucial to harmonise three core elements: economic growth, social inclusion and environmental protection. These elements are interconnected and all are crucial for the wellbeing of individuals and societies” (Amélie, 2016).
Also, a circular economy is an opportunity in relation to the United Nations Sustainable Development Goals (SDGs). That aim to put an end to poverty, protect the planet and ensure prosperity. Circular economy approach would aid in many of the UN SDGs since they see past the “industrial revolution-inherited, linear, extractive model of ‘take, make,dispose’ to shape positive solutions “(Amélie, 2016).
Five steps in achieving a circular business
“The principles of circular economy provide great inspiration to improve environmental, economic and social performance of our business. Nestle applies life cycle thinking to ensure that innovation hits this triple bottom line of sustainable development” (Amélie, 2016).
Step 1: Assess the current state of your circular economy
Firstly, observe the things in which the business is already doing that is following the principles of a circular economy. Certain assessment tools can be used to evaluate the company\’s current circular economy position. Some questions to ask in relation to the business include:
Does the business:
- Retrieve its waste and map flows and have objectives and reporting on resource/material consumption?
- Recycle its byproducts and removal of waste from its supply chains?
- Reproduce its goods and encourage upgrading and maintenance?
- Run a program for reduction of water/energy consumption or make products that aid in saving water/energy?
- Increase and optimise the efficiency and performance of goods and the business?
- Ensure that supplies are sustainable?
- Perform reverse logistics or share assets?
- Leverage new technology and big data?
- Consolidate Eco-design (for recycling, refurbishing, etc), increase product life from obsolescence, have durability in mind when designing?
- Carry out industrial symbiosis (swap materials with nearby industrials)?
- Develop strategic partnerships which contribute to circular economy development?
- Working with public authorities on policies which enable a circular economy (lobbying)?
Step 2: explore new opportunities for circular economy
There are various business models and methods which can be used in developing new opportunities. The most common opportunities which can help the business become more circular are listed below:
Begin with design (Product development)
Chances to make an impression are best early on in the product design stage and diminish later in the life cycle. Therefore, in order to reduce risk of negative impact, businesses should begin at the product and product design stage. For instance, a business should strive to design goods which will consume less energy both in the production stage and the consumption stage. AkzoNobel’s Decorative Paints business has produced Weathershield products which keep buildings cooler through reflecting sunlight. What this means is that less electricity is required for air conditioning
The eco design concept can be used in the innovation and product development process. Modular design, for example, that breaks a product into smaller parts which then can be created independently, used and replaced, can also effectively enhance a product’s life cycle.
Make the best of circular supply chains and acquisition
At every step of the supply chain, businesses can try to implement circular opportunities in their operations. Upstream in the supply chain, for example, businesses can make use of renewable resources which can remain in the economy after being used and be used as input for other (or the same) applications. An example of a circular supply chain is DEMB’s Joure plant located in the Netherlands.
Reduce, reuse, recycle
Businesses can make use of the simple 3R concept (reduce, reuse, recycle) and get the value from waste streams. Every material stream can be seen as precious resources and used in the best achievable way. In this method, the waste value chain can be stirred into a positive spiral of value for the business (more value in the remanufacturing and reuse stage than in the recycling stage). For example, Nestle’s district capsule recycling program is a good example of waste product recycling.
Lengthen product life
From the perspective of product development, businesses can not only forbid pre planned obsolescence, but strive to extend component or product lifetime as well. At AkzoNobel, one of its decorative innovative paint products for coating exterior wood can last for up to 16 years. That is 25% longer than the standard product.
Share platform and use product as a service
Businesses can go from “owning” to “using when needed” as much as they can and share so as to optimise the ratio of resources being invested for every use of a product. Product as a service can incorporate the advantage of circular resource productivity. Philips is a good example, converting the lighting business from a product to a service model.
Share and collaborate
From a broader perspective, businesses should continue looking out for opportunities, for example making use of other businesses byproducts, supplying waste streams to other companies as raw materials, working with customers in order to reduce waste, sharing sites of production, etc. Even though various cases will take a while to economically scale up, collaboration between businesses still remains a major factor of success in achieving a circular economy in the long run. Nudie Jeans, a Swedish denim businesses offers denim repair at its shops for free. Instead of disposing of old, worn out denim, consumers bring them in for renewal.
Step 3: Assessment of circular economy: Ensure high triple bottom line impact
It is essential to make use of tools such as environmental, social and economic assessment to ensure that the new circular businesses models reach the triple bottom line. The most prevalent methodologies and tools that can be used will be stated below. Most of the tools are commonly known but every individual one has to be carefully contemplated based on circular economy initiative.
Assessment of environment
Life cycle assessment (LCA)is a well known methodology which is used in estimating the environmental performance of new innovations. It could be useful in particular for circular economy initiatives while it uses a system perspective. Emissions of green house gas, water use, loss of biodiversity, land use, using non- renewable materials, and human health impacts are just some of the life cycle metrics which are used commonly. LCA is accountable for every environmental impact of a process or product, from extraction of material through end of life. It is vital to take a look at a broad set of indicators rather than individual indicators such as green house gas emissions or using non renewable materials alone. Also, in the case of new business models, the LCA calculation might be insufficient and should be changed to reflect the actual impact (such as model of reuse).
