The concept of a circular economy has gained significant momentum in recent years, with increasing interest from businesses. It rests on three key principles:
- Design out waste and pollution to reduce GHG emissions across the product value chain
- Keep products and materials in use and at their highest value
- Regenerate natural systems to sequester carbon in products, materials, and soil
In a circular economy, creating value is increasingly decoupled from consuming finite resources. It presents organizations with the potential to create an economy that is distributed, diverse, and inclusive.
Overall, consumer awareness of environmental, social, and governance (ESG) issues and policies are taking hold. Almost half of US online consumers consider themselves environmentally conscious, and their sentiments run much deeper. According to the Forrester Analytics Consumer Technographics Benchmark Survey, 2021:
- Approximately two-thirds of US online consumers wish that companies were more transparent about their business practices, and they believe that companies are responsible for protecting the environment.
- About two-thirds of online consumers in metro China, France, and the UK , and just over half of US online adults are concerned about the impact of climate change on society. One-third of US online consumers indicate that concerns about climate change affect their purchase decisions.
- Two out of five US online consumers want to understand the consequences of their energy choices. Almost half look for energy-efficient labels when they buy products.
Consumers worldwide are translating their values into purchasing decisions. They are actively looking for a commitment from brands where they shop. Product companies must take a product life cycle approach that aims to set up closed loops in which the complexity and functionality of a product are conserved for as long as possible, rather than breaking a product down into its basic materials after each use cycle.
“Over 70% of a product’s life-cycle costs and environmental footprint is determined during its design phase.”
Identified by Navi Radjou and Jaideep Prabhu in their book Frugal Innovation.
Another key perspective is to maximize the functionality of materials. Whenever possible, switch to less scarce materials or have a less environmental impact while performing a similar function. Some products can even be completely de-materialized and sold as a service. The circular economy needs new business models to translate circular product strategies into a competitive advantage, differentiated and improved customer experience, and successful revenue models.
We will need to embrace a new mindset, shifting from our current take-make-dispose approach to a circular vision. Companies seeking circular and sustainable product values will need to develop business models that are free of the constraints of linear thinking. Current policies are still rooted in waste management. In a circular economy, the very notion of ‘waste’ is phased out, as products are designed to prevent waste, and residues are transformed into new resources.
New business models for circular products
Companies want to develop new products and enhance their existing products by reducing their dependence on scarce and costly natural resources. At the same time, they are looking at turning waste into additional revenues and sharpening their customer value proposition. Today, most companies are not built to capitalize on the opportunities circular products provide, and their strategies, structures, and operations are ingrained in the linear approach to growth.
These business models have their own distinct characteristics and are being used to help companies achieve massive resource productivity gains, reduce cost, generate new revenue, enhance differentiation and customer value. The sustainable business model characteristics and benefits are highlighted below.
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BUSINESS MODEL |
KEY CHARACTERISTICS |
BUSINESS BENEFITS |
WHERE APPLICABLE? |
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|
1. |
Product as a service |
Customers subscribe and/or lease the product. |
Incentives for product durability and upgradability shift from volume to performance. Product longevity, reusability, and sharing are seen as drivers of revenues and reduced costs.
|
Cost of operation share is high, has capability in managing the maintenance of products, and can upsell additional services. |
|
2. |
Shared platforms |
Customers save money while effectively using /sharing the assets and promoting a culture of collaboration across users. |
Sharing of overcapacity or underutilization, increasing productivity and user value creation.
|
Benefits companies whose products and assets have low utilization and /or ownership rate. |
|
3. |
Product life extension |
Extend the life of products by maintaining and improving them. This leads to customer loyalty gains, savings on materials, transportation, energy, and distribution. |
Products stay economically useful for as long as possible, and product upgrades are done in a more targeted way. For example, an outdated component is replaced instead of the entire product. |
Capital-intensive B2B industrial segments, B2C companies that serve markets where pre-owned products are common, and where new releases of a product generate partial performance benefits.
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|
4. |
Resource recovery |
Recovery of embedded value at the end of one product lifecycle. Transform waste into value through innovative recycling and upcycling services.
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Eliminate material leakage and maximize the economic value of product return flows. Integrated closed loops recycling and Cradle-to-Cradle® designs where disposed products can be reprocessed into new ones.
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Companies that produce large volumes of by-products or where waste material from products can be reclaimed and reprocessed cost-effectively. |
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5. |
Sustainable supply chains |
Renewable, recyclable, and biodegradable raw materials can be used in consecutive life cycles. |
Savings in procurement costs, phase out the use of scarce resources while cutting waste and removing inefficiencies.
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Companies dealing with scarce commodities or ones with a major environmental footprint. |
Our digital engineering offerings enable business models for circular products
The transformation of circular products and sustainable innovations and business models requires a strong digital engineering foundation. This digital engineering foundation creates exponential business value by leveraging the power of digital platforms, digital commerce, cloud, data, AI, IoT, 5G connectivity, and new digital technologies.
Our digital engineering offerings have been strategically designed to allow our customers to drive sustainable innovations by accelerating the "time to market" and "time to monetize" of products and services for global enterprises. These services and solutions are customized based on customer needs and address the end-to-end product value chain across multiple product portfolios. Our digital engineering offerings are customer-ready and enable sustainable business models by driving the transformation journey to circular products.
The transition to circular products and sustainable business models presents clear opportunities across all verticals and industries, but there are still challenges to overcome. It is now time to decide how the new and sustainable business models will look and function, what technologies to invest in, and exactly which steps we need to take to get there. Please feel free to reach out to us at avijeet.ghose@hcl.com (what is our ERS sustainability email?) and join us on the journey to circular products.
