A circular economy – on the verge of a new economic and social reality?

Industrial society, in its traditional form, is predicated on the idea that raw materials and industrial inputs are cheap and plentiful. So cheap, in fact, that the old habits of farmers to carefully reuse everything finally gave way to far more cavalier attitude towards physical resources. But today, that assumption is looking more and more hollow, suggesting that the old wisdom is due for a comeback. The potentially revolutionary concept is called circular economy – an economic system where materials move in closed loops. Development towards a circular economy is bolstered by both technological and economic factors like digitization and innovations in the service sector, and cultural changes like an increased focus on sustainability and a distaste for waste.

Societies change by leaps and bounds. Old orders are being turned upside down in a never-ending series of paradigm shifts. Industry started to take over from agriculture as the primary mode of production from the second half of the 18th century on, leading to a complete transformation of what we now call the developed world. Now, a new shift is approaching – old industrial society is giving way to a digital information society with complex networked organisation replacing the rigid hierarchies ruling the 19th and 20th centuries. Perhaps a circular economy should be considered part of this package. This economic system aims to minimize both extraction of new raw materials and disposal by burning or burying, opting instead for recollection, reuse and recycling.

The Circular economy: What will it take to take off?

Achieving a circular economy requires three things.

1. First comes a truly efficient collection and sorting system, which in turn requires investment in physical and institutional infrastructure.

2. Secondly, product design must change to accommodate new needs. Products need to be designed and manufactured to be easily disassembled and the parts reused or recycled.

3. The final and perhaps most important requirement is a shift in perspective towards the whole system. Products must, from the design stage, be developed as part of a system. Their lifecycle does not end with their destruction, but uses, costs and benefits of their constituent parts after the "death" of the product must also be considered.

We're only just beginning the journey towards a circular economy. On the way we will face challenges on all fronts: economy, policy and everyday life. A major shift is needed when it comes to consumer habits – it would need to be just as fashionable to buy used as new products. Another potential change is giving up owning in favour of renting or borrowing – which we already see signs of among growing consumer segments.

Other challenges needs facing on other levels. EU as well as the Swedish government are currently studying policy options. New "circularity" clauses in public procurement contracts could have considerable impact. There may be new such standards in only a few years. That ought to kickstart the transformation, if it isn't already under way by then.

Is a breakthrough imminent?

A number of current developments support the shift to a circular economy:

  • "There is no such thing as waste." Much of the waste disposal industry has embraced this perspective. Waste disposal, producers and policy have all changed their attitude over the last few years. Making use of as much waste as possible is one thing, but more importantly, producers have changed design philosophy to allow disassembling and reuse.
  • Renewable energy. Any economy needs energy. A circular economy should run its production and transportation on renewable energy sources. Throughout the world, an energy revolution is taking place that may well leave our energy systems unrecognizable in a decade. We're moving towards an energy future where renewables are the norm - not fossils or nuclear.
  • "User" replaces "consumer". Instead of a typical product being bought and consumed, it will be leased, rented or shared whenever possible. This is one of the fundamentals of a circular economy. Things that are still sold will need to be returned and recycled, which requires proper incentives. The reuse and sharing economies are growing by the day, supported by digital coordination platforms, which enabled people to share things like clothes, music, cars or tools.
  • The proof in is the price. Prices need to reflect the true cost of products, including previously unaccounted for externalities. This is, since way back, the least developed part of the system and it holds back the shift to circularity. But now things are starting to move. Raised resource extraction taxes, new carbon trade systems and a number of new developments coming out of the Paris Agreement are on the way. Much remains, but when things do get moving change can be very quick.

Some businesses already work to implement circular principles in their processes. Many of them are very small and cater to a narrow market segment of extremely dedicated enthusiasts, but larger entities are following. Global corporations sometimes try new business models that build on circular principles. H&M lets consumers return their old clothes to their stores for recycling or second hand markets. Michelin is no longer a tire company but specializes in "efficient and sustainable transportation services" to their logistics clients. Yet another example of a pioneer is Dell, which uses recycled carbon fibers in their new products since late 2015.

Other companies build their entire existence on circular thinking. One is the American logistics company Optoro specializing in a kind of post-sale distribution, helping retail companies handle and resell returned and surplus goods. They're in business with 20 out of the top 100 retail companies in the United States, with an ambition to reduce waste of returned and surplus products by three quarters during 2016. There is also TerraCycle, a company that develops new methods to recycle products and materials previously seen as unrecyclable.

Five ways to adapt to a coming circular economy

Sceptics suggest a true circular economy is many years away, but the signs we see makes it risky and indefensible to dismiss the concept out of hand. Regardless of how quick and complete this transformation will be, we offer some advice we think everyone in a management position would be wise to keep in mind.

1. Map the critical flow patterns in your industry
How does material and energy actually move in your industry, today? Most have some idea, but we think sitting down for a basic analysis is a good idea. What are the important processes in the industry as a whole and in your specific organisation? This analysis need not be complicated, but make sure to do it properly.

2. Identify competitors and other key actors that will shape the future
Who are in the best position to pivot into a circular economy? What will happen with policy? Are competitors getting ready to move? Will new entrants stir things up? Mapping and analyzing key actors won't just be valuable for understanding the shift to a circular economy, but will also have other positive effects like a better understanding of the competitive landscape in general.

3. Try to gauge how quickly things will change in your industry or sector
When discussing change and the future in the context of strategy development, the rate of change is among the most difficult and important things to judge. What pattern will change follow? What other factors will accelerate to dampen the rate of change? It is possible to analyze the rate of change systematically. You may investigate what business models based on circular principles are likely to show up in your industry. Is someone else already working on this? Could digitization and the sharing economy accelerate the shift for you? Could other trends be relevant?

4. If you're dealing with major uncertainties, use scenarios
Sometimes the situation is so uncertain that we cannot identify the most probable future. In that case we advise clients to embrace this uncertainty and tame it by using scenario planning. This means creating different versions of the future, plan for these possibilites and keep one's eyes open for signs that we are heading in one direction or another. When, how and where will the circular economy become reality? What does different answers to those questions mean for you and your organization? Your answer from number 1 above will help you find out.

5. Picture your own operations as imagined in a circular economy. What does it look like?
The future’s foundation is laid today. If you keep imagining where you want to end up, you can get there faster than others. One way to break out of you current thought patterns is to force yourself to visualize something radically different. How would your business work in a truly circular economy?

/Article written by Erik Herngren

Want to know more about how to prepare for the change? Contact Erik Herngren. This article is based on the report produced for the members of the network Kairos Future Club, read more about membership here.