The Circular Economy: From a Linear to a Circular Economy
| Site: | Saylor Academy |
| Course: | BUS604: Innovation and Sustainability |
| Book: | The Circular Economy: From a Linear to a Circular Economy |
| Printed by: | Guest user |
| Date: | Saturday, 26 April 2025, 11:14 AM |
Description
This case study describes how to move from a profit-driven organization to a multiple-added-value organization using an applied scientific approach. It sketches the developments from moving from a linear economy to the circular economy, shows new developments, structures, and strategies, and discusses how to translate them into real-world practices.
What are the values and new perspectives that companies need to embrace in a circular economy? How do society- and value-based business models support circular economies?
Introduction
The Center of Expertise for Sustainable Business (ESB) of the Avans Hogeschool (Avans University of Applied Sciences) in Breda, The Netherlands, represents a group of researchers whose main focus is research into broadly applicable sustainable solutions in society. As sustainability in business is part of their mission, the Center of Expertise conducts practice-oriented research. The ESB creates knowledge, insights, and products that contribute to professional practice and to solutions to economic and social issues.
Increasing value in the Brabant region and enriching educational programmes are their main concern. Ideas for the research agenda of the lecturers of the ESB are put forward by professionals and by Avans' academies. The output of this research is the result of an ongoing dialogue between researchers and relevant stakeholders. In this, the demand for knowledge is always related to the question of goals and ability. The ESB chooses research that contributes to establishing connections which reach across disciplinary boundaries and professional fields. In keeping with this idea, they work in close conjunction with other centers of expertise, universities, research institutes, industry, and business.
Source: Jan Jurriens, https://archive.org/details/Breakthrough2180910/page/n41/mode/2up
This work is in the Public Domain.
Developments
There are three important developments when considering the subject 'Sustainable Strategy & Innovation'. First, the principle of circularity requires a shift in thinking about processes in terms of sustainability. It requires finding a balance between 'people, planet and profit' and in the end this has an effect on how people and organizations will relate to each other in a sustainable and connected way. A logical consequence of this development is a shift in thinking from (product) innovation to multiple value creation. Circularity has stimulated this way of thinking: two-thirds of our economic growth consists of this type of innovation. The third development concerns a state of transition. As a result of these new developments and also driven by government policies and technological innovations, world powers, organizations and civilians find themselves in a state of transition. All three developments will be covered in detail in the following sections.
1.1 From Linear to Circular
Our current 'linear' economic model is based on a firm belief in achieving short-term profit. We consume natural resources and apply our human resources in an unethical manner; the magic words are 'cost saving'. We buy products that are mostly designed on the basis that they will end their lifecycle as waste: the product to waste chain.
The call for the pursuit of a circular economy aimed at sustainable value gets louder and louder. In such a system capital is not only represented by money but also by social, human, and natural values. We move from profit made per product to profit per customer and value for employees. We refer to this as the new way of innovating.
Co-Creation and Interacting
As a result we need to focus on co-creation and interacting rather than on competing. We want to move from a hierarchical market-based model to society- and value-based business models. Because everything is related, we call this multiple valuation through cross-sectoral cooperation via international knowledge networks.
Figure 1. The linear economy
In a circular economy, the desire to recycle all product components is taken into account from the outset in the design phase. As a consequence the demand for production and for the extraction of raw materials falls and the amount of waste decreases. The objective is to scale up to chains of recycling which results in less pollution and a decrease in the consumption of energy. Through investing in a circular economy, the Netherlands will be less dependent on raw materials from abroad.
Figure 2. The circular economy
From the beginning, in the design phase of products and services, attention should be paid to circularity. In this regard, Niesenbaum's theory in which he mentions 'value-sensitive design' is relevant. This design method takes the objectives of all stakeholders into account, looks at effective work processes and communication between stakeholders, pays attention to cooperation (transdisciplinary), keeps an eye on the alignment of stakeholders' interests, and provides the infrastructure for the exchange of knowledge.
