What is the Circular Economy?

What Is The Circular Economy? Business Model Examples

You may have heard the term ‘circular economy’ tossed around in the world of sustainable business, but it is often tied up with different assumptions and its easy to get confused by the narrower details and arguments.

This confusion can make it hard for business owners to understand whether circular economy principles can be applied to their business and how to uncover its value.

In this post, I hope to bring awareness to the multiple circular economy approaches that can be taken, and highlight the opportunities available to entrepreneurs who are ready to take advantage while helping to save our planet.

What is the Circular Economy?

To start in simple terms, an economy is essentially a system of production, consumption and distribution of goods and services which forms the material wellbeing of a given society.

In traditional economics, financial capital has taken over as the most common measurement in determining wellbeing, but environmental and social factors are beginning to re-establish their place.

The ‘circle’ of ‘circular economy refers to the cycle of resources, including physical components and energy flow.

Combining these words presents ‘circular economy’ as a system for building society’s wellbeing through effective cycling of resources.

This definition shows the heart of the idea without specifying a singular approach to be taken, suggesting that any business can develop or make changes to embrace circularity.

The principles behind circular economy take inspiration from nature, where individual species and environmental features exist in harmony and contribute to one another’s growth. Through the vision of circularity, economies, and the businesses within them, are seen as open systems made up of multiple, interacting parts.

Where traditional eco-efficient innovations have focused on optimising individual components of products/processes, what all circular business models share is their dedication to improving total system sustainability. This is done through minimising waste, extending the usability of assets and maintaining or restoring an ongoing cycle of resources.

In contrast, the traditional linear economy ideology focuses on production and consumption, with little consideration of how they may influence the future. A linear approach continuously takes resources, churns them through a production line, and disposes of them without capturing their ongoing value.

As resources decline, the planet and its people suffer while businesses which waste the opportunity to preserve their value will be left with less and less to profit from.

Now, the great news about the vagueness of circular economy is that it is open to multiple interpretations and its principles can be implemented in a variety of ways.

In the next sections of this post, I’ll explore some of the approaches business models can take to capture the value of a circular economy.

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NARROWING THE CIRCLE

A first, and most basic, way that businesses can start on their journey to circularity is through narrowing the cycle of their resources. This resembles traditional eco-efficient practices which are applied to linear economy models.

Narrowing resource cycles involves attempts to use fewer resources, such as by developing processes which use less energy or incorporating some recycled materials, but otherwise continuing production on the same scale and at the same speed.

Though these initiatives are better than nothing, they have little effect in the grand scheme of things.

A common problem with narrowed resource cycles is that of ‘downcycling’.

‘Downcycling’ happens when elements of blended materials (for example, the several types of plastic it takes to produce a standard plastic bottle) remain mixed during the recycling process and the resulting material is weaker or less functional than its original components.

Recycled material that suffers this weakening often has to be strengthened by adding new materials. This encourages continued production, requires high amounts of energy and simply delays wastage as products can only be weakened so many times before we have to admit they can no longer serve us.

Downcycling can also cause valuable materials to be destroyed as they are compounded with others. For example, when car parts are recycled, precious metals are blended with cheap paints and their value is lost.

For ‘narrowed circle’ models to align with circular economy principles they must be combined with efforts towards slowing or closing resource loops. If narrowing the circle is the only approach taken, then positive steps towards sustainability can be cancelled out by continued production and ultimate end waste.

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SLOWING THE CIRCLE

Businesses can incorporate circular economy principles by developing innovative models which seek to slow the cycle of resources. In doing this, the rapid production and consumption of modern society decreases and fewer valuable resources are wasted.

These business models capture the value of resources over a longer period of time by lengthening how long materials are kept in use.

This can be done in a number of ways.

As one example, products can be designed with long-life in mind, such as by ensuring easy maintenance, repair, adaptability and compatibility (e.g. electronic items which fit a standard size/shape of charger or making clothing adjustable to accommodate regularly changing bodies).

Designing products for longer life does not necessarily mean their physical lifespan. It can also refer to their emotional and aesthetic appeal by following simple, classic designs which are unlikely to become outdated in consumers’ eyes.

