What Exactly Is a Circular Business Model?
Learn about different aspects of circular economies and how their business models work to support sustainability.
What is a Circular Economy?
In our capitalistic system, we accumulate more waste than we can afford to recycle, upcycle or sustainably manage. There is so much waste in the world that countries cannot deal with, which ends up being either incinerated, leading to increased GHG emissions in the atmosphere, or dumped in open landfills or the ocean, leading to massive biodiversity disruptions. An infamous example is the Great Pacific Garbage patch - an enormous collection of marine debris made up of non-biodegradable materials like plastics spanning from the West Coast of the US to Japan, as shown in the illustration below:
Source: National Geographic
Globally, we generate roughly 2.01 billion tons of municipal solid waste each year, and this figure is expected to grow to 3.40 billion by 2050
Plastic in the ocean eventually breaks down into smaller pieces called microplastics, easily ingested by marine fauna, causing them to eventually suffocate and succumb. Below there’s an image of the type of devastation this causes.
Source: Kayo Creative Agency
This is just one of the many examples of the consequences of our poor global waste management system. Others include the large toxic e-waste camps in Africa, where electronic waste from Europe gets incinerated nearby local villages leading to increased exposure to cancer and birth defects. Additionally, causing the spread of diseases like cholera, hepatitis, and typhoid from the groundwater pollution that thousands of people in India are exposed to due to the fast-fashion textile industry.
We need an alternative waste management system that allows for the re-introduction of waste into our life.
This is where the concept of Circular Economy comes from: “A circular economy keeps materials, products, and services in circulation for as long as possible.” Within a Circular Economy, sourced materials used to create products are reduced, items are redesigned to implement as much biodegradable or recyclable products as possible, and waste is recaptured and seen as a resource to manufacture new materials and products. When successfully designed, circular strategies have the potential to protect the environment, improve economics, and elevate social justice.
Below you can visualize how a Circular Economy works:
This is known as a butterfly diagram, which displays the continuous flow of materials within a Circular Economy. It is characterized by two cycles - a technical cycle where products and materials are kept in circulation through repair, reuse, and recycling processes, and a biological cycle where biodegradable materials are returned to earth to regenerate nature.
Three Strategies for Building a Circular Business Model
Considering a circular economy’s technical and biological cycles, how do we translate these into actionable steps to build a circular business model? Harvard Business Review offers three main strategies:
Retain Product Ownership
This is particularly pertinent to those offering a high-value product that can be rented to a customer and then returned to the owner. An example is Xerox, which leases its printers and photocopiers to corporate offices. Another example is the rental of fancy outfits - Rent the Runway rents designer clothes to people who need a smart outfits for one-off events.
2. Product Life Extension
Through this strategy, a company attempts to extend the lifecycle of a product for as long as possible. This begins with the design of products that last longer, which means fewer purchases over time. This seems like a bad idea for a business, but durability is actually a key competitive differentiator and provides a strong rationality for charging a premium. Examples of these are the outerwear brand Patagonia and the luxury home-appliance company Miele.
3. Design for Recycling
This strategy implies the re-design of products and manufacturing to maximize the recoverability of materials. Companies that choose these pathways usually require a partnership with an entity that has expertise in recycling a certain set of materials. An example of a successful, long-lasting partnership of this kind is that between Adidas and Parley for the Oceans. Parley is an NGO that collects plastics from the ocean and makes textiles for Adidas from the waste collected.
How are Circular Business Models Successful in Closing the Loop?
Now that we’ve gotten a good grasp of the theory, how can we ensure that these strategies are successful in practice? Firstly, we need to acknowledge that when implementing any one of the above strategies, this inevitably affects multiple, if not all, layers of a business model. For example, if a company provides repair and maintenance to extend the life of a product, it will also require a new set of resources and capabilities with implications for its cost structure. Or one that attempts to shift to a leasing revenue model will have to determine new key activities and re-create a brand perception for how customers view the value proposition of the company’s products.
Therefore, implementing a successful circular business strategy means, first and foremost to take into account all the modifications needed for the entire business model to continue to function. This is difficult to generalize because of each industry and each company. There’s plenty of room for experimentation and innovation, no one-size-fits-all.
