Business Model Innovations and Sustainability Transitions

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IN

DEGREE PROJECT INDUSTRIAL MANAGEMENT, SECOND CYCLE, 30 CREDITS

STOCKHOLM SWEDEN 2020,

Business Model Innovations and Sustainability Transitions

The Case of Circular Business Models in the Fashion Industry RIKU SALMI

KTH ROYAL INSTITUTE OF TECHNOLOGY

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Business Model Innovations and Sustainability Transitions: The Case of Circular Business

Models in the Fashion Industry

by Riku Salmi

Master of Science Thesis TRITA-ITM-EX 2020:232 KTH Industrial Engineering and Management

Industrial Management SE-100 44 STOCKHOLM

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Affärsmodellsutveckling och Hållbara Övergångar: En Fallstudie av Cirkulära

Affarsmodeller inom Modeindustrin

Riku Salmi

Examensarbete TRITA-ITM-EX 2020:232 KTH Industriell teknik och management

Industriell ekonomi och organisation SE-100 44 STOCKHOLM

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Master of Science Thesis TRITA-ITM-EX 2020:232

Business Model Innovations and Sustainability Transitions: The Case of Circular Business Models

in the Fashion Industry

Riku Salmi

Approved

2020-06-08

Examiner

Cali Nuur

Supervisor

Emrah Karakaya

Commissioner Contact person

Abstract

The concept of circular economy has gained a lot of interest among both researchers and practitioners. Moving from the traditional linear “take, make, disposal” resource management approach towards circular economy principles that aim to keep resources in a loop of usage is considered to be a possible way for material-intensive industries to decouple economic growth from environmental constraints. This could enable increased value creation while maintaining a decreased environmental footprint. The transition towards circular economy has stimulated companies across industries to introduce varying types of circular business model innovations. By using the case of clothing resale in the fashion industry, this thesis aims to explore how companies innovate their business models in the context of circular economy. The study uses the Multi-Level Perspective framework to analyze the emerging business model innovations within the clothing resale markets, incumbent fashion retailers’ reactions towards them, and the role of innovating business models in possible future stages of the fashion industry’s transition towards circular economy. The findings show that the main types of business model innovations emerging in the highly growing clothing resale markets are born-circular fashion retailers, online resale platforms, B2B back-end services for clothing resale and clothing as a service. Most incumbent fashion retailers have been actively monitoring the development of the clothing resale market, but only a small part of them have introduced resale-related business models themselves. Some fashion retailers that have taken a more active approach towards clothing resale have followed a business model diversification strategy where the existing business model stays in place and a secondary resale business model is established parallel with the core business model. Although the clothing resale business model innovations can entail some short-term economic and brand benefits especially with specific product types and price segments, the largest benefits are likely to be related to preparing for future changes. Fashion retailers that are currently reacting early to the circular economy transition by diversifying their business model with novel resale business model innovations strengthen their future position if changes in regulatory frameworks, consumer mindsets and technologies further accelerate the importance of circular economy in the industry.

Keywords: Circular Economy, Business Model, Innovation, Fashion, Multi-Level Perspective, Clothing Resale

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Examensarbete TRITA-ITM-EX 2020:232

Affärsmodellsutveckling och Hållbara Övergångar: En Fallstudie av Cirkulära

Affarsmodeller inom Modeindustrin

Riku Salmi

Godkänt

2020-06-08

Examinator

Cali Nuur

Handledare

Emrah Karakaya

Uppdragsgivare Kontaktperson

Sammanfattning

Begreppet cirkulär ekonomi har fått ett stort intresse bland både forskare och utövare. Genom att förflytta ifrån den traditionella linjära resurshanteringsstrategin: "ta, göra, bortskaffa", till principerna för cirkulär ekonomi. Principerna syftar till att istället hålla resurserna i en slinga av användning och anses vara ett möjligt sätt för materialintensiva industrier att koppla från den ekonomiska tillväxten från miljöbegränsningar, där en cirkulär ekonomi kan möjliggöra ökad värdeskapande samtidigt som ett minskat miljöavtryck bibehålls. Övergången till en cirkulär ekonomi har stimulerat företag över en mängd olika branscher att införa olika typer av cirkuläraffärsmodellsutveckling. Genom att studera det nya fenomenet av återförsäljning av kläder inom modebranschen, syftar examensarbetet att undersöka hur företag utvecklar sina affärsmodeller i samband med cirkulär ekonomi. Studien använder ett multi-perspektivramverk för att analysera de nya affärsmodellinnovationerna inom klädåterförsäljningsmarknaderna.

Utöver det studeras även de nuvarande modeförsäljares reaktioner gentemot dessa samt rollen som innovativa affärsmodeller kan ha i framtida stadier av modebranschens övergång till cirkulär ekonomi. Resultaten visar att de viktigaste typerna av affärsmodellinnovationer på de signifikant växande marknaderna för återförsäljning av kläder är de `föddes-cirkulära´ modeförsäljarna, återförsäljningsplattformar på nätet, samt B2B-tjänster för återförsäljning av kläder och kläder som en tjänst. De flesta nuvarande modeförsäljare har aktivt övervakat utvecklingen av marknaden för klädåterförsäljning, men bara en liten del av dem har själva infört återförsäljningsrelaterade affärsmodeller. Vissa modeförsäljare som har tagit ett mer aktivt förhållningssätt till återförsäljning av kläder har följt en strategi för diversifiering av affärsmodeller där den befintliga affärsmodellen förblir på plats och en sekundär affärsmodell för återförsäljning upprättas parallellt med den huvudsakliga affärsmodellen. Trots att utveckling av affärsmodellens klädesåterförsäljning kan medföra ekonomiska fördelar och varumärken på kort sikt, särskilt med specifika produkttyper och prissegment. Förutses de största fördelarna troligen vara relaterat till förberedelser för framtida förändringar. Modeaktörer som reagerar tidigt på övergången till cirkulär ekonomi genom att diversifiera den befintliga affärsmodellen med nya innovationer eller kompletterar med en ny affärsmodell, stärker sin framtida position om förändringar i regelverk, konsumentens tankesätt och teknik ytterligare påskyndar vikten av cirkulär ekonomi i branschen.

