Business model innovation: the 4 steps to build a circular product offering

Road To Forest Valley Podcast

Published on 2021-11-09

Listen the full podcast or read the article below!

Fabian Takacs examines the concept of circular economy with a focus on business model innovation and ecosystems. Small and medium enterprises that want to transition to a circular product offering can follow these four steps: Close, Improve, Monetise, Excite the loop.

 

Fabian, would you like to tell us shortly about your journey? 

I'm from Switzerland and I've been active on the topic of sustainability probably since I'm 16 years old as a young activist in environmental issues. I started my PhD journey five years ago, I'm going to finalize it this year, on the topic of circular economy, business model, innovation, ecosystems

What is circular economy to sustainability for you? 
Talking about circular economy you have an umbrella concept for the term sustainability. 
If you say "my company should be more sustainable" it's quite hard to find measures, ideas and strategies to do so. 
We have a concrete concept to implement sustainability at the corporate level, also at the country level or city level, as you like.

A circular economy brings all aspects of sustainability together, with also business ideas behind it. This explanation is really abstract but we come to a more concrete level afterwards.

 

We know that along with your research you've worked a lot with small-medium enterprises and so: what did you see as the main practical barriers and drivers for small-medium enterprises to enter this world of the circular economy and sustainability in general?

 We found in the research we did, we interviewed a lot of different CEOs and board members of SMEs in Switzerland, especially checking for sure literature from the whole of Europe. But for Switzerland, we found that one of the main or key barriers out there is the risk perspective

Risk perspective of managers or employees, how much risk do we want to take for a change? And this risk is always related to a kind of economic risk: It's not the fear of suffering, ecology disaster, resource scarcity or price volatility. It's more the risk related to direct investment, to not having so much cash flow anymore.

We found in our investigations that the barriers that people have if they invest in the circular economy is this kind of economic risk aversion, it's this fear of suffering financial losses and leaving family or path, doing something new. I think that's typical and normal.

The second dominant barrier is the so-called time perspective and monistic economy perspective of managers and employees. 
This means that the time perspective is often pretty short, so company leaders only look like half a year or one year to the future and for the circular economy you need a long time perspective in your past and in your future because of the concept of circular economy is prolonged life cycle.
You can't prolong the life cycle of a product without thinking about longer life cycles in your company. So you have to have a fit in this issue as well.

In one interview a CEO of a textile company said there is always this economic shortage or like in trade-off decisions: you always decide on the economically feasible option and not think about environmental or also social aspects, or there is no strategy to deal with that kind of trade-offs. That's also a barrier in this building.

 

When you say the companies are afraid of the economic risk, how do you quantify this economic risk? It means restructuring the manufacturing process, or it's about retraining, it's about distribution, finding new partners. 

I think this kind of economic risk is really dominant because they are short term and they affect a lot of different processes, also beliefs in culture in the company. 

In our research we found that technology problems are not so dominant: a lot of technologies are out there to solve circular economy issues. So it's more "how can I restructure the company? How can I change the culture towards a more long-lasting, more sustainable culture in my company?" I think this is a rather harder issue than, for example, technology barriers.

 

You recently published a paper in the Harvard Business Review about four steps to connect the physical and financial aspects of the circular economy in business. These four steps are close, improve, monetize, and excite the loop.
How did you come to the syntheses and how would you suggest companies take these steps? 

For a pretty long time, we looked at all the literature about circular business models out there. And we realized that there is no one circular business model. Oftentimes in literature or also in presentations, you'll hear about this circular business model but that's not the whole story: the whole story is that if you want to provide a circular solution to a circular product, you have to have a circular ecosystem. So you have to have different players working around one design, around one solution.

If people think about circular business models, they often think about so-called revenue models. So they're thinking about a leasing mechanism or a pay per use mechanism, but that's only one part of the story. Out of that, we looked at all the patterns we found out there in literature and also in practice. So we scanned a lot of different companies and in the end, we had more than 300 companies on our list. We'd try to create a kind of framework of topology with patterns that work, to build such a kind of a circular ecosystem, and we found there are four main categories. 

