Circular Economy: what is meant by this term? What is the difference from the business models used to-date by companies? This was the central theme of the first meeting of the InnoTech Community 2019 organized by The European House – Ambrosetti together with Enel on February 5, 2019 in Rome at Villa Lazzaroni.
Circular Economy: what is meant by this term? What is the difference from the business models used to-date by companies? This was the central theme of the first meeting of the InnoTech Community 2019 organized by The European House – Ambrosetti together with Enel on February 5, 2019 in Rome at Villa Lazzaroni. Taking part in the meeting were national and international companies who saw in the collaboration and exchange of views an important factor for growth.
Alberto Di Minin, Associate Professor of Management at the Scuola Superiore Sant’Anna, explained that the concept of the Circular Economy originated in England in 1989, developed by the economist David Pearce, Professor of Economics at UCL, and ecologist Kerry Turner. In turn, this new paradigm was triggered by the implementation of a concept of economist Kenneth Boulding who, in 1996, spoke for the first time about the “Open Economy”—an economy in which resources are rendered limitless thanks to the reuse of output in the production cycle. The Circular Economy business model differs from the classic “linear” model because, at the end of their life cycle, resources are re-transformed into inputs to be utilized in the process of value creation. Thanks to the action plan created by the European Commission in 2015, companies in the Eurozone are increasingly adopting Circular Economy principles. The effects of this transition will have explosive results from an economic, social and environmental standpoint. According to some studies, the transition to a Circular Economy will result in a 3% annual growth in productivity and generate aggregate earnings of about $1.8 trillion/year. These benefits will result not only in economic growth, but also an increase in available jobs, a progressive independence from fossil fuels and a reduction in waste. The importance of a shift towards an eco-sustainable economy is significant, especially at a time in which we are seeing an exponential growth in world population with a consequent increase in consumption of the planet’s resources. The Earth is a closed ecosystem in which resources are limited and irrational use of them is not sustainable.
Figure 1. Comparison of the Linear vs. Circular Business Models Source: The European House – Ambrosetti elaboration of Culture of Repair data, 2018
Ernesto Ciorra, Head of Innovability at Enel, talked about how Enel’s innovation strategy involves creating an Innovation Hub global network of “laboratories” whose goal is to intercept the most innovative solutions that are developed in hotspots around the world. One of the strong points of the project is the absence of a hierarchical structure. In fact, once an idea has been validated, it can rapidly reach the person who authorizes implementation, thus systematically shortening time frames. The company’s business model plays a fundamental role in allowing this mechanism to work. Ciorra explained that a company which decides to change its paradigm and adopt the principles of Open Innovation and the Circular Economy, must first change its internal structure to be able to reap the advantages generated by these processes.
Luca Meini, Head of Circular Economy at Enel, explained that at the basis of the corporate culture and cornerstone of the Enel business model are Innovability and Open Power. The first term could be defined as the union of innovation and sustainability. Thanks to the interaction of these two “forces”, new potential for disruptive changes is attained. The second term is the application of the concept of Open Innovation as theorized by Henry Chesbrough, according to which, to survive and prosper in today’s market, a company must be able to create new products and services utilizing stimuli and ideas from outside of it. In the case of Enel, the Innovation Hubs are a clear example of this paradigm.
An example of the transformation of its business model is Cisco which, in recent years, has embarked on a process of transformation and reorganization to maintain its market leadership. Agostino Santoni, CEO of Cisco, explained that the transformation was a key element in taking on the new challenges in the departments in which the company has decided to intervene: operations and supply chain. Specifically, in the first area, efforts were made to create new designs for products to guarantee less use of plastic components and allow for their recycling. For the supply chain, the approach taken was to introduce a process to reduce CO2 emissions.
The importance of this phase is clear. For example, Antonio Dentini, Governance and Suppliers Management Global Procurement Manager at Enel, explained that the use of sustainable inputs was an inevitable step for the company and to promote this, creating protocols and measurement standards for suppliers was fundamental. This resulted in advantages both for suppliers who had a paradigm to be respected, as well as the company which could better measure performance in the supply chain process. Similar measures have also been adopted by Novamont and BASF, which both decided to increase the use of renewable energy sources to improve their environmental performance levels.
Santoni reported that the implementation of these solutions has only been possible thanks to open collaboration and on-going search for new partners. For this reason, he suggests a joint initiative be launched to create a smart cities ecosystem which puts residents at the center, implemented on a city/regional level and with circular economy services.
