The EU from its perspective, and likewise many of its member countries with their own efforts, are backing the idea of the circular economy. The urgency of a looming materials shortage is getting a lot of policy makers into thinking materials should circulate rather than be used up. More bang for fewer materials is the idea. The strategy is to use all available means to educate, goad, tax, regulate and otherwise “nudge” companies into going circular. At the center of this is the idea of a circular business model.
Circular models will solve the materials and fossil fuel challenge
Indeed, the Swedish Government sees that reducing resources is also a strategy for reducing emissions, as explained in their recent announcement of their new circular strategy. After all, if you use fewer materials then the transport system emits less from lugging them around.(Link, Swedish text.) Let me explain why business modelling is necessary but not sufficient for the circular economy and suggest several developments.
The diagram below shows the general concept of the circular economy: economic activity works with a minimum of materials extraction, produces a minimum of non-useable waste and emissions to air whilst maximising social good. In its most responsible form it takes into account the effects of the activities on other parts of the world.
To understand the limitations of business modelling in the circular economy we first need to grasp what we mean by the term. For the purposes of this article we choose the model from BMI lab which I have sketched out in the diagram below.
A business model is employed by a firm to answer the four questions:
- Who are the customers I am targeting?
- What am I offering to them?
- How do I deliver it to them?
- Why is it profitable?
Putting circular economy into this model would encompass things like:
- Using recycled materials.
- Leasing the product rather than selling it so that it can be returned and recycled.
- Having customers share the product or service.
- Using less material throughout the whole supply chain.
- Repairing more and having a longer product life.
It might be helpful to explain the effects circulating material will have on business by looking at a model of a firm, shown below. Firms have four main components: the tools and other infrastructure needed for production, employees to produce the goods and services, inputs to the production and customers to buy the products. One more important component is the ownership of company and other suppliers of capital, like banks.
Policy makers will seek to guide firms to use materials differently
We include emissions and waste to make the model complete for our discussion of the circular economy. It follows from the diagram that policy makers will work to encourage renewable or recycled inputs, reduction of waste and modifying the waste so it can be re-used, reduction of emissions to air and new ways of keeping the product in service longer and then recycling it.
A wide reading of literature on circular economy reveals this emerging concept of circular business models. For example, a recent report from OECD says ..”new ways of producing and using products and services are needed, which in turn require innovative business models.” (OECD 2012.)
The general belief seems to be then, that if all firms adopted circular business models the aggregate effect would be a whole society functioning with circularity. It follows then that a national circular economy strategy should focus on getting firms to adopt circular business models.
Can we realistically rely on firms to deliver resource, and social value as well as economic value?
However, just focussing on firms might risk the whole transition. Indeed, any “firm-only” strategy will likely fall short of its goal encouraging instead sub-optimisation. Firms are not set up to – and can hardly be expected to -solve challenges like creating full employment, taking care of the most needy or increasing inclusion. “Circular business model” as a concept solely for firms may not be fully fit for purpose as a tool to transition to the circular society.
We need to bear in mind that the firm can only survive by “producing value”. I use the inverted commas because the economic term is rather narrow. It means keeping income higher than outgoing expenses. Not rocket science but not the easiest thing to do. Here are a selection of strategies:
- Get the customer to buy more product
- Sell at a higher price
- Push wage costs down
- Use cheaper inputs
Each of these strategies are not necessarily conducive to the circular economy. Selling more product will mean more material usage. Cheaper inputs might mean a higher environmental impact. Pushing wages down might mean using more fossil-fuel driven machinery instead of workers and so on.
Challenges with the business model approach
Several things about business models that complicate the circular society:
- The revenue model has to be robust enough to consistently deliver higher revenue than costs. Any model that does not carry excellent prospects of this will be discarded, however circular it may seem. Circular is often a good idea but it does not mean that anyone can make money from it.
- The “who” at the centre shows the focus of the firm is not on everyone – society in general – rather finding those who are willing to pay for the offer. These customers may or may not be interested in being part of the circular economy. And as so often is pointed out: those who need services the most are often those who have the least means to pay.