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LIST OF FIGURES

FIGURE 1.THE MULTI-LEVEL PERSPECTIVE FRAMEWORK ... 6

FIGURE 2.TRANSITION PATHWAYS ... 8

FIGURE 3.AN EXAMPLE CLASSIFICATION OF FASHION RECYCLE AND REUSE ... 17

FIGURE 4.INTEGRATED BUSINESS MODEL’S COMPONENTS AND PARTIAL MODELS ... 20

FIGURE 5.TYPES OF BUSINESS MODEL INNOVATIONS... 21

FIGURE 6.COMPARISON OF TRADITIONAL, SUSTAINABLE AND CIRCULAR BUSINESS MODELS... 23

FIGURE 7.TYPES OF CIRCULAR BUSINESS MODEL INNOVATIONS... 24

FIGURE 8.CONSUMER ENGAGEMENT IN CLOTHING RESALE ... 28

FIGURE 9.STRUCTURING THE MEANINGS OF LUXURY FASHION RESALE PURCHASES ... 29

FIGURE 10.TYPICAL FASHION RETAIL FORWARD AND REVERSE SUPPLY CHAINS ... 31

FIGURE 11.BUSINESS MODEL INNOVATIONS AS PART OF THE MLP ... 33

FIGURE 12.THE FOCUS OF EACH SUB-CHAPTER IN THE FINDINGS SECTION ... 40

FIGURE 13.TIME-TO-MARKET OF CIRCULAR BUSINESS MODEL INNOVATIONS VERSUS TECHNOLOGY-FOCUSED INNOVATIONS BASED ON THE ANALYSIS OF FASHION FOR GOOD AND BCG ... 42

FIGURE 14.TOTAL SECOND-HAND APPAREL MARKET (IN BILLION USD) ACCORDING TO THREDUP ... 44

FIGURE 15.WOMEN WHO HAVE BOUGHT OR ARE OPEN TO BUY SECOND-HAND PRODUCTS IN THE FUTURE ... 45

FIGURE 16.PURCHASERS OF SECOND-HAND APPAREL, FOOTWEAR OR ACCESSORIES PER AGE GROUP ... 45

FIGURE 17.FINANCIAL VIABILITY OF RESALE BUSINESS MODELS BASED ON THE ANALYSIS OF FASHION FOR GOOD AND ACCENTURE STRATEGY ... 47

FIGURE 18.AMOUNTS OF INCUMBENT FASHION RETAILER SIGNATORIES PER ACTION POINT IN GLOBAL FASHION AGENDA’S ”2020CIRCULAR FASHION SYSTEM COMMITMENT” ... 49

FIGURE 19.FOUR MAIN TYPES OF RESALE-RELATED BUSINESS INNOVATIONS BASED ON SCOPE AND NOVELTY ... 57

FIGURE 20.AMOUNT OF CLOTHING RESALE BUSINESS MODEL INNOVATIONS INTRODUCED BY INCUMBENT FASHION RETAILERS ... 60

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LIST OF TABLES

TABLE 1.INCUMBENT ACTORS’ REACTIONS TO SUSTAINABILITY TRANSITIONS ... 11

TABLE 2.MAIN PROCESSES OF CE AND EXAMPLE SECTORS THEY CAN BE APPLIED TO ... 13

TABLE 3.CHARACTERISTICS OF SUSTAINABLE BUSINESS MODEL INNOVATIONS... 22

TABLE 4.INTERVIEWS CONDUCTED DURING THIS STUDY ... 36

TABLE 5.COMPANIES WHOSE WEBSITES WERE ANALYZED IN THIS STUDY ... 37

TABLE 6.INDUSTRY REPORTS ANALYZED IN THIS STUDY ... 38

TABLE 7.DIFFERENCES BETWEEN CLOTHING SECOND-HAND SALES, RENTAL AND RECYCLING SOLUTIONS FROM THE PERSPECTIVE OF A FASHION RETAILER ... 43

TABLE 8.DESCRIPTIONS OF THE RESALE MODELS MOST COMMONLY ADOPTED BY INCUMBENTS ... 51

TABLE 9.CATEGORIZATION OF EMERGING ACTORS IDENTIFIED IN THIS STUDY ... 55

TABLE 10.TYPES OF RESALE BUSINESS MODELS INCUMBENT FASHION RETAILERS ARE PURSUING AS A REACTION TO CLOTHING RESALE .... 60

TABLE 11.BUSINESS MODELS OF EMERGING ACTORS IDENTIFIED IN THIS STUDY (PART 1/2) ... 79

TABLE 12.BUSINESS MODELS OF EMERGING ACTORS IDENTIFIED IN THIS STUDY (PART 2/2) ... 80

TABLE 13.INCUMBENT FASHION RETAILERS’ RESALE BUSINESS MODELS (PART 1/2) ... 81

TABLE 14.INCUMBENT FASHION RETAILERS’ RESALE BUSINESS MODELS (PART 2/2) ... 82

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FOREWORD

I would like to extend my sincerest gratitude to everyone who has helped me during the whole thesis journey. The thesis has been an interesting and educational process during which I have met exceptional professionals and learned a lot about circular economy and the fashion industry. A large thank you goes to the industry experts I met and interviewed during the process; I received a lot of valuable insights on the topic from them. Secondly, I would like to thank my thesis supervisor, examiner and classmates for their priceless comments and feedback during the whole process. Finally, I would like to thank my family and friends who supported me during this journey.

Riku Salmi

Stockholm, Sweden, May 2020

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1. INTRODUCTION

This chapter presents an introduction to the thesis. Chapter 1.1 presents a contextual background to circular economy and the fashion industry. Chapter 1.2 formulates a problem that acts as the basis for the aim of this thesis, which is presented in chapter 1.3 along with the research questions of the study. Finally, the study’s contribution (Chapter 1.4), case and limitations (Chapter 1.5) are presented.

1.1 Background

Climate change, socio-political concerns and shifting consumer behavior have pressured companies across different industries to incorporate environmental sustainability in their business models (Geissdoerfer et al., 2018a). There is an increasing need to find more resource-efficient ways for companies to deliver value for their customers. Addressing this need, researchers’ and practitioners’ interest towards circular economy (CE) has largely accelerated during the past decade (Ghisellini et al., 2016).

