Critical Success Factors of Circular Economy – II. Business Model Innovation

Aligning Business Model Innovation to Circular Economy Requirements.

n the first part of our research analyzing the organizational culture (read: A paradigm shit in Organizational Culture is the first step to a Circular Economy), we revealed that continuous improvement is not enough to achieve #circulareconomy. Indeed, another critical factor is the Business Model Innovation.

Circular Economy is a regenerative system that redefines growth. The concept focuses on positive society-wide benefits and it is based on the following principles: eliminate waste and pollution, keep products and materials in use and regenerate natural systems.

A business model is a holistic description of the logical contexts of how a company generates value for its customers and itself. Business models as analytical instruments are used to systematically identify the starting point for innovation.

When considering Circular Economy in the business model innovation process, companies must break the existing business model building blocks in order to re-analyze, reevaluate, re-invent and set them back together in alignment with the concepts of long-lasting design, maintenance, repair, reuse, remanufacturing, refurbishing, and recycling.

Worldwide, companiesin search of business model innovation are focusing their efforts on the product stages between design and consumption: “design-buying-consumption stage”.

With few exceptions, most of the companies are quietly neglecting the aspects related to the “post-consumption stage”, which suffers greatly in terms of innovation, consumer engagement, data bases and digitalization.

This situation has been brought about by the fact that, in the linear economy, the “post-consumption stage” is considered “someone else’s job”: compliance schemes, sanitation companies, local authorities, etc.

The latest evolutions on the EU market (collection and recycling costs, raw material prices, ban on some plastic packaging, some economic instruments, etc.) and China “waste ban” will push companies to innovate their business models by fully considering the “post-consumption stage” in all its aspects. And this is not for the sake of sustainability, but to gain a lasting competitive advantage.

INNOVATION DRIVERS

Considering the Circular Economy as a regenerative system, business model innovation must address multiple drivers with a significant impact on business model building blocks simultaneously.

Resource-Driven. Resource-driven innovation (certainly one of the main drivers of Circular Economy) springs from an organization’s existing capabilities and infrastructure or its strategic partnerships to “expand or transform” the current business model.

Offer-Driven. Extending the Value Proposition to “post-consumption stage” will differentiate and will generate a long-lasting competitive advantage. The market provides many examples in this regard (see Nespresso “post-consumption” value proposition – link).

Consumer-Driven. Consumer-driven innovations are based on consumer needs, facilitated access, or increased convenience in both: “consumption and post-consumption stages”. 

Finance-Driven. No doubt, innovations driven by new revenue streams, pricing mechanisms, or reduced cost structures affect all business model building blocks. Considering the fact that some of the costs attached to “post-consumption stage” are influenced by many stakeholders, the role of strategic partnerships in finance-driven innovation is crucial.

PRINCIPLES OF INNOVATION

In order to incorporate the post-consumption stage in the business model innovation process, companies must consider the following principles:

Going beyond the functional “jobs” of the product and including “jobs” which are specific to the post-consumption stage. Companies have to look beyond the functional “jobs” of the products and create new value by adding important, social, emotional and environmental “features” to generate a proper post-consumption behavior.

As humans are at the heart of all systems we develop on earth, the Circular Economy must generate accessibility, affordability, opportunity and credibility.

People will change their behavior in the post-consumption stage if they see the entire process as Easy, Rewarding and Normal.

Redesigning products considering simultaneously the rethinking of waste collection systems, to help more consumers get a “job done radically better”.

Living in a globalized world leads to one question: How will the innovative business models aligned to Circular Economy requirements interact with the current linear business models existing around the globe?

Even in the era of #CircularEconomy competition stays, and customers/consumers will remain the supreme judges. In the innovation process, companies must explore cost impact, value proposition impact and consumer impact.

Circular Economy cost impact. In terms of cost impact, companies must identify the highest “cost-elements” related to post-consumption activities (infrastructure, collection, transport, communication, etc.) and evaluate what really happens when these elements suffer substantial changes. So, companies have to analyze:

• What value elements should disappear, and what they would have to create in order to compensate for their absence?
• What are the infrastructure investments they may want to make and how much value they create on a long-term?

