Reassessing the Role of Digitalization in the Circular Economy: A Value Analysis
Master Thesis University of Groningen
MSc. Business Administration – Change Management Faculty of Economics and Business
Date: 05-08-2019 Supervisor: Dr. D. J. Langley Co-Assessor: Dr. C.Reezig By: Fruzsina Suliman f.suliman@student.rug.nl Student number: s2784262 Word count: 13074 ABSTRACT
The current linear economic model based on the exploitation of raw material and energy is unsustainable. In recent years, there has been an attempt to offer alternatives: a circular economy model. It offers companies the opportunity to simultaneously focus on value maximization and on the mitigation of environmental concerns. Digital technologies are considered the main enablers of these model. Yet despite the intense digitization process in the smart industry, the transition towards Circular Economy is slow. Thus, this paper aims to contribute through multiple case-study theory building research, on the role of the organization values in transitioning towards circular economy in the smart industry. This study found that there is a substantial number of circular-type initiatives happening across the production cycle, but a lesser number to transform product models. This demonstrates that circular thinking is on the agenda of the smart industry but that companies are at different points in their strategic thinking. The outcome of this study demonstrates how company values can lead to the adoption of circular economy
Table of contents
Introduction 3
Literature Review 8
Circular Economy 8
Smart industry characteristics 11
Transition to circular economy 14
Methodology 18 Research design 18 Sample selection 19 Data collection 21 Research quality 22 Data analysis 23 Results 25
What are the current circular economy practices in the smart industry? 25
What role has digitalization played within these innovations? 29
What are the factors driving and hammering the adoption of circular economy in the
smart industry? 30
Barriers towards CE 30
Drivers towards CE 32
What role do organizational values play in transitioning into the circular economy? 34
Discussion 38
CE practices and their definitions 38
External and internal drivers towards CE 40
Enablers and disablers of CE in the smart industry 41
Appendix A - List of Expert Interview Respondents 54
Appendix B - Interview protocol 55
Appendix C - Codebook 58
1. Topic: Smart industry 58
2. Topic: Transition towards CE 61
3. Coding tree 65
Introduction
In an increasingly competitive market, corporations seek leading positions and ways to maintain their competitive edge by improving economic efficiency. One way to do so is by
using cutting edge-technology (Yen & Su, 1997).
Cutting edge-technologies, such as digital solutions, are key characteristics of the Industry 4.0 (also known as the Smart Industry). The latter refers to a new industrial paradigm where integration between manufacturing operations systems (OP) and information and communication technologies (ICT) marks a new way to innovate (Wang et al., 2016). The term smart industry is therefore defined as “the trend towards digitization of the manufacturing sector” (Arnold, Kiel & Voigt, 2016).
This new model of digitized manufacturing is changing the established prototype of factories into smart and autonomous production (Wilts & Berg, 2017). It enables wireless connections of people, machines, and objects in real-time, as well as ICT for the dynamic management of complex business processes (Wilts & Berg, 2017). The current digitization in the smart industry provides apt solutions to contemporary challenges, such as intensifying global competition, volatile markets and demands, and customer demand for customization (Müller, Kiel & Voigt, 2018)
Nevertheless, the smart industry faces other challenges as well, namely environmental concerns. Current business models of linear economic approach to production, known as “take, make and dispose of” – where natural resources enable manufacturing goods – are based on
the exploitation of raw material and energy. Increased world population and demands on such resources are making them increasingly scarce.
of which are factors that need to be addressed in order for the smart industry to remain competitive (Korhonen, Nuur, Feldmann & Birkie, 2018). This has given rise to a new phenomenon known as the “circular economy” approach. Broadly speaking, it offers
businesses the opportunity to simultaneously focus on value maximization while minimizing waste. The model covers two key aspects of this cycle by allowing for:
1. Reintegration of waste/materials into the production process by means of reuse, recycling, and recovering practices.
2. Waste as an opportunity for new business, the circular economy is contributing in creating new economic value and more sustainable competitive advantage through new business models, all the while cutting down on environmental impacts (Kirchherr, Reike & Hekkert, 2017).
The circular economy is viewed as an important mechanism to promote sustainable production as well as a possible or potential future paradigmatic shift that will eventually result in industrial transformations. More than serving as a mechanism, it can also change the way of thinking of production and selling of goods/services. The expectation is that the adoption of circular economy would fundamentally shift economic activities away from reliance on non-renewable and emission-intensive carbon flows towards more sustainable production and consumption (Korhonen, Nuur, Feldmann & Birkie, 2018).
2017). By controlling the entire life cycle of the product, companies can then design the product with future recycling, reusing, and remanufacturing in mind, or reduce the need for raw materials through more efficient preventive maintenance. This allows for more compatibility in both the financial and sustainable performance indicators, instead of it being a trade-off, as it used to be (Golicic & Smith, 2013).
In the light of all this potential, we are faced with the question of why circular economy has not yet been implemented on a larger scale. The smart industry could be an enabler to sustainable business models, as digital technologies represent a substantial potential towards more sustainable industrial creation, value capture and circular economy (Bocken & Antikainen
et al, 2019). Further, the digitization initiative has been introduced to enable high-tech innovation leading to a competitive advantage. But it could also be an inhibitor - through further exploitation and only amplifying the possibilities of neo-classical business models. Investigating this notion reveals gaps in smart industry’s ability to fulfill the adoption of
circular economy principles (Bressanelli, et al. 2018). That is, companies are adopting technologies enabling circular economy (CE) due to the economic cost reduction benefits, with the environmental effect being only a positive side product, but not the goal (Diaz Lopez, Bastien & Tukker, 2019). I will argue that to achieve full CE adoption, it is essential to decouple economic growth from resource consumption and environmental impacts.