The first is close the loop
To close the loop for sure that's necessary for the circular economy. You can talk about classical reuse, as we know it from the secondhand market, then we have part reuse as we call it: it's refurbishment, remanufacturing, upgrading, and so on. And the third option to closing the loop is recycling. Oftentimes people only think about recycling, but recycling is so the worst option in a circular economy. The first part is reuse and recycling is the last option: you have to have recycling in the circular economy, but don't think about recycling first.
To close the loop you also have to talk about property waste as an input pattern. Using waste as a new resource, you also have to talk about bio-based materials: you can use them in the loop and bring them back to nature in some kind of bio-based degradation process. 
We also have to talk about, for example, reverse logistics. How can we bring the product out there back? To the manufacturers as an example.

To improve the loop we found a lot of patterns that we typically know as narrowing the loop or prolonging the loop. These are patterns that are not there for the closing but for making a more sustainable option. 
As an example, MUD Jeans is a fashion brand from the Netherlands, where you can lease your jeans. You can send your jeans every week back and get a new pair of jeans and then do a recycling process. But that's not sustainable: you have to have your jeans for an amount of time to ensure that it's sustainable. If you recycle these jeans every day then it's not the same as if you're using that kind of jeans for five years and then doing the recycling. You have to think about improving the loop.

You also have to think about detoxing the loop: if you have toxic elements in your products obviously that's not sustainable at all. So that's also an add on talking about renewable energy and energy recovery denaturalisation using fewer materials, for example, that are all patterns you can use to improve the loop.

These are the two first pillars, let's say the material-specific pillars and the third and the fourth pillar, they are more towards the customers. 

The third pillar is monetize the loop
Here we speak about different options to incentivize customers. For example, to bring back the products, to use the products in an efficient manner, as an example, pay peruse. If you have a pay per use mechanism you don't use it more than you have to, or you do a kind of dynamic pricing mechanism performance-based contracting. For example, in Philips, you pay for the light and not for the lamps, but these revenue mechanisms are to incentivize the customers. You don't have to have them for the circular economy, but probably you need them because the customers do not bring back their products. 

And the last one is excite the loop
Here we talk about patterns like prosumer: how can you use the customer as a way of inspiration. Bring your product forward as a means for marketing, for example, we're talking about a sharing pattern.
Sharing it's to improve the loop but also to incentivize customers. So sharing as we know from different kinds of and marketplace options, it's quite interesting. And we have also like solution provider or Robinhood
For this pattern, Toms shoes is an example. 

 

How important is it to be able to measure what you close with the loop?

 We need measurements, for sure in society as we have today, where numbers parameters and so on are always key.  

We know that a circular economy is more sustainable than a linear economy in general, but what does it mean on a practical level? We have to measure, like talking about life cycle assessment, what does it mean to have a product? And what does it mean in terms of carbon emission, in terms of resource use, land use and so on? 
So what is the really good way and in our work, we did in our four-year project here in Switzerland called LACE: Laboratory of Applied Circle Economy, supported by the Swiss state, and we operate it often with this so-called planetary boundary concept. So, not looking only at the resources as scarcity and so on but also looking at other elements. For example, land use is a planetary boundary, climate change is a planetary boundary and some of them are already like in a red zone so we are over what should be our like that the boundary level. So we are also talking about extinction rates, phosphorus and other indicators. It's quite heavy to implement such a framework like the planetary boundary concept or carbon emission into the logical one product.

As an example, doing recycling with a pet bottle is quite easy to measure: you use that bottle for eight seconds, drink your mineral water and throw it away. And then, you need some logistical efforts to bring back that bottle and do recycling. It's easy to measure, but how to measure the impact of a jacket? A jacket that is reused four, five times from different people that bought it in a secondhand market. It's quite heavy to measure it because you don't know how long that product is out there. Sometimes we need to do approximations.

 

What is the role of sufficiency in a circular economy? Could you explain to us what it means? 

Now we go really deep into sustainability research. 
Sufficiency, in my opinion, is a really important aspect of sustainability and a sustainable change in our economic system. Sustainable sufficiency means how to deal with a growing economic system with that kind of more and more belief that we always have to grow at all in a holistic way.

No, I don't talk about one company that wants to grow. There you probably have substitution effects and some companies are going out if the markets some are coming in, but overall, the overall consumption is steadily growing since the years. And that's a big issue because this planetary system is somehow fixed.