By designing with long-life in mind, businesses are able to capture additional value by charging a premium for high quality products, up-front guarantees and recurring services (e.g. repair). By having a justifiably high price point, the loss incurred by decreasing production and consumption can be offset.

Another approach is to build an access or performance-based business, where the core focus is providing customers with a certain capability or service rather than physical ownership.

Value can then be captured from the function supplied and the responsibility taken by the business for access or maintenance. Services can be broken down into units, such as hours spent on repair work or number of uses accessed, giving organisations a tangible measure to base their prices on.

Examples of access/performance models include rental businesses which charge for a period of access to their goods, or repair shops which capture value by fixing or updating items so their use can be extended.

Value can also be drawn out by remanufacturing goods without adding extra materials or energy. This can be done by the original manufacturer of the goods, or by third party businesses capturing the unused value of others’ products.

Examples include the sale of vintage clothing or 2nd hand electronics. Companies using these business models capture value by decreasing the material and energy costs of new production.

An additional benefit of a slowed resource cycle is the chance to improve customer loyalty as consumers are given a reason to stick with a given brand for a longer period. Remanufacture of products encourages personal engagement and repeated service provides an opportunity to build relationships.

A positive outcome of this is the increased likelihood that customers will return to their chosen brand for other products/services, or will make recommendations among their network.

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CLOSING THE CIRCLE

Business models which aim to close their resource cycle focus on the future purpose of all resources, including energy as well as physical materials.

These models reach the ultimate level of circularity by designing for technological and biological resource recycling.

This is done by adopting a biomimetic approach, drawing inspiration from nature when designing product and processes.

In nature, biodiversity allows for a network of different species and their roles to overlap. Through food chains and biodegradation, each substance returns as nourishment to its surrounding ecosystem.

As explored by McDonough and Braungart in their spectacular ‘Cradle to Cradle’ work, design must acknowledge the difference between technological (manmade) and biological (natural) materials.

In a fully circular process, design would allow for the easy separation of technological and biological elements, so that technological substances could be used in the next round of production while biological substances were returned to the Earth.

By designing for this separation, the resulting recycling process maintains the strength and functionality of all materials rather than falling into the trap of ‘downcycling’.

When resource loops are closed, production and consumption feed one another in a continuous cycle, allowing economic growth and social investment without harming the planet.

This requires innovative technology and commitment, but some incredible ideas have already been developed.

For example, Worn Again, Fibersort and Pure Waste are three companies which have developed technology for separating and fully recycling textile components.

The limitations faced by such companies include their lack of standardisation, the vast range of different materials/blends (each with different complications), and the infrastructure needed to bring these processes to scale.

An alternative is to avoid the need for separation altogether, by using resources which are either 100% natural or 100% technological.

Innovative materials have already been developed using everything from fish scales to pineapple to used coffee grounds.

These inventions show a great deal of progress and bring hope for sustainable production in the future, but it is important to be aware of the energy input they may require and the limitations they may face when designing products which appeal to consumer trends and demands.

Closed-circle business models can keep the recycling processes within their own business, reusing resources internally within their company and directly maximising its value to them.

An example of this is found at popular restaurant chain, Wahaca, where the heat energy generated by fridges and freezers is used to heat water in each branch.

Alternatively, some models seek to extend resource value by collecting the waste of other businesses and capturing new value from it.

For example, Aquafil are an organisation who collect plastic waste from the oceans and transform it into yarn for their sustainable Econyl® material, now used by many brands worldwide to replicate traditional nylon.

Other closed-circle business models may engage in ‘industrial symbiosis’ where waste from one production line is used in another.

This allows organisations to collaborate through sharing byproducts, which can benefit both parties by reducing both production and wastage costs and allowing new, sustainable lines of product to be manufactured.

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COMBINATION BUSINESS MODELS

The business models discussed above can be combined or naturally follow one another.

For example, a business which begins from a ‘slowing the circle’ approach could design for longevity while seeking collaboration with other businesses which might be able to reuse materials when they are eventually pulled out of their initial use.