Exploring under what conditions digitization allows for both economic and environmental benefits remains largely unexplored. When it comes to adopting CE and digitization initiatives in the smart industry, most of the literature has focused on ‘hard issues’,
Furthermore, the concept of the circular economy, digitalization, and smart industry have almost exclusively been developed and led by practitioners, i.e., policy makers, businesses (Ciraig, 2015). The scientific papers on those emerging concepts mostly follow an independent research direction, with the areas only rarely interacting, despite the knowledge supporting their dependency on each other. Meanwhile, soft issues, such as sustainability drivers and organizational values, which compose the underlying assumptions regarding the organizational culture, have barely received any attention (Korhonen, et al, 2018), even though they are crucial for change (Lozano, 2012). An organizational “sustainability culture” is essential to develop
truly innovative sustainable solutions (Galpin et al., 2015). Unless organizations undertake substantial cultural change, other changes will be superficial and insufficient to develop a truly sustainable organization (Linnenluecke & Griffiths, 2010) Thus, this paper aims to contribute with a more interdisciplinary research view on the role of the organization values in transitioning towards circular economy in the smart industry.
To address these research gaps, the main objective of this thesis is to identify: Why despite the promising potential of digitalization for CE, not that many companies in the smart industry are transitioning?
This will be done in an explorative manner, through a combination between a literary research and nine semi-structured in-depth interviews with open questions, using grounded theory methodology. The secondary objectives are: 1) to identify the current status quo on CE in the smart industry; 2) to identify drivers and barriers to CE adoption; and 3) to investigate how organizational value influences choices in CE adoption; These objectives are phrased in the following research question (RQ) and its sub-questions (SQ):
2. What are the factors driving and hammering the adoption of circular economy in the smart industry?
3. What role do organizational values play in transitioning into the circular economy?
Literature Review
In the following section, the terms circular economy and smart industry are presented, followed by an explanation on their relationship to each other. Finally, the role of organizational cultural value in the transition towards CE is discussed.
Circular Economy
Circular economy (CE) is a concept that has acquired significant importance in recent years, largely due to the scarcity of natural resources available in the environment and changes in consumer behavior as well as due to the pressure employed by the EU and other governmental and non-governmental bodies (Korhonen et al. 2004, 2018). The term comes to replace the current and traditional linear economy system that has been dominant since the industrial revolution (Ellen MacArthur Foundation, 2013). The current system, with its endless demand for resources, is simply unsustainable (Korhonen, et al. 2018).
CE shares characteristics with other concepts such as sustainable development theory (Connelly, 2007), corporate social responsibility (Okoye, 2009) and ecosystem services (Schröter et al., 2014). However, CE has primarily emerged from merging Cradle-to-Cradle and Industrial Ecology theories (Ghisellini et al., 2016; Murray et al., 2015). CE centers on the combination of the industrial ecology’s closed-loop processes approach to minimizing material
flow, energy flows and environmental impact (Lieder & Rashid, 2015) with the Cradle-to-Cradle “made to be made again” design philosophy (Pitt & Heinemeyer). CE differentiates itself by focusing on economics and by centralizing the role of alternative business models in maximizing resource value (Ghisellini et al., 2016; Lieder & Rashid, 2015; Murray et al., 2015).
design. It replaces the ‘end-of-life’ concept with restoration, shifts towards the use of renewable energy, eliminates the use of toxic chemicals, which impair reuse, and aims for the elimination of waste through the superior design of materials, products, systems, and, within this, business models”
The Ellen MacArthur Foundation (2013, p. 7)
With this circular logic, economic development is no longer achieved via manufacturing more products or selling more, rather, by keeping them available for a longer time. While the linear model is grounded on the exploitation of resources and labor efficiency gains, the circular economy will be grounded on increased quality in products and services (Wijkman & Rockström, 2012).
In this note, various approaches, known as R-strategies, have been developed to reduce the consumption of natural resources and materials and to minimize the production of waste1. In this paper, Potting el al. (2017) model of the 9Rs is chosen (Figure 1). The 9R framework’s addition of refuse and rethink strategies aims at cutting down the consumption of natural resources and materials used in a product chain by requiring less material for the same function, primarily through rethinking product design. The 9Rs are ordered according to their levels of circularity.
1
Figure 1: The 9R Framework of Circular Approaches with the production chain in order of priority. Source:
Adapted from Potting et al., (2017, p. 5)
As a rule of thumb, according to Potting, et al. (2017), more circularity equals more environmental benefits. Consequently, the authors suggest, among other things, to fundamentally rethink production/distribution and consumption processes prior to pursuing recycling, reusing and reducing.
These R practices change how companies are dealing with their waste, as now waste can be considered to be an input and value creation. This requires a fundamental change that runs through the whole organization’s processes, necessitating new solutions where present
is believed that such a transition could be done through business model transformations, which leads to greater strategic advantages as compared to traditional product or process innovation (Osiyevskyy & Dewald, 2015).
In their report Circular Advantage, Accenture (2014) has identified five circular business models that seemingly foster CE. 1. Circular supply chain: scarce resources are replaced with fully renewable, recyclable or biodegradable resource. 2. Recovery and recycling: pulls technological innovations to remove and recovers material outflow and maximizes economic value. 3. Product life extension: through remanufacturing - repairing materia ensure they remain economically useful for longer as well as discovering new sources of revenue. 4. Sharing platform and product: maximize the use of the products by selling through sharing of products and assets. 5. Service or performance-based payment models: companies offer to lease or pay-for-use arrangements versus the conventional buy-to-own approach.
Smart industry characteristics
The smart industry emerged from the German public-private initiative to build Smart factories technologies by the combination of physical objects with digital technologies (Santos, Mehrsai, Barros, Araújo & Ares, 2017). The key characteristics of this new industrial stage is the deep change in the industrial production methods through the integration of information and communications technology (ICT), internet of things (IoT), big data, artificial intelligence (AI) technologies and machines in cyber-physical systems (CPS), robotics, and radio-frequency identification (RFID) (Kagermann et al, 2013).
customer requirements to design a prototype, and, consequently, reducing the product development life-cycle time and cost considerably (Qin et al, 2016). It reduces set-up time, labor and material costs and processing times, resulting in higher productivity of production processes (Brettel et al., 2014). Customers’ demands and tastes will change, as the digital
technologies enables new digital solution for the customers (Ayala et al., 2017; Coreynen et al., 2017). This will, according to Gilchrist (2016), force corporations to reframe their business models and reinvent their competitive advantage emerging from the digitalization. The fundamental difference from its predecessors is its capability to provide a higher degree of control, customization, and decentralization through collaboration during production, consequently leading to customer-centric products at lower costs (Mckinsey & Co., 2015).
