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Capitalizing on Circular Economy
A Case Study of Circular Business Model Innovation at Scandi Gruppen AB
Bachelor thesis within: Business administration Number of credits: 15hp
Authors: Elina Jormakka & Andreas Lidvall Tutor: Thomas Cyron
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“Innovation is the ability to see change as an opportunity
– not a threat”
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Acknowledgements
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In the preface of this thesis, the authors would like to thank everyone involved for their contributions.
Thanks to Scandi Gruppen AB and all interviewees for their time and dedication for the research which enabled us to gain an insight to their business operation.
We would also like to thank our thesis tutor Thomas Cyron for his excellent job and tremendous talent which he demonstrated over the months he spent tutoring us.
Special mention also for Mr. Anders Melander, the mean of Jönköping University and the course examiner.
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Capitalizing on Circular Economy
Bachelor Thesis Within
:
Business AdministrationAuthors: Elina Jormakka & Andreas Lidvall
Tutor: Thomas Cyron
Date: 2020-05-18
_______________________________________________________________________________________
Abstract
Problem:Standing on the way of the development of a global circular economy is the mismatched objectives of profit seeking business entities and sustainability advocators. In addition, the research and literature mostly discuss circular business from a resource perspective, focusing on industrial applications closing resource loops and maximizing resource efficiency. The lack of practical
applications of circularity beyond the scope of production creates a barrier for especially small and medium sized enterprises with simpler business models and limited R&D funds to exploit circular business ventures.
Purpose: This paper answers to the following research question: “How do firms capitalize on circular
economy through circular business model innovation?“ The authors adopted a firm-centric approach
on circular business model innovation as an enabler of creating value for both internal and external shareholders through the exploitation of circular economy with an existing business model. Therefore, this research paper contributes to strategic entrepreneurship literature and is especially geared towards SME’s interest in joining the circular economy.
Method: This research is qualitative and adopts an interpretivist paradigm. Semi-structured interviews were used to collect primary data which was analyzed utilizing a thematic analysis. Conclusion: The analysis of the results showed that circular economy does not just serve sustainability goals but hides capitalizable value for businesses as well. Based on the analysis, a four-step model was developed to help SME’s to capitalize on circular economy through business model innovation.
Keywords: Circular Economy, Business model, Circular Business Model innovation, Value Creation,
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Table of Contents
__________________________________________________________________________ Abstract 1. Introduction 1.1 Background……….7 1.2 Problem………8 1.3 Purpose………9 1.3.1 Research Question……….9 2. Frame of Reference 2.1 Circular Economy………102.1.2 Drivers of circular economy……….11
2.1.2 Problems related to circular economy……….11
2.2 Business Model Literature………..12
2.2.1 Circular Business Model………14
2.3.3 Business Model Innovation and Circular Business Model Innovation………15
2.3.4 Barriers of Circular Business Models………..16
3. Methodology 3.1 Research philosophy………18 3.2 Research approach……….18 3.3 Research design……….19 3.3.1 Qualitative Study………. 3.4 Method 3.4.1 Research Strategy………20 3.4.2 Data Collection………20 3.4.3 Sampling………20
3.5 Case study company………21
3.6.1 Primary Data………21 3.6.2 Secondary data……….22 3.6.3 Data Analysis……….22 3.6.4 Data Quality………22 3.7 Ethical Considerations………23 3.8 Methodology Summary……….23 4. Empirical findings 4.1 Case company description………24
4.2 Circular Economy at Scandi Gruppen……….……….25
3.4 Business Model……….27
6 5. Analysis
5.1 Business model logic at Scandi Gruppen AB………28 5.2 Scandi Gruppen AB as a circular business……….29 5.3 Business model innovation………29 6. Discussion
6.1 Insights and Contributions………31 6.2 Limitations……….36 6.3 Suggestions for Future Research………..37 Conclusion List of references Appendix Interview guidelines Interview questions
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1. Introduction
_______________________________________________________________________________
This chapter establishes grounds for the research ahead by providing with a brief introduction to the topic of the study. The research purpose and problem will also be introduced to the reader towards the end of this
section.
________________________________________________________________________________ 1.1 Background
Governments and policy makers are growing increasingly concerned over the tension between economic growth built upon linear economy and the pressure it imposes on planetary boundaries. The linear economic system converts natural resources into waste and through unsustainable harvesting and extraction practices removes the environment’s natural capital as well as creates pollution which has a negative impact on the value of the natural capital (Murray et al., 2017) At current stage, we are over-utilizing natural resources 1.7 times faster than what the planet’s ecosystem can regenerate. This phenomenon, known as “ecological overspending” (WWF, 2018) leads to severe environmental externalities such as soil erosion, raw material insufficiency, deforestation and carbon dioxide buildup, but the consequences of environmental gluttony go beyond the costs imposed on the biodiversity. This is due to the fact that the scarce natural
resources such as crude oil, minerals and coal, play a significant role in manufacturing. And because manufacturing is the cornerstone of economic growth for industrialized countries, their
macroeconomic performance is heavily dependent on resources extracted from the nature (Ellen McArthur Foundation, 2015,(Drews, Antal et al., 2018). The estimated price tag for the value of resources and services provided by the nature annually is 125 trillion USD (Rooten&Almond, 2018) which is the over 6000 times the GDP of the US, as of the year of 2018.
Moving towards a more circular economic model is therefore necessary in order to secure the sufficiency of vital raw materials and to achieve a balance between both economic and environmental prosperity. However, the discussion regarding circular economy from a business perspective is still rather limited, and the practical applications of circular economy are mostly related to waste management and industrial applications. Needless to say, circular economy is much more than just large-scale recycling. Circular economy, as a system which aims to ensure a more circular flow of resources, materials and energy, can embody a variety of expressions from closing resource loops to redesigning products, services and the nature of ownership towards favoring renting, sharing, reusing and other alternative ways of maximize the resource efficiency and extend product life. Hence, the principles of circularity can be applied across all industries, instead of just those operating in the industrial sector.
