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Circularity versus linearity: how to transform existing economic models?

Maria Figueroa-Armijos , Associate Professor of Entrepreneurship

Maria Figueroa-Armijos, Associate professor at EDHEC, in an article originally published in French on The Conversation, looks at circular models that are based on a closed-loop system, and aim to use and transform materials already circulating in the economy, rather than taking them from nature.

Reading time :
2 Jun 2022
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Traditional economic (or business) models, based on the productivist triptych (exploitation, manufacture, disposal), consider nature to be endowed with an infinite quantity of resources. In other words, our economic systems are designed as vast open circuits that constantly siphon off natural resources to transform them into products that, at the end of the chain, are entirely or partially destroyed.

Unlike linear economic models, circular models are based on a closed-loop system, which aims to use and transform materials already circulating in the economy, rather than taking them from nature. As a result, these circular models have a smaller environmental footprint on two fronts: they avoid the exploitation of natural resources, and they revalue resources that might otherwise be considered waste.

The exponential growth in global consumption, combined with supply chain disruptions due to the health crisis and climate, regulatory and market upheavals, has made it all the more obvious that we need to move our business practices towards the principles of the closed-loop circular economy. According to figures from the Ellen MacArthur Foundation, launched by the British yachtswoman, business strategies that promote circular system solutions and innovations can lead to greater efficiency in the use of resources and annual savings estimated at a trillion dollars by 2025.

 

Source of opportunities

Systematically restructuring our business models could therefore significantly reduce the pressure on natural ecosystems. Rethinking value creation to avoid extracting virgin raw materials when substitutes already in circulation exist, and redesigning relationships within the supply chain to avoid waste, appear to be two fundamentally different ways of producing and consuming goods and services.

In my latest research paper, published in the Research Handbook on Innovation for a Circular Economy, I propose a modular framework for guiding the development of new business models, which requires an in-depth rethink of each of its constituent blocks: products, supply chains and customer journeys. This is already the principle behind, for example, the roadmap developed by the textile and clothing group H&M to achieve a "circular ecosystem", in partnership with the Ellen MacArthur Foundation.

Some of the changes expected involve the redesign of sustainable products, enabling the use of recycled or reused materials, the creation of reverse logistics, replicated collaboration networks in existing supply chains and the development of customer journeys that add value to circular products.

With this three-block redesign, companies can modify, add, create or transform different dimensions within the modular framework proposed, in order to methodically rethink their processes as they implement circular applications. For example, the various initiatives of clothing brand Patagonia, which has been pursuing circularity for two decades, aim to redefine its products as a priority so that the company can recover and use all its waste.

 

Leading players within 10 years

Despite their clear sustainable competitive advantage, however, circular models are still only established in niche markets, meaning that they enjoy a smaller market share than traditional extraction models. On average, circular business models account for around 15% of production across all sectors. However, technological advances, generational changes, commercial risks and new supranational regulations at EU level mean that this proportion is set to accelerate.

The EU Circular Economy Action Plan adopted in 2020 as part of the European Green Pact introduces measures involving consumers, businesses and citizens, with a timetable serving as a prerequisite for becoming the first climate-neutral continent by 2050.

Despite their promise, circular business models still face a major challenge: breaking down cultural and commercial barriers. A study carried out by Deloitte and Utrecht University revealed that, despite the media hype and an obvious appetite for circular market transformations, both consumers and businesses reject the concessions that currently need to be made.

On the one hand, consumers are partly unaware of the issues at stake or reluctant to change their consumption habits, especially when they are in a hurry or have a limited budget. On the other hand, companies have to make the trade-off between satisfying shareholder interests, bearing the high initial investment in transforming processes, developing new partnerships and new routes to market, and training their employees in circular processes. What's more, circular materials (reused, recycled, upcycled, bio-based) are still more expensive than traditional materials (e.g. petroleum-based plastics).

Fortunately, the combination of societal pressure, political interest and investor influence is pointing the way in a direction that is unlikely to succeed if it follows a linear economic model. According to a recent article published by the World Economic Forum, companies born into circularity will be major players by 2030, precisely because their models based on circular principles give them a clear advantage. France's Unbottled brand of hygiene products with less packaging and its counterpart Lush in the UK are two excellent examples. In addition to the ethical and environmental causes they champion, both of these companies have been circular from the outset, offering more than half their products without packaging. Although no business model is yet truly circular, the transformation seems to be progressing apace.

 

This article by Maria Figueroa-Armijos, Associate professor at EDHEC, has been initially published in French in The Conversation, and re-published under Creative Commons Licence. Lire l’article original.

Photo by Marcell Viragh on Unsplash

The Conversation

 

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