Once adequate investments are identified, the companies have to consider how much value these investments can create in the long run and how these investments contribute to consumer engagement and the scalability of the business model.

Value proposition impact. All companies opt to start designing the value proposition from technology or from the highest and most relevant of customers’ needs. Either way, in the context of a Circular Economy, companies must take in consideration the value proposition impact and they should ask themselves:

• What features should they eliminate, reduce, enhance or newly create in order to generate a valuable new customer post-consumption experience in the context of Circular Economy requirements?
• What are the cost implications of your changes to the Value Proposition?
• What is the real impact of Circular Economy requirements over the value side of our business model (customer segment, channels, revenue stream, etc.)?

Considering Circular Economy concept, it is a long process between designing a value proposition that creates value for customers and a business model that creates value for the company.

Customer impact. Last but not least, companies must explore customer impact. During this transition from a linear to a circular economy, business models will suffer on both sides, cost and value. The focus should be also on what jobs customers are trying to get done in the post-consumption stage and on how to prioritize them.

Companies should develop a comprehensive understanding of how customers’ profiles evolve during this transition:

• Which customer segments could you focus on, and which segments could you possibly reduce or eliminate?
• How do these customers prefer to be reached in the post-consumption stage and what kind of relationship do they expect? What are the cost implications ?

HOW TO FIT INNOVATIVE BUSINESS MODELS IN THE CIRCULAR ECONOMY

In order to fit any business model, companies must identify first the relevant customer needs they believe they can address with their products, including the post-consumption “needs”. Usually, in this step companies are prototyping (on paper) multiple value propositions to come up with the ones that produce the best fit.

The second fitting takes place at the market level, when customers positively react to the value proposition and it gets traction. Companies must have evidence that their products actually create customer value, before and after consumption.

The last fitting occurs when companies have evidence that their value proposition can be embedded into a scalable and profitable business model.

CONCLUSION

Business model innovation in the era of #circulareconomy, is a very long process during which companies will inevitably learn that many of their ideas simply don’t generate customer value or scalability. Implementing Circular Economy principles in business model innovation is not so easy.

The Circular Economy Package outlines some objectives, but only achieving those objectives doesn’t mean that Circular Economy principles have been met, or that business model innovation has taken place.

Besides Circular Economy principles, during the innovation process companies must consider also the dynamics of business environment: market forces, industry forces, key trends and macro-economic forces.

Particularly across Europe, where most of post-consumption activities are managed by compliance schemes (based on the Extended Producers Responsibility principle), companies must analyze if these compliance schemes (with current competences and resources) will be able to contribute to business model innovation in the era of Circular Economy.

WHAT’S NEXT?

Because most post-consumption activities require a strong network and experience, the next critical factor to be addressed is: Critical Mass.

Critical Success factors of Circular Economy – I Organizational Culture

A paradigm shift in Organizational Culture is the first step to a Circular Economy

Today, most stakeholders understand there is an urgent need to transition from a linear economy (take-make-dispose) to a Circular Economy. Even the general public has become familiar with the concept, The public has started to believe that a circular economy brings on major benefits for the environment and society.

Presumably, anyone with a stake in the industry has seen a Circular Economy infographic. The online world is full of them, one more beautiful and more explanatory than the other. But these infographics are only a technical representation of the circular economy concept.

How can we get there? How can we reach that Circular Economy? This is a different question.

The success criteria of a circular economy are defined and agreed among all stakeholders during each stage of the product life cycle. As success criteria require quantitative measures, the European Commission adopted the measures for 2025 – 2030 recently, through the Circular Economy Package (the most modern environmental legislation worldwide).

A successful transition towards a circular economy needs critical success factors to be in place. These critical factors, that will underpin the transition and the likelihood of its success, unfortunately, cannot be identified in the Circular Economy infographics. Based on comprehensive expertise and research carried out on various markets, in the next period of time we aim to describe briefly some of the circular economy critical success factors.

