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How to move from laggard to leader in the circular economy

The circular economy is characterised by closing the linear material cycles so that all end-of-life materials are used as input for new product cycles. This alternative way of doing business helps ensure a truly sustainable future. Achieving this transition would require unprecedented and radical change, given that today only around nine percent of all materials are reused with circular practices.

Our world faces a rising resource scarcity and waste problem. More than 100-billion tons of materials are processed globally every year—a staggering 13 tons per person—and more than 91 percent of these materials are newly extracted from the ground. The fundamental cause of these problems is the value chains that currently dominate our industries. Their linear nature systemically degrades our environment by promoting the extraction of finite resources and the disposal of materials at their end of life.

In a recent survey of about 150 companies across the globe, Kearney found that companies that have taken the lead in implementing and integrating circular initiatives into their operations are already reaping monetary and reputational benefits as a direct result of these activities.

The benefits of doing so are evident: our study shows that improved results from the implementation of circular practices do not accrue from differences in industry, company size, or material use but through deliberate choices in strategy.

The future is bright, the future is green

Increasing numbers of consumers are waking up to the fact that our linear economy of use and dispose has negative consequences for the planet. Most of society is worried about what will be left of the environment for their children if we don’t change the way we do business now.

A circular economy is defined as an economy where the value of products, materials, and resources is maintained in the economy for as long as possible and the generation of waste is minimised. Circular economy strategies have clear principles of action. They ensure that the value of materials is preserved for as long as possible to minimize the generation of waste. And they use all end-of-life wastes as new inputs to create products and materials that remain in use, while replacing fossil fuel and raw materials with renewables.

This approach is already driving dividends because customers “are the engine of top-line revenue growth” and there is increasing demand among them for green goods and services. The United Nations Sustainable Development Goals—which aim to put the world on a more sustainable footing by 2030—present $12 trillion in market opportunities in four economic systems: food and agriculture, cities, energy and materials, and health and well-being.

This presents business leaders with a unique opportunity to transform their companies for the future by analysing and adopting best practices when it comes to the circular economy. By shifting priorities from pure profit to protecting the planet, corporations can solve problems and create popular services. “If they are successful at doing this,” the World Economic Forum (WEF) has noted, “shareholder long-term returns can increase, as society-in-general is better served.”

In our own circular benchmarking survey, we identified 34 percent of respondents as “leaders” in circular economy (see figure 1). These businesses reported more than five percent improvement in core key performance indicators (KPIs) after switching to circular economy approaches and business models. Around a third of those leaders reported revenue increases and cost savings (see figure 1, 32 percent and 38 percent leaders reporting respectively). But the circular approach does not begin and end with the bottom line: of this group, 50 percent reported an increase in customer loyalty and 70 percent an increase in brand recognition.

What’s special about circular leaders?

There is a clear difference in approach and behavior between those that currently lead the way when it comes to the circular economy and those that are transforming at a slower pace.

This is seen across industries and is clearly defined by the following three factors:

Setting strategy and targets

According to our study, about 40 percent of companies place circular economy on their sustainability agenda (see figure 2). But leaders in this field are much more likely to include it either as a stand-alone element or embed it within their business unit or functional strategy. In fact, 28 percent have formulated a road map to reach total circularity in the future, compared to only 7 percent for others.

The defining factor between those that lead and those that follow is an appreciation that establishing circularity is not merely an item to be added to the overall corporate social responsibility agenda—to improve reputation cosmetically—but to make the circular approach utterly integral to their core business.

A combination of first establishing, then maintaining, strategic focus and continuously employing measurable KPIs shows that focused circular activity produces tangible results.

Partnerships and relationships

Success in the circular economy is built on the power of partnerships: twice the share of companies that lead in this field are partnering with other entities within their own industry, across other industries, or with relevant NGOs compared to the rest of the respondents (see figure 3). This split is even higher when it comes to interactions with policymakers (three times) and investors and financiers (four times). Market leaders also engage much more actively within their value chain, with an especially strong differentiation when it comes to the supplier side (84 percent versus 53 percent) and the customer (74 percent versus 58 percent).

This illustrates how the new economy takes shape. A radical transformation of the way business is done—placing stakeholder needs on par with shareholders—means circular strategies must become fundamental: the circular economy cannot be effectively pursued by one company alone. By definition, the whole value chain plays a part, as do intricate interactions and interplay across industries. Material flows and dependencies will always be highly interconnected, and the very nature of circularity implies intimate links between all players.

Companies that aim to excel in the circular economy must take a comprehensive approach, establishing relationships with a large group of diverse stakeholders while developing, enhancing, and distinguishing their overall capabilities.

