Managment Engineering - Circular economy business models

Completed notes of the course

Complete course

1 The genesis of circular economy The concept of circular economy : When talking about circular econo my we refer to the use of already existing resources (which have already been used for the production of a nother type of good ) in order to make another (similar or different) product; as a matter of fact, circular economy deals with the waste of today , which can become the re source of tomorrow , consequently, forming a cyclical model which uses waste as resource. Important aspects of circular economy : - It deals with the re-design of products , business models and eco -systems which are around resources - It is a model in which interconnection is key - It is a cyclical model and not a linear one : A product (which is a bundle of resources) pursuing a circular economy model is not following a linear one , for which resources end with the end of the lifecycle of the product itself . LIN EAR MODEL: BUY → USE → THROW AWAY On the other hand, a cyclical model deals with the idea of disassembling the product/service in order to use the resources around it for other purposes, e.g. the three lenses of the camera of an iPhone 11 are composed of one camera ideally built for the phone and the two others taken by the old phones. CYCLICAL MODEL: It i s the idea of designing new products (which are even better) but making use of existing resources. In other words, i f we find a way to redesign the product around resources – considerin g that not all resources have to be thrown away – we can make a cyclical model . Difference between linear and cyclical model through a graph: Blue: Linear economy Green: Circular economy, that is, the use of the same resource for different inputs → Creation of outputs with less input . 2 - In circular economy the ownership is crucial : In order to explain this, we will make an example. Let’s suppose Person A buys a washing machine and after a while it breaks (ownership: Person A) . The cost for replacing the broken engine is 500€ while the cost for buying a new one is 400€. Is the person going to replace the engine or buy a new one? Now, let’s think of person A who decided instead not to buy a washing machine but to use the washi ng service from a laundry service firm (ownership: The firm). When the engine gets broken, the firm has two options: Buy a new washing machine ( 400€) or replacing the engine with an old one (just the manufacturing cost: 10€/h). Is the firm going to repla ce the engine or buy a new one? Redesign produc ts and systems around resources makes the latter been able to exploit all their value: we don’t maximize the product value but the resources value, and in order to do so, we need to work on the relationship t he product has with the owner and the user, that is, the ownership . In order to maintain ownership on the manufacturer, a new type of businesses have emerged in recent years offering all manner of products to their customers on a short -term basis (that is, the sharing - economy) rather than selling it to them. - It helps the environment : This is, however, only a side effect, since circular economy is the ability to sustain the demand with a lower use of resources, which save s natural ones and conseque ntly allows to save the environment. REMEMBER: Resources mean value. Also, circular economy works only is there is economical sense in it, that is, if recollecting resources is costing less than doing resources from scratch (if the benefits are higher than costs) , then, there is an economic sense from this. A problem of input/output : As a matter of fact, society has three ways of producing outputs according to the relationship they (outputs) have with inputs . The three options are here illust rated: 1) EFFICIENCY : Through this option there is a reduction of the inputs used for the same outputs by taking for granted the process. E.g.: By knowing the production process of plastic bottles, firms can reduce the amount of inputs through the use of recycled plastic (in this case the process has some physical limits since using 100% plastic bottles is prohibited by law, in fact, re -used plast ic has contaminants which are not allowed for drinks and foods because of contaminants). Remember: In this case t he process is there, we are working to reduce the amount of resources used. 2) AUSTERITY : Working on the demand side, if the growth is unsustainable , the demand will stop accordingly. Austerity is an option related to modifying the demand side of products, f or example, by prohibiting the use or purchase of some specific goods/services in order to save some resources. Remember: Austerity is about reducing the output. In the austerity, we are reducing the output . 3) CIRCULAR ECONOMY : This option is about using each resource for its useful life, which means making a product long lasting. A Circular Economy is based on the principles of designing out waste and pollution, keeping products and materials in use, and regenerating natural systems. It is about redesigning products, services, ecosystems and new business models around resources. Incorporate the principles of circular economy into design Th e result of these three options is the same, as a matter of fact, in all these cases sustainability is produced. This also means that circular economy is not the only way and, sometimes, it isn’t the best option; as a matter of fact, for some countries eff iciency and austerity are better than circular economy. ➔ Circular economy is one of the solutions, it doesn’t fit all industries. 3 It is , of course, possible to incorporate the principles of circular economy into the design of products. There is no single way to design a product or service that creates no waste and pollution or a business model that keeps products in use for years and years. That said, analyzing successful case studies of circular design in practice illuminates certain strategies that appear to be more regularly successful than others. The circular economy opport unity : 1) Preserve and enhance natural capital by controlling finite stocks and balancing renewable resource flows. 2) Optimize resource yields by circulating products, components, and materials at the highest utility at all times in both technical and biological cycles. 3) Foster system effectiveness by revealing and designing out negative externalities : A circular economy is able to manage negati ve externalities, such as land use, air, water and noise pollution, release of toxic substances, and climate change. 