Defining the Concept of Circular Economy Business Model · 1.2.2 Definition of ‘Business Model’ In addition to defining the desired circular economy outcome, it is necessary to

ThisprojecthasreceivedfundingfromtheEuropeanUnion’sHorizon2020researchandinnovationprogrammeundergrantagreementNo.730378

DefiningtheConceptofCircularEconomyBusinessModel

APartofDeliverable2.1

AleynSmith-GillespieAssociateDirector,TheCarbonTrust

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Contents1 DefiningtheconceptofCircularEconomyBusinessModel(CEBM)..............................................1

1.1 Introduction............................................................................................................................1

1.2 FoundationsfortheconceptofCEBM...................................................................................1

1.2.1 Definitionofcirculareconomyoutcomes......................................................................1

1.2.2 Definitionof‘BusinessModel’........................................................................................3

1.3 DefiningtheCEBMconcept....................................................................................................5

1.3.1 ApproachestodefiningCEBMs......................................................................................5

1.3.2 CEBMpatterns................................................................................................................5

1.3.3 Circularbusinessmodelelements..................................................................................6

1.4 AworkingdefinitionofCEBM..............................................................................................16

2 Appendix......................................................................................................................................17

3 References....................................................................................................................................20

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1 DefiningtheconceptofCircularEconomyBusinessModel(CEBM)1.1 IntroductionThegoaloftheR2π–TransitionfromLineartoCircularprojectistosupportanddevelopbusinessmodelsthatfacilitatethetransitiontowardsacirculareconomy.TheprojectexaminestheshiftfromthebroadconceptofaCircularEconomy(CE)tooneofCircularEconomyBusinessModels(CEBM).Assuch,itisnecessarytodefinewhattheconceptofCEBMistoensurethatrecommendationsarefocusedontherightoutcomesforbusinessesandpolicymakers.ThepurposeofthissectionistoestablishaworkingdefinitionofCEBMwhichwillbeusedtoselectorganisationsforcasestudyanalysisanddevelopmentofpolicypackages.Thedefinitionpresentedhereisonethatattemptstobalancethetheoryofcirculareconomywithapractical,andpractitioner-focused,perspectiveofbusinessmodeldesign.OurdefinitionofCEBMwillbetestedthroughtheexecutionofthisproject,andwillberevisitedaswegainlearningsandinsights.1.2 FoundationsfortheconceptofCEBMToestablishtheoverallprincipleof“whatdoesacirculareconomybusinessmodellooklike?”,ourdefinitionisgroundedinaninterpretationoftheterms‘circulareconomy’and‘businessmodel’.1.2.1 DefinitionofcirculareconomyoutcomesThedefinitionofcirculareconomyisexploredinanotherreportoftheR2πprojectandnotrepeatedhere.ThecoreoutcomefromtheperspectiveofdefiningaCEBMisthat,withinagivensystemboundary,thebusinessmodelsoforganisationswithinavaluechainneedtoenabletheregenerationoffinitenaturalresourcesandkeepproducts,componentsandmaterialsattheirhighestvalueandutility.Definingthe‘systemboundary’withinwhichabusinessmodeloperatesisimportantasitdeterminestherelevantparametersforanalysingcirculareconomyoutcomes.Forthe‘biologicalnutrientcycle’,thesemaybelocalecosystemboundaries,waterbasins,etc.Forthe‘Technicalnutrientcycle’,thesemaybeeconomicsystemboundariessuchasvaluechains;industrialsectors;orlocal/regional/nationaleconomies.Thedesiredoutcomeisthat,atthesystemlevel(definedbythesystemboundary),theinputoffinitevirginmaterialsisbeminimised,andwasteoutputsbeeliminatedthroughcycling.Thefigurebelowillustratesthisconcept,showingsixmaterialpathwaysand‘cycles’thatareusedasabasisfordefiningwhataCEBMshoulddeliverasanoutcome.