Standing on the way of the development of a global circular economy is the perceived mismatched objectives of profit seeking businesses and sustainability advocators. Businesses want high sales levels and profit margins, whereas at the core of environmental sustainability is often to promote conscious consumption and cut down on activities resulting in pollution and waste. And because circular economy is often strongly associated with sustainability matters, businesses tend to stray away from it as it is considered to work against a company’s purpose of making profit. Yet here is
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the catch – instead of seeing circular economy just as a sustainability tool, it can also be considered as a viable business opportunity which when effectively exploited, can be a source of competitive advantage and a source of economic value. And because 99.8% of all businesses in Europe are categorized as small to medium sized enterprises (European Bureau of Statistics, 2018), it is important to create and promote knowledge on circular business models beyond closing resource loops and other production related applications.
1.2 Problem
The drivers for creating a global circular economy predominantly lay in the insufficiency of finite, yet highly important raw materials as well as the negative environmental externalities of linear production causing often permanent damage on the ecosystem. On a business level, competition over scarce key resources causes market price volatility which possesses a major risk for companies (Hallstedt 2010, Antal et al. 2016). Therefore, enterprises are on the lookout for new sources of competitive advantage. Because the linear system is reaching its’ limits, circular economy is suggested as an attractive, potentially providing a solution to the problem of achieving environmentally sustainable economic growth. Nevertheless, the process towards a concrete global circular economy is in many aspects still in its infancy.
Although the concept of CE has been widely addressed in the literature, there is relatively little research regarding capitalizing on circularity and CE as a basis for value creation instead of as a means of sustainability. Although some authors (Murray et al., 2017, Antikainen & Valkokari, 2016) recognize the potential economic value of circularity, the focus point of current research lay heavily on the sustainability perspective instead of representing circular activities as a viable business opportunity and a source of competitive advantage. The academic contributions to circular business models are scant and fragmented, although some attempts have been made towards developing the concept of circular business model and circular business model innovation (Antikainen&Valkokari, 2016, Geissoderfer et al., 2018). However, the literature is again limited and approaches the subject from a perspective of sustainable development.
The practical applications of circularity are often focused on industrial applications and highlight the importance of slowing down and closing resource loops (Tura et al., 2019) instead of effectively addressing it from a business perspective. Hence, there is a gap in literature in the crossroads of strategic entrepreneurship and sustainable development regarding the exploitation of circular economy as a value creating activity from a firm-centric approach. In order to create a global circular economy and ensure sustainable development in terms of both economic and environmental prosperity, academically supported knowledge needs to be created in order to serve a fundamental goal of attracting businesses to join the circular economy. In order to achieve that, increase the level of knowledge of circular opportunities, provide practical tools for management to encourage and enable the exploitation of those circular opportunities.
So why not apply the already existing business model innovation literature when exploiting circular opportunities? The problem lays in the novelty of the concept of circular economy and business and the limited amount of practical tools in combining the two concepts in order to create economic value. In addition, Teece (2010) mentions that although every business has a business model, sometimes it is unaddressed. That existing knowledge gap results in logical conclusion that the management might simply not be able to recognize circular opportunities or to lack the knowledge to develop the business efficiently. In addition, especially SME’s have limited funds to invest in
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experimental ventures and they might even struggle to get collaterals and loans to fund circular ventures due to the general perception of circular economy just as a sustainability matter, instead of a viable business opportunity.
1.3 Purpose
This paper utilizes the concepts of Circular Economy (CE), Business model (BM), and business model innovation (BMI) in order to gain a deeper understanding on exploiting circular economy with a current business model and circular business model innovation as its enabler. The business model framework was chosen because exploiting circularity requires changes in how the firm generates value, and business model is a management tool which maps the organizational architecture explaining the rationale of a firm’s process of creating, delivering and capturing value and it can be used as a guide to identify key areas of the business on which circularity could be applied to.
Therefore, this research paper contributes towards a better understanding of circular business model innovation and its practical application.
1.3.1 Research Question
Given the previously stated problem and research gap, this paper aims to provide an answer for the following research question:
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2. Frame of Reference
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This section sets the theoretical framework for this thesis by discussing the key concepts applied in this paper by shedding light to the current stage of the relevant literature. Each part consists of two categories: Conceptualization, which provides a brief background and defines the concept, and Utilization, which focuses
on the application of the concept both practically and in the context of this paper.
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2. 1 Circular Economy
Conceptualization
Before a more formalized conceptualization of circular economy, concepts closely related to Circular Economy (CE), such as resource loops and resource efficiency, have been mentioned in the literature since the dawn of industrialization. Starting in the 1970s, Circular Economy gained
momentum as ideas with circular features emerged in the literature and policy makers started to pay attention on sustainable development issues (Murray et al., 2017). Later, more structured approaches appeared, and eventually in 2013, Circular Economy was defined by the Ellen MacArthur Foundation as the following:
“A circular economy is based on the principles of designing out waste and pollution, keeping products and materials in use, and regenerating natural systems.” (Ellen MacArthur Foundation,
2013).
In essence, CE is considered as an alternative economic system for the traditional linear economic model characterized by a take-make-dispose approach to production and flow of resources and energy. Hence, the fundamental goal of CE is to reduce linear resource flows of production-consumption systems (EMF, 2013, Korhonen et al., 2018.). A commonly discussed approach in the literature regarding circular applications is the resource loop perspective, which highlights the importance of narrowing, slowing and closing down resource loops (Tura et a., 2019). This demonstrates how the existing CE literature is heavily focused on discussing CE in regards of industrial and production applications (Ranta et al., 2018), especially as variations of waste management and innovative recycling.
Utilization
However, what constitutes as circularity can be demonstrated in a variety of ways, such as
cooperation between different stakeholders like consumers, different producers and government or other social actors in order to achieve a higher level of material and resource efficiency. Another example of an expression of CE would be a service-based business models, such as rental firms which are reshaping the nature of ownership and consumption. Hence, the practical realizations of CE are various, the most common ones being different industrial applications to extending the product life through reusage or refurbishment. Nevertheless, the common shared objective of circular activities is to effectively lower the input of raw materials and to keep products,
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industries and the scope of CE covers infrastructure, products, equipment and services and it can be applied to all industries (Ellen MacArthur Foundation, 2012).
2.1.1 Drivers of Circular Economy
The linear economy reaching its physical limits (Tura et al., 2019) accounts for the raise of concerns over sustainable development, as climate change, pollution, waste and global warming has awoken a collective concern about the state of environment (European Environment Agency, 2016).
