The circular economy talks about — well, the economy — that is formed by businesses of all shapes and sizes. So, how can businesses adopt a circular model?
Here are a few common business models in the circular economy:
- Product life extension — This includes the repair, reuse, refurbishing and re-manufacturing of products to let it stay in service as long as possible. The obvious benefits of adopting this strategy is less raw material extraction and waste generation.
- Product-as-a-service — This model aims to extend the period of use for existing products. It changes the idea of ownership. What if instead of selling ownership, we sell access to services? This ensures efficient use of products and less waste produced.
- Circular supply model — Replace traditional material inputs from virgin raw materials with renewable or recovered materials. We can cut down on extraction of virgin resources this way.
- Resource recovery model — As the name suggests, companies applying this model turn waste into secondary raw materials.
- Sharing model — We have many things that we buy and use only once. These products are underutilised and thus, represent wasted resources. What if we can have businesses that allow us to share products instead of buying our own?
Here’s a graphic representation of the circular business models by KPMG. It illustrates the models for three different phases: Design, use and end-of-life.
Obviously, there are a lot of overlaps between the business models. Companies would typically combine the business models listed above. It’s also not so clear cut as it seems.
I’ve decided to elaborate more about a few of the models I find fascinating and my thoughts about how it can — or can’t — be applied below:
Product life extension
It’s not a new business model, merely one that has been forgotten as cheap products proliferate the market and planned obsolescence became the norm. Nowadays, people are less likely to send their old shoes to a cobbler to repair. It is easier — and probably, cheaper — to just buy a new pair of shoes.
Some companies, like Osprey and Patagonia, have adopted this model by giving a lifetime warranty to their customers, who can send their items back to be repaired or replaced throughout their lifetime.
Potential issues:
- The take-back model and reverse logistics — to make this happen, businesses have to make it easy for consumers to return the goods to the company. Can they send it via the mail? Or drop off at the stores? If it is inconvenient or costs too much, consumers won’t do it.
- Cost of repair, reuse, refurbishment and re-manufacturing — this will have to be lower than the cost of just dumping the product into the landfill and creating new ones. How to lower this cost? Who in the supply chain will do this job? How will the product flow through the different players? How will this impact the bottom line of the business, who might just prefer to sell more new products?
- Concept of depreciation — Companies write down the value of their assets as the years go by. This could even be the chairs, office tables, pens and computers in the office. Oftentimes, companies will just throw out these assets — that are still usable — to the landfill. It is only deemed worthless because of the accounting standard. Of course, some companies will trade in the assets for new ones, choose to lease assets or donate it to employees or others. So, how can we change the accounting concept of depreciation?
Product-as-a-service and sharing models
I love these models because it requires a mindset shift in the idea of ownership. What if instead of owning products, we just rent it? Or we pay a subscription service or pay-on-demand whenever we want to use the product.
Ride-sharing and car rentals, I think, are a prime example of this. There are also companies that rent out clothes, tools, light bulbs and furniture.
This ensures optimal use of products, less extraction of raw materials and reduces the amount of waste produced.
Potential issues:
- Logistics and cost of maintenance — How to make it convenient and affordable to both the business and consumer? How to make sure the consumers are motivated to take good care of the products and return it to the seller after use?
- Impact on business cash flow — This report from KPMG has several good examples about how this business model will impact a company’s business model. For instance, for businesses with a pay-per-use and rent business models have to keep the assets in their balance sheets and shoulder more financial risk. It’ll also change the business’ cash flow because the revenues will probably be spread out over a period of time (pay-per-use, subscription, rent).
Circular supply and resource recovery models
Honestly, if we can replace all raw materials with recovered, recycled or bio-based materials, that would make a huge change for the world. Imagine, no more virgin, limited resources extracted! What’s waste is no longer waste but input for a new product.
This is already a model commonplace in some industries. According to an OECD report, the proportion of recycled production in the global supply of industrial metals has remained between 15% and 35% for the last decade.
There are also a lot of innovations going on with bio-based materials, such as “plastic” made of seaweed or corn.
Potential issues:
- Cost, cost, cost! — Will it be too expensive to recover materials from used products? If a third party does this, at what price does the responsible party buy used products and sell recovered materials?
- Biodegradable or bio-based materials — There are controversies regarding the use of food crops to create bioplastics, as well as the definition of biodegradable plastics, for instance. Under what conditions is it biodegradable? Is it 100% biodegradable? What impact does it have on the environment?
All in all, for these business models to be implemented, the cost has to make sense. Businesses will always want to protect their bottom lines, and consumers will always want to get the most bang for their bucks.
By implementing these changes, will businesses pass on the costs to consumers? In that case, would consumers who still want to purchase these products or services?
For these models to scale, it’ll have to be affordable and convenient. Most of the solutions I see now are not really accessible to the mass population due to its high cost. How can we make it more commonplace?
Government regulations — plastic bag bans, extended producer responsibility — is the fastest way to achieve this, of course. That’s why in Europe, it is often cited as a driving factor for companies to change their business models. While we see some of this in Malaysia, it’s still a slow crawl with weak enforcement.
Another huge trigger for this is if multinational companies decide to adopt more circular models and move their supply chain to do the same. Some, like Unilever, are already running pilot projects in some countries by offering refill of liquid products for consumers who bring their own bottles, for instance.
I’m interested in finding solutions to make this happen. Let me know if you see any successful models that make circular economy models accessible, affordable and widely implemented out there!
And by widely implemented, I mean solutions you can find in your regular supermarket everywhere, instead of only in up-scale stores in the city ;)
Sources:
https://assets.kpmg/content/dam/kpmg/nl/pdf/2020/services/circular-revenue-models.pdf
https://assets.kpmg/content/dam/kpmg/nl/pdf/2020/services/circular-revenue-models.pdf