For example, if previously tracking inventory required manual work of the committed staff to program and maintenance check, now the sensors are capable to identify and send a problem to the machine. Creating systems that aim to monitor and control equipment and products through a cycle of feedback that collects a great quantity of data (big data) and update the virtual models with the information of the physical processes, resulting in a Smart factory (Wang et al., 2015, 2016; Gilchrist, 2016). When it comes to product design, the machine is now capable to processes the components into a finished product, significantly reducing the product design to manufacturing time, while, at the same time, eliminating the need for a fixed assembly line staff and management control.
manufacturing industry and the transition to a real 'smart industry' has the potential to motivate firms to transition to circular economic business models. (Garcia-Muiña et al, 2018).
Digitalization for a circular economy
To keep material in the loop for as long as possible, information about the quantity and especially the quality of products and the raw materials they contain must be gathered and analyzed (Porter & Heppelmann, 2014). Digital technologies such as sensors, connected devices, and online platforms enable the creation, collection, analysing, and sharing of data that will lead to Smarter use of resources (Bressanelli, et al. 2018). For example, by collecting and analysing real time data sent by sensors placed on the products, companies can now anticipate failure and know when and how to maintain, and repair their machineries, This enables predictive maintenance and extends the lifetime of a product, which are also one of the main goals of CE (Potting et al., 2017).
Furthermore, sensors can also enable a switch to pay-a-fee based consumption, whereby, companies can monitor the usage, for which they sell a service instead of selling the product directly. This creates a win-win situation, in which, consumers only pay for what they need, the companies receive a continuous revenue stream and an incentive to maintain their products longer in use, thus produce less (Pardo, 2018) Thus, enabling companies to take up Innovative business models that creates value by selling services rather than products.
Shifting to circular model in the smart industry leads to substantial advantages that drive companies to adopt CE such as saving time, raw materials and costs, while, at the same time, creates new advantages and helps diversify and develop additional revenue streams (Bressanelli, et al. 2018; Agyemang, 2018; Rashid, A. & Lieder, M. 2016).
would be reluctant to change or, unaware of the existence of potential in terms of resource efficiency gains and the completely new revenue streams (Hock et al, 2015). Kirchherr et al. (2018) differentiated between “soft” and “hard” barriers that hinder the implementation of CE
and categorized barriers into four categories related to culture, regulation, market and technology.
Transition to circular economy
Ehrenfeld (2000) applied Thomas Kuhn's (1962) definition of a scientific paradigm shift to study dominant societal paradigms on sustainable development and the change it necessitates. A paradigm is how we perceive, understand and interpret the world around and in relation to ourselves. It is the underlying worldview we hold and the language we use to define it. CE could be claimed to have the capacity to become the new social paradigm in production and consumption (Geissdoerfer et al., 2017).
contribution to the overall macroeconomic-level sustainability paradigm shift (Huppes and Ishikawa, 2009).
Thus, accelerating towards a disruptive CE practice, the organization underlying worldviews and values, norms would need to shift along with the tools and techniques utilized in the industry.
The values permeate an organization’s strategy and business models and are also critical for organizational culture. Organizational culture sets patterns of behaviors and determines the way employees interact with each other (Shin et al, 2012). At this point, there are not many papers studying the organization culture role in innovation towards CE.
Yet, there are similar disciplines focusing on the triple bottom line (Elkington, 1997): people, profit, and planet from which we can drive parallel assumptions. For example, organizational change management for Corporate Sustainability (CS) assume for the organization to break with unsustainable attitudes and to respond quickly to external stimuli, it is necessary to manage and balance change drivers (Lozano, 2012). External drivers include relationships with external stakeholders, while internal drivers are organization processes. According to DeSimone and Popoff (2000), internal drivers are more valuable in moving an organization towards sustainability. Furthermore, in previous sustainability research, it is the managers initiative that pulls environmental challenges to address those tensions (Bansal & Roth, 2000).
Furthermore, while organization culture fosters sustainable innovation as well as company performance, it could also be an obstacle for both of them depending on the values promoted by the culture (Hock et al., 2015). Values influence the firm’s strategic orientation
The most well-known concept of organizational culture is based on Schein’s three-layered organizational culture model; values, norms and artifacts (Schein, 1990)2. The firm’s values build the foundation block of the firm and become observable in the behavior and perceptions of members in an organizational. They provide the organizational framework both top down and bottom up for the behavioral expectations and conducts (i.e. problem-solving approaches) (Hogan and Coote, 2014). Studying the organization cultural values allows for a better understating of the social interaction, effectiveness and the overall behavior of a firm (Wiewiora et al, 2013).
‘Values’ play an ultimately critical role in moving towards a circular organization,
especially ethical values (Breuer & Lüdeke-Freund, 2015). In turn, organizational culture offers the innovation framework: “values help you make those decisions, not on an ad hoc
basis, but in a way that is consistent with your culture and brand, with who you are as a company” (Palmisano, 2004, 70). Essentially, if an organization wants to become circular, the
critical question is what are the (critical) values an organization is supposed to embrace, with embracing being more than just entrusting the values to paper. Organizations must live their values. Values drive culture, strategies and business models, but also financial performance and leadership (Breuer and Lüdeke-Freund, 2017). If an organization wants to contribute to the CE transition, all actions and activities must be in line and gearing towards that goal, otherwise it is not going to work. Values, as Palmisano (2004, 62) states, “let you change everything,
from your products to your strategies to your business model, but remain true to your essence, your basic mission and identity.”
2Organizational values become observable in the behaviour and perceptions of members in an organizational. In that, they
Methodology
This chapter describes the research methodology, including the choice of research design, the
collection of the data, the process of data analysis and how the quality of this research has
been assured.
Research design
This thesis project was requested by TNO (The Netherlands Organization for Applied Research), whereby the thesis internship was conducted. The initial research was of a quantitative research design, measuring the maturity level of digitization as an independent variable and the circular economy measurements and profit as the dependent variable. However, due to company privacy and the novelty of the topic, data gathering was an issue. Responses were either negative because organizations did not have enough experience with circular economy, not willing to share insights concerning profit and especially energy and mission or no response at all.
