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Using circular economy thinking to drive innovation and growth: five business models

26/6/2014

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Last week I had the pleasure of attending a talk on the Circular Economy by Jamie Butterworth (CEO of the Ellen MacArthur Foundation) and Peter Lacy (MD Strategy & Sustainability, Accenture APAC). The talks are part of a series of seminars organised by Oxford University's Smith School of Enterprise and the Environment to explore how we meet future sustainability challenges. Whilst it was very intellectually stimulating, the key for me was the practical insights and case studies on how we can re-frame innovation and growth challenges.

Many academics and practitioners alike have for many years been looking at how we can sustain our economic wellbeing without depleting our resources.  Some, like Tim Jackson, have suggested we can have ‘prosperity without growth’, or slow down growth significantly, but I don’t buy this – and nor does Peter Lacy, who said that this is simply not a conversation you can have in Asia (the area he covers) where billions of people want to lift themselves out of poverty. 

Instead, we need circular economy thinking (as opposed to our current ‘take, make, dispose economy’). Jamie summarises the circular economy as “a framework for an industrial economy that is restorative by intent. At an individual business level this provides the opportunity for businesses to begin to decouple economic growth from resource constraints and drives innovation and value creation”.  The short, eloquent clip by Dame Ellen MacArthur below also summarises the concept really well using her sailing experience as an analogy.

Peter outlined five business models for circular economy thinking and they make great lenses through which to innovate.  They’re not all new, but are very compelling. 

Products to services
“Every product is a service waiting to happen”. To my mind, this drives much of the rest of the circular economy thinking. The key is to get to the heart of the customer value proposition and look at how we can reframe it.  Are we selling cars or mobility? Gas or a warm house? Light bulbs or light?  For example, Philips has started selling lumens of light to municipalities for their street lighting, thus retaining ownership of the assets and reusing the resources at the end of the life-cycle.

More radically, how might you make shoes a service? Timberland have been trialling exactly this with the ‘Earthkeeper’ shoe for kids.  Kids of a certain age are notorious for going through many pairs of shoes a year, so instead of buying, say four pairs a year for $50 a go, Timberland will sell you the right to a shoe for your child for $100. Timberland retain ownership of the shoes and recovers many of the materials at the end of the life-cycle. It also has the great benefit of ‘closing the customer loop’ as customers are not exposed to the marketing mix and competitor products as they would every time they go back to a store to buy new shoes.

Sharing economy
We have talked about this trend on our blog before, but there is much scope for it to grow.  How can you use (digital) technology and social media to create ‘clearing houses’ to create a sharing effect, ultimately leading to a radical shift in heavy resource use? Great and prominent examples include Airbnb, ZipCar and Uber, highlighting how the sharing economy can drive growth with limited resource use; indeed, Airbnb now has a market cap to rival all major hotel groups.

Circular supplies
Looking at the supply chain and asking how we can make our inputs more circular, be that through R&D, supplier or even competitor collaboration. An obvious example is renewable energy in the manufacturing process and a more high tech one is around ‘green chemistry’ as demonstrated by Dutch chemical company DSM, who have developed some bio based substitutes designed closed loop from the start.

Resource recovery
Driven by service vs. product thinking, how do we design for disassembly and resource recovery from the start and ensure we maintain ownership of the raw materials? Much like Interface in the US, Dutch carpet supplier Desso are also pioneers in the sustainability field: they rent out carpets by the tile, replacing just the ones that are spent and reusing the materials for new carpet. This allows for lower costs for customers, predictable input costs, increased profits and radically reduces resource use. 

Product life extension
Linked to the above, how do we create products to maximise their life-cycle from the start? How do we design for remanufacture and refurbishment from the outset? For example, BMW now designs parts which in some cases up to 80% of the part can be refurbished and re-used – and put back into the market with the same warranty levels.

According to Peter, over 50% of 1000 global CEOs interviewed as part of a UN study, said they are introducing circular economy initiatives in the coming years.  Whilst it is early days, it is clearly moving from being a niche concept to a more mainstream reality with huge potential for innovators.

by Jesper Ekelund
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Learning from Sustainable Innovation At IKEA

16/6/2014

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IKEA was recently in the news regarding its famous meatballs. In 2015, they plan to offer lower carbon alternatives – chicken and vegetarian varieties . At the same time, they were also in the news for having their FSC (Forest Stewardship Council) certification in Karelia, Russia temporarily suspended because its subsidiary Swedwood was cutting down 600-year-old trees.  We’ll continue to hear more news about IKEA’s sustainability credentials from both supporters and detractors. It’s a global retail powerhouse, and it has taken a very public, proactive commitment to sustainable business.

In fact, each year it shares a very thorough Sustainability Report, which details its strategy, activities and results. In reading their latest report, one thing that stands out is its Sustainability Product Scorecard, which provides 11 criteria relating to how new products are designed and produced (see box).

