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March 10, 2023

Closing the loop: how to embrace the circular economy

Three actions businesses can take to leave the linear economy behind and embrace the circular economy that lies ahead.

Until recently, few companies sufficiently considered what happened to products after they’d reached the end of their lifecycle. But consumers have grown frustrated with the throwaway culture and its devastating impact on the environment.

That’s where the circular economy comes in. Circular business models design out waste, lengthen product usage timeframes and return materials to the product lifecycle. Increasingly, consumers are demanding this type of stewardship. By 2025, more than 40% of consumers will adjust their buying behavior to support businesses with demonstrable green practices such as circular business models.

In addition to consumers’ growing sustainability concerns, other factors are pushing the disposable era to the brink of extinction. Supply chain disruptions, “green” legislation, carbon taxes, the service economy and consumer preference for partial/temporary ownership models instead of full ownership—all these trends are combining to drive a rethink of traditional product lifecycles.

As noted in our 2022 e-book “The Future of Us,” new ways of collaborating across value chains are needed for enterprises to embrace circular business models and meet their sustainability targets. The tools that make this feasible—the Internet of Things (IoT), the “everything as a service” (XaaS) model, artificial intelligence (AI), including generative AI, and more—are powerful already and growing more so all the time.

From linear to circular business models

Here are three actions businesses can take to leave the linear economy behind and embrace the circular economy that lies ahead:

  1. Design reuse into the business model. A UK-based mobile-service provider recently offered to buy old Android phones from its subscribers, many of whom were surprised to see a $350 offer for a three-generations-old phone. Part of the motivation in this case was a growing need for older parts and raw materials, now much in demand among device manufacturers.

    Such product stewardship programs are emerging worldwide, from “Swap and Sell” Whatsapp groups to business-led moves such as IKEA’s Circular Hub. Government-sponsored initiatives are also emerging, including procurement programs in cities like Toronto and national strategies in France and the Netherlands.

    Already, innovative companies are identifying circular business opportunities. Paris-based Back Market, which runs a marketplace platform for sophisticated refurbished electronics, has reached a valuation of $5.7 billion that made it France's most valuable startup. And Schneider Electric’s circularity strategy helped the company avoid 157,000 tons of primary resource consumption in 2020.

    The secondary market for mobile phones hints at the opportunity for companies to retain more of the value of the material and energy used to make their products. It also points to the business model changes required to seize that opportunity—such as new processes and systems for helping customers when products wear out, approach obsolescence, fail or no longer provide satisfaction.

    Cognizant’s forthcoming research (launching Q2 2023) highlights the dynamics in play. Today, the extended use of assets and products in operational environments is a top-three major sustainability initiative. We found 41% of respondents focusing on reusing, repairing, maintaining and refurbishing operational assets to hit their sustainability targets and prepare for circular approaches to operations.

  2. Take a holistic view of operations across the value chain. Businesses need deeper collaboration across the value chain to develop products that can be managed over their lifecycle. Waste at one end of a value chain could be fresh input for another (using worn-out car tires to make padded floors in a children’s playground, for instance).

    The value chain will also extend far beyond the product sale, all the way to the consumer. IoT sensors embedded in products will further the emergence of XaaS models, in which product producers retain responsibility for the product over its lifecycle. With XaaS, providers are more apt and better equipped to extend product lifecycles through proactive maintenance and repairs, and build in measures for reuse, refurbishing and recycling.

    Optimized, data-rich processes that incorporate technology play an important role by increasing transparency, enabling accountability and improving efficiency to help reduce waste. For example, businesses are combining automation with RFID (radio frequency identification), blockchain technologies and analytics to track materials and products throughout their lifecycle, from extraction and production to use and disposal. By doing so, they can identify opportunities for reusing and recycling materials and ensure that waste is properly managed and disposed of.

    Logistics and transportation is another area where taking a value-chain-level approach to operations can make an impact. Using location technologies, analytics and AI, businesses can reduce waste by optimizing delivery routes, reducing the need for packaging and lowering the carbon footprint of transportation.

  3. Explore systems thinking. For those who take a broader view of the value chain, systems thinking is a common, perhaps even inevitable, next step. As it relates to business, systems thinking is a management and operations approach in which choices and decisions are analyzed based on their potential systematic consequences. Team decisions, for instance, also impact the rest of the department, the business unit, the organization, clients, suppliers—and the environment.

    Systems thinking pioneer Ellen MacArthur, who once held the record for the fastest solo sailing circumnavigation of the globe, gathered priceless insights during her travels about the interlocking nature of systems that may at first seem unrelated. The astonishing and ever-growing power and intelligence of today’s computers and networks allow us to understand such interrelationships as never before.

    Understanding the possibilities associated with circular business models requires collaboration among multiple players inside and outside the business. This is why, again, systems thinking is required. Whether it’s quantifying all the transactions involved across the supply chain to put a price on the final product, or enabling new services and opportunities around the product along its lifecycle, businesses will realize a greater impact when they coordinate actions and decisions with others in the ecosystem.

It will take new levels of foresight and boldness to make the shift from linear to circular business models. But as the net zero era unfolds, it will be just one of the many new ways we’ll work, create and interact to prioritize healthy business, social and environmental outcomes.

Cognizant Insights Team

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