Topic 1 Circular business models principles

Circular Business Models are considered a subset of the broader group of sustainable business models. Several definitions of circular business models can be found in the recent literature but currently no consensus has emerged on a generic definition. Mentink (2014) defines circular business model as “the rationale of how an organization creates, delivers and captures value with and within closed material loops” while Linder and Williander (2015) define a circular business model as “a business model in which the conceptual logic for value creation is based on utilizing the economic value retained in products after use in the production of new offerings”.

Adopting a circular economy strategy requires several organizational and strategic shifts.  Looking at the business model architecture including value creation, value proposition, value delivery and value capture, the following changes are required:

• In the Value Creation (1) component, products have to be made in specific processes, with recycled materials and specific resources, which may require not only specific capabilities but also creating reverse logistics systems and maintaining relationships with other companies and customers to assure closing of material loops.
• In the Value proposition (2) component, products should become fully reused or recycled, or firms should turn towards product-service system (PSS) and sell performance related to serviced products  activities, processes, resources and capabilities.
• In the Value delivery (3) component, selling “circular” products or services may require prior changes of customer habits or, if this is not possible, even changes of customers.
• Last, in the Value capture (4) component, a shift would be required to sell product-based services charged according to their use. 

1. How to categorize circular business models?

Circular business models can be characterized taking a product lifetime perspective. Using this perspective, circular business models can be classified according to their position on three distinct phases:

• Creating value prior to the use of the product (focus on the quality of materials to be used in the manufacturing process),
• During the use of the product (in one or several use cycles if the product is reused) or
• Creating value following the use of the product (by recovering materials for future purposes).

The position of these business models according to the product lifetime also has consequences on the value dynamics being unfolded.

• During the pre-use and the use phases, circular business models primarily aim to retain value: in the pre-use phase, by designing long lasting products or products in which materials can easily be recovered and reprocessed for future use; in the use phase by offering services aiming at prolonging the use lifetime of the products.
• During the use phase, circular business models may also focus on strategies aiming at optimizing value, by maximizing the usage of the product (i.e., through sharing practices).
• Finally, during the post-use phase, circular business models may focus on Recovering value – that is developing operations to reverse material obsolescence.