We can't grow infinitely and sufficiency. You can talk about sufficiency on this macro level, like on a state level where you say a state should not use more than X resources and do not produce more emissions than X and so on, but you also can talk about sufficiency on a person on an individual level. And I think this is really crucial and it's coming stronger and stronger every year because people start to. You also changed their way of dealing with the limitations of this planet and dealing with scarcity and so on. So, what sufficiency means on a personal level is to reflect your own consumption, your own mobility patterns and so on and see what do you need actually, to be happy?

That sufficiency is all about. And that is a de-grow movement it's really strong in France, for example, coming also in Germany, Italy.

I think sufficiency, that is really important, starts with reflecting: what are you doing? What are you consuming? But it's really important?

A contrast to research our colleagues from the ETH here in Switzerland, calculated that only 20% of the emissions out there can be changed by individual behaviours or changing individual behaviours. Only 20%, 80% are somehow structural and better in our system and process and so on, but this is only one part of the story. The other part of the story is that all the people also that are forming this system, forming the processes, forming how a hospital works how the trains are running and so on, there are all people like you and me and we all can change our mindset. And if the people start to change their mindset, they change probably the way they're looking at their own business. So then be coming to the drivers as we talking at the beginning, in our research: you can't hope that somebody in his business changes the whole corporate culture and the whole process coming from a mindset that it's not open for sustainability. So it's all coming from inside and going into our companies or institutions.

 

You said consumption is growing but also consumers are changing. 
If the consumers acceptance is low, that might slow down companies that they already know that it's a very risky change switch towards a circular economy.
How do you deal with customers when working with these companies?

This is probably the most critical issue in the subject of circular economy. If you're looking at the really long time horizon, then you find a lot of arguments why we should change as a company. As I mentioned, resource scarcity, climate change, other environmental issues.

You have to imagine only for Switzerland in the year 2050, there are prognosis that the costs for environmental problems that companies and the state have to provide to probably change these roads because it's getting warmer and they are like wobbly and so on, or climate air conditioners systems, and so on. The costs only for Switzerland, is estimated to be 1 billion per year. If you take this into your company calculation, and if you're a big company, it's a big issue probably. And the only reason why we do not change and only look at the customers that are not open to the new solution is that because we do not have a long time horizon and do not consider that. If we changed the way of looking at the time, then everything is changing. 

You always find customers that are not open to a new solution, but I can give you the example of Apple: they came every year, the last 20 years with new products on the markets and they knew nobody's waiting for that product before. And then the people saw the product and they were enthusiastic about what they found. So they created a demand.

So I inverted with companies, I always try to make this kind of perspective change. For sure if you want to see you always find a consumer not buying in, but probably if you are satisfied with your own solution you can change the way people look at your option.

Nobody talked about streaming music 20 years ago and now everybody's doing it. So behaviours are changing, consumer preferences are changing. Use that knowledge that people are open to change, to create new options for the market. And then probably consumers are buying in. And if they're not doing then, probably more difficult and probably have to change marketing and so on. But I see, do not go with the people who are not open.

Think about companies like Lego, it is the last company that people would blame for his plastic in the world because they make toys that everyone loves, and you're think "What material could I have made it from?" Because Lego exists because plastic exists. And then they went into the bioplastic realm. And it's the last company that would need to change but then you see changing and you fall in love even more with the company. So I guess being braver pays off. 
It's all about internalizing responsibility. Because there are a lot of causes out there why you should not change or why you can't change. But there are also a lot of opinions and causes out there that tell you can change: so use this opportunity to change. You can only win if you change something in the long term.

 

According to you, what are the drivers and capabilities for business leaders to successfully embrace the transformation that we talked about?

For sure, as I already said, supportive personal attitude towards the environment, and such a kind of pluralistic social orientation. So an orientation where you know how the environment is working, you know the relationships out there, not only the relationship on the around your company: but you know how the environment interacts with your company, how it interacts with your partner.
The feeling for the whole and the holistic view is healthy. So we found that this is quite a crucial driver as it promotes an understanding of the overall ecological context, so to say, and it also increases the urge to act. 

Another one is committed management and employees, but how you can create commitment. I think it goes in the same direction as we said before.

And another driver is being a role model. For some leaders, especially in SMEs, it's really valuable and really important to be a role model to be out there standing outperforming as a role model. And this drives the motivation to implement a circular economy from the beginning to the end.