4) Substantial net material savings and reduced exposure to price volatility : The shift to a more circular economy implies using less virgin m aterial and more recycled inputs with a higher share of labor costs, reducing a company’s exposure to ever more volatile raw materials prices, increasing resilience. The threat of supply chains being disrupted by natural disasters or geopolitical imbalance s is lessened, too, because decentralized operators provide alternative materials sources 5) Increased innovation and job creation potential : This impact on employment is largely attributable to increased spending fueled by the lower prices expected across se ctors and to the labor -intensity of high quality recycling activities and higher skilled jobs in remanufacturing. Employment opportunities would not be limited to remanufacturing and growth within large corporations; jobs will be created across industrial sectors, through the development of local reverse logistics, within small and medium enterprises, through increased innovation and entrepreneurship, and a new service -based economy 6) Increased resilience in living systems and in the economy . Another aspect s that could explain the need of a circular economy may be also related to the overall current market trends; as a matter of fact, 54% of the world’s population lives in urban areas (the United Nations has estimated that by 2050 about 64% of the world’s population will live in urban areas) and: ➔ Cities account for more than 70% of global emissions of anthropogenic origin, and in them 75% of total natural resource consumption, 50% of global waste production and a greenhouse gas emission between 60 -80% ➔ Since the beginning of the 20th year, with a 4.5 -fold population growth, the consumption of natural resources has increased by as much as 12.5 times and could double in the coming decades 4 The overall economic rationale: As we have explained till now, circular economy can benefit not only companies in terms of savings but also customers, however, something more has to be said about the economic rationale, that is, the economic sense circula r economy brings (both to customers and companies) . We will present a study in order to explain the economic rationale behind circular economy: The picture 1 shows that The Ellen MacArthur Foundation, SUN, and McKinsey have identified that by adopting circular economy principles, Europe can take advantage of the impending technology revolution to create a net benefit of €1.8 trillion by 2030, or €0.9 trillion more than in the current linear development path . The circular economy could create tremendous opportunities for industrial renewal, regeneration, and innovation . On the left of the graph we can see the cost of resources used nowadays for sustaining the demand is sect ors such as food, mobility and built environment which are accounted for 7.2 trln € , composed of 1.8 trln € of core resources, 3.4 trln € of related and other cash -out costs (e.g. transportation cost) and 2.0 trln € of externalities. In the middle of the graph we can see the improvements Europe would have in a linear scenario (that is, the use of a linear economy) in 2030 ; the main progresses would be done in terms of increase in efficiency, such as a better use of resource due to efficiency enhancing. In this type of scenario we would expect a rebound effect of 0.2 trln €*. Overall, the costs for sustaining the demand in a linear scenario would be of 6.3 trln €. What happens with a circular scenario? We would sustain the same level of demand with a lower consumption of resources. There is a reduction in cost of resources but also in the ot her costs such as transportation , labo r, etc . If we add this additional value (which will bring a rebound as well ) we will have to incur to a cost of 5.4 trln €. Customers would benefit in terms to a lower cost of resources and because of a lower impact on the e nvironmen t. *Rebound effect: Effect rebounded in the demand due to the perceived more availability of the resource, “a resource is cheaper so we use it more ”. 1 The picture does not consider a change in demand over the years 5 Let’s analyze the economic rational by looking at another example, that is, the mobile phone industry: Apple sells for 750 $ an iPhone X (remember that the price the customer pays is not on the phone itself but on the performance the product can guarantee). If we look at the bill of materials, the value of the material inside the iPhone X is 225 dollars. 225/750= 30% of the price of the product is related to the bill of material, so the value of resources inside the phone is the 30% of the purchase price. What ha ppens after the first sales of the phone? The price drops and after 2 -3 years the value of the phone goes to 0. What if we use circular economy? If I am able to recover (e.g. ) 30% of the materials and use them again for the next phone , I would bring the 9% of the value of the phone to some other products. And w hat happens to customers if the firm uses old materials for new phones? The price stays the same because the customers still look for the performance of the product ; that is, the price would not be affected by the materials inside . → If we save the money collecting existing material, we can sustain the production of a new phone with materials coming from old phones. As a general rule, in all cases in which the BOM counts, it becomes relevant the use of circular economy. What about the disassembly of resources? The disassembly of resources should be where the demand is (since it is less costly in terms of logistics) , we then store the resources that can be sent to assembly line of the new products , so that we are able to optimize the value and save raw materials. Another rule in terms of strategic decision is that the value of the product is preserved when it stays close to the demand, furthermore, i f we control the assembly process we also control the flow . Another example that can help is the case of IKEA: Every year IKEA has a new catalog of products which is composed mainly of new furniture made for the 70% by the already existing components from the previous year and 30% by new components . This strategy has t wo main outcome s: a) The customer perceives the product as a cheap one, since the cost of raw materials is low IKEA can charge a low price. b) IKEA can save on the manufacturing side ; when the product is thrown away IKEA already has the 70% of the product derived by the customer , the old resources not reusable can be recycled . In this way we will save resources that make the 70% of the BOM of pro ducts. The process requires quality check s and restoring activities which might take some time, however, we could think of placing the sorting activity next to stores such that the remanufacturing activity can be easily and quickly done afterwards. ➔ The idea of IKEA explains the economic rationale , since the customer is paying for a furniture easy to find and to use and the company saves money and time. The goods’ value is pres erved through the re -manufacturing , re -using or re -cycling activity , remember that in a linear model the value of a product decreases more than proportionally due to the AGE (not USAGE) of the product , which is a problem that we don’t encounter if circular economy is used. 6 Why the need of a circular economy? - The current system is no longer working for businesses, people or the environment. - We take resources from the ground to make products, which we use, and, when we no longer want them, throw them away. Take -Make -Waste. We call this a Linear Economy. - A linear economy model followed to date, with high resource and material usage (and high waste production) from processing and consumption activities is no longer sustainable. RESOURCE + MATERIAL < DEMAND Why is circular economy sustainable ? The reliance of many current business models on a ready sup ply of cheap nonrenewable resources exposes businesses and economies to: • Price risks → Higher resource price volatility can dampen economic growth by increasing uncertainty, discouraging businesses from investing and increasing the cost of hedging against resource -related risks . • Supply risks → Many areas of the world possess few natural deposits of nonrenewable resources of their own and so must rely on imports and environmental degradation. As well as risks to the supply of raw materials themselves, the risk to supply security and safety associated with long, elaborately optimized global supply chains appears to be increasing . • Natural systems degradation → A fundamental challenge to long -term global wealth creation is the set of negati ve environmental consequences related to the linear model (such as, climate change, loss of biodiversity and natural capital, land degradation, ocean pollution) . 