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Figure1Illustrationofcircularmaterialpathwayswithinasystemboundary

Source:CarbonTrustDescriptionofkeycircularpathways

Re-use:Productsarere-usedmultipletimeswithintheirfunctionallifebydifferentend-users.

Re-condition:Fixingofafault/aestheticimprovementofaproduct,butwithnonew/additionalwarrantyontheproductasawhole.Thisincludes:

o Repair–Fixingfaultsordamagebringingproductbacktorequiredfunctioningordero Refurbishment–Bringingproductbacktorequiredaestheticspecifications

Re-make:Alsoknownas‘remanufacturing’or‘reman’,thisinvolvesaseriesofmanufacturingstepsactingonanend-of-lifepartorproductinordertoreturnittolike-neworbetterperformance,withwarrantytomatch.

Re-generate:Nutrientsatend-of-lifearereturnedtothebiologicalcycle,re-generatingthesourcefromwhichtheywerederived.

Circularsourcing:Sourcingrecycledorrenewablematerialsthatcanbereturnedtoeitherthetechnicalorbiologicalcycle.Thisincludes:

o Materialsextractedfromaproductatend-of-life,insteadofusingvirginmaterialsextractedfromfinitesources(technicalcycle)

o Usingrenewable/bio-basedmaterialsthatcanbereturnedtothebiologicalcycle.

Co-productrecovery:Residualorsecondaryoutputsfromoneprocess(orvaluechain)becomeinputsforanotherprocess(orvaluechain).Thisincludes:

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o Directuse/industrialsymbiosis:Residualoutputsorco-productsfromoneprocess,becomefeedstock/inputforanotherprocess,typicallyamongco-locatedfacilities.Proximityisusuallyakeyenabler,astransportcosts,environmentalimpactanddistancebetweenfacilitieswouldnotmakethisfeasible.

o Indirectuse:Residualoutputs(whichmayotherwisebeconsidered‘waste’)gainvalueasacommodity/feedstockforanotherprocess(e.g.fly-ashfromcoalcombustionusedasclinkerforcement).Theymaybepooledandsoldviaasecondarymarketforthesematerials.

Resourcerecovery:Materialsorproductsatend-of-lifearerecoveredandre-incorporatedasinputsintoavaluechain.Categoriesinclude:

o Closedlooprecycling:Thematerialsataproduct’send-of-lifearerecoveredforre-usewithinthesamevaluechain.Importantly,theintegrityofthematerialsismaintained,enablingthemtocyclemultipletimesorevenindefinitely.

o Openlooprecycling:Materialsataproduct’send-of-lifeenteradifferentvaluechain.Typically,thiscanonlyoccuronce,andisthereforesometimesreferredtoasa‘cascade’ratherthana‘cycle’.Thisincludes:

§ Up-cycling:Materialorproductatend-of-lifeisusedasinputforproducingahigher-valueproduct(e.g.infashionoraccessories).

§ Down-cycling:Materialorproductatend-of-lifeisusedasinputforproducingalower-valueproduct(e.g.conversionofbuildingmaterialsorotherproductsintoaggregatesforroad).

Waste-to-energyisoftenshowninthecontextofcirculareconomy,andisidentifiedasanareaofactionwithintheEUCircularEconomyPackage.Waste-to-energyiswhenmaterialsorproductsatend-of-lifearecombustedorprocessed(e.g.pyrolysis;bio-digestion)toproduceheat,electricityorfuel.Whileitenablesturningwasteintovaluableproducts,itisnotincludedintheabovediagrambecauseittypicallyinvolvesthedestructionofrawmaterialsandexitingofnutrientsfromthesystemboundary.1.2.2 Definitionof‘BusinessModel’Inadditiontodefiningthedesiredcirculareconomyoutcome,itisnecessarytodefinetheterm‘businessmodel’andunderstandhowtodescribeit.AlexOsterwalder’sseminalpublication(Osterwalderetal,2005)andfollow-onbook‘BusinessModelGeneration’(OsterwalderandPigneur,2010)providethefollowingdefinition:

Abusinessmodeldescribestherationaleofhowanorganisationcreates,deliversandcapturesvalue.

