Circular business models

Traditional business models (also called linear business models) have focused on costs, revenues, and profits related to business activities, often with a short-term outlook. They empathise a linear approach of products that are created, consumed, and  chucked away (disposed of) as waste. This has created a disposable society where the culture of consumerism is to use products only once and are then disgarded as rubbish. Examples include soft drinks cans, hotel amenities (such as disposable toothbrushes, shower caps, and razors), and fast food packaging. A disposable society leads to overconsumption and excessive generation of waste.

In many cases, business use planned obsolescence as a strategy to get customers to replace (or repurchase) good. This term refers to the practice of manufacturing goods with an artificially short life span resulting in the need to replace the product. For example, many food items include ‘best before’ dates (rather than 'expiry' dates) that have little or no impact on the quality of the product but require the customer to make a new purchase. Other examples include home appliances and consumer electronic products, such as laptops, dishwashers, and washing machine. For many manufacturers, it does not make financial sense to make these products to last for 25 years or so, as it would not be a profitable business model. Hence, the use of planned obsolescence would incentivize customers to replace the obselete products. However, this further contributes to a disposal society.

By contrast, circular business models (CBM) focus on the long-term environmental consequences and sustainability matters related to business activities. Without CBMs, business activity based on traditional models is likely to have negative effects on the environment, such as resource depletion, climate change, and damage or destruction of ecosystems. CBMs are designed to turn all the waste that businesses and consumers produce into valuable and productive resources to be used again.

In essence, traditional business models focus on profitability whereas CBMs also focus on people and the planet. This means that using circular business models can be profitable and sustainable for businesses in the long term.

CBMs aim to replace the use of scarce resources, such as single-use plastics or non-renewable resources, with renewable, recyclable and/or bio-degradable resources for a sustainable corporate future. By doing so, organizations can reduce the harmful environmental side-effects resulting from business activity such as the extraction, use, and eventual disposal of non-renewable resources and other raw materials.

CBMs are increasingly important due to changing production and consumption patterns, such as shorter life spans of consumer goods such as smartphones, tablet computers, motor vehicles, trainers (sneakers), and other items of clothing (fast fashion). Many of these consumer goods are simply replaced (and often thrown away) long before their useful product life cycle.

For businesses, traditional business models have led to instead use of natural and non-renewable resources in an inefficient way. The fast fashion industry (a term used to describe a highly profitable and exploitative business model based on replicating high-fashion designs by mass-producing these at low cost) has been heavily criticised for leading to huge amounts of waste and damage to the natural environment. As put succinctly by Lucy Siegle (b.1974), a British journalist and environmental activist said, "Fast fashion isn’t free. Someone else is paying.” (the generations of the future). Wedding dresses are another example - these are typically bespoke items that are produced for single-use, and contribute to the depletion of scarce resources. Overall, the fashion industry accounts for around 10% of global greenhouse gas emissions due to the long supply chains and energy-intensive production involved.

Another example is food waste. Hotel and restaurant buffets, for example, lead to huge amounts of food waste across the globe. Hence, the use of CBMs have grown in popularity as they involve firms using renewable energy sources and recycled, reused or upcycled materials for a more sustainable world.

By contrast, some businesses such as IKEA are encouraging consumers to waste less. Watch this short news report about how IKEA creates incentive for customers to recycle (and resell) their once-loved (unwanted) furniture.

The IB syllabus refers to the five circular business models featured in the The Organization for Economic Cooperation and Development's "Re-Circle Resource Efficiency and Circular Economy Project". The OECD's five circular business models are:

(i) Circular supply models

(ii) Resource recovery models

(iii) Product life extension models

(iv) Sharing models, and

(v) Product service system models

What all these models have in common is they use already existing materials and products as inputs in the production process and therefore their environmental footprint tends to be considerably smaller than that for traditional business models.

Circular supply models are a type of circular business model that focus on replacing scarce and natural resources with renewable, recyclable, and/or biodegradable resource inputs. They are suitable for businesses that need and/or wish to replace scarce non-renewable resources with fully renewable, recyclable, or biodegradable resources in the production process.

Hence, with a circular supply approach, the resulting benefits are waste minimization, efficient use of scarce resources, and a reduction in the firm's overall costs of production.

