The Circular Economy Model – is Digital Transformation a key enabler?
Extrapolating from the micro economy of a round the world yacht
Ellen MacArthur gave an enlightening presentation at an iGate/Capgemini event (in December 2015) where she described her transition from round the world yacht racing to her focus on changing the world economic model from linear to circular. The spark for this transition was the realisation that for the time she was at sea (71 days) she had to operate completely within the constraints of the food, energy and equipment she had on board, maximising reuse to minimise weight carried on the journey (which was critical in a racing context). Extrapolating from this micro economy to a world context led her to a journey of discovery on how we are consuming the planet’s resources, such that many commodities are predicted to run out within our or our children’s lifetime (e.g. Copper ore is predicted to be used up by 2050). The solution to this problem is to recognise that the world has finite resources and to move away from a Linear Economy (make, consume, dispose) to a Circular Economy, where all items are re-used or re-cycled and we become users rather than consumers. This all embracing concept provides a framework for many initiatives but at its core it recognises the need for a fundamental shift in economic thinking. The Ellen MacArthur Foundation was established to drive the thinking and the transition to this future model.
This short note explores some of the concepts and questions which need to be addressed for a successful transition and looks at the aligment with the Digital Transformation.
The Circular Economy Model – focus on use rather than ownership (consumption)
The Ellen MacArthur Foundation has developed a model which embraces technical and biological cycles and is driven by 3 principles,
1. Preserve and enhance natural capital …by controlling finite stocks and balancing renewable resource flows
2. Optimise resource yields…by circulating products, components, and materials at the highest utility at all times in both technical and biological cycles.
3. Foster system effectiveness…by revealing and designing out negative externalities
At its simplest level I think about milk bottles. Up to 20 years ago most milk was delivered in the UK in bottles to our doorstep and we were just users of the bottles and consumers of the milk. We never owned the bottles. We now buy milk in plastic cartons from the supermarket and we then have to dispose of the plastic cartons and (indirectly) incur the cost of the disposal and recycling. So whilst the linear economy has been around for some while it is only in recent years that consumption versus use has become the norm (our parents would predominantly rent their televisions whilst now everyone owns them).
However, technology is in many areas enabling this shift to usage. Cloud platforms and a focus on ‘as a service’ commercial models means that we are moving from buying technology to renting it again. This vision of many aspects of technology as a utility service is driving a usage model for the technology sector. Digital technology and platforms are also creating practical asset re-use models and new business models (e.g. AirBnB and BlaBla Car). In Africa we are seeing a combination or peer to peer payment platforms such as MPesa combined with rental models or technology providing a vehicle for people to rent their solar panels.
So we can see that the general trend for technology to become as a service is supportive of the Circular Economy model, but in the area of devices more needs to be done. As devices (e.g Mobiles Phones, IoT) the consumption of high value metals and other items is accelerating. So whilst the big players such as Apple are investing is solar power more needs to be done to address recycling and re-use of obsolete devices.
From Value Chain to Value Networks
The milk bottle example above provides an example of a tight closed loop for a circular economy, but in reality most re-use and recycling involves new supply chains to collect, aggregate and then separate waste for re-processing. We are all party to this through our local authority recycling processes where there is increasing focus on putting personal responsibility on us for streamlining the process. However, it is essentially a completely additive process which incurs large amounts of energy and time to re-process the items back into commodities which can be re-used. It is also interesting to note that the focus is on us as individuals to take responsibility for recycling rather than pushing the responsibility back on the producers. In a market economy this makes sense as it motivates us to buy products which are easier to recycle or less wasteful. The shift from product centricity to consumer centricity across the consumer goods industry illustrates how this consumer voice is becoming increasingly dominant, powered by digital collaboration through social media.
Recent Research by the Consumer Goods Forum recognises the growing impact of the consumer and their opinions on the way products are produced, distributed and sold, with transparency and environment impact being key considerations. This has created a vision for future consumer centric, collaborative Value Networks to be created, moving away from traditional, linear value chains. It also creates the opportunity for these networks to adapt as opportunity to re-use and recycle arises, making use of local resources and facilities where possible. The rapid rise of organisations such as Uber illustrates that these highly collaborative networks are feasible now, as the technology is available to make them operate efficiently.
Is GDP the right measure
The shift from product led to consumer led manufacturing discussed above brings into question the very concept of whether consumer is an appropriate term and measure. At a macro, country and global, level success is measured as a function of growth in Gross Domestic Product (GDP). The definition of GDP is based on measuring the value add, created across an economy, in the production of goods and services. If we move from make- consume – dispose to update – use – return – update, then the amount of value add that is created in each cycle is much lower. However, delivery of services to users, rather than selling of products can provide higher motivation for innovation and create a demand for more rapid cycles. We can see this in the use of mobile phone services, where buying the phone as a service on a limited term contract has created huge pressures for competitive innovation. (Unfortunately the step of making the seller of the service responsible for re-cycling the phone has not yet been made to enforce the complete closed loop.)
So it would appear that the linear measure of GDP may need to be reconsidered (or its means of measurements) to take account of this different dynamic, as we move to a more complex networked economy with closed loops and a predominance of service rather than purchase. This is a challenge for governments and economists but if the consumer leads the change, as envisaged by the Future Value Network report of the Consumer Goods Forum, then governments will need to respond.
Digital transformation is the creation of new services and business models enabled by disruptive technologies, where the consumer/customer or user is the driver for success. We can see that the Circular Economy concept will similarly be driven by consumer pull and that disruptive technology has the ability to make new networked and collaborative models a success. As such there is an opportunity for Digital Transformation to act as a key driver and enabler for the creation of a viable circular economy, something to bear in mind as we all go on our digital journeys.