CE can be defined in various ways. One of the definitions, that is popularized by the Ellen MacArthur Foundation (2013), describes CE as “an industrial system that is restorative or regenerative by intention and design. It replaces the ‘end-of-life’ concept with restoration, shifts towards the use of renewable energy, eliminates the use of toxic chemicals, which impair reuse, and aims for the elimination of waste through the superior design of materials, products, systems, and within this, business models”.

There is an ongoing transition towards CE that is shifting the traditional linear “take, make, disposal” resource management approaches towards a paradigm that uses material cycles to keep resources in a loop of production and usage (Korhonen et al. 2017). This ultimately can lead to more value for a longer period (Urbinati et al., 2017). The increasing importance of this transition can be seen across various industries; a growing number of companies are implementing new ways of design, maintenance, repair, reuse, remanufacturing, refurbishing or recycling to shift their linear value chains towards more circular ones (Geissdoerfer et al., 2017).

A field where the transition towards CE is important is the fashion industry. Due to high energy consumption, water use, carbon emissions and the usage of chemicals, dyes and finishes, the fashion industry has one of the most polluting end-to-end supply chains out of all industries (Nagurney & Yu, 2012; Aiama et al., 2016). The industry’s environmental issues are also growing due to fast-changing cheap fashion that is increasing consumption and resulting in larger amounts of textile waste (Vehmas et al., 2018). Especially fashion retailers, companies operating in the downstream of the fashion supply chain, are responding to these environmental challenges with CE-focused initiatives. These retailers, facing large external pressures to decrease their environmental footprint, are emphasizing circularity in their sustainability strategies. They claim that transitioning towards circular operations will decrease the overall amount of materials needed throughout their supply chain which will inevitably reduce the negative environmental effects associated with the fashion industry. Some of the fashion retailers have even communicated their dedication towards becoming fully circular in the future (Ellen MacArthur Foundation, 2017).

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The incentives behind fashion retailers’ ambitions to transit towards CE are not purely environmental, however. One of the key reasons why these companies are interested in implementing new circular operations is because they enable decoupling economic growth from environmental constraints (Ghisellini et al., 2016). Fashion retailers see CE as a potential way for them to increase the economic value they create while maintaining a decreased environmental footprint (Leal Filho et al., 2019). This economic potential can be realized for example through increased transactions per product or material, or through cost savings derived from decreased resource losses (Stewart & Niero, 2018). CE can also be a way for companies to find completely new revenue streams out of the existing residual value of their products (Romero & Rossi, 2017).

As an effort to understand and capture some of the environmental and economic potential of CE, some companies have started innovating their business models (Ellen MacArthur Foundation, 2017). The phenomenon of introducing new business models in order to achieve circularity has spurred growing research interest in the concept of circular business model innovations. As Nußholz (2017, p. 12) state it, a circular business model innovation is “how a company creates, captures, and delivers value with the value creation logic designed to improve resource efficiency through contributing to extending useful life of products and parts (e.g., through long-life design, repair and remanufacturing) and closing material loops”. Circular business model innovations that have been piloted in the fashion industry can be categorized into reselling, recycling, upcycling, sharing or remanufacturing. The characteristics and challenges related to individual circular business model innovations can differ largely depending on which category they are a variation of; those companies that are for example recycling used textiles into entirely new clothing have to consider different types of aspects in their business model than companies reselling finished clothing items from one consumer to another (Ghisellini et al., 2015; Linder & Williander, 2017; Murray et al., 2017; Pedersen et al., 2019; Stahel, 2019). To transit towards CE in an economically viable way, fashion retailers must have a good understanding of the specific characteristics of the type of circular business model they are pursuing (Holtström et al., 2019).

The potential adoption of CE principles in the fashion industry is a multi-dimensional socio- technical transition that is affected by the actions of different types of actors such as incumbent fashion retailers, emerging start-ups, consumers and regulators. The Multi-Level Perspective (MLP) by Geels (2002) can be seen as an appropriate framework to understand such transitions as it incorporates the inter-linkages between the development in a higher macroeconomic socio- technical landscape, the existing socio-technical regime dominated by established actors and different niche innovations introduced outside the incumbent market. In this thesis, the MLP is used to analyze these inter-linkages in the context of the fashion industry’s transition towards CE.

1.2 Problem Formulation

As stated in the previous section, CE has inherent economic potential. However, companies are struggling to capture this potential. There is still a lack of comprehensive knowledge on how fashion retailers can make the shift towards CE economically viable (Rizos et al., 2016). One reason for this is that the specific cost and revenue structures are relatively unclear (Linder &

Williander, 2017). Another key reason is that introducing CE requires a change in how fashion retailers do business. New emerging circular business model innovations can be complex and inherently different than the companies’ core linear models. In some cases, they can require shifts

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in the ways of delivering customer value, which can be very challenging and thus increases the risk of successful implementation (Lewandowski, 2016).

Although the fashion industry has witnessed several pilot projects on implementing CE, and the academic community has published case studies on the circular solutions used, there is still a lack of sufficient framework supporting companies in innovating around circular business models (Bocken et al., 2017). The lack of industry best practices and granular analyses on the business model components proves to be challenging since existing circular business models have limited transferability to other companies. This, combined with the dissimilarity of circular operations with the traditional linear operating model, creates strategic challenges for the companies desiring to take part in the transition towards CE. To foster a clothing company’s successful implementation of circular economy, a deeper understanding of specific types of circular business models and how to design them is needed (Lewandowski, 2016).

1.3 Aim and Research Questions

The aim of this thesis is to explore how fashion retailers innovate their business models in the context of clothing resale. To do so, CE is taken as a basis and the following main research question is formulated:

• Main Question: How and under which conditions do fashion retailers innovate their business models to navigate the transition towards circular economy?

This question is addressed in the empirical context of clothing resale. Thus, this main question is translated into following sub-questions:

• Sub-question 1: What are the main types of circular business model innovations emerging in the clothing resale market?

• Sub-question 2: How are incumbent fashion retailers responding to emerging business model innovations in clothing resale?

• Sub-question 3: What are the potential pathways for clothing resale in the fashion industry’s circular economy transition?

