Executive Service Roundtable:
Service Models for a Circular Economy
What service models will accelerate the emergence of a circular economy?
A few notes from the discussion sessions
Notes from the Roundtable Discussion
Emerging Service Models in a Circular Economy
Adapting to a circular economy is essential, because:
- Governments are gradually implementing regulations to drive sustainability and circularity. For example, in the automotive industry, it will soon be mandatory for workshops to offer customers used or refurbished parts.
This could significantly impact the revenue and margins of the spare parts business.
- An increasing number of investors require specific social and environmental responsibility standards, such as circular business models.
Not complying with these standards will make it impossible to attract (good) investors.
- Industries with relatively high levels of waste and low levels of utilisation could be disrupted by new attractive value propositions like sharing or renting equipment at a lower cost of ownership and with higher flexibility.
Some opportunities towards a circular service model are incremental changes of the service model, for example:
- Offer customers a paid service to organise disposal and recycling of their equipment, or packaging materials.
Particularly if your company has a high service coverage or attach rate of the active installed base, this could have a significant impact towards a more circular business.
- Offer customers a lease option. With a financial partner, this does not impact the revenue and financial model of your service business and keeps the risk relatively low.
However, a real circular business model will require more radical business innovations. For example:
- Offer 2nd hand equipment, which may cannibalise new equipment sales.
- Offer refurbished components or spare parts, which again may cannibalise new components or spare parts sales.
- Extend your service offering with operational performance solutions, in which you work with customers to improve their operations. This requires a shift from product-dominant thinking to service-dominant thinking.
- Offer product-as-a-service, where multiple customers have access to the same equipment only when they need it. This will increase the utilisation and productivity of the equipment and reduce the manufacturing volume. This may, however, cannibalise the volume of the equipment business.
Particularly in industries with relatively low utilisation rates and high cost of ownership, this could become a successful offering from other manufacturers or service providers (like Airbnb).
- A radical business innovation could take years, if not a decade. Most market disruptions took more than 10 years.
- In industries with rapidly changing proprietary technology, it may be challenging to drive a lifetime extension because of the attractive business case to rapidly adopt new technology and new products and thus dispose of the older products.
Typical external challenges:
- There is still little or no push from customers.
- Customers often are not willing to pay more for sustainable or circular offerings.
- Customers do not accept refurbished parts or components yet.
- Waste reduction is not a priority for customers. Other initiatives still have a more significant impact on their success, hence a higher priority.
Typical internal challenges:
- Product design does not take serviceability into account, let alone circularity.
- High complexity of processes and customer relationships to manage returns, refurbishment, recycling, etcetera. It involves many new activities, skills and touch points with customers.
- Changing the culture from product-out to customer-in. Not only for marketing and sales but also for decision-making, prioritisation, and resource allocation for development projects.
- Establishing a shared sense of urgency for the potential disruption of traditional business and revenue/margin streams.
- Aligning strategies of different departments in the company.
- Aligning incentive schemes to these priorities.
Critical success factors:
- Develop value propositions that solve an actual customer problem they want to solve. Those offerings will get traction in the short term, allowing you to develop the necessary capabilities, competencies, and expertise for future circular service offerings.
- Develop your service innovation capabilities and capacity. After all, the name of the game is business model innovation at an increasing pace.