However, from firm-centric perspective, economic drivers are considered as the main drivers of circular economy (Stahel, 2016). Gusmerotti et al. (2019) for example argues that the regulatory pressure of promoting environmental value is not a driving sustainability and circularity. The growing rate of competition over resources leads to disproportional distribution of natural resources further resulting in volatile market prices (Hitt et al., 2016) and the increasing
competition is pushing businesses towards discovering new sources of competitive advantage and sources of value (Gusmerotti et al., 2019). Demonstrated in numbers, McKinsey&Company (2015) calculated that circular economy can potentially increase Europe’s productivity by a 3% annually, creating a net benefit worth of €1.8 trillion. The profit potential of circular economy has raised interest amongst companies who are increasingly viewing circularity as potential source of competitive advantage (EMF, 2013). European Environment Agency (2020) has estimated that by improving resource productivity, European industry could stand to save a total of €630 billion annually through the exploitation of circular economy.
2.1.2 Problems Related to Circular Economy
On a conceptual level, Circular Economy is a complex concept which compromises diverse areas from production, consumption and supply-chain activities (de Jesus & Mendonca, 2018) making it at times challenging concept to describe. A number of other issues of circularity include a prevalent dilemma that the fundamental principles of CE often conflict with traditional consumer
expectations and consumer behavior. Traditionally, the process of a buying process has followed a traditional protocol where the buyer exchange current for ownership of a good (White & Simpson., 2013). Although consumer habits are constantly changing and evolving (Ozteck et al., 2013), the authors argue that faces an enormous additional challenge when it comes to changing consumption habits and the nature of ownership. Although CE and circular business models hold unleashed potential in form of innovative ways of generating profit, Franko (2014) also states that changing the attitudes of consumers and businesses is the greatest challenge of CE, as the success of any business model is ultimately tested by the approval of the customer, a view also shared by Teece (2010). Another issue with creating a global circular economy is that many business models are hardly compatible with circular economy, such as the fast fashion industry and car industry (Garcie et al., 2017). However, a potential solution is to make incremental changes to their business model by for example becoming more service minded or offering rental services for their core products instead of selling them to the end customers, which calls attention for circular business model development.
From an industrial perspective, there are legal and regulative obstacles in regards of circular economy. For example, in most parts of the world there is no effective waste industry, but the heavy bureaucracy behind international waste transportation is a major challenge when it comes to capitalizing on waste (WRI, 2019). In most countries where there is an effective waste
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infrastructure, it was complimented by a heavy regulatory framework which sets limits to the use of waste materials and by-products of productions. Another challenge is the lack of effective
legislation regarding the ownership of waste material, which possesses a challenge if another party has an incentive to manage waste and by-products according the regulations, but another party would have an interest in purchasing the excessive material. At times, that is not legally simple or possible (WRI, 2019). Also, the lack of fiscal incentives, such as VAT reduction for refurbishment hinderers the transition towards circularity (Hart et al., 2019).
2.2 Business Model literature Conceptualization
The first notations of business model date back to the dot.com boom in the 1990s, when business
model was often used as a buzzword to roughly conclude the logic behind generating profit from
Web-based businesses (Margretta, 2002). In academic literature the concept is still relatively novel, yet commonly discussed in the context of management practices. However, up to date there isn’t a standardized definition for what constitutes as a business model (Zott et al., 2011, Teece 2010). Although different authors have adopted varying approaches to the concept, a common nominator for different definitions is a shared consensus that a firm’s business model describes the
architecture behind creating value (Chesbrough 2002, Johnson et al., 2008, Zott et al., 2011, Teece 2010). Table 1 below features five fundamental definitions for the concept of business model which are commonly referred to in related management literature.
Definition
Author
A business model describes “The heuristic logic that connects technical and potential and realization of economic value”
Chesbrough (2002)
“A business model describes the rationale how an organization creates, delivers and captures value”
Osterwalder & Pigneur (2010)
“A business model articulates the logic and provides data and other evidence that demonstrates how a business creates and delivers value to customers. It also outlines the architecture of revenues, costs and profits associated with the business enterprise delivering that value”
Teece (2010)
Business model is a system that “---decipts the content, structure and governance of
transactions designed so as to create value through the exploitation of business opportunities”
Amitt & Zott (2001)
Table 1: some common definitions of business model.
The development of the concept has been driven by the emerge of knowledge economy and digital revolution, which have profoundly changed the way how businesses make money. In the industrial
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era, the typical business profit formula in its simplicity was to translate a firm’s intellectual property into a sellable product which would be sold at high scale (Teece, 2010). Nowadays however, much of the business activities are outsourced or offshored and the development of information
technology has reshaped the nature of goods and services. At the same time, consumers have gained more power, as the internet enables an easy access to information which combined with the possibility of online shopping has increased competition since the market for goods have expanded from a local scale to much larger, sometimes even global. This translates into increased competition which forces businesses to accommodate their business strategy (Teece, 2010).
Utilization
Business model is a useful systematic and analytical tool to acknowledge and address the
enterprise’s key activities and occurring challenges, which aids in restructuring current activities in effort to achieve economic value (Morris et al., 2005, Osterwalder, 2004).
Even though the literature lacks a shared consensus and formalization of the precise definition of business model, in this particular paper a business model is viewed as a description of a firm’s value proposition, how it delivers the promised customer value to the customer and eventually translates the cashflow into profit. This interpretation by Teece (2010) is adopted throughout this paper as the definition for business model, coupled with the definition by Richardson (2008) who states that a business model is a description of how an enterprise creates, delivers and captures value.
According to the author, there are three main components of a business model: (1) value proposition, (2) value creation and delivery system and (3) value capture. The components are interconnected and complimentary and allow the business to create and deliver value to customers as well as the enterprise, hence the framework strategically demonstrates how an enterprise does business. According to Richardson (2008), value proposition (1) has three core elements: the actual offering, the target customer and a description of the strategy to achieve competitive advantage over competitors. The first two elements define the “what” and “to whom,” yet the third element captures the reason for the firm’s existence by defining the unique value it has to offer for a particular, underserved market. In essence, it captures how the firm achieves competitive
advantage and attracts customers. A crucial aspect for creating a strong value proposition is to have a deep understanding of multidimensional customer needs, to which the business provides a
customer solution for. In addition, the firm must consider its strategic positioning on the market and choose a market which is not overly crowded, thus highly competitive. However, a firm can have a strong value proposition even on a crowded market if it is able to provide superior value compared to competitor firms. A strong value proposition is the corner stone of a firm. Hence, all of the three elements must be taken into consideration in order to create an offering that identifiable customers find attractive enough to pay, over competitors’ offerings.
