The transition from a linear to a circular logic : case studies of MNEs in the FMCG-industry

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The transition from a linear to a circular logic: Case studies of

MNEs in the FMCG-industry.

Master Thesis by Nora Wei Qeen Foo

MSc Business Administration - International Management

N.W.Q. Foo

Student Number: 11233079 First Reader: Francesca Ciulli Second Reader: Erik Dirksen Date: 26/01/2017

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Statement of originality

This document is written by Nora Wei Qeen Foo who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its reference have been used in creating it. The faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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1. Abstract

Sustainability has become an increasing topic of conversation in the corporate world. The earth’s natural fuels are suffering exhaustion, and the amount of pollution is increasing. This is where the circular economy comes to light. Organizations who operate the circular economy turn goods that are at the end of their lifecycle into resources for others, close loops in industrial ecosystems, and minimize waste. This study will address how institutional change is able to trigger business model innovations, and will thereby focus on the adoption of practices, values, and beliefs consistent with the circular logic.

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2. Introduction

In the last decade both scholars and practitioners have increasingly underlined the need for businesses to change the economic logic that guides their activities, and move from a ‘linear’ logic towards a ‘circular’ logic, in order to, on one side, to reduce their impact on the environment and, on the other side, to decrease their costs and seize new business opportunities. The linear logic consists in the adoption of a ‘take-make-dispose’ model, i.e. in the lifecycle of water bottles; after the consumer has used its content, the bottle will be disposed and not used for further purposes. While organizations that operate a circular economy turn goods that are at the end of their lifecycle into resources, close loops in industrial ecosystems, and minimize waste. Different definitions have been developed of the circular economy, however according to Murray et al. (2015, p.1) it is generally agreed that it is “an economic model wherein planning, resourcing, procurement, production and reprocessing are designed and managed, as both process and output, to maximize ecosystem functioning and human well-being.”

The circular economy is gradually becoming an idea accepted by policy makers and businesses. Companies have increasingly transformed their business models to integrate a circular logic, yet this process is still in its initial stages. In particular, for large, multinational companies (MNEs), given their visibility and their significant use of resources, the commitment to a circular model is increasingly crucial for their legitimacy and it may also be financially profitable, but, at the same time, it represents a critical challenge, due their complex ‘activity system’ (Zott & Amit, 2010).

Despite the widespread call for a shift towards a circular economy, this subject has been overlooked by management scholars, with very few exceptions (e.g. Murray et al., 2015; Kortmann & Piller, 2016). A signal of a rising interest in management research is represented by the call for papers on “Circular Economy: Managerial and Policy Implications”, published recently by the California Management Review. However, neither the published papers or the

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their activities towards circularity is particularly valuable. Due to MNEs’ presence in multiple countries, implementing the circular economy is a particularly complex process, as it requires the transformation of an international system of activities.

The circular economy has become a highly relevant concept to examine, given the increasing popularity of academic debates on sustainable and socially responsible business (Russo & Tencati, 2008; Junior et al., 2013; Dossa & Kaeufeur, 2013). The adoption of both the institutional theory and the business model lens is particularly appropriate to explore this topic. Indeed, the shift from a linear to a circular economy requires a change both in companies’ ‘material practices’ (Thornton & Ocasio, 1999), i.e. in their ‘activity system’ (Zott & Amit, 2010), and in the norms, values, and rules that guide them. For a MNE to achieve a fully closed-loop system it has to engage in a substantial change of the values and principles, i.e. the institutional logic that guide its activities and shift from linear to a circular logic. The linear logic focuses on the conversion of natural resources into waste, through production. The circular logic encompasses the principles of restoring any damage done in resource acquisition while ensuring little waste is generated throughout the production process and in the life history of the product (Murray et al., 2015). The emergence of a circular logic has led scholars and practitioners to call for companies to innovate their business model, by integrating practices that are consistent with the beliefs of the circular economy. Thus the change in logic has to be reflected in a transformation of the MNE’s ‘material practices’, i.e. the system of activities on which its business is founded.

Both the literature exploring the process of institutional logic shift and the one investigating the change in business model, i.e. business model innovation, have highlighted the challenges companies have to face in these transformations. Indeed, companies are subject to path dependency (Bohnsack et al., 2014). Also, business model innovation is a

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‘trial-and-error’ process (Sosna et al., 2010), entailing continuous and incremental adjustments. As mentioned previously, the shift to a circular economy is particularly critical for MNEs, as they have to change a complex activity system and norms and values across the subsidiaries located in multiple countries. They have to decide whether and how the transformation to adopt should be global or local. In order to develop a thorough understanding of the implementation of the circular economy by MNEs, it is therefore crucial to adopt a longitudinal perspective, which allows to capture the gradual nature of the transformations adopted.

Thus, in keeping with the importance of the topic and with the limited attention assigned to it, this study aims to answer the following research question:

How do multinational enterprises in the FMCG-industry integrate the circular logic into their business model over time?

In order to answer the research question, the study will adopt a multiple case study research design. The cases will be represented by four multinational companies operating in the FMCG-industry: Unilever, Coca-Cola Company, Nestlè, and Danone. FMCG-industry is in particularly important because population growth places a strain on the world’s natural resources, the raw materials that the FMCG-industry relies on to make its products. These products are daily consumed by billions of customers across the world, making it one of the most influential industries. The four chosen multinationals are key players in this industry, they recognize the damage its operations have on natural resources and the need for a new economic system.

"The concept of a circular economy promises a way out. Here products do not quickly become waste, but are reused to extract their maximum value before safely and productively

returning to the biosphere. Most importantly for business leaders, such an economy can deliver growth. Innovative product designers and business leaders are already venturing into

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These companies have sufficient archival data available to fully analyze their process of integrating the circular logic into the business model. The qualitative data, specifically archival data, is collected from the documentations released by the company, i.e. sustainability reports and press releases.

