Circular Economy: the 4 steps to build a circular product offering

Published on 2021-11-09


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Fabian Takacs examines the concept of circular economy, with a focus on business model innovation for Small and medium enterprises. Follow these 4 steps to designing a circular business model leading to a circular product offering: Close, Improve, Monetise, and Excite the loop.


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

I'm from Switzerland. I've been active in sustainability since  I was 16 years old, as a young activist in sustainability and circular economy.

I started my Ph.D. journey five years ago and I will finalize it this year.  My expertise is in circular economy, business models, innovation, and ecosystems.

What are circular economy and sustainability? 

Talking about the circular economy is not easy. You have an umbrella concept for the term sustainability.

If you say: "my company should be more sustainable", it's too general to find measures, ideas, and strategies.

A circular economy brings all aspects of sustainability together, with sustainable business ideas behind it. This explanation is abstract, but we come to a more concrete level explaining the 4 steps framework.

What are the main practical barriers for small-medium enterprises (SMEs) to apply sustainability and circular economy?

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

How much risk do managers and entrepreneurs want to take for a change? The hesitation is always related to a perceived economic risk; it's not the fear of suffering ecological disaster, resource scarcity, or price volatility. small and medium businesses fear losing the investment in developing a circular business model.

In our research, we found out thatsuch barriers are related to risk aversion and the fear of suffering financial losses, and abandoning a habitual path to do something new. I think this is normal.

The second dominant barrier is the time perspective of managers and employees. 

It means that the time perspective is often pretty short, so company leaders only look at half a year or one year to the future.

However, the benefits of a circular economy for your business extend over the long term. It is necessary to have a long-term perspective on the past and the future because the concept of circular economy is an extended life cycle.

You cannot extend the life cycle of your products without thinking about the long-term strategy of your company. 

In one of our interviews, a CEO of a textile company said there is always this economic shortage: "you always decide on the economically feasible option and you do not think about environmental or social aspects, there is no strategy to deal with that kind of trade-offs".

What typology of economic risk are small and medium companies afraid of when a circular transition comes in place?

I think that economic risk is dominant because SMEs' strategy is short termed and a circular transition affects many different processes in the company.

Culture is also playing a crucial role.

In our research, we found out that technology problems are not so dominant. Technologies are already out there to solve circular economy issues. So, it's more about: "how can I restructure the company's processes? How can I change the culture inside the company?"

Cultural processes are an harder problem to solve than technological barriers.

You recently published a paper in the Harvard Business Review about 4 steps to connect the physical and financial aspects of the circular economy in business. What did you discover?

Firstly, we looked at all the literature about circular business models. 

We realized that there is no one circular business model. In literature and presentations, often we read about the circular business model, but that's not the whole story. 

If you are willing to provide a circular product, you have to design a circular ecosystem. In this scenario, you need different players working around your product.

If people think about circular business models, they often think about so-called revenue models. So, they're thinking about a leasing or a pay-per-use mechanism, but that's only one part of the story. 

We scanned a lot of different companies and, in the end, we got more than 300 companies on our list. We tried to create a framework of four-step with patterns that work. 

We have seen such a kind of circular ecosystem, and we found that there are four main categories. 

The first step is to close the loop.

Closing the loop is necessary for the circular economy. You can talk about classical reuse, - as we know it from the second-hand market -  then, we have part reuse: refurbishment, remanufacturing, upgrading, and so on. 

The third option for closing the loop is recycling. 

People only think about recycling, but recycling is the worst option in a circular economy. Recycling is the last option: recycling is necessary for the circular economy, but don't consider recycling first.

You also need to talk about property waste as an input pattern, using waste as a new resource. We also have to talk about, for example, reverse logistics. How can we bring the product out there back?

The second step is to improve the sustainability of the loop

There are a lot of patterns to improve the loop, such as narrowing or prolonging the loop. These patterns are there for choosing new and more sustainable options.

For example, MUD Jeans is a fashion brand from Netherlands, that allows you to lease your jeans. You can send your jeans back every week,  get a new pair of jeans, and then do a recycling process. In this case, circularity can be improved by incentivizing customers to wear the jeans for a longer period to ensure the sustainability of the product.

