Six ways to build circular business models

Nancy Bocken and Paavo Ritala

Nancy Bocken is based at he circular economy is a new economic paradigm that aims to break free from the
Maastricht Sustainability
Institute, Maastricht
University, Maastricht,
T destructive and wasteful industry practices dependent on high sales volumes and
fast-paced consumption. This change will eventually affect every industry and
company, posing a major challenge for both startups and incumbents to develop new types
The Netherlands.
of circular business models that are both financially and ecologically feasible. Our study
Paavo Ritala is based at the
aims to provide a strategic decision-making framework that can be used to create or renew
School of Business and
Management, LUT business models that draw from circular economy principles.
University, Lappeenranta, To respond to the rising demand for circularity, companies have developed different types
Finland. of circular business models (Ferasso et al., 2020) that deliver superior customer value
propositions, while resolving resource issues and combatting the dominant linear “take-
make-dispose” business model (Bocken et al., 2016). These are not only beneficial for
society and environment but also make a good business case. First, people have grown
more aware of environmental aspects and increasingly view environmental issues as part of
their consumption and employment choices. Second, regulators are focusing on circular
economies with differences across institutional contexts, gradually providing incentives and
enforcement toward circularity (Ranta et al., 2018). For instance, the EU has adopted a new
“EU Circular Economy Action Plan” focused on a cleaner and more competitive Europe
(European Commission, 2020). In the USA, there are circular economy policies at city and
sectorial levels (United States Chamber of Commerce Foundation, 2015). Finally, the
circular economy can be a source of innovation and new revenues, particularly when a
suitable business model is found (Hopkinson et al., 2018). Yet, there is a need for clear
strategic guidelines on how existing and new companies can launch circular business
model initiatives.
We suggest starting with two critical strategic choices: the innovation strategy and the
resource strategy. For the innovation strategy, firms need to choose how much they aim to
improve circularity in their business models by firm-driven internal processes, by
collaborative processes with external stakeholders, or both. These choises correspond to
the idea of closed vs open innovation (Chesbrough, 2003), and provide different benefits
and challenges for circularity (Brown et al., 2019). For the resource strategy, firms need to
decide which type of circularity they will pursue: narrowing, slowing, or closing resource
loops (Bocken et al., 2016). We discuss a combination of choices that result in a 2
3
matrix of different strategic approaches to circular business models.

Feasible resource and innovation strategies for circular business models

Resource strategy
The authors would like to thank
the participants of ISPIM Virtual Resource strategy refers to the environmental goals of the circular business model:
2020 Conference, as well as narrowing, closing or slowing resource loops (Bocken et al., 2016).
Joona Keränen from RMIT and
Outi Blackburn from LUT, for
the comments on the previous
Narrowing the loop focuses on efficiencies in design and production processes, for
drafts of the paper. example, when a product is manufactured using fewer resources (i.e. energy, water,

PAGE 184 j JOURNAL OF BUSINESS STRATEGY j VOL. 43 NO. 3 2022, pp. 184-192, © Emerald Publishing Limited, ISSN 0275-6668 DOI 10.1108/JBS-11-2020-0258
material), facilitated through cleaner production processes and better product design (e.g.
by reducing packaging). This strategy is already prevalent in the current “linear” economy
as it often saves costs while saving resources. Companies should pursue this strategy
regardless of their overall business model since improvements in technologies and
processes allow them to do more with less. These efficiency gains should not sacrifice
quality or customer value, however.
Closing loops refers to reusing material post-consumer usage, often referred to as
“recycling”. For instance, precious metals collected from electronics may be reworked into
a new batch of devices. When discarded materials are of inferior quality, they can be used
for lower value purposes (e.g. insulation material) or worse, simply burned to generate
energy, which is referred to as “downcycling”. When a higher quality product is created –
e.g. a quality piece of furniture from reclaimed wood – this is called “upcycling”
(McDonough and Braungart, 2013). Hence, the business case depends on the quality of
the collected material and the end-product for which it is being used.
Slowing loops refers to extending the product life, so the product remains at its highest
value for a long time. The idea is well-described by former eBay CEO John Donahoe who
argued that “the greenest product is the one that already exists” (Bocken et al., 2016,
p. 310). Consider any product lasting for a lifetime and slowing down the need to source
new raw materials. This strategy is focused on product quality and durability (and, possibly,
upgradability, e.g. for electronics) and involves strategies of maintenance and repair.
Service models may involve strategies to extend the product lifetime. For example, “power
by the hour” established by Rolls-Royce already in 1962 involved a “complete engine and
accessory replacement service” [. . .] “on a fixed-cost-per-flying-hour basis” (Rolls-Royce,
2020). Airbus offer maintenance packages such as “Flight Hour Services” (Airbus, 2020). In
second-hand, vintage and flea-markets used consumer products are re-sold after potential
cleaning and repairing.
These three strategies are not mutually exclusive and are rather compatible. For example, a
product may be produced using cleaner production processes (narrowing the loop) and
recycled materials (closing the loop) and in a way that the product is durable and that
services allow for a long product lifetime (slowing the loop). Moreover, slowing of loops
might be later complemented with a business model that allows for closing the loop, e.g.
when the material from a high-quality product that is eventually abandoned is adopted as a
source for new value creation elsewhere.