As this first attempt failed, the trajectory was redirected. As a result, I turned to the qualitative research method. More specifically, an explorative qualitative research method seems to suit best as the aim shifted from searching for concrete answers to exploration.
Thus, an explorative qualitative research method of case studies was carried out. Case studies are used as a research method to study a problem which is not yet clearly demarcated, rather, it is applied to have a better grasp of the existing problem - the relationship between digitalization and circular economy (Dooley, 2002).
as the phenomenon is more general than a specific business problem in an organization (Eisenhardt, 1989). In this case, how firms in the Smart industry handle circular economy practices. The second step is to study the phenomenon in one or more case studies. The insights are then compared with existing literature and leads to the development of explanations that can be developed into propositions (Van Aken et al, 2012).
This ‘reverse’ approach is often used to answer questions like what, why and how. Case
studies with interviews on the research topic can provide meaningful insights that otherwise might not be reachable (Gläser & Laudel, 2010). Furthermore, in grounded theory, building concepts emerging earn their relevance through the systematic generation and conceptualization of the data (Glaser and Strauss, 1967). Thus, it was possible to refine the interview questions based on findings in the initial data collection phase, while also provided flexibility to investigate deeper on the emerging topics.
In sum, theory-generating multiple case study has been chosen because of the novelty of the topic and the missing substantial experience with technology and the circular economy in most organizations and employees (Bogner & Menz, 2009).
I started out this research project by identifying and formulating a current research problem that is relevant to the practitioner in organizations, i.e. not enough organizations in the Smart industry transition to circular economy. The initial research intent was left very broad on purpose, in order to understand why companies, despite their digital potential, are not making the transition to a circular economy. The specific research questions, where formalized during the research process while already analyzing the initial interviews.
Sample selection
adoption, the choice fell on the smart industry. This choice is justifiable, as this is an industry where the digitalization and circular practices have vast potential impact on the business’
financial and environmental performance. Studying the challenges and enablers of the transition is necessary. The smart industry keeps getting more complex and collecting more data about the industry is crucial for a better transition to a circular economy. It is smarter than before in the sense that it is collecting more data, has better algorithms, can communicate data wirelessly through telemonitoring and can alert production in real-time. All those activities that are necessary for monitoring and predicting material and energy usage to close the loops in the circular economy Thus, this is an industry where technologies are being implemented with an idealization for a better environmental impact (Kapás, 2018).
This multiple case study research focused on multiple types of companies that are in the process of becoming, or already are, fully digital. The sample contains nine cases in total (see list in Appendix A). The case selection was not based on the organization category, rather, on the digitization process. Of the sample, four are innovators, two are early adopters and two are late adopters3. The four innovators are part of the field lab initiation in the Netherlands4. The two early adopters are in an experimentation phases with digitalization, that is, much of it is in pilot phases. The two late adopters are companies that did not report much digitalization application, rather, they are in the interest phases. While, industry experts can offer the researcher with the higher-level perspective on the information gathered by the interviews with the other companies (Gioia, Corley, & Hamilton, 2013).
Several approaches were employed for case recruitment. First, I used my network at TNO. Second, specific filters, such as smart industry, circular economy, innovation, and
3 Although the sample consists of nine interviews, one was conducted with a consultant, hence it cannot be classified into a level in the digitization process.
Change Management, were used on professional network service platforms (LinkedIn) to identify experts from the business. Relevant interviewees, in this case, are identified as professionals that are working in the manufacturing industry within the operation department, the sustainability department, or the ICT department for more than five years (not necessarily in the same company), as these professionals are in close contact with technological changes, environmental issues and decision making in their daily work.
Eventually, a total of nine interviewees were successfully recruited. Table 1 presents a list of all respondents (R), including the organization name, the type of industry, and their role within this organization. Two of the interviewees chose to remain anonymous, relating contact information to this paper are not published.
After about six interviews had been conducted, new interview material did not contribute to much new insight, as the researcher observed patterns she had heard before, as several interviewees shared similar experiences concerning the core research questions (see Appendix B). Therefore, it is likely that the small sample size of nine generates theoretical saturation, at least in the key questions of the interview and thus further adding interviews would probably not have a significant effect (Glaser & Strauss, 1967).
Data collection
interview protocol was revised as the research progressed, and taken as a guideline, in order to have the interviews in a semi-structured setting. The interviews were conducted over a time frame of four weeks.
The interviews started with questions regarding their background and current responsibilities and proceeded with open-ended questions about their field of work, for instance, participants were asked for their personal understanding of the term circular economy and about recent challenges and trends. Following, core questions were asked specifically regarding the research questions, separate questions for the companies and the industry expert (Appendix B). Therefore, the method allows for connecting between the theory and the smart industry and circular economy-related empirical content.
Research quality
Regarding external validity, it is ensured through having nine interviews with different organizations across the smart industry (van Aken et al., 2012), which implies that, theoretically, the results are generalizable to the smart industry in the Netherlands.
Data analysis
As the research progressed, some of the interviews were already being coded while new interviews were still being conducted. This is in accordance with the grounding theory protocol, which requests that new questions and insights be generated as the data collection phase progresses. That is, in between the various interviews, as they could be compared to previous findings in other interviews (Eisenhardt, 1989). The early phase of the research studied the relationship between digitalization and smart industry. After the first four interviews, it became clear from the codes that a differentiation was needed between companies reporting CE as 3R focusing only on reduce, recycle and reuse, focusing on process rethinking and the companies reporting CE to also involve product rethinking and new business revenues as the two categories have different barriers and different challenges. To answer the first two questions, I looked at the entire sample, while, for answering the third question - what are the internal changes needed towards a transition to a disruptive CE - the focus was mainly on the second category, meaning the companies who mentioned CE beyond just the 3Rs. Another turning point in the coding process was the observation of the culture and values relevance as enablers and barriers to Circular economy. Thus, I decided in the second round of interviews to revise the questions to include topics of organization internal process such as culture and values.
For data analysis, I followed Eisenhardt’s (1989) method, which suggests that the
main code is ‘Circular economy enablers’ and an example of a subcode is ‘Harmony-driven company value’. In the coding scheme, initial codes were derived resulting from the interviews.
Results
This section presents the results to the three sub-research questions as outlined in the introduction.
What are the current circular economy practices in the smart industry?