- Firms tend not to operate over the whole supply chain. They rather chose their niche. This is where the danger of sub-optimisation comes in.
- It is easy to be mislead by modern economics to think that the price of materials reflects their value. Indeed, as hinted at earlier, the price of anything is what the buyers are willing to pay. The value add of a business activity is simply what is left over from revenues after costs are dictated. Value added is a poor indicator of value to society of any economic activity.
- Firms operate in chains, supply chains, and one firm seldom carries out all the activities in a chain. The diagram below shows the main categories of firms in a supply chain.
Not business model for a firm but a supply chain
These supply chains are often linear. It is often difficult to calculate the environmental, resource and social impact of one chain or one product. This life cycle analysis (LCA) requires specialist knowledge.
For example, it is fairly easy to calculate the CO2 released from burning fossil fuel. However, the fossil fuel was transported to the gas station (by truck). The fuel was distilled (often by burning fuel) and the crude oil was extracted using fossil energy. With a supply chain perspective then, per kilometer tavelled at lot more fule is spent that the fuel I burn in my car . Even more considering car manufacture uses as much fuel as the car uses in its lifetime.
Circular thinking is from – to – and back again
Circular thinking offers another view as the diagram below shows.
Instead of thinking in terms of linear supply chains, the circular economy focusses on regenerative circles in terms of from – to – back. The diagram above illustrates this approach. Food supply becomes field to plate to field. Water supply becomes from rain to tap to surface water. Housing becomes forest to timber to forest and so on.
So, just focussing on individual firms will not usher in the from – to, and -back approach of the circular economy. Business modelling needs to evolve if society is to transition to the circular economy. We cannot continue to see the world simply as separate production units (“firms”) that need to be goaded, educated and legislated into transforming to circular production units. We have to think bigger and see new forms of ownership, production and collaboration.
Before we explore new ownership forms there are three important differences with this kind of thinking.
- All material in the supply chain can be compared to books in a library: checked out, used but not degraded and then checked back in again. This means among other things that the economic system needs to include a material tracking facility.
- These new chains have several steps as with current linear systems. Measurement of the economic and social performance of the circular chains needs to be done over the whole chain.
- The effect of the chain on stocks is central – a circular economy odes not draw down stocks of raw materials available per person. A circular economy keeps stocks of materials in products in use at an optimal level.
- Because fossil energy use will fall to align with the Paris agreement, using energy to transport frequent and large amounts of, especially low value, materials will be less feasible. This opens for local and regional solutions for certain circular processes. Linear chains tend not to be scale-specific.
The diagram above illustrates the concept of scale of circular from>to >and back thinking. Heavy, frequent and lower costs materials need to circulate as close to people’s homes as possible. Lighter, more valuable, less frequent can circular nationally and internationally.
The diagram below shows the effect of the circular economy on stocks and the flows to and from products as well as the inevitable but essential to minimise, waste.
Stocks and flows are central to the circular economy
|Biological Stocks – from the living world||Mineral stocks – from the geosphere|
|Located in the living world||Located in the ground|
|Located in products in use||Located in products in use|
|Returned to living world||Located in stocks ready for re-use|
Towards an evaluation model for circular economy flows
We established earlier that the value added by firms says almost nothing about the social, resource or even economic performance of the supply chain. We need to evaluate this from>to >and back string from the point of view of what kind of society do we want. Lack of resources and the demand for fossilisation means we have to step aside from the “let firms get on with their thing and it will all come right” attitude. And this is where doughnut thinking and other ways of handling resources comes in. We like to see the evaluation of a circular chain as citizen-centric (remembering that owners of firms are also citizens).
A lot of good thinking around this comes from Kate Raworth and her Doughnut City Initiative. Amsterdam in particular is taking this idea on. She starts by asking city stakeholders what it would mean if their city thrived and if the city helped other parts of the world thrive too as a result of their interaction with it.
