In Practice
 

Supercharging the Circular Economy with Service-dominant logic.

 Work In Progress
circular customer economy exchange goods linear logic product reuse service service-dominant sharing thinking value waste
  This article is work in progress - it will probably change (improve ) between visits, so please come back often

We really need the circular economy to work. An economy that, amongst other things, reuses, shares, refurbishes and recycles goods to minimise waste and pollution. Yet, only 9% of the economy is currently circular, and trends suggest this is decreasing. At the same time, the service economy is booming.

Can service-dominant logic help us understand better and supercharge the circular economy?

Yes. There are usable parallels between the shifts from:

  • product-dominant logic’s focus on value-in-exchange -> service-dominant logic’s value-in-use, and
  • linear economy’s “take-make-waste” -> circular economy’s maintain/prolong, reuse/redistribute, share, refurbish/remanufacture, recycle approach

With its evolved view that value is co-created rather than simply exchanged, service-dominant mindset pushes us to think beyond the traditional focus on making a sale. And it encourages relationship building, a focus on offerings that solve jobs to be done, and, sees a network of actors involved. These are all things we need in order to supercharge the circular economy.

But we have to be careful – a service-dominant logic economy can lead to more waste. We can easily create, for example, subscription models that encourage increased volume of throw-away goods.

Harnessing the circular economy, through the lens of service-dominant thinking, offers the potential to drive additional business and additional customer value (as well as sustainability) Click To Tweet

In this article we look at how using a service-dominant logic mindset can supercharge the circular economy.

Key points

  • The Circular Economy is a move from the linear economy of take-make-waste to one that:
    • designs out waste and pollution
    • keeps products and materials in use
    • regenerates natural systems
  • We look to Maintain / Prolong, Reuse / Redistribute, Share, Refurbish / Remanufacture, or Recycle goods
  • To operate such a circular economy we have to
    • start building relationships with customers, and look beyond what happens after the sale
    • move from value-in-exchange approach (embedd value in manufacturing and focus all on the sale)
    • generate co-value
    • co-ordinate many actors to achieve value
  • Those are exactly what service-dominant logic brings to the table

So let’s start with understanding what is the circular economy.

What is the circular economy and why is it important?

To understand the circular economy let’s start with its opposite though common approach today: the linear economy.

Today’s world: The Linear Economy

Think of how we typically use goods today. We take raw resources, make various component parts and assemble those into goods. Then we focus all our efforts to sell those goods to customers. Our customer then uses the good until it is no longer of any use, and then throws it away. This is the Linear Economy. And is referred to as the “take-make-waste” model.

We often don’t care about the residual value of goods or trying to reuse that. This generates waste, pollution, and locks away scarce resources. Worse, usually, the taker and makers don’t have visibility, or care, how their goods are used or wasted by the users in the next step.

One thing is for sure: we can’t continue with all the waste we generate in the linear economy. Firstly, it’s not environmentally friendly. Let’s just take the following, quite astonishing, fact:

total greenhouse gas emissions from textiles production, at 1.2 billion tonnes annually, are more than those of all international flights and maritime shipping combined

A New Textiles Economy: Redesigning Fashion’s Future

Secondly, we have limited physical resources to take and too high demand for those; a demand which is only increasing.

So we need something different for tomorrow (or really today/yesterday).

Tomorrow’s (needed) world: The Circular Economy

We need to find an alternative to the linear economy. An approach where we:

  • “design out waste and pollution
  • keep products and materials in use
  • regenerate natural systems”

And these three principles are exactly what the Ellen MacArthur Foundation uses to define the Circular Economy. You can see their interpretation in Figure 1. And we see why it is called circular. Notice that there are two streams: renewables flow management and stock management.

Figure 1: The Circular Economy (Ellen MacArthur Foundation)

We’ll concentrate on the stock management side in this article (or goods management, to keep the naming the same across this site). And we can see there are four circular loops in this half of the diagram, covering:

  • Maintain / Prolonging & Sharing
  • Reuse / Redistribution
  • Refurbish / Remanufacture
  • Recycle

Where the intention is to keep within the inner loops before moving to the outer ones. For example, reuse is preferred over refurbishing and maintaining over reuse, etc.

So what’s the idea behind this article?

Despite the need to shift to a Circular Economy, only 9% of the world’s economy is currently seen as circular. And sadly, that trend appears to be decreasing.

Only 9% of the world economy is circular and according to the Circularity Gap Report 2019 the trend is negative

The Nordic Market for Circular Economy – Attitudes, Behaviours and Business Opportunities” SB Insights (2019)

On the other hand, we are in economies that are predominantly, and increasingly, powered by services.

