Many ideas for the design of business models for the circular economy have been put forward. Some are based on case studies, others derived from theory. But why is it so difficult to provide a comprehensive overview of circular economy business models? The answer is simple: because there are so many of them.
We explored their variety in an April 2018 article in the Journal of Industrial Ecology (freely available through 2019). Together with Prof. Stefan Gold and Prof. Nancy Bocken, we reviewed the circular economy literature and found 26 major business model types, including for example “remanufacturing”, “waste exchange”, and “product-as-a-service”. These business model types reveal a lot about the numerous design options for the development of circular economy business models.
This is important not only for researchers, but also – and maybe much more so – for supply chain managers, business and product developers, innovation managers, and other practitioners working to make their businesses more sustainable. An astonishing variety of design options was found, including numerous value propositions, customer relationships, or supply chain approaches to close material and energy flows. Theoretically speaking, this variety allows for the development of more than 4 million different business model designs for the circular economy.
Complex, but a rich source for creativity
The notion of the circular economy is not new and can be traced back to early approaches in the field of industrial ecology, which promotes eco-industrial parks and other concepts to mimic nature’s principles in human activities since the early 1990s. But the translation of ideas such as closed material and energy flows or dematerialised products into business activities is a rather new phenomenon. This idea is supported by non-governmental organisations such as the Ellen MacArthur Foundation as well as a growing number of policies and regulations, which explains the growing interest shown by firms around the globe.
One of the main challenges of practically implementing circular economy principles is rethinking companies’ supply chains, and as a consequence the way they create and deliver value through their business models. This is because generations of engineers, operations managers, and business administrators spent decades or even centuries on optimising forward supply chains that conduct resources and goods “from cradle to grave”, and not from “cradle to cradle”.
For companies to create more circular production and consumption systems, they must develop and improve the reverse flows of their supply chains, and sooner or later that requires them to adapt their business models – for example, replacing non-renewable with renewable inputs, using recycled materials and creating products that are easier to refurbish or remanufacture. Companies can even replace physical products with less material-intensive services. A well-known example is Interface Inc, which offers floor-covering services rather than carpets.
Obviously, as soon as customers and their needs are affected, companies have to reposition themselves in the marketplace and adjust their logic of creating (economic) value with and for their customers, while they try to maintain natural resources and do less harm also in social terms. As our review shows, changes on the production side are rather invisible to customers and other stakeholders, and can lead to the need to rethink a company’s business model.
Needless to say, this is a complex endeavour, and the questions are endless:
Do we have to change our forward and reverse supply chains?
Should we do it now, or only when regulators and customers ask us to do so?
Can we improve our competitive position by moving toward closed-loop supply chains?
What is required is careful analysis and also the willingness to take the risks of business transformations – which are brilliantly described in two books by Ray Anderson, the late founder and chairman of Interface. Our research cannot answer these questions in general as they are highly case-dependent.
Still, we can offer an overview of the many design options that business and product developers, innovation and sustainability managers can choose from to create their own circular economy business model. Once companies are willing to dig deeper and search for the business potential of the circular economy, they will understand that these design options can become a rich source for creativity and future business success.