Sustainability goals are moving up on the priority list of many large organizations. Unfortunately, doing better for our planet and society in itself is rarely the primary trigger to innovate. Until we reach that stage, organizations need a couple of extra nudges to get motivated enough to act. Luckily there are plenty of other arguments!
Take circular business models as an example. Why do companies decide to engage in the circular economy? Aside from estimates that the circular economy is a $4.5 trillion dollar opportunity waiting to be seized, here are 6 other reasons why you might pursue the circular economy (for entirely selfish reasons).
6 reasons to redesign your business model
Save costs/boost profit margins
By re-covering or re-using resources, companies can save a significant amount of budget.
“The remanufacturing business is perhaps the most impressive of Renault’s circular business model initiatives. Thus, the Choisy-le-Roi plant near Paris has repaired parts belonging to six different product families since Renault acquired it back in 1949. The operating margin is higher than that of other Renault plants, and the process is waste-free. Hence, 43% of the parts supplied to the plant by Renault’s European network are recuperated in the remanufacturing process, 48% are unserviceable and are thus recycled in the company’s foundries into new parts, while the remaining 9% is valorized in treatment centers. In total 30.000 engines, 20.000 gearboxes and 16.000 fuel injections systems are remanufactured at the plant each year providing jobs for 345 people (Renault Communications 2014c, Renault Communications 2014a, Ellen MacArthur Foundation 2013b).”
Gain access to a new market
The group of consumers who take the negative sustainability impact into account when buying a product is growing. If you want to attract this consumer segment, you will have to do far better. Some basic window-dressing and “green” marketing campaigns will not be enough.
Through selling its healthcare equipment under lease contracts, rather than outright sales, global healthcare leader Philips Healthcare expanded its refurbishment operations through a steady stream of returned products, to expand its market penetration in cost-constrained market segments (e.g. cost-conscious private clinics and hospitals with tight operating budgets).
In many regions, sustainability goals are embedded in new regulatory frameworks. For many industries, this direction is inevitable. Even if you have a runway to implement these upcoming regulations, it will be smart to build up the experience and resources to comply. Some of your competitors will, and you don’t want to play catch-up later on.
In March 2020, the EU released its second Circular Economy Action Plan (CEAP), raising the bar from its first CEAP issued five years earlier (where, by the way, all 54 outlined actions got delivered upon, or are currently in implementation). This new plan contains directives for longer lifetimes and better collection, new mandatory requirements on what is allowed in the EU market, including the reduction of (over)packaging; new mandatory requirements on recycled content and biodegradable plastics, with attention to microplastics, and more. There are some directives that apply to services, too, like new legislative initiatives on reuse to substitute single-use packaging (cutlery) in food services. Right now the plan focuses on sparking action in industries where the potential for circularity is high. These sectors include electronics, batteries and vehicles, packaging, plastics, textiles, construction and food, water, and nutrients. The EU is a front-runner in this respect, but this will have consequences in other markets, too, where different circular economy aspects are being promoted. The message is clear – society expects more from business, and will continue to legislate it.
The younger generations have been raised with a sense of urgency to act, and many talented people are looking for careers where they can do meaningful work. If you want to gain access to this workforce, you will need to be open about your efforts to minimize your negative impact. You don’t build a reputation in a matter of weeks. The earlier you act, the better.
This point has been made abundantly clear for nearly a decade: talented employees want to work for companies with a positive impact on the world, and that includes being a sustainable business. Employee engagement software provider Peakon analyzed 14 million survey comments in 2020 to uncover that employee expectations on sustainability are still increasing. What does that mean? CSR might have been good enough in 2014, but in 2020 people are looking for more impact and results on SDGs – that means incorporating sustainability and circularity in your core business model.
Build a competitive advantage
The direction is clear. Every single industry will, sooner or later, make significant investments to limit the negative impact of doing business. Production techniques need to be redesigned, distribution channels will need to evolve, waste management needs to level up – you get the point. But where will all these businesses go for solutions? Most organizations will not start from scratch. If you build up knowledge and IP today, you can surely monetize this in the near future. Additionally, the shift from circular to linear involves business model innovation for all players in a value chain. Shifts in business models are harder to copy than product innovations. It can be difficult to innovate with suppliers, your customers, and downstream businesses to build the relationships and infrastructure required to close the circle. But that being said, first ones to build this network have lasting competitive advantage over new entrants.
Dutch scale-up Swapfiets sells flat-fee monthly bicycle subscriptions to consumers, which include repairs or a ‘swap’ for a new bike within 2 days. At first glance this business model might seem easy to copy, yet, it only has 1 main competitor in its markets, VanMoof. In the past 5 years, Swapfiets has been able to expand its customer base to 130,000 users, for whom it controls which bikes they’re riding and who does the repairs. Not just that, in their user base, they are able to gather data about usage and repair data that most bike manufacturers miss out on, giving them a competitive advantage. The accumulation of this data over time, alongside the business relationships with insurance and core activities of repair, gives them a competitive advantage that makes their business model challenging to copy.
Build resiliency to market shocks from a predictable flow of used goods
Market volatility of commodities creates uncertainty for businesses, driven by large macroeconomic variations: everything from the price of oil to the price of the stock market. If your business model is depending on a market price for commodities like plastics or gold, you may benefit from switching to circular operations. Circular operations give you more predictability overflow of products to and from your customers.
When lift equipment manufacturer JLG Industries launched its asset management program in 2013, it was able to create a predictable return flow of used equipment that it could refurbish and resell, saving 35% of costs.