Sub-questions 1 and 2 focuses on the present-day interaction between the niche innovation and regime levels of the MLP. Sub-question 3 on the other hand expands this view into possible future stages of the fashion industry’s transition.

1.4 Contribution

Several studies have aimed to better understand the transition towards CE by studying circular business models. To date, researchers have focused mainly on definitions, taxonomies, components and conceptual models of CE in relation to business model theory (Barquet et al., 2013; De Jong et al., 2015; Lewandowski, 2016; Mentink, 2014; Urbinati et al., 2017). Despite a few exceptions (Guldmann & Huulgaard, 2020; Hofmann, 2019), there has still been limited interaction between the research areas of CE, industrial transitions and business model innovations. This thesis sheds more light on the interplay between these concepts by exploring

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clothing resale business model innovations and using the MLP to discuss their role in a socio- technical transition towards CE.

Furthermore, some past literature has also examined specifically the fashion industry when studying circular business models (Bocken et al., 2017; Holtström et al., 2019; Hvass & Pedersen, 2019; Stål & Corvellec, 2018). These studies have focused on a broader sense of the phenomenon;

they have included all categories of circular business models into the same study scope. This thesis contributes to this growing literature by bringing in-depth empirical insights on the case of clothing resale.

1.5 Description of case and delimitations

The case focused on in this study is clothing resale in the fashion industry. Clothing resale refers to reselling or redistributing used garments to a second or later end-user, as well as clothing rental.

The case is chosen due to its relevance given that clothing resale is an area within CE where a large part of the fashion industry’s business model innovations occur (Todeschini et al., 2017).

The case of clothing resale is studied from the context of business model innovations of both emerging start-up companies and incumbent fashion retailers. As the study is delimited to only investigating clothing resale business models in the fashion industry, other aspects of CE, such as circular design or recycling, are not focused on in the study.

From Blomkvist & Hallin’s (2015) system perspective, this study focuses on the industrial level;

clothing resale business model innovations are studied by analyzing the processes of firms across the industry. The studied business model innovations’ effects on the transition in a higher-level socio-technical landscape will also be analyzed. Implications on the individual level will not be focused deeply on this study.

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2. LITERATURE REVIEW

This chapter presents a review of previous literature relevant to this thesis. It focuses on two different types of literature: Transition literature (Chapter 2.1) and business model literature (Chapter 2.2). Both fields of literature are reviewed in a top-down manner; the higher-level concepts are first presented, after which each sub-chapter focuses on narrower research spaces that are more specifically related to this study. After the literature on transitions and business models is presented, Chapter 2.3 combines these two fields in form of a summary and concludes with a theoretical framework considered suitable to be used in this study.

2.1 Industrial Transitions

Industrial transitions are complex occurrences that do not happen easily due to lock-in effects that make shifting from one industry paradigm to another extremely difficult (Arthur, 1989). Past literature has studied multiple transitions using different theoretical frameworks in different types of industrial contexts. This section reviews a part of the transition literature space by going in a top-down manner from a general theory towards literature specifically applicable for this thesis.

The section starts by presenting the MLP by Geels (2002), one of the most common frameworks in the transition literature. Followed by this, the industrial transition research specifically focused on CE transitions is reviewed. Finally, the transition towards CE in the fashion industry and its centric role in the industry’s sustainability efforts is presented.

2.1.1 Multi-Level Perspective on Sustainability Transitions

A widely used framework to understand systematic transitions within industries is the Multi-Level Perspective (MLP) by Geels (2002). The MLP offers to address the complexities of socio-technical transitions by presenting the inter-linkages between different forces that are involved in the transition. It has been used to analyze technological transitions as well as sustainability transitions (Geels, 2011; McMeekin & Southerton, 2012; Bolton & Hannon, 2016). Geels (2010) further points out that, in addition to changes in technology, socio-technical transitions are changes in consumer behavior, regulations, culture and business models. The MLP conceptualizes socio- technical transitions with three heuristic levels: niche innovations, socio-technical regime and socio-technical landscape. The interplay between these three levels in a socio-technical transition is visualized in Figure 1.

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Figure 1. The Multi-Level Perspective framework (adapted from Geels, 2002, p. 1263).

Niche Innovations

The first level of the MLP consists of niche innovations. This is an area where innovation activities pursuing to enter the current socio-technical system occur. These innovation activities are often pursued by smaller players operating in niches that are separated from the incumbent market.

These niches are typically protected from the existing market forces that are prohibiting incumbent actors (Smith et al., 2010; Geels, 2011). Although operating rather separately from the incumbent market dynamics, the solutions developed in the niches are usually geared towards solving an underlying problem in the regime-level (Geels, 2005). Niches and socio-technical regimes form an evolutionary system; innovators operating in niches provide new potential solutions for the regime-level and the dynamics between regime actors determine whether these solutions are suitable enough for them to be injected into the regime (Genus & Coles, 2008; Geels et al., 2016).

Some niche innovations break through into the regime-level and initiate a diffusion and competition with the incumbent regime. These breakthroughs are driven by internal factors such as the innovation’s performance improvements and external factors such as windows of opportunities caused by changes in the landscape-level (Geels 2005). The interactions between niches and socio-technical regimes occur in many dimensions (for example market, regulations, culture and technologies), and are driven by individual actors that search, learn, compete, negotiate and collaborate as the transitions move forward (Köhler et al., 2017).

Socio-Technical Regime

The regime-level describes the dominant socio-technical system where incumbent actors have established. It is described by a set of networks, practices, technologies, and rules that are dynamically stable. Components within the regime level can include industries, markets, companies, policymakers, users, technologies and cultures (Geels, 2002; Smith et al., 2010; Geels;

2011). These regimes are locked in and stabilized in many ways, which makes it harder to change

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the dynamics within them (Geels, 2010). Due to this, most regimes tend to resist radical transformations and undergo changes only through incremental steps along predicted trajectories (Lachman, 2013) while only some are able to proactively enter or follow into niches (Bergreen et al., 2015; van Mossel et al., 2018). The MLP describes industrial transitions as the shifts in the regime-level. These shifts are caused by pressures both from the other levels and from inside the regime. Especially macro-level socio-technical forces can create transformation pressures for the regime that, if grown large enough, can cause a crack in the existing regime which can lead to a creation of a new regime with new dynamics, actors or rules (Geels, 2010).