7 Sustainable development and circular economy: Global trends: In terms of global trends it is important to state the raise in the population over the years ; indeed, over the last 20 years it has almost doubled. This aspect is changing the society in which we are living in in terms of domestic material consumption , as a matter of fact, in the last 50 years we have increased the consumption of domestic resources of 350% . The forecasts on the future expect an increase in the urbanization and population (population will be 9 bln people) all over the world. In terms of economic development, t here will also be an increase in the GDP in all the developed, developing and underdevelo ped countries , however, i f on one side we will have an increase in population, on the other side we will have an economic growth which does not really match. As we have stated above, domestic consumption has raised during the decades, however, their resource is limited; this aspe cts refers to an important issue, that is, the increase in the population won’t be directly proportional to the increase of natural resources in the world such that we will always encounter a consumption of domestic resources highly increasing due to incre ase in the population which is not possible to be sustained in terms of availability of resources. Studies show that we are using more resources than we have, since the need is always increasing but resources are step by step decreasing: The global footprint network has developed an indicator called THE EARTH OVERSHOOT DAY, which make s us understand the date of each specific year in which we had spen t all the resources that were a vailable for 12 months (this date for Italy occurred in the middle of May , which means that for 2/3 of the year we are living on credits of the next generations ). This is called the earth overshoot day . In relation to what we said just now the issue of CO2 (which is the main contributor for GHG emissions) emissions is relevant , since it has astonishingly increased due – mainly – to industrial energies and transportation. Th ese global trends are an import ant source that induce to re -think the way in which we are living, such that we would be able to increase the economic growth for each country without consuming all the resources the environment has . The main future trends in this matter would be that of i ncreasing production efficiency and creating ways for reducing resource consumption such as circular economy does. → The world needs to decouple natural resource use and environmental impacts from economic growth. Today, humanity uses the equivalent of 1.7 Earths to provide the resources that we use and absorb our waste . We use more ecological resources and services than nature can regenerate through overfishing, overharvesting forests, and emitting more carbon diox ide into the atmosphere than forests can sequester. 8 The concept of sustainability: Since the shift to a more sustainable world looks like kind of mandatory, we will now introduce the concept of “sustainability” and its connection to what we have said so far. Historically, the concept of sustainability was introduced in the economic and social sphere by some economists during the first industrial revolution, where there was talk of economic growth and sustainable population growth. Starting from this definition, centered above all on the environment and the use of resources, the term has undergone a gradual evolution, until it assumed a broader meaning that included the environment and related it either to the economy and the society. The concept of sustainability through the years: The birth and diffusion of the concept of sustainability has seen several historical phases, among which: ➔ 1972 – ROMA CLUB: Development's Limits Report (known as" Meadows Report "): for the first time it is rectified that the availability of natural resources is limited - especially oil - and th e limit of the planet's ability to absorb pollution places limits on the economic growth. It was in 1972 that for the first time we understood the limitation of natural resources. ➔ 198 7 – BRUNDTLAND COMMISSION: The underlying concept of sustainability is defined: sustainable development; is defined as being pursued only if the size of the population and growth is in harmony with the productive potential of the ecosystem. In this year the community started understand that there is a strong link and inte rconnection between the economic, social and environmental spheres. → It was during this commission that the first concept of sustainability was introduced. ➔ 1992 – ONU RIO CONFERENCE: The United Nations Framework Convention on Climate Change entered into force, which included the first obligations for governments regarding the reduction of greenhouse gases. The concept of sustainability has been widen in the years, but it was in the conference of 1992 that it was introduced a proper definitio n of sustainability which includes all the actions which humanity does to prevent the waste of natural resources. ➔ 1997 – KYOTO PROTOCOL: Definition of the Kyoto Protocol , which set clear emissions targets for the period 2008 -2012; in particular, a 5.2% r eduction in 1990 GHG emission levels was established to be achieved between 2008 and 2012. We start seeing the first agreements against climate change. ➔ 2009: Starting from 2009 , a world conference is planned every year with the aim of checking the environmental, social and economic progress achieved against the objectives set and rediscussing others . In 2009 we see the first conference in order to check and redefine aspects for climate change, social and envir onmental and economical issues. The term sustainability refers to the “processes and actions through which humanity prevents the exhausti on of natural resources, with the aim of maintaining an ecological balance that does not reduce the quality of life of today's and future societies” 9 Therefore, with the intention of proposing a broader approach, which considered the social, economic and environmental aspects of sustainability as a single whole: the concept of sustainable development was introduced for the first time in the Brundtland Report of the World Commission for Environment and Development (1987). The definition contains two key aspects: 1) The c oncept of need : what we need today cannot take what is needed tomorrow and, in particular, the essential needs of the world's poor, to which overriding priority should be given; 2) The i dea of limitations : We are running out of resources, so that we need to rethink the way we consume