ORGANIZATIONAL CULTURE between EXECUTION and INNOVATION

A simplistic approach of achieving circular economy goals covers only a significant change in the actual business models. But Circular Economy requires first and foremost a fundamental change in the existing attitudes and mentality, requires a strong leadership, and an outstanding organization culture.

The successful transition to the circular economy depends on the company’s ability to develop that organizational culture which can strike a balance between exploiting the actual knowledge (continuous improvement of the actual business model) and exploringnew opportunities (business model innovation).

Definitely in a linear economy, companies can use exploitation capabilities to produce predictable results and improve the resource base. In fact, most of the companies will be always in favor of continuous improvement of the actual business models. Following a “continuous improvement” approach, companies can achieve some success on a short term and maintain a stable performance.

In a Circular Economy, however, “continuous improvement” is not enough.

Companies must integrate, build, and reconfigure internal and external competencies and capabilities to address the new environment dynamic. Circular Economy goals requires “business model innovation”, but innovation-related results are unpredictable and distant. Innovation can bring both considerable successes and failures.

Are the business leaders ready to take on these risks? What about the shareholders’ “willingness”?

Most of the companies are embracing the idea of “circular economy”, but in reality, many of them don’t want to go through the string of failed experiments necessary to get there. We have to admit that innovation is associated with high costs and risks. But on a long-term, if companies don’t take risks, they can miss opportunities to obtain a competitive advantage in a circular economy early on.

Today, the leaders’ business decisions are “trapped” between circular economy goals (which come at a “cost”) and the company expected financial results (“rewarded” business goals). The actual global situation makes their strategic decisions even more difficult. Except for the EU member states, most of the international markets are still oriented on a linear economy, having no regulations related to the circular economy.

Exploitation and exploration capabilities compete for the company’s limited resources and the internal tensions are high.

Using the same resources (financial, human resources, infrastructure, etc.) for both innovation and continuous improvement is not an easy task. Without sufficient capabilities (and the transition to a circular economy requires a lot of capabilities) companies will remain stuck in the middle or even lie behind.

How many companies have adequate and sufficient capabilities to move forward to the circular economy nowadays?

Developing an adequate organizational culture in order to embark on exploitation and exploration simultaneously is not easy. Specialized literature identifies the following approaches:

• Companies can focus the organization culture on either exploitation or exploration alternatively due to the difficulties in pursuing both simultaneously.
• Companies can develop both capabilities at the same time, through the establishment of structurally separated units within the same organization.
• Contextually, companies can support and allow people to judge for themselves how to divide their time between exploitation and exploration activities.
• Depending on their leadership, companies can decide that top managers play the most important role to develop exploration and exploitation activities.
• Companies may outsource exploitation or exploration activities to external companies, or develop strategic alliances with other companies.

Obviously, the transition to Circular Economy requires different organizational structures, processes, and strategies. 

This statement is largely valid not only for companies (producers, importers, retailers, waste management) but for all the other stakeholders: local authorities, industry and professional associations, compliance schemes and so on.

Standalone innovation is not enough for transitioning to a Circular Economy. New structures, processes, and strategies are required. Stakeholders must find an optimal approach between mechanistic structures, routinization, control, bureaucracy, and organic structures, improvisation, and autonomy.

CONCLUSION

When addressing the Circular Economy desideratum, the first challenge of companies is how to create that organizational culture able to develop synergies between “continuous improvement” and “business model innovation”.

To succeed in a circular economy, the companies have to strategically integrate exploration and exploitation activities and to capture their benefits simultaneously.

WHAT’S NEXT?

Once such a culture is in place, the next critical success factor to be addressed is Business Model Innovation.

About the author:

Marius Brinzea has a managerial experience of over 20 years and he is a graduate of Strategy Executive Programs within INSEAD. He has worked in managerial positions both in Romania and abroad, also providing consultancy in a series of projects in Europe, USA and South America.

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