“Value chain” thinking is slowing the circular revolution we need

The traditional value chain, a staple of business textbooks, is holding us back from achieving the economic and sustainability benefits of a circular economy
October 19, 2020
Charlie Macdonald

The “end” is a human invention

One of my daily morning rituals is to walk past a statue of a worm in Edinburgh Gardens. It’s called The Unsung Hero, a daily reminder of the worms doing the important work of maintaining healthy soil. The name also speaks to the fact that people don’t tend to think about the unseen workers driving a cyclical ecosystem, leaving these heroes to remain unsung.

One of the many things we can relearn from nature is that the “end” is a human invention. Natural ecosystems do not recognise waste, as almost everything that is lost by one organism is used as an input for another. Take worms, who decompose foliage and organic matter into nutrient rich soil for plants to thrive.

This concept is completely at odds with how we’ve built our economy. We produce, we use, we dispose in a straight line with an end. Unsurprisingly, this is going to cause very big problems, very soon. At the rate we’re depleting natural capital, we would already need 1.6x earths to sustain human life indefinitely. And this figure increases every year.

But there lies hope in building a circular economy, one that mimics natural cycles by regenerating or recycling waste to be used as valuable inputs for new production, if we can remove the obstacles to achieving one.

A brief history of the circular economy

The idea of a circular economy is nothing new. Since the 1970’s, economists have dreamed of the circular paradise:

“a story about the possibilities of abundance, of meeting people’s needs by designing out waste, and recreating the kind of elegant abundance so evident in living systems” — Ken Webster, Circular Economist

Circular thinking decouples waste into biological and technical materials that can be recycled through our economy. Biological cycles are ones where products can be consumed (like apples or cotton), meaning that they can be bio-degraded and regrown into new products. Technical cycles are ones where products can be used, but the base materials are non-renewable (like metals or plastics). In these cases, the cycles must find ways to prolong usage or deconstruct products at end of life so the base materials can be reused.

Source: Ellen Macarthur Foundation

Aside from the obvious environmental benefits, circular economists point to improved profitability from cheaper inputs, increased resilience from reducing depletion of natural capital, and job creation from shifting production from energy intensive resource extraction to labour intensive recycling as some of the key economic benefits of circularity.

“Value chains” are part of the problem

Despite these benefits, our disposable economy has stubbornly persisted, with more waste produced now than ever.

What exactly is stopping us from achieving circularity?

One problem is the reductionist thinking that has been so dominant in Western science. Reductionism seeks to understand complex systems as a sum of their parts. It’s been a powerful tool for fields like medicine, where, for example, understanding the heart has been incredibly important to understanding why the body fails without it.

But this thinking has also been applied liberally to other fields, including business, with unintended consequences.

This is abundantly clear in business textbooks, where we are taught a famous reductionist straight line: the value chain.

The Value Chain Model (Michael Porter)

The value chain is a powerful model for understanding how an individual business can create and capture value.

The problem is, when you link up a bunch of value chains you end up with a disposable economy, one where it makes more economic sense to extract, consume, and dispose. This is because the system has not been designed with recovery in mind, making it cost prohibitive to extract valuable feedstocks from waste streams because they are grouped together, made from polymers that are harder to separate, or other such factors caused by reductionist value optimisation.

We have an obligation to reduce the importance of the value chain in our business education and start teaching more circular models. Why?

There is abundant profit opportunity in circular systems

Circular systems, when built effectively, are a source of competitive advantage and profitability for individual businesses.

Accenture estimates there is a $4.5 trillion opportunity in businesses shifting to circular models, with value unlocked primarily by cheaper inputs, lower waste disposal costs, and increased demand due to a differentiated offer.

For example, Goterra is a waste management startup that uses organic waste to breed black soldier flies, providing cheaper waste management and producing insect meal, which can be sold as sustainable livestock feed. As another example, the Ellen Macarthur Foundation estimates the manufacturing costs of mobile phones could be reduced by 50% with effective collection of end-of-life devices.

Beyond this, the outlook for linear business is not good. The 20th century will be one marked by scarcity and rising prices for virgin resources. Companies that lag in their thinking will not survive.

Broad systems change is impossible to achieve without collaboration

The most wasteful industries need the biggest loops, which requires business leaders that can see value in the bigger picture and easily collaborate across their ecosystem.

Granted, some circular loops can be achieved relatively easily by individual businesses. For example, in industries where there are highly vertically integrated players sitting across multiple steps of production, assembly, and consumer engagement, these businesses can design their products for recyclability and capture the cost savings internally. Take Sunpower, a solar panel manufacturer that designed its solar panels for ease of deconstruction so it can take them back cheaply at end-of-life and reuse the expensive rare metals within for future panels.

But the highest impact circular systems require partnerships and collaboration between multiple players. Take the fashion industry, where vertical integration across the value chain is limited and 87% of waste is put into landfill or incinerated. Building circularity into the fashion economy requires retail brands, consumers, waste collectors, and fibre producers to work in sync. To illustrate, Evrnu, a regenerative fibre company, is playing the role of connector, working with retail brands (including Stella McCartney and Adidas) to design clothing for deconstruction, consumers to understand how to recycle at end of life, waste collectors to efficiently sort recyclable clothing, and fibre producers to produce new fibres from recycled clothes.

Without the guidance of business leaders with an understanding of system level challenges and need to collaborate, the circular economy for clothing will never work.

Education will accelerate the circular revolution with creative solutions

The fact is, we need to move faster to address our unsustainable economy, and business is the most powerful lever for change that we have.

While consumers and governments are increasingly understanding the importance of sustainability, the blocker is that business models haven’t been equipped to solve for value creation at a systems level. For example, Australians are still sorting their waste into recycling bins despite warehouses filling up with recycling waste because, since China stopped accepting unsorted waste in 2018, it’s become too expensive to sort and recycle.

Equipping the next generation of business leaders with circular thinking will enable more founders to find creative ways of solving the issue. For example, Full Cycle Bioplastics takes organic waste to turn it into marine biodegradable bioplastics as a substitute for plastics, transforming a technical cycle that requires recycling in Australia’s warehouses to a biological one that can decompose in your everyday garden compost bin.

Closing thoughts

Clearly, we have both an economic and moral obligation to update our business textbooks. The “value chain” is only holding business leaders back from accessing the profit opportunities that lie in circular systems and accelerating the systems change we need to address our unsustainable economy.

Inspired to find circular economy startup opportunities?

There are so many opportunities for founders to build the circular economy, from distilling urine to replace non-renewable phosphate in fertilisers to transforming printer cartridges into top quality road material.

I encourage anyone who has made it this far to use the Ellen Macarthur Foundation circular economy library as a resource for exploring the possibilities.

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