Circular economy in the business model for sustainable development

The term “business model” is relatively new. Previously the subject was treated marginally but since the turn of the 20th and 21st century research on this topic has been conducted on a larger scale. It happened when there was an attempt made to find common features of ventures ensuring a permanent growth in the company’s value.

Initially, the research tried to define what business models are – they were to be a combination of a company’s development strategy and an appropriate organization of processes, conducive to the implementation of this strategy. However nowadays it is seen in a bit different way. The business model, according to Osterwalder and Pigneur is a set of strategic decisions that define how an organisation creates, communicates and captures value through internal activities and relationships with stakeholders, including suppliers and customers.

To achieve this, the company needs an appropriate strategy based on gathering resources transformed at a later stage into a finished product that is a source of income for the company, and at the same time something on which the company-customer relationship is built. The essence of the modern economic system is the multiplication of capital caused by the increase in the mass of resources used and their faster circulation in the production process. The condition for the functioning of such a system is the absorption of new areas, searching for new sources of energy, raw materials, human resources or stimulating technological progress [1].

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The period of global industrialization was characterized by increasing efficiency in the use of materials and energy. Since the beginning of the 20th century, a significant decrease in energy intensity (0.68% per year) and material intensity (even 1% per year) could be observed. However, this has not contributed to a reduction in consumption.

It is noted that economic growth, so far seen as a universal measure to solve all difficulties, is now becoming the source of the world’s greatest problems. The growth imperative is determined by the economic model, which boils down to a constant increase in the pace and volume of production and consumption. This leads to a number of negative consequences, including to depletion of natural resources, reduction of biodiversity or the generation of growing waste streams

The linear model of economic growth (take – use – throw away) that was relied on in the past is no longer suitable for the needs of modern societies in a globalized world. Nowadays the most increasingly popular model is circular economy model, about which there are more and more publications published, which is being talked a lot, and which is also becoming a kind of example of a responsible enterprise [2].

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Circular economy is a type of economy in which the value of products, materials and resources is kept as long as possible and the generation of waste is kept to a minimum. In this meaning it can be defined as sustainable, low-carbon, resource-efficient and competitive. Its main assumptions are focused on resolving the conflict related to the excessive consumption of resources, and the emphasis is on reusing, constantly rebuilding and using what is renewable. It is therefore a transition from the so called “from cradle to grave” to the one called “from cradle to cradle”. It is based on four fundamental principles: product reduce, product reuse, product recovery and product recycling at the end of the effective use period. Thus, in the circular economy, it was assumed that the value of materials and energy used in products would be maintained throughout the value chain for the optimal time, and the resulting waste (if any) is a potential raw material.

The concept of the circular economy is based on the assumption that it is a continuous development cycle. It preserves and enriches natural capital, while optimizing raw material returns and minimizing systemic risk through effective management of material flows. The important thing here is to ensure the conditions for creating more jobs using and wasting fewer resources than today. Therefore, it is believed that the transition to a more circular economy can foster competitiveness and innovation by stimulating new business models and technologies and facilitate social innovation.

The premises of the circular economy concept appeared in the EU policy and strategy already in The Sixth Environment Action Programme of the European Community. It emphasized the importance of activities promoting rational management of natural resources and proper waste management, pointing to the need to dematerialize the economy, increase resource efficiency and reduce the amount of waste generated. In Europe, the introduction of the principles of GOZ implementation into EU policies and strategies started from 2014, clearly indicating that the economic model should be adapted to the economies of the member states. GOZ has been described as a development strategy that enables economic growth while optimizing resource consumption, profoundly transforms production chains and consumption patterns, and redesigns industrial systems [3].

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Despite its many advantages and its future-oriented nature, the circular economy is still not at the center of mainstream management practices. It is very difficult to convince investors that the use of this type of projects will be sustainable. At the present stage, we do not yet have a database of the described historical experiences directly and unquestionably showing the effectiveness of using this type of practice. The discouraging fact for entrepreneurs is also a number of administrative regulations that follow it [4].

The only factor so far that encourages some companies to introduce a circular economy to their operations is ethical pressure. Environmental organizations and the growing awareness of people about the need to care for the natural environment constitute a significant pressure force that prompts companies to change their operating model.

However, the economic evaluation model, focused on short-term rates of return, is still dominant. It makes it difficult to replace the assessment of economic efficiency with broader ecological and economic approaches.

How difficult it is to convince investors to extend the criteria of capital commitment beyond economic efficiency based on current market prices is evidenced by comparisons of stock exchange indices, which do not clearly reveal the advantage of valuations of enterprises declaring sustainable development compared to enterprises traditionally oriented to the market. The idea of an enterprise that reconciles economic growth with respect for environmental and social values is gradually entering the mainstream, which is manifested by e.g. new business models, including circular economy models.

An additional difficulty faced by entrepreneurs in this case is the need to reconcile economic efficiency with the physical limitations resulting from recycling. The concept of a circular economy is easier to analyse and implement at the macro- and meso economic level when it comes to the economic system as a whole. Such a level allows the economic calculation to be extended with social costs, which are often beyond the scope of influence on the company’s decisions. Also at the macro- and meso-level, administrative decisions that make it possible to achieve goals that are difficult to achieve through the market mechanism are of greater importance [5].