Among the other key factors a company must consider to improve circular economy performance is the role of financing. It is clear that, without capital, even the most promising investment and most disruptive idea are destined to be short-lived. Speaking on this theme was Claudio Zara, Professor and Researcher at the Department of Finance at Università Bocconi, who explained the importance of financial capital as an enabling factor for change. A concrete problem for all companies in search of funds for highly-innovative projects is that operators are unable to evaluate risk and, without a technical background, they prefer not to invest. Therefore, communication and disclosure of relevant information are fundamental to investors understanding the potential of an innovation, its benefits and other information. It must be remembered that operators in the financial market operate according to the “Paradigm of the 3Rs”: Risk, Revenue and Reputation. According to recent studies, the Circular Economy can contribute positively to all three aspects. In fact, it lowers both system-wide and specific risk in an economy, creates new sources of revenues and, finally, can enhance the reputation of the financial backer for having supported a project with high social value (e.g., CSR). To conclude the analysis of the finance/innovation relationship, Prof. Zara suggests that communication of the following types of information be “efficientized”:
How is it that an idea born in the 1980s is becoming so interesting to business and institutions and only recently a subject of interest for governments, international organizations and companies? The primary reason can be found in technological development. When the Circular Economy was first conceived, the technical knowledge required for its implementation did not yet exist. Meini explained that Enel has been able to exploit its technical know-how to become, first, an energy-sector leader and subsequently extend its business 360°. Concrete examples of the Circular Economy are actions aimed at closing cycles and examining the new economy concept (for example, the subscription economy in which an object is not bought outright, but used on a fee-basis). Within this context, measurement of the results obtained is fundamental, and for this Enel has developed a series of specific KPIs in order to always be able to evaluate the direction in which it is going.
Michele Falce, Agriculture Supply Chain Development Manager at Novamont, also illustrated how new technologies have allowed the company to substantially reduce its environmental impact. Novament is active the chemicals sector, in which scientific discoveries play a key role. The research undertaken by the company’s Industrial Biotechnologies Research Center has led to the creation of new industrial processes, thanks to which it has been possible to reuse production waste as new inputs. In addition, new materials have been developed, specifically, a number of bioplastics whose organic characteristics make it possible to accelerate the biodegradation process and significantly reduce the polluting effects generated by standard plastics.
The use of renewable sources was also discussed by Astrid Palmieri, Sustainability Coordinator at BASF, the German company that has created two paradigms. The first is “Close The Loop” designed to reuse resources at the end of their life cycle to reinsert them in the production cycle (e.g., the company has succeeded in producing bio-naphtha using organic waste subjected to a chemical process and this fuel is used instead of fossil fuels). The second is “Keep It Smart” which involves optimizing the efficiency of resources utilized in the production cycle and this has made it possible to significantly reduce energy consumption and CO2 emissions.
A further point underscored by Ciorra involves the importance of individuals—the “circularity of people”. In fact, it is impossible to attain new technological levels without considering the impact of these innovations on the social fabric. Concern about the effects of technology on employment arose initially in the second half of the 18th century during the first Industrial Revolution and became more pressing during the second. In both cases, the new technologies took the place of many workers who were forced to migrate to new geographical areas and new sectors. Today, there is a fear that robots and Artificial Intelligence algorithms could replace much of the workforce, in particular those in routine jobs. In the case of Enel, implementation of electric mobility will lead to the closing of service stations and repair shops because electric cars require less maintenance due to the reduced number of mechanical parts subject to wear. It is important that the players in the new technological revolutions also take into consideration the management of social problems emerging from the introduction of new production-related factors. According to Ciorra, this is the only way a sense of shared well-being throughout the social fabric can be attained.
Interesting examples from a number of companies involved in achieving both economic and social results were offered. At this point, it is right to ask ourselves if there are any obstacles in this “rush”. It is difficult to think that, in a country in which the prospects for GDP growth in 2019 are near zero, it is possible to have a flourishing ecosystem in line with other economies.
However, in Italy, a culture based on innovation is lacking and it could prove difficult to obtain financing or have the support of market and national institutions, as occurred with Fujitsu. Unfortunately, this phenomenon holds Italy back where, unlike in the Netherlands (an example offered by Prof. Zara), the government, companies and financial institutions do not work in a coordinated manner. Unfortunately, examples abound of entrepreneurs who report bureaucratic red tape, long time frames and authorization difficulties in Italy. Too often, all these negative factors cause entrepreneurs and companies to abandon projects with potentially positive effects for the nation and its economy.
What emerged is the importance of the business model in the innovation process to be able to fully implement the Circular Economy model. Given the complexity of the current ecosystem and the tremendous challenges facing companies, collaboration is also needed to obtain win-win results, in both economic and social terms. Over the next few years, the challenges will involve both technological and legislative aspects and, therefore, it will be important for companies and government and institutions to work together to obtain optimal results in creating an active and stimulating ecosystem. Achieving implementation on a system-wide level, many more companies will be induced to begin the transition towards new business models and this will lead to benefits for multiple stakeholders.
POINTS WHICH EMERGED
→ Exploit the InnoTech Community platform and network to launch a common initiative aimed at creating a people-oriented smart-cities ecosystem that is implemented on a city- or regional-wide level and which utilizes the Circular Economy paradigm.
In preparing this report, we would like to thank: Alberto Di Minin, Valentina Cucino, Gherardo Montemagni.
 The measures which will enter into effect by 2030 are designed to impact on the entire life cycle of products with the goal of improving the efficiency and use of resources. For example, a number of measures aim at reducing urban waste by 70% and packaging waste by 80%.
 Source: The European House – Ambrosetti elaboration of Ellen MacArthur Foundation, European Commission data, 2018.