Innovation strategy
Innovation strategy refers to the classic division between “closed” and “open” innovation,
and in the context of our framework, to the openness of the developed business model in
question (Chesbrough and Appleyard, 2007).
A closed innovation strategy in relation to a circular business model is about organizing the
circularity principles within the boundaries of the firm. This refers to, for example, internal
resource reuse and improvements in quality of the products, making them last longer.
Company-driven initiatives to encourage customers to return used products is an example
of closed innovation. Companies pushing circularity with a closed innovation strategy
benefit from keeping the process under their own control. This is beneficial in many ways,
including close monitoring of resource efficiency, reuse and recycling, and also possibility
to directly reap the economic benefits of these activities.
An open innovation strategy in the context of circular business models refers to connecting
with external partners or customer and user communities to boost the circularity of the
business model. Examples include engagement with communities and platforms that sell
the firms’ products in second-hand markets such as the selling of vintage and used
Patagonia gear in Asos Marketplace. Alternatively, firms can establish industrial-scale

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 circular operations in energy and resource use, as recently witnessed with regional data
center heat reuse schemes (Kokoulina et al., 2019). Open innovation for circularity
provides benefits such as rapid scale-up of material reuse, as well as new ways to use
excess resources in other organizations. The challenge from open models is the loss of
control over the whole process and related relational and organizational coordination
costs and risks.

Six strategy archetypes for circular business models

To help deal with the managerial challenge of choosing the right way to approach
circularity, we develop a conceptual model that supports the development of circular
business model innovations (Table 1). The framework represents two critical aspects of
circular business model innovation: the resource strategy and the innovation strategy.
Within each of the cells in the framework, we identify the key aspects of circular business
models according to the value proposition (what value is provided and to whom; Ranta
et al., 2020), and the classic business model components (Teece, 2010) of value creation
and delivery (how the value is provided) and value capture (how the company makes
money and captures other forms of value).

Table 1 Circular business model strategy framework

Resource strategy
Innovation
strategy Narrowing loops Slowing loops Closing loops

Open Open-narrowing Open-slowing Open-closing

Value proposition (example): Reduce Value proposition (example): Reuse Value proposition (example): A circular
waste and resources in design and resources to broaden the offerings to offering which involves lower
production processes the customer (e.g. vintage, second- environmental footprint and resource
hand) burden
Value creation and delivery: Reduce Value creation and delivery: Create Value creation and delivery: Combine
cost and negative impact through new value by connecting internal and resource flows from external ecosystem
technologies and processes in external resource flows via generative into customer offerings
collaboration with suppliers, models
customers and others
Value capture logic: Save cost and Value capture logic: Increase the Value capture logic: Lower the cost of
resources number of transactions in an resources used in customer offerings,
ecosystem via reuse of products improve brand and corporate image
Case examples: industry collaboration Case examples: H&M – Sellpy Case examples: Interface Networks for
on cleaner refrigeration technology; collaboration on second-hand clothes ’circular carpets’ with ZSL, Aquafil and
Sony and Samsung collaboration on market; iFixit repair platform; ResQ Cl fishery communities; JLR and Novelis
LCD efficiency ub excess food sales model closing the aluminum loop
Closed Closed-narrowing Closed-slowing Closed-closing
Value proposition (example): Reduce Value proposition (example): High Value proposition (example): Connect
waste and resources in design and quality products with high customer with customers by using, recovering,
production processes value and maintaining post-consumer
materials
Value creation and delivery: Reduce Value creation and delivery: Long Value creation and delivery: Increase
cost and negative impact through lasting design, repair services; Create customer retention and repurchases via
internal technology, process and more value from less resources take-back plans
design innovations
Value capture logic: Save cost and Value capture logic: Price premium Value capture logic: Resource
resources through achieving quality leadership efficiency, improve brand and
and customer loyalty; create value reputation, reduce cost for materials
from same product multiple times
Case examples: Companies like Apple Case examples: Long-life warrantees; Case example: Take-back, rental and
minimising packaging and using hotel linen rental services focused on lease models to recover the company’s
recycled materials; McDonald’s “fried product longevity own materials such as MUD Jeans
for fuel” Lease and Philips pay per lux