In all the cases, there is a general agreement that CE is necessary to remain relevant in the game, and that, in the future, it will be a key success factor to remain relevant in the game and for the whole industry to thrive the whole industry: “if your business model is built on unsustainable energy or material and you are not capable of changing what you are offering to the market, then you are out of business and forget the company, that is true for all companies”(A1;59). However, despite the recognition of the future relevance of CE, there seems to be two more prominent issues. 1. A major division in the perception of what circular economy is 2. How to differentiate CE from other sustainability practices.
When it comes to the division in perception, two main themes emerged from the case studies. There are companies that defined CE mainly as a waste minimization approach, and those who defined it as an approach which is restorative and regenerative by design.
Among those that approach it as a minimizing waste approach, CE would aim at reducing the business’ impact on the environment by reducing their need for raw material, their usage of
energy and their usage of water. These three objectives are typically bundled up together in a company’s outlook on waste minimization, especially when presented in their ‘sustainability’ objectives. “It also set to work on sustainable operations: like use 100% carbon neutral for operations, 100% use of renewable electricity, zero waste to landfill in manufacturing…ensuring a sustainable supply chain with a minimum supplier performance rate of 90%.” (E1:23).
resources. To identify bottlenecks, companies map out their entire business activities through a life cycle analysis to work towards reducing their waste. Nonetheless, the companies reported that this is done together with their partners: “Part of the strategy is connecting sustainably across the chain. That means we map out our ecological footprint, and the carbon footprint of our products and reduce them by realizing our objective. That way we allow for transparency in supply chain with the parties around us” (A1; 9).
challenge and stand to the regulation and sustainability procurement and to gain their social
license5 to operate: “we are aware of the environmental challenges we are facing as a company but also as a society, and we are no longer ignoring the harm such production can cause. In the same line, we are working on our social license to operate and to gain public trust” (D1:5)
Other cases defined CE as working towards managing their waste. They are involved in very similar activities as the above cases, with one difference; they generate profit from their waste. That is, while they rethink their business process, they map out their ecological footprint and explore new profit revenue from waste. “That means we are switching from producing only starch but also to a company producing, extracting valuable planet-based protein from wastewater, and turn it to planet-based cheese. It’s a bit like reusing from circular economy” (A1;63). While others, define CE as a tool to reach sustainability “circularity is also a way of thinking that is very sensible as a kind of solution to the sustainability challenge, so if you create circularity to systems you might be able to keep going and be sustainable.” (A1;42).
When it comes to process rethinking, companies do not need to make big changes, rather, think how their business can be conducted more efficiently considering the material and energy they are using, and work towards doing the same business with less resources. “But I think most important is being able to reduce your dependency, by organizing our processes Smartly. For example, we have fully aligned the production of our high-quality protein for the animal feed industry with the existing processes. This avoids an extra drying step and lowers the transport of the product. Only this step already resulted in a CO2 reduction of no less than 3 percent on the total an annual reduction of 40,000 transport kilometers. it’s a small change but had a big effect on reduction road transport kilometers.” ( A1;12).
The other approach to CE is employing the restorative and regenerative by design outlook. Companies work to keep the product, components and materials in a constant flow at
5
their highest utility and value at all times rather than those products, components and materials being used once and then discarded. In order to do so, they believe it is necessary to think about this on the product design phase of the product life cycle - how to use the least amount of material to provide the same or even more value for the customer. There are two main strategies used. 2.1. Thinking about how it is possible to recycle and disassemble the product. 2.2 Replacing packaging, using different biodegradable material. “Rethinking how we design our products, so we use less plastic, better plastic, or no plastic: using our Design for Recyclability guidelines that we launched in 2014 and revised in 2017, we’re exploring areas such as modular packaging, design for disassembly and reassembly, wider use of refills, recycling and using post-consumer recycled materials in innovative ways” (G1:28).
To work towards this, companies reported the importance of their R&D departments. Most notably, the integration and smoother transition between the R&D and the business units, either to work on more transparent communication between the departments or employing a “middle” man to translate between production and application. “...there is a cut between what we develop and how it integrated by the business developers. I think there is a need for a company to develop new capabilities that make the R&D and the business unit more connected- R&D are very difficult to manage, by definition, the feature of research is that the researchers do not know in advance exactly they are looking for”(E1:32).
Waste minimization and regenerative by design are two distinct approaches to CE. The first is lead by rethinking production and the latter by rethinking product. Thus, as shown above, they employee different strategies. The first one relies on the CE practices of reducing and recycling, the latter, on rethinking product design and alternative material design. Yet in none of the cases there is a complete switch to a CE business model; they all kept its core business activity and had their new revenue stream as a ‘side hustle’ until it becomes a
….you are out of the game if it doesn’t get embrace widely in this sense it this type of spreading and looking into various alternative business models and wait and see which will be the survival ” (D1:25).
Only one case reported something approaching a total switch, through the CE practices of refurbishing and remanufacturing. It includes the practice to upgrade the current equipment without the need to replace. The main motivation behind it is customer value, to be able to give an extra service to their customers through a new maintenance service: “Our refurbished products business refurbishes and upgrades our older lithography systems to a higher performance level to extend their lives. We are able to upgrade our systems while they are in use ‘in the field’ thanks to their modular design…system could last for decades and be used by more than one lab” (I1:50). They also introduced “as new” programs, through their component collection and
remanufacturing, yet they are struggling to “sell” them to their customers. “As-new’ program helps cut waste to help achieve such sustainability, we are introducing our ‘As-new’ modules, which are being integrated into our mainstream manufacturing lines and are suitable for multiple product life cycles.”( I1:13)
What role has digitalization played within these innovations?
Only three cases reported a direct link between their digitalization and their CE practices. Companies reported proactively utilizing digitalization for circular practice are using
big data and to quantify data from core business activities and help in reducing emissions. Blockchain to tackle the supply chain tracking and transparency challenges. Machine learning
What are the factors driving and hampering the adoption of circular economy in the smart industry?
Barriers towards CE
With every change, there is some reluctance to move away from the known to the unknown. While there are common themes identified across the sectors, every company has its own unique mix and match of the following challenges that need to be dealt with when it comes to CE.
