Leading Strategicially

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Circular Economy

The ramifications of COVID-19 will go beyond the short-term worldwide health and

financial effects. Aside from a need for a more coordinated response from governments

and corporation, the coronavirus has exposed the fragile state of the world economy.

"The 'coronacrisis' has demonstrated the fragility and unsustainability of our current

model of economic growth" (Dixson-Declève et al., 2020). Without economic change,

future worldwide crises are likely to trigger similar upheaval.

Economists worldwide are pointing to an old idea – the circular economy – as an

alternative. The circular economy is "an idea where we move away from the old linear way

of consumption – produce, use, discard – and towards … an economy where what we use

is produced with the purpose of being reused, recycled, or repurposed" (Lyche, 2020). The

conceptual framework has been with us for over 40 years but was seen as an expensive

move and hard to justify when the current framework was viable.

But as entire nations went into lockdown, sustainability of resources got a closer look, and

the role of strategic leadership in developing and implementing policies to minimize waste

and use of our resources becomes critical.

Life Cycle Thinking Framework

Built-in obsolescence of a product is often incorporated by companies at the design stage

to render it obsolete or nonfunctional after a certain period to stimulate consumer

demand.

The practice of continuously replacing, rather than repairing, products creates more waste,

uses more resources, and is being increasingly challenged by the customers. The issue of

forced obsolescence goes beyond ecological consideration of waste disposal and resource

intensity. Software companies stop supporting older technologies to force users to

purchase new products.

Learning Topic

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That said, the dominant forces behind product obsolescence are technology and

innovation. The pace of innovation, which was shown years ago by Kondratieff in his "long

waves" theory (1935), has been accelerating giving rise to rapid product obsolescence

(e.g., 5¼ inch floppies to 3½ inch floppies to CDs to DVDs to solid state memory storages):

Kondratieff's Long Waves

Source: Rursus (2009).

Whether obsolescence is planned or driven by technology changes, an evaluation of a

product's entire life cycle needs to be part of enterprise strategy of cradle-to

grave evaluation (Rainey, 2006, pp. 507–551) that includes upstream supply network

management and manufacturing, and downstream aspects of product sale, use, and end-

of-life considerations.

Sonntag (2000) points out that the sustainability focus in the past has been on limiting the

ecological impact of production on a per unit of activity. This approach has been used

in the life cycle assessment that provides a framework for measuring the environmental

footprint of a product (Finnveden et al., 2009).

However, with faster product cycles and competition, this generates newer products and

faster product obsolescence, and we find competition promotes an overall increase in

consumption. So, despite a decreasing ecological impact per unit, when viewed in totality,

we see greater ecological impact due to an overall increase in consumption driven by

faster product cycles driven by competition. This impact is exacerbated with standards of

living rising around the world and the increasing demand for consumer goods.

The importance of full recycling recovery of products has accelerated. In fact, this trend is

evident as regulations seek to make companies responsible for "cradle to grave"

products. In the UK, embedded planned obsolescence in products is a breach of customer

rights, enforced by the Office of Fair Trading.

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The Conceptual Framework

The circular economy model synthesizes several major schools of thought.

The environmental movement that began roughly in the 1960s brought about reform

legislation in several countries, but the idea of sustainable growth was highlighted in an

economic light by a Club of Rome report, "The Limits to Growth." The lead author of that

report, Donella Meadows, cowrote a 1992 book, Beyond the Limits (Dixson-Declève et al.,

2020).

Meadows noted years ago that "humanity's future will be defined not by a single

emergency but by many separate yet related crises stemming from our failure to live

sustainably" (Dixson-Declève et al., 2020). By using "resources faster than they can be

restored, and by releasing wastes and pollutants faster than they can be absorbed,"

(Dixson-Declève et al., 2020), disastrous consequences can result. The Club of

Rome warning about resources remains valid in terms of the need to reevaluate

exploitative attitudes toward use of natural resources.

Nearly 50 years after the UN Conference on the Human Environment at Stockholm

(1972), 23 years after the World Commission on Environment and Development

(Brundtland Commission) defined sustainable development as "a development which

meets the needs of the present without compromising the ability of the future generations

to meet their own needs" (1987), and 26 years after the Earth Summit at Rio (1992), the

concept has inspired many scholars and practitioners to seek ways to include

sustainability in corporate strategy and develop tools to measure and evaluate

sustainability in company operations.