AlexOsterwalderandYvesPigneurOsterwalderdescribesthisusingtheBusinessModelCanvas–aframeworkthatcreatesacommonlanguageforunderstandinganddiscussingbusinessmodels.Thisframework,describedbelow,hasbeenadoptedinternationallybypractitionersinthebusinessworld.

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Figure2TheBusinessModelCanvas

Source:AdaptedfromBusinessModelGeneration(OsterwalderandPigneur,2010)TheBusinessModelCanvasconsistsofninebuildingblocksthatdescribethedynamicsofabusinessmodel:TheValuePropositionisthecentralblock–thisiswhatessentiallycreatesvaluetocustomers.Thefourbuildingblocksofthe“backstage”arewhatdeterminethekeyelementsofanorganisation’soperatingmodelanditscoststructure.Thefourbuildingblocksofthe“frontstage”governtheorganisation’sinteractionwithmarketsandcustomers,anditsrevenuemodel.TheBusinessModelCanvasisatried-and-testedframework,providingacommonlanguageforunderstandinganddiscussingbusinessmodels.Giventhatbusinessesarethemainactorsthatneedtobeengagedinordertotransitiontowardsacirculareconomy,theBusinessModelCanvasisusedasthebasisfordescribingcirculareconomybusinessmodels.ItshouldbenotedthattheoutcomesdescribedbytheBusinessModelCanvasframeworkaremeasuredinfinancialterms(costsstructureandrevenuestreams).Itdoesnotexplicitlyrecognisevaluecreated(ordestroyed)inenvironmental,social,andotherdimensionssuchassecurityofsupply,whichareessentialaspectsofthe‘businesscase’forcirculareconomy.Norcanthisframeworkbeusedtomapthecomplexitiesofmaterialflows.VariousapproacheshavebeenproposedtoexpandorbuildontheBusinessModelCanvas(suchasAntikainenandValkokari,2016;andMentink,2014).However,theusefulnessofthisframeworkliesinitsrelativesimplicityandflexibility.Instead,asetof‘businessmodelpatterns’aredefinedtodescribeaCEBMandhowitdrivesthedesiredcirculareconomyoutcomesmentionedabove.

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1.3 DefiningtheCEBMconceptDuetothecomplexityofcirculareconomyconcepts,aswellasthenomenclatureused,itisnecessarytobalancethetheorywithapractical,andpractitioner-focused,perspectiveofbusinessmodeldesign.1.3.1 ApproachestodefiningCEBMsAnumberoforganisationshaveproposedclassificationsorarchetypesof‘circular’or‘circulareconomy’businessmodels,forexample:(seeAppendixforadescriptionofeach):

ForumfortheFuture:TheCircularEconomyBusinessModelToolkit(2016)

IMSA:CircularBusinessModelScan(2015)

Accenture:CircularAdvantage(2014)

