Product-service system business models and circular economy

Introduction

Most current production and consumption systems are linear, adopting a “take, make and dispose" model and thereby contributing to the depletion of natural resources (WEF, 2014). To achieve sustainable growth, firms need to shift from linear to circular economy models. A number of companies (e.g., Unilever, Toyota, P&G) and third-sector organisations (e.g., the Ellen MacArthur Foundation) are seeking solutions to accelerate scale-up and transition efforts towards more circular operations. This change requires not only product, process, and technological innovation but also a new business model that can improve the circularity of the manufacturing and supply chains through activities of reduce, reuse, remanufacturing, refurbishment, and recycling. Also, circular economy cannot be achieved by a specific firm. It requires collaboration between organisations across the supply chains and other stakeholders from similar and/or diverse sectors. A change in one organisation’s business model will affect the business activities of other organisations in its supply chains. Therefore, a systemic approach to managing better utilisation of the materials, energy, and other valuable resources through higher rates of recycling, reuse, and remanufacturing is imperative for success.

Business model innovation for circular economy

Circular economy

A circular economy is defined as an industrial system that is restorative and regenerative by design (Ellen MacArthur Foundation, 2015). In this system, the flows of materials, energy, and information are closed loop. The word ‘circular’ is an antonym of ‘linear’ and is related to the concept of a cycle, so a circular economy is a cyclical closed-loop system in which environmental protection and economic development are balanced (UNEP, 2006). There are two types of cycles which are particularly important in the circular economy: the biological nutrients cycle, in which they are designed to re-enter the biosphere safely, and the technical nutrients cycle, in which they are designed to circulate without entering the biosphere through end-of-life activities (Ellen MacArthur Foundation, 2012). Thus, the ‘Reduce, Reuse, Recycle’ (3R) principles are essential to the notion of a circular economy (Murray et al., 2015).

The circular economy has been studied on three levels: the firm, interfirm, and entire industrial levels (Murray et al., 2015). The management of manufacturing and supply chain operations at all three levels plays an important role in moving towards a circular economy ideal. This may be accomplished by the activities of reduce, reuse, recovery, remanufacturing, and recycle within supply chains (Cooper, 1999). UNEP (2006) proposed the general characteristics of circular economy as: low consumption of energy, low emission of pollutants, and high efficiency. Hu et al. (2011) emphasised that the circular economy needs to be resource productive. The Ellen MacArthur Foundation's investigation with a practical emphasis summarises three principles, five key characteristics, and four sources of value creation in a circular economy (Ellen MacArthur Foundation, 2012, 2014, 2015). The four sources of value creation are:

• 1 Power of the inner circle, referring to minimising material usage and reducing cost through the inner circles such as production, reuse, and refurbishment, and then through outer circles such as recycling;
• 2 Power of circling long, aiming to maximise the number of circles as much as possible and prolong product longevity;
• 3 Power of cascaded use, applying ‘waste-is-food’ logic and suggesting a different use of the used products through symbiosis approaches; and
• 4 Power of pure circles, using an uncontaminated material stream so that the redistribution efficiency and material productivity can be increased.

Circular business model

Business model refers to the logic of how a companies does business (Magretta, 2002; Teece, 2010). It describes how a firm creates and delivers value for its stakeholders within the value network and how it captures value from them (Richardson, 2008; Zott et al., 2011). Osterwalder and Pigneur (2010) developed a business model canvas using nine components to describe a business model: value proposition, customer segment, customer relations, key resources, key activities, partners, channels, cost structure, and revenue streams. Designing and developing business models that are conducive to a circular economy need to identify new sources of value creation in the context of the nine components, for example, turning the waste from production facilities and end-of-life products into revenue streams.

A circular business model is defined by Linder and Williander (2015) as “a business model in which the conceptual logic for value creation is based on utilizing the economic value retained in products after use in the production of new offerings.” Some other researchers, such as Loomba and Nakashima (2012), believe that circular flow not only includes products after use but also production waste and by-products. The Ellen MacArthur Foundation (2012) identified four sources of value creation within the circular economy, which implies that business models for circularity could create value from the inner circle, circling longer, cascading use, and the pure circles. To some degree, every business model is both linear and circular (Mentink, 2014; Lewandowski, 2016). Lewandowski (2016) investigated how circularity could be embedded into each of the business model components and proposed a conceptual framework for circular business models. Planing (2014) regarded business model innovation as one of the fundamental building blocks for the transition to the circular economy. Mentink (2014) described the required changes of business model components for developing circular business models and proposed a tool for business model innovation in a circular economy. Laubscher and Marinelli (2014) identified six components of embedding circular economy principles into business models, among which reversed supply-chain logistics is regarded as the most important component of circular business models. A number of methods and tools have been developed to support firm transition towards a more circular operations, such as the business model scan developed by Van Renswoude et al. (2015), 7-P model proposed by Scott (2015), and sustainable value analysis tool by Yang et al. (2017b). In general, the research on circular business models is in its infancy yet continues to attract attention from operations management, innovation, and strategy scholars.