Value creation and delivery system (2) describes the boundaries of the firm and the allocation of activities. This component has three sub-elements: resources and capabilities, the organization including value chain, activity system and business processes and partner network, including important linkages to partners, suppliers and customers. Whereas the first component describes the theory of value creation, the second element defines the sources or enablers of competitive advantage and describes how the theory is executed in practice. Under this component of a
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business model, core activities including related key activities in order to demonstrate the design of how the firm executes its’ strategy. The operational design delivers the firm’s value proposition, including how it competes and how it achieves competitive advantage. As an example, for a firm competing with a low-cost strategy, the activities are allocated in a way that serves the goal of maximal cost savings, whereas as for a company which has chosen a differentiation strategy, the activities reflect how the differentiation is achieved.
The third component of business model, the value capturing (3), describes the revenue model as well as the economic model of a firm. Revenue model includes the sources of revenue the firm receives by selling its goods or services, such as the traditional sales model, rent model or
subscription model. The economic model consists of the cost structure and the financial aspect of the enterprise, including the revenues, cost and expenses of the firm’s profit equation. Economic model reflects the company’s level competitive advantage and profit margins. Hence the economic model has an impact on the operating cash flow statement.
Table 2. A visual demonstration of the components of a business model. (Richardson, 2008)
2.2.1 Circular Business Model
Despite lacking a standardized definition, the literature usually discusses a circular business as any firm that serves the goals of circular economy, such as closing and narrowing resource loops, reconsidering the efficiency of the utilization of resources and minimizing externalities its
operations impose on the environment whilst generating economic profit (Tura et al., 2019, Sitra, 2020). EMF (2013) adds to the definition by stating that an additional criterion for a circular business is that the quality and functionality of the services or products produced isn’t sacrificed compared to corresponsive goods produced by exploiting a linear business model. Interreg’s (2019) definition relays heavily on the definition of the concept of business model by simply stating that a circular business model describes the logic of creating, delivering and capturing value within a circular economy.
Beyond the scope of manufacturing, companies can also exploit circularity by profit from post-consumption markets by selling used items or by providing repairing services (Moreno et al., 2016).
The value
proposition
The value
creation and
delivery system
Value capture
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Circular business models have several dimensions from sourcing of materials, production, consumption and management of waste (Interreg Europe, 2019).
Bakker (2016) contributed to the circular business literature by recognizing different categories of circular business models most commonly exploited by firms however companies can also exploit hybrid models combining traits and elements from the following circular business model categories.
Access and performance model – Value is created by changing the nature of ownership of a product. In this model, the consumer often pays for a function to be executed or per use, instead of buying a physical ownership from the producer. An example: wedding dress rental, car-pooling.
Extending product value model – This model creates value by capitalizing on the residual value of a product after its traditional useful life by repairing or remanufacturing it. An example:
companies buying off used electronics or white goods.
Long-life model – The model aims to design products that are durable and reusable to a highest possible degree or simply by minimizing the end-user consumption by promoting sufficiency and having a non-consumerist approach to sales and marketing and therefore encouraging the consumer to hold onto the product for as long as possible. An example: any company which has
abandoned a consumerist approach to marketing, for example the winter clothing brand Patagonia.
The drivers and barriers of circular economy are discussed from different perspective, such as corporate social responsibility drivers, waste management or financial perspective, yet analysis on several aspects is next to nonexistent (Tura et al., 2019). Although the literature on circular
businesses is limited, and at current stage heavily focused on barrier of transition which according to Ritzen&Sandström (2017) can be either financial, structural, attitudinal, operational or
technological.
2.2.3 Business Model Innovation and Circular Business Model Innovation
Business model innovation is a subfield of the business model, which although lacks a formalized definition, is generally considered as a change in the firm’s value creation process by modifying at least one aspect of a business model. In the past, innovation was often considered to be limited to product, process or technological innovations (Chesbrough, 2007), yet business model innovation goes beyond the traditional scope and refers to innovating the way how a business gains
competitive advantage and essentially, makes money. Business model innovation is often discussed in the literature regarding strategic entrepreneurship, in which is commonly considered as a change in the established way of doing business (Amit & Zott, 2010), often initiated by uncertainty in the changing business environment which necessitates a new set of dynamic capabilities such as
organizational flexibility, to reconfigure the firm resources in order to discover new sources of value (Chesbrough, 2007, Teece, 2010, Amit & Zott, 2010). Business model innovation is also discussed from a resource perspective, which mainly discusses BMI as a way of finding resource-capability combinations that optimize the firm’s value chain (Bouncken & Fredrik, 2016).
As discussed in the previous section regarding business models, the emerge of knowledge economy coupled with the digital revolution has resulted in new ways of creating value to customer, as the development of information technology has given birth to entirely new industries, such as e-commerce (Teece, 2010). Although the change has been most radical for industries like news and
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music recording industry, industries throughout different sectors have been subjected to changes Whereas the competition has increased due to an increase in the amount of information available to the customer, the other side of the coin is that information technology has given firms an easier access to potential customer through a variety digital marketing channels and fintech solutions allow firms to get paid faster through phone applications and other modern payment gateways (Klient Solutech, 2020).
Different approaches to business model innovation has been introduced by the literature.
Chesbrough (2003) for example discusses business model innovation from a perspective of sources of innovation. Johnson et al. (2008) has covered topic from the point of organizational
transformation. The concept of business model innovation has rightfully gained popularity in the research, as it can increase firm performance significantly and be a source of competitive
advantage. (Bashir et al. 2017, Amit&Zott, 2012). Rashid et al. (2013) argues that business model innovation is especially important in capitalizing sustainable solutions which according to the authors aligns mechanisms to generate value with established sustainability incentives. Johnson et al. (2008) highlighted the importance of business model innovation in uncertain competitive market environments where the capability to innovate and adapting to change is crucial.
Circular Business Model Innovation focuses on creating superior customer value in order to gain competitive advantage while capturing economic value and protecting the environment (Pieroni et al. 2019).Business Model Innovation enables firms to map their resources and therefore guides in the process of transforming from a firm-centric operational logic to network-centric (Pieroni et al. 2019). Another aim of circular business model innovation is to increase resource efficiency by slowing down resource loops or even closing them by making incremental changes in the approach of generating value and doing business (Bocken et al., 2016, Lahti et al., 2018).
