The Circular Economy. Great Idea, But Can It Work?

Is there a more sustainable way to drill a hole?  Consider that power drill stored at the back of a cupboard at home. On average it’s used for six minutes a year.  Surely it would be better to rent one when you need to fix that wonky door?  But this would require us to reconsider such tools as services not products. And it would need an entirely different approach to design, manufacturing and disposal. If we pulled it off, the Circular Economy would be much closer.

At Davos this year, the Circular Economy finally looks like an idea whose time has come. As the world population continues to grow and economic growth charges on in the emerging markets, with over 500 million middle class consumers in Asia alone by now, the global economy is pushing up against its physical limits given our existing model of production and consumption. At the current rate of growth and levels of resource intensity we will need three planets’ worth of resources by 2050. Obviously, this is impossible. Instead of giving up on material wealth, though, what if we simply became more attuned to “stewarding” precious resources through the value chain and returning them as inputs to new, refurbished or recycled products? The theory is simple enough. The challenge comes in the practicalities.

The Circular Economy requires businesses to rethink more than just their resource footprints and energy efficiency. It demands a more radical remodelling of business models. As Sir Ian Cheshire of retailer, Kingfisher, points out, shifting from buying power drills to renting them requires an organizational and cultural shift. And it requires the integration of technology – from mobile payments to GPS – into product offerings. Kingsfisher owns B&Q, a company that, among other things sells those drills. So, Sir Ian is making a much more profound point about the future of the business. One that requires us to understand much better how digital capabilities and new consumer behaviour is broadening the art of the possible when it comes to selling services rather than products. In Kingsfisher’s case, selling “holes drilled” rather than drills, for example.

The sharing economy is just one of the many business models that constitute the Circular Economy. Accenture has identified five new business models and ten emerging technologies that will define and enable progress. The Industrial Internet of Things and advances in material science are among the key enablers.

The variety of approaches shows that environmental concerns are not always the prime motivator even if they are addressed by new business models.  There’s a world of difference between how a company like AirBNB is opening up the market for holiday accommodation without the need to build new hotels, and a company like Nike, which has managed to reduce the amount of material used in its Flyknit Racer shoes by 80%, or a company like Ecovative which is “growing” new packaging materials from (of all things) mushrooms. Throughout the process we’ve been spurred on by recent research from the Ellen MacArthur Foundation and the World Economic Forum that the world stands to gain a staggering $1 trillion from rolling out circular business models, whilst becoming significantly less wasteful in the process.

But are we likely to see the Circular Economy becoming mainstream any time soon? There are reasons to be optimistic. Governments and regulators are active. I was encouraged by Li Keqiang’s comments at the World Economic Forum’s summer meeting last year for example. Likewise, Janez Potočnik has been nominated for a Circular Economy leadership award at this year’s inaugural “Circulars” (the Circular Economy “Oscars”) at Davos. Potočnik has played a major role in pushing the European Union to adopt an ambitious circular economy package.

Irrespective of policy though, companies are pursuing the Circular Economy more aggressively than is often appreciated. They may be motivated by the chance to enhance brand reputation.  But they are also being driven by the need to be more competitive. That means cutting costs but it also means creating entirely new growth opportunities through a product innovation and service differentiation.

The World Economic Forum has helped put the Circular Economy on the map.  The finalists at the inaugural Circulars awards illustrate the extent of progress from established players to small start-ups. If the Circular Economy does become mainstream, there may come a time beyond which these new awards no longer serve a purpose.

Forbes