You can decrease the input costs, create new revenue streams and keep customers on your books for longer.
All it takes is a little imagination
The circular economy is gaining ground. The European Commission has announced it will present an ambitious circular economy strategy in late 2015, China has set up government-backed association CACE to encourage circular growth, and Japan has been practicing it for decades.
But progress towards a circular or even half-circular economy has been halting. Indeed, when I explain the premise of the circular economy to people, they are less stunned by the opportunity than by our collective disregard for it. Why? The power of inertia is important, of course, but I have also come across a number of myths on the subject. Here are the three most common ones.
Myth 1. Going circular will cannibalise existing sales
Traditional economics suggests that used cars compete with new cars. But this is only if car companies let others make the next sale. In the age of the internet the idea that secondary markets are somehow marginal cannot be sustained; the likes of online marketplace eBay prove otherwise. So, looked at in a circular way, the used-car market can become an additional profit centre for car manufacturers.
Another way to avoid cannibalisation is to sell refurbished items into markets that are otherwise unsuitable. Patagonia collects clothes and sells used items in countries where its new ones are not on the market; it has also created a new (albeit small) revenue stream in repairing its products. Renault, the French car maker, is investing in car remanufacturing, using the parts and materials of discarded cars again (and sometimes again).
This circular approach not only reduces resource consumption, but cuts H&M’s input costs. McKinsey has found that, as long as quality is maintained, refurbished systems can deliver substantially higher margins.
If companies begin to think of what goes out their doors as the possible start of another business cycle, new opportunities can reveal themselves. That is not alternative thinking, it is thinking like a business.
Myth 2. Our customers prefer new-built products
Certain people want the newest thing and will camp out for days to get it. But I believe a new consumer segment is emerging, made up of individuals who favour service over ownership.
Car-sharing is one example. Statistics show that young people in Germany and the US are not buying or driving cars the way their parents or even older siblings did; they are happy to pile into a Zipcar when they need to.
Besides, old versus new is a 20th century way of thinking anyway. It is more than possible to create high quality out of old stuff. Kingfisher’s Infinite brand kitchen counter is made entirely from wood waste and end-of-life DIY products. It is lighter than comparable products, more water resistant andre-uses materials that would otherwise have been dumped. And, for Kingfisher it has created a revenue stream from materials it previously paid to get rid of.
In many cases consumers don’t really care about the product one way or another; they just want to get a job done. Consider the humble drill. Outside professional craftsmen, the average drill is used just a few minutes a year. Taking a circular view, the drill can be provided as a service through leasing or lending, rather than as a product through purchase.
Myth 3. Setting up a circular business model is too complicated
It will not always be straightforward, but capitalising on service models is a strategic imperative that goes way beyond the circular economy. When companies and consumers are closely entwined, businesses can use circular thinking to deepen the relationship in a way that benefits both parties.
For example, mobile phone companies have an enormous amount of data on how customers use their devices. So they could offer to take the old phone back every year and tailortheir services to specific needs, such as offering more memory, or pay-by-the-minute options. The old phone can be mined for parts, or sold into the secondary market. Customers get new phones and better services; the company gets a steady flow of materials and a consumer that keeps coming back every year.
There may also be particular potential in business-to-business transactions. For example, many lighting manufacturers sell lamps and bulbs to an office building but, looked at through a circular lens, they could instead sell light. That is what Philips has begun to do. It owns the equipment and, because it is selling watts, not plugs, it has every incentive to provide light in the most efficient way. As the owner of the hardware, Philips can – with a secure flow of returned devices – then recycle or re-use the parts.
The way to think about it is simple: how can we keep consumers on our books, month in, month out? That is the kind of circularity business understands.
In literature, myths are stories that help explain a culture to itself. In business, myths can be excuses for inaction. These three myths hint that when it comes to the circular economy, it is not a logical narrative that is lacking, but the imagination to bring it to life.