Socio-Technical Landscape

The socio-technical landscape is a set of macro-level drivers influencing the current state of socio- technical regimes. It includes high-level economic, political, social and environmental pressures that shape both the regimes and niche innovations (Geels, 2005). Actors in the socio-technical systems are not able to control landscapes since they cannot be changed at will. The changes in the landscape-level occur slowly through events such as changes in demographics, macroeconomic trends, regulatory changes and crises, deep cultural and societal values and climate change. These changes create transformation pressures to the existing socio-technical regimes, thus opening up opportunity windows for niche innovations (Smith et al., 2005; Geels; 2010;

Köhler, 2019).

By dividing the transitions into these three levels, the MLP enables understanding of the interplay between industrial and societal ecosystems, incumbent market actors and innovations. Industrial transitions are a result of a dialectic interaction processes between the three levels; the landscape- level dynamics are destabilizing regimes and pressuring them to change, which in terms creates opportunities for niche innovations to foster this change (Smith et al., 2005; Geels & Schot, 2007;

Genus & Coles, 2008).

The MLP stresses that the processes of the three levels should be aligned for a transition to happen (Köhler, 2019). Timing is therefore a crucial factor in MLP. When the change pressures caused by landscape-level shifts are large enough, the niche innovations have to seize this opportunity with a sufficient solution. If the innovations are not fulfilling these change pressures, due to for example technological prematurity or economic unviability, existing regime actors can prevent them from diffusing into the regime.

Sustainability Transitions and their Pathways

Within industrial transitions, sustainability transitions are a highly emerging field of research.

Sustainability transitions can be defined as “long-term, multi-dimensional and fundamental transformation processes through which established socio-technical systems shift to more sustainable modes of production and consumption” (Markard et al., 2012, p. 956). As stated by Köhler et al. (2017), these transitions have a special role within sustainability research due to their multi-dimensionality, multi-actor process, dialectic relationship between stability and change, long-term timespan, uncertainty, values contestation, and the central role of public policy. The topic of sustainability transition has gained interest among scholars and it has been studied in various empirical contexts and geographical locations. During the past decade, sustainability transitions as a research topic has reached an extremely large output of published articles per year (Markard et al., 2012; Köhler et al., 2019).

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Among the frameworks that have been used to display, understand and promote transitions towards sustainability, the MLP has been one of the common ones (Markard et al., 2012; Lachman, 2013).

Smith et al. (2010) argue that MLP is a suitable framework to capture sustainability transitions since it is a straightforward way to order and simplify the analysis of complex, large-scale shifts in broad systems.

There are multiple types of transitions pathways through which a socio-technical regime can shift from one stage to another (Geels & Schot, 2007). The type of transition pathways is ultimately depending on the magnitude of change pressures the landscape-level is causing, the nature of multi-level interactions (symbiotic or competitive) and the timing of the niche innovation disrupting the regime (Genus & Coles, 2008). Geels and Schot (2007) present four different types of transition pathways: Substitution, Reconfiguration, Transformation and De-alignment and re- alignment. In substitution, the new entrants may replace the incumbent actors of the regime with the niche innovations they are driving forward. Reconfiguration on the other hand includes a combination of new and existing technologies; regime actors are in search of alternative regimes and may create alliances with new entrants. Transformation occurs when regime actors aim to keep the existing regime through incremental innovative improvements to existing technologies and business models. They might also incorporate symbiotic niche innovations into these incremental innovative efforts. Finally, de-alignment and re-alignment is when the regime is disrupted by shocks and the incumbent actors either search for alternative regimes or collapse.

Figure 2 visualizes the transition pathways.

Figure 2. Transition pathways (adapted from Geels et al., 2016; Karakaya et al., 2018)¹.

1 Original framework’s technological innovation system is changed to business model innovation.

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Some specific differences of sustainability transitions compared to other types of industrial transitions are noticed in the past literature. Geels (2010) summarizes three main complexities that should be considered when studying sustainability transitions through MLP. Firstly, sustainability is a normative goal and a collective problem. This leads inevitably to prisoner’s dilemma and free- rider problems; private actors do not have clear incentives to transition towards sustainability.

Therefore, public authorities and civil societies have a much larger role in sustainability transitions; the rules and economic conditions of sustainability actions as well as changes in consumer behavior act as motivators for private actors to ‘make the transition’. Secondly, the author emphasizes that unlike many historical transitions that were often focused around one or two innovations, sustainability transition in many industries include multiple different types of

‘green’ niche innovations. This makes the transition more complex since it raises questions such as: Through what kind of metrics should these innovations be evaluated and compared? Should the choice between ‘green’ innovations be made by public authorities and experts that base their decisions on environmental calculations, or by consumers and industries? The third problem emphasized in the study is the fact that current environmental problems such as climate change, biodiversity and resource scarcity are global and not directly visible or tangible. Geels argues that mobilization of these problems is highly dependent on a large extent of social movements and public opinion.

Incumbents’ Strategies in Sustainability Transitions

Another trait of sustainability transitions that has spurred a lot of discussion in the academic community is the role of corporate strategists in questions regarding environmental sustainability.

The studies in the field of environmental management have often been too naïve and lacking the perspective of strategists; they have lacked attention on the trade-offs between profits, people and environmental impacts, which are essential when companies are deciding on their sustainability strategies (Hahn et al., 2010; Pinkse & Kolk, 2010; Winn et al., 2012). This has been an essential source of criticism in sustainability transition literature. The studies of sustainability transitions using MLP have lacked focus in the micro-level; strategies of regime-level actors have been insufficiently included in the analysis of the transition (Smith et al., 2005; Markard and Truffer, 2008; Stenzel & Frenzel, 2008). Due to this, some researchers state that more emphasis on companies and competitive dynamics between them is needed. Farla et al. (2012, p. 996) state that

“If we understand the struggles of actors with competing interests […] we will better be able to assess the conditions for sustainability transitions to materialize”. They suggest that further research should try to understand how much leeway regime-level actors have when pursuing sustainability transitions, how do different companies collaborate in the transitions, and how do competitive dynamics affect the transition.

