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Integration of Circular Economy in Business
Dr. Markus Laubscher and Dr. Thomas Marinelli
Philips International B.V., High Tech Campus 5, 5656 AE Eindhoven, The Netherlands
Markus.Laubscher@Philips.com and Thomas.Marinelli@Philips.com
Abstract: Circular Economy has gained attention in society and industry in the past years,
since the world is faced by the challenge of balancing the economic growth with the use
and availability of natural resources. Royal Philips embraced the Circular Economy concept
and started its journey to integrate this new business model in its business processes. Six
key areas for integration were identified including the sales model, product design &
material composition, IT & data Management, supply loops, strategic sourcing for own
operations and HR & incentives. There is a call on the European policy makers to create the
right conditions for the Circular Economy. When implementing a new business model the
company is interested to measure the success; the paper will conclude with suggestions of
value drivers.
1. INTRODUCTION
At Royal Philips we strive to make the world
healthier and more sustainable through meaningful
innovation. Our goal is to improve the lives of 3
billion people a year by 2025. For a sustainable
world, the transition from a linear to a circular
economy is a necessary boundary condition. A
Circular Economy aims to decouple economic
growth from the use of natural resources and
ecosystems by using those resources more
effectively. By definition it is a driver for innovation
in the areas of material-, component- and product
reuse, as well as new business models such as
solutions and services. In a Circular Economy, the
more effective use of materials enables to create
more value, both by cost savings and by developing
new markets or growing existing ones.
The ecological principals that are addressed
in the Circular Economy approach are similar as in
methodologies such as cradle to cradle, bio mimicry
or the Natural Step, all aiming to use natural
resources much smarter and more effective. The big
difference in the Circular Economy approach is that
the starting point is economic value creation with the
improvement of the ecological aspects as a derivative
and not the other way around.
Philips has become a strategic partner of the
Ellen MacArthur Foundation, the leading
organization on the concept of Circular Economy,
and is committed to supporting this concept in the
most efficient, productive way possible.
2. CIRCULAR ECONOMY
Key characteristics of the Circular Economy
approach [1] are
Customer access over ownership, pay for
performance e.g. pay per lux or pay per scan;
Business model innovations, from transactions to
relationships via service and solution models;
Reverse cycles, including partners outside current
value chains e.g. upstream-downstream
integration and co-creation;
Innovations for material-, component-, and
product reuse, products designed for disassembly
and serviceability.
The McKinsey group, assigned by the Ellen
McArthur foundation, produced several reports on
the value creation possibilities of a Circular Economy
[2, 3]. For the durable products and solutions industry
these reports indicate an economic potential of EUR
250-500 billion per annum for Europe alone in the
next decade (see Figure 1). Royal Philips has applied
the McKinsey approach on all the Philips value
chains to determine the opportunities of establishing
additional value creation.
Over the past years the EU has developed an
increasing number of regulations, whose impact on
the Circular Economy implementation is not
necessarily stimulating progress in circularity. It is
good to observe that the European Commission has
embraced the concept by preparing the grounds for a
zero waste program and adopting the communication
‘Towards a Circular Economy’. The Commission
adopted a legislative proposal to review recycling
and other waste-related targets aiming for ambitious
goals to create jobs and economic growth, and to
move towards zero waste [4]. To promote the
Circular Economy the scope of a common and
coherent EU framework should not look mainly at
waste management related policies. It is still a rather
linear way of thinking. The EU institutions and
European governments should establish a policy
framework that promotes investments in new
business models and remanufacturing, facilitate
cooperation across industries to strengthen circular
models and incentivize reverse logistics and promote
long-term performance based business models in
public private partnerships making use of green
public procurement. It should remove unnecessary
barriers that restrict the flow of refurbished
equipment and devices. By adopting smart waste
legislation, the EU will both ensure citizens’ safety
and allow shipment of used equipment and materials
for recycling purposes.
Figure 1: Economic potential of Circular Economy
Models for durable products and solutions industry in
billions of euros for Europe alone [2]
3. KEY AREAS FOR INTEGRATION
While working on the implementation of the Circular
Economy principles in our business processes, we
identified six focus areas for enabling the Circular
Economy at Philips.
3.1. Sales Model
Here we address the question of how Circular
Economy changes the way we sell to our customers.