To me, that feels like a disconnect. Each loop of the Circular Economy appears to be service-like.

Figure 2: Loops in the Circular Economy are powered by Service (including self-service)

Could it be that our in-grained focus on looking at economies with a goods-dominant mindset is holding us back? We have, after all, spent 300+ years living in a “goods/product” economy. Our whole mindset of the firm is built around making goods, selling them, and not thinking about use.

Figure 3: Shifting to the Circular Economy can be analogous to the shift to Service-dominant logic

With its evolved view that value is co-created rather than simply exchanged, service-dominant mindset pushes us to think beyond the traditional focus on making a sale. And it encourages relationship building, a focus on offerings that solve jobs to be done. As well as seeing value is co-created through a network of actors. These are all things we need in order to supercharge the circular economy.

To show this, let me take you on a journey. One that ends with viewing the Circular Economy through the lens of service-dominant logic. But which starts by looking at the Linear Economy as seen through goods-dominant logic. That is to say, how we usually see the world today.

Linear Economy and Goods-dominant logic

Goods-dominant logic is a lens onto what happens with value in our economy. It takes a very linear view where value is created, exchanged and destroyed.

Value in linear economy
Figure 4: Value in linear economy as seen from a goods-dominant logic mindset

During the manufacturing process, various parties are extracting raw materials, making parts, and assembling parts into goods. Value is seen as being embedded at each of these steps. A car or a cake, for example, is more valuable than the parts, ingredients, or raw materials that went into making them.

The total focus of the firm is on making a sale. That is to say, getting an exchange for that value they have embedded. Now the customer owns the goods (and so the value) and they then go about destroying/using-up that value. They do that by using the goods so it wears out or is eaten or, etc.

We can bring the linear economy and product-dominant logic together as Figure 4 also shows. Here we see that the take-make part of the linear economy aligns with the creation of value. And the waste part comes typically after the customer has used up the value and so the goods are thrown away. But, let’s not forget some waste can be produced during usage – replacing batteries, for example.

What impact does goods-dominant thinking have?

So, I suggest goods-dominant thinking is bad for the circular economy. And that comes down to two sides of the same coin: the focus on the exchange of value.

Similarities between Linear Economy's take-make-waste and Product-dominant Logic view of value being embedded, exchanged and used-up
Figure 5: Similarities between Linear Economy’s and Product-dominant Logic, including when the firm loses visibility/interest in the goods

Firstly we focus totally on getting an exchange. We have to show the value we have embedded. And we do that through the traditional marketing mix of product, price, promotion, and place. For example, showing why our product is more valuable than someone else’s. Or we drive down costs to make higher margins at a lower price than a competitor. Classic Porter’s Competitive Strategy.

There is no thought of developing something that feeds into the circular economy. Unless your competitive strategy is one of differentiating to be sustainable. However, we don’t really want differentiation on this point. We need everyone to get there.

Secondly, at each exchange there is no interest in what the party in the next step does with the output from the current step. From miner to part manufacturers, to final manufacturer, to customer, once the exchange is made, the job is done. They are off to make the next sale and next customer.

Next, let’s look at how value changes if we are in a Circular Economy using the same goods-dominant logic lens.

The Circular Economy in Goods-dominant logic

The Circular Economy is about reducing waste. To achieve that, in a goods-dominant mindset, means achieving two things with the value. Firstly, we need to preserve and extend the value embedded in the goods. This is represented by the yellow box in Figure 6. And here we can think of maintenance and sharing, or reuse, etc.

Figure 6: In the Circular Economy we need to preserve and extend goods value, as well as increasing the value in order to reduce waste (value destruction).

Secondly, we find ways to increase the value of the goods – the blue triangle in Figure 6.

By both preserving & expanding and increasing value we potentially reduce waste (or destruction of value). But, we need to be careful. It does not automatically follow that waste is reduced. We could actually produce more waste than expected by making ineffective choices.

We are still stuck with the value in exchange thinking under this perspective. The original manufacturer needs not to think about sustainability. There are no networks acting together to drive the circular economy. And the customer can be acting as expecting value in exchange. Getting deposits back on bottles for example.

One thing it is useful (if not important) to recognise in the Circular Economy is that it is the user (customer) that determines the value of reuse, refurbishing, sharing, recycling etc. And the user does that in conjunction with providers of services. Realising this opens the door for us to look at the Circular Economy through a service-dominant lens.

