The unexplored economic advantage of the circular economy
One month ago today, we celebrated the World Population Day.
How big is the number exactly? 7.8 billion, none less. We have tripled our population in the past 70 years and we are expected to grow more than 2 billion people stronger in the next 30 years.
The pressure this puts on our planet is wild. If the entire world would live the same lifestyle I personally do, it’d require 3.8 Earths to sustain it. If you eat meat, do any long haul travel, live comfortably in a developed nation and drive around a private car, there’s a good chance your lifestyle racks up the number even higher. It doesn’t exactly take a genius to add up 1+1 = this won’t to last.
As developing regions rise to the middle class and higher, the widening gap between resource availability and growing demand will not just be an environmental debate. It’s an economic, societal and moral imperative. While those who see this push for change and those who don’t resist, it’s about time we shift the focus from ideological rights and wrongs towards a model where the battle isn’t about a trade-off between environment and economy, but rather one that is advantageous for both at the same time.
What got us here
To understand the problem is to understand how we got here in the first place. Business, the activity of exchanging goods and services for money, has traveled a long journey from privatization of ownership to first paper money and through four Industrial Revolutions that form the base of our modern economy today. The first two Industrial Revolutions solved a huge problem by making goods accessible and affordable through mass production. The third used information technology to automate production and now the fourth, occurring since the middle of last century, is blurring the lines between physical, digital and biological spheres.
In just 200 years, we evolved from being at the mercy of nature to shaping our entire planet. Industrialization meant improved access to food, urbanization, significant growth in population and an increasing demand for raw materials. Demand meant more money for production, more production meant more jobs and more jobs meant more even more consumption. Professions became more specialized. Industries formed. Geographic expansion enabled a wider selection of goods, along with a wider range of prices and terms.
By the late 1800’s, a teapot that used to be handmade by a local artisan was now divided into small parts produced by multiple companies. Fast forward a few centuries, that tea pot is now a smart kettle — and it’s shipped to your home door from China through a global network of value chains. Why? Because this is how most market economies work when the operative measure is price. When economic value is determined by the mechanics of demand and supply, the lines between actual value and what we’re paying for (perceived value) gets blurred — resulting in metrics that incentivize short-termism, extractive behavior and inequality.
Ethics aside, the way this smart kettle is being operated today is economically efficient and effective: cheaper for the buyer, cheaper for the producer and it employs those who make it. Everyone wins, except for the environment.
This is the base of our modern markets, the linear economy.
The problem of 8.6%
While economic growth has brought us a higher quality of living and lifted entire nations out of extreme poverty, using resources without boundaries has a price. In 2019 alone, more than 92 billion tonnes of materials were extracted and processed, contributing to about half of our global CO2 emissions and over 90% of biodiversity loss and water stress.
This may be hard to put into perspective but a sobering figure is to understand that from the 100% of all resources extracted today, from biomass to minerals, only 8.6% of that material use is cycled back into the system — and it’s mostly food products that are biodegradable by default.
The point of this?
The 91.4% of all extracted resources is the opportunity cost we leave on the table when we operate in a linear, transactional system.
This simply makes no sense, environmentally nor financially.
The reason this is such a big deal especially in 2020–21 is because if we don’t change our actions drastically today, irreversible damage will be done within the next 10 years of time. In fact, the latest UN report argues that even if we did meet the commitments made under the 2015 Paris Agreement, the world is still heading for a 3.2 degrees Celsius global temperature rise over pre-industrial levels. This would make our planet barely inhabitable for humans by 2100.
In response to this, we’re seeing systems level changes already starting to shift from policy makers and consumers. What this means for companies, then, is an urgent need to rethink their role in the society at large.
Going exclusively for profit is no longer a model where the math adds up.
Therefore those who have the guts to reimagine entirely new ways of doing business will be the ones who lead us towards the next era, the Sustainable Revolution.
Towards regenerative business
While forward-thinking businesses are already making significant progress in addressing environmental values, only a handful of companies have tried to systematically understand the vulnerabilities and possibilities of their business models and systems they operate in.
Sure, we’ve come a long way from dumping industrial waste into the rivers in developed regions but we still have a long road ahead shifting from today’s compliance-driven CSR reporting to having a real link between core business and sustainable values. What we’ve seen is a range of marketing campaigns and offset of emissions (which are great ways of testing the market and doing something) but the real deal is strategic level commitment on greener business — and more importantly, making it your core advantage.