Some literature on sustainability transitions has studied the topic in relation to business models and incumbent reactions. Bidmon and Knab (2018) argue that incumbent business models are a part of the socio-technical regime because they enforce this dynamic stability by creating rules and structures between regime actors. This view of placing existing business models into the regime is aligned also with the views business model scholars since the literature on business models often describes the existing dominant mode of doing business creates significant cognitive and structural barriers to renewing business models (Chesbrough, 2007; Doz & Kosonen, 2010). Bolton &

Hannon (2016) studies the business model innovations in the context of sustainability transitions.

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They argue that although business model innovations have a role in sustainability transitions, the relationship between business models, regulatory frameworks and infrastructure systems is of much greater importance.

Since sustainability transitions are complex systemic changes, business model innovation in itself is insufficient in causing it (Bidmon & Knab, 2018). Emergent business models need to be well aligned and have synergies with political, regulatory and market structures for them to drive the transitions (Bolton & Hannon, 2016). Both Smink et al. (2015a) and Fuenfschilling and Trugger (2014) on the other hand focuses on the strategies of powerful incumbent regime actors that are threatened by sustainability transitions. Their findings suggest that incumbent actors deploy multiple types of strategies to defend their position from new sustainable innovations; they try to influence policymakers by providing information and arguments and try to persuade the general public and other companies on their stable position by communicating new strategies and setting new technical standards. Van Mossel et al. (2018) argue that incumbents have four different behavior types during transitions: First to enter the niche; Follow into niches; Delay the transition and Remain inert. They explain common incumbent characteristics for each of these behavior types (Table 1). Multiple researchers also agree that the role of intermediary actors and boundary spanners have an important role in aligning niche and regime development (Diaz et al., 2013;

Kivimaa, 2014; Smink et al., 2015b)

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Table 1. Incumbent actors’ reactions to sustainability transitions (adapted from van Mossel et al.

2018).

2.1.2 Transitions Towards Circular Economy

Based on numerous researchers (Perman, 2003; Andersen, 2007; Preston, 2012; Su et al., 2013;

Heshmati, 2015; Ghisellini et al., 2016), the concept of CE was first introduced in 1989 by Pearce and Turner in their book “Economics of Natural Resources and the Environment”. The authors criticized the environmental harm caused by the traditional linear economic system and concluded with a new economic model, CE. Although the authors were first to introduce the concept as such, some aspects of CE can be traced back to even earlier decades. Their publication of Pearce and Turner was influenced by the work of Boulding (1966) which describes the earth as a closed and circular system. Boulding envisioned a closed economy that would be less reliant on first-use material inputs and more utilizing the reproduction of recycling waste outputs. Other researchers also introduced some aspects of CE before the concept was introduced. Stahel and Reday (1976) conceptualized a type of loop economy to describe company strategies for prevent waste and use

Theory First to enter niches Follow into niches Delay the transition Remain inert

Behavioral Theory of the firm

• Incumbents not meeting their aspirations, in the absence of a niche perceived to be successful.

• Incumbents with a high amont of slack.

• Incumbents not meeting their aspirations, in the presence of a niche perceived to be successful.

• Incumbents meeting their aspirations.

Resource-Based View • Incumbents with dynamic capabilities.

• Incumbents with dynamic capabilities and resources fitting niches better than the regime.

• Incumbents able raise isolating mechanisms.

• Incumbents that have internal conflicts.

• Incumbents that have enough slack.

• Incumbents that have well developed routines.

• Incumbents that dont have dynamic capabilites or excess resources.

Resource Dependence Theory

• Incumbents that possess resources that can be used in a niche.

• Incumbents controlling resources that enables increased control over their environment within a niche.

• Incumbents that depend on powerful companies supporting a niche.

• Powerful incumbents supporting the incumbent regime.

• Incumbents dependent on powerful firms supporting the incumbent regime.

Institutional Theory

• Incumbents exposed to different conflicting institutions.

• Incumbents are more legitimate in niches than in the regime.

• Incumbents whose priviledge and position are threatened.

• Incumbents that are only exposed to institutions within the incumbent regime.

• Incumbents are more legitimate in the regime than in niches.

Organizational Ecology

• Incumbents with technically efficient practices that deviate from institutional demands.

• Incumbents that have been able to innovatively change their organization in the past.

• Generalist incumbent.

• Small incumbents.

• Specialist incumbents.

• Large incumbents.

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resources more efficiently. Their concept pursued four main goals: product life-cycle extension, long-life goods, reconditioning activities and waste prevention. In addition to this, Stahel (1982) emphasized selling utilization over ownership of products as a relevant sustainable business model.

Over the past decades, several research disciplines have emerged that have influenced the present understanding and interpretation of CE and its applicability to economic systems and industrial processes. Lyle (1994) started developing ideas of regenerative design in contexts beyond agriculture, where the concept had been used earlier. Graedel & Allenby (1995) studied industrial ecology in the context of creating closed-loop processes in which waste serves an input. Benyus (1997) created the concept of biomimicry, a practice to mimic nature’s best processes, such as circularity, to create innovations that solve human problems. McDonough and Braungart (2002) developed the concept and certification process cradle-to-cradle. It is a design philosophy that aims at transforming the industrial material flows towards a circular one where waste from one process is used as input for another process.

Definitions

There have been numerous attempts to define the concept of CE in the literature. Many scholars have emphasized the circular material and resource flow in their definitions. Geng and Doberstein (2008, p. 232) use this angle to define CE as the “realization of closed loop material flow in the whole economic system”. Preston (2012, p.1) goes further by stating that “Circular economy is an approach that would transform the function of resources in the economy. Waste from factories would become a valuable input to another process – and products could be repaired, reused or upgraded instead of thrown away”. Morgan and Mitchell (2015) are aligned with the emphasis on resource management in the definition of CE. They define CE as an alternative to the traditional linear ‘make, use, dispose’ economy model where resources are kept in use longer, extracting maximum value from them by extending their lifecycles as well as recovering and reusing them.