Another driver is when you're creating a corporate responsibility that creates a platforms process that enables the interaction of employees that facilitate the creation of new ideas. If you are old, trapped in daily business, you can't innovate new solutions. You need resources for that. 

We found another driver - and I think this is from a more holistic perspective - is probably the most important one, is creating collaboration. Going into interaction with other companies, partners, institutions, you cant provide a whole circular ecosystem by yourself. You'd probably do not have all the resources, you do not have the competencies. So establishing collaboration helps to on one side to gain new knowledge also to simplify investment decisions, probably because you have all the knowledge and support from others. And on the other side, it sets concrete projects on a path of implementation because together you are stronger. It sounds so silly, but somehow for a circular economy, it's true. 

This is really important and, also, a circular economy can change your cost structure. It can change probably and make your company more agile and more cost-efficient.

And you have to take all this into consideration when you're talking about the circular economy, also improving communication internally and externally: "How you speak with your own employees? How do you speak with your customers?" That's all important.

 

Talking about the collaboration, the old type of company it's based on competition in the market: the mindset was you have to protect your ideas and compete with the others to arrive first; and now we starts to see how open source and collaboration has become a value for the new generation. 
We're seeing a change from competition to collaboration or coopetition, as they call it, a mix between collaboration and competition.

The problem is not only that companies are oftentimes tracked in that kind of "we against the other". Oftentimes there are regulations that hinder collaboration in the market because of some competition rules and so on.

It's not as easy as it sometimes seems to collaborate, to talk with your partners or with other players in the market, but especially on our SME level where the players are rather small, it's probably easier than as a really big shareholder driven company talking with the other competitors. So I think this is quite an issue here.

 

Can you give us some examples of effective projects that you've been involved in while you were doing your PhD program at San Gallen University or outside of it, and how have you applied your academic insights to this project? 

On the one hand, I saw a lot of companies doing an extremely nice job out there. We have like Nudie jeans from Scandinavia, or we have other companies that really famous one, like Interface, for example, Blueland, there are a lot of companies doing an amazing job innovating their own business model on creating a new circular solution.

But on your question on my project, I work together with different companies and one example that I like because it's also a family-owned business here in central Switzerland, it's called Filed Suit, and they produce home appliances, washing machines, dryers, and so one. They really try to implement not only a new revenue model like leasing, for example, they also started to change during our work together - the last four years - their designs and how they're looking at designs, how can they make it more modular, for example, and that you can upgrade it after like 10 years or so. This is a really old company and they have quite long-lasting washing machines as an example. And for them, it's nothing new to think in long cycles, so it was quite easy to jump in and offer some circular economy thoughts about their products.

I worked also with other companies, there is a shareholder driven company and it's heavy to provide a change there. So we're talking four years now and we are at the same point at the beginning. They're so risk-averse, so not going into a new direction. So it's quite heavy and it's also heavy for the people working there that wants to have a change. So you see that they are quite sometimes a little bit annoyed by this kind of de-movement. 

Another one is Wear2Wear it's also in the white paper we published of a textile ecosystem, eight companies working together more or less providing from the yarn to the fabric, to the membrane and mono-material solution. And you can take a part at the end and do a proper recycling process also with which partner they use, face with incredibly interesting and revenue models. 

So there are a lot of companies out there, but still, we are at an early stage and are looking for more companies trying to chomp on the train of the circular economy. And not only because of marketing reasons, because this is also a problem we see right now: It's easy to take the word circular in your marketing ads and not do something circular at all.

 

We need companies to change the design of their products and services. We need legislators to support collaboration. We need to learn from the new business model from the digital world. We need to change so many things in the company culture and the communication with clients. And we can just hope that all of these changes can snowball together before it's too late. 

The circular economy is nothing new and that is really important to understand that 250 years ago, being sustainable, having products that last forever, products that are not toxic, it was normal to not throw away your t-shirt after eight times of using it: it was normal to be circular. And I think we have to bring that belief back in our minds that throwing something away after using it only several times, that's not normal.

That's not normal from a human perspective of dealing with the resource and we are so trapped and embedded in the environmental world. We see that how diseases like COVID or others are SARS and aids: it's all coming because we destroy nature. We have to deal with these resources carefully. 

 

About the author

Fabian Takacs

PhD Candidate & Research Associate with Focus on Circular Economy and Business Model Innovation, University of St.Gallen.

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