To help companies adopt circular strategies that can narrow, slow and close resource loop, business model innovation is essential. But what does that actually mean and why is this relevant? To answer this, let’s begin by having a closer look at what a business model is. A business model is a management tool that is used to present the company’s organisational structure and value creation processes. They describe the organisational and financial architecture that defines how an organisation converts resources and capabilities into economic value. A widely used definition of a business model is the one of Osterwalder and Pigneur, who describe the business model as the core logic of how a company creates, delivers, and captures value. So, business models describe the core “value creation logic” of a business. A business model consists of different elements that can be innovated to enable and integrate more circularity, and these elements can be structured into three value dimensions. The value proposition dimension that describes which value is provided and to who. The value creation and delivery dimension that describes How value is created and delivered. And the value capture dimension that describes How value is captured and how this value can be turned into a profit. Each of these value dimensions consists of a number of business model elements. Let’s use the example of the fictional backpack company ‘Waterproof Bags Incorporated’ and go through these elements together. The value proposition dimension consists of three elements, the actual value proposition, the customer segments and customer relationships. The value proposition is the value that the product or service creates for the customers. For our backpack company our main value proposition is that our bags are a 100% waterproof. Our main customer segment that we want to target is Adventurous Outdoors People and our for customer relationship our main strategy is co-creation powered by social media, where our customers are involved in the development of upcoming models. The value creation and delivery dimension consists of four elements: Key resources and capabilities, channels, key partners, and key activities. So for our backpack company, our key resources and capabilities include the development of new lightweight waterproof materials. To establish channels with customers, we want to focus on online sales to support our online community. Our main key partner is a big cycling parcel delivery company to promote our backpacks. And our key activities are lean manufacturing and sales. The value capture dimension consists of two elements: revenue flows and costs. In our case our revenue model is quite simple, we have income from selling our bags to our customers. And our main costs consists of manufacturing, retail, and managing our online community. Multiple Choice Question 1 So, what does innovating the business model mean? Well, innovating a business model means to alter or relink some of the business model elements. If this is done with a circular strategy in mind, shaping and adjusting these elements, can make implementation of the strategy easier, as well as help overcome barriers, and capture value. For example, the value proposition can be designed to deliberately use a circular strategy and target customers that find the associated value appealing. A value proposition can be a long-life product with low maintenance and lifecycle costs. This can be appealing to customers with a high environmental awareness or to customers that are bothered by obsolete products. The relationship with customer segments can be designed in a way that it encourages return of a product after its use. For instance through establishing closer, and more service-oriented relationships and offering a financial reward upon return. Value creation and delivery elements can be devised to successfully create and deliver the value of a company’s circular offer. Operating a circular strategy, requires specific activities, resources, technologies, capabilities, and partner networks to successfully prolong the life of products and close material loops. So, a company should aim to shape these elements in a way that it has everything in place it needs to embed circular practices in their business model. This can include finding partners that have some of the required capabilities. For instance, partners that can test and certify quality of repaired products, or partners that can provide sufficient volumes of discarded products to be upgraded or reused. Value capture elements in a circular business model can be adjusted to generate additional revenue from selling the same product several times or from capitalizing on the environmental benefits associated with resource conservation. There is also potential to reduce production costs by using cheaper secondary materials or by avoiding costs for end-of-life disposal. So, innovating the elements of a business model can align the core value creation logic of a company with a circular strategy in a more systematic way. For every business model, depending on the circular strategies operated, or the type of product, the business model elements will be shaped differently. But through paying close attention to how these elements are shaped and by making sure that they support implementation of the specific circular strategy, circularity can become a part of a company’s value creation logic and the barriers can be gradually removed.