Some scholars have attempted to go beyond material flows and resource management by adding other aspects into the definition of CE. Bastein et al. (2013) focus on the economic side of CE by defining it as a facilitator of new kinds of economic activity that strengthens competitiveness and generates employment. Ghisellini et al. (2016) also agree that the benefits of CE improve the entire living economic model. They emphasize that the CE efforts require radical changes in all processes during a product's lifecycle and are therefore conducted especially by innovative actors. Bocken et al. (2016) add a design and business model perspective to the concept by defining CE as a design and business model strategy that slows, closes, and narrows resource loops.

One of the more exhaustive definitions is conducted by The Ellen MacArthur Foundation (2013), which is arguably the most essential institution in the work of CE. They define CE as “an industrial system that is restorative or regenerative by intention and design. It replaces the ‘end- of-life’ concept with restoration, shifts towards the use of renewable energy, eliminates the use of toxic chemicals, which impair reuse, and aims for the elimination of waste through the superior design of materials, products, systems, and within this, business models”. This definition is one of the most used ones and it includes aspects of various disciplines (Geissdoerfer et al., 2017; Rizos et al., 2017). Therefore, this definition is considered to define what is CE in this thesis.

Circular Processes

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Different types of processes can be considered circular. By combining definitions and interpretations from different publications, Rizos et al. (2017) categorize CE into three categories:

Use of less primary resources, maintain the highest value of materials & products, and change utilization patterns. Within these categories, they define that the main processes of CE are recycling, efficient use of resources, utilization of renewable energy sources, remanufacturing, refurbishment and reuse of products and components, product life-extension, sharing models, and shift in consumption patterns (Rizos et al., 2017).

The authors also conclude a few examples of industries where each of the main CE processes are applied. These examples are stated in Table 2. The listing of applicable sectors is meant to provide a view of the wide spectrum of use cases of CE through examples and thus is not exhaustive (Rizos et al., 2017).

Table 2. Main processes of CE and example sectors they can be applied to (Rizos et al. 2017).

Current Literature Directions

The literature on CE transitions is still emerging; researchers’ interest in the topic has increased largely during the past decade (Geissdoerfer et al., 2017). Scholars such as Andersen (2007), Su

Category Circular process

Examples of sectors where circular processes can be applied

Recycling

Automobile, textile, building, packaging, critial raw materials, forest, chemical

Efficient use of resources

Building, plactics, mining and metals, food sector

Utilisation of renewable

energy sources Chemical, food, forest Remanufacturing,

refurbishment and re-use of products and components

Automobile, manufacture of computer, electronic and optical products, building, furniture, transport

Product life extension

Manufacture of computer, electronic and optical products, automobile, household appliances, building, food, textile, defence

Prodct as service

Household appliacnes, transport, building, printing

Sharing models

automobule, transport, accomodation, clothing

Shift in consumpton patterns Food, publishing, E-commerce USE OF LESS

PRIMARY RESOURCES

MAINTAIN THE HIGHEST VALUE OF MATERIALS AND PRODUCTS

CHANGE UTILISATION

PATTERNS

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et al. (2013), Ghisellini et al. (2016) and Rizos et al. (2017) have conducted literature reviews aiming to achieve clarity on the definition, interpretation, dynamics and applicability of the concept. One popular direction in CE research is to study the supply chain effects of moving towards circularity (Wells and Seitz, 2005; Guide and Van Wassenhove, 2009; Stindt and Sahamie, 2014; Govindan et al., 2015). Other researchers have focused on the business model (Lewandowski, 2016; Bocken et al., 2016; Urbinati et al., 2017; Heyes et al., 2018; Oghazi &

Mostaghel, 2018), policy implication (Gregson et al., 2015; Kirchherr et al. 2018) or product design (Bakker et al., 2014) perspectives in their studies of CE.

Criticism

Although the academic community, in general, has been largely interested in CE during the past decades, the concept has also received criticism from some scholars. Preston (2012) argues that the term CE is applied inconsistently by researchers, companies and governments. There have been varying interpretations and applications of CE which has led to reduced international cooperation as well as the challenge of assessing the impact of the overall transition towards CE.

Some scholars have also questioned the actual environmental benefits and economic viability of CE. Demailly & Novel (2014) and Murray et al. (2017) state that, in some cases, the net environmental benefits of a closed-loop supply chain can be ambiguous, and recycling or reusing products may require more energy than products with a short lifecycle. Robert (2000), Mentik (2014) and Berndtsson (2015) on the other hand criticize the viability of CE; they state that closed- loop supply chains can be difficult to achieve, expensive to implement or they may lead to undesired lock-in effects.

2.1.3 The Fashion Industry’s Transition Towards Circular Economy

One of the key industries focusing on CE currently is the material-intensive fashion industry. CE has become an important aspect in both the literature focusing on the fashion industry as well as the industry practitioners’ sustainability efforts. (Stål & Corvellec, 2018) As a background to the industry’s CE transition, this section first presents the challenges and efforts made regarding environmental sustainability in the fashion industry. Followed by this, the state of the art of the CE literature in the context of the fashion industry is presented.

Environmental Sustainability in the Fashion Industry

The high population growth and increased living standards have increased the amount of clothing consumed around the globe tremendously during the past decades. According to an analysis by the Global Fashion Agenda, the industry size for apparel and footwear in 2019 reached 1.9 Trillion US dollars, and it is expected to grow to 3.3 Trillion US dollars by the year 2030 (Global Fashion Agenda, 2019b). The industry’s high growth is increasing the environmental problems associated with fashion. Wasted resources are a big part of the underlying problem; it has been evaluated that approximately 400 Billion US dollars’ worth of clothing is wasted every year (Shirvanimoghaddam et al., 2020). In addition to clothing waste, the industry causes other types of damage to the environment. The high energy consumption and CO2 emissions as well as the usage of chemicals, dyes and finishes, the fashion industry has one of the most polluting end-to- end supply chains out of all industries (Vehmas et al. 2018). Approximately 8000 synthetic chemicals are used to turn raw materials into textiles (Aiama et al., 2016). Textile manufacturing also pollutes 200 tons of water with every ton of fabric produced (Nagurney & Yu, 2012).