The most common barrier is the reluctance to switch from the safe, well-functioning core business activity. The need to change is not urgent, thus, they do not direct their energy and resources to change: “we do what we can do, I mean we are not directing all of our efforts, we are not radically changing our whole process, but we are willing to take into doing improvements at much as we can” (F1:35). There is a reluctance to change from “business as usual mentality”
mentality to adopt a whole new mindset that would be needed to change: “Process innovation is always tough to implement but we have been doing it for decades and have gained valuable experience. Product innovation requires new ways of thinking from designers and collaboration with new partners and suppliers and is thus more difficult” (B1:45). Moreover, when you own
explanation to your shareholders, every decision needs to be justified financially: “… so you want to follow what is right and you need to invest and the benefits are not always clear, and the shareholder doesn’t give a shit about technology and investment, they just want money… changes not even relevant at all when the company has to explain itself to its shareholders” (C1:49).
point of view its difficult. we need to find a better way or reuse our product we would” (H1;11). Or,
there is a belief that the technology is still in its infancy and is too simple to tackle the CE process of rethinking or generate creative solutions for the climate problem. On the other hand, it is good for reducing and detecting errors, which helps in processes optimization. “I could be wrong, of course, but I have not seen any evidence so far, that computers are capable of innovation and creativity. AI might be able to be trained to detect error…but that’s about it. It cannot innovate spontaneously; it cannot connect random information to form knowledge and insight” (B1:31)
Thus, digitalization, at this stage, is used more to amplify the human skills, rather than replace it with something different. “That vast implication this technology can do to help innovation is to fasten up research, it can abstract in speed that human brain would never be capable of, but also in precision that the human brain can’t keep up with”(B1:11). One of the barriers towards CE with
digitalization is the over reliance on technology to ‘save the day’ when it comes to
environmental issues. For example, dealing with big data requires a huge set of structured and unstructured data to handle, but also the people to interpret the data. Those people also need to be trained in environmental issues to be able to detect and report them. Furthermore, a strong point often overlooked is that the data used for analytics and for ‘feeding’ the machine in AI, is historical data. “The thing is you are basically trying to predict the past; you are using past data… there are a lot of problems with that, because to let the system to learn, you need huge data…his is also the reason why scan recognition can recognize white people more accurately than black; this was also the story with amazon using the AI system for automating hiring and getting biased pool of white applicants… that is why it’s important to keep your data as updated as possible” (B1:41). In this
Although other barriers to CE were found, they were not under the purview of this study. These include, for instance, barriers relating to the supply chain, which are included in Appendix D.
Drivers towards CE
Although, a few solutions were mentioned above, some common factors that act as drivers towards CE are identified and can be classified between external and internal drivers. Much like with barriers, each company has a unique mix of possible drivers.
For the external drivers, mostly governmental policies and procurements such as Zero impact can push organizations to measure and track the environmental impact of their operations. However, in these cases, it mostly pushes them towards employing impact strategies to reduce their emissions, water and energy usage against market benchmark. They do so through optimizing and building efficient process. Furthermore, a force majeure can create a sense of urgency that there is a need to change: “…after the earthquake in 2012 …it was impossible to continue our work as is was, and since then we have worked to change and we want to change, and now we as a company have to find our way in that” (D1:43).
Second, Consumer behavior can also be a driver, but also a barrier contingent on whether the firm believes that the current consumer is becoming more sustainable. When they do, companies respond by making sustainability their competitive advantage. “Ultimately business will see opportunities to build competitive advantages… there is a small group of consumers that is a lot more conscious now, that group will become larger, it's become economically interesting to meet the needs of those consumers who want extra, you will see a fast turning point where the balance will jump from one side to the environmental side” (C1:41).
behavior. “It would be very difficult to recruit new and young people, who say why would I go work for a company that will be obsolete in ten years…the people who are working here would be frustrated if you are working for a company that is just ignoring that (environmental impact), a lot of your people will become frustrated and leave” (D1:36).
On the other hand, internal drivers towards CE steam from the internal needs of the organization to remain relevant. Employee engagement with the sustainability topic seemed to be a big driver towards CE. Asking critical questions in general meeting concerning the organization environmental agenda can drive directors to become more sustainability oriented. This, however, is contingent on management support.“Logically, people at home see the news, and they are asking themselves, I’m working for a gas company so what is our future? How are we going to continue? And they bring these critical questions to work… And ask in general meeting questions. of where are we with our emissions? How are we going to look at the future? As the company how do so we stay relevant? How are we keeping with the new developments? I think if management would not support it, we would have a big problem a lot of people would leave ” (D1:14/35).
Second, top level involvement is not only to be open for its employee criticism but also it needs to to guide the organization and to set the direction for the organization. “Ultimately, the role of management, I think will be critical, senior management obviously needs to embrace not only what is good for our customers and consumers but also what is good for society and humanity” (C1:40). And such drive may help the organization in making make tough decisions between
the environment and profit. “There is a large group of senior management that has the conviction that we have a responsibility towards the people and the planet, but at the same time we are also having a strong responsibility for our shareholders which means profit, so companies have to find the balance” (C1:32).
that is economic and social values and create shared values” (A1;37). When the company is harmony driven, it aims at finding that perfect balance between its product quality, its promises to shareholders and its responsibility to nature. “So we don’t only work on developing produce smaller, faster, cheaper, more powerful, and energy-efficient chips for our customers, but we aim to invent, develop and manufacture our products in a more environmentally friendly way, striving to make sure that our products are manufactured and can be operated responsibly across their entire life cycle” (I1:16).
What role do organizational values play in transitioning into the circular economy?
To further understand the value role in the transition towards CE, we focused on the cases that assert harmony values. The following section highlights the common enablers for change arising from the interviews.
Although it is mentioned as a driver, being harmony driven is the most notable enabler; these companies are adopting a value that is based on finding the balance between profit, earth and people and accepting that Earth is also part of the business equation that needs to be considered in the decision making phase. “Decision makers put a greater emphasis on safety and the environment, at the expense of financial and economic considerations.”(D1:6). Thus, they are
putting sustainability values at the core of their business and letting this value drive their organization towards more sustainable decision making.
managers. “Working on sustainability, is one of the main values that also brings me, it’s the impact you can have…..sense of empowerment ... strive for better environment and society” (G1:16).
