Why businesses must embrace the circular economy to build sustainable success

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Henrik Hvid Jensen, Chief Technology Strategist NEE, DXC Technology

• The 1990s saw the internet and digital technologies prompt businesses to overhaul their approach to creating, capturing and delivering value.
• Nowadays, the shift towards a circular economy demands a similar transformation to ensure leadership in innovation and market competitiveness.
• Here’s why the circular economy is not just an alternative business model, but instead a blueprint for any business building a sustainable future.

In the late 1990s, visionary thinkers foresaw a major shift in business models with the upcoming digital transformation. Harvard Business School Professor Clayton Christensen was at the forefront with his 1997 book The Innovator’s Dilemma, where he introduced the concept of disruptive innovation.

His key insight was that established companies were often blindsided by technological shifts, as their focus remained on refining products for existing customers, leaving them vulnerable to new, groundbreaking business models.

Nicholas Negroponte, founder of the MIT Media Lab, also played a pivotal role in shaping this vision. His 1995 book Being Digital predicted the extensive impact of digital technologies on life and work, envisioning a future where information technology was intricately woven into the fabric of everyday life, reshaping the way value was created and delivered.

These thought leaders highlighted the transformative potential of the internet and digital technologies, and emphasized the need for businesses to overhaul their approach to creating, capturing and delivering value.

Their insights often met with scepticism from established businesses, which were slow to adapt, underestimating the full extent of the digital revolution’s impact on traditional models of value in business.

Embracing the circular economy for value innovation

Despite the lessons from the digital revolution, many companies continue to focus primarily on refining their existing products and services for their current customer base. But this approach overlooks the transformative potential of the circular economy, which, like the internet in the late 1990s, stands poised to redefine how businesses create, capture and deliver value.

The circular economy’s transformative impact is akin to that of the internet because it fundamentally challenges and changes the traditional linear model of “take, make, use, waste”.

In the late 1990s, the internet was a nascent technology often underestimated by established businesses. Today, the circular economy is at a similar juncture. However, the pace of change is now much faster, driven by advancements in technology, new legislation and shifting consumer preferences.

As we approach 2030, companies that embrace this shift will lead in innovation and market share, much as early adopters of digital technologies outpaced their peers. The rest of this decade will be crucial for businesses to adapt to this new paradigm, where sustainability is no longer a choice but an essential component of success.

Reinventing value in the circular economy

In a circular economy, the concepts of value creation, capture and delivery are not just incrementally adjusted but fundamentally reimagined, requiring a systemic shift in business strategy and operations. This transformation goes beyond simply tweaking existing processes; it involves rethinking and redesigning the entire value chain.

Value creation in a circular economy is not merely about selling a product; it’s about delivering ongoing value to the customer. This paradigm shift from value-in-transaction to value-in-use compels businesses to reconsider their relationships with customers, transitioning from transactional interactions to long-term partnerships.

To emphasize value-in-use, companies must invest in understanding the evolving needs of their customers and offer customizable solutions and services that support the prolonged use of products. This requires a robust framework for feedback and engagement, ensuring that products and services evolve in tandem with customer requirements.

The economic benefits of this approach are manifold: extended customer retention, diversified revenue streams from service offerings and enhanced brand loyalty.

Value-in-use demands quality and durability in product design, encouraging businesses to source sustainable materials and employ manufacturing processes that extend product life. It also entails creating incentives for customers to engage in circular practices, such as returning products for refurbishment or recycling.

Revenue models evolve through value capture

Value capture becomes a dynamic and innovative process, where revenue models evolve to meet the sustainability demands of both the market and the planet. Traditional up-front sales are augmented or replaced by circular models that redefine the concept of ownership and value, including:

Product-as-a-Service (PaaS): This model transforms products into services, with customers paying for the performance and use of a product rather than its outright purchase. For businesses, this means a steady stream of revenue over time; a closer, ongoing relationship with customers; and continuous control over the lifecycle of their products for easier refurbishment and resale. The challenge lies in determining the pricing models and contract structures that ensure profitability while also appealing to customers used to traditional ownership.

Sharing economy: Embracing the sharing economy allows businesses to tap into new market segments where access and convenience are valued over ownership. This model reduces resource consumption by maximizing the use of each product. Companies must consider how to facilitate sharing among users and how to position their products as viable and attractive options for a community-based clientele.

Remanufacturing: Remanufacturing extends the life of products and components, often making them as good as new or even better. Businesses need to plan for the return of products, the logistics of remanufacturing and the resale of refurbished items. There is also a need to educate consumers about the value of remanufactured goods to overcome any biases towards new products.

Regulatory compliance and incentives: With an increasing number of regulations incentivizing circular practices, businesses can capture value by aligning with government policies and taking advantage of tax breaks, grants or subsidies.

By redefining value capture in these ways, businesses not only create new revenue opportunities but also contribute to a more sustainable and resource-efficient economy. The key to success in these models is a deep understanding of customer behaviour, innovative pricing strategies and a commitment to the principles of circularity.

Reimagining value delivery as a service-oriented process

Value delivery is reimagined as a service-oriented process that extends beyond the initial sale. It’s about shifting the focus from a one-time transaction to a continuous cycle of use and reuse.

Service and maintenance: The shift towards prolonged product lifecycles necessitates a strong focus on service and maintenance. Businesses need to ensure that their products are not only durable and long-lasting but also easily serviceable. This may require developing new capabilities in servicing and maintaining products, as well as considering design changes that make repair and maintenance more efficient.

Redistribution and remanufacturing: As products reach the end of their first or subsequent lifecycles, companies must have processes in place for redistribution to find new users for products, and their transportation to remanufacturing or recycling centres. Such processes extend the life of products and reduce the need for new resources.

Material and component recovery: In cases where products can no longer be reused or remanufactured, recovering materials and components for recycling becomes crucial. Companies must strategize on how best to disassemble products and extract valuable materials, which can then be reintroduced into the manufacturing process.

Customer education and engagement: Educating customers about the value and process of circular models is essential. Businesses should communicate the benefits of longer-lasting products and the availability of repair and refurbishment services.

By prioritizing these aspects of value delivery, businesses can create a more sustainable, efficient and customer-centric model. The circular economy’s focus on advanced use-oriented or results-oriented services represents a fundamental shift in how value is delivered.

Circular economy as a blueprint for a more sustainable future

As we reflect on the transformative journey since the 1990s, the lessons are clear: adaptability and forward-thinking are not merely advantageous but necessary for survival. The digital revolution was just a precursor to the seismic shifts we will experience with the circular economy.

DISCOVER

What is the World Economic Forum doing about the circular economy?

The urgency is twofold. Economically, clinging to outdated linear models may leave businesses vulnerable to the same fate as those that missed the digital wave. Ecologically, our environmental stewardship is non-negotiable if we are to maintain the delicate balance of our ecosystems. The circular economy is not just an alternative business model; it’s a blueprint for a sustainable future.

Let’s approach 2030 with the knowledge that being circular is synonymous with being competitive and innovate with the understanding that our businesses and the Earth are interdependent. Our legacy will be defined by how swiftly and effectively we transition to these sustainable practices and the measure of our success will not just be in profit margins, but in our contribution to a sustainable world.