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Should I invest in a circular business?

The climate crisis put the focus on the need to fundamentally change our way of life – becoming more resource efficient in using renewable raw materials and recycling products. Transitioning from traditional sales to a circular business model is a challenge, and an absolutely crucial success factor is an in-depth understanding of customers.

Concepts such as recycling, recycled materials and sustainability have been with us for decades. But with the substantial challenges of the climate crisis, the concepts have become increasingly important – we must find ways to live in our world in a much more conservation-minded manner with sharply reduced climate footprints, and we must be better at managing raw materials by using renewable materials, reusing more of what we produce and managing our waste.

When adopting these concepts in an enterprise, the key often lies in a strategy that is based more on circularity. While the traditional linear economy is based on maximising production, assuming an infinite supply of raw materials and an equally limitless opportunity for the globe to deal with all the generated waste, the circular economy is in many ways the opposite.

Raises questions and entails challenges

But taking the step towards a circular business model in whole or in part raises many questions and entails several challenges. Because it's not just about managing resources and being renewable – companies also need to maintain profitability and know that customers are willing to pay for what they offer.

– “When it comes to the uncertainty about the willingness to pay, we see a major challenge,” says Agnieszka Hunka, senior researcher at RISE. “If customers were to embrace a product or service; how much could they imagine paying? Will customers perceive the circular product as lower quality, and could a circular product make use of the company's existing product line? These are important questions to consider in a circular transition.”

Turn the process upside down

With broad knowledge that spans widely different industries and with several completed research projects, RISE helps companies find their way towards circular business models. Companies often need to fundamentally change their mindset – not just make a chair, for example, sell it and forget about it.

– “You have to turn the whole process upside down,” Agnieszka Hunka explains. “A lot is about looking at their assortment and trying to identify how much could be reused or sold in another way.”

Reconsidering both the business model and how the company's products are manufactured can be complex. Here, both opportunities and challenges can arise. This can be, for example, offering services that extend the life of a company's products, or a return program to take back products that are no longer used. But it can subsequently bring challenges; for example, introducing a return program requires looking at logistics.”

It’s important to consider circularity while still at the design stage

Long-term perspective requires keeping track of the regulations

If you want to take a more long-term approach with your products, you also need to relate to the current regulations, something that can easily becomes a balancing act. Agnieszka Hunka gives an example of this with a project in which RISE is trying to find the middle ground between the goal of becoming circular and the fact that the rules regarding chemicals are constantly changing and substances are being banned or phased out.

– “If you want to work long-term with circular products, there is naturally a major risk of encapsulating these substances in your circular cycles,” says Agnieszka Hunka.

Knowledge and research guide and predict

RISE's first step in a collaboration is always to discuss which product or service a company offers at present. Or what it would want to offer. As many of the products or services are often not yet on the market, RISE's many years of expertise in circular business models can help business leaders to take action based on the right grounds.

– “In those cases, you cannot rely on historical sales statistics from an already existing product,” says Agnieszka Hunka. “Our knowledge and research help companies predict how well their idea would sell and work in practice.”

Among other things, RISE helps companies define which important properties the products need to have. Furthermore, an analysis is made to determine an optimal price and to determine whether the product could work alongside what the competitors may already have on the market.

It is often a matter of taking an in-depth look at customers' behaviour and examining which details are crucial. For example, which properties customers are willing to compromise on for a potentially lower price and which properties would they never compromise on – regardless of price. The results can be completely different from what might have been expected.

– “In a previous project, for example, we looked at how willing people are to pay for a used mobile phone – and we were surprised,” says Agnieszka Hunka. “It turned out that people actually don’t care what was inside the phone, as long as it looks new on the outside and has a new battery. Whether a computer chip was recycled didn’t matter to them.”

Less sensitive supply chains

This sheds light on another advantage of a more circular business model, in addition to contributing to a more sustainable society. The corona pandemic has shown how fragile our supply chains are – something that could be reduced with a circular business model.

– “It’s probably become very obvious to everyone who, for example, has tried to buy a product with a computer chip during the pandemic. I'm not saying that circular economy is the obvious solution, but it would potentially be a way to make companies a little more independent.”

Here, however, Agnieszka Hunka points to another challenge. At present, it is difficult to reuse computer chips due to how they are integrated with the products.

– “Because of this, it’s important to consider circularity while still at the design stage.”

Another financial challenge with a transition is which investments the transition can entail, if, for example, you want to offer products as a service instead of selling them.

– “The company then retains the products and thereby the responsibility for them as well,” Agnieszka Hunka explains. “The company is even responsible for the initial investment in the products, which means that the investment is larger in relation to how much longer a company has to wait to get their money back. So more capital is needed from the beginning.”

Businesses are leading development

On the other hand, most people agree that a more circular economy is a prerequisite for creating a sustainable society. And often it is precisely the companies that are taking the lead as we move into the future.

– “My experience from companies and municipalities is that many often call for political direction as to where we should go. But in the end, it is the companies, not infrequently the small companies, that make things happen and lead development,” concludes Agnieszka Hunka.

Agnieszka Hunka

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Agnieszka Hunka

Senior Researcher

+46 10 228 40 65

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Shiva Habibi

Senior forskare

+46 70 468 21 76

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