Circular Business Models: The Proof
Part Two: this post is the second in a series of three. Read Part One.
In our 2019 Circularity Gap Report, a global measure of how we use or squander materials, Circle Economy argued that the Paris climate target of a 1,5 degree world can only be a circular world.
However, when it comes to building circular business models, the key actors in companies and capital markets often experience what has been described as a split heart. What is a viable pace of change? Is there a certain ‘trade-off’ between divergent values? Is it possible to reconcile maximum (often short-term) financial returns and doing the right thing?
Several companies are setting out to answer this question.
Frans van Houten, CEO of Philips; Carola Wijdoogen, Corporate Sustainability Officer of Dutch rail operator NS; and Martin Stuchtey the founder of consulting firm Systemiq, were among the key speakers at our Beyond Next Circularity Festival in February. In different sectors, each one is finding new answers to the question of how to thrive within the circular paradigm.
Philips is a Dutch-based multinational technology group with an increasing focus on healthcare. The company’s journey to circularity began with its development of a light-as-a-service proposition. In 2016, the lighting business was demerged from the Royal Philips group, but the principle of circularity is being rolled out across the largest sector of medical equipment and appliances.
In a circular model, the relationship between producer and customer is transformed. For example, customer engagement is longer-term. In its core medical devices business, Philips wants to remain the now owner of technology products such as scanners or diagnostic machines.
“A world with zero waste, with no waste to landfill, would require designing the products in a completely different way so that we can reuse and repurpose. We have to keep the customers happy until the end of the product use, so the retention rate goes up. Economically, this is very defensible as long as you design it as an integral business model.”
— Frans van Houten, CEO of Phillips
The costs of installation, maintenance, refurbishment and recycling are carried by the company, creating a strong commercial incentive to invest in Research and Development. Circular products are designed to maximise the life-cycle of materials through re-use and re-purposing of components.
For the model to work, customers become effective business partners: they no longer pay for ownership, but for the benefits of a service. The producer has a strong interest in educating suppliers and customers alike, to ensure that materials and equipment are handled efficiently. The customer relationship becomes the story of co-creation for a circular world.
Another example is NS, the Dutch railway operator whose initials stand for Nederlandse Spoorwegen. Did you know that the CO2 footprint of riding in an NS train is zero? Yes, you heard it right! NS adopted an energy policy that shifted the company from extractive forms of energy to wind power.
Carola Wijdoogen, the company’s Corporate Sustainability Officer, explained to the Beyond Next participants, that train carriages can be designed for durability, recycling and re-use. Up to 97% of the parts can be recycled into other commodities, while the balance of about 3% is harvested for the floors and ceilings of the train compartments?
Our next blog will deeper into the strategic implications of sustainable resource use for industry. Martin Stuchtey, founder of management consultants SystemIQ, previously spent 20 years with McKinsey & Company. His career was transformed by a realisation that technology is not enough to ensure sustainable use of energy or resources: “We need principles,” Martin told Beyond Next.