Internal resources and operating model

Appropriate investment of internal human resources is essential to developing circular economy models, and our data illustrates that 94 percent of our leaders dedicate staff to circular economy activities, compared to 52 percent for the other respondents (see figure 4).

Typically, most companies bundle their resources within their sustainability team or into a dedicated circular economy unit, or embed them directly within operations. Circular leaders, on average, appoint more than double the number of full-time employees to circular activities to establish the principles of the circular economy within their whole business.

The allocation of human resources is 2.5 times higher for circular leaders, which are on average committing six to 14 full-time employees (FTEs) for circular activities compared to other companies dedicating just two to six FTEs for this purpose.

Choose circular benefits

Leaders in circular endeavors exist in all industries (including services, consumer goods, chemicals, energy, materials, and metals and mining) and in companies of all sizes, with a slight overrepresentation among businesses valued at more than $2 billion (46 percent as compared with 33 percent) (see figure 5).

Comparing our respondents in terms of material use in their business, companies are still using on average 32 percent virgin nonrenewable sources. What differentiates leaders in this respect is a higher level of transparency when it comes to material use—in other words, leaders largely know where their material originates and have clarity on the supply chain players. Only a third of material origin remains unknown in leading companies as opposed to 44 percent unknown material use for followers. Nevertheless, supply chain transparency and material origins continue to be a challenge.

Circular pioneers demonstrate that introducing circular business models drives competitive advantage.

Take Desso. The 13,000-employee US company developed a new type of carpet that can be fully recycled and reprocessed whenever its customers want a change. Thus, they introduced a new product as a service model instead of just selling carpets. They live out their use and are then taken back to be used as raw material for new carpet. Within five years of implementing this strategy in 2007, Desso improved its EBIT from 1 percent to 9 percent and increased its EU market share from 15 percent to 23 percent while cutting energy consumption in half.

Household names are also keen to help create new economy. Swedish furniture giant Ikea is committed to achieving a fully circular business model by 2030. Currently, around 80 percent of its furnishings are produced in accordance with circular design principles and last year the company reduced its carbon footprint while continuing to grow.

Also, companies outside of manufacturing industries take inspiration from circularity as a concept. Cars are shared among multiple users via peer-to-peer platforms (such as Zipcar) and clothing is rented as needed (for example, Rent the Runway).

Such transformations clearly demonstrate that placing environmental considerations front and center can boost both a company’s financial performance and its future resilience. As the WEF has noted, “climate change, water management, and other aspects of environmental stewardship are increasingly recognized as bottom-line issues in a world where technology, regulation, and other features of the operating environment can change quickly.”

The circular nature of life

Our study shows that it is possible to reap benefits from integrating circular economy strategies and that those that lead in this field are already achieving monetary and reputational benefits.

Such success is rooted in developing a strong strategic focus in what the company wants to achieve with circularity, while building strong internal capabilities and using the power of partnerships to make such aspirations a reality.

Each industry is different, but the underlying principle is consistent. To date, most of the materials we use, we lose—and the value inherent in them is lost too, often after a very short period of time. This is a symptom of the old, linear way of doing business: the “take-make-waste” economy is not sustainable in the long term.

As we enter the Fourth Industrial Revolution, the path toward a circular economy should be made clear for future generations. This entails a radical shift in business models and a radical rethink of value creation today (see figure 6).

For some products, sales and ownership must become a thing of the past, and rental, sharing, or incentivized return a thing of the future. Envisioning such circularity has to begin at the design stage, but it will yield ever more profound benefits while slowing the seemingly irreversible impacts already wrought by industrial production methods to date.

Building in circularity from the start of the design process means less waste ending up in a landfill or openly dumped in nature. But not only this, it can lead to the design and manufacturing of better products, improved relationships with customers, and savings in energy and resources. Through design it will be possible to address the underlying causes of environmental challenges rather than struggling to cure the symptoms.

This may involve fundamentally reimagining business models: emphasizing access over ownership or prioritizing performance over new products, as well as keeping items in use for longer even as they are used more intensively. Strategy is vital to this and must be specifically tailored according to individual, carefully analyzed circumstances while keeping product functionality the same.

Companies of scale may use their size to drive circularity into the mainstream, enhancing their own brands with eco-credentials and inspiring others around the world to follow their lead. Smaller companies, meanwhile, may utilize their nimbler natures to invest in people and introduce faster changes to their products and services that appeal to their customers.

To address the needs of companies trying to understand and incorporate the benefits of the circular economy to maximize all potential benefits, we have developed a set of offerings to support companies throughout their entire circular journey (see figure 6).

The companies that do so will not only be ahead of the curve, they will lead the future cycle.

Courtesy: www.kearney.com

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