For example, an increasing number of farmers are using agricultural residue or waste as renewable fuel. Chicken droppings and wood waste have also been used successfully to to power turbine boilers to create electricity. By contrast, Coca-Cola is the world’s largest plastic polluter, selling over 100 billion throw-away bottles every year - that's more than 11.4 million single-use plastic bottles every hour!

Resource recovery models are a type of CBM that focus on recycling waste (such as glass, plastics, and aluminium cans) into reusable raw materials, thereby diverting waste from final disposal. At the same time, this puts less pressure on the economy's scarce resources, and reduces the need for further extraction and processing of non-renewable natural resources.

According to a report by the OECD, producing raw materials via recycling, rather than from non-renewable natural resources, can reduce greenhouse gas emissions by as much as 90%.

An example is IKEA, the Swedish furniture company. IKEA uses an initiative called Buy Back as part of its resource recovery model. This scheme encourages customers to bring back their old IKEA furniture for recycling or repurposing. This allows the multinational company to keep resources in use for longer, reducing waste and depletion of the earth's scarce natural resources.

The benefits of using a resource recovery circular business model include:

• Preservation of the earth's scare and natural resources

• Minimizing risks of harm to people and the planet, including wildlife and ecosystems

• Saving landfill space (traditionally used for waste disposal and accumulation)

• Reducing pollution to the land, air, and waters.

As the name suggests, product life extension models are circular business models based on the notion that businesses try to extend the product life cycle of their goods. In a traditional disposable society, products and materials, such as old consumer electronic goods, would be thrown away or wasted after their useful life. Conversely, product life extension models rely on methods such as repairing, reconditioning, refurbishing, and renovating products so that they can be continued to be used.

• Repairs involve replacing faulty parts so the product is restored to working condition.

• Reconditioning (or remanufacturing) involves disassembling a used product (such as a smartphone or motor vehicle), replacing faulty or worn out parts, and reassembling the product back to like-new condition.

• Refurbishment involves restoring a used product to its original functionality, including any cosmetic upgrades that are required.

• Renovation means to upgrade or improve the functionality of a product by adding new features to an existing product to improve its performance and to extend its life.

Extending the product life cycle of consumer goods and educating people about the harm caused by frequent upgrades and purchasing of replacement products before their best sell-by date can help to reduce the need for businesses to use the earth's finite resources to produce more consumer goods and services.

Typical processes include remanufacturing, rebuilding, recycling, refurbishing, reconditioning, and repairing products to extend the lifespan of products, e.g., Patagonia, the outdoor clothing and equipment company, has a strong commitment to environmental sustainability. It has implemented a number of CBM initiatives to reduce waste and pollution. For example, the company has a programme called Worn Wear, which allows customers to trade in their old Patagonia clothing for repairs or discounts on new products. This keeps old clothing in use for longer, reducing the need for new resources to be used to produce new clothing.

Businesses that use product life extension models also focus on designing and deliberately producing goods to last longer. This is because products with longer life spans result in customers make fewer purchases.

Sharing models are a category of circular business models that focus on allowing customers to share products that have a low ownership and/or usage rate, instead of consumers having to purchase and own such items for themselves that are often used just the once. Hence, sharing models enable products to be used more efficiently, providing a better use of an economy's scarce resources.

Changes in the external environment, including greater awareness of the impact of commercial activities on ecological sustainability mean that an increasing number of businesses are providing services where customers share products rather than owning them outright.

Examples of businesses that use sharing models include:

• Airbnb - The world’s largest accommodation provider, but doesn't owns any of its own real estate or rental properties. This saves the economy from having to build new hotels and properties, alongside the environmental impacts of large-scale construction projects. According to the OECD, Airbnb rooms are typically around 15 to 20% cheaper than equivalent hotel rooms.

• Uber - The world’s largest taxi company, but doesn't owns any physical vehicles or taxis. Other service providers of such sharing models include Lyft, Gett, DiDi Global, Grab, RelayRides, and BlaBlaCar.

• Bicycle sharing service (public bike share), such as Mobike, Lime, JUMP Bikes, and Motivate rent bicycles to use in city centres rather than people buying their own bikes. Cities that have established bike sharing services include Shanghai, Taiyuan, Hangzhou, New York City, Montreal, Barcelona, Paris, and London.