Translating the theoretical concepts of the circular economy to the stubborn and slow-to-change practices of international business is the challenge. At the World Economic Forum in Davos, the Ellen MacArthur Foundation and McKinsey presented a report on the economic benefits of the circular economy. They called it 'Reconciling the circular economy with the reality of the world economy and the complexity of supply chains'.
According to both organizations, the circular economy should stimulate or drive industrial innovations and value creation in the 21st century. Ellen MacArthur placed these drivers in the so-called 'drivers' tree' with the factors 'refurbishing, remanufacturing, recycling and collection rates'. The drivers' focus is rather one-sided on saving costs for companies.
Recommended Strategies Based on the 'Drivers'
1. Business Models Need To Be Structured Differently With The Objective Of Creating More Value Per Unit Of Raw Materials.
Worldwide, supply chains will be more and more circular. As a result of this, the cost of recycling materials (higher on the ladder of Lansink can decrease. With steel, for example, the circularity method is predominantly recycling. This positions it too low on Lansink's ladder; this circularity's value even turns out to be negative. This means that the value of the circular feedback loops is lower than the new value. Scaling up within the chain might change this.
Recycling and upgrading finished products and/or parts of finished products is important in moving up Lansink's ladder. This can be done in various ways: renovate, upgrade and bring to the market as an enhanced product; offer products as good second-hand equipment with guarantees; offer products as second-hand but still useable; and by using data about product usage in the development of new products.
This results in a larger potential for cost savings and promotes prosperity and employment. Many theories have this as their subject. But an overview that also relates to the application field is lacking. These theories have the following characteristics:
- The manufacturing of a service product usually happens through cooperation;
FIGURE 4: LANSINK'S LADDER.
- Money is no longer the only currency, more often it is about the exchange of needs. In other words, the added value shifts from ownership, possession, and control to having access to, use when required, and trust.
2. Reaching Critical Mass And Handling The Correct Materials.
Start with four categories of materials and choose the correct raw materials from one of them. The first category consists of 'Golden Oldies' containing paper, metal, and glass among others. In addition, initiate a number of 'trigger projects' to reach critical mass. MacArthur and Kinsey put it like this: at the beginning, a material that has many applications should be chosen.
The potential is evident but to make circular thinking a success
companies will have to change their way of operating and develop new
business models. And that is not all that is needed. New services or
products (technologies); a different customer relationship; ICT systems
for making data available. The availability and the use of relevant
information is a factor for success where improving operational
processes and recording feedback loops are concerned.
Often only limited use is made of information that is already available simply because it is not known that the information is available or because it is not easy accessible. The capacity and the instruments to improve on this are often not available whilst knowledge is. This knowledge (put into practice) is often not used. If we don't bridge that gap, we stay stuck in the 'innovation paradox'.
Steel
Steel is one of the five base materials that are most in demand. The production of steel contributes about 25 per cent to total industrial CO2 emission. The circularity of base metal consists mostly of recycling. It is on a low rung of Lansink's ladder; the value of this circularity is negative (that is the value of the circular feedback loops compared to the new value).
1.2 From (Product) Innovation to Multiple Value Creation
The Development Of Thinking About Innovation
Government considers innovation a necessity for achieving economic growth, the driving idea being that the traditional European production industry is not competitive in world markets. Research into innovation is in a constant state of flux. Innovation policy and research have developed from linear to circular systems thinking. In addition, we see a broadening of the research field into the public domain and increasingly attention is paid to innovation of services. A brief outline of these developments is provided below.
Research on innovation is mainly aimed at the private domain. However, in the last few years there has been increased attention on innovation in the public sector
This also applied to the specific demand for support for innovation in the regions. In response to this the systems approach was developed, whereby innovation was seen as an evolutionary, non-linear and interactive process.
This process required intensive communication and cooperation between various departments in companies, as well as between companies and other organizations such as universities, educational institutions, financial institutions, and government and regulatory authorities.
