Real Leaders

Why a Circular Economy is Critical Now

Forget red and blue oceans, it’s the overfished ocean that should be calling your strategy shots. Ask any experienced manager or aspiring MBA student around the world for their favorite subject in the field of business, and the answer will strike you with overwhelming consistency. Strategy! At the time when shaking economies are struggling to find their standings, developing a strategy that beats the competition is the sexiest topic around. And judging by all the strategy courses I have ever taken or been asked to teach, we seem to be focused on only two choices.

Popular strategic thought tells us that to compete well, we need to find the most advantageous position in the crowded market space and stick to it. Michael E. Porter is the guru at the helm of this thinking, and his famous 1980 menu of “generic” strategies aims to offer you the entire market landscape to consider. In a striking contrast to Michael Porter’s positioning concept, in 2005 W. Chan Kim and Renée Mauborgne invited the business world to leave behind the crowded (and often violent!) waters of the existing market and instead search for—or create demand in—the uncontested market space, the so called blue ocean.

With the powerful advice of the former, many companies for decades claimed their victory by finding and protecting the best spot—a unique position on the crowded competitive landscape. Following the fresh invitation of the latter, adventurous businesses strived to avoid the crowd by discovering a new market space—swimming into the “blue ocean” waters far away from shark-filled blood-red existing markets. Both options are great. And both are oblivious to one simple fact: whether red, blue, or rainbow, the oceans are getting excruciatingly empty. We are, simply put, running out of things to mine and places to trash.

The question of declining resources is not new. Long before current frameworks, such as the Natural Step, put declining resources at the center of attention, the issue of resource scarcity commanded the notice of theorists and practitioners alike. From Plato in the fourth century BC to Thomas Malthus in 1798 to the Club of Rome in 1972, a parade of esteemed thinkers drew our attention to the looming collapse—to no avail. Hardly any changes in the behavior of businesses, governments, and consumers alike were inspired by their powerful outcry—if anything, the global market grew tired and deaf to the calls for radically new business models. Why?

While the theory of resource decline seemed strong and sound, for nearly two centuries the market reality had been telling the opposite story. McKinsey’s 2011 report “Resource Revolution” puts it best: “Throughout the 20th century, resource prices declined in real terms or, in the case of energy, were flat overall despite periodic supply shocks and volatility. The real price of MGI’s index of the most important commodities fell by almost half. This decline is startling and impressive when we consider that, during this 100-year period, the global population quadrupled and global GDP increased by roughly 20 times.

The result was strong increases in demand for resources of 600 to 2,000 percent, depending on the resource.” In essence, what the declining prices of resources told us for so long was that we could have our cake and eat it too—grow our population, increase our consumption, and keep cutting prices, all at the same time. But that was then. The now looks drastically different—and the speed of waking up to this new reality will determine who will survive and who will vanish in the new era.

Each year, I work with about 5,000 senior managers directly, and our conversations so far suggest that the majority have not yet fully awakened to this new world of a rapidly collapsing resource base. So, here are a few alarm sirens for you—the general trends that are beyond striking:

  • One: since the turn of the 21st century, real commodity prices increased 147 percent.
  • Two: at a minimum, an additional $1 trillion annual investment in the resource system is necessary to meet future resource demands.
  • Three: three billion more middle-class consumers are expected to be in the global economy by 2030, all putting new pressures on resource demand.

Whatever key aspect of business—or life—we consider, declining resources are unraveling the very foundation on which we built our economy. As the linear throwaway economy is approaching its collapse, this old economic order is running its course, and those managers who deeply understand and master this shift are able to use the new reality to power up radical innovation and secure a remarkable competitive advantage. As they ride ahead of the wave, new products, new business models, new markets, and new profits follow. Behold the Overfished Ocean Strategy.

At the center of this approach to resource depletion is a simple strategy: it’s time to turn scarcity into competitive advantage. While this comprehensive strategic framework is built around five well-researched principles, today I will only talk about the essence. And it has to do with the nature of economy. To be able to invent products, processes, and services that do not deplete our resources our businesses need to move from linear to circular economy.

In linear economy we mine, use (usually once), and trash all of our hard-earned materials like a cheap plastic fork. In circular economy all that is used stays in the production cycle indefinitely – the waste of one product becomes raw material of another. Let’ me make it palpable for you. For years we have been hearing that the world is running out of gold. Indeed, in the linear economy, we are. So, consider this: a ton of used cell phones has up to 30 times more gold in it than a ton of gold ore.

The first piece of data breeds hopelessness. The second offers a tremendous opportunity. That is the essence of Overfished Ocean Strategy.

So, if the reports on the diminishing stocks and rising prices on every raw material possible suggest that the future of business is doom and gloom, the good news is already here: a new era of innovation for a resource-depleted world is upon us. Join.

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