Additionally, by having already built the infrastructure of their returns process, access-based businesses are more able to ensure that when they have done all they feasibly can with a product, it is diverted from landfill and disposed of as sustainably as possible.

They could also dedicate their own efforts into improving refurbishment, remanufacture or true recycling processes, with their inbuilt returns system providing materials for research and development.

These examples show how different approaches to, and levels of circularity can be developed and strengthened through taking a collaborative approach, strengthening relationships with suppliers, recyclers, return facilitators and consumers.

By building relationships, common understanding and perspective can form which promotes social inclusivity and wellbeing.

There are several arguments which acknowledge the need for global societies to come together in addressing our sustainability crises, and by encouraging businesses to coordinate their efforts, circular economy enables such a collective approach.

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CONCLUSIONS

Rather than being a defined criteria which individual businesses do or do not meet, circular economy is essentially a set of purpose-driven guidelines which organisations can interpret uniquely in order to contribute towards a constantly growing cycle of social and environmental wellbeing.

By following these guidelines, production and consumption are shifted from damaging the Earth and its communities to encouraging social wellbeing by developing, capturing and appreciating valuable resources which naturally regenerate and allow the cycle to continue.

By accepting circularity as a transition or process, businesses can get creative in their commitment to doing what they can, when they can, rather than setting the most difficult goals from the start.

The main limitation of circular business models is their scalability. As it stands, the majority of consumers are driven by immediate price and the thrill of shopping, rather than long-term value and savings.

But, things ARE changing, with younger generations showing increasing interest in new business models.

Awareness and dedication towards sustainability are growing rapidly, and brands which are ahead of this curve will be perfectly placed to capture customer value which leads to increased firm value and is nicely topped off with social and environmental benefits.

Industry attitudes change as consumer values shift, and as these changes occur there is more scope to invest in technological and infrastructural development which will help solve issues of scalability.

A recent report by Capgemini found that sustainability was becoming a major interest to investors across the globe, suggesting that sustainable businesses may be about to get their big break.

Such a major shift could be the turning point in saving our planet.

Through creativity and collaboration, new business models built on principles of circularity are set to build a sustainable future for us all to enjoy.

As Neri Oxman says in one of my all-time favourite quotes:

“Technology catches up with the imagination, and so, therefore, imagination has responsibility”.

I hope these wise words inspire you, and that this post has helped you consider some of the ways you can apply principles of circular economy in your business and in your life!

If you’re keen to learn more about sustainability, or if you’ve heard another term which confuses you, or if you’re struggling to work out the difference between seemingly identical phrases, I encourage you to check out the Waggle Dancers Sustainability Jargon-Buster with over 65 short definitions in one easy-to-navigate guide!

FREE download available below!

Further resources:

Broken, N. M. P. et al. (2016) ‘Product Design and Business Model Strategies for a Circular Economy’. Journal of Industrial and Production Engineering, 33(5), pp. 308-320. DOI: 10.1080/21681015.2016.1172124.

Ellen MacArthur Foundation (2013) ‘Towards the Circular Economy Vol 1: An Economic and Business Rationale for and Accelerated Transition’. Available from https://www.ellenmacarthurfoundation.org/

https://www.ellenmacarthurfoundation.org/circular-economy/concept

Pal, R. and Gander, J. (2018) ‘Modelling Environmental Value: An Examination of Sustainable Business Models Within the Fashion Industry’. Journal of Cleaner Production, 184, pp. 251-263. DOI: 10.1016/j.jclepro.2018.02.001.

Planing, P. (2015) ‘Business Model Innovation in a Circular Economy: Reasons for Non-Acceptance of Circular Business Models’. Open Journal of Business Model Innovation. Business_Model_Innovation_in_a_Circular_20170309-10330-13ng4rp.pdf

Tate et al. (2019) ‘Seeing the Forest and Not the Trees: Learning from Nature’s Circular Economy’. Resources, Conservation and Recycling, 149, pp. 115-129. DOI: 10.1016/j.resconrec.2019.05.023

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