Within the systems approach there is a distinction between hard and soft factors. Hard factors, for instance, are the physical infrastructure, educational level, and economic structure. Soft factors are, among others, network activities, the willingness to cooperate, and entrepreneurship. In addition to national and sectoral factors, the regional dimension receives more and more attention when systems for innovation are being researched. The use of raw materials and dealing with outdated technology are also factors.
Research on innovation is mainly aimed at the private domain.
Shifting Focus
At the end of the 19th and at the beginning of the 20th century innovation was mainly aimed at technique and technology. From the 1930s until the 1980s, the focus shifted to the organization and to marketing. The economist Joseph Schumpeter distinguished between new or improved products, new production methods, new markets, and new ways for companies to organize themselves. At the end of the last century, the concepts 'social' and 'political' were added. In the Netherlands the Social Innovation Taskforce (in 2005) uses the following definition for innovation: the renewal of labor organizations in making maximum use of competences aimed at improving business results and developing talent.
However, in the last few years there has been increased attention on innovation in the public sector but literature on this is still fairly limited. Hartley outlines a number of differences in innovation in the public and private sector. First, the drivers for innovation differ.
In the private sector, market pressures determine the extent of innovation. In the public sector innovation happens in a dynamic and political environment, and it appears that the catalyst for innovation can operate bottom-up, top-down, and laterally (by disseminating best practices, for example).
Furthermore, the unit of analysis differs. In the private sector, this unit is often the individual company while in the public domain the sector is the central objective. Lastly, it is interesting to note that government plays an ever-larger part in the private sector where innovation is concerned. It has a facilitating and at times even an initiating role.
Copy and paste is not an option. For example, the knowledge developed in the private sector often concerns product innovation. One cannot automatically apply this knowledge in the public context where services are the main focus.
The innovation process no longer occurs as a 'stand alone' in an organization or a department. The starting point is joint innovation, also referred to as open innovation.
Performance
The Netherlands' performance in the Global Innovation Index varies: 8th position in 2010, 10th in 2011, rising to 4th in 2015, and up to 3rd in 2017. We have a high score on output, online e-parThe Netherlands' performance in the Global Innovation Index varies: 8th position in 2010, 10th in 2011, rising to 4th in 2015, and up to 3rd in 2017. We have a high score on output, online e-participation, and efficiency in innovation. We do not perform that well on innovation climate and investment climate, the drivers of innovation. More important, however, are scores for service and sustainability, whereby sustainability refers to 'energy' as well as 'cooperation with partners'.
| High Performance in 2014 Delivering knowledge-intensive services (number of people employed): 8th (Germany 14th) Cooperation between education and industry = 11th (Germany 9th) |
Low Performance in 2014 Cooperation in alliances: 42th (Germany 59th, Middle East in top 5, Luxemburg, Greece, and Ireland in top 15, Switzerland 17th) Use of sustainable energy, including 'ecological footprint' low |
The Netherlands is in 8th position worldwide when it comes to delivering knowledge-intensive services. This is particularly relevant for service provision, the main growth factor in our economy. We rank 11th on 'cooperation between industry and universities and higher education colleges'. This in particular is an element of open innovation. It is striking that we rank 42nd on cooperation in alliances, specifically if taking into account that Luxemburg, Greece, and Ireland are in the top 15. We also rank very low on 'use of sustainable energy'.
If cooperation is of such importance, then the GII report rightly states: 'The need to gather more knowledge of, and a better understanding of, the role that the human factor – along with technology and capital – plays in innovation is critical. Adequate education, training, and motivation in schools, universities, business, civil society, and the government itself is a challenge.' This challenge especially concerns countries with higher incomes such as The Netherlands.
From Technical Innovation Via Services To Multiple Value Innovation
Authors predominantly distinguish between product, process, and service innovation. In practice we mainly see an increasing importance in service innovation. This is not just because the customer tends to be forgotten in product innovation (see the Lego case study).
