Circular guide

CIRCULAR ECONOMY

Didactic Units 4

Economic and business opportunities that companies can develop through the circular economy. Process and product differences and changes.  

 The circular economy presents several new business models that can generate new opportunities and competitiveness in the market. 

There are models that change the perspective of the sales system (PRODUCT AS SERVICE), whereby no longer is only a product sold in order to maximize sales, but to the sale of the product is added the sale of a service to extend the life of the product. 

With this in mind, there is a need for companies to review their business structure, their supply chain and the skills that my company requires. 

 Another example is the use of recycled materials for the production of a product thus reducing the use of raw materials, in this case the company will need to review its supply chain, production process and also its communication and marketing which will consequently need to adapt to a paradigm shift. 

 The introduction of new services, processes or products in the company that follow the principles of the circular economy represent an opportunity for growth and development in terms of:

  • Innovation: reorganizing the company according to the circular economy can be a great opportunity to “open up” to innovation. Digitization can be an enabling factor that pushes companies to rethink processes by making them smarter and open to new networks;
  • Employment: the reduction in the amount of raw materials used and the growth of value-added services should lead to a shift in the cost structure from raw materials to labor, i.e., from more automated sectors to sectors that are predominantly human labor (e.g., services, maintenance, repair) resulting in a growth in employment impact;
  • Competitiveness: business models that save raw materials and use recycled materials allow for a cost structure that is less at risk of price volatility due to both market dynamics and regulatory interventions. 

Some estimates speak of possible benefits to 2030 of: 

  • resource consumption: reduction of 17 percent to 24 percent 
  • savings 630 billion euros/year 
  • European GDP growth + 3.9 percent. 

A study by the Ellen MacArthur Foundation, SUN and McKinsey identified that by adopting circular economy principles, Europe could create a net benefit of €1.8 trillion by 2030, or €0.9 trillion more than the current linear development path. 

The circular economy could create enormous opportunities for industrial renewal, remanufacturing and innovation. Economic growth, as defined by GDP, would be achieved primarily through a combination of higher revenues from emerging circular activities and lower production costs due to more productive use of input resources to a production process. 

These changes in the input and output of production activities can affect market supply, demand and prices, interacting in all sectors of the economy and generating in a number of indirect effects that add to overall growth. These indirect effects include higher spending and savings resulting from increased household income, which in turn results from higher pay at work. Adding up these positive effects could thus result in a positive change in GDP. 

 Thus, following a circular economic development path, European GDP could increase by 11 percent by 2030 and 27 percent by 2050, compared with 4 percent and 15 percent in the current development scenario. The Ellen MacArthur Foundation has estimated that in sectors of products with a medium-to-long useful life (such as phones), under an advanced circular economy scenario in the EU, the net annual opportunity for material cost savings amounts to up to $630 billion. For consumer goods, an additional potential of up to $700 billion has been identified globally1. 

 Circular economy: maximizing economic value per unit of resource 

 There can be different types of interventions that a company can apply to move closer to the circular economy, either by creating innovation at the process or product stage or by completely overhauling its business model. The ultimate goal is to maximize the economic value of the product per unit of resource used. (Figure 1)

1. Business model innovation 

By changing the business model within your company, you can apply models such as the PRODUCT AS A SERVICE model, where a product is supported through a service system that maintains the efficiency of the product, extends its lifespan or enables its reuse. 

Or apply a DISOWNERSHIP/SHARING ECONOMY model where it is possible to transform the sale of goods into their shared use and access. At that point, by purchasing a good, the product itself is no longer paid for, only the service it provides. 

A clear example of this model can be seen in mobility with car-sharing services, where it is no longer necessary to buy a car, but it is possible to pay only for the use of a car made available to everyone with precise rules. Automotive companies then will not have revenue in selling cars but in their use and maintenance.

2. Product innovation. 

A different business model to be applied in the company mainly concerns product design. 

First of all, it is necessary to abandon the principle of planned obsolescence of a product in order to have calculated “replacement” and sales cycles, and aim, on the contrary, to lengthen their useful life by making products easily disassembled and repairable. 

ECO-DESIGN is the first circular approach that a company can implement, designing products composed of recycled materials that are easily replaceable and repairable, so that the consumer does not have to continually change the product at the end of its life. 

In addition, all products should have a life cycle analysis through LIFE CYCLE ASSESSMENT (LCA) to clearly have a measure of its environmental impact.

3. Process innovation

The production process can comply with circular economy principles through the application of various innovations that can generate economic benefits. Again, in addition to giving importance to the environmental impact of the product, it is necessary to measure the life cycle of the entire supply chain, rethinking it with a LIFE CYCLE THINKING (LCT) approach to identify all possible supply chain benefits. 

Rethink, for example, all high-temperature processes that can be replaced by biological-type models, imitated by nature, that use microorganisms and enzymes to carry out the same reactions. The use of renewable energy to run a production process is certainly one of the bases for a circular approach or apply REMANUFACTURING, which involves a series of activities carried out on a component or product at the end of its life to make it as good as new, with equal or better performance, and guaranteed.

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    [1] Towards a circular economy: business rationale for an accelerated transition – Ellen MacArthur Foundation, 2015 

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