We move away from selling volumes of products
towards the maximization of asset productivity
through service selling (mainly Business-2-Business
and Business-2-Government customers) and to
creating incentives for customers to return products
after first life (Business-2-Consumer customers).
To illustrate the shift, see a recent light as a
service relationship we started with the National
Union of Students (NUS) in the UK [5].
Figure 2: NUS new library space in London uses Philips
LED lighting throughout, procured through the light-
as-a-service solution.
NUS represents the voice of 7 million students in the
UK, and 80% of them say they want their institutions
to be doing more on sustainability. When NUS
moved into a new office building in London last year,
they felt passionate about capitalizing on the
opportunity to create one of the most sustainable
office spaces in the country and the lighting was an
important part thereof.
Philips didn’t sell lighting fixtures to NUS,
as would have been its past way of business. Instead
NUS rents lighting equipment from Philips, and pays
a flat rate for an agreed energy usage. If the energy
use goes above that, NUS gets cash back from
Philips. This creates a financial incentive for Philips
to provide NUS' new office with the most energy-
efficient service possible, while granting the stability
of a predictable, fixed price over fifteen years. The
ambition on Philips side is to maintain the value of
the installation, keep it up to newest technology
standards and to re-new the contract, thus avoiding
the value destruction of complete lighting overhauls.
3.2. Product Design / Material Composition
New business approaches are made more profitable
or even enabled in the first place through a revised
product design approach. Instead of focusing only on
the lowest possible production cost for a given level
of features and quality, products for a Circular
Economy need to be designed and engineered to
maximize high quality reuse at level of product,
component and materials. An example of design for
improved recycling is the SlimStyle LED
replacement lamp [6].
Today, consumer lamps that reach their end-
of-life are being collected through waste management
schemes and get to recyclers who crush them in order
to primarily recover easy-to-separate (valuable)
materials. The current recycling scheme costs energy,
deteriorates the purity of the material fractions and
still creates waste for incineration or landfill. To
enable optimal material separation and eliminate
remaining waste in the recycling process, Philips’
newest 40/60W incandescent replacement SlimStyle
LED lamp (see Figure 3) introduces a number of
radical design choices:
1. The overall flat geometry enables sufficient
heat elimination from the light emitting diodes to
make the use of the conventional aluminum heat sink
obsolete. Such heat sinks are often partly lost in
recycling and hamper the recovery of other materials
from the lamps. Its elimination results in less material
use, a reduction of the number of different materials
and less material loss during recycling.
2. The annular shape of the lamp housing acts
as the lens for guiding the light evenly into all
directions. Housing and lens are one and the same -
one component, one material - further reducing the
number of different materials.
3. The electronics are squeezed between the
two sides of the housing in a sandwich construction.
This enables the lamp to fall apart into the desired
fractions upon crushing in the recycling process. The
printed circuit board comes out in one piece.
4. Components are ultrasonically welded
together instead of glued. Electronics are not potted
with resin. As a result, no additional polluting
materials are introduced for bonding and
stabilization.
Figure 3: Philips’ newest 40/60W incandescent
replacement, the SlimStyle LED lamp has low material
complexity, less material and the flat geometry assures
clean separation upon shredding.
3.3. IT / Data Management
A key competence to enable Circular Economy
business models is the ability to keep track of
products, components and material data to enable
resource optimization. Tracking and tracing assets
enables effective return logistics. Information
regarding the composition of assets (subcomponents
and materials) enables better sorting and (cross-
industry) component harvesting. Usage information
(wear and tear) of a product or component determines
the re-usability and residual value of the asset.
Philips currently mainly tracks its high-
value equipment that frequently is delivered with
maintenance and service contracts. In the near future,
also medium value consumer products will be
connected and collect data that enable preventative
maintenance, lifetime extension, valuation for second
life and collection for re-use or (spare) parts
harvesting.
To accelerate the business innovation
around asset tracking, we are teaming up with other
leading companies as part of “Project MainStream”.
This collaboration was launched at Davos 2014 and
is led by the World Economic Forum and Ellen
MacArthur Foundation, with McKinsey & Company
as knowledge partner [7].
3.4. Supply loops
To extract additional value from product, component
and material flows, Philips aims to maximize the
recovery of own assets where profitable and to
maximize use of recycled material/used components.
A recent example for the latter is our new SENSEO
Up coffee maker [8].
