Explaining the differences
The shift from a linear to CE has gained attention for its impact on society, environment and economy.
Nevertheless, as presented above, this shift requires a series of changes and considerations on the macro-level (i.e. society and public sector). But also, on the micro-level, the shift depends on the ability of companies to introduce circularity in their BM. Thus, this section will, introduced the reader to the differences between traditional business models, business models for sustainability and circular business models.
Business models (BM) have been a popular concept both from an academic and empiric point of view. BMs represent the logic for a firm on how to make a profit (Osterwalder & Pigneur, 2010). The way BMs are designed
41 and intended have changed over time (Wirtz, 2011). Up to now there is no univocal approach upon BMs understanding and representation. Traditional approaches presume that focusing on any environmental issue would decrease a firms’ profit (Friedman, 1970; Xepapadeas & de Zeeuw, 1999). However, in recent years, academics have brought to attention that this relationship can actually be inverted (Lüdeke-Freund, 2010;
Schaltegger & Hasenmüller, 2005). Even though this had already been noticed, many of the papers and frameworks that have been reviewed only try to adapt the traditional BM approaches without taking into consideration the synergies and the complexity of todays’ competitive, political, and financial arena (Doval, 2016) which requires a more systemic approach.
Basically, BM can contribute to sustainability in two ways (Boons & Lüdeke Freund, 2013). First, a BM and the way its process is designed, produces certain products and services that can be characterized as sustainable technological or social innovations (Teece, 2010). Second, the BM itself may be subject to an innovation process leading to an overall more sustainable and competitive firm (Chesbrough 2010; Johnson 2010; Boons & Lüdeke-Freund, 2013). For this reason, articles who share an interest in serving new tools for BMs, linking environmental efforts and capturing value for stakeholders have been selected.
This section tries to organize and clarify two concepts (i.e. “sustainability” and “circularity”), that have been overlapped most of the time without understanding the differences.
Palzkill and Augenstein (2017) have addressed these differences in understanding sustainability and circularity by differentiating the sustainability concept along three levels.
Business sustainability 1.0 focuses on economic, environmental and social issues, close to the idea of innovative strategic syntheses. Furthermore, business sustainability 2.0 achieves more by comprehending both the concerns of shareholders and those of stakeholders. This way, it is possible to create value along the triple bottom line.
Moreover, business sustainability 3.0 looks for a truly sustainable business, changing the perspective from the dominating inside-out, to the more advanced outside-in. This shift in perspectives implies a change in the focus and goals of businesses. From solely looking to existing BMs, strategies or products to new ways of using resources, capabilities and operations to fix sustainability problems. Hence, firms that want to be sustainable, in this perspective, need to be proactive and share the responsibility for creating sustainable development. This means that new synergies can be created between heterogeneous types of stakeholders (Muff and Dyllick, p. 14, 2014).
For these reasons, new streams of literature are now introducing environmental issues throughout the CE concept directly in the BM design. Although the terms “circularity” and “sustainability” are often used interchangeably, it is worth observing that they differ (Geissdoerfer et al., 2017, 2018). None of the two concepts can be defined as better than the other. However, sustainability has proven to be such a wide concept, so flexible and adaptable to different contexts, that is too vague and difficult to be taken into consideration for private businesses (Middleton and O’Keefe, 1993 a,b). On the other hand, CE is a much more tangible way of organizing society and economy (Geissdoerfer et al., 2017, 2018). Hence, these new streams of literature are approaching BMs for sustainability under a more focused and complete perspective.
42 The relationship between sustainable and circular BMs is provided in Figure 10. In the scheme it is possible to understand the differences between traditional BMs, sustainable BMs and circular BMs. In fact, Figure 10 displays the different subcategories and generic strategies for sustainability and for CE. This means that a Circular business model has additional characteristics with respect to a Sustainable business model.
Figure 10: An explanation of the relationship between Sustainable and Circular Business Models. Adapted from “Sustainable business model innovation: A review” by Geissdoerfer, Vladimirova, & Evans. (2018). Sustainable business model
innovation: A review.Journal of Cleaner Production,198, 401-416.
In this thesis broader and more complex category of circular business models are taken into consideration. Circular business models do not only take into account the creation of sustainable value, long term-perspectives and pro-active stakeholder management, but also frame these perspectives in a systematic and holistic overview of resource flows.
Hopkinson et al. (2018) investigate how sustained CE practices are able to distribute profits and optimized productivity while considering the technological developments and market volatility. More specifically, the academics analyze the technical cycles of the Butterfly Diagram and show throughout a case study how a firm can initiate and scale up a sustainable and circular BM departing from a linear one. Despite the existence that biological cycles are recognized, the BM focuses exclusively on the technical BMs. Hence, the study by Hopkinson et al.
(2018) achieves an incomplete perspective on the matter, considering the scope of this paper.
Other scholars contribute to the literature in the field focusing on the transition from a linear to a circular BM.
Frishammar and Parida (2018) provide a step-by-step process to enable the circular transition without missing the environmental, social and financial objectives. Although the analysis of the research does not concentrate on the shift from linear to circular economy, Frishammar and Parida’s research have pointed out some of the barriers and challenges that researchers discuss in the analysis. These barriers and challenges include ,1) the understanding of political, economic, social, technological, legal and environmental factors and the understanding of the
43 stakeholder system in which the company operates, 2) the ability to define the scope of CE and how it relates to the specific industry, 3) the alignment of culture and incentives both internally and externally, and 4) the ability to shift to a CE in a way that is financially sustainable for the company. These barriers happen in the order they have been presented during the transformation. Finally, focusing on this transition allowed the researchers of this present work a better understanding of the practical differences between traditional linear BMs and circular BMs.
Frishammar and Parida (2018) define Circular BMs (CBM):
“As one in which a focal company, together with partner, uses innovation to create, capture, and deliver value to improve resource efficiency by extending the lifespan of products and parts, thereby realizing environmental,
social, and economic benefits” (Frishammar & Parida, p 2, 2018).
This definition restrains the concept of traditional BMs, both from the value-based (Johnson, 2010; Abdelkafi, 2012, p. 313) and the activity-based streams (Baden-Fuller & Morgan, 2010). The main differences that emerge by comparing the above definitions suggest that circular BMs allow firms to dispute or renovate value-related operations and reduce negative feedback loops (Frishammar & Parida, 2018). Although other definitions have been taken into consideration1, the researchers of this thesis will refer to the definition by Frishammar and Parida (2018) during the analysis.
In conclusion, this section has explicated the differences between traditional, sustainable and circular business models. On one hand the transition to a CE depends on the system thinking introduced in the previous section and the decisions of policy makers. However, on the other hand, these concepts can be applied in the micro level of companies only by rethinking traditional business models. Also, it is conveyed that the present research will refer and apply concepts that refer to the category of circular business models. Nevertheless, specific research papers on sustainability will be taken into consideration due to the confusion that prevails in the literature.
Although the analysis will not evaluate the case companies' BM in all their dimensions (e.g. cost structures), this section has the purpose of explaining what circular companies have to include within their BM in order to understand the environmental impact in their business practices. Thus, the literature on BM has been reviewed in order to connect circular economy to Product-Service Systems (PSS).
1Linder and Williander: “a business model in which the conceptual logic for value creation is based on utilizing the economic value retained in products after use in the production of new offerings”.
Mentink, 2014: “a circular business model is the rationale of how an organization creates, delivers and captures value with and within closed material loops”.
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