Circular economy: how to transform existing business models?

Traditional economic models (or business models), taking as a reference the productivist triptych (exploitation, manufacturing, disposal), consider nature as being prodigal of an infinite quantity of resources. In other words, our economic systems are designed as vast open circuits which constantly siphon off natural resources to transform them into products which, at the end of the chain, are entirely or partly destroyed.

Unlike linear economic models, circular models are based on a closed-loop system, which aims to use and transform materials already circulating in the economy, rather than withdrawing them from nature. Thus, these circular models have a lower environmental footprint on two levels: they avoid the exploitation of natural resources and revalorize resources that could be considered as waste.

The exponential growth in global consumption, coupled with disruptions in the supply chain due to the health crisis, climatic, regulatory or market upheavals, has made more evident the imperative to evolve our business practices towards the principles of the closed loop circular economy. However, business strategies that value circular systemic solutions and innovations can allow for greater efficiency in the use of resources and annual savings estimated at trillion dollars by 2025according to figures from the Ellen MacArthur Foundation launched by the British sailor.

Source of opportunities

The systematic restructuring of our business models could therefore greatly reduce the pressure on natural ecosystems. Rethinking value creation in order to avoid the extraction of virgin raw materials when substitutes already in circulation exist, as well as a redesign of supply chain relationships to avoid waste, appear as two fundamentally different means. to produce and consume goods and services.

In my latest research article published in the Research Handbook on Innovation for a Circular Economy, I propose a flexible orientation framework to steer the development of new economic models which requires an in-depth redesign of each of its building blocks: products, supply chains and customer journeys. This is already the principle today, for example, of the roadmap of the H&M textile-clothing group to achieve a “circular ecosystem”developed in partnership with the Ellen MacArthur Foundation.

Some of the expected changes involve the redesign of sustainable products, thus allowing the use of recycled or reused materials, the creation of reverse logistics, networks of collaboration replicated in existing supply chains and the development of customer journeys that value the circular products.

With this three-block redesign, companies can modify, add, create or transform different dimensions within the proposed modular framework, in order to methodically redesign their processes as they implement circular applications. For example, the various initiatives of the clothing brand Patagonia, which launched in search of circularity for two decadesaim to redefine its products as a priority so that the company can recover and use all its waste.

Leading players within 10 years

Despite their definite sustainable competitive advantage, however, circular models are still only gaining a foothold in niche markets, which means they enjoy a lower market share compared to traditional mining models. On average, circular business models account for approximately 15% of production in all sectors. Nevertheless, technological advances, generational changes, commercial risks, or even new supranational regulations at European Union level augur an acceleration of this proportion.

the EU circular economy action plan adopted in 2020 within the framework of the European Green Pact notably introduces measures counting on the participation of consumers, companies and citizens according to a timetable serving as a prerequisite for becoming the first climate-neutral continent by 2050.

Despite their promise, circular business models still face a major challenge: breaking down cultural and commercial barriers. A study carried out by Deloitte and the University of Utrecht revealed that, despite the hype and a clear appetite for circular market transformations, both consumers and businesses reject the concessions that must be made at present.

On the one hand, consumers are partially unaware of the issues or unwilling to change their consumption habits, especially when they are in a hurry or have a limited budget. On the other hand, companies must arbitrate between satisfying the interests of shareholders, supporting high initial investments in process transformation, developing new partnerships and new routes to market and training their employees in circular processes. Furthermore, circular materials (reused, recycled, upcycled, bio-based) still remain more expensive than traditional materials (e.g. petroleum-based plastics).

Fortunately, the accumulation of societal pressure, political interest and investor influence draws a path that is unlikely to succeed if it follows a linear economy model. According to a recent article published by the World Economic Forum, companies born in circularity will be leading players from 2030, precisely because of their models based on circular principles which give them a clear advantage. The brand of hygiene products with less packaging Unbottled in France and its counterpart Lush in the UK are two excellent examples. Apart from the ethical and environmental causes they defend, these circular companies from their creation both offer more than half of their products without packaging. Although no business model is yet truly circular, the transformation seems to be advancing rapidly.

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By Maria Figueroa-ArmijosAssociate Professor of Entrepreneurship, EDHEC Business School.

The original version of this article was published on The Conversation.