Theoretically, the study aims to make a contribution to the field of sustainable business model innovation as it provides an overview of how businesses can alleviate its environmental footprint by changing its logics. It will explore the shift from a linear to a circular logic, during the integration of the circular economy. It will identify patterns and implications of the process, that will be generalizable for MNEs in the same industry. Research is limited on how the circular economy is integrated across subsidiaries in multiple countries, so by focusing on MNEs this study also aims to make a contribution to the field of international management. It offers a deeper understanding of how the circular logic is integrated into a more complex activity system. Simultaneously, this study adds to the current literature on institutional logics by assessing the transition towards the circular logic of organizations that already face potential heterogeneity in institutional logics. The empirical research will be practically relevant for practice for managers and policy makers. Ultimately the goal of this study is to improve the design, implementation, and performance of a closed-loop economy in the sustainable business model in theory and practice.

First, the main concepts are discussed and the research gap will be explained in the third chapter. The first paragraph will discuss institutional logics to create a better understanding of the values, beliefs and material practices of institutions. The following paragraph will discuss institutional change, specifically the transition from a linear logic to a circular logic. This transition does not only require a change in the institutional logics, but it also changes a businesses’ activity system. Therefore, the last paragraph will discuss the Business Model (BM) and the sustainable-oriented Business Model Innovation (BMI). The fourth chapter will

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present the theoretical framework and the propositions. Subsequently, the fifth chapter will discuss and elaborate the research design, case selection, data collection, and data analysis. Based on the data analysis chapter 6 will present the results in a within-case analysis for each company, followed by a cross-case analysis that includes all cases. Chapter 7 will discuss the significance of the findings, the theoretical and managerial contributions, and the limitations and avenues for future research. The last chapter will present the conclusion of this study.

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3. Literature Review

In the following sections the core concepts examined in this research will be discussed and illustrated. More specifically, the first section will introduce the construct of institutional logics. The following section will discuss the institutional change consisting in the transition from a linear logic to a circular logic. Next, the business model and the sustainable-oriented business model innovations will be explained. The last section will elaborate on MNEs and sustainable business model innovations.

3.1. Institutional Logics

The construct of institutional logics is one of the core components of institutional theory and was conceptualized in 1985 by Alford & Friedland. Its purpose was to describe the contradictory beliefs and practices inherent in the institutions of modern western societies. In 1991, Friedland & Alford extended the definition with the idea of exploring the interrelationships between society, individuals, and organizations. Based on the definition of institutional logics by Friedland & Alford (1991), Thornton & Ocasio (1999, p. 804) further developed the concept of institutional logics by defining them as “the socially constructed, historical patterns of material practices, assumptions, values, beliefs, and rules by which individuals produce and reproduce their material subsistence, organize time and space, and provide meaning to their social reality”.

Institutional logics are the basis of taken-for-granted rules guiding the behavior of field-level actors, and they refer to the belief systems and related practices that predominate in an organizational field (Scott, 2001). Reay & Hinings (2009) claim that logics are an important theoretical construct as they help to explain connections that create a sense of common purpose and unity within an organizational field. They argue that logics also play an important role because a change in the field’s dominant logic is fundamental to institutional change.

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Over the last decades, the construct of institutional logics has increasingly been adopted by management scholars to investigate firms’ behavior, indicating that companies’ activities can be driven by multiple and diverse institutional logics. A relevant stream of research has explored the institutional change that consists of the shift in the logic driving organizational practices. For example, Thornton (2002) has explored how firms shift from an editorial logic to a market logic. She explains how the differences between these logics showed a decrease in the importance of professional determinants of organization structure and an increase in the salience of its market determinants. She claims that the change in logic can be understood as the movement of publishing houses from one institutional sector to another. Firms that embody old organizational forms under old institutional logics are relatively immune from change pressures, until the prevailing institutional logic changes. So when a shift to a new logic occurs, firms that are embodied in the old organizational forms become deviants that are particularly vulnerable to change pressures. Therefore, it can be expected that the emergence of the circular logic creates changes pressures of which firms operating the linear logic are vulnerable to.

Faulconbridge & Muzio (2015) claim that as they operate across multiple and diverse institutional contexts, MNEs are inevitably exposed to competing and potentially incompatible institutional pressures, and therefore to experiences of complexity. This requires different logics and can create different implications. They have the need to reconcile the different the logics of home and host country. Scholars have highlighted that due to institutional complexity the change in logics face barriers. Reay & Hinings (2005) argue that actors hold values and beliefs that are consistent with a certain institutional logic. Since organizational fields are composed of actors who make up communities, and are characterized by the interactions between actors, logics, structure, and political factors are all important to field level change. Within communities, actors can hold different institutional logics, and all fields can be characterized by competing institutional logics to some degree. When a dominant institutional

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logic exists, it is because other logics are subordinate. Consequently, this process of moving from one dominant logic to another requires time and actors using their power accomplish such shifts. Lok (2010) argues that over time, new organizations (e.g. Ellen MacArthur Foundation) enter fields, introducing new ideas to the market. Changes in social circumstances can enable subordinated interests to successfully install and mobilize a new logic or reprioritize existing ones. Over a longer period of time, institutional complexity unfolds, creating different circumstances to which organizations must respond.

In the next section a specific type of institutional change is discussed; the transition from a linear to a circular logic.

3.2. Institutional change as shift from a linear to circular logic

The term linear economy has become popular in use, as the antonym of the circular economy, by those writing about the circular economy and related concepts (Murray et al., 2015). The norms and values of today’s linear logic, known as the ‘make-dispose-waste’ economic model, is based on large quantities of cheap and easily accessible materials and energy. A linear economy is defined by converting natural resources into waste, via production. Such production of waste leads to the deterioration of the environment in two different ways: by the removal of natural capital from the environment and the reduction of the value of natural capital caused by pollution from waste. Also during the resource acquisition stage, pollution can occur (Murray et al., 2015). After the use period, the product will partly become waste and the buyer decides whether to dispose it. The optimization of generated waste or used raw materials is not specifically addressed in the product’s technical specifications (Witjes & Lozena, 2016).

According to Stahel (2016), the linear economy aims to be efficient at overcoming scarcity, but profligates at using resources in often saturated markets. It has been the heart of industrial development and has generated an unprecedented level of growth, however, it is

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reaching its physical limits. The world’s key resources, as rare earth metals and minerals, are diminishing. As a result, the costs of material extraction and exploration are rising. This has drawn the attention of policy makers and business leader and forced them to rethink the use of materials and energy (Ellen McArthur Foundation, 2015). Scholars and practitioners have acknowledged the need for change in the economic logic that drives business and more widely in society. According to Pearce & Turner (1990), are resource deficiency and product waste typical characteristics of the linear economy. They argue that in order to address this issues it is necessary to adopt a circular logic, where waste is considered a resource and resources have to be maintained within the system. The time is right, many argue, to take advantage of the potential benefits of the circular economy. The need for a new economic model is increasing as population growth places a strain on the world’s natural resources, and the new possibilities in technology and social factors have enabled the transition towards a circular economy.

