The Four Fatal Mistakes Holding Back Circular Business Models

Manufacturing companies must avoid key missteps as they shift to more environmentally sustainable approaches.

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The urgency of the climate crisis is driving some of Europe’s leading manufacturers to pursue new strategic approaches intended to mitigate the environmental impacts of their products and processes. One such innovation is to adopt a circular business model, whereby a focal company collaborates with its ecosystem partners to create, capture, and deliver sustainable value.1 The goal: to improve resource efficiency — by extending the life spans of products and parts, for example — to achieve environmental benefits while still meeting profit targets.2

ABB, BillerudKorsnäs, Komatsu, LKAB, Metso, Sandvik, Scania, and Volvo are among the major companies that have moved from the traditional, linear model of take-make-dispose to a circular model of make-use-reuse-remake-recycle. For many manufacturers, that means bundling their products with advanced services in order to allow the products to be shared, repaired, upgraded, reused, refurbished, optimized, or recycled.

During the past five years, we studied how 15 large manufacturing companies designed, developed, and implemented circular business models with their ecosystem partners. While we learned from the companies’ successes, we also discovered that manufacturers’ ambitious profit targets and environmental goals — such as lower greenhouse gas emissions, improved resource efficiency, and reduced energy consumption — frequently failed to materialize.

Pursuing Value With a Circular Business Model

Making the transition from a linear to a circular business model is an ambitious undertaking that involves rethinking how the organization creates, captures, and delivers value.

Value creation. A manufacturer that adopts a circular business model must integrate itself more deeply in the operations of its customers, cocreate value with partners, emphasize value-in-use rather than value-in-transaction, and launch new, innovative services. For instance, heavy equipment provider Metso cocreates value with its customers by offering them a performance guarantee.

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References

1. J. Frishammar and V. Parida, “Circular Business Model Transformation: A Roadmap for Incumbent Firms,” California Management Review 61, no. 2 (February 2019): 5-29.

2. R. Henderson, “Reimagining Capitalism in a World on Fire” (New York: PublicAffairs, 2020).

3. C. Zott, R. Amit, and L. Massa, “The Business Model: Recent Developments and Future Research,” Journal of Management 37, no. 4 (July 2011): 1019-1042.

4. R. Adner, “Ecosystem as Structure: An Actionable Construct for Strategy,” Journal of Management 43, no. 1 (January 2017): 39-58.

5. M.A. Cronin and L.R. Weingart, “Representational Gaps, Information Processing, and Conflict in Functionally Diverse Teams,” Academy of Management Review 32, no. 3 (July 2007): 761-773; and J.H. Dyer, H. Singh, and W.S. Hesterly, “The Relational View Revisited: A Dynamic Perspective on Value Creation and Value Capture,” Strategic Management Journal 39, no. 12 (March 2018): 3140-3162.

6. C. Grönroos and P. Voima, “Critical Service Logic: Making Sense of Value Creation and Co-creation,” Journal of the Academy of Marketing Science 41, no. 2 (March 2013): 133-150.

7. K.R. Tuli, A.K. Kohli, and S.G. Bharadwaj, “Rethinking Customer Solutions: From Product Bundles to Relational Processes,” Journal of Marketing 71, no. 3 (July 2007): 1-17.

Acknowledgments

The authors would like to thank Vinnova and the Swedish Energy Agency for their financial support.

Reprint #:

62301

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