Circularity – the driver towards new business modells.
Using the circular model for driving sustainability makes it crystal clear. Reduced use of virgin materials, longer product life, less energy spent in manufacturing and so on. All spells less consumption and less manufacturing and consequently, less products sold.
Since the start of industrial revolution, the business models in the manufacturing industry has been based on Profitable Growth. This has driven increased production and lowered costs.
Increased production relies on increased consumption which has developed into shorter product life cycles, with related increase in material consumption and creation of waste. This also drives product design towards products having shorter life span, reduced backward compatibility between generations, less possibility for repair, and with little or no consideration to recyclability.
Lower cost drives sourcing to lowest price in a linear economy which means increased use of virgin materials and production from regions with low cost levels, usually related to low or no regulatory systems. Low cost targets also affect product design in a way so to drive lower reparability and recyclability. A self generating, negative loop, sustaining linear consumption.
This systems has been in place for more than 100 years and has gradually worsened as affordability has increased. The effect is an increase in non recycled waste, environmental damages from extraction and emissions from the entire value chain. Just looking back some 40 years we still repaired our clothes, home appliances etc., that we today throw away to buy new instead. This behavior is sustained by a culture and a financial system that has been developed over the same “more than 100 years” and today constitutes the way of life.
The more sustainable circular system, built on the opposite philosophy – minimized consumption through optimized utilization with reduced use of virgin materials. This, more or less, means decreased sales of products and an increase in product cost. At least if there is no change in business model.
So they are on opposites ties with the main barriers to change related to culture and the finance system. And we like “our way of life” so much that logic does not stand a chance. Having a car for instance is a symbol more than an actual practical need as its typical utilization is only 5% of it’s life. There are endless examples of this. A culture built on fast consumption, supported by the growing economy created in its wake. So, if a company boldly moves to change its business model in a way to challenge this, it will meet resistance and change will take time. Considering that most established industrial companies are listed, they are governed by how the financial market (also the consumers) judge their ability to generate returns, short term (a quarter or less). Consequently, KPI’s for CEO’s of industrial companies today, still relate mainly to their ability to generate profitable growth short term. And this is strongly related to their career. Hence, both culture and finance are intertwined in preserving the linear model.
To succeed in making the change towards circular business models, these efforts needs to be managed as investments to buy room for creating the change needed.. There are a lot of good initiatives in this area, but most still struggle with the financial part of being truly circular and becoming profitable fast enough. So even though there are a lot of great initiatives in this area over the past decade with increasing focus, they all struggle with speed.
Companies can drive speed by investing in bold innovation in new business models and ecosystems that drives consumer behavior and legislation.
There will be an amount of risk in this of course. One critical area to adress is the supply chain. As the linear model has no return loop it needs to be developed. Today, there are few fully functional circular supply chains. This means that challenges in availability and prices. will be initial barriers of change that needs to be addressed in partnerships. It’s, however, just a matter of time before these flows with related standards and regulations are in place and those that are ahead will have a clear advantage. And this is the reward – it will be a matter of survival.
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