The concept of Circular Economy, inspired by Swedish and German loop-closing, was first introduced in China by Zhu (1998), and in 2002 it got officially accepted by the by the Chinese central government. This new strategy is aiming to enable rapid economic growth and counteract the shortage of raw materials and energy (Su & Zhou, 2005). Over the last years, support for the circular economy has emerged, and the application of this concept has also been seen in western economies. According to Hill (2015), the circular economy started as a theoretical construct but is now gradually becoming an idea accepted by some policymakers and businesses within Europe as conveying an aspiration to keep resources in economic use for as long as possible. Since 2009, the Ellen MacArthur Foundation, a leading proponent founded by the round-the-world yachtswoman, has been promoting the idea of circular logic to manufacturers and policymakers. The EU Horizon 2020 program and the Swedish

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Foundation for Strategic Environmental Research published their first call for circular economy proposals in 2014.

However, there is still a lack of agreement on definitions of the circular economy. According to Murray et al. (2015), the circular logic is defined by having no net effect on the environment; rather it restores any damage done in resource acquisition while ensuring little waste is generated throughout the production process and in the life history of the product. By increasing a product lifecycle through better manufacturing and maintenance, the rate of product replacement decreases, thus resource use is reduced. This is how the ‘waste-as-food concept’, wherein unwanted outputs of one industrial process are used as raw materials in another industrial process, and the three Rs of Reduce, Reuse, and Recycle have become central concepts to the circular economy.

Literature has been discussing what the components are of the circular logic. The European Commission submitted a Circular Economy Package to the European Parliament in December 2015. It identified four sources of economic and sustainable value creation within a circular economy: the power of inner circle (less cost production); the power of circling longer (lengthening lifetime of products); the power of cascading use (waste-is-food); and the power of pure circles (where source materials remains uncontaminated, and therefore improving redistribution efficiency and material productivity) (Ellen MacArthur Foundation, 2012). Stahel (2016, p. 1) claims “the circular economy would change economic logic because it replaces production with sufficiency: reuse what you can, recycle what cannot be reused, repair what is broken, remanufacture what cannot be repaired”. He argues that organization integrating the circular economy can be divided into two groups: the first group supports reuse and extended life service through repair, upgrades, remanufacture and retrofits; and the second group that turns old groups into as-new resources by recycling the materials. He says that these forms of circular economy create the need for new skilled jobs in remanufacturing old goods,

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buildings, and infrastructure. However, since it is a fairly new concept, lack of unfamiliarity slows down the process of adoption to circular logic. Stahel (2016) claims that the idea of creating wealth by extending product lifecycle is the opposite of economist’s idea of creating wealth. Promoters of the circular economy have argued that it is valuable both from a sustainability and from an economic perspective. Indeed, the widely acknowledged definition of sustainable development is the closed flow of materials and use of energy and raw materials in multiple phases (Yuan et al., 2008). The principles, norms, values, and material practices of both the linear and circular logic are highlighted in table 1.

Circular activities of multinationals are hardly investigated. To be able to succeed in integrating the circular economy, MNEs have to adapt their business model to one wherein planning, resourcing, procurement, production and reprocessing are designed and managed, as both process and output, to maximize ecosystem functioning and human well-being (Murray et al., 2015). A change in logic will not only lead to a change in norms and beliefs, it also leads to an important change in material practices of a company. These practices can be found in the design of a firm’s business model. MNEs who are integrating the circular logic into their business model, have to implement these changes in multiple countries, requiring a more complex ‘activity system’ (Zott & Amit, 2010). This is particularly interesting because of potential heterogeneity in institutional environments. To create a full understanding of sustainable business models the following section will discuss the business model and the sustainability-oriented business model innovation.

Linear logic Circular logic

Principles, norms, and values

Based on large quantities of cheap and easily accessible materials and energy. Efficient at overcoming scarcity.

Waste is considered as a resource and have to be maintained within the system. It should have no net effect on the environment.

Material practices

Make-dispose-waste. Reduce, reuse, and recycle.

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3.3. Business Model and Sustainability-Oriented Business Model Innovation

Business model (BM) and business model innovation (BMI) have received significant attention in industry and management literature. It has been increasingly suggested that business model innovation is a key to business success (Chesbrough, 2010; Lüdeke-Freund, 2010; Zott et al. 2011). Bellman et al. (1957, p. 474) were the first to mention the term “business model” in an academic article, defining it as “a representation of reality, a simulation of the real world through a model”. However, the number of articles on business models remained low until the 1990s, when the use of the term increased due to information and communication technologies (ICT) and internet companies. Nowadays, the term ‘business model’ is often misinterpreted and misused, and has consequently been inadequately understood and applied by both scholars and practitioners (DaSilva & Trkman, 2013).

According to Zott et al. (2011), researchers have begun to converge on the following common themes that characterize business models: (a) business models center on the logic of how value is created for all stakeholders, not just how it is captured by the focal firm; (b) activities performed by the focal firm as well as by partners, suppliers, and even customers play an important role; (c) business models emphasize a system-level, holistic approach toward explaining how firms “do business”; and (d) the business model is emerging as a new level and unit of analysis. A subject of debate among scholars has been the components of a business model. According to DaSilva & Trkman (2013), a business model does not give strategists all the answers for how to operate a business and generate a sustainable competitive advantage. Instead, it creates an image of the company and shows how the various elements of the business work together at a certain moment in time. Zott & Amit (2010) created a conceptual toolkit that enables entrepreneurial managers to design their future business models. They argue that an activity in a focal firm’s business model can be viewed as the engagement of human, physical and/or capital resources of any party to the business model to serve a specific purpose

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towards the fulfillment of the overall objective. They discuss that one set of important design parameters that characterize this activity system are the design elements of ‘content’, ‘structure’ and ‘governance’, which go beyond interdependencies among activities or notions of network structure. These elements can be used to identify different categories of BMs related to the circular logic.