Circular Business Model Innovation is fundamental for firms due to the scarce nature of essential resources which pushes firms towards decoupling value creating activities and effective resource consumption (Bocken et al., 2016). At the core of circular business innovation is a fundamental swift of focus from profit maximization through cost cuts in supply chains, operations and factories to redesigning the value chain structure and the concept of ownership (Pieroni et al. 2019) whilst still ensuring market competitiveness.
2.2.5 Barriers of Circular Business Models
A prominent problem of circular business models is the lack of tools for circular business model innovation, especially regarding frameworks that are able to combine different shareholders’ interests, such as the economic interests of firms as well as different sustainability goals (Lahti et al., (2018, De Jesus & Mendonca., 2018) Therefore, circular business models are viewed as somewhat an unknown territory, causing companies to be hesitant to effectively exchange information due to confidentiality and competition issues. This creates a barrier to the adoption of CMB’s, as a
fundamental feature of circular economy is to effectively manage end-of-life products and find use for by-products and waste materials through innovative co-production (Lahti et al., 2018).
There is also a lack of technical and technological technical know-how of circular innovations and technology (Ritzen & Sandström., 2017) which hinders especially SME’s with limited resources from transforming from linear to circular business model. Making incremental changes into business
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model is expensive as well as risky, and implementing circularity into business model creates a pool of additional costs in the form of administrative costs, management and planning, and possible technological investments, further increasing the risk potential of making the decision of transition an existing business model into a circular one instead of traditional linear business-as-usual
operations. Consequently, SME’s often also face a challenge when it comes to getting granted financing and collaterals needed for undertaking circular innovations and business ventures from commercial banks. Kirch et al., (2018) found that there is also a lack of effective legislation and government support which affects the funding of new innovation and therefore opportunities. Through effective tax policy as well as regulations and laws, the exploitation of CE can be supported by the government, yet at the current state the lack of effective and coherent legislative framework hinders firms from exploiting circularity to its full potential. For example, the taxation on virgin-materials are lower than the processing costs of reprocessing waste material, making it more economically attractive to use unrenewable resources. Another expression of the lack of support concerns the supply and demand network, referring to companies’ dependency of different parties of their value network when it comes to sustainable activities. The problem arises for example if the suppliers are hesitant to co-operate in circular economy because the perceive it as a high-risk investment.
Adopting a circular business model often complicates the entire supply chain, as well as creates complexity in legal and financial sense. The attitudes towards circularity represents and another challenge for CBM’s. Consumer demand drives growth, implicating that governments are less likely to intertwine as it doesn’t serve the government’s goals for maximizing economic growth. On a firm-level, firms also face a conflict of interests regarding sustainability issues, as the aim of a firm is to make sales and generate profit to shareholders. At the very core of sustainability initiatives aimed at preserving the environment is conscious consumption. Although this represents an opportunity for sustainability-focused companies, it is also a challenge for companies who doesn’t necessarily promote sustainability as an incremental aspect of their value proposition but who still experience the effects of diminished sales when consumers change their consumption habits. Another challenge facing firms is that making incremental changes in the business model and incrementing CE on a production level is possibly investment-heavy whilst being risky. However, (Lahti et al., 2018) argues that it is also an expression of a current attitudinal norm and therefore the lack of innovation and lack of vision poses a greater obstacle also on a business level. Still, the lack of CE related research and development does hinder effective implementation of circular economy on a business level, and often times the traditional linear economic system regarding profits can be an easier way to quick profits, as the mentioned barriers on consumer behavior, attitudes and technology concerning CE and especially circular business model development are not affecting the firm’s performance.
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3. Methodology and Method
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The purpose of this section is to describe the scientific approach adopted, detailed research design and chosen methodological tools in order to let the reader critically consider the credibility and reliability of the research. The chosen case study company will also be presented to the read.
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3.1 Research Philosophy
Research paradigm is the philosophical framework guiding the research (Collis & Hussey, 2014) and it shall be decided upon conducting a research in order to ensure that any methodologies used align with the purpose of the study. For this thesis, interpretive paradigm is chosen as the
appropriate research paradigm as it suits both the purpose and chosen data collection method of this thesis, as interpretivism as research philosophy indicates that the authors of this thesis deepen and enrich understanding of prevalent concepts through thoughts and reflection (Saunders et al., 2016). The choice of research paradigm is also justified due to an underlying assumption that the research conducted satisfies certain assumptions of interpretivism. These assumptions include that the researchers and the study subject have an interactive relationship. The study is conducted in order to understand a social phenomenon instead of explaining it. In addition, knowledge
generated is relative in nature instead of absolute. Hence, interpretivism is an appropriate choice for a qualitative research as it provides an interpretative way of understanding the subject of the study (Collis & Hussey, 2014.)
The study conducted aims to explore how firms can exploit circular economy as a value creating activity with their existing business model. Therefore, an interpretivist philosophy makes it possible for the authors gain a deeper and more accurate understanding of the complex phenomenon of exploitation of circular economy on a firm level. Hence, the nature of the study doesn’t allow positivistic approach, as it would be difficult to study a complex phenomenon through assigning numerical values on the study subjects in this particular instance without derailing the research purpose as well as the relevance of the findings (Collis & Hussey, 2014).
3.2 Research Approach
In research, the research approach defines the theory development approach linking together theory and previous research. Those three approaches described by Saunders et al. (2016) are inductive, deductive and abductive.
In deductive approach, the research begins with a theory which is then tested by the researcher by developing and testing a hypothesis on a collected data in order to validate the theory. Inductive approach on the other hand begins with data collection and exploring of the phenomena which is followed by identifying reoccurring themes or patterns in the data in order to explain the
phenomena. Abductive approach falls in between the two previous approaches, as the approach consists of inductive and deductive approaches, indicating that the researcher adopting the
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abductive approach exploits data and theory back and forth throughout the process (Saunders et al. 2016)
The inductive research approach is chosen as the most appropriate choice for this thesis. The research approach is rationalized by the fact that the research topic is not widely researched yet. Following the chosen research approach, the authors will interlink theoretical connections to the data once it has been collected and analyzed. The exploratory nature of the research allows the authors to take into account a large variety of affecting factors when it comes to providing an answer to the research question. Furthermore, the chosen approach enables the authors to observe the data and from thereon move onto more broad generalizations relevant for the study (Bryman & Bell, 2015).