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Closed-narrowing: save costs and resources internally
Closed-narrowing is perhaps one of the most common industry practices where value
creation is about saving resources and costs using various types of innovation within
the company boundaries. Value capture takes place via direct cost savings, and using
these savings often contributes to the symbolic aspects of customer value proposition by
signaling the environmentally sustainable products and processes. First, there are several
opportunities such as using combined heat and power and heat recovery to reduce energy
use and also the direct reuse of manufacturing waste or scraps within factory boundaries. A
second example is light-weighting and reducing materials used per product. Many
consumer product giants such as Apple have sought to minimize packaging per product
and increase the recycled content of the packaging. A third example is internal industrial
symbiosis, where one “waste” is used as a resource for another process within the same
company (Zhu et al., 2007). For example, in 2006, McDonald’s launched “fried for fuel” to
produce biodiesel from fried oil generated in its restaurants, powering company trucks and
reducing disposal fuel costs (Albino and Fraccascia, 2015).

Open-narrowing: collaborative efficiency

Open-narrowing is about collaborations, often on new technology and processes, to
reduce the environmental impact associated with products and production processes.
Companies capture value by saving in costs and resources and creating value
propositions that communicate the reduction in material use to the increasingly
ecological-aware end customers and stakeholders. However, value creation takes
place across company boundaries, where various types of collaboration are used to
reduce the material and resource use. A cross-industry example is the Consumer
Goods Forum, a membership organization which facilitates collaboration on such
processes as phasing out hydrofluorocarbons (HFCs) from refrigeration (The Consumer
Goods Forum, 2020). Another example is horizontal industry collaboration (or
“coopetition”) among manufacturers to improve the resource efficiency in their
processes (Christ et al., 2017).

Closed-slowing: live with less that lasts longer

Closed-slowing is about creating more value from fewer resources by focusing on long-
lasting design and services, developed in-house. Value propositions typically involve high-
quality offerings, increasing customer satisfaction and loyalty. This allows companies to
capture value by price premiums by virtue of quality leadership. A typical example is to
develop long-lasting products and offer customers warrantees and repair and maintenance
services. A range of companies selling anything from outdoor gear to cookware, socks and
furniture are offering some form of lifetime warrantee to help extend the lifetime of products
and slow the loop. The costs of additional services and warrantees are typically borne by
the company through a relatively higher price. Closed-slowing might also involve a different
sales model. For example, furniture company Vitsœ focuses on design that allows people to
“live with less that lasts longer”. Part of this strategy involves no sales commissions,
bonuses or discounts. A case study on Vitsœ suggests that the business has been
financially viable despite its unconventional sales strategy (Bocken and Short, 2016).
Slowing the loop can also be facilitated by a service model. For instance, rental models
allow for the product to be reused over time. In the case of car rentals, it is in the interest of
the car rental company to ensure that the car gets repaired and maintained. The same is
true for hotel linens and workwear rental services where the product remains in the
ownership of the service provider who is incentivized to look after the product so it can be
reused over and over.