The Circular Economy through the Service-dominant Logic lens

Service-dominant logic is a way of seeing the economy as only having service(S). And where goods are a distribution mechanism for services. At its heart are five axioms:

  1. Service is the fundamental basis of exchange
  2. Value is co-created by multiple actors, always including the beneficiary
  3. All social and economic actors are resource integrators
  4. Value is always uniquely and phenomenologically determined by the beneficiary
  5. Value co-creation is co-ordinated through actor-generated institutions and institutional arrangements

It would be wrong to think service-dominant logic is the opposite of goods-dominant logic. Rather it naturally emerges after making a few realizations about how the world really works.

I dig deeper into these realisations in my article on service-dominant logic. But for now, let’s look at the impact of a service-dominant logic mindset on value in the circular economy, as shown in Figure 7.

Figure 7: value in the circular economy through the service-dominant lens

And an immediate observation is that there is no build up of value any more. This is because manufacturers are no longer seen as embedding value, they can only offer proposals (to get jobs done). The value itself is co-created by the customer interacting with those service offerings. We call this value in use (or sometimes value in context).

I think it’s relatively easy to see sharing, recycling, reuse, refurbishing etc as service. But what happened to our goods?

Goods as a mechanism to transport a service

Goods don’t disappear in our service-dominant logic world. But they do take on a different role. They are no longer the all important aspect. Rather they are a way of transporting a service. And this might mean they enable you to perform a self service act. Or they might contain a service that has been, in a sense, frozen.

Let’s take freezing a service first. We listen to music for relaxing and a band playing is a service. Record that music on a CD – remember those? – and we have in a sense frozen that service in time. Now, when we play the CD we unfreeze the service. The CD has no value until you play it.

Alternatively, take a hammer. You use a hammer to knock a nail into something. We can’t really see this as a frozen service (we stretch credibility a little if we try). But we can see the hammer as enabling the self service act of knocking in a nail. The hammer has no value to you until you use it.

Water is a frozen services for quenching thirst. Clothing a service that keeps us warm. Buildings provide the service of shelter and security. And so on.

This is not just semantics. It offers us the ability to start thinking how to get more value from these frozen services/enabling items. What can we, as a firm, society, individuals do when we are not using these services? The point of value exchange fades into the background. And an interest into customers usage appears. How can a service be reused, shared, reconfigured (refurbished/remanufactured) and recycled?

Now let’s explore in more depth why a service-dominant logic helps the circular economy.

Why Service-Dominant Logic helps

Figure 7 exposes a big difference between the two logics. In goods-dominant logic the firm focuses on the exchange and doesn’t care what happens after (as we saw in Figure 5). In the service-dominant logic the firm is intimately involved in what the customer does, as there is co value generation.

This change in focus opens up two opportunities. Firstly the firm is enabled to think more about waste. Now they are building relationships with the customer and have deeper visibility into usage.

Secondly marketing myopia can diminish. We are no longer making and selling a hammer. Instead we are thinking how to help the customer get their job done. For example: to bang a nail into the wall. And that could be by offering a hammer (for self service), a sharing platform for hammers, or a person to turn up and do it.

In fact, both opportunities work together as we can envisage business models based on usage over ownership.

Additionally, the circular economy loops are services. So service-dominant thinking is perfectly appropriate.

So, we can say that harnessing the circular economy, through the lens of service-dominant thinking, offers the potential to drive additional business and additional customer value.

harnessing the circular economy, through the lens of service-dominant thinking, offers the potential to drive additional business and additional customer value (as well as sustainability) Click To Tweet

For this article I want to highlight some key aspects when realising a change from goods to service logic, including those shown in Figure 7. And what that means for the Circular Economy.

Figure 8: Transitioning from goods to service logic, and the implications that has for the Circular Economy

(first two columns comes from “From Goods To Service(S): Divergences And Convergences Of Logics“)

Making Something => Assisting customer in their own value-creation process

Value as produced => Value as co-created

Customers as isolated entities => Customers in context of their own networks

Firms resources primarily as operand => primarily as operant

Customers as targets => Customers as resources

Primacy of efficiency => Efficiency through Effectiveness

Supplier => Multiple actors

SD-logic is comfortable with the concept of multiple actors co-creating value. Circular economy may require that with different actors acting at various levels that the customer co-ordinates with. Or, in the product as a service approach, that the main service provider needs to co-ordinate.

