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Photo: Tomas Bergman och Johan Baggström.
There is a strong tendency among companies to overestimate their own resources and capabilities and underestimate the contributions that other players can make according to Johan Frishammar and Vinit Parida. Photo: Tomas Bergman och Johan Baggström. View original picture , opens in new tab/window

Difficult to implement circular business models

Published: 23 March 2021

Sweden aim for no net emissions of greenhouse gases by 2045. To achieve that goal, Swedish industry must change by developing circular business models. In an article in the reputable journal MIT Sloan Management Review, researchers in entrepreneurship and innovation report what problems are on the way and how these can be overcome.

– Industry today accounts for about 30 percent of Sweden's total greenhouse gas emissions. There is strong political pressure for companies to take their climate responsibility. By switching from linear business models to circular ones, the industry can reduce its emissions and address the issue of sustainability in practice, says Johan Frishammar, who has carried out the study together with Vinit Parida.

A circular business model means, unlike a linear one, that the responsibility for the product remains with the manufacturer for a longer period of its life cycle. When the manufacturing company takes life cycle responsibility for operation, maintenance and reuse, incentives are created to build in environmentally and economically efficient solutions that maximize product life and minimize energy use, resource utilization and transportation costs.

Two types of bias

Johan Frishammar and Vinit Parida, both professors of entrepreneurship and innovation, have studied the transition to circular economy in about ten industries. The empirical material consists of about a hundred interviews with both managers and engineers in a dozen leading Swedish companies and their partners (subcontractors, customers, and so on.).

Based on their analyzes of the material, they identify two types of bias that constitute an obstacle to change. On the one hand, companies tend to take too much of an internal perspective and take too little notice of the needs of their partners, and in addition there is a strong tendency to overestimate their own resources and abilities and underestimate the contributions that other actors can make. This often leads to difficulties in designing and implementing circular business models.

The article lists four key challenges for change as well as advices on how to tackle these challenges. First, a large manufacturing company should formulate its business strategy in close cooperation with its partners in an environment where the incentives of all actors are coordinated. It is only when all partners pull in the same direction that a circular business model can work.

Second, companies underestimated their need to collaborate with new types of players. Companies must seek outside their traditional value chain, for example with various providers of digital platforms, companies niche towards recycling, and those that offer complementary services.

Mental paradigm shift

Third, there must be a mental paradigm shift in the view of business relationships.

– Traditionally, many companies have lived on product sales, but a circular business model requires much more of relationships and that the customer is deeply involved from the beginning. It will be a focus on a deep relationship rather than a business transaction, says Johan Frishammar.

Finally, the relationship must be formalized over time through agreements on recurring operational maintenance, upgrades, additional services. The value for the customer lies in the actual use of the service rather than in the purchase, and this requires long-term relationships and contracts that often run for many years.

"The Four Fatal Mistakes Holding Back Circular Business Models" is published in the MIT Sloan Management Review published by MIT.