in order to meet present and future needs without an overuse of resources. To achieve sustainable development it is necessary that: a) The level of withdrawal of non -renewable resources do not exceed their regenerative capacity and the emission of waste (solid, liquid and gaseous) due to the metabolism of social systems does not exceed the assimilation capacity of natural systems . In other words, we n eed to be able to balance a use of resources with their regeneration since an over -use could not be sustained (we cannot take more resources than nature can restore). b) Technological progress for the production of goods and services has to be directed toward s increasing efficiency rather than increasing the flow of energy and raw materials. Technological progress has to allow us to achieve a level of efficiency that can lower the amount of resources we need . c) Human intervention is limited within the carrying capacity of natural systems while preserving their vitality and resilience. Only in 1994 the interconnection between aspects such as environmental impact, economic and social development was understood. As a matter of fact, it is important to underlying this connection: The 3 -pillar scheme of sustainability - economic, environm ental and social - is universally known as the « Triple Bottom Line ». The intersection of the areas associated with the 3 pillars of sustainability identifies the area in which the concept of sustainable development is defined. Three further areas can be id entified: 1. socio -environmental: which includes issues such as environmental justice, management of environmental resources etc. 2. socio -economic: which includes issues such as labor rights, business ethics etc. 3. economic -environmental: which includes issues such as energy efficiency, management of incentives etc. «Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs» 10 In September 2015, more than 150 international leaders from 193 states met at the United Nations to contribute to global development, promote human well -being and protect the environment through a new strategy, the 2030 Agenda named “Transforming our world . The 2030 Agenda for Sustainable Development ”. The essential elements of which are the 17 Sustainable Development Goals (SDGs) and 169 targets , which aim to end poverty, combat inequality, achieve social and economic development, tackling climate change a nd building peaceful societies by the year 2030. 304 i ndicators were also created in order to measure the sustainable development. Sustainable development and Circular Economy However, an important aspect that has to be highlighted is that a circular approach is always sustainable, but a sustainable approach is not always circular. → A system that is sustainable is circular, on the other hand a system that is circular is not nec essarily sustainable. Circular Economy is viewed as an operationalization for businesses to implement the much -discussed concept of sustainable development . A circular system is not necessarily sustainable. Often, in fact, it does not put the three pillar s of sustainable development on the same level, favoring the economic and environmental ones to the detriment of the social one. Differences between sustainable development and circular economy: We have to state the fact that circular economy is, as the name suggests, economy , which means that the activities put in place need to give us an economic return in terms of efficiency and reduction of waste; this activity is not always done by taking into consideration the social sphere, while sustainable de velopment does. 11 Similarities between sustainable development and circular economy: In order to sum up the key aspects in terms of differences and simil arities: Sustainable development and Circular Economy – SDGs and CE : The Circular Economy acts as an implementation mechanism for several United Nations Sustainable Development Goals . As reported by the EMF , the Circular Economy contributes to at least 12 of the 17 SDGs directly or indirectly . This paradigm is in fact essen tial for our ability to meet the objectives linked to responsible production and consumption (SDG 12) and to the fight against climate change (SDG 13). It is also fundamental in achieving other targets, mainly related to decent work and economic growth (SD G 8), businesses, innovation and infrastructure (SDG 9), sustainable cities and communities (SDG 11), life underwater (SDG 14) and life on earth (SDG 15). In particular, the EMF refers to a study aimed at establishing how the Circular Economy can be releva nt to the achievement of the SDGs. This study shows that of the 169 targets relating to the 17 Sustainable Development objectives, the Circular Economy contributes directly to the achievement of 21 targets and indirectly to the achievement of 28 . Finally, it is interesting to underline how the achievement of 52 of the Sustainable Development targets can have a positive effect on the adoption of Circular Economy practices. In terms of social SDGs, circular economy could just contribute to 1 out of 5 of them, so that there is no particular relationship; different speech instead for the economic and environmental dimensions which respectively have a score of 4 out of 5 and 7 out of 7 SDGs influenced by the adoption of circular practices. These numbers underline how the main benefits deriving from a circular approach are for the economic and environmental spheres, while the social sphere benefits in a minor and sometimes implicit way . 12 SOCIAL SDGs → Sustainable cities and communities (11) ECONOMIC SDG s → No poverty (1), Decent work and economic growth (8), Industry, innovation and infrastructure (9), Partnerships for the goals (17) ENVIRONMENTAL SDGs → Zero hunger (2), clean water and sanitation (6), affordable and clean energy (7), responsible consumption and production (12), climate action (13), life below water (14), life on land (15) ESG criteria : Through the increase for the interest in social and environmental impacts, ESG (environmental, social, governance) criteria were created. The ESG criteria are non -financial criteria which measure the three aspects related to environment, society and govern ance of a specific company. Over the years they became more and more important, as a point in which now they are the first criteria to be taken into consideration when referring to stakeholders. As a matter of fact, stakeholders do not care only about ec onomic information through balance sheet and annual reports, they seek other aspects pursued by the company for the environment it is living in. In terms of environmental criteria , we refer to the a ttention to climate change and therefore to carbon dioxid e emissions, efficiency in the use of natural resources and attention to water and air pollution and the waste of natural resources and deforestation. In terms of social criteria , we refer to q ualitative policies for the working environment, labor relation s, control of the supply chain, focus on equality and inclusion in the treatment of people, attention to safety in the workplace and respect for human rights . In terms of governance aspects , we refer to e thics and transparency in corporate governance, presence of independent directors, diversity policies in the composition of the Board of Directors, remuneration