What I mean by strategic commitment is exactly that. A roadmap that is designed to be restorative and regenerative; the kind that aims to maximize not only the financial, but also environmental and social values at the same time. A sustainable playbook, if you will, to rethink what is it exactly your customers are paying you for? Will your offering still be relevant tomorrow? In what ways could your business rely fully on renewable sourcing? And more importantly, how could that be your competitive advantage, not just an overhead expense?
Circularity — the new lens in strategy
As an alternative to our current linear model, the upcoming era is for the circular economy. Instead of extracting resources for a transactional chain, we aim for a system where all materials once produced can be turned into a renewable resource, reused over and over again, by design.
The more resources we recover, the closer we are in closing the loop of material circularity. NASA is a great example of using a closed-loop method for their space missions, and our nature itself is the master of this, producing zero waste. In the hierarchy of circularity, we think in reducing, reusing, repairing, refurbishing, remanufacturing, recycling, repurposing and regenerating all resources and materials.
Sounds like something our grandparents would do, right?
That’s because this isn’t exactly new. What is new, however, is combining regenerative thinking with actual business strategy in a way that it can sustain our growing demands of living at a global scale.
While circularity undoubtedly lends itself to green values, the key is to understand this isn’t just about being a cheerleader for the environment. Circular innovation is so much more than that.
Here’s what makes it powerful.
To someone like me who operates across industries and cultures, it is by far the most effective way of aligning different stakeholders with different points of interest behind a shared vision in a way that it is a win-win for all.
In a world where we aren’t even able to agree whether or not our planet is round, I’d say this itself is already a pretty remarkable achievement. The pluralistic lens of circular thinking is just as applicable for environmentalists as it is for economists. It can be applied to build resilience in the local community just as it can be used to approach healthcare, political decision making, urban planning and larger ecosystems.
Estimated as a $4.5 trillion industry, the circular economy will unlock 40 million jobs in the transition from our legacy economy. If you are a business executive today, you won’t even need the numbers because you can already feel the landscape changing.
One insightful way to view this is through business transformations. A Harvard study looked at all the S&P 500 and Global 2000 firms over the past 10 years to identify the top 20 business transformations. And this what they found:
All the top performing companies were able to develop significant new growth outside their traditional core. But it was their ability of infusing a higher purpose-driven mission into their culture, more than anything else, that propelled them to success. In other words, it wasn’t so much about these companies’ performance itself as it was about their ability to reposition their mission into creating a new future, that made them winners.
The unexplored circular advantage
All of this high level talk may sound abstract but it isn’t. Our current way of extracting, producing and consuming actually leaves a lot of underused value on the table, yet this is the part of circularity that doesn’t get talked much. Why? because circular economy is typically discussed under the umbrella of climate change — making it a social study of values rather than economic modeling.
The minute we stop debating this as an ideological conversation and start seeing this as an economic opportunity, this becomes language that translates across industries and sectors, regardless of your cultural or socioeconomic interests.
One of the most untapped possibilities of the circular economy is its ability to turn inefficiencies of linear value chains into new business opportunities. These inefficiencies may manifest as premature product lives, underutilized capacity, wasted end-of-life value or unexplored user engagements.
What is too often left out of circular discussions are numbers that can back this up but that doesn’t mean there aren’t any. General Motors’ by-product recycling and reuse initiative generates the company $1 billion new revenue a year in addition to saving costs. Caterpillar has managed to cut off 40–50% off their production costs through remanufacturing, and Wärtsilä, a leading marine and power supply manufacturer, achieved 45% reduction in production development expenses, 44% lower cost for ongoing product care and 50% reduction in assembly time as a result of modular engineering — breaking a Guinness World Record in their efficiency rating as a result.
For operators in manufacturing, these numbers are telling. They don’t only mean notable cost savings but also show the opportunity cost of playing by the rules of a linear system.
The rise of the sustainable consumer
For those doubting market readiness, it has become abundantly clear that consumers, especially younger generations, do care. Already in 2015, Nielsen reported that 73% of Millennials globally are willing to pay extra for sustainable goods. Followed by a more recent study finding that in the US, 90% of the same generation is ready to pay more for products that contain “environmentally friendly or sustainable ingredients”.
Chinese consumers are no exception to this growing trend. JD, one of the largest e-commerce sites in China, found a 71% increase in sales of green products on its platform in 2017 from the previous year and reports a staggering 85% of all green product sales coming from domestic brands.
In response to growing environmental consumerism, expectations continue towards increased transparency. This allows brands that traditionally guard their image to find alternative ways of interacting with their users.
Instead of hiding behind the corporate veil of ‘everything is under control’, younger generations expect honesty and inclusion.