The Blue Economy is an open-source movement featuring case studies provided to the

Club of Rome by Gunter Pauli, a former CEO of Ecover and a Belgian businessman (Ellen

MacArthur Foundation, n.d.). The Blue Economy calls for solutions being determined by

the local environment and promotes physical/ecological characteristics, emphasizing

gravity as an energy source. The movement's initial report includes "100 innovations

that could create 100 million jobs within the next 10 years" (Ellen MacArthur Foundation,

n.d.).

Schmidheiny (1992), with business leaders in the Business Council for Sustainable

Development, developed the concept of "eco-efficiency," which would allow companies to

achieve higher efficiency while preventing pollution. Elkington (1998) coined the term

"triple bottom line" (TBL) to enable companies look not merely at the economic (profit)

outcome of their business, but also the environmental at social costs. Basically, the term

provides a framework to measure and report corporate performance against economic,

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social, and environmental parameters. In a broader sense, TBL embraces a wide spectrum

of values, issues, and processes companies must address to minimize any harm resulting

from their activities and to create economic as well as social and environmental value.

Transitioning to a circular economy, however, is not confined to "adjustments aimed at

reducing the negative impacts of the linear economy. Rather, it represents a systemic shift

that develops long-term sustainability, creates new economic opportunities, and provides

societal benefits" (EcoGlobal Foundation, n.d.).

Walter Stahel and Genevieve Reday presented a 1976 report to the European Commission

on their vision of what they called "an economy in loops" (Product-Life.org., n.d.) and

effects on jobs, economic competitiveness, resource savings, and waste prevention. The

report, "The Potential for Substituting Manpower for Energy," was published in 1982 as a

book, Jobs for Tomorrow: The Potential for Substituting Manpower for Energy.

Today these factors are commonly referred to as the three pillars of sustainable

development: ecologic, economic, and social compatibility (Product-Life.org, n.d.). Many

have credited Stahel with the phrase "cradle to cradle," and his Product Life Institute

supports those goals, including "the importance of selling services rather than products."

Stahel worked at developing a "closed loop" approach to production processes. That

approach pursues four main goals: product-life extension, long-life goods, reconditioning

activities, and waste prevention. It also advocates the importance of selling services rather

than products, now popularly known as the "performance economy" (Ellen MacArthur

Foundation, n.d.).

The concept of harm, counterintuitive to development model of profit maximization,

extends to nonhuman life. Naess (1973) and Devall and Sessions (1985) provide the deep

ecology perspective to sustainability that includes biocentric equality and emphasizes the

intrinsic right of all species to exist.

Benyus (1977) describes the biomimicry principles focusing on nature's attributes and

illustrating the lessons from evolutionary experiences. Nature optimizes resources by

using only the energy it needs, recycles everything, and curbs excesses from within.

Nature's optimization is in contrast to the waste in manufacturing, inefficient use of

nonrenewable energy, and excessive consumption in industrialized societies.

Biomimicry relies on three key principles (Ellen MacArthur Foundation, n.d.):

1. Nature as model: Study nature's models and emulate these forms, process, systems,

and strategies to solve human problems.

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2. Nature as measure: Use an ecological standard to judge the sustainability of our

innovations.

3. Nature as mentor: View and value nature not based on what we can extract from the

natural world, but what we can learn from it.

As a business case for sustainability, Arnold and Day (1998) point out that businesses

pursue sustainable development for three reasons:

morality – based on the assumption that business owes to society to improve

people's lives and the environment in exchange for the privilege to operate

compliance – driven by the threat of regulations

opportunity – the result of seeing a chance of increased revenues and profits

Willard (2002) presents quantifiable evidence that investing in sustainable development

pays off with bottom-line benefits. Hawken, Lovins, and Lovins (1999) show that the use

of eco-design and eco-measures enhance resource productivity and give rise to a new set

of practices.

In a book by Paul Hawken, Amory Lovins, and L. Hunter Lovins, Natural Capitalism:

Creating the Next Industrial Revolution, the authors discuss "interdependencies that exist

between the production and use of human-made capital and flows of natural capital

(MacArthur Foundation, n.d.)

The following four principles underpin natural capitalism (Ellen MacArthur Foundation,

n.d.):

1. increase the productivity of natural resources by increasing the life of products

2. shift to biologically inspired production models and materials; model closed-loop

production systems where every output is either returned to the ecosystem as a

nutrient, or becomes an input for another manufacturing process

3. move to a "service-and-flow" business model that aligns the interests of providers

and customers in a way that rewards resource productivity

4. reinvest in natural capital

The circular economy of cradle-to-cradle is based on the design philosophy that considers

all material involved in industrial and commercial processes to be nutrients, technical, and

biological (Ellen MacArthur Foundation, n.d.).