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 Open-slowing: collaborative product stewardship
Open-slowing creates value by extending the product life by partnering and developing
innovative solutions in collaboration with external stakeholders. The value propositions focus
on reuse of products over time with new customers, which allows companies to capture
value from the increasing number of transactions from the same products. At best, the
business interests of partners and ecosystem members are combined with a circular flow of
material that warrants extended usability for an offering. H&M, for example, started to
partner with (and in 2019 bought a majority stake in) second-hand online seller Sellpy to
encourage clothing reuse. Another example is the iFixit community, which includes “repair
guides for everything, written by everyone”. Whereas repair information is freely available,
the company earns revenues through selling parts and tools for repair. Finally, Finnish
scale-up company ResQ Club enables luncheons to sell excess food to the users of the
ResQ Club platform for reduced prizes, thus redistributing good food so it does not go to
waste (Mattila et al., 2020).

Closed-closing: continuous material reuse

Closed-closing strategies appear quite similar to the closed-narrowing category, but the
main difference is that “closed-closing” creates value via post-consumer recovered
materials while closed-narrowing occurs at the “pre-consumer stage” (reusing metals
scraps within factory boundaries). Closed-closing takes place within company boundaries
and allows companies to offer value propositions that rely on resource recovery from
consumers or business customers in various ways. This enables capturing value by both
efficiency and cost saving. As a closed-closing example, the business model of the
company allows for recovery of the materials and fully closing the loop after consumer (or
another business in the case of B2B businesses) has used the offering. The jeans company
MUD Jeans (mudjeans.eu), for example, offers a leasing and take-back model for its jeans,
so that the materials can be recovered and used again for new pairs of jeans and other
clothing. In the case of the Philips’ pay per lux model, used in offices and at airports, the
company provides light as a service, Philips retains ownership of the lights so these can be
recycled in the end (Kramer et al., 2019).

Open-closing: reducing waste via external ecosystem integration

Open-closing creates value by bringing resources from external ecosystems and
reconnecting those in different ways into customer offerings. The value proposition typically
involves a product with a lower environmental footprint and lower resource burden. This
allows capturing value by saving in resources as well as improving company brand and
image among customers. A collaboration between the Zoological Society of London,
Interface (carpet manufacturer), Aquafil (yarn manufacturer) and local communities in the
Philippines led to the clean-up of discarded fishing nets, which were turned into new
carpets (Bocken et al., 2018). In the automotive industry an open-closing example is the
collaboration between Jaguar Land Rover and its aluminum supplier Novelis to close the
aluminum loop. Close collaboration was needed to collect offcuts and scrap from
manufacturing and have the material reprocessed and reshipped to the factory. Since
2011, the company has increased its recycled inputs from 33% to nearly 50% and
continues to pursue this goal, as recycled aluminum requires up to 95% less energy during
production than virgin material (Cambridge Institute for Sustainability Leadership, 2020).

Conclusion
Circular business models are increasingly pursued by companies, but managers face the
challenge of navigating the many possibilities. This study brings clarity to this rapidly
evolving area via the “circular business model strategy framework” (Table 1), which

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introduces six strategic approaches to circular business model innovation. These are built
on the resource strategies of narrowing, closing or slowing loops (Bocken et al., 2016),
closed or open strategies for innovation (Chesbrough and Appleyard, 2007) and business
model and value proposition literature (Teece, 2010; Ranta et al., 2020).
There are many ways to achieve circularity in business models, as demonstrated by the
six strategies. Both closed and open approaches are available, but each approach has
distinct benefits and downsides. Closed approaches allow firms to maintain control
over the coordination of the whole circular process, leading to less uncertainty and
better control over the value capture. Ideally, all material and resource flows are
circulated and processed inhouse, which maximizes the material efficiency in the local
context. However, retrieving and processing material would require a change in
processes, both at the physical (take-back) and financial and accounting levels. Open
approaches allow companies to flexibly bring in new capabilities such as product
return services for refurbishing and repair and maintenance services, building on user
and producer ecosystems. Yet, over time, it may be beneficial to develop these
capabilities inhouse when the new business model becomes more important to the
business. Therefore, companies need to make critical choices on which strategies to
follow when pursuing circularity. Each strategy involves specific benefits and risks.
Therefore, we outlined key questions that managers need to develop circularity in their
business model (Table 2).
After assessing the potential of the different strategies, companies should decide on the
best configuration and roadmap to develop these approaches. In fact, we have noticed
that many leading companies combine several approaches within their business model.
To begin with, innovation strategies are at their best when they combine the best features
of closed and open innovation (Dąbrowska et al., 2019), and this is very much true for
circular business models. Companies need not settle for just one strategy within the six
possibilities identified in this study. Instead, many circular economy trailblazers are
combining several – if not all – of the six ways to build circular business models.
Patagonia, for example, incorporates several circular business strategies, from using

