Take, make, waste—this is the linear economy model that the majority of the companies throughout the world have been using for decades. But just because this business model is popular, it doesn’t mean it’s healthy too.
The linear economy approach has led to a deficiency in natural resources and disadvantages such as fluctuating raw material prices, geopolitical interdependence, and more. To top it all off, the new generation of consumers is more aware of these issues than the previous one. And, unlike their older kin, today’s consumers increasingly advocate for sustainability and minimalism, choosing wholesome experiences over possessions that may harm the environment.
So, what’s the alternative? One is definitely needed because the world cannot go back to business-as-usual with an infrastructure and spending habits that pollute and harm the environment and everyone living in it, especially in the aftermath of the COVID-19 pandemic.
Enter the circular economy model
The circular economy (CE) approach—reduce, reuse, recycle—promises to solve and prevent the issues caused by the linear economy model by reusing resources and reducing waste. Governments around the world have already embraced this approach and manufacturing businesses are expected to follow suit.
But shifting to the circular economy model has its own challenges, such as the high upfront costs necessary for product redesign and material reconfiguration. While this may be discouraging, the benefits of making this transition are undeniable:
- Waste reduction and prevention
- Substantial savings on net materials
- Decreased pressure on the environment
- Less exposure to price volatility
- Enhanced resilience
- Increased competitiveness
- Innovation boost
- Economic development
- Greater quality of life
Those who have set their eyes on the prize know that shifting to the circular economy model will provide long-term value and futureproof their relevance in the business landscape. But how can manufacturers achieve that and leverage the aforementioned benefits with minimal business disruption?
Embracing servitization and digitalization
For a successful transition to the circular economy model, businesses should look into transforming their practices by enabling servitization. Simply put, servitization allows manufacturers to retain the ownership of their assets throughout their lifetime, thus building new revenue streams from their services.
In servitization, manufacturers can start small by providing base services such as goods and spare parts. However, they can climb up the ladder to intermediate services that include product repairs, maintenance, training, and monitoring. Eventually, they can provide advanced services such as customer support and outcome contracts.
The value output here is directly proportional to the level of services provided. However, higher-level services require more responsibility and risk. In the old days, it was much easier to sell a product and simply fix it if it broke. But the modern world requires a modern approach that can only be possible by putting technology at the heart of any servitization strategy.
In the current context of Industry 4.0, servitization is enabled by digitalization. In turn, digitalization is possible thanks to technological advancements and breakthroughs such as cloud computing, robotics, data integration, and the Internet of Things (IoT).
The use of IoT-enabled technology doesn’t only provide better service delivery but it can also be customized based on a customer’s specific needs. Manufacturers that rely on their servitization strategies understand that incorporating IoT-enabled technology, such as smart sensors, into the services they offer can collect the necessary information for decision-making, monitor product health, detect potential maintenance issues, and more. The business value of accessing this data is significant in terms of cost-reduction, enhanced product/equipment performance, and customer experience.
By embracing servitization and digitalization, manufacturers can support their shift to the circular economy model with minimal business disruption. Offering product availability and reliability through maintenance and repair services is a great first step towards environmentally sustainable manufacturing.
Considerations for the post-pandemic economy
The linear economy model has been unsustainable for decades now, but its fragility has become clearer since the COVID-19 outbreak began. The pandemic has disrupted field-service operations and supply networks, causing business activity to collapse around the world.
Consumer behavior has also changed during the pandemic. When the outbreak began, hoarding and panic-buying have reached a dramatic level, only to significantly drop once incomes started to be affected by the imposed travel bans and social distancing norms. Because of this, consumers now prefer access and price flexibility over ownership.
This combined with the decline in consumption, changing preferences, and digital acceleration creates an opportunity for companies to shift from a product-centric to a service-centric business model and even possibly shape the future behaviors of their consumers.
In the past, especially during the financial crisis of 2008-2009, servitization has helped manufacturing businesses stabilize through services such as maintenance, overhauls, and repairs. Now, it would only make sense to adopt servitization as a strategy to cater to buyers who cannot afford to spend resources on new products.
However, the current COVID-19 crisis has affected supply chains and buffer stocks, making it almost impossible to provide services when travel is banned, borders are closed, and human proximity is limited.
The difference between past economic crises and the one we’re facing today is profound.
One of the most important business phenomena the world has seen during the pandemic is the accelerated digitalization of both public and private sectors. The private sector especially has been forced to adopt new business models in order to accommodate social distancing and remote work. This paradigm plays a key role in enabling the circular economy by enforcing the need for minimal waste, longer product lifecycles, and lower transaction costs.
Digitalization supports the circular economy and servitization model, creating an opportunity for business continuity in a post-pandemic era. Leveraging IoT-enabled technology, connected products, industrial internet platforms, and digital services can help manufacturing firms build resilience and become independent. Fortunately for manufacturers, the digital landscape doesn’t depend on direct human interaction and physical travel.