What is the circular economy and how your company can capitalize on it?

By Andre Ribeiro

According to the Ellen MacArthur Foundation, the EU alone could save $700 billion per year by applying circular economy principles to business and production. The European Commission has calculated that increasing resource productivity by 30 percent before 2030 could create 2 million jobs.

What is this circular economy that has such cost-saving, job-making potential?

Reinventing the use of resources

The circular economy refers to an approach to business and consumption that focuses on reusing, refurbishing and recycling all of what we have, as opposed to the current mainstream linear business models based on the principles of make, use and dispose. It means managing production efficiently and, crucially, seeing waste as a valuable resource for economic activity.

The European Commission stated that using resources more efficiently will bring new growth and job opportunities while reducing annual greenhouse gas emissions. Business leaders are waking up to the opportunities the circular economy can offer their companies, too. They want to capitalize on it to revitalize their revenue models, stay competitive, drive higher value from resources and offer new and better services to their customers.

Digital reinvention with a focus on new, circular business models will be necessary to transition into a more efficient economy. Only by leveraging advanced technologies and sophisticated cognitive analytics techniques will organizations be fully able to measure current waste or slack in existing value chains. For example, Uber applied a comprehensive set of analytics coupled with advanced technologies and a superior customer experience to address a very particular type of waste — idle time of the existing stock of cars and drivers — and in doing so, it reinvented the taxi industry around the world.

The consumer electronics industry is often accused of having a narrowly linear approach. As innovation cycles shorten, consumers are encouraged to upgrade devices regularly. In Western Europe, North America and Japan, per capita, consumers own 1.1 mobile phones, and average usage time is down to less than 2.5 years, according to the Ellen MacArthur Foundation. This trend is driving the creation of substantial amounts of material wastes such as plastics and metals.

A focus on refurbishment and remanufacturing, informed by insights derived from analytics, would not only drastically cut the volumes of e-waste going to landfills, but also make stark financial sense for the industry and consumers alike.

Profit through performance

In addition to revolutionizing material use, circular strategists question the world’s wider attitude toward ownership. They envision a future in which everything people consume is available as a service and people don’t need to own anything at all. Everything from appliances to textiles can be leased or shared among communities, then returned to the maker to be refurbished and reused. Many industries are already exploring new business models where they sell the performance of the product, rather than the product itself — with lucrative results.

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For example, a company might loan a washing machine to a customer at an ongoing cost and upgrade it as required. For the company, it’s an alternative revenue model that allows for ongoing engagement with the customer while capturing valuable data about their use of the item. The manufacturer is incentivized to produce the most efficient and highest-quality washing machine it can and to constantly innovate to maintain its performance. The customers — who have very little interest in the components inside their machine as long as they have clean clothes and a small electricity bill — gain a top-of-the-range washing machine and don’t need to worry about maintenance or disposal.

How can you start to envision new business models for the circular economy?

  1. Map the business model and value chain to highlight the benefits of moving to a circular economy model.
    Survey your immediate value chain and identify the points at which value is being lost. Map the company’s role, industry and revenue model amid its ecosystem. Are you supporting a service or performance selling model? What is your relationship with suppliers, customers and maintenance partners? Where is the value and potential of a reused unit?
  2. Identify key enterprise capabilities for a circular model.
    Define critical capabilities that will enable a value-driven circular economy model for your business. Some capabilities include product design and management, reuse operation, reverse management, solutioning/selling and reuse selection (dynamic decisions on reuse based on detailed product data, supply and demand information and profitability).
  3. Initiate a use case to articulate the potential financial value of improved circular economy practices.
    Typically, in remanufacturing or refurbishment, the focus is on current technology, where there is a better understanding of potential residual value. The challenge is to understand the reuse options for older technology or secondhand parts.

Written By

Andre Ribeiro

Senior Managing Consultant, Strategy Center of Competence, IBM iX

Andre Ribeiro is a senior member of the IBM iX Strategy Center of Competence, focusing on digital business strategy advisory. He is an expert practitioner in IBM Design Thinking and digital reinvention, and an expert in the circular economy, Component Business Modeling, business value…