Adopting this core value makes a lot of change, not only with regards to what they sell but how they sell. As transition to CE affects the business structure, strategy, staff and culture. First, it forces interdepartmental and interdisciplinary connections. As mentioned earlier, it requires a closer relationship between R&D and business units and more collaboration. However, these two have very different cultures, the first employs a long-term orientation and more experimentation attitude, while the latter has a short-term result-oriented approach. The two units need more integration and transparency. Therefore, a redefinition of their interdepartmental interdependence and a redesign of their associated coordination mechanism is necessary. On the other side, moving towards CE requires the development of new business units, as, for example, when shifting from product to service you need new units, new staff and new attitude. “Shifts it back and we repair it we handled back to the customer…...so you need a whole new business unit than what we were.” (F1:41). Redefining the way your work, shifting, for example, from product excellence to a customer centric approach, requires a whole new way of thinking and of approaching customers. It also requires embracing that you are shifting from your core strength to an unknown, which requires more focus on collaboration, not only internally but also across their whole supply chain to create joint value “Part of the strategy is connecting sustainably across the chain, that means we map out our ecological footprint, and of the carbon footprint of our products and reduce them by realizing our objective ……that way we allow for transparency in supply chain with the parties around us” (A1;9)
exploiting the actual knowledge (continuous improvement of the actual business model) and exploring new opportunities (business model innovation). This brings a whole new way of thinking, and trial and error mindset. “You have to take your time and try out until you get it right and sometimes it will not go right and you have to fix it so if a company does not have R&D mindset before going to production process” (B1:21)
Third, in order to be able to adopt an explorative culture, there is a need to be supported with role and skills enrichments and a lifelong learning attitude. One strategy is to enrich an employee’s job by integrating into it, sustainability responsibility. Thus, instead of having one
big sustainability department, all employees can have knowledge on how their work is related to the topic of sustainability and make decisions founded in sustainability KPI. These are made sure through adopting a lifelong learning mentality and supporting employee education on CE through offering trainings and workshops through the whole organization, thus, by building a participative and inclusive organization culture. “…..educate on how you can reduce the environmental impact and how they can be more aware of environmental impact … we also incorporate the circular economy in their training material both for the people in the headquarters and also people on the field” (D1:45). Remarkably, and often overlooked, the role of software engineers plays a crucial role in the Smart industry’s transition towards CE, as they are the ‘masterminds’ behind the Smart industry. They need to collaborate with different disciplines in order to ‘shape’
technology to reach the CE triple bottom line social, economic, and environmental benefits. “Technologies and people who built factories have very little clue about human behavior. They invent a new process and it works, and maybe indeed incrementally reduces energy, but that is not enough. We also need to change how people move, how they produce and use energy for transformational change. (A1;56).
they only had a small department who only coordinated with very low authority … now the executive committee they made sure from the start that having me here only makes sense if given enough authority for more of the goals will be reached, so no big decision will pass without consideration for sustainability perspective.”(A1;36) Essentially, the purpose is to make environmental concerns intentional and not only a side effect of technology advancements. “Ultimately, the role of management, I think will be critical. Senior management obviously needs to embrace not only what is good for our customers and consumers but also what is good for society and humanity” (C1:40)
Discussion
This chapter links the results back to the literature review, from which the propositions can be derived. The research questions are answered one by one, showing propositions for every question. This chapter starts with the current CE practices and their definitions. Following, enablers and constraints of the transition towards CE in the smart industry and then organization’s internal factors’ role in this transition.
CE practices and their definitions
It can be derived from the results that there are a substantial number of circular-type initiatives happening across the production cycle, and a lesser number to transform product models. This demonstrates that circular thinking is on the agenda of the smart industry but that companies are at different points in their strategic thinking.
Even though few have adopted a circular economy framework, there is strategic intent to do so, due to the belief that CE is a necessity to remain relevant in the ‘game’. However, at the
present time, CE is not implemented as a game changer in the smart industry. Part of this could be due to the way CE is defined. As The Ellen MacArthur Foundation. (2012) pointed out, the CE definition predisposes its utility, leading to certain CE practices, while disregarding elements not included in the definition. The company’s approach to CE therefore depends on
how it is defined; the distinction between production optimization and product optimization becomes evident in the two distinct sustainability strategy applied separating; operational
sustainability and intentional sustainability.
Operational sustainability may refer to an optimization strategy, meaning that
those tools are constantly going through incremental changes responding to an industry trend. While this can be perceived as contributing to the circular economy, it is mostly aimed at reducing production costs. If the costs would not decrease, such a strategy would not be followed. In this sense, the organization does not actually contribute to the circular economy, although they might believe they do (Korhonen, 2002; 2003). Quite often, companies take part in some reuse processes, because it pays off financially, such as water stewardship. The examples mentioned under process rethinking do not require disruptive innovations, nor are they part of it. To become more resource or energy efficient may indeed involve merely incremental innovations of processes rethinking. In fact, most companies will always be in favor of continuous improvement of the current business models, as it is less risky (Hock et al. (2015). Following a “continuous improvement” approach, companies can achieve some
success on a short term and maintain a stable performance, referred to as “low hanging fruit,” such as energy savings and eco-efficiencies, which do not challenge market discourses of growth and profit maximization (Huppes and Ishikawa, 2009). However, in a circular economy, continuous improvement is simply not enough. Building sophisticated resource/material loops and completely new circular business models require disruptive innovations, or these may themselves be disruptive innovation examples, thus, it requires a fundamental change in the underlying assumptions, norms that leads to more intentional
sustainability.
Proposition 1a. Those companies employing resource efficiency outlook on CE will engage only in process optimization strategies. (Operational sustainability does not lead to a paradigm shift)
External and internal drivers towards CE
The findings in the results support that, in general, drivers can be separated into external and internal (Rashid & Lieder, 2016). Previous research suggests that companies’
environmental practices are shaped by different external and internal pressures (Delmas & Toffel, 2004). This creates tensions that trigger organizational transformation, according to DeSimone and Popoff (2000), internal drivers are more valuable in moving an organization towards sustainability. In this study, however, the results indicate that both external and internal drive can lead to ‘sustainable’ behavior, under certain circumstances.