Indeed, if you recycle these jeans every day, 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.

Also, You have to think about detoxing the loop; if you have toxic elements in your products, that's not sustainable. 

that's also an add-on talking about renewable energy and energy recovery denaturalization, using fewer materials, for example, all patterns you can use to improve the loop.

These are the two first pillars, let's say the material-specific pillars.

The third pillar is monetize the loop.

Here, we speak about different options to incentivize customers. For example, bringing back the products to have a discount, using the products efficiently, and pay-per-use. 

If you have a pay-per-use business model, customers don't use it more than you have to. You can manage this aspect with a dynamic pricing mechanism and performance-based contracting. 

For example, in Philips, you pay for the light and not the lamps, this revenue mechanism incentivizes customers to buy more efficient lamps. 

And the last one is to excite the loop

Here we talk about patterns like prosumer, that is, how you can use the customer as a way of inspiration. 

Bring your product and your circular business model forward as a means of marketing.

Sharing improves the circularity but also incentivizes customers. Sharing economy is growing, and today there are several different kinds of marketplace options. 

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, numbers and parameters that are essential to measure our progress.

We know that a circular economy is more sustainable than a linear economy in general, but what does it mean on a practical level?

When we produce something, we need to measure the impact of the product. life cycle assessment is a good way to do it: How much carbon emissions does your product produce? How much land use? What are the resources that you consume in the life cycle?

We did it in our four-year project, here in Switzerland, called LACE: Laboratory of Applied Circle Economy, supported by the Swiss state. We operated with the so-called planetary boundary concept, that is, not looking only at the resources as scarcity and so on, but also looking at other elements. For example, land use and, climate change are planetary boundaries, and some of them are already like in a red zone,that is we are over what should be our likely boundary level. 

For that reason, we are also talking about extinction rates, phosphorus and other indicators, and sometimes it is very challenging to implement them into the business production.

Measuring the impact of a pet bottle is easy, you use that bottle for eight seconds, drink your mineral water, and throw it away. then, you need some logistical efforts to bring back that bottle and do recycling. 

But how to measure the impact of a jacket? A jacket could be reused four or five times by different people, that bought it in a secondhand market. It's hard to measure it because you don't know the real life cycle of the product. In these cases, 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 deep into sustainability research.

Sufficiency is one of the major aspects of sustainability and it is vital for a sustainable change in our economic system.

Sustainable sufficiency is needed to cope with a growing economic system that expects to consume more and more energy, and continuously extracts new resources.

The Overall consumption of the planet is steadily increasing year after year. Without a circular business model, we will consume new resources without reusing what we have already produced. Who will have to take charge of all this waste?

That's a big issue, not only for waste management. This planetary system has fixed resources, and we must deal with them.

We can't grow infinitely and sufficiently. We can apply sufficiency on the macro level and a micro level.

The macro level regardes directly countries and all the policies that incentivize companies tonot use more than X resources and not produce more emissions than X and so on. 

There is also sufficiency on an individual level. 

And, I think, it is crucial and this trend is coming more relevant in the last years.

Sufficiency on a personal level reflects your own consumption, your own mobility patterns, and what you need to be happy?

Sufficiency is all about that. It is rappresented by the  De-growth movement, that is particulary strong in France, and  is emerging also in Germany and Italy.

I think sufficiency is really important for every human being, and it starts with reflecting: what are you doing? What are you consuming? Is it improving your life?

However, a research from the ETH, here in Switzerland, calculated that only 20% of the emissions out there can be changed by changing individual behaviours.

The other 80% are somehow structural in our system and process. However, companies are made of people. People are forming this system, creating processes, deciding how a hospital works, how the trains are running.

The economy is made up of people like you and me, and each of us can change our mindset. When we start changing mindsets, we look for new ways to run sustainable businesses.  

So, as we said at the beginning of our research, you cannot hope that someone in your company will change the whole corporate culture,and the whole process ,from a mindset that is not open to sustainability. Therefore, everything should be internalized within our culture and institutions.

If the consumer's acceptance is low, that might slow down companies that they already know that it's a risky change to switch towards a circular economy. How do you deal with customers when working with these companies?

