Capturing value in the circular economy
Green transition 4 January 2021 Patrick Moloney
The transition to a circular economy is perceived by many to be inevitable, due to the anticipated economic, environmental and social benefits. Yet, if so beneficial to society, why is the transition happening so slowly?
The rationale behind the circular economy is logical with multiple benefits to both our economy and society as a whole. The transition to a circular economy will aid in increasing productivity, profit and competitive advantage whilst simultaneously strengthening relationships across value chains – just to name a few examples. Furthermore, it is anticipated that the transition will play a crucial role in combating climate change, eg CO2 emissions emanating from food systems, mobility and the built environment in the EU could be cut by as much as 50%. The positive impacts upon the environment and human health and well-being are numerous and include, for example, an expected increase in air quality and a reduction in water contamination.
With such anticipated benefits across our economy and society, why then is the transition moving so slowly? A report published by Circle Economy states that the world is now only 8.6% circular and progress in the transition has actually stalled. This indicates that either the ability to transition or the business case to do so is not in place.
Understanding the concept of value, in both a linear and a circular economy, is central to enabling the circular transition. But is the concept of value in a circular economy truly understood and more importantly are the opportunities for capturing value understood?
What do we mean by value?
In conventional economic theory, value is a concept that links customer and a company through a chain of activity leading to profit maximisation. A business proposes a product or a service to a consumer that creates value for both sides. For the business, value can be taken to mean profit. For the customer the product satisfies a need or want. In our modern society value is expected to be quickly received and oftentimes short-lived.
Value in our linear economy
Value as a concept in our linear economy is, more often than not, transaction driven by price which plays a central role in that transaction. Furthermore, due to the emphasis placed upon lowering costs in order to lower prices, little effort is placed upon the value that a particular product may have at the “end of life” or the recirculating associated value.
The concept of value in our linear economy is also very much driven by competition between organisations, manufactures, retailers etc. which invariably results in an emphasis upon low cost transactions. Again, this re-emphasises value being short-lived which is further epitomised by the inability to keep value circulating because of e.g. no systematic end-of-life recovery. The consequences of linear value and related competition can be summarised as:
The value shift
The current linear economy is leaking value throughout the value chain. Indeed, one could argue that it is haemorrhaging value rather than leaking. Plugging value leakage and moving to value creation and subsequent value capture is central to the transition to the circular economy.
Leakage of economic value of inputs into the production of a particular product or service occurs across all stages of a supply chain or business process. For every product that is on our desk or in our homes made of a particular material, a percentage of that material has been lost in the production process. And it is not just the material components but also other resources, such as water and energy, the inefficient use of which can contribute to value leakage. Leakage can also occur on the sale of a particular product with the assumption that the product will be a “single use” item. For example, it is estimated that in excess of 400 billion USD of value related to the disposal of plastic is lost annually.
Value creation is the essence of a business, for creating and delivering value in an efficient way will ultimately generate profit after cost. Value can be created in numerous ways, the main ones summarised herein:
Value capture is the key to unlocking the true value of a circular economy. Value can be created but can remain uncaptured for a variety of reasons. It is the ability to capture value that is the key catalyst to the transition to a circular economy. There are many options for capturing value including:
An example: office furniture
Let us walk through the process of capturing value with the office furniture industry as a case. The office furniture industry is expected be worth 96 billion USD by 2024 yet current statistics highlight that approximately 85% of office furniture ends up in the municipal waste stream in some shape or form. Yet by placing an emphasis upon value leakage, creation and capture the industry has greater potential than most to become truly circular. Summarised below are the key concepts applied to the furniture industry.
This example illustrates the step-by-step approach an industry such as office furniture can take to capture the value of a circular economy. However, it is important to note that no step on its own brings added value to either the furniture company or the customer. Designing for longevity, without the correct business model in place, would result in the furniture company actually loosing value.
All stages need to be followed, thus re-emphasising the importance of strengthening relationships between manufacturer and customer to capture value. The furniture company is incentivized to design for longevity, durability and maintenance as the company maintains ownership of the product while the customer is provided with a product that comes with an enhanced circular value, reduced environmental and carbon footprint and accompanied by a repair and replacement service.
Only with value being created and captured can manufacturers, businesses and customers truly transition to a circular economy. The principles outlined here and their application to the office furniture industry can be replicated throughout our economy. At Ramboll, we place value capture at the centre of our approach to the circular economy transition, an approach that incorporates these principles to ensure that the transition is indeed sustainable and captures real value for our clients.
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