4 Ways the Digital Economy is Circular

[daniel_wellers]

In 2005 British yachtswoman Ellen MacArthur became the fastest person to circumnavigate the globe alone. For this record-breaking achievement, she gained both international renown and the title of Dame Commander under the British Empire.

But on that 71-day journey she also came to understand that her very survival depended on how well she managed the resources in her boat, and that it was a completely closed ecosystem. And though she had no formal ideas about economics, she had the epiphany that our global economy is no different.   It's a system of finite resources under increasing demand.  And the idea that was to become the Circular Economy was born. Back then, Dame Ellen may also have sensed the sea change of hyper-connectivity that was building, with individuals, businesses, and entire societies soon to be interconnected in real time. Today we call this the Digital Economy, and its arrival is accelerating the adoption of circular business models around the world.

Indeed, Circular Economy concepts are now emerging onto the world stage.  They were featured at the World Economic Forum with the support of McKinsey & Company.  Accenture has added their voice to the conversation. And institutions around the world are adopting its principles.

Let’s take a closer look. Today’s economy is a linear model of resource consumption. Companies extract raw materials, manufacture products, sell them to consumers, who then discard them when they’re no longer useful. But this linearity is hugely wasteful.  By one estimate, Americans alone throw away 50 Great Pyramids worth of trash every year.

This is clearly unsustainable. Upsurge in consumer demand by the billions that are entering new middle class is causing what the World Bank has described as a “potential time bomb". And natural resources prices are increasing, since Y2K erasing a century’s worth of declines with the last decade seeing the highest price volatility in the past 100 years. Indeed there are strong reasons for change.

Enter the “Circular Economy”, which is about re-designing our economic system around materials re-use, restoration, renewal, and using innovative design, products, systems, and business models to multiply economic value.

Click here for an interactive diagram of a Circular Economy.

To understand how this works let’s look its core principles.

• Separation between biological and technical components in the economy.  Biological components that decompose back to the earth circle very differently from technical components made from durable materials.
• Products designed for cycles of dis-assembly and reuse, so there's no waste. This obviously sets it apart from today’s model where large amounts of embedded energy and labor are lost at the end of a products life.
• Use of renewable energy to reduce energy supply risks, and to be easier on the planet.

These principles in turn are the basis for four powerful sources of value.

1. The power of the inner circle, or minimizing materials use to speed up re-use and increase savings on material, labor, and capital.
2. The power of circling longer or maximizing the number of cycles and the time in each cycle of reuse.
3. The power of cascaded use, which is about diversifying reuse across value chains and industries.
4. The power of pure inputs or simple, uncontaminated materials that are more efficient to reuse or recycle.

What are the implications for business, societies, and individuals?

Many believe that the next big wave of innovation will be based on exponential technologies, radical resource productivity, and whole system design.  History shows that first movers in these waves create enormous wealth, for themselves as well as the economies and societies they're part of.

What’s needed to thrive in a Circular Economy?

Business Process Innovation - Supply Chains and Logistics Networks will need to be reversed, and also re-engineered as closed loops; new methods will have to be created for designing products and using materials. Advanced manufacturing techniques and systems will need to be designed and implemented.

Business Model Innovation - Products as Services, Next Life Sales, Product Transformation, Recycling 2.0, Collaborative consumption, and how to monetize these business models.

Enabling Technologies – Now that everything can be tracked and measured, resource and value flows can be mapped, and innovations can be crowd-sourced, the adoption of Circular Economy concepts is accelerating.  Organizations that digitize their value chains and core business processes using mobile, Big Data, and advanced analytics technologies will be well positioned. So will those who have embraced collaborative networks for person-to-person, business-to-business, the “Internet of Things”, as well as the cloud because these networks will have to be massively interconnected.

Thus the Digital Economy is the catalyst for a Circular Economy, and is accelerating its arrival as a mainstream economic concept.

To learn more about how exponential technology will affect business and life, go to SAP Digital Futures

This story also appears in the Digitalist Magazine