- Activity system content refers to the selection of activities, i.e., those that are performed. For example, a firm can adopt waste collecting activities to achieve a closed loop system.

- Activity system structure describes how the activities are linked, and it also captures their importance for the business model, i.e., in terms of their core, supporting or peripheral nature. When a firm makes the transition from a linear to a circular logic it has to change its core and peripheral activities. For example, it has to change new activities in product development and manufacturing.

- Activity system governance refers to who performs the activities. To integrate the circular logic, it is likely that the firm has to collaborate with partners outside its original value chain.

For simplicity and conceptual clarity, they described the design parameters of activity systems as independent and ethical, but they could also be highly interdependent.

With the increasing pressure of competition and institutional changes, organizations have to constantly be innovative to keep their position in the market, this is where BMI enters the strategic plan. Zott & Amit (2010, p.1) define BMI as “a tool for entrepreneurs and general managers to create and appropriate value, especially during an economic change”. They claim that BMI consists in creating a new or adjusting an existing activity system by recombining resources of a firm and its partners. Entrepreneurs and managers should be focused on BMI for

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several reasons. Firstly, it creates a source of value for future businesses. Secondly, by executing a BMI which competitors find hard to imitate, a company is able to create a competitive advantage. And as last, because BMI is a competitive powerful tool, managers and entrepreneurs have to be able to analyze the competitors’ efforts in this area. Companies face a number of barriers when innovating their BM. According to Chesbrough (2010), companies need an effective attitude towards business model experimentation. Companies trying to change their business models are highly likely to fail by experimenting with different business models until the right one is found. Business model innovation is a trial-and-error process (Sosna et al., 2010) entailing continuous and incremental adjustments. Furthermore, Chesbrough (2010) argues that companies need to identify the right internal leaders for a business model to change. These leaders need to manage the results of the processes of BMI and deliver a new and better business model for the company. Moreover, the culture of the organization has to learn to embrace the new model, while keeping the effectiveness of the current business model until the new one can be taken over completely.

Companies are subject to path dependency; the idea that path events guide future action and history matters, which also implies a persistence in decision-making patterns over time (Sydow et al., 2009). Large companies, according to Helfat & Lieberman (2002), have vast resources that provide a wide variety of starting points for business model innovation and allow experimentation with multiple business models simultaneously (Doz & Kosonen, 2010). This increases the chance of adopting a business model that will become the standard eventually (Bayus & Agarwal, 2007). Therefore, the transformation of the business model can take much longer as there is no need to make a definite choice right away, which leads to a greater diversity in business models over a prolonged period (Bohnsack et al., 2014).

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Nowadays, within the research exploring BMI, increasing attention has been assigned to sustainability-oriented BMI. In line with the circular economy, Kortmann & Piller (2016) have developed a framework of SBMs involving a closed-loop value chain. They argue that a holistic perspective is driving the emergence of a closed-loop value chain and requires managers to design, control, and operate a system maximizing value creation over the entire lifecycle of a product, striving to dynamically recover value from different types of returns over time. They conceptualize this by means of three consecutive stages in an extended product lifecycle, comprising the production stage, the consumption stage, and the subsequent circulation stage. Firms need to develop competitive and integrated business models that extend the traditional production function, include service offerings in the consumption stage, and emphasize the circulation or recovery of distributed products. Bocken et al. (2014, p. 44) define BMIs for sustainability as “innovation that create significant positive and/or significantly reduced negative impact on the environment and/or society, through changes in the way the organization and its value-network create, deliver value and capture value or change their value propositions”.

Due to rising pressures, collaborations between firms and other key stakeholders are becoming more important (Lowitt, 2013). The approach of system thinking and the need to consider a business entity as an element of a wider system of stakeholders and the environment in which it operates has been long discussed in the business literature (Mason & Mitroff, 1981; Pauchant & Mitroff, 1990; Hester & Adams, 2014). As Zott & Amit (2010) mentioned, a business model is geared toward total value creation for all parties involved. It lays the foundation for the focal firm’s value capture by co-defining the overall ‘size of the value pie’, which can be considered the upper limit of the firm’s value capture potential. Bocken et al. (2014) claim that a sustainable business model (SBM) incorporates a triple bottom line approach and consider a wide range of stakeholder interests, including society and

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environment. SBMs are important in driving and implementing corporate innovation for sustainability, can help embed sustainability into business purpose and processes, and serve as a key driver of competitive advantage. Kortmann & Piller (2016) argue that, nowadays, the integration of external partners into the new product or service development process has become almost a routine activity for many organizations. They conceptualize the firm as a system of interdependent and transcending activities that span internal and external firm boundaries and enable the creation and capture of value in concert with external partners.

Firms increasingly seek to identify opportunities to gain a competitive advantage in a world characterized by tightening regulation, resource supplies, climate change effect, and shifting social pressures (Bocken et al., 2014). Due to the resource scarcity, one of the most recent types of SBM is the one integrating the circular logic. However, it appears that limited attention has been given to the integration of circular economy principles in the BM across multiple institutional environments. As mentioned before, in particular, for large, multinational companies, given their visibility, the commitment to a circular model is increasingly crucial for their legitimacy and it may also be financially profitable, but, at the same time, it represents a critical challenge, due their complex ‘activity system’ (Zott & Amit, 2010).

3.4. MNEs and (sustainability-oriented) business model innovation

For all companies, reconfiguring the existing business model is a challenging process. It is however particularly demanding for MNEs, which need to implement the business model innovation across their complex, international ‘activity system’ and they need to decide to what extent and how to implement it across the multiple locations in which they operate (Zott & Amit, 2010).

Sustainability-oriented BMI is a core necessity for MNEs, due to the strong impact their businesses have on the environment and on the society and due to the higher pressures they face from multiple stakeholders (Zott & Amit, 2010). Yet, although MNEs represent a unique

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context to examine (sustainability-oriented) BMI, to the author’s knowledge extant literature has given very scant attention to this topic. Some studies, e.g. Bohnsack et al. (2014) examine MNEs, but take a ‘monolithic’ approach to their sustainability-oriented BMI and do not take into consideration the international nature of their activities and the challenges they face due to this. Other studies (e.g. Sosna et al. 2010) address international expansion as a way to scale the BMI, but not as a pre-existing condition of the company.

