Why aren't North American Companies Jumping on the Circular Economy Bandwagon?

The concept of the circular economy has taken off in Europe, but seems to be having more difficulty being embraced by North American businesses. Its slow uptake is surprising given the projected benefits from this type of business model.

What is the Circular Economy?

We have seen the concept of the Circular Economy described as "recycling 2.0" but this is a simplified definition of what it really encompasses. In fact, recycling -- as in, turning old products such as plastic water bottles into carpet -- would be the one of the least preferred options of the circular economy because it creates a demand for plastic bottles.  The most concise description of what the circular economy is can be found in an article by the Ellen McArthur Foundation:

A circular model is restorative and regenerative by design, and aims to keep products, components and materials at their highest utility and value at all times. [source].

The Ellen MacArthur Foundation, the European Union and the US Chamber of Commerce are three institutions that consistently provide studies declaring that adopting a circular economy business model will increase business profits and create more jobs. The added side benefits include lowering greenhouse gases, reducing overall pollution, and generally relieving pressure on our natural resources. In fact,  as noted by the US Chamber of Commerce Foundation,

A shift toward the circular economy could generate, by 2025, an estimated $1 trillion annually in economic value, create more than 100,000 new jobs, and prevent 100 million tons of waste within the next five years, while restoring the natural capital and ecosystem services that are the foundation of healthy societies and economies globally....

Despite all of the predicted benefits of the model, the reception of the idea has been lukewarm in North America. Although one reason could be North America's lag in environmental and waste management regulations versus Europe's, we believe there is another important reason that uptake has been slow.

In the current linear economic model, known as make-take-use-dispose, companies record success when there is a sale of a good. Their responsibility for their product ends once the warranty expires. The more sales of goods there are, the higher the revenue. A circular model implies that there would be fewer sales of hard goods, and what would companies do to compensate for fewer sales? Shareholders would be furious, employees would have to be laid off, company values would decrease. A circular system doesn't make sense!

That's where the circular model tends to fall off the rails for most people. Fewer sales equals lower revenues and less profit. But that logic doesn't correspond to circular thinking, which focuses instead on selling a service, not a product. A few businesses, have transitioned to, or have begun the transition to, a circular model and are seeing the benefits of doing so. Xerox sells the service of photocopying and their copy machines are the vehicle used to provide that service. They have been practicing a version of circular thinking since the 1990's and it has been successful. Interface Flooring has made a commitment to become carbon neutral by 2020. It has leased its carpet tile providing care and maintenance as part of the contract. Philip's has begun to sell lighting as a service to commercial spaces. The architect will determine how much lighting is needed for a completed space, and Philip's takes care of designing the right system based on the requirements and takes care of maintenance and service during the life of the lease.

The advantages of the service model

As these businesses move away from selling objects to services they have reaped several rewards in doing so.  Companies benefit by

·        gaining a better understanding of how their products are being used post-sale. They interact more with the customer and have a better idea of what the customer likes (or not) about their products;

·        targeting "upselling" for the next lease, or if the customer decides not to lease a new product from the company, they can have a deeper understanding as to why.

·        keeping track of service throughout the product's life, especially in later years, giving companies better insights into product operation.

·        refurbishing and releasing products at end of lease earning more money off of one product. It therefore becomes in their best interest to design products for longer durability and easier refurbishment.

Why isn't the system being embraced?

Switching from a one-time sale to a service model is a significant undertaking and something that can't be achieved overnight. It needs to be phased in to help employees, supply chain companies, service people and the sales force adjust to the new model. Pilot projects can be launched to test new ideas and new models. Ongoing communication is key as is constant monitoring and evaluation of programs. Where leasing might work for one product, it might not be the right model for another.

As the model progresses there are trickle down effects such as redesigning products for easy disassembly and refurbishing, using materials that are more recyclable and finding substitutes for harmful products.

We have the technology

An important aspect to keep in mind is that switching to a circular model doesn't need to wait for more technology advancement for it to be implemented. Transitioning from one-time selling to a service model is achievable now - it only requires forward thinking and commitment to making it happen at the highest levels of the organization.