Circular Economy Business Model

“Currently, over 90% of the resources that are used globally do not return in the economic system. Only 9,1% of our society can be characterised as circular.” (De Wit et al., 2018b).

Our society is a society comprised of organisations.

Everything we are is organized by, for, and with one another. The pattern that underpins how we organize is based on the industrial model, which aims to turn raw resources into products. This is done extremely efficiently within the organization. The (implicit) premise is that the lifespan of items should be as brief as feasible, even if they are fully usable from a material standpoint. Based on the notion of ‘planned obsolescence,’ this results in a stimulation of as high a turnover rate as feasible.

This means that things are broken down or rendered obsolete after a specific and restricted time period, and it underlies the so-called ‘take-make-waste’ manufacturing paradigm, which is built on linear value chains.

The implementation of the circular economy necessitates fundamental structural transformation. This new system necessitates the development of new business models. Companies must get insight into which business model matches the organization and is promising for the chain in order to adopt the various business models.

In a nutshell, the circular economy is founded on the concept of keeping resources in circulation for as long as possible and utilising them at the maximum potential value throughout their lives. To do this efficiently, a large-scale strategy is required since material fluxes must be of significant volume. When compared to a linearly organized economy, such an economy will shrink considerably. Less mining and manufacture of new items is required, but things are used for considerably longer periods of time, contributing to value creation and value retention.

“Value retention as a collective task means that a shift occurs from an organisation-centric perspective to co-creating and co-maintaining a cycle that creates value over time at various moments by re-entering that what already exists ((raw) materials, products) into new transactions. This results in a collective business model, based on a value cycle-centric organisational perspective. Recycling shifts from something that occurs at the end of the value chain to a central principle for the design and organisation of a cycle.”

“Over 61% of the total input of materials are being used for so-called ‘short-lived products’; the lifespan of these products is usually less than a year.” (De Wit et al., 2018b)

A business model (BM) is the method through which organizations organize the generation of value. The traditional definition of a business model (see figure 2) consists of three components. First, consider the logic of value creation, or the value proposition: what extra value is being generated financially, as well as socially and environmentally? Second, how this value generation is organized inside a single organization or, in certain situations, across numerous parties. To do this, various building elements like as clients, channels, expenses, and activities must be linked logically to enable the fulfilment of the aim, the profitable supply of a certain commodity or service.

Figure.4. Business Model

Source: Business model (Adapted from Osterwalder, A. ‘The Business Model Ontology’, 2004)

In the new era of sustainable business models there are three types of business models, worth mentioning:

• platform business models

We live in a world full with ‘things. Many of these items are rarely or infrequently used (for example, automobiles, parking places, but also clothes and tools). Wouldn’t it be preferable to enhance the usage of such features (drilling, dressing, mobility) by allowing more people to benefit? Capacity and availability can be considerably better ‘brokered’ using a platform, which means less stuff has to be built. Intensifying use is thus prudent, but not always sustainable. Anyone who can combine capacity, need, and accessibility in an intelligent way has a business model. Thus, platform models contribute directly to the move to services and may be very successfully coupled with the other two types of business models.

• community business models

People are more eager to invest in their own means, community, power, and so on, as long as these investments offer some type of ‘return.’

New business models develop when these two phenomena intersect.

As a result, we are seeing individuals form energy cooperatives, shared mobility schemes, local do-it-yourself energy supported by blockchain technology as a method of transaction, and so on. Ordinary folks contribute money (crowdfunding) and time (time banking) to create a community business model.

• circular business models

The organization of value retention between and by organizations around the redesign of several interrelated material and product cycles is at the heart of circular business models.

The parties concerned must agree on a joint business proposition.

A circular business model, in essence, is a description of how value generation and retention are organized amongst partners (at a certain moment, in a specific place, and given the available resources). A circular business model demonstrates the logic of value generation via the use of a set of building blocks.

Often, the above mentioned business models can be very well combined.

A circular business model, however, consists of several other building blocks, and together with the contextual factors in which business models exists. The introduction to this model occurred during the Dutch national research on Business Models for the Circular Economy (BMCE) which took place in 2016 and 2017.

It is worth mentioning the five building blocks:

Cycles: the core concept of circular entrepreneurship is the organization of cycles in which products, components, or (raw) resources may be used repeatedly. The nature of the cycle, as described above, determines how frequently it occurs and at what cost.

value: Organizations that strive for numerous value creations, including social, ecological, and financial; companies that end a cycle but do not produce any long-term value cannot be described as a circular business model. They make no contribution to an economy that runs within the confines of the earth.

Strategy: It is critical that the point of sale of a product is no longer the primary determinant of value creation, but rather the delivery of added value throughout the product’s existence. This Creating implies a greater long-term engagement with one or more clients for a single product.

Organisation: a CBM (Coordinated and cooperative organisation) requires the coordination and cooperation of numerous value production processes. This must be supported by a proper underlying organizational model. Because no organization can conclude a full cycle on its own, organizational frameworks must facilitate communal organizing.

Revenue: CBMs must be accompanied by appropriate revenue models.

Turnover is produced differently than in traditional value chains, for example, over time (e.g., centered on product-as-a-service with a leasing contract) or as a result of value co-creation. When single transactions are no longer the focus, but rather the ‘lending’ of a product’s function, a slew of new revenue models develop, including leasing structures, but also pay-per-view, pay-per-print, and so on.

Figure.5. Building blocks of circular business models

Source: Dutch national research on Business Models for the Circular Economy (BMCE) which took place in 2016 and 2017.

Finally, but most critically, one feature of the model should not be overlooked. Closing a cycle is not a goal in and of itself, but it is all about partners cooperating and working together to arrive at a collective value or collective business offer. When working on the CBM, the proposal serves as both the beginning point and the end point. The collective value proposition is the heart of the company model and hence not a component. We can now see the basic line of reasoning if we combine the CBM model, the key principles of the circular economy, and the linked building blocks.