25 Sep. 2017 | Comments (1)
Evaluation of the circular economy concept is growing across the private sector, governments, non-governmental organizations and universities. This heightened interest stems from international concerns over current and future resource availability and price volatility, accelerating quantities of emissions and wastes, elevated risks to public health and the environment, and the future resilience of business and civil society, to name several major factors. These factors are of growing interest to corporate boards as they seek to navigate business strategies between risk and opportunity.
The circular economy is not an entirely new concept, but it is presently at a major inflection point. Its intellectual roots emerged from early ideas and practices of recycling and pollution prevention, life cycle analysis, eco-efficiency assessments and analysis of materials flows. In response to current sustainability challenges and business opportunities circular economy proponents are now attempting to transition it from a diverse set of individual methodologies aimed at addressing specific problems to a more integrated and systematic set of ideas to transform business strategies and operations.
Government policy, non-governmental organization (NGO) evaluations and advocacy, and university research each perform important roles in this transition. However, the primary focus and responsibility for circular economy implementation lies in the management and strategic alignment of value chains across individual business sectors as this will be the area of greater impact and market scale.
There are major structural challenges to advancing circular economy thinking and applications. While there remain many knowledge gaps in operationalizing circular economy opportunities, they alone are not a principal obstacle to success. Among the more important are:
- Underpriced commodities that generate overconsumption of materials and natural resources
- Absence of circular economy planning in product design and development.
- Complicated logistics management that stems from insufficient collaboration among suppliers, product producers, and customers.
- Lack of robust markets for commercializing used products and reducing their costs through scale.
- Insufficient engagement from consumers in connecting their purchasing behavior to more sustainable beliefs and lifestyles.
Two major keys for operationalizing circular economy’s potential for value creation lie in the examination of business models for specific enterprises and the development of collaboration strategies necessary for scaling business solutions.
A business model contains a set of key assumptions and values for how a company defines its market purpose and applies technology, people and capital to make money from customers. As one specific example, Ricoh, the global Japanese-based $18.7 billion (in sales) office, industrial and consumer products company, has used a business model dependent upon the use of virgin materials for producing office equipment, cameras and other products. A recent company assessment concluded that, by 2050, there will be an insufficient supply of many of these materials at a reasonable cost to support its manufacturing needs. If realized, this development will create stranded manufacturing assets and disrupt business continuity. As a result, Ricoh is revising its business model using life cycle analysis as the basis for decision making and establishing a series of “Resource Smart Solutions” for product design and manufacturing, re-use, collection, maintenance and materials recovery.
Ricoh’s business review is leading to changes in the company’s strategy and operations. Since the company owns approximately 60 percent of what it sells, there’s an increasing motivation to leverage this asset to engage its customers in new business solutions derived from circular economy thinking. Ricoh has a service model component to its business, thus expanding opportunities for product refurbishing, recycling and new designs that support growth of service model revenues. Its combined product and service portfolio expand opportunities to reduce customers’ energy consumption, carbon footprint, use of virgin materials and other sustainability challenges.
Ricoh has developed a series of interim targets to reduce the use of virgin resources—25 percent by 2020 and 87.5 percent by 2050, using a 2007 baseline. The integration of mid-term and long-term horizons enables the company to innovate such functions as materials and resource utilization; parts and products manufacturing; materials and parts recovery; collection, recycling and shredding; maintenance operations; and sales. In adopting circular economy thinking, Ricoh is increasingly able to transition beyond more incremental efficiencies and footprint reductions to more ambitious net zero impact business operations.
Market scale collaboration strategies represent a second key to unlocking circular economy value creation through business transformation. This is supported by a recent report by The Conference Board, which finds that successful circular economy initiatives require high levels of collaboration with customers and suppliers and readiness to form strategic alliances across the value chain. Leading companies such as CH2M (by building global coalitions to protect migratory workers in major construction projects), HP Inc (from digitizing the supply chain), and Nestlé and Unilever (by large scale collaborations with farmers to improve food production and living standards) are moving beyond pilot project thinking into “design for scale” to achieve positive global impacts from their value chains. Market scale collaboration in these and other business sectors generates numerous opportunities to draw the various elements of value chains together around common governance and transparency protocols, standards development and audits, best practices and business process innovations with the circular economy as a core operating parameter.
The advancement of circular economy thinking will require a redefinition of business purpose, deeper and more creative levels of innovation and more fundamental business transformations to enable companies to better respond to major disruptions and capitalize on emerging economic opportunities. A major impact of this development will be on corporate goal setting and metrics. Moving forward, such goals and metrics will need to transition beyond measurement of efficiencies achieved, emissions reduced and materials consumed to broader commitments for the avoided use of resources over product life cycles and avoided future emissions. A recent example of this thinking is The Coca-Cola Company’s declaration, having achieved its 2020 goal of net replacement of water utilized in its business operations and products, of a new goal of net positive replenishment, or actually returning to nature more water than the company consumes for its multiple beverage brands and operations.
Business model innovations, new collaborations, and strategy and operations that are implemented at market scale will be necessary to harmonize both business and societal values. Companies that accelerate the transition to the circular economy have begun to re-define business leadership. Corporate boards will need to perform an especially meaningful role in charting the future course of strategy and governance as part of their ongoing mission of enhancing the long-term interest of the company.
The views presented on the Governance Center Blog are not the official views of The Conference Board or the Governance Center and are not necessarily endorsed by all members, sponsors, advisors, contributors, staff members, or others associated with The Conference Board or the Governance Center.