Circular Business Models and the Circular Economy

A business model defines how an organization creates, captures and delivers value for its customers. The primary objective of a business model is to define an organization’s consumer value proposition and pricing mechanism that, in turn, indicates how the organization functions and aligns with supply chain partners to create value. Academia has proposed five (Table 15.1) mainstream circular economy business models (Figure 15.2) (Sivertsson and Tell, 2015):

  • 1. Circular supply chain.
  • 2. Recovery and recycling.
  • 3. Product life extension.
  • 4. Sharing platform.
  • 5. Product as a service.

The past decade has seen the implementation of these five business models in business organizations across the globe. More than one-third of worldwide company CEOs are considering adopting circular economy business models as a part of their primary business strategy (Accenture and United Nations Global Compact Report, 2016).

The first business model, i.e. circular supply chain, presents completely recyclable, biodegradable and renewable raw materials which may be used across the product lifecycles - for example, introducing a renewable energy source to replace an existing fossil fuel-based energy technology (Ghisellini et al., 2016). A company can adopt this business model within its operation or through its supply chain partners (Sivertsson and Tell, 2015). For instance, a company can source biodegradable materials from its suppliers and can provide their customers with recyclable products.

TABLE 15.1

Five Circular Business Models

Five circular business models and their flow of operations

FIGURE 15.2 Five circular business models and their flow of operations.

Moreover, a company can incorporate renewable energy sources into its daily operations, thus reducing fossil fuel-based energy consumption.

The second business model, recovery and recycling, deals with extracting value from waste, i.e. reuse of the products which have reached the end of their lifecycle and thus eliminate the concept of trash (Ghisellini et al., 2016). For example, Nike, the global shoe manufacturer, is implementing this business model, in which the company collects used shoes and converts them into Nike grind materials. These grind materials are then used to make athletic surfaces and sports courts. Moreover, they also used these grind materials in making new shoes; around 71% of new Nike shoes are made from such waste products. One more approach of this business model is to extract residual value from the waste. For instance, medals for the athletes in the 2020 Tokyo Olympics are made from metals extracted from electronic waste. Indian companies can also think in such an innovative way to adopt this business model.

The third business model is product life extension, which deals with an exciting idea. Sometimes consumers discard their existing products because of many reasons, e.g. the product is broken, the product is no longer needed, the product is out of fashion even though these products have some value (Sivertsson and Tell, 2015). In this business model companies extend the product life cycle by improving the existing product through repairs, remarketing, remanufacturing and upgrades (Inigo and Blok, 2019). A classic example can be taken from the Indian e-com- merce industry (Sivertsson and Tell, 2015). Nowadays, due to continuous technology introduction cellphones become obsolete very quickly. To eliminate such substantial electronic waste e-commerce companies like Amazon and Flipkart have started exchange programs where they purchase old cellphones for some value for new cellphones. The purchased cellphones are then upgraded and repaired and are again sold as refurbished phones by extending their lifecycles. This business model can be adopted by performing six distinct activities that are as follows:

  • (a) Refurbish: this process involves restoring an old product into an almost original state or remanufacturing them.
  • (b) Build to last: this setting involves the creation of products which are built to last a long time and can be availed by paying premium prices.
  • (c) Trade-in: this model deals with taking back products from the customer for trading and reselling.
  • (d) Upgrade: this process consists of adding and replacing the existing functionalities of the products by adding new technologies. However, the core product remains the same. For example, Nokia provides the latest software upgrades to its current cellphone users so they avoid having to buy new cellphones.
  • (e) Refill: This setting deals with replacing the degraded functionality of the product, which has deteriorated quicker than the primary commodity.
  • (f) Repair: This is one of the most unpretentious settings of all as it involves the repair of the damaged product to enhance its longevity.

The fourth business model sharing platform is based on an innovative idea (Inigo and Blok, 2019). In developed countries in a typical home, around 80% of the things stored are used only once a month. This is a classic case of small consumption of assets. This business concept is based on the idea to maximize the utilization of existing assets (Sivertsson and Tell, 2015). On a sharing platform, the platform provider connects interested parties that may be two or more in number, to drive up the net asset consumption through co-access.

This business model works on digital technologies where new' relationships and business opportunities for interested parties can be created who rent, share, swap, lend or barter their unused products and services (Inigo and Blok, 2019). At the current stage, this model exists and works in two dimensions:

(a) Consumer to consumer (C2C): Nielsen (2014) states that more than 68% of online consumers globally are keen to share their private belongings for some money. These items include electronics, clothing, bicycles, automobiles, furniture, sports gear, as w'ell as their homes. A classic example of cashing in on this opportunity is Airbnb. Airbnb provides a sharing platform for people who are willing to share their homes with tourists and tourists who are looking for good and cheap accommodation in various tourism destinations. By their initiative, they have provided homeowners with a chance to utilize their unused/less-used assets (home), as well as giving the tourists an opportunity to learn the culture and tradition of a tourism destination more effectively and economically (FICCI-Accenture Report, 2018).

Moreover, by providing this sharing platform, Airbnb has established itself as one of the most significant tourism operators in the world.

(b) Business to business (B2B): Although the sharing platform model is more prevalent in the C2C market. It is slowly gaining momentum in business to business markets as well where businesses with more expensive assets and low utilization rates have the opportunity to cash in.

The fifth business model is called a product as a service. In the 21st century, the mindset of consumers has changed. Consumers these days are shifting their focus from ownership to access to products and services (Inigo and Blok, 2019). If a company is to cope with such requirements, then it has to accept the entire cost of merchandise ownership and offer their products as services. In this case, the customer becomes a user rather than the owner of the product. This model also focuses on increasing the longevity of a distinct product where durability, reusability and reliability of a product become more important than the existing system of volume, mass production and disposability (FICCI-Accenture Report, 2018). It is a thumbs-up situation for both the manufacturer and consumer.

On the one hand, the company establishes a new revenue system and the consumers realize cost savings as they are not the owner, as well as feeling superior performance and quality.

A classic example can be drawn from Michelin tires. The company has started manufacturing sensor-enabled tires for their customers. Rather than a product, they offer these tires as service. The company sells its tires on a lease basis and monitors the value per the kilometer driven. In this scenario, the consumer does not have ownership over the tires and thus does not have any accountability for maintenance (FICCI-Accenture Report, 2018). After using the tires, the consumer can return them to the company and obtain a new set of tires. The used tires are then remanufactured and supplied as fresh ones; it has helped Michelin save around 35 million tons of emissions globally. In India, Audi cars have started a similar scheme where the customer can opt for an Audi car and after using the vehicle for four years, they can return it and take a new Audi car home. Mahindra and Mahindra are also planning such a scheme. The product as a service business model can be incorporated in several ways:

  • (a) Pay for use: in this model, consumers buy a product yield rather than the product itself and they pay the company on the base of usage of the product.
  • (b) Leasing: in this scenario, the consumer buys a contractual right to use a product for a distinct period without the transfer of ownership.
  • (c) Rental: in this case, a consumer purchases the rights to use a product for a short duration of time. The rental car service providers like Ola and Uber come under this category of service providers.
  • (d) Performance agreement: in this business model, a consumer buys a predefined service and quality level with service providers to achieve a specified tangible result.
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