• Zipcar - Global car-sharing company (and a subsidiary of the Avis Budget Group) that provides car rental services to its members, billable by the minute, hour, or day. The global membership of urban car sharing schemes, such as Zipcar, is growing as more people see less of a need to own their own vehicles.

• Many businesses in the catering industry also rely on the likes of Uber Eats, DoorDash, GrubHub, and Deliveroo as an outsourced sharing model, rather than hiring their own drivers and purchasing a fleet of motorbikes.

• Online businesses can be used as sharing models, such as Fat Llama which is an online platform that enables people to rent almost anything from other who live in the same local area. Products that can be hired include bikes, cameras, chairs, drones, games consoles, ladders, musical instruments, power tools, scooters, and even sewing machines.

• Toy Box Club - Re-sharing of children's toys, board games, puzzles, and books

Product service system models are the final type of circular business model in the DP Business Management syllabus. These circular business models focus on organizations providing a service instead of selling tangible products, whilst consumers buy a service to fulfil their needs instead of buying a physical product to do so. Businesses typically use a subscription model as part of their pricing strategy.

Examples of businesses that use product service system models include:

• Cloud computing service providers, such as Google Drive and Dropbox, have reduced the demand for computers and laptops with large storage devices, including physical external hard drives and hardware accessories.

• Gerrard Street has pioneered a subscription service for its modular headphones, meaning fewer virgin (natural) resources are used to create new headphones. The subscription product service model allows Dutch company Gerrard Street to recover and recycle headphones at the end of their life and help to cut down on the millions of tonnes of precious materials and electronics waste that ends up in landfill every year.

• iTunes and Spotify have revolutionized the music industry, with a huge drop in consumer demand for physical products such as CDs, DVDs, and vinyl records as well as the physical devices to play the music using these platforms.

• Michelin offers motor vehicle tyres as a service, based on a leasing contract to commercial clients to many business, with corporate customers charged on a rate per mile driven. Customers do not own the tyres but the hire agreement also mean Michelin is responsible for all repairs and maintenance costs (see case study 7 below).

• Netflix is the world's largest provider of movies but doesn't own any cinemas of its own. Customers do not purchase any movies or programmes (unlike a retailer that sells CDs and DVDs), with customers paying a monthly subscription to access their streaming services.

Possible advantages of organizations moving away from a traditional and disposable business model in favour of circular business models include:

• Environmental protection - Using a CBM does less damage to the environment so businesses act in a socially responsible way, which is also beneficial to external stakeholders of the organization.

• Resource preservation - Using less resources is also good for the planet, and can enables businesses to reduce their costs of production.

• Adapting to changing consumer needs and preferences - Adopting a CBM helps to the changing needs and wants of a broader customer base, in a more effective way because of the firm’s environmentally friendly business activities.

• Employee morale - Being ethical and acting in a way that sustains business activity helps to boost morale, motivation and productivity in the workplace. It can also help to attract better staff as an increasing number of people/employees are concerned about the environmental stance of the business that they work for.

• Attracting investors - Similarly, investors, financiers and commercial lenders are increasing in support of businesses that care about the natural environment and ecosystems, so adopting CBMs can help organizations to secure much-needed sources of finance to fund and expand their operations.

• Avoiding negative media coverage or media criticism - Businesses that put people and the planet before their own profits tend to have good publicity and avoid pressures from lobbying groups and local or central governments, as well as the mass media (such as the press).

• Gaining a competitive advantage - Businesses that adopt a CBM tend to have the support of the general public, so this can give the firms a competitive edge over other businesses that do not adopt a more circular approach to their operations.

As with all business tools and models, there are limitations of adopting circular business models. These include:

• The costs of implementing the various circular business models are unlikely to be cheap, especially in the short run. Developing new production processes that are sustainable and marketing new business models will take time, efforts, and money.

• Similarly, despite the potential benefits of CBMs, issues including risk liability, insurance, transparency, and workforce protection can all hinder the development of the circular economy.

• Local and regional contexts are also important. Not all consumers in all regions regard sustainability as a priority, especially if such practices result in higher prices for customers.

• Similarly, not all business owners (entrepreneurs and shareholders) as well as investors prioritise the circular economy, and focus instead on short-term profits.