Circular Economy: From Cowboy Economy to Spaceship Economy

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Boulding in 1966 discussed a shift from what he called the "cowboy economy,"

characterized by endless resources and an option to move on, leaving problems behind to

the "spaceship economy," where resources needed to be reused to keep life support viable

(EASAC, 2015).

The concept has since been developed by many authors such as Smith (1972), Mäler

(1974), and Dasgupta and Heal (1979), according to a report on circular concepts by the

European Academies' Science Advisory Council (EACAC, 2015).

Before we can understand the circular economy, it helps to define the linear economy.

Most organizations today operate in the linear economy, which is based on a "take, make,

and dispose" model. Companies take raw materials and make them into products, which

are purchased by consumers. Those consumers eventually throw away the products and

create waste.

The Linear Economy

The circular economy is not about just recycling the products. In a circular economy, the

manufacturer maintains ownership of the products, much like leasing a car. The model

looks more like this: make, use, reuse, remake and recycle.

The Circular Economy

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Example

In a linear economy, consider the use of a light bulb. Once the light bulb burns out,

the customer disposes of it and neither the seller nor the customer will see that bulb

again. The resources to make the bulbs, such as glass or metal, are also not seen by

the seller or customer again. In this linear economy model, the light bulb company

buys materials at the lowest cost to sell as many bulbs as possible. This model

assumes there are infinite resources, like glass or metal, in the world (Leonard,

2018).

By contrast, in the circular economy, you would lease light, just as you would a car

or an apartment.

The financial shock of 2008 reignited the idea of "resource productivity and efficiency"—

doing more with less, and subsequently, the European Commission (EC) presented a

"Resource Efficient Europe" in 2011 (EASAC, 2015). The EC eventually compiled proposals

in 2014 for a road map to a circular economy, after studies that showed that "improving

resource efficiency along value chains" could significantly reduce material inputs (EASAC,

2015).

The European Union (EU) adopted an action plan (European Academies, 2015) aiming to

make supply chains more circular. This includes everything from production to

consumption, repair and manufacturing, and waste management. One report (European

Commission, 2020) estimates a shift toward the circular economy in the EU could increase

GDP by an additional 12 percentage points by 2050.

The benefits of the circular economy are seen as (EASAC, 2015):

improved competitiveness by controlling rising costs

reducing raw materials and energy dependency

opportunities for new businesses

reducing environmental impact of resource extraction and waste disposal

reducing greenhouse gas emissions

In spite of compelling evidence of the benefits of the circular economy, the reasons why

the economies stay locked in the linear economy include (EASAC, 2015):

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Costs associated with the company's environmental and social impacts of its

operations are not captured though they are a direct consequence of the company's

activities

Ignoring the potential impact on resource depletion, pollution, and climate change on

the company itself.

Priorities for short-term profits and dividends to shareholders. This avoids the

perspective required for investments into resource efficiency.

A 2015 report on the circular economy by the European Academies Science Advisory

Council notes: "If the true cost of the circular economy model were compared with the

true cost of the linear economy model, which currently excludes most externalities, then a

proper comparison of the costs for pursuing a circular economy over a linear economy

could be made" (EASAC, 2015)

The report also states that economic indicators based on traditional national

accounts such as GDP do not measure how efficiently resources are used, and new

indicators are still "being evolved" (EASAC, 2015).

Case Studies of Circular Economy

A 2014 report from the World Economic Forum illustrated some examples of companies

taking part in initiatives that promote the circular economy (World Economic Forum,

2014). Information was provided by the companies.

Philips – The lighting equipment company offers "lighting as a service" by keeping

ownership of the equipment. Philips says it can reach more customers and those

customers don't pay "high upfront costs." The company also works with organizations that

dispose of bulbs containing mercury.

Vodafone – Vodafone offers "buy back" programs and is a partner in a "reverse cycle

network" to collect devices to send to secondary markets in Hong Kong and China.

H&M – H&M's UK retailers allow customers to bring in old clothing in exchange for a

voucher. The company works with an apparel "reverse logistics" provider that handles the

sorting for reuse, recycling, or even energy generation.

Ricoh – Ricoh's "GreenLine" brand represents its effort to design and manufacture copies

and printers to be recyclable or be reused. For productions that cannot be reused or

recycled, the company "harvests" components and materials.

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