of top management linked to sustainability objectives . ESGs criteria were introduced for the first in the ‘ 80s , however, ESGs cri teria see their first introduction in the ‘90s, when the Global Reporting Initiative (GRI) was born , which is a guide to help companies measure and communicate their social responsibility activities, through the sustainability report or balance sheet based on standard criteria. In 2015, a second crucial milestone was the 2030 Agenda and the establishment of the UN Sustainable Development Goals. In the same year, the first global, legally binding climate agreements were reached at the Paris Climate Conferenc e. On the basis of these agreements, non -financial reporting obligations have been defined for companies. Particularly relevant in this regard at European level is EU Directive 2014/95. However, more than four years after the implementation of the NFRD, there is a lack of a standard methodology adopted by companies to report o n non -financial performance to their stakeholders. Another important aspect is the lack of attention paid to SMEs (small and medium enterprises) , as European provisions tend to focus on listed and/or large companies. 13 Of course, circular economy can be used for some of the ESGs criteria : As we can see, t here is a big overlap between environmental sphere of circular economy and ESG criteria. For what concerns the social, we can find less aspects that can be tackled by CE; while as for the governance there is just one phase that can see the use of CE. There are t wo big difference s between CE and ESGs criteria : The latter are not taking into consideration the re -use and re -generation of products in order to preserve their value and, furthermore, they don’t care about the economic ben efit . ENVIRONMENTAL → Climate change • Greenhouse gas emissions • Environmental footprint of the product • Funding for the environmental impact • vulnerability to climate change → Natural resources • Water stress • Biodiversity and land use • Procurement of raw materials → Pollution and waste • Toxic emissions and waste • Packaging materials and waste • Electric waste → Environmental opportunities • Opportunities in clean technologies • Opportunities in green building • Opportunities in renewable energy SOCIAL → Human capital • Labor management • :ealth & Safety • :uman capital development • Supply chain working standards → Product responsibility • Product safety and quality • Chemical safety • Security of financial products • Data privacy and security • Responsible investments → Stakeholder opposition • Relation with the community • Controversial sourcing → Social opportunities • Access to communication • Access to finance • Opportunities for nutrition and health • Access to health care GOVERNANCE → Business management • :eterogeneity of the BoD • Remuneration of top management • Property • accounting → Business Behavior • Business ethics • Anti -competitive practices • Corruption • Financial system instability • Tax transparency 14 The butterfly model and the resolve model: THE BUTTERFLY MODEL: In order to define the butterfly model, it is best to determine an important distinction of the types of materials tackled and entering inside the cycle of the model; as a matter of fact, inside every product we might find mainly two types of materials: The butterfly model is then composed by two main cycles, which distinguish themselves for being biological on one side and technical on the other: Biological materials: - Organic materials inside the product - Biological materials are currently used for the packaging - Their process “make -consume -enrich”: =f we use a bio base packaging we are consuming natural resources for making it in t he package form but these materials are coming back to the soil and come back as form of nutrient for the soil - In the butterfly model a quick recovery (destruction) of bio products is best Technical materials: - Product components that include material s that are not organic (plastic, glass, ..) - Technical materials are making the biggest part of the most product components - Their process consists of “make -use -return” - In the butterfly model a long technical cycle (that is, maintain the product alive as long as possible) i s best 15 There are potentially some exchanges between the two cycles, we can imagine to use bio logical materials i nstead of tech nological materials or we can do the opposite (for example, w e can also use tech nological materials for packaging purposes with the idea that the packaging will stay longer than its only use ). The main objective of the butterfly model is to r ank through circles the different “circular” activities that are done in terms of technical and biological perspective ; the ranking is expressed in such a way that the bigger circle s are expressing the longer process that products have to make, while the smaller circles are expressing the smaller process the products have to make ; such that the sm aller the circles are the more “circular” they are . TECHNICAL CYCLE : 1. Maintain/prolong : The first point for a circular economy approach is to maintain a product for long in order to extend the its life once they are in the users hands. 2. Reuse/redistribute/share: In this case we decide to prolong the technical lifecycle of the product by resuing, redistributing or resharing it. Difference between first and second cycle : in the first one I am just involving the user, in the redistribution I have to go a step behind the chain and look for someone taking care of redistributing it, in this case I need an interface between the product and the user given by a service provider. 3. Refurnish/remanufacturing: Reusing the component into a productive process, in this case we need the product manufacturer involved into the chain (we include then another player) . 4. Recy cling: We are recovering the materials in their original form so I restart the journey from the part s manufacturer . Every cycle adds some activities, in the maintenance we are at the user site . On the other side, if we need to share the product we need a e.g. a platform that can connect us to others. I f we remanufactur e the product we need other sources such as the parts manufacturer . In this sense, a dding activities means that we are add ing complexity and cost , such that the value of the sources is higher the inner is the cycle , the more we stay in the inner cycle, the best it is for a CE business model. BIOLOGICAL CYCL E: In this case, the cycle is a regenerating cycle and the options available are the following : 1. Cascades: The product stays with the consumer , for example, the package itself could be immediately used as a biological component by the consumer ; we can say that this option is similar to the one of “maintenance, reuse and reduce” of the technological component . The biological product is maintained and used more times for different scopes. Of course, the best would be the use of the product as a compostable by the customer (remember: the faster the product is given back to soil, the better it is). 2. Bio-chemical f eed stock : The product is recollected and regenerated as a bio -chemical feedstock , for example, we use it for creating other packaging ; this second cycle is used in order to create another product with the bio -chemical components of the product . This second option is the one next to the “product manufacturer” in the butterfly model. 