It is probably the most critical issue in the circular economy. If you're looking at the long-time horizon strategy, you find a lot of arguments supporting a circular transition: resource scarcity, climate change, and other environmental issues.

Only for Switzerland in the year 2050, the costs for environmental problems that companies and the state have to provide will be almost 1 billion per year. 

If you do not take into account this scenario in your company, it will be harder to face a circular transition in the future.

I always try to make this kind of change in perspective. Companies in the market do not sell to everyone. It is always a segment of the market that will not buy your product. However, positioning your product for environmentally aware people will give you a competitive advantage.

Nobody talked about streaming music 20 years ago, and now everybody is consuming it. Behaviors are constantly changing, and consumer preferences are changing.

People are open to change, if you show a better alternative. If you explain it well,  probably consumers will buy it.

Think about companies like Lego. It is the last company that people would blame for the plastic waste because they make toys that everyone loves, and you're thinking: "What material could   they have been made from?".

Lego went into the bioplastic realm. And it's the last company that needs to change, but then you see an effort to improve sustainability. People fell even more in love with the company. It pays to be brave.

It's all about internalizing responsibility. Because there are a lot of reasons why you should not change. We know it is a huge opportunity. Companies are hesitating to start the circular transition. For that reason, the first mover will benefit more from the positive market impact that the circular business model implies.

According to you, what are the drivers and capabilities for leaders to successfully embrace the business 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.That is,an orientation where you know how the environment is working, you know the relationships out there; not only the relationship around your company,but you know how the environment interacts with your company, how it interacts with your partners.

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 can you 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 outanding and outperforming as a role model. 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 platformprocess that enables the interaction of employees, facilitating 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  and is probably the most important one,  - is creating collaboration. It is based on interaction with other companies, partners, institutions. You can’t provide a whole circular ecosystem by yourself, You probably not have all the resources, you do not have the competencies. So,establishing collaboration helps on the one side, to gain new knowledge and to simplify investment decisions, probably because you have all the knowledge and support from others. 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 and make your company more agile and more cost-efficient.

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

Let's talk about collaboration between companies. Are we witnessing a shift from competition to collaboration?

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 tal with your partners or with other players in the market, especially on our SME level. Where the players are rather small, it's probably easier than as a really big shareholderdriven company talking with the other competitors. So I think this is quite an issue here.

Can you tell us about some of the projects you participated in during your PhD at the University of St. Gallen or outside of it, and how you applied your academic knowledge to this project?

I have seen many companies do a great job.

We talked about Nudie jeans from Scandinavia, but there are other companies like Interface and Blueland. There are many companies that are doing an amazing job, innovating their business model and creating a new circular solution.

I collaborate with several companies. One of them is a family business in central Switzerland, it's called Filed Suit and it produces household appliances, washing machines, dryers and so on.

It is implementing a new revenue model such as leasing. In the last four years, they have changed the design and thought about how to make their products more modular, for example. They have long-life washing machines. It is not new for them to think about long cycles, so it was easy to step in and offer some thoughts on the circular economy of their products.

Another is Wear2Wear, also featured in the white paper we published, a textile ecosystem, eight companies working together providing yarn to fabric, membrane, and single-material solutions. With these materials, it is possible to participate in a proper recycling process, also thanks to the partners used, with incredibly interesting revenue models.

So there are a lot of companies out there that are already applying a circular business model. However, a lot of companies are still at an early stage. We are looking for other companies that are willing to get on the circular economy train. And not just for marketing reasons, but also because this is a real issue that affects our life on the planet. It is easy to use the word circular in marketing ads and not do anything circular at all.

Do you think that circularity will be implemented in the next future?

The circular economy is nothing new and it is important to understand that 250 years ago it was normal to be sustainable, to have products that lasted forever, to repair what broke.

Today you throw away your T-shirt after you have used it eight times: it is not rational.

And I think we have to bring back into our minds the belief that throwing something away after using it only a few times is not normal.

It is not normal from a human perspective to manage resources and we are so trapped and entangled in the environmental world. We see how diseases like COVID or others like SARS and AIDS - all this happens because we destroy nature. We have to manage 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.