1 The Value Hill Business Model Tool: identifying gaps and opportunities in a circular network [Insert Abstract] Authors: Elisa Achterberg, Jeroen Hinfelaar, Nancy Bocken While researching financial barriers for entrepreneurs with circular business strategies 1, many different categorizations and listings of circular business models were encountered. This enforced the demand for a simple, balanced categorization to get a grip and an overview of circular business models. In (FinanCE Working Group 2016), this resulted in a simple categorization that enabled structuring corresponding financing challenges. It was experienced as a clear framework, especially for entrepreneurs transitioning towards a circular business model. Therefore this categorisation was extended with a corresponding appealing visual in (Hinfelaar et al., 2016). This paper presents the Value Hill Business Model Tool more elaborately, and substantiates the results by placing it in context of other commonly used categorizations of circular business models. The Value Hill provides companies with a tool to position their business (model) in a circular context and to support businesses developing future strategies for a circular economy. Additionally, the Value Hill provides oversight in essential circular partners and opportunities in the circular value network. This paper is structured as follows: firstly an introduction is given on the concept of the Value Hill in a circular context. Subsequently, a few examples of other commonly referred circular business model categorizations are given, which are compared with the Value Hill framework. Lastly, this exposition is concluded with envisioned next steps. INTRODUCTION From a business perspective the circular economy makes sense: reuse of materials can save costs and service models can deliver new business propositions and revenues. Circular businesses keep the value of products as long as possible on the highest level (Ellen MacArthur Foundation, 2015; Kraaijenhagen et al., 2016). 1 Nederland Circulair!
2 All over the world we have developed sophisticated ways of design, production, distribution and selling of goods: extracting resources from the earth, refining for manufacturing, making into products and distribute them to consumers, adding value at every step. After delivery to the consumer, value goes downhill. Business models are generally sales oriented and therefore revenues come mainly from selling as much products as possible. This creates an incentive for producers to design products that have a relatively short lifespan and to sell new products after use. The old products end up in landfill or incineration. The bottom- line: value is added and is in turn quickly destroyed. This process is illustrated with the Value Hill in Figure 1. Value is added uphill, on top of the hill value is at its maximum, but after a relatively short lifecycle, value is destroyed and the product goes downhill. LINEAR BUSINESS MODEL Add value Destroy value Retail Assembly Manufacturing Extraction Figure 1 The Value Hill in a Linear Economy The idea of a circular economy is inspired by eco- systems where the waste of one is food for the other (Ellen MacArthur Foundation 2013). Circular businesses aim at retaining added value as long as possible, if not eternally, meaning that the waste of one business provides food for the other. In context of the Value Hill, this comes down to adding value uphill with circular strategies to keep products as long as possible as high as possible on the hill. Products are developed that have long life, are suitable for good maintenance and repair, thus slowing the use of resource loops (Bocken et al., 2016) and prolonging the use phase. Finally, products are cascaded as slowly as possible down, back into the Value Hill (Figure 2), where they can serve as useful resources.
3 THE VALUE HILL CIRCULAR ECONOMY CIRCULAR BUSINESS MODEL repair/ maintain Add value Retain value Retail Assembly Manufacturing Extraction Figure 2. The Value Hill in a Circular Economy In summary, the path of material and physical products travelling the Value Hill is divided in three phases. The phase before use (mining, production, distribution), which is displayed as uphill as value is added in every step. The second phase is the use phase of a product. This phase is depicted at the top of the mountain, here the value is at its highest. And the third phase is after use, where the product loses value going downhill. Value is recaptured by feeding the complete product or its components back into a previous phase (e.g. production or directly back into the use- phase). In every phase different business activities take place. This is further elaborated in the following paragraph. CIRCULAR BUSINESS MODELS The transition to a circular economy and its corresponding differences in the way businesses are organized have two main challenges. The first is the need to keep control over resources. This means that products need to be tracked and the return of products need to be organized. A much- explored strategy is the product- service- system (PSS) model (Tukker, 2004), where companies create bundles of products and services that are of greater value than products alone, and provides greater control over resources. These PSS models are organized through leasing, renting, pay- per- use or performance- based business models, which leaves the ownership at the service provider. These models potentially decouple profit from production, which enhances product productivity (Sonerud 2014). The second challenge is to preserve the value added and optimize the residual value of products after use. To do this, collaboration within the value network is essential. To overcome these two challenges of keeping control over resources and maximally preserve value added, various business activities take place. These different business activities can be positioned in four different categories onto the Value Hill.
