Circular Economy: new opportunities, new markets?
Offering all sorts of new markets opportunities, the circular economy is disrupting existing economic configurations. How can we conclude that this brings forth new market opportunities? Is the circular economy a market economy, or do we need an alternative perspective accompanied by a different vocabulary?
Market economy perspective
A market economy essentially is a linear economy that ‘behaves’ according to the rules of the market. Supply and demand are the ingredients at the cored of this mechanism. The way of thinking in terms of markets for products and services forms the dominant design of the linear economy. In 1776, Adam Smith used the metaphor of the ‘invisible hand’ to describe the interplay between market and rules culminating at a specific price both parties agree on. In fact, the resulting price is the ultimate statement of this agreement in which product and service characteristics are merged.
Two principles in this process are of interest. First, the market paradigm departs from the notion of substitutability of products. This means that goods and services may be interchanged. When only one supplier of a good or service exists, it may set the price independently (the monopolist). In this case, no real process of price-setting takes place. However, when taking a closer look at current markets, we see a different picture. For most products more than ten alternatives are offered. The second principle concerns competition. The idea is that a market only may function well under the condition that supply and demand compete over goods and services on amongst others price and quality. The dynamics resulting from both substitutability and competition ideally leads to an optimal price in relation to demand. Thinking about markets in this way is so all-encompassing and dominant in current society, it is near to impossible to think outside its confines.
Thinking and organising in loops
The idea of a circular economy enters thought processes in market economic ways. Yet, when observing the circular economy from the principles that lie at the core of the linear economy, a diverging path unfolds. The circular economy builds on organising loops of (raw) materials, and semi-finished and finished goods. Existing businesses transforming towards the circular economy are confronted with the question how they are able to organize their value chains as closed loops. They soon discover that this is not a one-company task. To close loops around (raw) materials, et cetera, all actors in the value chain need to contribute. This calls for close collaboration and coordination of all parties involved, regarding product and process design, logistics, choice of materials, planning, business processes, and strategy. Such coordination needs to take place at the level of the entire loop, taking into consideration geographical circumstances, and restrictions in time. Different loops mean different life cycles; some involve just a few hours up others last decades.
Circular Quote of the Day
For now, we suggest to typify circular economy as the economy of co-creation.
Niels Faber & Jan Jonker
Non-market perspective: cooperation replaces competition
Working towards a circular economy can mean complicated problems of coordination. This is an issue that is not easily captured in the existing (mental) framework of the market. After all, within the circular economy, substitutability becomes more complex or even impossible. Every operation inflicted on a material renders the material more specific for a certain purpose. Within a specific loop, value chain partners are able to use these specificities to the fullest. This allows them to efficiently give shape to the circular functions of reduce, reuse, and recycle. Applying these materials in alternative loops is not obvious. Also, the circular economy does not benefit from competition as the co-ordination mechanism. Ultimately, the task is to collaborate within a specific geographical area, through time. Loops take shape and function around materials and value chain partners. Hence, cooperation replaces competition. The interwovenness and mutual dependencies between loop partners is such that organization, business, and revenue models will become a shared characteristic.
Economy of co-creation
The idea that the circular economy by definition will create market opportunities seems to rest on market economic rhetoric. From that perspective, every change in the economy is perceived as an opportunity for growth. The pursuit of growth is the engine of the linear economy. Maintaining this rhetoric hampers the transition towards a circular economy. It does not contribute to the development of a new mental frame with accompanying vocabulary. If the circular economy aims to become more than the enhancement of recycling, a non-market perspective is desperately needed. A perspective which builds on collaboration between partners. And one where value cycle, collective value creation, and co-operation are key terms. For now, we suggest to typify this perspective as the economy of co-creation. Other suggestions are more than welcome.
Niels Faber and Jan Jonker are well-known scholars in the field of the ‘New Economy’. Prof. Jan Jonker has been researching and publishing about this topic for over a decade. His book ‘New Business Models’ demonstrates how sustainability and circularity can be achieved at the same time. Faber worked closely with Jonker during the set up for the New Business Models Conference 2020, which was held online that year due to COVID-19.
Niels Faber is assistant professor Circular Entrepreneurship at the Campus Fryslân Faculty of the University of Groningen. His research focuses on the organizational aspects of and business models for sustainability and the circular economy. This translates to the following themes: new forms of organizing within the circular economy, transition towards the circular economy, and measuring the progress of the circular economy transition. This has led to a series of academic and professional publications related to this topic.
Jan Jonker is professor of Sustainable Entrepreneurship at the Nijmegen School of Management at Radboud University Nijmegen. His research focuses on challenges at the interface of sustainability, (new) business models and in what way these developments are related to change and transition. He is author of over 35 books among which the ‘Green Bestsellers ‘Duurzaam Denken Doen’ (Thinking and Acting Sustainable, 2011) and Werken aan de WEconomy (Working on the WEconomy, 2013) and Nieuwe Business Modellen (New Business Models, 2014).In 2020 he will publish with his co-author Niels Faber the book ‘Sustainable Organising; Template for the development of sustainable businessmodels’ (Boom/Managementimpact).
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Circular Quote of the Day
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Dr. Sebastian Porkert, Founder ECOFARIO
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