In addition to their positive environmental impacts, circular solutions can also help companies solve business challenges, for example, increasing their control over input costs. While the most basic conceptualization of a circular business model is recycling, companies are seeing greater potential across a wider range of solutions. They are developing more products designed to be easy to disassemble and reuse; using circular-friendly materials such as recycled cooking oils for plastics; and designing circular business models that transform products into services to maximize their utilization — for example, car sharing platforms like Turo, which brings an Airbnb model to rental cars.
This interest and potential has led some to estimate that circular business models could contribute as much as $4.5 trillion to the global economy by 2030. So as not to be left behind, many companies are publicly committing themselves to circularity, allocating meaningful resources to circular solutions, and hiring heads of circularity to design their programs.
There are inconsistencies between what consumers say they value and their purchasing behavior; while most customers applaud sustainability, fewer will pay a premium for it, or accept the inconveniences it might impose.
To glean some insights into the current state of circularity and how to accelerate its adoption, Innosight recently convened a group of senior business leaders for a wide-ranging discussion. The group was composed of individuals from a range of industries, including CPG, retail, basic materials and logistics and involved leaders directly accountable for helping their organizations bring new circular solutions to market. Over the course of the conversation, three high-level takeaways emerged:
1. Focus on Circular Solutions That Provide Tangible Benefits to Customers.
“Success is finding the right customers who will pay,” one forum participant commented. This sentiment likely resonates with any company that has tried to launch sustainability solutions. While customer interest in sustainability is increasing, in most industries it is not the dominant purchase criteria and there are limits to the trade-offs customers will accept.
Circular solutions that drive unique value to the customer beyond just sustainability benefits are more likely to be adopted; forum participants agreed that it is best to focus on value through the customers’ eyes rather than pushing solutions that may help achieve a company’s sustainability objectives but don’t offer meaningfully new benefits to the customer. A participant from the retail industry shared an analog that customers often choose sustainable organic options for their health benefits, rather than their contributions to sustainability. But to find these ancillary benefits leaders must think beyond the core product.
IKEA, for example, uses circular design principles and supports them with buy-back programs and its “As-is” stores for second-hand furniture and spare parts. These add value for customers by giving them a way to easily dispose of furniture when moving or upgrading. The products are the same, but their overall value proposition is enhanced.
Companies need to be explicit about what customers are getting back when they are asked to behave differently.
Key Questions for Leaders
- Beyond sustainability, what new benefits are we offering customers in performance, convenience, or cost?
- Does the customer fully understand the value of our new offering? How challenging is it to educate them?
2. Circularity Requires Major System Change, but it’s Best not to Start There.
Circular solutions can be daunting because they often require system changes. For example, as the automotive industry pursues aggressive EV goals, it will need circular business models for batteries to reduce the need for virgin battery materials, the extraction and processing of which have significant environmental impacts. New product designs will be needed, and new players, like Redwood Materials, will be required to process used batteries. Supply chains to source and transport spent batteries will have to evolve. Car companies will need to experiment with different ownership models–for example, selling the car, but leasing the battery–and second-life application–for example using old vehicle batteries for smaller scale applications, like storing electricity generated by solar panels. This system change will require a high-level of coordination and collaboration across the ecosystem.
It’s not easy to change complex systems like the automotive example above. Regulations, such as those built into the Inflation Reduction Act, are often required to nudge systems forward. Incentives must work across the value chain, from end-users to suppliers. Companies need to develop new modes of coordination and co-investments.
Forum participants agreed that while it’s important to understand and have a plan to address wide scale system change, it’s best to start with something simple. “You have to find the equivalent of rebar,” the head of packaging for a CPG company suggested. He was referring to the classic disruption story that Clay Christenson told in The Innovator’s Dilemma, in which mini mills drove integrated steel mills from the market. The mini mills didn’t focus on the most complex, challenging parts of the market at the outset, even if that was their ultimate goal. They concentrated on rebar, where the barriers to entry were lowest. Incumbents were not motivated to respond to their lower prices, because rebar was less profitable than higher-quality steel products. This allowed them to gain a foothold in the market, from which they could move on to more demanding categories.
While full circularity should be the ultimate goal, “partial circularity” can serve an analogous role to rebar. Companies should assess their ecosystems methodically, looking for areas where the barriers to the introduction of circularity are lowest. A leader from the lubricant industry described how his company winnowed a long list of ways to transition to circularity down to three areas for initial prioritization: renewable feedstocks, product utilization, and recovery. Each of these areas represented a foothold where they could make progress, thereby building support for additional action and investment.
A key characteristic of low-barrier entry points is the ability to leverage existing systems, reducing costs and allowing for more rapid experimentation. One forum participant described how his firm introduced new materials for making bottles that were easier to recycle. They made sure they could be used on their customers’ existing fill lines so they wouldn’t have to invest in new production equipment. The more a company can leverage existing systems and relationships, the quicker they will be able to bring new circular solutions to market.
Key Questions for Leaders
- Have we prioritized areas that are meaningful but also have low barriers to adoption?
- Have we identified opportunities to embed more circular solutions into existing systems and structures?
- How can we gain an initial foothold from which to launch more ambitious initiatives?
3. Make Circularity Everyone’s Job.
An aligned vision and shared ownership are critical accelerators of circular business initiatives. Though they are needed to ensure long-term viability, investments in the current business model are often more profitable in the near-term. Leaders must work proactively to defuse these tensions.
Sustainability, and by extension circular solutions, must not be treated as if they are ancillary or external to the core organization. As one forum participant put it, “Sustainability is not a market segment. It has to be integrated into the markets you serve.”
Leaders must develop a clear point of view on the role that circularity will play in their long-term strategies for performance and growth as well as sustainability and articulate it. This will ensure the organization has a common language and frame for circularity and on the magnitude and pace of investment.
Beyond setting a common vision, organizations must hold leaders accountable for execution, setting specific targets and incentives. One forum participant noted that a big unlock for their organization was achieved when sustainability and circular goals were directly incorporated into every leader’s scorecard.
Key Questions for Leaders
- Do we have a common language for talking about circularity and sustainability more broadly?
- Is our vision for the role that circularity will play in our long-term strategy widely shared?
- Is every part of the organization appropriately incentivized to drive circular solutions?
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Circular solutions and business models can help companies make meaningful progress towards their sustainability goals. Done right, they can also drive top- and bottom-line impacts, a win-win that is essential for their successful scaling.
About the Authors
Ned Calder is a Senior Partner at Innosight. ncalder@innosight.com
Kelsey Beuning is a Senior Associate at Innosight. kbeuning@innosight.com
Rob Bell is a Partner at Innosight. rbell@innosight.com
Claudia Pardo is a Partner at Innosight. cpardo@innosight.com