4 1) Circular Design correspond to business models that operate in the pre- use phase or the design, development and production phase of a product. These activities are positioned upwards the Value Hill and are forward looking by focussing on prolonging of the use phase (e.g. long- life products), account for end- of- life suitability (e.g. modularity), less resource- intensiveness or re- using existing products, components or materials, that are recovered from earlier usage. 2) relate to the use phase of a product. These business models seek to optimise the use of the product by providing services or add- ons to extend the lifetime of a product or provide ways to use products more intensively or efficiently. These business models can be positioned on top of the Value Hill. 3) Value Recovery involve the phase after use of a product. These business models generate revenue by capturing the value from used products (formerly known as waste or by- products). However, doing business in one of the three aforementioned business model categories does not automatically entail circular business. There is a need for coordination of activities, information flows, material flows, energy flows and services. Therefore, a fourth overarching category has been identified: 4) Circular Support are business models that are engaged in the management and coordination of circular value networks. This entails coordination and management of resource flows, optimizing incentives and other supporting activities in a circular network. Note that these circular business model categories are not mutually exclusive. It may well be that businesses apply multiple strategies in conjunction in their business management. FINANCING CIRCULAR BUSINESS MODELS Support better usage and supporting service Circular Design Design products and materials with the aim of long term value retention Retail Assembly repair/ maintain reuse/ redistribute refurbish Value Recovery Capture value after user life remanufacture Manufacturing recycle Extraction incinerate/ landfill Circular Support Management, Support Figure 3. Business Model Categories mapped on the Value Hill
5 MAPPING OTHER BUSINESS MODELS TO THE VALUE HILL In the grey and academic literature several business model types and categorizations can be found, which are relevant for the circular economy. Some key examples are discussed below. A much used business model categorisation is the one proposed by Accenture (. Distinguished are five types of circular business models: Circular Supplies, Resource Recovery, Product Life Extension, Sharing Platforms and Product as a Service. Circular Supplies models provide renewable energy, bio- based-, or fully recyclable input materials. Resource Recovery models recover useful resources out of disposed products or by- products. Product Life Extension models repair, upgrade or re- sell products thereby extending the working life of products. Sharing Platform models are models that increase the utilization rate of products by sharing the use, access or ownership of products. And lastly, Product as a Service models offer product access combined with services to capture the benefits of circular resource productivity. Similarly, Stegeman ( distinguishes five types of business models. Circular input models, waste value models, lifespan extending models, platform models and Product- as- a- Service models. Besides platform models, the categorisation is very similar to the one given by Accenture (. With platform models not only sharing platforms are indicated, but any platform that has an intermediary function and brings supply and demand together for residual value of goods or services. Bakker et al. (2014) identify five archetypal business models. The classic long life business sells products with a long life at a high price. The hybrid model sells cheap products together with high quality durable products, for example toner cartridges for printers. The gap exploiter model provides repair services or sells refurbished units, second hand equipment or turns waste into useful resources. This is a combination of the Product Life Extension and Resource Recovery model as proposed by Accenture (2014). The access model generates its revenue from the providing of access to a product, while ownership remains with the access provider. And lastly, the performance model where earnings are based on performance that is provided. The difference between the latter two lies primarily with the attitude of the customer, who is in case of the performance model mainly interested in the quality of the service (and not in the product performing it), whereas in the access model, the brand and the kind of product matters. The access model and the performance model correspond to the Product- as- a- Service models as described above. Related work on sustainable business model archetypes (Bocken et al., 2014) developed eight archetypes of business models that drive sustainability, categorized according to the major innovations (social, environmental and organisational): 1. Maximise material and energy efficiency; 2. Create value from waste ; 3. Substitute with renewables and natural processes; 4. Deliver functionality, rather than ownership; 5. Adopt a stewardship role; 6. Encourage sufficiency; 7. Re- purpose the business for society/environment