Table 2 Key managerial questions to decide upon a strategy for circular business model innovation
Narrowing loops Slowing loops Closing loops

Open Which of our current ecosystem Can we create digital platforms or Are there existing producers of leftover
business partners are ready to improve their partner with platform providers that material that is valuable but currently
model resource efficiency together with us? allow for reusing and sharing of underutilized?
innovation valuable resources among customers?
Are there new horizontal or vertical What is our own added value to such Can we create external ecosystems that
collaborations that we can initiate to ecosystems? collect such materials?
boost resource and material
efficiency?
Can we build on an existing customer Can we bundle these materials into
base or do we need to attract new competitive customer value
customers? propositions?
Closed How can we minimize resource Can we create a well-functioning repair Can we identify valuable ways to take
business usage in internal processes? or refurbishment organization and back products from our existing
model offering to serve existing customers customers and use it as an input in the
innovation better? same or different products?
Are we able to build on those Are we able to take a risk of long Can we design a win-win take-back or
resource savings to generate warranties? repurchase scheme with our customers?
concrete cost savings?
Are we able communicate those Can we charge customers premium Can we use closed-loop processes
efficiencies to customers and prices in exchange for product effectively in marketing and branding?
business partners? longevity?

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 recycled material content to close the loop and establishing a second-hand clothing
platform to slow the loop, on top of all kinds of efficiencies in design and production to
narrow the loop. While some of their initiatives are done inhouse, the second-hand
platform was initially a collaboration with eBay. Similarly, consumer goods
manufacturers, urged by increasing consumer interests and policies, need to find every
means to reduce plastic waste, leading to developing of circular business models across
all dimensions of our framework.
To conclude, we propose that for organizations to transition to a circular business model,
they need to consider both their resource and innovation strategies. The decision whether to
close, slow and narrow the loop is combined with a deciding whether to act alone or work
with others. This decision depends on the availability of internal capabilities and whether the
new circular business activity (e.g. returns of used products, repairs) will be a core and
significant part of the business model. Here, the classic decision of make-buy-partner
Keywords: needs to be considered together with the assessment of the circular economy benefits (or
Collaboration, downsides) that the different organizing models allow. Organizing decisions are certainly
Strategy,
not static, and they evolve as the business model matures. A company might begin by
Open innovation,
Business model innovation, honing the internal processes, and then move to generate a larger impact on its supply
Business model, chain partners, user ecosystems, and ultimately even the whole industry. However, the
Closed innovation, voyage needs to start somewhere. The six strategies should provide support for managers
Circular economy in their business transformation toward the circular economy.

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About the authors

Nancy Bocken is a Professor in Sustainable Business at Maastricht University, Maastricht
Sustainability Institute. Her research topics include sustainable business models, business
experiments for sustainability, Circular Economy, sufficiency and closing the ’idea-action’
gap for sustainability through novel tools approaches. Her most recent research project is
Circular X, a e1.5m, five-year research project funded by the ERC, about experimentation
with circular business models. Nancy is also Fellow at Cambridge Institute for Sustainability
Leadership and co-founded her own sustainable business called HOMIE. Nancy holds a
PhD from the Department of Engineering, University of Cambridge, which was fully funded
by Unilever.

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 Paavo Ritala is a Professor of Strategy and Innovation at the School of Business and
Management at LUT University, Finland. His main research themes include collaborative
innovation, coopetition, digital strategy, platforms and ecosystems, as well as
sustainable value creation. His research has been published in journals such as Journal
of Management, Research Policy, Journal of Product Innovation Management, Long
Range Planning, Industrial and Corporate Change and California Management Review.
He is closely involved with business practice through company-funded research
projects, executive and professional education programs, and in speaker and advisory
roles. Prof Ritala is the incoming Co-Editor-in-Chief of R&D Management and he serves
in the editorial board of Journal of Product Innovation Management. Paavo Ritala is the
corresponding author and can be contacted at: [email protected]

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