3. The third option is to turn this component into energy , that is, bio/gas : We are making energy out of the organic component s inside the product ; this activity is also called anaerobic digestio n, which is a sequence of processes which is used to manage waste or to produce fuels. Recycling products is part of a circular economy busines s model, however, recycling is not the only solution (and not even the best solution) since recycling also determines a waste of material s. The same for biogas , since what we do is the only activity of collecting bio products and transform them into gas. Something to remember about the two cycles is that t he quicke r the nutrients go back to the soil, the best it is (bio cycle) while , on the other side, the long er tech products stay alive, th e better it is. 16 The butterfly model can be used in order to position ourselves in the industry and to take directions . The main objective of the model is to help the person understand which can be the inner circles that can be done in order to avoid longer circles. → The outcome, then, of the butterfly model is to create products that last, so that their resources can last longer. In this sense, we can say that the idea is that of extending the life of the product in order to remain in use as long as possible. This may involve designing products to be both physically and emotionally durab le through innovative approache s that allow the product to adapt to the user’s changing needs as time passes. Products th at resist damage and wear, or retain their emotional appeal are able to be used and reused multiple times, potentially by many different users . Connection with different circles: One way of projecting or using the butterfly model is that of creating connections between different circles (industries) in an input output logic, in order to increase value creation. We can have two types of cycling activities: ➔ UPCYCLING : An output becomes and input in a higher valued industry ; in this case the final loop is more valuable. ➔ DOWNCYCLING : An output becomes an input in a lower valued industry . Case of coffee cups of Nespresso : We analyze the case of Nespresso since the company is recycling both its technological and biological components. We will analyze it through the butterfly model. Coffee cups are made in aluminum and coffee is inside : - Biological product: coffee - Technological product: aluminum Usually coffee c ups become waste , however, Nespresso decided to change the components’ value and transform them into something else : - BUTTERFLY MODEL OF THE COFFEE COMPONENT: In this case coffee is recollected and regenerated. The process starts by washing the finished c ups, the coffee is taken and used as a compost , as a biological feedstock . - BUTTERFLY MODEL OF THE ALUMINIUM COMPONENT: The technological component is then sent to the recycling process. Considerations: Neither coffee nor aluminum is used back in the production process of Nespresso, that is, ev ery time we buy Nespresso cup they are usi ng original material , such that their products are connected to other butterflies: aluminum producer and compost producer. Q: Where is the only prob lem? A: The recollection of cup by the customers. As a matter of fact, we need to connect to the customers in order to have the coffee cups back . The way in which the company is solving this problem is through a monthly subscription for the cups. Q: Whe re is the issue? A: If we throw the cups away Nespresso cannot take it back. This is because by l aw, what we throw away directly becomes waste, which cannot be treated by everyone (just by waste collector ). For this reason they are fostering people to exchange old cups with new ones, such that the product is just a transaction. Q: What could Nespresso do to improve the butterfly model? A: The next step could be that of remanufacturing , so that the collected cups are washed and refilled by the Nespresso productive process ; this method would value more the product itself . Another option could be that of creating a cascade for the customer. 17 In the case of Nespresso strategy, the two activities are characterized by a downcycling approach , that is, coffee and aluminum enter in a n industry where their value is lower. Case of Freitag: Freitag is a producer o f bags by using the exhausted tarps from trucks. Freitag made this idea by collecting exhausted tarps from logistic hubs . Q: What kind of cycle is this? A: We are dealing with a technological product and we are in the phase of remanufacturing , we are not recycling since we are not reusing it back for the same purpose, but we remanufacture the tarp. In this case the connected circle is upcycling : we are taki ng a resource with a low value and by connecting it into another industry we make it more valuable. We can also design a platform where we support users swapping their products, the company is also a connection point between the users who want to exchang e their bags. The profit is in the platform, we make more and more people exchange products and at the same time we keep the product alive in the chain for a longer period. So we also make profit by doing the second hand market on our own and support the r euse and redistribution on the system. The next step is the remanufacturing of their own bags (this is what the company will actually do in the close future), Freitag buys the bags back and once collected they can imagine to remanufacture and have a new bag to be sold again, every time they move from the external to the inner loops they make more value. Case of toast: Toast is a beer made of exhausted bread . Q: But, where do they collect the bred? A: They collect bread from restaurant s, which are the ones who receive the beer with a discount; so there is a creation of a partnership between restaurants and Toast. This is another case of upcycling : We are taking a resource with 0 value (bread) and we make it as an ingredient. Differently from the case of Nespresso where the company creates compost, in this case Toast take s the bread and get a more valued product . Case of oracle: It is a company providing cloud service . In this case Oracle is providing a service through its own use of hardware and machines that can support the service given to the customer. In a linear model when the computer is kind of broken we buy a new one or eventually just bring it back to the sho p to be wasted or collected as an electronic material (recycling process). Q: What if we can reuse part of the components of the computer? Or we can remanufacture parts of the components? A: As a matter of fact, Oracle started introducing circular econom y with its own hardware , since the company started collecting the hardware of the customer for making the loop. Oracle takes back old hardware when the customer move s to the cloud , by dismantling it, part of it is sold and part of it used for the hardware’s company. → Partially Oracles reuses and remanufactures the component , while completely broken parts are going to be recycled. In conclusion, t he butterfly model is a good tool for positioning the company and find improvements for circular economy. The values are inside: the inner the circle the best it is. We can also connect butterfly models with other industries , as a matter of fact, we c ould co nnect an input or an output coming from other companies in order to potentially increase the product’s value. 