WRAP:InnovativeBusinessModelMapAccentureprovidesagoodsynthesisintofivebusinessmodels.However,someofthebusinessmodeltypesencompasstwoormorepotentiallyverydistinctmodels,suchasthebusinessmodel‘ProductLifeExtension’includingbothremanufacturingandrepair.Attheotherendofthespectrum,IMSAidentifiesnineteendistinctbusinessmodels.Someofthesehoweverareeitheraproductionmethod(e.g.‘3Dprinting’);orareanenablingmechanismwhichdoesn’tnecessarilycharacteriseanentirebusinessmodel(e.g.‘takebackmanagement’).ForumfortheFuture’sfiveCircularBusinessModelsomitareassuchasremanufacturing,whichisabusinessmodelwithdistinctdynamics,andemphasisesmaterialcycling(thisismainlyaconsumergoodsfocusedapproach,whichmaybeduetothefactthiswasdevelopedincollaborationwithUnilever).Lastly,WRAP’sclassificationofbusinessmodels,thoughcomprehensive,sharesanumberoftheabovedraw-backs.1.3.2 CEBMpatternsA‘businessmodelpattern’(orarchetype)describesadistinctsetofbusinessmodeldynamics.ThisisusedbyOsterwalder(2010)indescribingdifferentbusinessmodelstrategiesemployedbyorganisations(e.g.Google’s‘multi-sidedplatform’),andhasbeenfurtherexpandedbyGassmannet.al.(2014)inthepublication‘TheBusinessModelNavigator:55ModelsThatWillRevolutioniseYourBusiness’.Inordertogeneratethecircularmaterialpathwaysdescribedabove,sevencirculareconomybusinessmodelpatternsareidentified.Thesearedefinedbasedonasetofdistinctivebusinessmodeldynamicsandwheretheyliealongaproduct’slifecycle,namely:

Production:Howproductsaremadeandproduced.

Consumption/use:Howproductsareconsumedorused.

End-oflife:Howproductsaremanagedatend-of-life.

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ThesevenCEBMPatternsaredescribedbelow.Twoofthese–the‘Access’and‘Performance’patterns–arenotnecessarilycircularperse,butsignificantlyenhancethecircularityimpactandvaluewhencombinedwithotherpatterns.Thesecanincludetheconceptofproduct-servicesystems(orPSS),asdescribedbyTieze(2011),Tuckeretal(2004),andValenciaetal(2015).Figure3SevenCEBMPatterns

1.3.3 CircularbusinessmodelelementsEachofthesevenCEBMpatternsaredescribedbyadistinctivecombinationofkeybusinessmodelelementswhichproduceacirculareconomyoutcome.Anorganisationwillnaturallyhavemanymoreelementsthatdescribethefullmechanicsandlogicofitsbusinessmodel,andthesewillvaryamongcompanies–eventhosesharingasimilarbusinessmodel(e.g.whetherornottheyoutsourcereverselogistics).Thefocushere,however,isontheessentialelementsthatmakeaCEBMpatterndistinctive.TheseelementsaredescribedandcategorisedbelowaccordingtotheninebuildingblocksoftheBusinessModelCanvas.ThisapproachtousingtheBusinessModelCanvastodescribeasetofCEBMpatternsisaninnovationwhichweputforwardinthispaper.Thiswillbetestedandusedinworkshopswithorganisationstodevelopcasestudiesandbusinesstools.ValuePropositionelements

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BusinessModelFrontStageelements

BusinessModelBackStageelements

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ThefiguresbelowusetheBusinessModelCanvastoshowhowtheseelementscombinetodescribethesevenCEBMpatterns.Anorganisationmayincorporatetwoormoreofthesepatternswithinitsbusinessmodel.

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1.4 AworkingdefinitionofCEBMInsummary,aCEBMcanberecognisedthroughthewayitadoptsoneormoredistinctivebusinessmodelpatterns.Thesepatternsarederivedfromacombinationofelementswhichenableabusinessmodeltoachievecirculareconomyoutcomes(the‘circularpathways’describedabove).Atthemostfundamentallevel,acirculareconomybusinessmodelisonewhichcreates,delivers,andcapturesvalueinamannerthatiscompatiblewithandenablesregenerationoffinitenaturalresources,andkeepsproducts,componentsandmaterialsattheirhighestvalueandutilitywithinarelevantsystemboundary.

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2 AppendixAccentureclassificationofcircularbusinessmodels(Lacey,2014)

IMSAclassificationofcircularbusinessmodels(VanRenswoude,2015)

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WRAPclassification–‘InnovativeBusinessModelsMap’(WRAP)

Servicesystems

Providingaservicesystembasedonanexistingproducttoextendlifetimeandoptimiseperformance.

Dematerialisedservices-Providingaservicetoprovideproductbenefitswherethe'physical'productdoesnotexistatallatthepointofuse.