Blind Innovation By So Called 'Creatives'
In 2013 'The Gelderlander' reported that 'creatives' had brought Lego to the brink of the abyss through their urge for innovation. But, reading on, one notes that 'Lego has a solid foundation again.' Turnover of below 1 billion Euro in 2004 increased to 3.14 billion Euro in 2012. The loss of 752 million Euro in 2004 was turned round to a profit of 752 million Euro in 2012. Lego is now the world's second-largest and most successful toy manufacturer.
What happened in 2004? There were many innovations and product launches during that period. In itself that is not a problem because that befits the product leader in the sector. But it also included many 'alien' products/projects, such as Lego theme parks, clothing, video games, and jewelery, that had little connection with the foundations Lego is based on. The creative minds, always Lego's strength, were driven by the blind urge to innovate. Products and projects were often not particularly successful and failed to sell. Lego lost a major part of its market to the games sector, which did grow and saw its profits increase.
Why? Lego stopped communicating with its customers. The image of the customer was replaced by the images of the creative product and project developers.
What did Lego do between 2004 and the present to break this downward spiral? The company started to communicate with children and immersed itself in their experiences. Children and their parents started to actively contribute ideas about products. For example, the Friends product was assessed by 3,800 girls and their mothers before its hugely successful launch in 2012.
The basic product (the building blocks) was a product that helped children all over the world to play together. Connections to existing trends like Star Wars were made around this and new worlds were developed. The company distanced itself from theme parks, products, and experiences that were not connected to Lego's basic product, building blocks.
In retrospect, we see that Lego stopped researching. The company no longer knew what children (and their parents) wanted. Lego did not communicate or discuss things with them. That is harmful, because product experience innovation must be based on what customers, in this case children, want.
Communicating with your stakeholders and researching their needs is the basis for innovation.
The majority of our economic sectors and the innovation in them concerns services. It therefore makes sense that about two-thirds of our economic growth comes from new services.
Communities of well-informed consumers are gaining influence; they are no longer a passive audience. 'Innovation' becomes 'innovation of experimental environments' where consumers (communities) and (networks of) companies cooperate to create personal experiences for individual customers. Open innovation, a definition introduced by Henry W. Chesbrough, matches this. Consumers' and companies' roles are becoming increasingly similar. Innovation is thus enabling customers, together with (networks of) companies, to create a personal and unique experience.
Service innovation may flourish but innovation research is still mainly based on a sector where physical goods and industry are dominant. As a consequence, innovation is too often limited to technological innovation. Because of this, various researchers into innovation, like Den Hertog, argue in favor of paying more attention to service innovation. Service innovation is often multidimensional and appears in many ways: the introduction of a new service concept, for example a new shop formula, new ways of interacting with buyers, combinations of elements that jointly bring a new service to the market, the introduction of new business models.
Service Innovation
Den Hertog defines service innovation as 'new service experiences' or 'new service solutions'. Hartley deepens the definition of 'services'. He distinguishes between:
- Position innovation, aimed at finding new contexts and clients;
- Strategic innovation, aimed at finding new goals and strategies;
- Governance innovation, aimed at finding new ways to involve civilians and public organizations in innovation;
- Rhetorical innovation, aimed at finding new concepts and ways of communication.
This concerns social challenges, where often the definition of 'social innovation' is used: 'The development of new management capabilities (dynamic management), flexible organization principles (flexible organizing) and realizing high value oriented form/ shape ('work smarter') to increase competitiveness and productivity.' Social innovation is also often defined as a means by which one stimulates or creates stronger entrepreneurship. Cooperation (smarter) and co-creation or innovation is then used as a driver.
