Are we seeing the rise of a disruptive new business model?

May 1, 2015 by BPIR.com Limited

Originally posted on Management Focus by Professor David Grayson

“Another industrial revolution is coming and it’s circular,” declared Jeremy Warner, one of Britain’s leading business and economics commentators and assistant editor of The Daily Telegraph.”

Warner explains: “The circular economy (CE) is basically about making finite resources go further in an era of ever increasing consumer demand.” Instead of the ‘take-makeuse and throw-away’ linear model which the world has been used to, CE is all about sustainable raw materials; renewability; reusing; repairing; upgrading; refurbishing; sharing and dematerialisation.

Doughty Centre visiting professor and sustainability guru John Elkington remarks: “The circular economy has been promoted for years with concepts such as industrial symbiosis, industrial ecology and cradle-to-cradle, but got a new shot of adrenaline with the work of the Ellen MacArthur Foundation, Green Alliance, the European Commission and the World Economic Forum.”

CE is becoming increasingly important for business. The 2013 UN Global Compact/Accenture CEOs triennial sustainability survey found that although the CE was almost entirely absent from their conversations in 2010, the concept had quickly taken hold among CEOs focused on innovation and the potential of new business models. Already, a third of CEOs in the 2013 survey report that they are actively seeking to employ CE models.

The circular economy was a major topic at the 2015 Davos World Economic Forum with at least four major sessions, as well as the announcement of the winners of the first ever ‘Circulars’ (Oscars for the CE) and the launch of a new e-book (Waste to Wealth: creating advantage in a circular economy) by Doughty Centre advisory council member Peter Lacy, a managing director of Accenture.

McKinsey & Co has also produced a series of influential reports on the economics of CE, concluding that it could save businesses over $1 trillion on a global scale by 2025. Stefan Heck and Matt Rogers (current and former McKinsey consultants) have also written a powerful book Resource Revolution: how to capture the biggest business opportunity in a century, which encourages adoption of the CE. They argue that rather than settling for historic resource-productivity improvement rates of one to two per cent a year, leaders must deliver productivity gains of 50% or so every few years.

As Warner writes: “With the traditional take, make, dispose’ model, elements such as gold, silver, indium, iridium, tungsten and many others vital for industry could be depleted within five to 50 years.”

This linear model relies on large quantities of easily accessible resources and energy, and as such is increasingly unfit for the reality in which it operates. Working towards efficiency – a reduction of resources and fossil energy will not alter the finite nature of their stocks but can only delay the inevitable. A change of the entire operating system seems necessary. So the idea is to make all devices, or rather the parts that make them up, recyclable so that the same resource can be repeatedly used.

According to research by McKinsey and the Ellen MacArthur Foundation, the cost of a mobile phone could be reduced by 50% by applying these principles. Similarly, the cost to the consumer of a high-end washing machine could be reduced by a third if they were leased rather than sold, and their parts recycled into new machines.

Cranfield is developing a panUniversity focus on CE and is one of the first three university partners of the Ellen MacArthur Foundation and active in CE100, an international network of companies committed to learn from each other about how to implement the circular economy.

Cranfield’s unique focus on technology and management makes us the perfect partner to explore the potential and inform the practice of the CE. Managers and companies need to understand both the science and the technology of CE – but also how to manage what is transformational, organisational change. Cranfield experts are already investigating the scientific and technological aspects of CE: how to replace unsustainable raw materials with those which can be recycled and reused and how to modify manufacturing processes in line with CE principles.

As the circular economy moves higher and higher up the political and business agenda, managers and leaders are being called upon to embed CE thinking throughout their organisations and in doing so they are beginning to see the potential bottom line gains to domestic economies and businesses are huge. In the UK, it has been estimated that a more circular approach to the economy could boost GDP by £3bn, while
generating 50,000 new jobs.

Every aspect of management will be impacted by the CE including; engaging with suppliers so that they are prepared to identify the components they source and are willing to switch where necessary to sustainable ones; managing the internal and outsourced innovation needed; marketing CE and potentially learning reselling techniques; servitization; reverse logistics; motivating and reskilling employees; and embedding strategy so that the transformation is real and not superficial, leaving the organisation open to charges of greenwashing.

Managing the CE will require additional skills to understand the basic science relevant to your industry; to learn how to collaborate and partner (sometimes with unusual and unexpected partners such as NGOs, development agencies or academic institutions); and how to enthuse employees that CE is a positive business transformation which they want to contribute to, and not just the latest management fad.

As Lacy argues: “Continued dependence on scarce natural resources for growth exposes a company’s tangible and intangible value to serious risks.” Conversely, he says companies can initiate the transition to a new way of doing business that radically improves resource productivity, enhances differentiation, reduces costs and risks, creates robust new revenue streams, and enhances the customer value proposition. In the face of runaway resource scarcity and rising expectations for better, more sustainable products, there’s never been a better time to start.

Business leaders can start by asking themselves, where are the opportunities for adopting CE approaches in our value chain and what can be done to shape our company’s journey? Corporate boards have a crucial role. New research by the Boston Consulting Group (BCG), MIT Sloan Management Review and the UN Global Compact found that only a fifth of corporate boards provide substantial oversight, while 58% of boards are perceived to be not even moderately engaged in sustainability.

As Professor Andrew Kakabadse and I have previously argued, boards need to appoint Non Executive Directors who understand CE and sustainability broadly and integrate it into the duties of the overall board and committees in order to create a mindset for sustainability across an organisation.

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