To have a thorough understanding of a MNE’s BMI, it is instead crucial to adopt an international perspective to the study of the change in the BM components. This consists for example in examining to what extent the transformation of MNE’s activity system content occurs globally or in defined locations, whether and how the change in the activity system governance relies on the involvement of global and/or local partners, how the change to the international network of the MNE’s activities unravels over time.

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4. Theoretical Framework

In the last year, both scholars and practitioners have increasingly agreed on the need to rethink the use of resources and energy (Stahel 2016; Ellen McArthur Foundation, 2015; Murray et al., 2015). The widespread call for a closed-loop production system has triggered an increase in interest among researchers for the study of the circular economy. As mentioned in the previous sections, a signal of this is represented by the call for papers on the circular economy by the California Management Review. Yet, research on the circular economy among management scholars has focused on its origins and conceptualization (Kortmann & Piller, 2016; Murray et al, 2015), overlooking the process of transformation towards a circular economy. Also, scholars have given very scant attention to the adoption of an international perspective to the investigation of firms’ transition towards circularity. For MNEs the transition towards a circular economy is particularly important for two main reasons. First, MNEs due to the size, are primary actors in the supply and transformation of materials and resources. Since the world’s key resources are diminishing, and costs of materials extraction and exploration are rising, pressures from multiple stakeholders are increasing in favor of a shift from linear to a circular system. Second, due to their presence in multiple countries, MNEs face critical challenges in the change of norms, values and materials practices towards circularity. Turning their complex, international ‘activity system’ (Zott & Amit, 2010) into a circular one requires time and significant efforts.

This is even more critical when confronted to what is stressed both by the literature on the shift in institutional logics and on business model innovation. These two streams of research highlight the difficulties and the gradual nature of these transformation processes. Path dependency (Bohnsack et al., 2015), the need for a trial-and-error approach (Sosna et al., 2010), the importance of keeping the effectiveness of the current business model until the new one can be taken over (Chesbrough, 2010) are core features of these processes. Logics are important within an organizational field and play a role in institutional change. The process of moving

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from one dominant logic to another involves actors using their power to accomplish such shifts (Reay & Hinings, 2005).

Given the absence of research that focuses on the transformation of MNEs towards the circular economy and the need to adopt a longitudinal approach to gain a thorough understanding of the transformation in institutional logics and BM, this study aims to answer the following research question:

“How do multinational enterprises in the FMCG-industry integrate the circular logic into their business model over time?”

Drawing on Zott & Amit’s (2010)’s categorization of the BM component, the study focuses on examining how the circular logic has been integrated into the MNEs’ activity system content and activity system governance from a longitudinal perspective. Given the international presence of the MNE, the study will examine whether the changes have been implemented at a local, regional, and/or global level. More specifically, with regard to the activity system content, I expect that MNEs take a holistic perspective when integrating the circular logic into the product lifecycle. Firms need to develop competitive and integrated business models that extend the traditional production function, include service offerings in the consumption stage, and emphasize the circulation or recovery of distributed products (Kortmann & Piller, 2016). Murray et al. (2015) agree with this theory by arguing that increasing product lifecycle through better manufacturing and maintenance, the rate of product replacement decreases, thus resource use will be reduced. The three Rs of Murray et al. (2015) of Reduce, Reuse, and Recycle can, therefore, be related to the production function stage, consumption stage, and subsequent cycling stage respectively. The three stages and the three Rs form the four sources of the circular economy identified by the Ellen MacArthur Foundation (2012); the power of inner circle, the power of circling longer, the power of cascading use, and the power of pure circles. Because recyclable package designs are needed in order to recycle the products, it is expected

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that MNEs are likely to first integrate the circular logic in the production stage before focusing on the consumption stage and the subsequent circulation stage.

Proposition 1: over time MNEs are likely to start integrating the circular logic in the beginning of the product lifecycle, and then extend it to the end of the product lifecycle.

Secondly, as regards the activity system content, I expect that the MNEs initially focus on recycling activities. According to Pearce & Turner (1990), a closed-loop value chain should consider waste as a resource and resources should be maintained within the system. Resource cycling is fundamental to the circular economy since it is part of the reversed value chain and embraces all firm activities from product returns to the potential recovery of the products maximum value via recycling and up-cycling activities (Kortmann & Piller, 2016). Upcycling and downcycling activities are strongly related to the third and fourth source of the circular economy; the power of cascading use (waste-is-food) and the power of pure circles (Ellen MacArthur Foundation, 2012). Downcycling refers to the recycling process of converting materials into new materials of lesser quality and reduced functionality, whereas upcycling processes converts materials into new materials of higher quality and increased functionality (Ellen MacArthur Foundation, 2013). Since upcycling is a more complex and costly process, MNEs are likely to initially adopt downcycling activities and then move to adoption of upcycling activities.

Proposition 2: over time MNEs are likely to initially adopt downcycling activities and then integrate upcycling activities.

As regards the activity system governance, I expect that over time the MNEs establish increasingly partnerships outside their ‘traditional’ value chain. Nowadays, integrating external partners into the new product or service development process has become almost a routine activity for many organizations (Kortmann & Piller, 2016). This is also consistent with the idea of “system thinking” that has been associated with the circular economy (Pauchant & Mitroff,

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1990; Mason & Mitroff, 1981; Hester & Adams, 2014). Since circular activities often involve technologies and processes that might be unfamiliar to the MNE’s current business model, it is expected that over time MNEs establish partnerships with external actors that have the authority or technology to develop these circular activities.

Proposition 3: over time MNEs are likely to increasingly establish partnerships outside their ‘traditional’ value chain.

The last proposition regarding the geographic scope is related to the scale on which the activities regarding the circular logic are practiced. Given a MNE’s visibility, the commitment to the circular logic throughout the whole business model is crucial for their legitimacy (Zott & Amit, 2010). MNEs operate across multiple and diverse institutional contexts, thus face different logics that can lead to different implications (Faulconbridge & Muzio, 2015), which makes experimentation crucial to business model innovation (Chesbrough, 2010). Therefore, I expect that MNEs initially perform circular activities on a local scale, and then extend it to a global scale.