18 RESOLVE MODEL: If the butterfly model defines the positioning and directions, the resolve model is a checklist of ingredients . The resolve model enables us to question ourselves and look if the activities we are implementing are the best activities we could do to the pro duct. → The butterfly gives us the direction, the resolve model gives us the check list so that we do not forget something. The resolve model is an acronym: 1. REGENERATE : We need to m ake sure we use renewable energy and renewed or recovered material . Renewable and renewed materials are not in the inner circle of the butterfly model, however, their use can maximize the impact of the model . 2. SHARE: Can we imagine a sharing model for our products or services? Is there room for sharing? Sharing is adding value by definition , si nce it increases the amount of demand supported for the same input . 3. OPTIMIZE : We need to increase the performance/efficiency of the model, by removing waste in production and the supply chain . 4. LOOP: This additional point is connect to the butterfly model , to remind us to connect components and prioritize inner cycles. 5. VIRTUALIZE: In order to increase value, we need to make some ancillary activities virtual. E.g.: W hen we rent a phone, the phone comes with the package and the user manual, the manual is a kind of waste of resources. Can I virtualize part of the ancillary components of the products or service? We could have one page for the manual in the phone . 6. EXCHANGE: Are we using the best production proce sses for our components? Suppose we cannot change it to renewables, can we still do something in order to exchange the materials? In this sense we need to keep up with the “trends”, by applying new technologies and choose new products and services. The resolve model is not a mandatory action as the butterfly model, it is a pointing out improvements ingredients. It has to be interpr eted as if we are doing additions to the already circular model we have created. For example, virtualizing something doesn’t mean being circular, but if we have a circular model and we add the virtualizing aspect, we increase the value of the circular mod el. The activities of the resolve model taken alone are just sustainable, they are not circular. 19 The key pillars of circular economy : Differences between the linear and the circular model: It is important to state the differences between the linear and the circular model. 1. In case we are dealing with circular economy, it is important to state that we are moving from a point of sale to a point of service . This aspect is related to the fact that the product, not only is a product itself, but it can become part of a wider sphere, in which it is used as a service through the activities done on it. → In this case the producer retain s the property of the resource , the use r has no economic advantage . This aspect claim s, however, a big issue, that is, the extended responsibility : In a linear model the producer is responsible till the selling (and eventually the warranty, which is not a responsibility on what the produc er does, but on the physical problems at the production). In a circular model the responsibility extends to the performance, to the value of the resource itself and to what the product does , since the ownership remains in the hand of the producer . The solution to this problem could be that of doing a counter -warranty: The producer makes a warranty on the customer, that is, if the cust omer treats the product with no respect, it has to pay a fine. This point has to be stressed since the shift of the product as a service also impact the users, which doesn’t have a direct responsibility on the product, but has the responsibility on behavi ng accordingly. → The only way to manage the behavior of the user is through the price , since it should reflect the risk. An example can be Renault ( which has a car sharing service), which establishes the price of the service according to how the person d rove the car. 2. In a linear model the benefit comes from economies of scales and the reduction on cost for the production of the good thanks to its standardization ; in a circular model standardization is circular , since it takes into consideration repair, reuse and recover ; in this case standardization is much more on the design than on the production , while in a linear model the attempt is exactly the opposite. → The design for circularity is a key point. 3. In a linear model co sts are externalized in order to reduce cost, while on a circular model the maintenance is done internally . It makes economic sense since it reduces time to failure, we are experts on the maintenance and we reduce risk. This is derived by the fact that the profit we make with a product as a service is much more than with a normal product that we sold, so that maintenance and repair are better if done internally. 4. In a linear model, the more we consume, the more we buy ; in a circular economy, the more we consume, the more we maintain the product. 5. Something important that has to be remembered is that circular economy is not always cheaper than a linear economy . In most of the cases products are coming at a more ex pensive price, since the price contains all the costs of the chain (from the producer to the consumer). Circular economy is not about making cheaper products to be used just ones, but exactly the OPPOSITE: Making b etter quality products that can be turned into services and that can last long. ➔ The ingredients of a circular economy business model are: PRODUCT AS A SERVICE - EXTENDED RESPONSIBILITY - DESIGN FOR CIRCULARITY 20 The CE Matrix and the classification of circular economy business models: The two dimensions of circular business models: We are going to discuss other types of frameworks in order to better understand the different models of CE . The framework we will analyze now is called the circular economy matrix , but before introduce it, we need to highlight the two dimensions mentioned here: First of all, we need to state an important consideration, that is, not all the companies are circular and the ones that do it are not performing it in the same way, this also means that not all of them have resolve ingredients . For this reason, w e need to better define the business models for CE, understanding the constraints the company faces in adopting circular economy. We need to distinguish the CE business models in 2 dimensions: 1) VALUE NETWORK : That is, the arrangement done in terms of supply chain; 2) CUSTOMER VALUE PROPOSITION AND INTERFACE : In this case the issue is in getting a better relationship with the customer and its difficult y, since it has to take into consideration the peculiarity of CE . If we look at the picture as if we were considering the business model canvas, we could say that t he customer value and proposition are placed on the right and the value creation , which is the value network , is place on the left. → It is important to state that a company has the possibility to be circular in the value network (it can arrange the supply chain