Critical Success factors of Circular Economy

September 14th, 2018   •   no comments   
Critical Success factors of Circular Economy

Part I – 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 and 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 environment 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 of 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 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 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 BrinzeaMarius 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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