Circular Economy Means Business

Kathryn Rae

It’s 2008, and I am sitting in a large lecture theatre, excited to learn from renowned strategy guru Prof. Michael Porter. He is a compelling speaker; intense, direct, pointed, and above all, highly on-point.

Corporate social responsibility and associated initiatives are failing to make lasting change, Porter said. (In considering the number of CSR initiatives I’d supported through various marketing roles, I could only agree).

Business exists to create value for shareholders, he expanded. To effect lasting social change, business must look for ways to create lasting, shared value for both society and shareholders. Put bluntly, commitment to social good can wane without a solid business case.

Not another sustainability initiative

Fast forward 10 years and circular economy (CE) is becoming a buzzword for many corporations looking to tap into the increasing environmental consciousness of customers and reduce plastics and waste. A scan of recent annual reports shows CE initiatives alongside environmental and social programs – not inappropriate placement, given that CE is focused on minimizing waste and improving sustainability.

However, Porter’s message continues to resonate.

For CE to have lasting sustainability impact, consider it as a new business model to drive business profitability and increasing value. Rather than focusing solely on waste minimization or recycling end-of-use products, managers should consider how these could be turned into new sources of value.

Let’s consider three circular business models to spark fresh thinking.

Waste equals opportunity

How can “waste” or “under-utilized resources” become the starting point for another business? Imagine the moment Airbnb grasped the potential to leverage the millions of unused spare rooms globally to build the world’s largest accommodation service.

In Phoenix, Arizona, over 34,000 tons of palm fronds per year are diverted from landfills, saving the city on disposal costs, by processing them into an ingredient for livestock feed by Palm Silage, creating a new $10 million business and local jobs.

Observe the waste in your business or in society. Consider forming new partnerships to transform these wastes into valuable inputs, or let “waste become food” for your next business idea.

Planned obsolescence to planned permanence

Depending on your product, production and sales/distribution generally represent a sizeable cost. By prolonging product life through consecutive refurbishment, efficient maintenance, or better design, businesses can keep the product circling longer within the market – which requires a transition from repeat sales revenues.

Shifting to ongoing maintenance revenues – with performance measures around enduring performance – can be enabled by leading technology such as IoT and predictive maintenance systems. Consumers are increasingly embracing the cost-effectiveness of a more expensive, durable product – such as reusable facial wipes – allowing new entrants to compete against incumbent single-use products.

Plan to take your product back

All products have a lifecycle, however extended that may be. As customers, we like to upgrade and benefit from the latest features and be excited by a fresh design.

Consciously designing products so they can be easily dismantled and remanufactured reduces production costs and reliance on fluctuating raw materials expense.

In Ricoh’s leasing model, 100% of equipment is recovered. Remanufacturing in Europe produces “green line” machines, drastically reducing manufacturing costs and producing copiers with the original quality that are accepted by users at the same price.

Enabled by new technologies, companies can offer pay per use (or pay for access) while retaining ownership. For example, Philips pioneered a new business model for high-end lighting installations, charging businesses for the light used through intelligent lighting, enabling better maintenance and recovery.

Explore Circular Economy business models

A core principle for the circular economy is that Innovation = Profit.

Through innovative thinking and leveraging new technologies, companies have created new circular business models and generated new value for their shareholders. Along the way, they are contributing to making the world more sustainable.

Porter’s argument holds true. Let’s take circular economy out of the sustainability section and explore the power of new business models.

SAP is committed to fostering social enterprise, the UN sustainability goals, and the circular economy – and helping businesses innovate for long-term sustainability.

Kathryn Rae

About Kathryn Rae

Kathryn is an experienced innovation leader and manager with over 15 years of experience in consulting, digital business programs, and SaaS product management. As part of the Applied Business Innovation team in Australia and New Zealand, Kathryn specializes in customer experience and business model design, as well as helping organizations apply emerging technologies to impact their business at scale.