Getting round to the circular economy

The goal of the circular economy is to support continued economic development by removing the links between growth and the planet’s diminishing pool of natural resources. The systematic approach of the circular economy aims to replace traditional ‘take, make and waste’ linear business models with smarter economic models that encourage more sustainable consumption and increase profitability through effective resource management. In the circular economy, production and consumption are increasingly based on selling services rather than selling and owning products, focusing on steady revenue streams instead of one-off sales.

Marjaana Mäkinen, Business Banking at Nordea, says: “Many companies are already beginning to implement more sustainable ways of doing business, including a  gradual switch to circular business models. Customer demand, competitive advantage and profitability are the drivers of this shift. Companies taking action now are also more likely to be relevant for their customers in the future.”

Transformative

Founded in 1967, Sitra is an independent Finnish innovation fund operating under the supervision of the Finnish parliament, dedicated to promoting stable and balanced development in Finland. Since the publication of the world’s first ‘Roadmap to the Circular Economy’ in Finland in 2016, Sitra has become one of the main drivers responsible for accelerating societal change towards a circular economy in the country.

Jyri Arponen, Senior Lead at Sitra, says: “We realised many years ago that ecological matters will increasingly become one of the main issues affecting Finland and the globe in general. Once we learnt more about the cradle to cradle thinking of the circular economy, we started to discover the potential of adopting it for all sorts of industries in Finland.”

“In terms of business models, a big change in industrial culture and mind set is needed: Shifting the focus from production to the customer and maximising the value of existing products, while decoupling value creation from resource consumption. Not only is the circular economy approach financially very viable, realistically the only way to be able to operate in the future is by making changes that reduce or reuse waste. Once a circular process is in place, the value of the waste can be restored or even transformed into something new that increases its value,” Jyri adds.

Circle of five

According to Sitra, the circular economy approach can be divided into five business models: ‘Product as a service’ involves focusing on providing services instead of products, ‘Renewability’ relates to using renewable and recyclable materials as well as renewable energy in product design and manufacturing, ‘Sharing platforms’ maximises the usage of goods and resources and extending their life cycles by using digital platforms to facilitate their reuse, ‘Product-life extension’ encompasses using products according to their original purpose for as long as possible or enabling multiple instances of reuse through means such as maintenance, repair and refurbishment and ‘Resource efficiency and recycling’ relates to material and energy-efficient solutions, and the collection and reuse of products and raw materials that have reached the end of their life cycle.

Jyri continues: “Usually when you talk about the circular economy, there are two distinct ways of creating value. The first is related to efficiency, which means you go after all of the inefficiencies in your processes related to material and energy usage and try to fix those. In many cases that is typically the starting point, where you close and combine processes with actions like recycling and reusing resources. The second aspect is related to value creation and discovering any new potential business models. Here, you start to figure out what is most valuable to your customers and focus on how you can change the actual value you are creating by adapting your business model.”

Costs and reputations

By focusing on reusing resources, reducing waste and introducing a value based approach less reliant on material heavy processes, a circular economy business model naturally has cost efficiency at its core.

Jyri says: “A main driver for a company is of course cost efficiency which should lead to improved earnings. If you are more efficient then costs should go down and waste becomes a positive factor in many cases. Reduced inefficiencies also means improved labour productivity, better oversight of resource usage and clearer measurement processes. This means you are also mitigating risks, which includes reputational risks as well as economic ones.”

Marjaana adds: “Even for purely business to business companies, changes in consumer preferences do not happen in isolation and will still eventually impact their business. Customers in all sectors are expecting solutions that deliver sustainable outcomes. As an example, mapping how to develop one-off product sales into services would result in more sustainable outcomes. This may also lead to re-occurring revenue streams, longer customer relationships and predictability for businesses.”

First steps in the circle

For companies considering the switch to a circular business model or those already on the way, an incremental approach can often lead to noticeable results in the short term.

Jyri continues: “It’s a good idea to start by considering what are the pain points that you feel should be fixed? What are the universal inefficiencies that you have in your processes? What would be the new customer engagements if you changed the way you are doing things? Many companies are often surprised by how easy the first step is just to remove the obvious inefficiencies all around them. For example, why are there lights on in the meeting room when nobody’s there? Why is there air conditioning in a certain room? Why do we still throw all sorts of reusable items in the garbage? Start with the low hanging fruits and then go further. Figure out what can be fixed and take the most cost efficient ones first. Usually there are so many things that can be done. Over a longer period, a company can begin to build a strategy towards circularity, which is aligned with their business.”

In the future, business models adapted to reflect the circular economy are expected to gain a competitive edge.

Jyri adds: “There are many forerunners in Finland and Europe already that have shown that a circular approach can be profitable and make good business sense. Most companies are doing something but there is a large variation in their level of change. Usually companies are just on the first steps, with programmes to diminish waste production, for example. Others are piloting new business models. Some companies are already at the upper level, meaning that they have implemented circularity in their strategy and operational model, bringing it to all of their processes and functions.”

Data supports circular

With the onset of Industry 4.0 and the increased availability of data streams from the Internet of Things (IoT), the possibility to change operating models is now greater than ever.

Jyri concludes: “Many circular economy solutions are supported and enabled by data and digital platforms. They ensure the availability, reliability, and transparency of the solutions to the relevant actors and stakeholders. It is therefore essential that firms understand the importance of  data management if they are interested in implementing circular economy strategies and solutions. Data is information and now there is the possibility of gathering it from multiple sources such as the product itself and customer behaviour, etc. IoT data streams have rapidly developed during the last three years, offering faster ways of supporting the change and facilitating improved resource efficiency. The business environment is really shifting and there is a huge potential for many companies enabled by the combination of data and sustainability.”

Marjaana concludes: “The circular economy approach asks companies to re-think their business models to contribute to sustainability, secure future demand and increase profitability. We want to help our customers on this journey and engage them beyond the traditional banking agenda.”