For this product we decided to specify
recycled plastics right from the start of the design
process and succeeded in launching it with a total of
13% recycled plastics. Its internal frame is made of
40% reinforced polypropylene, a plastic used in
many household appliances. The baseplate of the
coffee machine is made of 90% ABS plastic coming
from post-consumer electronic waste.
By using recycled plastics in our products,
we hope to create a market for high-quality recycled
plastics that allows recyclers to invest in better
technologies, resulting in improved recycling of all
our products. The SENSEO Up is part of a bigger
initiative on recycled plastics, in which we aim to use
3500 tons of recycled plastics in 2015 [9].
Figure 4: Philips’ SENSEO Up coffee maker contains a
total of 13% recycled plastics
3.5. Strategic sourcing for own operations
Philips is eager to apply circular business principles
when working with suppliers for its own operations.
Building long term relationships with customers as
well as suppliers is crucial for decoupling economic
growth from the use of natural resources. In building
trusted partnership upstream (as well as downstream)
integration and co-creation is encouraged; there is an
increased drive to provide the best service and ensure
that the processes and operations of the customer are
interrupted as minimal as possible.
Examples are the performance based
procurement instead of transactional product buying
of IT hardware, copy machines and office furniture
and carpets.
Philips has service level agreements with IT
suppliers that give access and allows usage of
equipment in a service relationship, including asset
disposal and recovery services at end of first life.
3.6. HR / Incentives
The integration of a new business model is exciting
on the one side but creating uncertainty on the other.
Such a shift needs adequate culture adaptation and
development of capabilities. Training programs have
to enable and support the transformation.
Furthermore the performance and rewards scheme in
the company needs to be designed to stimulate the
change the mindset of the workforce.
As a product manufacturer with a 120 years
history, a key challenge to move to circular business
models that emphasize access to functionality over
ownership of products is to overhaul the incentive
schemes within the company and for its sales teams
in particular. Personal targets and bonuses of sales
managers are linked to turnover and cash flow, which
incentivizes a sale of equipment today, rather than a
service relationship over the next 10 years, even
though the latter would provide more value for the
company.
4. CHALLENGE OF MEASURING SUCCESS
OF CIRCULAR BUSINESS MODEL
As discussed in the previous sections the Circular
Economy drives new business models, solutions and
services, shifting from ‘transactions’ to
‘relationships’ via service and solution models.
Products need to be designed for disassembly and
serviceability. The conventional model of customer
ownership of the product is replaced by customer
access to the product, ‘paying for performance.’
In Lighting and Healthcare the number of business
cases is growing where Philips is applying this new
approach. The ‘Light-as-a-service’ lighting model is
offered allowing customers to use the best lighting
solution for their needs without owning the hardware
(see Figure 5). At Philips Healthcare, sustainability is
an integrated part of Refurbished Systems (see Figure
6).
Figure 5: Examples of Circular Economy business
cases: Light-as-a-service contract with Washington
Metropolitan Area Transit Authority [10]
Figure 6: In Healthcare there is end-to-end value
creation through optimal use of resources and
introduction of new business models and services.
Companies embracing Circular Economy will be
confronted with the challenge of how to measure the
success while integrating this business model. The
following section gives guidance on which value
drivers may be considered when developing a
methodology to measure the success. Although the
company’s goals and activities will eventually
influence the measurement methodology; we would
suggest that companies always take a combination of
measurement methods to ensure that there is an
economic and ecologic benefit. A sole focus on the
economics does not really reflect the full potential of
the Circular Economy.
Philips is still in the beginning of
systematically measuring success of Circular
Economy models. The first step has been the
identification of the following three main areas.
4.1. Measure the reduced ecological footprint
Nowadays companies are further considering the
ecological impact of their operations, products and
solutions next to the financial performance. In the
transition from a Linear to a Circular Economy the
use of natural resources and ecosystems is optimized
and lowers the footprint of the company. Companies
are requested to be transparent on their footprint and
on their attempts to lower it. Next to the reputational
value, lowering the footprint generates a financial
value as well.
4.2. Measure direct financial value through
recovery of materials and assets
Direct financial value can be created via material
recovery and recovery of assets. Material recovery
could save cost by enabling the reuse of materials
while reducing the need to purchase new materials
(e.g. measure how much recycled materials are used
instead of virgin). Another benefit of material
recovery is the financial benefit through the sales of
recovered materials to other interested purchasers.