3.3 Research Design
The overall strategy which combines the components of a study coherently is referred to a research design (Saunders et al., 2016). By other words, research design outlines how data is collected, measured and analyzed and therefore ensures that the research problem is successfully addressed. According to Saunders et al. (2016), research conducted in the field of business is either
exploratory, explanatory, evaluative or descriptive, or a hybrid version incorporating any of the mentioned ones. Due to limited prior research, this particular study is exploratory, as exploratory study enables the authors to deepen the understanding of the interest area of the study and more clearly define the occurring problem. Exploratory study serves this aim, as it enables the
researchers to approach the topic at hand without being bound by more strict research design guidelines, such as explanatory study, which focuses on pointing out causal relationships between research variables or evaluative, meaning that it is focused on providing an assessment of how well something works. Descriptive study on the other hand means describe as well as document the phenomenon studied (Saunders et al., 2016).
Therefore, explorative study enables the authors to make changes in the focus point and direction of the study along the way, which might be necessary when conducting a qualitative research on a rather undefined and not well understood interest area of which there is a limited amount of previous research. Hence, exploratory design compliments the intent of this particular paper and it is generally considered as a suitable research design choice for a qualitative research (Saunders et al., 2016).
3.3.1 Qualitative Study
This study is an exploratory qualitative research which aims to study the exploitation of circular economy as a source of profit. The aim of the study is to deepen one’s understanding of a
phenomenon, which as a study subject is unstructured and undefined in nature, hence, exploratory study design is appropriate (Saunders et al., 2016).
20 3.4 Method
The study features a holistic design as well as a single case study. A single case study method was chosen in order to explain prevailing circumstances, interconnecting the chosen phenomenon with the particular research context (Saunders et al.,2016). A choice of simple case study method is justified because the interest area of the study as well as the type of the research question which aims to effectively answer how CE can be exploited as a tool of value creating, suits the
fundamentals of a simple case study (Saunders et al., 2016). Therefore, a simple case method will provide applicable and relevant data for analysis, which is conducted exploiting a holistic design. That means the single case study object acts as the unit of analysis when describing how circular economy can be exploited with a business model (Saunders et al.,2016).
3.4.1 Research Strategy
The empirical data was collected through interviews and the information gathered was examined in order to recognize common themes and patterns. Commonly occurring patterns would then be analyzed in the light of the literature. Hence, the qualitative research strategy chosen follows that of a thematic analysis. The choice of research analysis is also justified by the freedom provided by thematic analysis, which enabled the authors to choose the theoretical framework freely and conduct data in a desired way (Collis & Hussey, 2014).
3.4.2 Data Collection
Collis and Hussey (2014) state that for a research, primary and secondary data is gathered. The difference between the two is that primary data is original and self-gathered through interviewees or experiments, whereas primary data is data that is already conducted by someone else and collected from for example public records, government agencies or publications. (Collis & Hussey, 2014). For this particular research, the empirical data gathered through interviews with the case study company represents the primary data and the literature review section of this thesis represents secondary data. The study benefits from the use of thematic method of analysis when analyzing primary data, which indicates that the findings of the study were drawn from occurring themes instead of being limited by other, more defined analyzing methods. (Saunders et al. 2016).
3.4.3 Sampling
In research, sampling refers to the process of choosing a study object or objects from a population of interest in order to make observations from it which can later be applied as generalizations on the population (Saunders et al., 2016). Through selective sampling, entailing that the researchers relied on their own judgement in choosing an appropriate sample (Collin & Hussey, 2014), a set of criteria was established to guide the process of searching for a suitable sample for the single case study. These criteria concerned the size of the firm, its history of operations and importantly, that the case study firm exploits circularity with its business model. A medium sized company was preferred and chosen in order to effectively generate, study and analyze appropriate data complimenting the purpose of the study, instead choosing a large corporation with large scale operations and possibly more complex business model. Therefore, a data gathered from a large company would potentially be too diverse and outside the scope of this paper.
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After the initial search and reaching out to potential candidates, they were contacted in order to confirm that the set criteria were met. Eventually, the now chosen case study company was picked as they filled the initial set of criteria but also due to its willingness to engage in the research and provide an access to necessary information, as well as to devote time for interviews.
The case study company was chosen for its contributions to sustainable development and circularity, its relatively long history with exploiting circular economy and that the company originally started off using linear logic of production yet has since increasingly exploited circularity in its business model. This serves as the main criteria set for an appropriate case study company. In addition, in order to provide data that serves the research question, another important criteria was that the company had not been exploiting circularity from the early days, but that it had later found ways to exploit circularity as a value creation tool. The case company also needed to have notable history in doing so in order to ensure that the company holds appropriate knowledge of the industry as well as in exploiting circularity to create value.
The interviews were conducted with three people from the upper management team as well as the business development manager, as they hold crucial information on the crucial aspects related to the area of interest.
Interviewee #1
Interviewee #2
Interviewee #3
Position Business Development
Manager/member of board of directors
Upper
Management/member of board of directors
Senior position, did not want to specify publicly Interview (minutes) 92 56 71 Years employed by the firm 30+ 30+ 10+ Educational background MS.c in Mechanical Engineering Master of Science, didn’t want to specify
University degree, did not want to specify. Figure 2: the three interviews conducted for this study
3.5 Case Study Company
The case study company chosen is Scandi Gruppen AB, a Swedish company specializing in selling recycled copy printers and printer parts on a global scale. The company was chosen for this study due to its commitments to sustainable development and because it has successfully exploited circular economy with its existing business model.