Hire&leasing

Long-termleasingofproductstouserswithalinkedservicetoextendlifeandoptimiseperformance.

Short-termrentalofvehicleslocatedatstrategicpointsaroundmajorcities.Cheaperthancarownershipfortheusers.Maximisesassetutilisation.

PeertoPeer-Rentalofproductsbetweenmembersofthepublicorbetweenbusinesses.Gainsanincomefortheproductownerandcheaperaccesstoaproductfortherenter.

Conventionalhireofaproductforashorttime-enablesaccesstobetterproductswithoutfullcostpayment.

Long-termleasingofproductslinkedtomobilecommunicationsservice.Incentivisedreturn

Incentivisedreturn-Encouragescustomerstoreturnuseditemsforanagreedvalue.Customersgainvalueforunwanteditemsandrecycleproductsviaaconvenientsystem.Collectedproductsarerefurbishedandsoldforre-useonappropriatemarkets.

Incentivisedreturn-Remanufacturingofenginesformajorplanttoextenditslifetime.Cheaperthanfullenginereplacementforcustomersandreducesquantityofmaterialsrequiredtokeepanassetrunning.

Collectionofusedproductstoensuretheyarepassedontoanappropriatere-usesystem.

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Re-use Reducingconsumption-Employerpaysemployeetobuyacomputerforuseatworkandathome,alongwithasupportpackage.Reducesquantityofproductsrequiredtomeetmarketneed,reducingnumberofworkcomputerslostandimprovingemployeemotivation.

AssetManagement-Collection,refurbishingandre-saleofusedproducts.Reducesthequantityofrawmaterialsrequiredtomeetthemarketneed.

Longlife

Peer-to-peer-Onlineexchangeofproductsbetweenhouseholderswithfeedbacksystem.Reducescostofclothingownership,extendsactivelifeandprovidesuserswithaccesstoawiderangeofproducts.

LongLife-Productsaredesignedtohavealonglifetimewithdurability,reducingconsumption.

Other

Madetoorder-Productionismanagedtominimisematerialrequirementsandavoidpotentiallossesfromover-stockingproducts.

ForumfortheFutureandUnileverclassificationofcircularbusinessmodelarchetypes(2016)

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3 ReferencesAntikainen,M.;Valkokari,K.AFrameworkforSustainableCircularBusinessModelInnovation;TechnologyInnovationManagementReview,2016.Availableonline:https://timreview.ca/sites/default/files/article_PDF/AntikainenValkokari_TIMReview_July2016.pdf(accessedon21March2017).DLLFinancialSolutionsPartner.SustainableReturnsbyRecoveringUsedAssets,2015.Availableonline:http://info.yoursolutionspartner.com/sustainable-returns-whitepaper-thanks-en(accessedon21March2017).DLLFinancialSolutionsPartner.Availableonline:http://info.yoursolutionspartner.com/realising-circular-business-models-thanks(accessedon21March2017).ForumfortheFuture;Unilever.TheCircularEconomyBusinessModelToolkit.2016.Availableonline:https://www.forumforthefuture.org/project/circular-economy-business-model-toolkit/overviewGassmann,O.;Frankenberger,K.;Csik,M.TheBusinessModelNavigator:55ModelsThatWillRevolutioniseYourBusiness.FinancialTimesPublishing.2014.ING.Rethinkingfinanceinacirculareconomy.2015.Availableonline:https://www.ing.nl/media/ING_EZB_Financing-the-Circular-Economy_tcm162-84762.pdf(accessedon21March2017).Lacy,P.;Keeble,J.;McNamara,R.;Rutqvist,J.;Haglund,T.;Cui,M.;Cooper,A.;Pettersson,C.;Kevin,E.;Buddemeier,P.;etal.CircularAdvantage:InnovativeBusinessModelsandTechnologiestoCreateValueinaWorldwithoutLimitstoGrowth;Accenture:Chicago,IL,USA,2014.Availableonline:https://accntu.re/2cR5sVq(accessedon21March2017).Lacy,P.;Rosenberg,D.;Drewell,Q.;Rutqvist,J.5BusinessModelsthatareDrivingtheCircularEconomy,2013.Availableonline:https://www.fastcoexist.com/1681904/5-business-models-that-are-driving-the-circular-economy(accessedon21March2017).Lewandowski,M.DesigningtheBusinessModelsforCircularEconomy—TowardstheConceptualFramework.InSustainability,18January2016.Availableonline:http://bit.ly/2o3S5lA(accessedon21March2017).Mentink,B.CircularBusinessModelInnovation:AProcessFrameworkandaToolforBusinessModelInnovationinaCircularEconomy.Master’sThesis,DelftUniversityofTechnology&LeidenUniversity,Leiden,TheNetherlands,2014.Availableonline:http://repository.tudelft.nl/islandora/object/uuid:c2554c91-8aaf-4fdd-91b7-4ca08e8ea621?collection=education(accessedon21March2017).Osterwalder,A.;Pigneur,Y.;Bernarda,G.;Smith,A.ValuePropositionDesign:HowtoCreateProductsandServicesCustomersWant;JohnWileyandSons:Hoboken,NJ,USA,2014.Osterwalder,A.;Pigneur,Y.BusinessModelGeneration:AHandbookforVisionaries,GameChangers,andChallengers;JohnWileyandSons:Hoboken,NJ,USA,2010.