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The increasingly growing issue of the industry’s negative effects on the environment has spurred practitioners’ and scholars’ interest in environmental sustainability in fashion operations. One of the most studied topics within the fashion industry’s transition towards environmental sustainability is fashion supply chains. This is a key area because managing the industry’s long and complex supply chains, which are often characterized by focusing their upstream operations in developing countries and downstream operations in developed counties, are one of the main ways to influence the environmental effects of fashion (Resta et al., 2014). This importance can also be seen from a practical viewpoint; supply chain’s sustainability is the most reported aspect in fashion companies' CSR reporting (Edgeman et al., 2015)

Past literature studying the industry actors’ attitudes towards increasing sustainability in their supply chains have found differing views among fashion retailers. Some companies are reluctant to react to the growing environmental pressures, try to survive with an existing supply chain management model and are even prone to blame others. Some companies, on the other hand, have a more active view on the topic and strive to include the sustainability supply chain improvements into their strategy (De Brito et al., 2008; Nagurney & Yu). Caniato et al. (2012) study the drivers that push fashion retailers to make these supply chain improvements. The authors determine that currently, the most relevant drivers come from within the company. These internal drivers include for example corporate values and inspiration of the top management. Regulatory or legislative drivers did not have major relevance. The authors also state that the importance of market drivers such as consumers’ environmental consciousness is growing rapidly in the industry.

Other researchers have focused on the actions that have taken to improve supply chain sustainability in their studies. De Brito et al. (2008) state that these improvements are often done through ‘green’ standardization, environmental audits, partnering, communities of practice and clean transport modes. Turker & Altuntas (2014) agrees with this by stating that fashion retailers’

sustainable supply chain management focuses significantly on supplier compliance, which is done through setting sustainability criteria for their suppliers as well as establishing monitoring and auditing activities to prevent production problems in the upstream of their supply chains and improve overall supply chain performance. Other publications overlapping with the supply chain research have studied the topic with a focus on product design (Curwen, 2013; Resta et al., 2014), production processes (Jørgensen & Jensen, 2012; Curwen, 2013) and environmental KPIs measured by fashion retailers (Caniato et al., 2012)

In addition to the studies focused on the supply chains in entirety, the fashion retailer’s transition towards environmental sustainability has also been studied from the downstream perspective of fashion retailing. This part of the industry, where the products are sold to the consumers, is a key area in the research of the industry’s transition since it drives the companies’ sales development.

(Ying et al. 2017). Nagurney & Yu (2012) found out that consumers have a major influence on the profitability of sustainable efforts through their environmental consciousness (Nagurney & Yu 2012) Choi and Wong (2012) continue this discussion by arguing that sustainability actions in product design and supply chain management have limited driving effect in the company’s sales.

They recommend that fashion retailers need to increase the store-related sustainability attributes to satisfy the customers’ needs and be cautious when determining price-premium levels of eco- fashion.

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Studies focused on consumer behavior and demand have seen a distinction between consumer perception towards the sustainability efforts of fast fashion retailers and slow fashion retailers.

Fast fashion retailers, companies producing and selling clothes with low prices and fast-paced changes in clothing lines, are often affiliated with unsustainable operations and environmental efforts done by these brands receive skepticism (Thomas 2008; Bly et al., 2015). As a countermovement to this, slow fashion actors, companies creating higher-quality products with a value proposition more focused on a clean environment, have received increased attention (Clark, 2008; Fletcher, 2010; Cline, 2012).

Among both fast and slow fashion companies, there has been an increasing shift towards using environmental efforts as a brand-building method. The increasing environmental awareness of consumers has made a large number of fashion retailers to strive towards building a more environmentally conscious brand identity (Hartmann et al., 2005; Brown, 2010). A widely used strategy for this has been introducing environment-focused labels such as “eco-friendly”,

“organic”, “natural” or “eco-fashion” into their assortments (Beard, 2008). Multiple studies have shown that different types of consumer-facing green branding and eco-labeling initiatives can attract more environmentally conscious consumers as customers (Husvedt, 2009; Gam, 2011; Yoo et al., 2013).

Some studies have focused on the interplay between consumers’ and retailers’ behaviors. Joung (2014) states that as a response to consumers’ environmental consciousness, companies have engaged consumers to recycle their old clothing. The study paradoxically showed that although many consumers are interested in the environment, they did not participate in recycling efforts.

Goworek et al. (2012) focus on this type of difference between consumers’ environmental preferences and buying habits. Their study shows that sustainable clothing buying habits are largely dependent on the consumers’ existing habits and routines, rather than their awareness of the company’s environmental practices. To some extent, fashion retailers can have the power to influence the consumption patterns of consumers by providing information and initiating consumer-facing ‘green’ initiatives. This together with their leverage to influence upstream manufacturers’ production processes make fashion retailers in many ways able to decrease their environmental footprint (Durieu, 2003; Erol et al., 2009).

Circular Economy in the Fashion Industry

One aspect that has become a truly key part of the fashion industry’s environmental sustainability efforts is CE. The industry’s large environmental issues and the promising idea that CE could be a way to decouple the economic growth from these issues has emerged a vastly growing interest towards CE by both practitioners in fashion companies and researchers studying the industry (Stål

& Corvellec, 2018). Especially fashion retailers, companies operating in the downstream of the fashion supply chain, are increasingly focusing on CE when reacting to the pressures from both consumers and institutions to decrease their environmental footprint (Franco, 2016). The fashion industry is considered likely to be the industry that will transition to totally new types of circular product service systems first (Stål & Jansson, 2017). This emerging interest towards CE has also spread to the academic community; CE is perhaps the fastest-growing research direction within sustainable fashion (Jia et al., 2020). The research on CE in the fashion industry is still emerging and is therefore rather fragmented both in study topics and geographical focus. A significant amount of new research on the topic has been conducted especially in the Nordic countries (Kjaer

Business Model Innovations and Sustainability Transitions

Business Model Innovations and Sustainability Transitions

The Case of Circular Business Models in the Fashion Industry RIKU SALMI

Business Model Innovations and Sustainability Transitions: The Case of Circular Business

Models in the Fashion Industry

by Riku Salmi

Affärsmodellsutveckling och Hållbara Övergångar: En Fallstudie av Cirkulära

Affarsmodeller inom Modeindustrin

Riku Salmi

Abstract

Sammanfattning

TABLE OF CONTENTS

LIST OF FIGURES

LIST OF TABLES

FOREWORD

1. INTRODUCTION

2. LITERATURE REVIEW