3.6.1 Primary Data
Primary data refers to the information gathered by the authors for the research. For this study, the interviews conducted with the case company representatives serve as the source for primary data and the primary data collection method was chosen because the authors wanted to gain a deeper understanding of the unclear circumstances of the study topic (Collin & Hussey, 2014). Three complete, structured interviews were executed, the length totaling in 217 minutes. A
semi-22
structured interview entails that the questions were scripted prior with an intent to direct the interview towards a specific topic whilst allowing additional questions to arise during the interviews (Colin & Hussey, 2014). The interviews consisted of open-, closed and probing questions (Collin & Hussey, 2014). An open question refers to question to which one cannot answer simply and shortly, but what will require the respondent to develop a lengthier response, unlike closed questions to which short and simple (for example “yes/no”) answers are expected. Probing question on the other hand entail that the researchers would ask the interviewee to further elaborate an answer they’ve given. This was done to either clarify the answer or to gain a deeper understanding of the topic at hand. Business model canvas was used as an aiding tool in understanding the
circumstances and to gain a deeper understanding of the case company on an operational level. Another source of primary data utilized was articles and reports in relevant topics, which were gathered in order to gain a deeper understanding of the chosen concepts and to be able to analyze the collected interview data. The primary data used in this research includes peer-reviewed articles, relevant textbooks and credited online sources. Th data gathered from the mentioned sources was used to develop the theoretical framework as well as the literature review section, but also to identify literature gaps on the chosen field. The primary source of data used was JU library
database, Web of Science and Google Scholars. Key words used in the secondary data search were: “Circular economy,” “business model,” “circular business model,” “business model innovation,” “circularity.”
3.6.2 Secondary data
Secondary data refers to data that is pre-existing and not created by the authors of the paper (Hussey et al., 2016). For this paper, the case company’s website and reports released by the company for public as well as for the authors to use in conducting this research, serve as the source of secondary data. This data served a purpose of providing additional information for the study in regards of increasing the author’s level of information regarding the case company as well as its operations and value chain.
3.6.3 Data Analysis
Once the data was collected as demonstrated earlier, it was analyzed utilizing thematic analysis. The process of data analysis started by reading through transcripts from the three interviews. In order to detect occurring themes and important factors the data was coded by using codes that had been brought up during the interviews and which related to the interest area of the study, such as “value chain” “adaptation “innovation” “circularity”. Such coding method is also known as in vivo coding, as the chosen codes where used by the interviewees themselves (Saunders et al.,2016). The data transcripts and codes where then further examined in order to find linkages to the research area and question from each interview. Once the occurring themes had been detected and identifies, they were analyzed even further by using academic literature.
3.6.4 Data quality
In order to meet the criteria for a research of high quality, the authors have considered a set of criteria regarding qualitative research.
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Reliability relates to the consistency of the results, and it defines whether the research account is both appropriate and reliable. In order to increase the reliability of the results, the interview transcripts are analyzed systematically, and the authors aim to phrase the interview questions in a way that yields to answers on desired questions and issues yet doesn’t lead on the interviewee or impact the interviewee’s opinion, therefore minimizing any biases from impacting the data (Saunders et al., 2016).
In qualitative research, validity means the level how appropriate the used research tools, processes and data are (Saunders et al., 2016). It refers to the dependability of the study, as well as the extent to which the findings yielded from the data are applicable in other contexts. In this particular research, validity is achieved by structuring the interviews in a way that ensures that all relative interest areas relating to the study where covered by a variety of questions in order to extract rich data. The participants were asked to clarify unclear answers and follow up questions were asked for additional information on important topics (Saunders et al., 2016). In addition, the full transcripts of the interviews were sent to interviewees in order to ensure that the interpretation of information they provided held truth and was valid, therefore contributing to the level of validity of the research conducted.
Another aspect of data quality is known as generalizability (Saunders et al., 2016), referring to the degree of which the findings from a qualitative study can be applied to different settings. A common problem affecting generalizability of a study is the chosen sample size. Choosing a small sample, however, it can be reasoned by the nature of the sample. Although this paper conducted be exploiting a single case study, the choice is reasoned by the characteristics of both the chosen company and the aims of this study. The chosen company has a long and established history of exploiting circularity and its business model revolves around circular operations. In addition,
choosing one company allowed a deep analysis of the case company as well as its operations, which was supported by the degree of access granted by the company to information that was relevant for the study. This includes a set of interviews with firm’s representatives as well as reports on the firm’s financial performance, history and projects on circular economy.
3.7 Ethical Considerations
The authors of this paper took various ethical considerations into account throughout the research. The objective of this study has been clearly communicated to the representatives of the case company. It has also been clearly stated and clarified who would have access on the information gathered and how the data would be treated after the research was conducted. The interviewees were asked prior to each interview whether they wanted to stay anonymous and they were encouraged to decline from disclosing potentially sensitive information if they desired so.
In addition, the authors have aimed at realistic, honest reporting of the data and findings and have analyzed the data as objectively as possible.
3.7 Methodology summary
To conclude this section, this paper utilizes an interpretivist research philosophy as well as inductive research approach. The method of sampling is known as purposive sampling, indicating that the authors chose a company with certain set of criteria, such as the company’s size, exploitation of circular economy as well as access to relevant information. Furthermore, the participants for the
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interviews where chosen to be employees who held critical key positions in the company which granted them high level of knowledge on the firm’s circular operations and activities, as well as their overall value chain. Primary data was gathered empirically from semi-structured interviews and from reliable literature sources in order to embrace the purpose of the research. Research ethics were considered throughout the research process, which is demonstrated by protecting the interviewees anonymity and ensuring that the participants where well-informed about the purpose of the study as well as the information that would be later disclosed in the paper. In addition, the authors remained as realistic and objective as possible when analyzing the findings, minimizing any biases and in order to ensure that the results where therefore as valid as possible, given the
exploratory nature of the study.
4. Empirical Findings
_______________________________________________________________________________________
This section presents the case company and the empirical findings from the interviews regarding Circular Economy, Business Model and Business Model Innovation.
________________________________________________________________________________
4.1 Case Company Description
The case company chosen for this research is a business that has a long and established history of capitalizing through the exploitation of circular economy. The company, Scandi Gruppen AB, is a pioneer in trading used photo copiers, printers and other related electric parts and components. In addition, the company’s product portfolio includes services related to their products. The company provides complete service concepts for their products, meaning that the products are tested, functional and ready to use. Also, a large portion of all copiers purchased by Scandi are harvested for useful original parts for other products and sold as such. The key activities of the organization are sourcing quality products at best price, testing/repairing at high speed and volumes and selling and exporting.
Scandi Gruppen is one of the largest exporters in the EU with over 40,000 copiers globally. Its’ most significant market areas are Asia, Africa, the Pacific, Middle East and Latin America. The company has three logistics centers in Europe in Sweden, Germany and in the UK. The logistic centers serve the firm’s long-term strategy which is to efficiently cater its pan-European suppliers of used photo copiers. The headquarters is located in Stockholm and the company employs around 60 people as for 2020.