LCA is frequently done in later project stages to ensure targeted environmental benefits, for instance, when the designing of a new good is frozen and every input data is known. In instances where environmental performance does not meet expectations, it usually is too expensive or late to make design changes. It therefore is recommended to make use of LCA from beginning project stages on so as to be sure to make the right decisions (eg, about ingredients, manufacturing strategy or sourcing) while freedom in design remains high.
Social assessment
A circular economy usually is linked to job creation, which typically is a social impact. Social life cycle assessment methodologies (social LCAs) are not as well developed but can be useful doe to their similar structure to normal LCAs. Social life cycle assessments can not help in quantifying this and shed light to other potential social impacts. In addition, some qualitative and quantitative methods and an appearing standard, the UNEP SETAC Guidelines for Social Life Cycle Assessment of Products, also are being developed. In addition, the round table for Product Social Metrics has provided a Handbook for Social Impact Assessment led by some industry key players.
Typically, qualitative methods are based on questionnaires similar to checklists. They are easy and quick to perform to a certain degree, but somewhat subjective as well. In any instance, they can aid in raising awareness and highlighting potential opportunities or issues which would have been overlooked and not addressed otherwise. The quantitative ways need way more exhaustive data collection and underlying databases aren\’t yet available or incomplete. However, the results remain.
Social LCA takes a look at the effects on various stakeholder groups and social themes that are related. In a circular economy context, creation of jobs is the most talked about subject, whereas different indicators such as quality of created jobs and worker health and safety, are overlooked. Aside from job creation, there are various other social topics. Potential opportunities and issues could easily be overlooked, especially for goods which use materials that come from international or Unknown sources.
Similar to environmental LCA, stakeholder groups and social indicators need to be looked at holistically so as to prevent cases whereby focusing on fixing a particular issue brings about unwanted negative consequences on others.
Economic assessments
Overall initiatives and business models of circular economy can reduce costs of input and create entirely new profit streams in some cases, create better resilience in supply chains, and limit exposure to shortages of material scarcity and related impacts of price unpredictability. New business models like leasing contracts or rentals create a more long term relationship with customers. There are also various non tangible benefits, for example, reduced risks and improved reputation. Finally, initiatives of circular economy usually come with financial subsidies and incentives which might aid in boosting its business case.
Most means of assessing circular economy initiatives are customary methods in business, depending on what businesses already know and do.
The Natural Capital Protocol was established to aid in generating trusted, actionable and credible data for business managers so as to inform their choices. The protocol reacts through putting forward a systematised framework to identify, measure and value impacts and dependence on natural capital.
Life Cycle Costing (LCC) principles do not only assess purchase price and every associated cost but end of life costs, operating costs and costs of externalities as well. Merged with a classical discount cash flow model (DCF) helping today\’s value of future revenues and costs in association with a circular economy initiative, it can be achieved using a Monte Carlo simulation bringing a statistical distribution of potential project returns dependent on probabilities and key variables.
Nonetheless, the model is restricted by the anticipated investment returns. Circular economy investments in most cases are long-term, thus a substantial share of the value would be gotten from risk minimisation and intangible benefits, that are always very hard to model in a classical DCF methodology.
Within a DCF model, costs can be regarded as investment, annual operating expenses or one off costs needed to implement and operate the new circular economy business model, like cost of set up of a collection network, or recovery of raw materials as a step in the manufacturing process.
The cost reductions/revenue streams below will positively effect the business case:
- More sales from extended volumes that are triggered by cost savings increasing the consumer base or purchase frequency;
- More sales from higher selling price related to a higher value proposal;
- Achieved savings on raw materials when raw material inputs are lessened by recycling, modular strategies or dematerialisation.
- Costs of disposal might be lowered with reduced disposal volumes; this might involve reduction in costs of logistics as well;
- Subsidies/financial motivations might be accessible for funding circular economy initiatives.
In most cases, such impalpable benefits won\’t be involved in the financial/economic business case. They however need to be recognised and brought to decision makers’ attention given that they might materially lower the risk profile of the investment and/or raise the impalpable value of the investment. Commonly, the items will provide a substantial benefit potential to the economic business case of circular economy initiatives if they were measurable.
In order to promote the initiative, it needs to show a net present value(NPV) that is positive, a payback period that isn\’t too long, and an internal return rate above the discount rate.
Step 4: implementation
Implementation of a business opportunity in a circular economy context can range from something easy such as assessment of material efficiency, to something more complex such as developing a new business model, including teaming up with other businesses to support circular material flows in industrial symbiosis.
Implementing should involve:
- Making use of established processes and structures of the company to carry out implementation, for example, new product development (NPD) process. Simultaneously, adapting those processes and structures might be needed incase the new business opportunities really are a breakthrough and something never done by the business before.