How digitalization can help build a circular economy ecosystem

To create a fully circular business model, digital business ecosystems must be designed to make significant decisions and take action. While companies ratchet up their digital processes, they must simultaneously implement circular business models and use digitalization to create durable, interoperable ecosystems that support circular ambitions and create new opportunities for innovation, differentiation, synergies and jobs. Developing this inherent virtuous circle of economics will produce efficiencies, savings and additional profits.

The circular economy decouples economic growth and development from the consumption of finite natural resources. It deploys principles and strategies to achieve global climate and environmental goals while increasing competitiveness and profitability. It changes the way we produce and consume to become more resilient, more innovative and more resource efficient and it increases our supply chain flexibility

The global circular economy ensures that the concept of waste is just a comma in history. Before the industrial revolution and mass production, waste almost didn’t exist; everything was reused, repaired, and regenerated. In our modern society, we see materials and products that no longer perform their original function as unusable. This practice must be eradicated. If we are to reach global climate goals, while continuing to increase global wealth, we must ensure that the concept of waste is not an integral part of our modern society. Materials and products must maintain their economic value and never become unusable; instead, they should be continuously on a journey towards their next-use stage.

The most interesting opportunities to innovate and differentiate in a circular economy rest with organizations. Companies that use the circular economy’s competitive advantages collaborate with their ecosystem partners to create, capture and deliver sustainable value.

By extending the lifespan of products and parts and benefitting from all usage cycles, companies improve resource efficiency, increase resilience and customer intimacy and create new income sources.

The competitive circular business model operates across organizations and is ecosystem centric. This is compared to the traditional company-centric linear model, where companies primarily focus on up-front product sales to the next in line, do not consider how to create benefits throughout a product's full usage cycle and do not have a business model that incentivises them to extend the lifespan of products.

Ecosystem collaboration is not only an opportunity, it also entails challenges, such as interdependence, transaction costs, power relations and the need for intermediation in the system.

It’s worth noting that an outcome of improved circularity across the business ecosystems is the increased visibility afforded by digitalisation and ecosystem transparency. This is especially true in the current era of supply chain fragility.

An efficient business ecosystem can only operate if it is fully digitalized. Digitalization’s ability to facilitate business ecosystem collaboration across geographies and organizations is central to the realisation of a global circular economy.

To observe the successful digitalization of the business ecosystem, we need to examine a new set of market leaders that use digital platform models to achieve this position. They have monopolized the interface and the trust building, they piggyback on the incumbent investment in assets and services and have exclusive insight into the business ecosystem’s behaviour.

While it is attractive for an incumbent to pursue an ecosystem’s key intermediator role in a centralized digital platform for the circular economy, it is difficult for established industry players to do so. Often competitors are not willing to cede power to a competitor – entrenched or emerging – and the incumbents are unable to maintain the sufficient internal focus, organizational capabilities and financial resources to implement the centralised digital platform for their industry’s circular business model.

To benefit from a digitalized ecosystem while protecting against a centralized digital platform owned by a dominant player, incumbents must realise a shared digital backbone for the circular economy that accelerates the transition and reduces time, cost and risk in implementing circular business models. Recent history shows how the emergence of shared cross-industry backbones has enabled innovation and differentiation in a business ecosystem without monopolizing the foundational infrastructure. The internet, shared molecular research - such as GenBank, the railroad, the telephone, containerization of global trade and electrification, are all examples of this.

A digital backbone for the circular economy will have a similar impact on accelerating competitive circular business models and putting global climate goals within reach. It is now time to collaborate on a digitalized ecosystem that is competitively and commercially neutral, that facilitates differentiation and innovation for each company and ensures seamless digital interoperability for any ecosystem participants.

Efficient digital collaboration within a business ecosystem throughout a product’s different usage cycles is critical for enabling attractive circular business models and competitive user experiences. Johan Frishammer and Vinit Parida describe how a transfer to circular business models is an ambitious undertaking that involves rethinking how the organization creates, captures and delivers value in collaboration with its business ecosystem. The digital backbone for the circular economy must be designed to support rethinking in all three dimensions.

It is a daunting, but necessary task to move the mindset and internal biases from a narrow company-centric focus on transaction-based interactions toward a broader longer-term orientation on ecosystem-centric collaboration. Incumbents will face 'born-circulars' as new industry leaders during the 2030s.

Executives must steer their organizations to gain experience on circular business models, as these will be the central business models of the 2030s. Organizations must leverage digital backbones to integrate more deeply into the operations of customers and partners. The goal is to establish identification and trust, emphasize value-in-use, rather than value-in-transaction, and launch new, innovative digitally-supported services. This will enable and improve the co-creation of value.

This migration to a digital core provides the base layer for the transition to a circular economy’s ecosystem-centric business model. Executives must address new ways of working and new principles that allow value creation, capture and delivery. While some organizations may elect to be keystone players; gaining experience through participation is vital. The shared global digital backbone for the circular economy offers benefits besides cocreation with business-ecosystem partners and customers. By its very nature, it provides a line of sight across the supply chain to minimise environmental harms, while providing a path to increased profitability and competitiveness.

The time is now.