Recovery of assets improves the direct profitability
by allowing selling refurbished equipment and/or
harvesting components. Innovative product designs
(including modularity and Design-for-Recycling or
Reuse) support the optimal refurbishment, extend the
lifetime, and/or lower the cost of non-quality by
facilitating the reparability of the product instead of
scrapping after first use.
4.3. Measure top line growth through new
business models
There is the possibility to enrich the value
proposition through the creation of more sellable
services during the lifetime of the equipment at the
user. For example moving from the pure one time
sales transactional model to a long-term contract the
performance can be provided and optimized through
a managed services business model. The intimacy
with the customer’s operation has led to higher
services offerings: e.g. copy machine manufacturers
moved from product selling to ‘pay-per-copy’ to
handling the entire customers’ data management.
Traditional IT high end equipment manufacturers like
IBM are moving gradually further to a services
model where key insights from data storage are
generated and presented as a service value
proposition to clients. This enables by the hardware
equipment that could be still owned by IBM where
big data is stored, managed and analysed to create
various valuable insights for the clients. For
Healthcare a similar trajectory could go from selling
the professional medical equipment to ‘pay-per-scan’
(where the user has access over ownership). In
addition the user could be supported in data storage,
analytics and diagnosis.
5. CONCLUSIONS
Royal Philips is committed to supporting the Circular
Economy concept in the most efficient, productive
way possible. Six key areas have been identified to
enable the implementation of the Circular Economy
principles in our business processes. In Lighting and
Healthcare the circular approach has led to a number
of circular business cases.
The EU institutions and European
governments need to work on a coherent policy
framework that really promotes the Circular
Economy principles and not limit themselves in
looking mainly at waste management related policies.
In order to measure the success of the
Circular Economy business model the company
needs to define a methodology to measure the
success. Several ecological and financial values can
be considered as value drivers in the methodology.
.
6. REFERENCES
[1] Key Characteristics of Circular Economy,
http://www.philips.com/about/sustainability/ourenvironmen
talapproach/greeninnovation/circulareconomy.page;
http://www.ellenmacarthurfoundation.org/circular-
economy/circular-economy/the-circular-model-an-
overview,accessed 28 July 2014
[2] Ellen MacArthur Foundation, Towards a Circular
Economy Vol.1 - economic and business rationale
for an accelerated transition, Cowes, Isle of Wight, 2013.
[3] Ellen MacArthur Foundation, Towards a Circular
Economy Vol.2 – opportunities for the consumer goods
sector, Cowes, Isle of Wight, 2013.
[4] EU Commission Communication on Circular Economy:
http://ec.europa.eu/environment/circular-
economy/,accessed 28 July 2014
[5] R. Warfield, UK student movement is beacon of
sustainability for wider society, Guardian Professional,
Tuesday 29 April 2014.
http://www.theguardian.com/sustainable-business/uk-
student-movement-beacon-sustainability-wider-society,
accessed 10 July 2014
[6] M. Rhodes, “Why Philips flattened the light bulb?”,
Fast Company magazine, January 2, 2014.
http://www.fastcodesign.com/3024281/why-philips-
flattened-the-light-bulb, accessed 10 July 2014
[7] World Economic Forum, Davos, January 2014
http://www.weforum.org/issues/circular-economy;
http://www3.weforum.org/docs/WEF_ENV_CircularEcono
my_MainStream_ProjectOutline_2014.pdf, accessed 28
July 2014
[8] Philips, Philips' SENSEO Up coffee maker small in size
but big in recycled plastics, Guardian Professional,
Thursday 17 April 2014.
http://www.theguardian.com/sustainable-business/design-
challenge-philips-senseo-coffee-recycled-plastics, accessed
10 July 2014.
[9] E. Smit, Learnings from Philips Consumer Lifestyle
Recycled plastics program, Care Innovation 2014, 17
November 2014.
[10] Washington D.C. Metro to convert to low carbon LED
lighting, The Climate Group, December 16 2013.
http://www.theclimategroup.org/what-we-do/news-and-
blogs/washington-dc-metro-to-convert-to-low-carbon-led-
lighting/; K. Tweed, Washington Metro Will Install LEDs
at Zero Cost, greentechefficiency, November 13, 2014.
http://www.greentechmedia.com/articles/read/washington-
metro-will-install-leds-at-zero-cost, accessed 10 July 2014.