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Osterwalder,A.;Pigneur,Y.;Tucci,C.L.ClarifyingBusinessModels:Origins,Present,andFutureoftheConcept.Commun.Assoc.Inf.Syst.2005,16,1–25.RSA.Designingforacirculareconomy:LessonsfromTheGreatRecovery2012–2016.2016.Availableonline:http://www.greatrecovery.org.uk/resources/new-report-lessons-from-the-great-recovery-2012-2016/(accessedon21March2017).Tietze,F.;Schiederig,T.;Herstatt,C.Firms’TransitionTowardsGreenProduct-Service-SystemInnovators.R&DManagementConference.2011.Availableonline:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1846915(accessedon23March2017).Tukker,A.EightTypesofProduct-ServiceSystem:EightWaystoSustainability?ExperiencesfromSusProNet.BusinessStrategyandtheEnvironment13,246-260.JohnWiley&Sons,Ltd.2004.Availableonline:http://bit.ly/1UlRHaY(accessedon23March2017).Valencia,A.;Mugge,R.;Schoormans,J.P.L.;Schifferstein,H.N.J.TheDesignofSmartProduct-ServiceSystems(PSSs):AnExplorationofDesignCharacteristics.InternationalJournalofDesign.Vol9,No1.2015.Availableonline:http://www.ijdesign.org/ojs/index.php/IJDesign/article/view/1740/677(accessedon23March2017).VanRenswoude,K.;Wolde,A.T.;Joustra,D.J.CircularBusinessModels.Part1:AnintroductiontoIMSA’sCircularBusinessModelScan.2015.Availableonline:https://groenomstilling.erhvervsstyrelsen.dk/sites/default/files/media/imsa_circular_business_models_-_april_2015_-_part_1.pdf(accessedon21March2017).VanderPijl,P.;Lokitz,J.;Solomon,L.K.;VanDerPluijm,E.DesignaBetterBusiness:NewTools,Skills,andMindsetforStrategyandInnovation.2016.VanRenswoude,K.;Wolde,A.T.;Joustra,D.J.CircularBusinessModelsPart2:Overviewandexamples.2015.WRAP.InnovativeBusinessModelMap.Availableonline:http://www.wrap.org.uk/resource-efficient-business-models/innovative-business-models(accessedon21March2017).

Defining the Concept of Circular Economy Business Model · 1.2.2 Definition of ‘Business Model’ In addition to defining the desired circular economy outcome, it is necessary to

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