Managing the Path Forward: Six Insights on Developing Business Models for the Circular Economy
Don’t be afraid of twists in the path to a circular future. Many companies are here, too. Here's how to manage and predict this transition.
As the Circular Economy (CE) gains traction, with a potential market growth of 650 billion euro annually through new business models - its impact on various industries becomes increasingly significant. Over the past two years, our collaboration with companies – particularly in the mining, automotive, and health sectors—using the Circular Navigator approach (HBR, 2021) has provided valuable insights on how to develop business models for the circular economy.
This article offers insights that can help companies transition to a circular economy.
Learning 1: Recognize CE as a holistic transformation
Entering the circular economy requires viewing each project and initiative as part of a broader transformation that permeates the entire organization. This demands full commitment from top management and active participation from all departments from the outset to ensure a comprehensive and unified approach to sustainable practices. For instance, this can be achieved through company-wide CE campaigns, Intrapreneurship programs, or CE Learning Journeys.
Why is this important?
While it makes sense to start with individual projects to learn and show initial success, without full understanding and support from top management, circular projects cannot succeed as the changes impact the entire organization, from design and procurement to sales and beyond.
Learning 2: Frame CE as an innovation challenge
Positioning CE adoption as an innovation challenge sets the stage for success. This involves instilling top-down guidance, implementing a structured stage/gate process, and conducting early piloting. The continuous integration of customer feedback is crucial, ensuring that the CE initiatives are not only aligned with the organization's objectives but also responsive to the evolving demands of the market. A systematic approach, like the Circular Navigator, helps identify and develop new business opportunities.
Why is this important?
The Circular Economy requires cooperation with many partners within an ecosystem and complex changes to the value chain. This necessitates considerable effort and coordination, often leading to solutions that may lose sight of customer needs. Without actual added value and strong customer demand, circularity cannot succeed.
Framing it as an innovation challenge allows you to rely on known and well-established tools and processes from innovation management, smoothing the journey.
Learning 3: Start by identifying cost savings
Beginning the journey into the Circular Economy starts with identifying immediate cost-saving opportunities, such as leveraging product returns and minimizing production waste. Making the transition financially appealing from the outset fosters a positive and sustainable trajectory. The Circular Pattern Cards can can help identify potential cost-saving areas.
Why is this important?
Initial circular projects often have limited funding or need to stretch their resources thin, as opportunities for change are diverse. However, to be taken seriously, it is well advised to go for some quick wins. But be aware that those wins often seem easy on the outset (making better use of product returns doesn’t sound too complicated, right?) but often encounter many process and competence-based hurdles.
Learning 4: Adjust KPIs for long-term benefits
Short-term margins may undergo temporary adjustments, but it’s crucial to understand and emphasize the substantial long-term benefits of CE adoption. Increased sales through product and material reuse signify a shift toward sustainable practices, requiring an adjustment of financial Key Performance Indicators (KPIs) to reflect and prioritize these broader environmental goals.
Why is this important?
A more sustainable product, newly designed, that can be reused or offered in a fleet management service might produce lower margins initially. When the main revenue model for a company is product sales, a typical success KPIs is the margin of a product. When it comes to Circular Economy, this is a traditional approach that can quickly kill any new project. However, products can generate significantly more revenue and profit over their lifetime if sold, rented, or remanufactured multiple times.
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Learning 5: Embrace as-a-service models
Adopting As-a-Service models facilitates active management of product fleets, optimizing usage and return. Beyond core offerings, there lies the potential for increased profits through the introduction of supplementary services, adding layers of value to the circular process. A systematic tool for developing these new offerings is the St. Gallen Equipment-as-a-Service Navigator.
Why is this important?
As-a-Service models nicely align the incentives of the company with sustainability and customer needs: While planned obsolescence drives additional sales in linear models, longer product lifetimes benefit companies in As-a-Service models by generating fees over longer periods, and repairability and maintainability also become advantageous.
Learning 6: Tailor sales approaches and incentives
Recognizing the need for customization in sales strategies and KPIs is fundamental in the Circular Economy landscape. To promote sustainable practices effectively, organizations must develop incentives that that align with CE goals. This requires moving away from traditional approaches and developing sales teams attuned to the circular narrative.
In the initial phases of Circular Economy adoption, organizations stand to benefit significantly from deploying specialized sales teams. These teams bring targeted expertisee and enthusiasm for promoting circular solutions, accelerating the go-to-market process, and ensuring that sustainability remains a focal point in early CE integration stages.
Why is this important?
Sales teams are good at what they are currently doing and the whole system around them is geared towards optimizing the outcomes. When it comes to circular solutions and offerings, there is usually a substantial shift in what is offered: services instead of products, rent instead of buy, buy-back options that should not be used as another negotiating factor, and more. In addition, the buying center or at least the once influencing the buying decision might be very different roles than usually. As such, companies usually struggle when they simply toss over their new solution to the existing salesforce without adequately adapting the sales incentives and train their sales force correctly.
Leonie Schäfer
Shaping a circular future
The transformation to a Circular Economy is a comprehensive journey that demands a holistic approach, persistence, and clear KPIs within organizations. Many companies are already on this path, having gained valuable learnings.
We believe that sharing these learnings and insights is key to make more companies take their first steps. For more information on the mentioned aspects, feel free to reach out to us!
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