Maintain/Prolong & Sharing

First, and without any need for collection, is the inner loop of maintain/prolong. Here we look to prolong the use of a goods either by using it longer, using it in a different way, or maintaining it so it can continue to function.

This can be done by the user, or in some cases by a service provider (not shown on the diagram). The use of a 3rd party may be driven by legal requirements. For example, maintaining gas appliances in the UK must be performed by a licensed CORGI provider. Or perhaps the goods is too large or challenging for the user to maintain – office space for example.

Reuse/Redistribute

The next loop outwards relates to reusing or redistributing goods. There has long been a market for this loop from hand-me-downs within families through newspaper classified ads and on to Craigslists etc.

What we see now are services popping up to get the job of reuse/redistribution done easier for the user. Say you want to redistribute your clothes. You could use a traditional site where you make the advert, deal with the potential customers, pack and send the clothes. Or, you could use a service like Sellpy.se. In that case, you just order a bag. Once you fill the bag with the items you want to distribute, Sellpy pick it up. They then sell your items on their store. The store’s experience is like a major retailers. They handle photographing and displaying the items, the sales and distribution process as well as customer service. It couldn’t be easier to redistribute your no-longer needed clothes (of course, for a fee). And it couldn’t be easier for customers looking to find their new second hand clothing.

But we also see extensions into new areas such as reducing food wastage by redistribution. Karma allows restaurants, cafes, bakers, grocery stores to quickly and easily sell food items that would otherwise go to waste.

The figures we see from Karma in Figure X make a compelling story. Free monthly marketing of €35K; 9000 saved meals (generating an extra revenue of €33K); a supermarket reducing CO2 emissions by 0.5 tonnes/month; and another selling 200kg more food in 2 months.

Share

From a circular economy perspective sharing gives the promise of reducing the number of goods created. Therefore conserving resources and reducing waste. Again, this is a wider concept than you may initially think.

First it covers the obvious, such as cars. Did you know in the UK cars are parked (not in use) 96% of the time! And whilst we’re talking about cars, if you drive yours to work, then you’re probably leaving a parking space unused at home. JustPark will help you hire that out on an hourly basis.

Here’s a snapshot of what was being shared in cities in 2017 (from a World Economic Forum report called “Collaboration in Cities: From Sharing to ‘Sharing Economy’“).

McKinsey looked at 28 industries and identified that 22 of them could benefit from adopting sharing. Although, they define sharing as “promoting the sharing of products or otherwise prolonging product lifespans through maintenance and design”

Refurbish/Remanufacture

If we can’t share, reuse/redistribute or maintain/prolong, then we could refurbish/remanufacture the goods.

Recycle

Finally the last loop is recycling. Plastic bottles, aluminium cans and paper are the most recognisable categories here.

In Sweden there is a well established scheme requiring deposits to be paid on all PET and aluminium drink containers. This is collected at the point of sale. To get the deposit back, customers return the containers to collection points. These are usually conveniently located in supermarkets. And rather than getting money direct, the customer feeds the containers into automatic machines and gets a receipt. That receipt can be used to reduce the grocery bill in the same store. Or you can donate the deposit to charity.

But recycling is a mature sector and applies quite widely. Cars (metal), mobile phones (precious metal) etc. However it may not be as environmentally friendly as wished, e.g ship breaking.

Products as a service

Example – Lighting up Schipol Airport

Case in point is Philips. The company that makes lightbulb. And the deal they made with Schipol airport.

Old school thinking is selling lightbulbs to the airport. Because the airport needs lightbulbs.

Service thinking focuses on the job to be done. Schipol need to light up areas when the ambient light is not sufficient. They don’t really care if it is by filament lightbulb, led bulbs or whatever.

Wrapping up

[to be completed]

[Old stuff]

The OECD’s report “Business Models For The Circular Economy: Opportunities And Challenges For Policy” identifies 5 business models common in the circular economy.

It is a synthesis of several ideas. And there’s a great summary, and video expansion, of each of those ideas on this Ellen MacArthur Foundation page. In short these ideas are:

  • Cradle to Cradle – eliminate concept of waste, power with renewable energy, and celebrate diversity
  • Performance Economy – product-life extension, long-life goods, reconditioning activities, and waste prevention. Selling services rather than products is important (functional service economy)
  • Biomimicry – study and imitate nature’s best ideas to solve human problems
  • Industrial Ecology – the study of material and energy flows through industrial systems
  • Natural Capitalism – global economy where there is an overlap of business and environmental interests
  • Blue Economy – where “the waste of one product becomes the input to create a new cash flow”
  • Regenerative Design

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