From linear to circular value chains

The idea of a value chain was popularized in the 80’s by Michael Porter who wrote about it in his book ‘Competitive Strategy’[1]. The premise is that within an organization each departments adds value. While the primary activities contribute to the core-business, departments like HR, ICT & Facility management organize the support activities. Porter basically describes it as an internal value chain that you can optimize to enhance your own business’ competitive position.

Later on Michael Porter expanded his management concept and theory further and published an article in the Harvard Business Review in 2011 titled: ‘Creating Shared Value: Redefining Capitalism and the Role of the Corporation in Society’[2]. Porters view wasn't necessarily inspired by nature, though his central message was that 'Creating shared value is about the competitiveness of a company and the health of the communities around it. They are mutually dependent.' In this more holistic  view, an organization cannot be well understood without attention for the network it operates in.

This conceptual idea of value has also helped to expand the business horizon from managing financial capital towards a more integrated view on prosperity by adding social and ecological capital to the equation. It has become a hallmark of sustainability, the 3P’s: people, planet & profit[3]. The use of value as central theme in designing business models was already made common practice by Alexander Osterwalder who coined the definition of a business model as: 'A business model describes the rationale of how an organization creates, delivers and captures value’[4]. Add to that the idea of ‘shared value’ and you almost have the recipe for business in the 21st century.

However, one important piece is missing: embedding this business rationale within the Circular Economy.

Analogy with Nature

Thinking in terms of value chains and networks seems pretty abstract, though it is actually quite common in Nature. We have the food chain that resembles the supply chain in which we also distinguish producers and consumers. However, in Nature the reality is more like a gigantic food web. The difference is that you draw a chain as a horizontal or vertical line. And a web can go everywhere. It's all about inter-dependent connections.

SCI-tropical-rainforest-image.jpg

In Nature, a great example of a mature ecosystem is a rain forest. It has an enormous rich variety of species that compete to a certain extent, though they are also mutually depend. All plants, mushrooms, trees and animals; actually everything alive in a rain forest works together as a refined balanced ecosystem that evolved in millions of years. A rain forest is a highly complex mutually depended system.

Taking this example and transitioning back to our business world, we can easily see that our human designed production & consumption system (our economy) still has a lot of opportunity for improvement. Especially when you take into account that - by evolutionary design - in Nature there is no waste. Everything is reused, energy comes from the sun and a rich biodiversity makes life resilient.

Closing the loops

A business supply chain mostly is represented as a simple linear chain where value is added at every step and that starts at the source and finishes at the consumer.

Classic supply chain.png

Figure 1: classic supply chain

Starting point is a description of the project ideas from the entrepreneur. Second, drawing this linear supply chain helps spotting the connections the idea will have, however it is still organized in a linear way. A third step is to select the relevant 9R-strategies and defining what makes the improvement circular. Final step is identifying the most important stakeholders for collaboration along the value chain (making a stakeholder list).

From linear to circular value chains using the 9R-strategies.pngFigure 2: from linear to circular value chain using the 9R-strategies

In contrast to the traditional supply chain where materials, information and finances are central elements, the value chain broadens the scope to the environmental, social and financial impact. In addition, ‘closing the loop’ increases the interconnectedness of stakeholders and their business models along these value chains. And at the same time, making sure the selected ideas have the ‘circular’ component in their DNA by using the 9R’s. For scientific purposes FACET is dedicated to testing and validating a new type of value chain model that is useful for CE-collaborations.

A next step would be to define shared business models and more complex value networks. As stated before, these collaborations within value chains enable other improvements that lay beyond the scope of individual businesses. Considering opportunities like a co-operating a bio-digester for organic waste, joint-purchase of sustainable packaging, or co-development of circular building techniques can create greater value and align incentives through business models that build on the interaction between stakeholders in value chains.

FACET has started with the value chain meetings and is currently developing more practical and hands-on tools for business modelling, decision-making, and measuring financial, ecological and social impacts of small-scale innovation projects. FACET also organizes several (online) meetings to encourages shared innovation.

References

[1]   Porter, M. E. (1997). Competitive strategy. Measuring business excellence.

[2]   Porter, M. E., & Kramer, M. R. (2019). Creating shared value. In Managing sustainable business (pp. 323-346). Springer, Dordrecht.

[3]   Elkington, J. (1997). Cannibals with forks. The triple bottom line of 21st century, 73.

[4]   Osterwalder, A., & Pigneur, Y. (2010). Business model generation: a handbook for visionaries, game changers, and challengers. John Wiley & Sons.

[5]   Sitra Fund (2018). Circular Economy business models for the manufacturing industry. https://www.slideshare.net/SitraFund/circular-economy-business-models-for-the-manufacturing-industry?from_action=save
























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