What are Circular Business Models (CBM)?

By: Pejvak Oghazi / Rana Mostaghel

Shortly, the demands and needs of approximately nine billion people will be about three times the current resources. At this time challenges will accelerate for the deficiencies of resources and enormous production of waste. Circular Business Models (CBM) is the solution for not only improving resource management and decreasing waste production but also reducing costs and expanding firm performance.

To handle the forthcoming challenges, the transition in Business Model (BM) seems necessary. BM determines not only the internal activities within the firm, but also extends the link between supply chain members and other partners. The three main elements of BM entails:

1)    Value Proposition: Focuses on what value is provided?

2)    Value Creation and Deliver: Discusses how the value is provided?

3)    Value Capture: How does the firm make financial gains and obtain other forms of equity?

Similar terms can be used interchangeably with CBM; however, precise observation makes it clear that CBM is a subcategory of Sustainable Business Models (SBM) and is slightly different from the closed-loop business models.  CBM is part of business innovation model in the realm of circular economy.

Shortages of resources, advanced technology, and customers’ behavior shifts have moved the attention of both practitioners and researchers toward CBM. This study aims to understand what Circular Business Models (CBM) are. We seek to understand the drivers, barriers, solution strategies, and methods of evaluating the CBM.

Definition

The idea and concept of Circular Business Models (CBM) can be traced to the early 1950s. Probably, the Ellen MacArthur Foundation was first to define and conceptualize the circular economy. Here a comprehensive definition that encompasses different aspects of CBM is explained.  Here a comprehensive definition that encompasses different aspects of CBM is explained: CBM is a business model that strives for 1) employing fewer materials and resources for producing products and/or services; 2) extending the life of current products and/or services through refurbishment and remanufacturing; and 3) closing the loop of products’ life by recycling. In short, CBM seeks to reduce, retain, and recycle.

Drivers

Organizations and firms transit from linear BM to CBM for various reasons such as:

• Anticipated performance: The Ellen MacArthur Foundation estimated a savings up to 630 billion for the European Union with the CBM adoption. For instance, General Motors outsourced their waste management, and results indicated a reduction in waste generation by 20% and a decrease of waste management costs by about 15-30%. Additionally, it achieves other aspects of sustainability and environmental benefits.

• Access to New Markets: Consumer behavior demonstrates a shift from ownership mentality to performance. Adopting CBM would assist in opening up new and innovative opportunities to access to new markets.

• External Pressure: legislations and regulations that politicians set for firms and organizations could motivate adoption of CBM.

Barriers

Despite benefits and anticipated performance of CBM model researchers and practitioners have identified several barriers to this transition such as:

• Cannibalization: since the CBM seeks to prolong the product quality and lifetime, cannibalization is a barrier especially to some industries such as technology equipment.
• Fashion vulnerability: similar to cannibalization, high-quality and long-life products are threatened by fashion. Some companies have managed this problem such as Rolex and Mielé with their strong branding. Their products live long without becoming out of fashion.
• Negative customer behavior: research demonstrates that despite benefits of innovative offers, users’ adoption time is much longer than expected.
• Internal resistant: lack of internal organizational support could be a hinder for leadership. Knowledgeable leaders with the understanding of benefits and challenges of transition to CBM would motivate and align the internal support.
• Supply chain conflicts: Research emphasizes that transition to CBM is not possible without support from supply chain members. Furthermore, conflicts of interest in the supply chain could be a powerful barrier.

Solution Strategies

There are many strategies to tackle barriers and implement CBM. In the following we discuss some strategies:

1)    Product design: the very first stages of product design make it possible to use fewer materials, make recycling and up-cycling processes possible and easier. Technology enables saving information about different component to reuse them and track them more efficiently. Some examples are upgrading (modular phone such as Google Ara project) and product transformation (H&M collecting cloths).

2)    Supply chain design: strategic selection of supply chain members facilitates CBM adoption. In addition, the reverse logistics empowers recycling process.

3)     Offering design: instead of just selling the products it is possible to share or sell service and this way maintain the value. Examples of such BM are performance model (e.g., hours of trust in Rolls Roys) and access model (e.g., car sharing).

4)    Regulations: policy makers can motivate via decreasing taxes for environmental produced products and increase taxes for use of natural resources. Similar to Swedish economy that have improved environmental quality and consumption efficiency. Organizations can also take initiative and motivate recycling an example is recyclebank.com that gives rewarding points for recycling and other environment activities to customers.

Evaluation

There are three major aspects of CBM that could be evaluated, namely:

1)    Business level and costs: direct financial value of selling waste, purchasing fewer materials, recycling and reusing materials and components.

2)    Market value: improving the quality and lifetime of products would change the nature of contracts and value propositions. For instance, long term relationship and contracts with customers to pay per service would take place for sell at one point. This is exactly what Xerox does.

3)    Ecosystem level: assessing changes of resource usage and lifecycle of products in the ecosystems should make impacts of CBM clearer.

Conclusion

In conclusion, this is only the start for changing the entire economy. Despite challenges, the transition to CBM provides many opportunities for environment, customers and firms. The academic literature on CBM is growing and more countries are involved; however, European countries are leaders in this field. The number of organizations and firms changing their BM to CBM increases as well. The successful examples in industry indicate at opportunities for CBM.