Proposition 4: over time MNEs are likely to integrate the circular logic on a local scale then extend it to a global scale.

It is expected that closed-loop business models will have a foundation based on reduce, reuse, and recycle. The lifecycle of the companies’ products increases through better manufacturing and maintenance, which leads to the result of resource use reduced because of a decrease in the rate of product replacement (Murray et al., 2015). It is expected that these MNEs faced barriers that when making the transition towards a circular logic. The reason for this is because firms that embody old organizational forms under old institutional logics are relatively immune until the prevailing logic changes (Thornton, 2002).

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5. Methodology

5.1. Research Design

This exploratory research aims to analyze and understand how multinationals integrate a circular logic in the business model. A multiple case study design is adopted in order to answer the research question. According to Yin (2013) a case study method is a preferred method when; (a) “how” or “why” questions are being posed, (b) the investigator has little to no control over events, and (c) the focus is on a contemporary phenomenon. These characteristics correspond to the research conducted in this thesis. By adopting a longitudinal case study this research aims to answer questions such as: “how do MNEs operate a circular economy?”, “what patterns can be discovered?”, “what are the main changes in the BM when integrating the circular logic?”, and “what actors are needed to integrate the circular logic?”. The conclusions that answer these questions are drawn carefully because these answers are only tentative (Saunders and Lewis, 2012). Yin (2013) argues that a multiple case study design has two rationales. Each case must be carefully selected so that it either (a) predicts similar results (literal replication) or (b) predicts contrasting results but for anticipatable reasons (theoretical replication). Since it is expected to discover similar patterns for each case, this study is based on the rational of literal replication. Yin (2013) also claims that a few cases, no more than 4, can be used to base a study on literal replication. Therefore, this study will focus primarily on 4 cases.

5.2. Case Selection

The cases will be represented by 4 multinational companies operating in the FMCG-industry specified in table 2: Unilever, Coca-Cola Company, Nestlé, and Danone; The FMCG-industry is one of the most powerful industries since it supplies a substantial portion of the world’s daily consumed products. Fast-moving consumer goods account for 35 per cent of material inputs into the economy, a significant part of total consumer spending on tangible goods, and 75 per

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cent of municipal waste. Moreover, the consumer goods sector uses more than 90 per cent of agricultural output, possibly the most embattled resource in the future (Ellen MacArthur Foundation, 2013). Altogether, the FMCG-industry is pressured to look for a new economic model to alleviate its environmental footprint. The companies representing the cases were selected for a number of reasons.

First, the four chosen multinationals are one of the main key players in the FMCG-industry that focus on the same type of sustainable business model innovation; the integration of the circular logic. According to Statista (2015), the selected companies belong among the top 15 FMCG companies based on net sales in US dollars. These 4 companies were selected out of the 15 because of a number of reasons. First, the selected companies have in common that they are all operating in the food and drinks industry which is, according to the European Commission is responsible for 23% of global resource use (Euractiv, 2012). The food industry faces many significant risks from public criticism of corporate social responsibility issues in the supply chain (Maloni & Brown, 2006), therefore Unilever, Nestlé, and Danone were examined. Coca-Cola Company, the world’s largest beverage company (Jones, 2013), is the only company among the cases that solely operates in the beverage industry. However, it is still a valuable case to include in this research as it generates a significant amount of plastic waste. The current plastic economy has drawbacks that are becoming more apparent each day, this makes it one of the main issues the circular economy is focusing on. After a short use, 95 per cent of plastic packaging material value is lost to the economy. A shocking 32% of plastic packaging does not end in the collection systems, generating significant economic costs by damaging the productivity of vital natural systems. As the world’s largest beverage company Coca-Cola is a key player in the plastic packaging industry. One of the core proposals of the Ellen MacArthur Foundation (2014) is inspired by polyethylene terephthalate (PET) in plastic packaging that was first introduced in 1973. Coca-Cola Company has introduced PET material

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in the production of plastic beverage bottles in the late 1970s, setting an example for many other companies in the FMCG-industry (Ellen MacArthur Foundation, 2014), including the other 4 companies representing the cases in this study. Nowadays, PET is also used for many other consumer products, not just beverages.

Second, the 4 MNEs are committed to actively promote the circular economy in their practices, on their website, and in press releases. Unilever and Danone both joined the Ellen MacArthur Foundation as Global Partner. Coca-Cola Company and Nespresso, an operating unit of Nestlé, are member of the Circular Economy 100 Initiative (CE 100); a global platform led by the Ellen MacArthur Foundation bringing together leading companies to support the circular economy.

Third, it is particularly important to examine MNEs because of the following reasons. MNEs operate on a global scale that makes their operations more visible to the consumers, which makes it more urgent for them adapt a sustainable business model otherwise it may affect their legitimacy. Due to the size, they are primary actors in the supply and transformation of materials and resources. Since the world’s key resources are diminishing, and costs of materials extraction and exploration are rising, pressures from multiple stakeholders are increasing in favor of a shift from linear to a circular system. Furthermore, because of their presence in multiple countries, MNEs face critical challenges in the change of norms, values and materials practices towards circularity. Turning their complex, international ‘activity system’ (Zott & Amit, 2010) into a circular one requires time and significant efforts. Literature is limited on how MNEs integrate the circular logic, therefore it is valuable that the companies representing the cases have an international orientation.

Unilever Nestlé Danone Coca-Cola

Company

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Headquarter location Rotterdam, the Netherlands & London, United Kingdom Vevey, Vaud, Switzerland

Paris, France Atlanta,

Georgia, United States of

America Core products Food,

beverages, cleaning agents, and personal care products Food and beverages Fresh airy products, waters, early life nutrition, medical nutrition Beverages # brands 400 2,000 unknown 500 # countries it operates in 190 189 130 200 Net sales in US Dollars

59,145 million 92,361 million 44,294 million 23,113 million Table 2: Company specific information

5.3. Data Collection

This study is based on secondary data and specifically focuses on the analysis of archival data. The data will be collected from annual reports, sustainability reports, press releases, and other corporate documentations released by the company itself. The data sources do not include interviews with individuals, since the main interest was understanding the change in logics for each company. According to Reay & Hinings (2005), if there is enough data to conduct the research, the analysis of archival data should be enough. The data shows the prevalence of the publicly accessible communications in the FMCG-industry, which provide insights into the change process of a firm. Since this data is created by the company itself, this data is useful to create a full inside knowledge of its operations and how it integrates the circular logic. These documents represent the end result of decisions and negotiations made within the company. Furthermore, the methods of using archival data also have an advantage when the research goal is to be predictive of certain outcomes (Yin, 2013), thus is suitable for researching propositions.