Main external pressures found in the result are market demand and company reputation. These are contingent on the organization’s belief on whether it will lead to the desired
objective. Thus, the company will only engage in circular practice if, for example, it believes that talented job seeker prefers to work in a sustainable company, or, if the company believes that the consumer behavior has shifted towards a more sustainable consumption trend.
On the other hand, internal drive, is related to the organization prerequisites. The literature supports sustainability initiation to be pulled by top management (Bansal & Roth, 2000). In this study, both employee engagement and managerial involvement and support were drive for ‘sustainability’, thus it is a simultaneous top-down and bottom-up process that leads
to CE. As top-down initiative may not be enough for a major break, as most organizations have many change projects underway simultaneously, all of which must be managed concurrently while continuing to produce products and services. Thus, a very strong intrinsic motivation is at the bottom to go beyond the daily operation.
(2017) model. When the company is harmony driven, it aims at finding that perfect balance between its product quality, its promises to shareholders and its responsibility to nature. Thus, when the company is confronted between cost reduction and environmental damage, having harmony values can lead to a more nuanced approach, where more than just financial considerations are taken into account (Matzler et al, 2013).
Proposition 2a: When the organization believes that the market trends shifts towards more sustainable demand, it will engage in CE practices
Proposition 2b: When the company adopts harmony value, it will engage in intentional sustainability (higher CE practices)
Enablers and disablers of CE in the smart industry
Nevertheless, digitalization does enable CE practice, but it does not lead to disruptive changes. This is supported by the paradigm shift view that for a disruptive change, the core values and worldview also need to change, rather than only the analytical tools (Korhonen, 2003; Korhonen and Seager, 2008). In this case, we identify harmony value as the underlying worldview than can lead to CE. Thus, the following proposition is outlined:
Proposition 3a: Those companies engaging in digitalization in combination with a drive towards harmony will transition towards disruptive CE.
To further understand the value role in the transition towards CE, we focused on the cases that assert harmony values, and searched for differences between those who did and those who did not assert this value. What we found is that adopting the harmony values leads to changes in the business structure, strategy, staff and culture (Breuer and Lüdeke-Freund, 2017). When it comes to the structure, these companies reported a need for a stronger integration between the R&D and the business department. While the two departments have different goal orientation, there is a need for a better transition enabled by more collaboration and transparency between them. That necessitates a new way of thinking - of a trial and error mindset - that would permit the seeking for the best choice for the earth, profit and people equation that comes with an explorative strategy.
When it comes to staff, the companies reported a higher interdisciplinary knowledge between the various roles with the sustainability topic. That is, they believe in a lifelong learning attitude that is reinforced by training and workshops on CE. Specifically, they draw attention to the software engineer’s sustainability education and capability to design sustainable
Proposition 4a: Adopting harmony value leads to internal changes to the structure, strategy and culture, which can serve to enable intentional sustainability (higher CE practices)
Theoretical contribution
This research enriches the existing literature in multiple ways. First, it identified the current circular practices in the smart industry, and it showed how the role of digitalization in those practices. At the moment the direct link between digitization and CE is not obvious for the companies, while, in the literature, the link is evident. This implies that, in practice, the connections may not be clear, highlighting the need for more empirical research on the topic. Furthermore, the difference between intentional and operation sustainability is highlighted and should be kept in mind when focusing on the paradigm shift of CE.
Moreover, the study shed light on the enabling and constraining factors that influence circular practice. While the literature focuses more on technical aspects, this study revealed that an organization's internal factors, such as values and culture, are of importance towards the adoption of disruptive CE practices. Lasly, the study showed what differentiates companies that adopt CE practices from those that do not. Adopting a harmony value can lead to intentional sustainability by working as a reference point for decision making. The values permeate an organization’s strategy and business models. These values are also critical for
organizational cultures. And in turn organizational culture offers the innovation framework
Managerial implications
various CE definition can shape CE strategies and practices. Not only is it important to understand the adopted definition of CE and its implications, but also the impacts that may carry for both the company’s business activities and the wider society. Thus, they need to have a clear vision of the future of the industry, and adopt an intentional sustainability approach, that is, built on internal values to strive towards harmony - seeking a balance between earth, people and profit. After that, companies have to decide on a set of actions to implement CE strategies and adopt an exploration mindset culture at the firm. For policy designers, if the policies only require companies to reduce their impact, companies are not going to go beyond what is expected of them. Nonetheless, that would not be enough to transition to CE nor to mitigate the environmental impacts sufficiently as to avoid further damage. If companies felt their reputations were threatened by not engaging in sufficient measures towards that end, it could serve as a driver, especially as the new workforce becomes more sustainably aware and purpose driven.
Study limitations
Applying grounded theory is tricky, in the sense that it simultaneously requires a blank mindset, not influenced by current literature, while having a thorough understanding and knowledge on the topic to be able to recognize the relevance of emerging theme and be able to build the relationships among the identified variables (Eisenhardt, 1989). Furthermore, applying case study and grounded theory allows for much subjectively into the data analysis. This bring to the table the researcher’s own construal and biases. Considering the researcher’s humanistic
intentionally broad, to be able to detect the phenomenon, as there is no previous literature on the research topic. Nevertheless, for future studies it is recommended to further categorise (SME and corporate) and identify niche industry segments (automobile, health etc.) for a more nuanced understanding of the relationship.
The focus of the research was on the smart industry in the Netherlands, thus the results are only applicable to that, although it could be generalized to other companies in the same reality. Another point to add to this is that, the interviews were conducted with companies of different sizes, with different structures and of different ages, which are all characteristics that could impede the generalization of results.
Future recommendations
The research consisted of the theory development approach, therefore, testing the hypotheses that are created could extend this study, as well as developing a theory testing approach to test them empirically and find out whether these assumptions fit in practice.
Furthermore, this study was an attempt for an interdisciplinary approach between the CE literature and smart industry. More studies employing such view could lead to more complex views and shed new perspective on ‘old’ problems. Further, future research could focus on the more on the ‘soft’ side of the organization process in the smart industry and CE,
as both fields are mostly dominated by technical studies. As it was shown in this study over reliance on technology will not lead to a paradigm change. Thus, more research is needed to understand the role of norms and values in directing strategies and decisions towards CE.
