The Performance Economy by Walter Stahel
A complex phenomenon like circularity, with such deep root causes in our economy and behavior, can only be “storytold” with so much clarity and rigor by its founding father: Walter Stahel. Here’s a summary where he (re)introduces the topic, complemented with my own (humble, of course) views.
We surround ourselves with products we use only for a limited time, we fill the oceans with low-tech plastic objects and outer space with high-tech plastic objects. In the next 50-100 years, we will see that our current industrial economy is not in any way compatible with the natural resource base at our disposal. We take, make, and dispose.
We saw business models based on “more of the same” (economies of scale) being favorited by many organizations: source more, manufacture more, sell more. In the future, we need a more intelligent way to structure our business models, we need more from less (economies of scope). A circular economy (one not of scarcity, like in times where we needed to reuse everything to make ends meet, but of abundance).
Our current industrial system is based on oversupply and omnipresent waste. It is like a river: goods that are produced must be sold (oversupply) and goods must be manufactured to maintain GDP-growth. Growth means maximizing throughput. In a circular economy, on the other hand, growth means an increase in quantity and quality of material stocks, which can be reused infinitely.
- What? : The circular economy puts the emphasis on renewable & infinite resources (like labor, and good intentions) and shifts away from non-renewables (like material resources) or at least tries to keep (or stock) them up in our economic system!
- How? : By building business models that focus on labor, and less on material consumption.
- Why? : Because 75% of the energy associated with manufacturing finished product is in extracting and making basic raw materials (steel, cement, aluminium, …) and only 25% is in further manufacturing or assembly. Furthermore, 75% of the labor associated with manufacturing finished product is in “end-manufacturing” or assembly and only “peanuts” is in raw material mining or manufacturing.
Things starting to get clear? Maybe this picture sheds some light on the matter:
Circular business models allow to “cut away” the energy intensive raw material transformation step, allows to recuperate the material value in products – AND increases the need for labour or… jobs! Triple jackpot, wouldn’t you say?
There is one overarching principle in the circular economy: the power of the inner circle. Business models based on inner circles typically extend the product or component lifetime, while business model based on recycling go for material re-use. The most inner circle, where the products lifetime is lengthened by reuse or shared use preserves the most resources (i.e. material & energy).
The opportunity – building service around products
Extending the product lifetime beyond (market-accepted) lifetimes – no rational, commercially driven actor would opt for that. Unless… the business can valorise the robust design and extra-long lifetime… or can increase the revenue elsewhere?
- For example, in the use-phase: by investing in operational maintenance. Already common practice in organizations trying to build a tighter customer relationship.
- Or even in the end-of-life phase: by offering the service of taking back the product once it has entered the waste stage – and ensuring proper recycling, or another purpose.
The most sophisticated, but most effective, way to bring circularity “to the market” is transitioning towards a business model based on “servitization” – this is what we call the “product as a service”-model. Here the full performance of the product is offered as a service.
But how does this relate to the circular economy?
In product-as-a-service business models, manufacturers typically retain ownership of product – while the customer only pays for the related performance of the product.
Customers don’t want luminaries – but only the light, customers don’t want tires – but mileage, customers don’t want a printer – but copies. In: business models based on renting or leasing.
In these business models, a manufacturer is inclined to extend the product lifetime (the inner circle!) by producing products that need little maintenance, are easy to operate, can be dismantled and reused easily – since this will increase the economic value of the business model (because service models typically imply that manufacturers will internalize lifecycle cost, and will price the model in a, sometimes flat, fixed fee). So customers, in turn, benefit from flexible access and a predictable, flatter price.
Walter Stahel ends his talk with some wonderful, eye-opening lessons:
- Buying stuff that rapidly decreases in value over time – like a car – makes no sense at all. Renting or leasing makes this stress-free. Buying stuff that increases in value over time, like a house, does make sense. This, people, is the difference between consumption and investment goods and is the basis of the performance economy.
- A circular economy is an economic phenomenon, the environmental (preservation of material and energy) and social (jobs!) repercussions are a nice add-on.
- And one that goes even deeper: The goods of today are the resources of tomorrow at yesterday’s resource price.
Walter Stahel’s talk about the performance economy was brought at the Disruptive Innovation Festival 2017, an online festival of ideas that asks the question ‘what if we could redesign everything?’.
Walter Stahel founded the Product-Life Institute, Europe’s oldest sustainability-based consultancy, in 1982. His seminal 1976 research report to the European Commission in Brussels ‘The Potential for Substituting Manpower for Energy’, written with Genevieve Reday, sketched the vision of an economy in loops (or circular economy) and its impact on job creation, economic competitiveness, resource savings and waste prevention. Currently, he is a visiting professor at the Faculty of Engineering and Physical Sciences at the University of Surrey, UK and works as independent researcher.
Here’s the full talk :