6 and 8. Develop scale- up solutions. Of these archetypes, encourage sufficiency (slowing consumption), creating value from waste, substitute with renewables and natural processes, and providing functionality rather than ownership (e.g. PSS) are most clearly linked to the circular economy. Maximise material and energy efficiency can also fit in a linear economy. Building on the sustainable business model archetypes (Bocken et al., 2014) and the products that last archetypes (Bakker et al., 2014; Bocken et al., 2016), these are categorised according to three mechanisms by which resources flow through the system. Narrowing resource loops are concerned with the use of fewer resources per product. Closing resource loops involve the circular flow of resources and connect products after use with production. Lastly, the slowing of resource flows extends the utilisation period of products and slows the flow of materials before recycling (Bocken et al., 2016). One of the business models that closes the resource loop, and was not yet mentioned in the other examples but is similar to the platform models of Stegeman (, is Industrial symbiosis, which is a process- oriented solution that uses residual outputs from one process as feedstock for another (Bocken et al., 2016). Product- Service- Systems (PSS) appear on some form in all categorisations. Recent work of (Tukker looks into the potential of PSS models for a circular economy. (Tukker lists three main categories of PSS: 1. Product- oriented PSS, in which the business still sells products, but services are added. This comes close to the classic long- life business model that sells high quality products and adds guarantees and services; 2. Use- oriented services, in which the business is not geared towards selling. Ownership of the product remains with the provider. Business models in this category are product leasing (use by single user), product renting or sharing (product is used sequentially by different users) and product pooling (simultaneous use of the product by various users); 3. Result- oriented services, in which business models provider and client agree upon result, whereas there is no predetermined product involved. Paid is per service unit or per functional result. The first category we do not stipulate as a typical circular business model, because the incentives still lie at selling as much products as possible. Therefore these business models will only find its way onto the Value Hill if it concerns long- life products. In the use- and result- oriented service models, products and materials are a cost factor in the value proposition and therefore companies with these business models have an incentive to prolong the service life of products, ensure intensive use of products (i.e. make them as cost- and material- efficient as possible), and to re- use parts after product life (Tukker. The third category, result- oriented service models have in theory at least the greatest potential for circularity (Tukker, but this still needs to be proven in practice.
7 THE VALUE HILL BUSINESS MODEL TOOL The Value Hill Framework proposes a categorisation based on the phase in the lifecycle of a product, in which the corresponding business activities take place: before, during and after the use phase of a product. This allows businesses to position themselves onto the Value Hill and getting an overview of possible circular strategies as well as missing partners in their circular network. In a perfect circular economy uphill (design, development and production) and downhill (capture value of waste) will coincide, but reasoned is from a current (actual) state of the economy. In Table 1 below, an overview is given of identified business models, including a description, categorisation and naming of similar findings in consulted literature. Also the location of the business models on the Value Hill is given and example of businesses with similar activities (Figure 4). FINANCING CIRCULAR BUSINESS MODELS Product Life Extension Product leasing Product renting Sharing Platforms Performance provider Provide and buy-back Repair & Maintenance Service Circular Design Circular supplies Circular products Classic long life Encourage sufficiency Retail Value Recovery Recaptured material supplier Refurbisher Second hand seller Remanufacturer Recycling facility Assembly Manufacturing Extraction Circular Support Recovery provider / Process design / Value management / Tracing facility Figure 4. Business summarized in the Value Hill The Value Hill framework is easily extended with additional or new to be invented business models. It categorises circular business models by the position they have in the value network according to their business activities. It therefore provides an easy to use tool for entrepreneurs to position themselves and explore gaps in the circular value network. Next steps To complete and substantiate the proposed framework business models that are concerned with managing, supporting and connecting circular stand- alone business models need to be further explored. Needed is to gain more insight into practice and case studies in collaborative strategies and what potential there is to make a business model out of that.
8 Place on Value Hill and corresponding business model category Business Model Description Similar BM s Examples Uphill: Circular Design Uphill: Circular Design Uphill: Circular Design Uphill: Circular Design Circular products Classic long life Encourage sufficiency Circular supplies Providing products designed for end- of- life by making them easy to maintain, repair, upgrade, refurbish or remanufacture Providing products delivering long- product life with high levels of guarantees and service and a high upfront price. A high price per product can justify lower volumes Provides input materials such as renewable energy, bio- based-, less resource intensive- or fully recyclable materials Product Life Extension (Accenture 2014), Designing for technological cycle, designing for biological cycle, designing for dis- and re- assembly (Bocken et al., 2016) (Bocken et al., 2016), Product- oriented PSS (Tukker (Bocken et al., 2016) (Accenture 2014), Design for technological cycle, Design for biological cycle (Bocken et al., 2016), Circular input Fairphone Miele Patagonia Dutch awearness Top of the hill: Product Life Extension Sells consumables, spare parts and add- ons to support the lifecycle of long lasting products Lifespan models (Stegeman, Hybrid model (Bakker et al., 2014) Bundles Top of the hill: Product leasing Delivers product access rather than the product itself through a combination of product and services and where the service provider retains ownership of the product. Primary revenue stream from payments for use of the product. Single user uses Access model, Use- oriented services (Tukker, Product as a Service (Accenture 2014), Access model Product as a Service (Stegeman Bundles