Technology, developed and used by services, is (too) often not sustainable. The increasing need of consumers and businesses for technology which is manufactured in a sustainable way demands further developments. Lecturers at the Avans of Center Expertise for Sustainable Business call for a paradigm shift in innovation such as service concepts, realized in a sustainable way, as a driver for necessary, sustainable, technical innovations. Product innovation will be achieved increasingly as a result of the requirements of service innovation (concept) - not ' driven by technology' but 'driven by needs'.
Figure 5: Value creation
Expertise for Sustainable Business call for a paradigm shift in innovation such as service concepts, realized in a sustainable way, as a driver for necessary, sustainable, technical innovations. Product innovation will be achieved increasingly as a result of the requirements of service innovation (concept) - not ' driven by technology' but 'driven by needs'.
Value thinking is an emerging phenomenon in the innovation field. Value creation concerns multiple value outcomes. Various agents play a role in this. They work together strategically (not limited to the customer–supplier relationship) and are not focused on a transaction. The foundation is: exchange/swap against a number of currencies (money and other things) and appreciation based on each individual's self-interest.
Values That Matter
- Transcendental (from spiritual to intellectual);
- Social (from relationships between people to collegiality)
- Personal (from development to consciousness)
- Communal (from society in general via equality to sustainability)
In other words, creating multiple values. Arjo Klamer broadly describes values (see box below). He identifies a large number of values that vary from spiritual and aesthetic to communal. It is a clear extension of the focus on financial values. Luijendijk describes the discussion about values in the banking community in London, in particular the fact that one viewed moral values as moral, immoral, or amoral. The latter value was the starting point for bankers: comply with the rules but not out of a moral conscience. This was judged to be 'out of line' by society as a whole.
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Figure 6: New perspectives on values
This outline of value thinking is a major change from thinking and operating in companies and 'communities'. Jonker gave Klamer's values more substance and compared them to current outdated values. He describes this transition (see figure 6) and gives a new perspective of which the main terminology is value, circularity, networking, and reciprocity.
1.3 Towards Speeding Up and Multiplicity of Transitions
Business, and thus the way we earn our money, is going through a major development.
Whereas the current economy is based on economic values such as growth, efficiency, effectiveness, and wealth, a sustainable economy is based on different values such as quality, quality of life, diversification, and well-being.
We are at a turning point: 'our hierarchical, top-down society is changing into a sustainable, bottom-up networking society'. This is a result, among others, of the new popularity of sustainability (already there in 1972 because of the Club of Rome) and influenced by the recent global financial crisis. How companies should react to this has not been sufficiently researched. The focus will be on organizing activities in a sustainable way to which everyone will be challenged to make a contribution.
Holland is in transition. The 'buzz word' transition has many meanings. The website transitionnetwork.org lists about 100 transitions that are required to attain a sustainable society. The move towards a service-based economy from an industrial-based economy in the last century was also a transition.
So nothing new is happening. But the number of transitions and the speed with which they occur are new to us. Rotmans (2010) identifies transitions in healthcare, the building sector, energy supply, the mobility system, and the sustainable economy. We will briefly look at the transition in the economy, this being a prerequisite for the other two sectors: the building sector and healthcare. These sectors are closely linked.
The Economy
To develop a sustainable society, it is essential to invest in a sustainable economy, particularly in view of the huge budget cuts of recent years and the amoral behavior of bankers. Rotmans identifies three levels:
- The financial, banking, and debt crisis. Financial supervision with regulations for the financial markets and a morally-driven attitude towards companies and consumers;
- The relationship between market, government, and cooperation. A free market is no longer the best solution for a number of markets in Holland. Only the telecoms market seems to be able to handle free competition well but it does require a regulator;
- Virtues, standards, and values for the economy and for society.
The Building Sector
Luiten et al stated that open tendering is aimed at obtaining the lowest price and not at achieving the best performance. In a highly competitive market and the delivery of a large number of relatively low-value services, chances for price-fixing agreements are high. They advised maximizing returns for contractors combined with lowering the risk for clients. In various states in the US, this is a proven system for 300 contractors. In this way there is more cooperation and it contributes to taking each other's interests into account.
The economic decline in the building sector and/or the decline in revenues started after the financial crisis. Compared to 2006, architects received 75 percent fewer orders for new homes and utility buildings between 2007 and 2012 .
Historically, the building sector is a traditional sector even though innovations have been made during the last couple of years. An overview of innovations and experiments in the building sector can be found on the website de bouwvernieuwer.nl. But Rotmans points out that the innovation process is a fragile one (only 10 percent of the sector is involved in innovation processes).
Where cooperation is concerned, several issues stand out. Innovations have not yet been incorporated into the construction regime; not many parties are involved in innovation experiments; and there is too little competition to facilitate the application of innovative knowledge. In the construction world, there is a complex and fragmented field of influence with a lot of conflicting interests.
According to Rotmans, several elements of the building sector need to change:
- The building sector as supplier of services. The sector needs to develop from a supplier of building works to a supplier of services. It needs to switch to using concepts whereby it must see customers' needs in a holistic way. This is consistent with the development from product to service innovation mentioned earlier;
- The building sector delivers social added value. Social issues con-cerning living, working, mobility and recreation are also issues for the building sector to consider. This is consistent with the development from product to value innovation;
- The building sector as an innovative sector. The building sector should deliver more innovative and sustainable concepts. The traditional tendering system will accordingly change to delivering functional specifications
- Outside focus. The building sector develops into a cooperative partner which works on a holistic basis with other parties.
The building sector must increasingly seek to cooperate with other parties in the network. That is one of the conclusions derived from this report. The Building Information Model is the basis for further growth in the sector. In this model, data of the building to be built and the relationship between data is recorded and managed. For a start, more attention should be paid to data which shows information about the sustainability of the building and a sustainable way to handle 'worn-out parts' in a sustainable way. Furthermore the model should be developed into a cooperation model for building, which could be based on the exchange of information.
Healthcare
Government has initiated the transition in healthcare. There is a shift from central to decentralized financing, and government is working on huge budget cuts in healthcare. The strong focus on costs and the corresponding bureaucracy turn out to negatively influence effectiveness and efficiency. Each year, costs in healthcare increase while the number of hands-on medical staff decreases. Overhead constitutes an increasing part of healthcare costs.
It is time for a paradigm shift in healthcare. Various organizations have already started to act, in some cases successfully. But the sector has a long way to go. The transition will only be completed once the starting point is modified: 'away with systems thinking', more control for clients. This implies a change in the professionals' role, from leading to supportive.
Human capital stems from cooperation and services are organized with the customer being the focus. The professional must be able to utilize his/her professional capacity whereby he/she is supported by the organization. The organization should limit the administrative burden. This means no policy documents and strict rules but straightforward frameworks.
This is driven by the idea that in practice it will result in cost reductions. In 2014, Holland spent about 90 billion Euro on healthcare. As a consequence of increased demographic aging and multiculturalism, demand on healthcare is rising. Healthcare costs have stabilized in the last few years. There is a growing unwillingness in society to pay these costs.
Healthcare has its own characteristics. Despite the fact that the individual relationship between practitioner and client is essential, a healthcare professional or his organization can hardly ever be regarded as an isolated unit. The professional is dependent on the input of others. It is very relevant to liaise with and transfer information to colleagues. No one (or no one part of an) organization can be held responsible for the elimination of waiting lists. There is a chain or rather a network of organizations/professionals. Only through cooperation and the transfer of information can one reach the desired level of performance and quality.
It is crucial that communities can make choices based on relevant indicators for quality of life. One of the issues here is that welfare professionals are not sufficiently equipped and trained to facilitate this development. In other words, these professionals lack the competencies and tools (especially where it concerns cooperation) and they don't know what new services they need to offer. Local government, healthcare professionals, and civilians all struggle to set priorities and to put cooperation into practice in a transparent and democratically responsible way.