That it has a Sustainability Product Scorecard is noteworthy in and of itself. However, delving beyond it, there are a number of best practices for marrying sustainability, innovation and growth.

Sustainability is embedded into the innovation process

This may seem like an obvious one; however, fewer companies embed sustainability into their innovation processes than we might think. Many include a broad sustainability category as a tick mark in their stage-gate governance, and some don’t include one at all. In reading IKEA’s Sustainability Report more closely, it’s clear that the Scorecard is not only used as a checklist for decision-making at stage-gates. It drives their thinking in terms of spotting opportunities, how products are designed and how they are produced.

Sustainability as an innovation opportunity, not a roadblock

Sustainability is often seen as a roadblock, creating costs and obstacles. However, by challenging assumptions, companies can create new proposition, product and service opportunities that drive growth. The most obvious one is in responding to customers’ various needs around sustainability, and the ability to differentiate products based upon total carbon footprint. In addition to this, though, it creates opportunities to collaborate with the entire supply chain, thereby expanding a company’s possibilities through its partners’ capabilities and assets whilst potentially reducing costs and mitigating development risk.

IKEA Sustainability Product Scorecard
  1. More from less (using fewer materials in the product) 
  2. Renewable materials 
  3. Reused and recycled materials 
  4. Material from more sustainable sources 
  5. Recyclability at end of life 
  6. Quality 
  7. Transport efficient (number of 
products per container) 
  8. Energy use in production 
  9. Renewable energy in production
  10. Raw material utilization
  11. Sustainable life at home (products that enable customers to reduce energy and water use, or reduce waste in their homes)
Source: IKEA Group Sustainability Report FY13
Enabling customers to lead more sustainable lives

Picking up on the last point, enabling customers to live a more sustainable life at home opens up a number of opportunities to create new product categories and differentiate existing ones. For example, IKEA has teamed up with Hanergy to offer solar panel packages in its UK market and is in the process of updating its lighting range to LED light bulbs as standard. It has also developed products such as white goods, space saving solutions and food storage containers to help customers use less energy and water, and to reduce waste. Enabling customers to have an impact on sustainability not only opens up growth opportunities, it also communicates real reasons to believe that a company is committed to sustainability. It demonstrates a value chain perspective on sustainability rather than a supply chain viewpoint. A value chain takes into account the customer, and by doing so a company can expand its sustainability impact beyond the point of sale.

“We will do our best to use sustainability as a driver of innovation and transformational change - from factory and farm, to store, to customers’ homes and all the way to our products’ end of life - and strive towards having a positive impact on people and the planet.” 
(IKEA Group Sustainability for 2020)

Understanding the bigger picture on customers’ needs

It’s tempting to focus solely on the sustainability aspects of a product in the design phase. However, doing so at the expense of customers’ wider needs will most likely result in low take-up and miss the mark in the impact on their behaviours, and ultimately on the positive impact on the environment. Customers still have a wide set of needs regarding products, and except for the most diehard green advocates, they are unwilling to sacrifice them. IKEA recognises this, which is why it still addresses customers' needs for style and design, ease of purchase and use, and very importantly affordability. Affordability is one of the main needs that remains unaddressed, and creates an obstacle to helping customers take action – just look at households’ low take-up of renewable energy solutions in the UK, despite periodic incentives such feed-in-tariffs. For example, IKEA sold over 22m LED products, including 12.3m LED bulbs. In addition to designing LED lighting solutions that deliver on performance, IKEA took steps to make them affordable, and therefore accessible, to its customers.

Alignment and integration of sustainability strategy with corporate strategy

If sustainability efforts are isolated to one part of the business, such as product design or production, they’re unlikely to survive against other corporate priorities, particularly short-term sales and cost targets. In addition, the market and customers are increasingly sceptical about companies' sustainability credentials – they sense when sustainability is an add-on or PR attempt. A clear sustainability strategy that is seamless with corporate and brand strategies is essential to avoid a greenwashing tag, and to embed sustainability in the innovation process. IKEA’s approach reflects this understanding – the Sustainability Product Scorecard stems from the wider corporate, brand and sustainability strategies. In fact, IKEA has 11 guiding group strategies and sustainability is one of them, and it runs throughout all of the others.

Making a public commitment to sustainability, as IKEA has, will attract assessment and commentary from the public – from customers, non-customers, and other stakeholders. It will create reasons to believe for some audiences, while others will challenge a company’s real motivations and performance. Putting aside which audience you fall into regarding IKEA, their approach demonstrates valuable best practices on how to align commercial and sustainability objectives. It also demonstrates that these objectives are not inconsistent. Rather, sustainability can drive innovation and provide real opportunities for growth.

by Dennis Pannozzo

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