Annual reports are analyzed because they form a comprehensive report of a firm’s audited accounts for the preceding year, as required in corporate legislation. Sustainability reports form the majority of the analyzed data in this research because it presents the economic,

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environmental, and social impacts of a firm’s everyday activities. It presents the firm’s values and governance mode and discusses the firm’s strategy and its commitment to a sustainable global economy. The press releases included in the data collection consist mostly out of news releases or statements written by the company itself that are formatted for public consumption. Other corporate documentations used in the data analysis include documents such as strategic reports and Global Reporting Initiative (GRI) reports. The number of corporate documentations collected and analyzed can be found in table 3.

Unilever Nestlé Danone Coca-Cola Company

Annual Reports 6 6 6 6

Sustainability Reports 6 6 5 6

Press Releases 7 19 5 8

Other corporate documentations 5 1 6 3

Total 24 32 22 23

Table 3: Overview of data collection

The collected data will originate between 2010, the first full year that the circular economy was supported by the Ellen MacArthur Foundation, and 2015, the most recent year from which similar corporate documentations of all cases can be found. This time frame is believed to be sufficient to observe the emergence of the circular logic in the business models of key players in the FMCG-industry.

5.4. Data Analysis

This study will use a priori approach to analyze the data. The design elements of Zott & Amit’s (2010) business model design will form the themes for each company to identify activities within the business model that are part of the circular economy. For each activity the following parent codes existing out of ‘activity system content’ and ‘activity system governance’ are

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determined. In addition, the activities will be coded based on whether they have been adopted on a local, regional, or global level. The activity system content codes will have a value chain orientation in line with the holistic perspective of Kortmann & Piller (2016) in order to answer the first proposition with regard to the positioning of the circular activities in the product lifecycle. The stages will include all three Rs of Reducing, Reusing, and Recycling identified by Murray et al. (2015) that are central to the concept of the circular economy. The codes ‘innovation’ and ‘reducing’ are linked to the early stages of the value chain and represents the production function stage of the closed-loop value chain. In this stage, the traditional production function is extended. Innovative activities are expected to improve product packaging and reducing activities are expected to decrease the amount of generated waste or materials used during production. The code ‘reusing’ is linked to the consumption stage, where it includes service offerings to encourage consumers to reuse a particular product of when the company itself reuses materials or sources. The production and consumption stage aim to increase products lifecycle through better manufacturing and maintenance, the rate of product replacement decreases, thus resource use is reduced (Murray et al., 2015). The codes ‘collecting’ and ‘recycling’ are associated with the subsequent circulation stage. The collecting activities are referred to as the reversed value chain that embraces all firm activities that encourage product return and waste collecting behavior. To answer the second proposition, the ‘recycling’ code exists out of 2 subordinate codes; ‘upcycling’, and ‘downcycling’. In this last stage, the circulation or recovery of distributed products is emphasized. Upcycling activities refer to the conversion of waste into high-value products, whereas downcycling activities refer to the conversion of waste into low-value raw materials.

In order to answer the third proposition, the activity system governance codes can be divided into two groups; actors within the traditional value chain and actors external to the traditional value chain. The codes ‘internal’, ‘consumers’, ‘suppliers’, and ‘competitors’

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belong to actors within the traditional value chain, whereas ‘NGOs’, ‘government’, and ‘companies in unrelated industries (CUI)’ are external actors. During the data analysis the ‘local community’ code was added, as it appeared that all companies integrated activities that not necessarily involved its consumers, but local inhabitants or visitors from a specific area.

The last theme regarding the geographic scope is related to the last proposition in relation to the scale on which the circular activities are performed. The circular activities are performed on either a local, regional, or global scale. According to Asmussen (2008), local activities are practiced on a subsidiary level and global activities are initiated by the headquarters. In this study, regional scale activities are developed in a specific administrative, area, division, or district, such as the North America or the Amazon Rainforest area.

Last of all, since this study aims to analyze the integration of the circular economy over time, the data needs to be organized with a longitudinal perspective. Thus, each activity found in the dataset will be categorized to the year it is initiated in. The themes and corresponding codes are specified in table 4.

Themes Codes Coding strategy

Activity system content

Innovation Changing packaging designs to save materials, reduce weight, and make it more recyclable

Reducing Reduce waste disposal or material use Reusing A product or elements of the product that

are reused again

Collecting Post-consumption activities that include waste collection

Recycling The process of converting waste into new products, recycling consists out of two subcodes:

- Upcycling: Converting waste into high-value products.

- Downcycling: Converting waste into low-value raw materials. Creating partnership Joining other organizations in an alliance

in order to achieve a collective goal Internal The activity has exclusively been

developed by the respective company Consumers Individuals who consume products of the

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Activity system governance

Suppliers A party that supplies goods or services to the respective company

Competitors A company in the same industry that offers similar products

NGOs A non-profit organization that operates independently of any government Government The system by which a state or

community is controlled Companies in unrelated

industries (CUI)

Companies not operating in the FMCG-industry

Local community Inhabitants/visitors of the respective area

Geographic Scope

Local Activities developed in one or a few countries (subsidiary level)

Regional Activities developed in a specific administrative area, division, or district Global Activities developed across the world

(headquarter level)

Year

2010

The year in which the activity was initiated in 2011 2012 2013 2014 2015 Table 4: Themes and codes

To analyze and code the unstructured data, the qualitative data analysis software NVivo was used. NVivo provides a set of tools to assist in undertaking an analysis of qualitative data by helping to manage data, manage ideas, query data, visualize data, and report from data, however, it is not able to ensure a bias-free analysis (Bazeley & Jackson, 2013). Therefore, to ensure the validity strong and clear explanations are given and rival explanations are addressed (Yin, 2013). In spite of this study having a deductive approach, during the data analysis there was an open approach for new activities and actors. A case study database was created and the information was put in chronological order to analyze the activities adopted, the changes in the business model over time, and to ensure reliability of this research (Garud and Rappa, 1994; Yin, 2013).