25 4.2 Circular Economy at Scandi Gruppen AB
Scandi Gruppen’s value creating activities have always focused on selling used copiers which were bought from major producers at the end of their lease life. However, the company started to exploit circularity to a much greater degree as a survival strategy when the market conditions for a foreign market suddenly changed and the company was left with thousands of products which could not be sold to the target market due to suddenly occurred issues regarding exporting regulations. To make things worse, the inventory could not be sold on other major markets due to some parts and components either being banned by regulation in other countries or just
incompatible with local products and technology. As a result, the company was facing major financial losses after losing an access to a large international market, and it needed to quickly find buyers or an alternative use for an extensive inventory of products. However, this turned out challenging, since different international markets have different product requirements and
regulations. In addition, finding a buyer willing to purchase a large bulk of copiers is not that simple. The now useless inventory was not just heavy on acquiring and storing costs but disposing it
accordingly would also represent a major cost for the firm since disposing electrical devices and products is heavily regulated and costly. Instead, the company ended up doing something out of the scope of its’ then current operations and disassembled the entire inventory in order to find new use for the components which would be sold forward as such. The out of the usual solution turned out successful and eventually changed the entire business model of the firm. Not only did Scandi Gruppen manage to turn the useless inventory into profit, but they even found new, innovative use for parts which were previously unrecyclable. In the history of the company, this happy accident acts as the starting point of their relatively long history of creating value from circular economy. When asked to define what circular economy means to Scandi Gruppen, the answers underlined the economic value of circular economy for the business. For Scandi Gruppen, circular economy represents as the cornerstone of their current business model, and it is primarily discussed from the perspective of a source of value.
“
For Scandi Gruppen, circular economy is key to the success story – the entire business
idea is to reuse and enhance the value of used goods through refurbishing. Today, we
are 99,5% circular.”
When discussing the matter further, the answers were only loosely relating to sustainability
aspects, although when the authors explicitly asked what sustainability means to the company, the interviewees enthusiastically elaborated how sustainable development is one of the most
important values of the company. It is also demonstrated in the company’s environmental policy, according to which Scandi Gruppen effectively exploits circularity throughout the company’s business model and operations. In addition, the company is devoted to increase its capacity and maintain its reputation as a reliable supplier of used copier components. The main way how the company exploits circularity is by harvesting used parts to be refurbished or either sold or reused in
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operations. However, circularity is present on all aspects of the company’s operations and the company aims at sustainable sourcing, transport and logistics as well as designing the products to be later repaired and reused as far as possible.
“About 99,5% of all sourced/purchased copiers are either refurbished and sold or
stripped for parts or sold for full recycling for full material recovery. The balance
<0,5% ends up as refuse/garbage or destroyed (incineration of waste toner)”
The company differentiates itself by high levels of professionalism and unique knowledge, which is reflected in the exceptional level of circularity which according to the interviewees, is a result of skilled employees and effective processes. Their unique knowledge on the industr has enabled them to build an extensive network of suppliers and customers, which is repetitively brought up during the interviewees when discussing the company’s operations, history and performance. The level of technical skills and capabilities held by the company’s staff also adheres to their success in creating value through circularity, as the highly effective and skilled technical department is able to classify the products and components based on their ideal further usage by either extending the useful life of whole products or to extract valuable components and prepare them for sale to appropriate channels.
The main motivators for implementing circularity into Scandi Gruppen’s business model are the financial gains which the company reaps from circular activities. However, its cost structure has experienced increases as its circular operations are also labor intensive, therefore causing additional labor costs.
“
There is money in other people’s garbage!”
“The more circular we get, the more money we make – and incurring higher costs due
to more work put into product enhancement / refurbishing”
As for challenges and obstacles for circularity, the interviewees believe that the greatest challenge of circular economy in general is to change consumers attitudes towards used products. On firm-level, the main obstacle of new circular ventures is convincing the upper management that there is capitalizable potential in circular economy right in front of their eyes, and therefore to get financing for circular ventures. On the other hand, Scandi Gruppen hasn’t experienced issues related to political and regulative framework as a hinderer for its circular operations but states it has benefitted them by regulating the industry for their gain.
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“In general, the company hasn’t experienced major regulative or legislative issues
when it comes to circular economy. The EU WEEE directive prohibits export of
malfunctioning or junk electronic goods such as copiers. This is good for us since it
prevents our competitors to export junk (we export only quality products but suffer
from competitors selling sub-par products driving the pricing down”
4.3 Business Model
In order to gain an ever deeper understanding of how Scandi Gruppen creates, delivers and captures value through exploiting circular economy, the interviewees were asked to describe the company’s business model using Richardson’s (2008) model which categorizes the components of a business model into three main aspects; the value proposition, the value creation and delivery system and value capture.
Starting from the value proposition, a unilateral answer was given by all interviewees stating that Scandi Gruppen’s value proposition is to provide used printers, copiers parts and components which are of high quality. The high product quality was also mentioned as the enabler of competitive advantage, and which makes the company’s products attractive to the customer. However, some variance existed in the answers regarding the sources of competitive advantage, which according to one interviewee accounts for the company’s high level of unique knowledge and intellectual capital. One of the employees interviewed also discussed the network of long-term customers as a steady source of profit, as the firm has managed to establish tight customer relations with large-scale purchasers enabling Scandi Group to sell its’ products to over 70 countries.
Scandi Gruppen’s value creation and delivery process constitutes of sourcing good quality products, testing/repairing at high speed and volume, asset sales/exporting, unique knowledge, wide network with good relationships and high levels of co-operation, highly efficient and skilled technical staff and major copier producers as sourcing partners, long term contractors and supply contracts, long-term partner customers. Strategic alliances with international selling companies as the main key partner network. The identifiable customer segments are wholesale importers and distributors, copier dealers presenting different brands outside Sweden. The customers are further segmented based on individual segment’s product needs and quality expectations. For example, top quality products are sold to top paying customers, medium quality to bulk buyers, obsolete copiers are stripped down for spare parts and excess plastic and metal scrap is sold to recyclers. As for value capturing, the company has value streams from services as hardwire wiping,
registration chargeable fee to suppliers in addition to its main revenue stream from bulk-selling copiers and printers to partly and fully owned selling companies in several countries as well as large scale independent copier dealers.