according to CE) and still not use C E in customer value proposition; this works also on the opposite. For example, we could encounter some companies that work on the value proposition in terms of CE, but still don’t have full control of the value network. Circularity in the value network: In this case we have some c riteria for defining the degree of adoption of circular economy , which are low, medium or high . On the value network, the idea is that the starting point is energy efficiency (1) (emission, sustainability measures around the product or service of the company); in this way we assume a low level of circularity since efficiency is circularity. If we change the materials and the components into some recyclable products (2), then we are in the medium -low degree; in this case we are rethinking about and redesigning the BOM for the design of the product. If we do DFR (design for recycling), DFA (design for assembly) or DFRE (design for reuse) (3) we are trying to standardize d esign such as in the eas e to disassemble . In the third phase we a re adopting a life cycle assessment approach : we choose to design the product across its lifecycle (this states for product but also for services ). 21 If we also involve in the process the sup ply chain and make it circular (4), then we have the high est degree. In this last case w e make a product designed to be disassembled AND we also put in place a specific chain for disassembly (so that we take care that the product will really be disassembled by someone else) in order to make the supply chai n circular. In conclusion, t he degree of circularity starts from the efficiency and becomes highly circular if we implement circularity in the supply chain : EFFICIENCY → MATERIALS → DESIGN → SUPPLY CHAIN In the case of value network the company is taking care of the cost advantage, however, the customer is not aware of this. Circularity in the value proposition and interface: The customer value proposition is the other dimension of CE business model . It is characterized by two subsegments: PRICE AND PROMOTION . - In terms of price : In order to be circular we need to move from one single sale product to a sharing product. The basic model is com posed by the single sale (1), then the sale with maintenance service (2), then leasing and renting (3) and then the pay -per -use (4). In terms of promotion : T he price strategy itself is not enough to make the customer aware of the CE business model. Another perspective in which we need to move is the promotion , that is, the company’s use of CE explicitly as a matter of communication. In this case we start from the single inform ation to companies website (1), the communication in store (2), direct customer involvement (3) and, then, the communication of circularity in all the channels (4). It is important to say that in order to have a high value of circularity we also need to communicate the type of circularity we are using to the final customer . What is the criteria that should bring the company to move from one degree to the other? Cost reduction or economic sustainability. Only if the implementation of one level more of the degree makes value for the company, it makes sense to implement it. This means that the only driver that brings the company to an higher degree of circularity is economic sustain ability. 22 The circular economy matrix: If we assume that there are two main dimensions in the CE model, the value network and proposition, we can derive a matrix in which on the Y axes the “value network” is inserted and in the X axes the “value proposition” is drawn. The matrix gives us four results: 1) Full circular : The Full Circular adoption mode concerns firms that are circular both internally and externally . In particular, this kind of firms, not only manage the production system according to the principles of Circular Economy, but also the involvement of supplier s in its circular production system is relevant and effective. Moreover, these firms communicate clearly to customers the implementation of circular practices in their internal activities because this is considered of value. Compared to the other types of CE models, this is the max imum level of adoption, in which there is an integrated chain of activities and clear communication to the customer. An example of full circular is MUD jeans : it is a jeans producer where customers rent the jeans made up of re-furnished or re -treated existing jeans. The company is taking the whole chain (and offering also a repairing service). 2) Linear : Linear companies are behaving in the opposite way of companies adopting a full circular model. An example might be a company just dealing with efficiency in the value network, it is still based on sale s and they only communicate a bit . 3) Upstream: The Upstream Circular adoption mode concerns firms that adopt circular principles in their produc t design activities and eventually establish effective relationship with new suppliers, but that do not make visible to their final customers, neither on the price or in the marketing campaigns their adoption of Circular Economy. In this case, contrary to what happens before, the focus of Upstream Circular companies is on the cost structure and the advantage is tied to the cost efficiency . In this case companies have a degree of adoption of CE the value network (so they have redesigned their product and rearrange an eco -system of actors for the circularity of the chain) but still they are not doing much on the customer side . This means that the approach to the customer is the same that there is in a linear company, since we are not communicating it. Example s of upstream: Apple, Renault 4) Downstream: The Downstream Circular adoption mode concerns firms that adopt a price scheme or a marketing campaign that is based on the “use” and “re -use” of products, but where internal practices and design procedures for products do not seem to reflect the characteristics of a circular “adopter ”. =n this way, the firm is focusing on the market acceptance of the pay -per -use model whereas not relevant changes are made at the level of product design, internal activities or suppliers. In this case, the focus of Downstream Circular companies is on the revenue stream and the advantage is tied to the market penetration . 23 If we try to think about some examples, we can imagine that a low level of value network might happen when the company does not control the value network , so that the most circular solution is that of offering in most of the cases services that help the customer to increase the circularity of products. Examples : R econfiguring electroni c devices by the company Mazuma. In this case the company takes care the collection of products, change the parts not working and then makes the product still available on the market . Q: What kind of circularity is in place? A: They are extending the life of a product, they are extending the demand of a product that has already been used ; Q: However, what is missing to the company model? A: The company does not have the chance to act on the design, they are not choosing the material and the design of the product, they are just actors of the system extending the life of a product without having the control of the value network . Important things about the circular e