Question: what would your region look like if were thriving
Taking a regional perspective, a thriving, circular, region:
- Meets the core societal needs of all: from education to health, housing, gender and racial equality etc.
- Safeguards the boundaries of both the local and global environment: to minimise climate change, loss of biodiversity, ocean acidification and so on.
- Is clear how economic activities affect the world outside its own borders and seeks to act responsibly.
- Respects that both local and global ecological boundaries can only be adhered to through a circular economy.
Towards a circular business model evaluation tool
Any proposed model of how a chain of businesses provides basic needs to citizens could be evaluated against how well it supports the aims in the diagram below. A tool could be developed, for example, that estimates how much better or worse the circular model would perform compared to existing solutions.
The scale could be a simple scoring of something like compared to the present:
- -1 worse
- 0 no better
- 1 slightly better
- 2 much better
- 3 markedly better
In the theoretical example above, the proposed new circular model will not create more jobs, nor will it create less. The best performance is a positive effect on health, with increases in built infrastructure capacity followed by an improvement in the natural stocks. Firms will be more stable in production of a margin and there will be an improvement in the core needs being met although this scores lower indicating only those that affect health will be improved.
Advantages of using an evaluation tool
A model like this could help bring stakeholders together to help accelerate transition to sustainability. For example, understanding the benefits to society, citizens might be prepared to change behaviour, authorities might be clearer on measures like regulation changes or public procurement needed from their side, and firms could be prepared to invest in changes if they feel confident they can operate at a margin.
One further advantage of the model might come from understanding how measures to promote circularity through changes in supply chain models might create virtuous loops.
The model might not only be a tool to analyse business models at regional level but offer a way for stakeholders to understand virtuous cycles. Society is complex and adaptive. Some measures can create positive (or negative) ripple effects that go much further than the measure itself. Let us consider a practical example along the theme not of the circular region but the circular home. We could imagine an example where the municipality was considering employing a team of handy-persons (link to example) who would help out older citizens and those with physical difficulties with repairs and maintenance in the home, including helping them with energy saving and recycling.
The model indicates that these local jobs, which are themselves a positive for the community, reduce injury risk to the older population by making their houses safer and thereby reduce health costs. Using local materials helps local firms as does the general health improvement. By reducing energy use, it helps the carbon balance and climate system.
Daring to look at other models of production
Regional, citizen-centric modelling opens up for new combinations of ownership and business activities. We can accept that firms have a role to play within society in partnership with authorities and citizens. Once we accept they need to cover costs and have a margin over, we can lift our gaze beyond that to explore the value that citizens seek which is not money itself. Rather, exploring how to gain other values. Money’s worth without having to spend money.
Take for example the new kinds of platform economies that are emerging. Some platforms, often citizen-owned, bring citizens together to pre-pay local farmers for food on a subscription basis. This eliminates the waste from production that does not get sold, and eliminates the waste from the food left unsold in the supermarkets. It also opens for these citizens to compost their household waste to be collected by the farmer, coming close to the farm to fork to farm circular concept. Indeed, citizens become investors and in the case above are invited to the farm to help out, to plan production and generally enjoy the environment. A farm holiday without the need to pay!
As stated above, the economy is a complex adaptive system. And there are polycentric approaches needed in terms of scale, geographic and climate adaptation as well as cultural challenges. What is needed is not one solution but many. We hope that this article helps point out the major role local and regional authorities, together with stakeholder groups, can take in stimulating the dialogue needed that lifts our attention from firms to place-based, citizen centric circular models that bring many dimensions of value to the society they are embedded in. Approaches to evaluate a wider understanding of business models as chains that deliver services from-to-from could be useful in informing these dialogues.
Fraccascia, L., Giannoccaro, I., Agarwal, A. and Hansen, E.G., 2019. Business models for the circular economy: opportunities and challenges.
OECD (2012), Sustainable Materials Management: Making Better Use of Resources, OECD Publishing, Paris, https://doi.org/10.1787/9789264174269-en.