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In this third article of Green Book, you will learn how to start rethinking business models to embrace more regenerative designs.
Last time we addressed the importance of design in a circular economy, concluding with the fundamental notion of business model. The latter, we said, has four interdependent components that must be congruent between themselves: customer value proposition, profit formula, resources, and processes (Christensen, Bartman, & van Bever, 2016). Understanding our current business model is crucial to know if we can support new opportunities (Johnson, Christensen, & Kagermann, 2008). According to the authors, we must understand our existing business model components, the premise behind its development, its natural interdependencies, and its strengths and limitations. They stress this importance in their work, Reinventing Your Business Model, one of the essentials of strategy concerning business model innovation.
They explain that customer value proposition (a way to help customers get an important job done) and profit formula (revenue model, cost structure, margin model, and resource velocity) define value for the customer and the firm. In addition, the authors describe key resources as assets such as people, technology, products, facilities, equipment, channels, and brand required to deliver the value proposition to the customer. Instead, key processes are operational and managerial processes that successfully deliver that value in a repeatable and scalable way. The power of a business model lies in the complex interdependencies of its parts – devising a more or less stable system in which these elements bond to one another in a consistent and complementary way (Johnson, Christensen, & Kagermann, 2008). Finally, they conclude that any significant changes to these four elements affect the others and the whole.
This prominent dynamic affects business model innovation and innovation in general (product and technology). To give an example and on a much lower scale, any new business project often means reallocating existing resources and capabilities. That translates into a potential destabilization of core business activities because we are pooling the resources from one part or making a brand-new investment to get the needed assets. Hence, often even the slightest innovation initiatives fail to pass this test. However, innovation is crucial to remain competitive. Thus we often experience this innovation paradox – we must innovate for tomorrow while maintaining and improving our core business - the new versus old tension (Smith & Lewis, 2022). Moreover, we often find the dilemma between profit and social impact as environmental awareness increases. So how do we go about this?
Perhaps the good way forward is first to consider the meaning of value. For example, today, we produce more waste than we can decompose, which presents one of humanity's pressing problems. Hence, what happens if we look at value differently? What if we shift our thinking from either/or to both/and focus and reframe the question (Smith & Lewis, 2022)? What if we look at it from a different, bigger perspective to accommodate both doing good for business and equally for the environment? Ellen McArthur Foundation, Circular business models: Redefining growth for a thriving fashion industry (2021) study is revealing. It shows that circular business models represent a significant opportunity for new and better growth in the fashion industry, as businesses can seize the full economic and environmental opportunity. The study explains that this is possible through decoupling revenue from production and resource use, i.e., making more revenue from fewer new products. The latter reduces the need for raw material production, lowering greenhouse gas emissions, pollution, and pressure on biodiversity.
Furthermore, it points out four business models (rental, resale, repair, and remaking) that currently represent a USD 73 billion market and have this decoupling potential. The study says they can grow from 3.5% of the global fashion market today to 23% by 2030, representing a USD 700 billion opportunity. The latter has the potential to provide a third of the emission reductions necessary to put the fashion industry on a 1.5-degree pathway. The authors conclude that there are four actions that the circular business models, supported by policymakers, need to reach their full potential.
They need to:
- rethink performance indicators, customer incentives, and customer experiences
- design products that can be used more and for longer
- co-create supply networks able to circulate products locally and globally, and
- scale a wider range of circular business models
Next time we will explore them in detail and look at examples beyond the fashion industry.
Article contributed by:
Ajlin Dizdarevic (www.ajlindizdarevic.com) - She is a management consultant, researcher, and entrepreneur, working with circular economy projects.
- Read the second Green Book article: "From degenerative to regenerative design"