Undoubtedly, however, each company must address the ecosystem it operates in to make its strategy truly successful. For instance, it may not be a smart idea to invest heavily in a recycling scheme in a location where any types of recycling plants and technical expertise are lacking, as partnerships are crucial to making this strategy successful. In short, a company can rarely do it all on its own. To make a circular system work, you need key committed partners with shared objectives.
Hence, a company should establish three things to make its circular strategy successful:
A thorough understanding of how circularity will change the entire business model in all its facets
An awareness of the ecosystem in which it operates - understanding its challenges and opportunities
Strong like-minded partnerships - creating a supportive network that enables the strategy to thrive
Businesses that Implement Circular Models
Finally, let’s have a look at some examples of companies across various industries which successfully implemented circular models to take inspired action.
Teemill is a UK sustainable t-shirt company that was born out of a circular business model. Teemill harvests GOTS-certified organic cotton, uses renewable energy and water recycling systems during production, turns cotton waste into paper for its packaging, and has built a recycling scheme to get the t-shirts back to be remanufactured once they’re worn out. Here’s a diagram of Teemill’s closed loop:
Source: Ellen McArthur Foundation
With Teemill, anybody can create their own t-shirt designs and open an e-commerce business. They then can leverage Teemill’s sustainable production to build their business. Once a customer orders your product, Teemill takes care of the printing on-demand (to reduce waste) on its organic t-shirts and ships it. Each t-shirt comes with a QR code on its label that allows the customer to request for the item to be sent back for recycling.
Teemill integrated a mix of Product Life Extension and Designed for Recycling strategy - it built a durable, high-quality product and, through its recycling scheme, is extending its product’s life as much as possible. In this loop, the materials are fully re-integrated into the supply chain.
2. Food: De Clique
This Dutch company collects organic waste like coffee grounds, orange peels, and other food by-products from businesses and then re-sells them to third-party manufacturers, which transform these items into new products like food ingredients, cosmetics, and biomaterials.
“We are working towards zero-waste cities in which all residual flows are reused.”
Usually, this type of waste is sent to landfills or gets incinerated. Through this system, De Clique turns waste into high-value products, and as a result, the company reported that many businesses they work with are now taking steps to reduce non-useful waste. But this wouldn’t be possible without a strong network of partners that enable this system to function effectively. In fact, De Clique collaborates with over 50 organizations, including both those from which they collect waste and those that make products with it.
Some innovative companies working with De Clique are:
Peelpioneers produces cleaning products and hand soap from orange peels.
Rotterzwam uses spent coffee grounds as a substrate to grow Oyster mushrooms which are further processed into products such as vegetarian bitterballen, an iconic Dutch bar snack.
De Leckere produces orange beer from orange peel.
Here we can clearly see the power of building strong partnerships to make a circular business model successful. However, De Clique also had to develop a solid business case and financial plan that ensured the cycle was scalable so as to expand to other cities in the world. To avoid scaling a loss-making enterprise, they focused on sales and operations rather than brand building.
3. Plastics: Tesco
Innovation doesn’t always have to come from young hip circular start-ups! Tesco is an interesting example of how a major UK supermarket has managed to eliminate 1 billion pieces of plastic from its stores by 2021. How? Through its 4R circular strategy: Remove, Reduce, Reuse and Recycle, which informs all of its packaging designs.
An example of this was its removal of multi-layer plastic packaging. More than 40% of its customers include a multi-pack in their shop, which is usually wrapped together in plastic film. Since 2020, Tesco has removed all these plastic films from its UK stores. Through this simple bit of software programming, it is estimated that 67 million pieces of hard-to-recycle plastic film, with an equivalent weight of 350 tons, have been eliminated.
This is an example of how sometimes starting ‘small’ could actually have a vast impact, especially when operating within such a large company as Tesco. This is to show that circularity doesn’t necessarily have to be disruptive; it can start with simple policies.
Key Takeaways
Our global economy produces more waste than it can afford to recycle, upcycle and/or sustainably manage, leading to devastating social and environmental impact.
A circular economy is a system in which waste is seen as a resource to be re-integrated into production. We need circular systems to be applied to business models across various industries to reduce waste and innovate current production processes.
Three key strategies to create circular business models are renting out products instead of selling them, extending the life of the product by its design, and creating effective recycling schemes.
These can only be successful if the company takes into account how circularity will affect all facets of its business, the strengths and weaknesses of the environment in which it operates, and the formation of partnerships necessary to support its objectives.