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6. Results

The results obtained from data analyzes will be presented in this chapter consisting out of a within-case-analysis and a cross-analysis. The within-case-analysis will illustrate the results for each case separately, starting with a summary of the company’s circular activities related to the propositions. Subsequently, the results will be discussed in chronological order from the year 2010 to 2015. The data presented in this section has been retrieved from the case study database that is created for this research.

6.1. Within Case Analysis 6.1.1. Unilever

The results show that the amount of circular activities of Unilever increased over the years and peaked in the year 2012. Unilever has been active in reducing and recycling activities over the full period examined. They have also been active in innovating its packaging over the year, except for the year 2014, in which no data was found of new innovations in packaging. The results show that Unilever has invested more in activities related to the beginning of the product lifecycle than activities related to the end of the product lifecycle. More investments were made in downcycling than upcycling activities, however, the first investments were made in upcycling activities. When it comes to the activity system governance Unilever has developed most activities exclusive internally. The activities that involved partnerships with other actors have been equally developed with actors within and external to the traditional value chain. However, in 2015, there was a significantly higher amount of activities that involved actors outside the value chain. The majority of these collaborations exists out of partnerships with companies in unrelated industries. These were mostly focused on recycling activities and R&D projects to innovate packaging. Collaborations with governmental organizations were needed to commence partnerships with other competitors or enable waste collecting activities. The highest amount of partnerships started in 2015, of which the majority involves collaborations

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with local municipalities for research and waste collecting purposes. In general, the majority of partnerships over the years involve actors outside Unilever’s traditional value chain. With regard to the geographic scope, over the examined years, Unilever has always initiated more circular activities with a global scope than with a local scope. Regional activities were not common at all. New packaging designs were implemented in markets depending on the countries in which the product is available in. Most of the improvements in packaging were made on flag brands, thus implemented on a global scale. The results from the data analysis for Unilever can be found in table 5. The following paragraphs provide a more detailed overview of Unilever’s circular activities initiated in 2010-2015.

Unilever’s main circular activities were recycling, reducing and innovating its packaging. With the data analysis starting in 2010 Unilever’s main circular activity initiated involved a partnership with retailer Tesco to create consumer awareness about sustainability and recycling. This program has been implemented in nine markets from the UK to China. This was also the year that Unilever published its board and packaging sourcing policy. The policy outlines the company’s goal to source 75 per cent of its paper and board packaging from sustainably managed forest or from recycled materials by 2015, rising to 100 per cent by 2020. Furthermore, Unilever changed the packaging of different flag brands to reduce the amount of material used in each unit, and therefore reduce waste.

In 2011 they continued innovating the packaging of many flag brands both in local as global products. To create a new design for the Vaseline Petroleum Jelly Jar, Unilever started a collaboration with Blue Marlin’s New York studio to create a jar that uses less plastic and is more recyclable. A collaboration with the RecycleBank in the United States aimed to encourage consumers to recycle.

In 2012 Unilever both focused on the reduction of waste disposed at their manufacturing sites across the world and the reduction of materials used in packaging. Which

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led to a significant increase in globally initiated activities. Efforts were made to not only reduce materials used and waste generated during manufacturing, but to also create awareness among the consumers about waste management. Unilever has appointed packaging mangers dedicated to increasing recycling and an advocacy manager who will encourage positive change in government policy on waste.

In 2013 the amount of initiated activities remained high, still focusing on reducing waste/material but also on innovating packaging. The focus laid on R&D projects to develop new technologies to create new packaging designs that will lead to waste reduction. An important innovation was the continuing improvement of Dove packaging design, starting with the new up-side down deodorant pack in 2010 till the new Dove Body Wash bottles in 2013. Investments in downcycling factories were made to achieve zero non-hazardous waste disposal to landfill. Moreover, Unilever launched a research project with the University of Liverpool to develop the next generation of renewable chemicals from biomass to use in the manufacturing of its home and personal products.

The year 2014 was the beginning of the official Global Partnership between Unilever and the Ellen MacArthur Foundation. Another important collaboration was the UK industry collaboration, the REFLEX Project, which included Nestlé as one of the project partners. The collaboration aims to remove several barriers to create a circular economy in flexible plastic packaging that involves the whole supply chain. Furthermore, Unilever has continued reducing and recycling activities from the year before and launched the ‘Design for Recyclability’ guidelines.

The year of 2015 involved an important milestone for Unilever since they have achieved to be the world’s first zero to landfill company in Europe, which means that no waste from Unilever-owned premises, such as factory and offices, goes to landfill in Europe. Similar to previous years, Unilever continued innovating its packaging by reducing weight and

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materials. Another milestone was achieved when Unilever’s research in India has proved that pyrolysis technology can convert sachet waste into and industrial fuel through extended production runs. Based on this we can expect more downcycling projects to be introduced in the following years, more than that, that year they already placed an order for equipment to build a pilot plant to prove the commercial viability of this technology. Unilever has also achieved its goal of the paper and board packaging sourcing policy that was set for 2015. Lastly, 2015 has been the starting point for 2 new partnerships; they partnered with Greenredeem to encourage people to recycle and live more sustainable, and they brought together over 100 representatives to create a movement for change on zero waste.

Overall, research shows that over time Unilever initiated more activities that were related to the production stage of the product lifecycle; of which the majority started in the first 3 years of the research period. Consumption stage activities were only found in the middle of the research period, whereas data shows that recycling activities were initiated in a continuous pace over time, existing out of more downcycling then upcycling activities. The one upcycling activity found in the data appeared to be initiated before the downcycling activity. As regards the activity system governance, it is found that more external than internal actors were involved in circular activities. During the first half of the research period, Unilever developed more activities within the value chain, then gradually started to involve more external actors. Finally, as to the geographic scope, during the research period, Unilever has continuously performed the majority of its activities on a global scale rather than a local scale. The regional performed activities were only found in the data once.

Unilever

Activity system content 2010 2011 2012 2013 2014 2015 Total

Innovating packaging 2 3 2 3 1 11

Reducing 2 3 5 2 2 3 17

The transition from a linear to a circular logic : case studies of MNEs in the FMCG-industry