Circular change doesn’t happen overnight — and it’s okay to admit that. Committed progress is key and brands from Patagonia to cities like Helsinki have issued open calls for greener solutions in what they’re currently doing. Ultimately, it’s not just the end result but the progress users want to be engaged and interact with.
Interactive feedback loops
Which brings us to feedback loops. In circular design, what we like to draw special attention to is closing the loop with users. This means building interaction cycles that allow brands to engage in an interactive, real conversation with their real users — and co-create the kind of product and service that serves all its stakeholders, not just the company’s shareholders.
Company brand, then, is not based on outdated and one-sided storytelling, but rather a co-constructed journey that truly serves and interacts with its community.
The difference between this and what’s traditionally referred to as ‘good customer service’ is the level of user inclusion. Instead of just gathering user feedback or purchasing customer data, how can we incorporate our users to be our co-developers of our product, service and even future direction?
Circular business models from servitizing products to extending material life cycles have this tremendous opportunity of building better client retention. Be it repair, upcycling or collecting end-of-life products, we are automatically incentivized for long-termism: higher quality and committed interest.
Same thing with talent acquisition. Employee performance won’t be solely based on built-in hierarchical structures when they are given ownership to tackle the problems they truly care about. Have the guts to decentralize. The lines between your users and employees will blur as both groups can sit on the same side of the table.
Purpose-driven mission and modern activism are underestimated yet powerful ways of attracting your first-choice candidates and leveraging their very network of problem solvers.
Circular innovation isn’t necessarily so much about the products or services themselves as it’s about everything surrounding them from go-to-market to business models.
A great example of this is MUD Jeans that takes the most popular fashion item in the world, a pair of jeans, and turns them into a circular product where the upcycle, client retention and subscription model play the key role over the actual jeans. Another one is Maersk that developed a Cradle-to-Cradle Passport for vessels, a database listing up to 95% of all material composition of the main parts used in their ships by them and all their suppliers, enabling smarter circulation of all parts used — and giving them powerful data-driven leverage in future developments.
As circularity is a fundamentally different economic model, we need new tools and metrics to help us think and manage. Technology plays a crucial role here from AI to blockchain as trackability, traceability and distributed trust can be established on global value chains. Real-time data will help brands deploy multi-leveled pricing: from on-demand orders in inventory to custom orders with no inventory, shifting the traditional market push towards a demand-specific pull, allowing companies to minimize warehousing and meet real need with greater agility and responsiveness.
The power of systemic design
Finally, the backbone of the circular economy is in systemic design. More than 80% of a product’s environmental impact is determined during the design phase, which makes this a powerful yet strategically underestimated source for circular innovation. This is a huge topic itself and I will go into more details in another article but for now, just understand this:
Compared to traditional product or service design, systemic design allows us to zoom out radically more and therefore consider a multitude of angles cross-discipline, cross-stakeholders and cross-sector. It allows us to think both bigger and longer-term than usual scope of design.
What this means is that it allows us to understand the wider context a business is operating in, identify the problem’s root causes, cluster relevant stakeholders together for a new systems portfolio and continuously evolve with user feedback loops.
Systemic design can be used to tackle inefficient silos, duplication of effort and absence of synergy. Instead of thinking in a user-centered ‘me’, we expand to a life-centered ‘we’, where each of us plays a role.
For example, most products and services today are designed to provide a specific solution to a specific user. In order to match your target user, companies purchase customer data in the hopes of finding the perfect fit. But what if instead, your service could help your users to help themselves? Instead of being burdened by one sided push, you are now strengthened by participation. Because your solution is co-developed with your users, it’s not only more nuanced but also more personal. User ownership changes. Instead of running the show, you now play a role in a larger innovation ecosystem that is interdependent of all its stakeholders, including nature.
The era of the Sustainable Revolution
“In times of change, learners inherit the earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists.”
— Eric Hoffer
Since the early Industrial Revolutions, businesses have entered a new era roughly every 50 years. And the newest shift — it’s happening right now.
If the previous three Revolutions helped us increase productivity and use IT to build the basis for data-driven decision making, then this era is all about reorganizing our current economic systems around regenerative growth.
This calls us to redefine the changing role of business and everything in and around it. While sustainable thinking itself isn’t anything new, the start of 2020 has forced us into a global reset questioning whether or not our world will ever look the same again. This has set stage for a greener, more regenerative agenda — and this is why I remain more optimistic than ever.
Ultimately, forward-thinking decision makers who adopt, innovate and steer their strategy towards restorative models will be the winners of this exciting, inevitable, new chapter.
Originally published ’originally published at Circularity by FUL Aug ’20.