9 Top of the hill: Top of the hill: Top of the hill: Top of the hill: Top of the hill: Product renting Sharing Platforms Performance provider Provide and buy- back Repair & Maintenance Service the product. Delivers product access rather than the product itself through a combination of product and services and where the service provider retains ownership of the product. Primary revenue stream from payments for use of the product. Different users use the product sequentially. Enables an increased utilization rate of products by enabling or offering shared use/access/ownership. Different users use the product sequentially. Delivers product performance rather than the product itself through a combination of product and services where no predetermined product is involved. The service provider retains ownership of the product. Primary revenue stream are payments for performance of the product, i.e. pay- per- service unit or other functional result. Provides a product and agrees on repurchasing the product after some time. Repairs, maintains and possibly upgrades products in use if necessary. Access model, Use- oriented services (Tukker, Product as a Service (Accenture 2014), Access model Product as a Service (Stegeman Access model, Use- oriented services (Tukker, Product as a Service (Accenture 2014), Access model Platform models (Stegeman Result- oriented services (Tukker, Performance model (Bocken et al., 2016), Product as a Service (Accenture 2014), Performance model (Bakker et al., 2014), Product as a Service (Stegeman Gap exploiter model 2016), Lifespan Lena s Fashion Library Peerby Bundles, Phillips Circle Design Repair Cafe
10 Downhill: Value Recovery Downhill: Value Recovery Downhill: Value Recovery Downhill: Value Recovery Downhill: Value Recovery Recaptured material supplier Refurbisher Second hand seller Remanufacturer Recycling facility Provides recaptured materials and components to substitute the use of virgin or recycled material Refurbishes used products if necessary and re- sell them Provides used products Provides products from recaptured materials and components. Transforms waste into raw materials. Additional revenue can be created through pioneer work in recycling technology. Resource Recovery (Accenture 2014), Gap exploiter model 2016), Waste value Resource Recovery (Accenture 2014), Gap exploiter model 2016), Waste value Resource Recovery (Accenture 2014), Gap exploiter model 2016), Waste value Resource Recovery (Accenture 2014), Gap exploiter model 2016), Waste value Resource Recovery (Accenture 2014), Gap exploiter model 2016), Waste value Leapp Marktplaats Desso, Interface Connecting up-, down- and top of Recovery provider Provides take back systems and collection Resource Recovery (Accenture 2014), Gap Recyclebank
11 the hill: Circular Support Connecting up-, down- and top of the hill: Circular Support Connecting up-, down- and top of the hill: Circular Support Connecting up-, down- and top of the hill: Circular Support Process design Value management Tracing facility service to recover useful resources out of disposed products or by- products Providing service around processes that increase the re- use potential and recyclability of industrial and other products, by- products and waste streams Providing service around managing information, materials, transparency, payments and governance in a circular value network. For example ICT solutions for smart contracts and payment systems, or consultancy on circular management systems. Services to facilitate the tracing, the marketing and the trade of secondary raw materials Table 1. Extensive Overview of Business Model Strategies exploiter model 2016), Platform Dutch awearness, Blockchain technology, Ethereum, CESCO Dutch awearness, Bundles
12 REFERENCES C. Bakker, M.C. den Hollander, E. van Hinthe, Y. Zijlstra. Products that Last. Product Design for Circular Business. TU Delft Library, Delft, The Netherlands, Bocken, N.M.P., de Pauw, I., van der Grinten, B., Bakker, C Product design and business model strategies for a circular economy. Journal of Industrial and Production Engineering, 32 (1), Ellen MacArthur Foundation TOWARDS A CIRCULAR ECONOMY: BUSINESS RATIONALE FOR AN ACCELERATED TRANSITION. Available at: MacArthur- Foundation_9- Dec pdf (accessed 6 June 2016). FinanCE Working Group, CE100. Money makes the world go round - and will it help make the economy circular as well? Available at Hinfelaar, J., Achterberg, E., Kerkhof, J., Heideveld A., Ahsmann, B. Kansen voor circulaire businessmodellen. Tijdschrift Milieu, maart Kraaijenhagen, C., Van Oppen, C., Bocken. N., Circular business. Collaborate & Circulate. Circular Collaboration, Amersfoort, The Netherlands. Available at circularcollaboration.com Sonerud, B. "Meeting the financing needs of circular business. (report submitted in partial fulfilment of the requirements for the MSc and/or the DIC), Stegeman, H. The potential of the circular economy, Rabobank, Tukker, Arnold. Product services for a resource- efficient and circular economy - a review, Journal of Cleaner Production, 2015: