The 5 essential steps towards circular economy

The circular economy is based on the idea that we can continue to drive economic growth, but only if we find a completely different approach to our consumption of raw materials and materials. The circular model means that right from the start we design our products so that they can be manufactured using green energy, so that large parts of it or the whole thing, including packaging, can be recycled or is biodegradable, that wastewater from one producer can be used by a neighbouring manufacturer which does not need completely clean water and so on. It creates circular supply chains where products or parts of products can be returned and where customers expect them to be recycled or broken down for recycling.

Circular start-ups know how to follow this logic right away. They will invent a new type of biodegradable packaging, or develop a sustainable way to make food last longer, but how does the circular economy affect large, established companies?

Here it gets really challenging. When it comes to sustainability, Danish companies are far ahead, but they are also struggling with some of the most difficult questions right now.How do we get our entire complex value chain, from ingredient suppliers in Indonesia, to the firms who transport goods, to our own production sites, to the intermediaries who sell our goods, to reduce GHG and CO2 emissions, or limit water consumption so that we can live up to our ambitious sustainability targets for 2030? Why should a supplier in a foreign country make his life more difficult, just because a company he barely knows, has some climate goals to live up to in Denmark ?.

When you look at the sustainability agenda in this holistic way and the so-called green transition, you can start to see the need to think about completely new business models. This maybe one that initially runs in parallel to the old one until the full transition can take place.

The "Circular Economy Business Model Playbook," produced in collaboration with some of the 100 leading companies that are members of CE100, provides a “how-to manual” so that businesses we support can work through systematically regardless of their starting point. When we asked the other members of CE100, who are some of the world leaders in circular economy, they said it was this kind of guide that they needed the most.

In response, we have jointly developed five strategic steps companies can take to make further progress into the circular economy. There is money in doing this - perhaps counterintuitively. The Ellen MacArthur Foundation estimates that, in 2030, the circular economy in Europe alone, will be worth $ 13 trillion. With that potential in mind, it suddenly makes sense that companies like Renault have set themselves the goal of increasing the financial potential of their circular business by DKK 750 million by 2022.

Nonetheless, there are many companies that find it difficult to identify the right circular model, or the best combination of circular initiatives for their particular business. It does not make it any easier that circular models rely on long-term collaborations across entire value chains and ecosystems. Getting all those people to work together towards a common goal and actively contribute to a circular system requires courageous and agile leadership to guide people out of their traditional company-centred mindsets.

The following five strategic steps will enable your organisation to select, design and test the right circular business model for your particular business:

1. Find the part of the circular economy that provides value for you ("where to play")

Buy, sell or rent your product via platforms. These include, "Product as a Service" where you sell a service instead of a product (think green mobility), extending the life of your product, restoring or reusing resources from your product, etc. There are parts of the circular economy that can be tailored to your business.

The right models are often identified from understanding the resources consumed and the value lost in the existing business, as well as the potential value you can create by moving to a circular business model. In that context, value means more than just profit. It also covers value creation such as stronger and deeper relationships with customers, value from new data sources and an improved business reputation and stronger brand.

Example: The company Fat Llama has created an online marketplace to buy, sell or rent electronics. And Dell is also in the process of making products where all their sub-components can be recycled.

2. Agree on the value of collaborating across your value chain

Once you have identified the right model, you must methodically identify all the stakeholders you need in your circular business model, and the value each one gets from being part of your circular value chain. This allows you to really discuss how to identify win-win situations.

It can include customers, suppliers, and infrastructure providers. It is important to understand each stakeholder’s goals, and then create common aims where you work together for the benefit of both parties. To be successful, your partners must also be successful.

Example: The Swedish do-it-yourself chain, Clas Ohlson, has launched a subscription service, where customers, for a monthly fee, have access to tools without owning them. In this way, the chain is reducing waste and storage space by introducing a completely new circular business model ("tools as a service").

3. Identify the operational changes the conversion will require

In this stage, we identify the operational changes required to succeed in the new business model. The best place to start is your organisation's capabilities: what do you need to do that is new or different in a circular business model, and do you have the right employees, the right technology and data and infrastructure in place to underpin the model? Can you manage with the existing capabilities, or do you need to develop completely new skills as a company?

Example: Gerrard Street develops headphones that can be easily rebuilt or have components replaced. To make it work, they had to develop a cheap and efficient way to collect, rebuild or maintain components, and they have done so by working with partners around Europe, showing how involving other parts of the value chain can work for the common good.

4. Ensure financial viability

Once you have identified your business model, the right partners and the operational requirements, then it is time to choose a profitable revenue model. This means considering and analysing the many revenue models the world has become used to in recent years: subscriptions (think Netflix), products returned when they are no longer used, resale and many other pricing models.

Examples: The Swedish steel company Sandvik guarantees the repurchase of its steel and H&M collects used clothing, which do not have to be H&M clothes.

5. Implement the model successfully

Plan your implementation in detail, and take into account the risks and challenges that inevitably arise. To minimise your risk, we recommend that you think big, start small, and scale quickly. This will allow you to test new concepts with a limited group of customers, get their feedback, go back and refine the concept and keep incorporating feedback until the customers are genuinely excited and willing to pay for the product.

If there is one thing larger companies can learn from startup companies, it is precisely the value of this experimental approach to new products and services, and the recognition that the customer is the only judge of whether something is good or not. That means remembering to check their willingness to pay.

The circular economy is a unique opportunity. If you follow these five strategic steps, you will create value, not only for your own business, but also for your partners, the environment and society at large. That makes it a truly worthwhile exercise.

Read the full article in Danish in SCM.dk here.