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However, the concept of the circular economy is based on a completely different assumption. Its goal is the continuous development cycle and the enrichment of natural capital, while optimizing raw material returns and minimizing systemic risk through effective management of material flows. There are five fundamental features of the circular economy:

1. Waste is “designed”. The objectives of the circular economy include systemic elimination of waste. Technical materials such as polymers, alloys and other products of human activity should be designed in such a way that they can be recovered, refurbished and improved. This will reduce energy inputs and maximize the value retention (both economically and resource-wise).
2. Diversity creates strength. In an ecosystem economy, the size of the individual sectors must be balanced. This is similar to the environmental changes driven by biodiversity. This creates conditions for long-term development.
3. The economy is powered by energy from renewable sources. As the circular economy seeks to decouple resource use and increase the resilience of the economic system, the energy used to drive it should, by nature, be renewable.
4. System thinking is essential. The whole world is made up of many systems. They consist of elements such as companies, people, the environment, and nature. They are all closely related and interact with each other. The effectiveness of changes towards a circular economy is determined by taking into account all these dependencies and the resulting consequences.
5. Prices or other feedback mechanisms reflect actual costs. In a circular economy, prices act as indicators. Their effectiveness depends on their ability to reflect all costs, including the costs of negative externalities [6].

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Discussions around the circular economy are taking place all over the world, and it is currently one of the most important topics in business. In fact a company’s growth can be accelerated by strategies geared to repairing and renewing products or replacing them with services (creating additional value in existing products and services), adding value to products by introducing changes to the design or functionality (increasing the innovation of products and services) and the appropriate and most effective use of resources, which leads to reducing operating costs [7].

The transition to a more circular economy requires changes at every link in the value chain, from product design to new business and market models, from new ways to turn waste into resources to new consumer behaviour. This involves a complete systemic change and innovation not only in technology but also in organization, public awareness, financing methods and politics. It is estimated that improving resource savings across the value chain could reduce the need for material inputs by 17-24% by 2030, and better use of resources could save European industry a total of € 630 billion per year. It should be borne in mind that the transition to a circular economy may be the greatest revolution in the global economy in 250 years and, at the same time, an opportunity for changes in the process of organizing production and consumption. The key to success and sustainable competitive advantage in this field is the “intelligent” use of recycled materials so that huge investments of companies in new technologies and non-standard solutions will bring results in the form of a complete elimination of the concept of “end of product life” in favor of wide use of waste in various areas of the company.

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The implementing of the assumptions of the circular economy is a process. It begins with defining the company’s vision. To this end, it is necessary to create overarching rules as well as changes to corporate governance. In addition, opportunities and goals to achieve are identified.

The next step is to choose a business model that enables the transformation towards a circular economy. Success in implementing the assumptions of circular economy depends on cooperation between individual departments of the company (including procurement, supply chain, production, marketing).

The most important challenges faced by the business sector can be divided into groups using the ReSOLVE scheme (Regenerate, Share, Optimize, Loop, Virtualise, Exchange). It distinguishes six main areas for action to support the transition to a circular economy.

1. Regeneration is an action aimed at switching to renewable materials and energy sources, i.e. the practical implementation of the idea of returning recovered biological resources to the biosphere.
2. Sharing with co-users is a fantastic way to maximize the use of a product or service. The idea can be implemented by sharing private resources (on a peer-to-peer basis) or providing a public pool of reusable products (secon-hand).
3. Optimization activities focus primarily on increasing the efficiency and effectiveness of the product and the removal of waste in the production process and the supply chain. Importantly, optimization does not require changing the product or technology.
4. Loop – Keeping components and materials circulating closed byg. re-use of products, recycling, recovery of raw materials, minimizing material and energy losses
5. Virtualise – is a model of operation that assumes the provision of specific utility virtually instead of materially.
6. Exchange – it is about applying modern technologies and choosing modern products and services. Old materials are replaced with new advanced technologies [8].

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The circular economy is an important aspect of the modernization process of the European economy and a key to the resource reuse economy model. We should strive for a system in which the main domain will be the protection of the natural environment for future generations. It is also important for economic development that all changes are also introduced in order to better meet important social needs, create new social relations, and in particular to achieve the common good. It is about reciprocity. The opportunities brought by circular economy mean that companies that effectively transform their business models can expect measurable benefits. However, this comes with a number of challenges. It is necessary to make deep changes in many areas of the company’s activity in order to implement the solutions offered by circular economy [9].

The biggest challenges include: introducing significant modifications to product designs or designing them from scratch, implementing new technologies (e.g. 3D printing), increasing the efficiency and durability of offered products, switching to renewable energy sources and materials, identification of valuable waste and their reuse . Meeting them all must be gradual but complete. Above all, a systemic approach is required, focused on the interconnections in the organization. Sample implementation diagrams may be helpful. This process should be adapted to a specific enterprise, with particular emphasis on its specific features, possibilities and limitations, because there is no single general scheme of installing the circular economy model applicable to all types of companies.

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