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Sustainable Development and Strategic ThinkingWalter R. Stahel aa School of Engineering, University of Surrey , CH-1211, Geneva , 3 , SwitzerlandPublished online: 20 May 2013.

To cite this article: Walter R. Stahel (2007) Sustainable Development and Strategic Thinking, Chinese Journal ofPopulation Resources and Environment, 5:4, 3-19, DOI: 10.1080/10042857.2007.10677526

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Sustainable Development and Strategic Thinking

Walter R Stahel

School of Engineering, University of Surrey, CH-1211 Geneva 3, Switzerland

Abstract: From an economic point of view, the industrial econ­

omy is efficient to overcome situations of a scarcity of goods.

From a technological point of view, the resource efficiency of the

manufacturing processes of the industrial economy has been per­

manently improved during the last 200 years. In addition, cleaner

processes have been developed. However, from an ecologic point

of view, an increasing world population with increasing consump­

tion has produced a "global footprint" which approaches the car­

rying capacity of the planet.

A circular economy and its high-value spin-offs-a lake

economy and a performance or functional service economy-<:an

fulfil customers' needs with considerably less resource consump­

tion, less environmental impairment in production and considera­

bly less end-of-life product waste, especially in situations of af­

fluence, when a considerable stock of physical goods and infra­

structures exists.

Also, in situations of a scarcity of natural resources, both en­

ergy and materials, often characterised by rapidly rising resource

prices, the economic actors of a circular economy have a high

competitive advantage over the actors of the industrial economy,

due to much lower procurement costs for materials and energy.

From a social point of view, a circular economy increases the

number of skilled jobs in regional enterprises.

However, the shift from a linear manufacturing economy to a

circular or service economy means a change in economic thinking,

from flow (throughput) management to stock (asset) management:

in a manufacturing economy with largely unsaturated markets,

total wealth increases through accumulation as resource through­

put (flow) is transformed into a higher stock of goods of better

quality (but in a manufacturing economy with largely saturated

markets, wealth represented by the stock of goods will no longer

increase); in a circular or service economy, total wealth increases

through a smart management of existing physical assets (stock)

that are adapted to changes in both technology and customer de­

mand.

This second approach not only applies to physical capital but

equally to social capital, such as health and education and green

GDP. To measure the social wealth of a population, it is not the

amount of money spent on schools and hospitals that matters, but

Corresponding author: Walter R Stahel(wrstahe/@vtx.ch)

if this expenditure has led to a better education of the students,

and a better health of the people.

Key words: sustainable development, circle economy

1 Defining sustainable development

1.1 Concept of sustalnabillty

Sustainability as a concept has a number of different faces and interpretations that depend on the underlying

cultures and traditions. The common denominator of most concepts is that sustainability is a synonym for happiness, quality of life and health.

Today's most commonly used definition of sustainabil­ity is based on the principle of the Prussian foresters, to make a living from the "interests" (timber) while safe­

guarding the "capital" (forests). This principle dating from the late 18th century was adapted by the Brundtland report "Our Common Future", in the sense that the present gen­

eration shall not consume the resources of coming genera­

tions. However, this definition is static and difficult to !1-p­ply to industrialised economies.

The six nations of the Iroquois Confederation in North America defined sustainability as: in our every deliberation,

we must consider the impact of our decisions on the next seven generations.

A European analysis of the past two centuries, using the

Iroquois principle, shows the following result. The 19th century started off with horses and candles.

What did the scientists, engineers and industrialists of the 19th century leave to the following seven generations?

Mobility: bicycles, railways and tramways, steam and electric locomotives, automobiles

Energy: electricity, dynamos and electric motors, eleva-tors

Chemicals: photographic film Telecom: telegraphy without wires, telephones Printing: typographic equipment and typewriters After this period of discovery, at the beginning of the

Chinese Journal of Population. Resources and Environment 2007 Vol. 5 No.4 3

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20th century, the head of the US Patent Office wrote a let­

ter to US Congress, stating that his office should be dis­

solved as everything that could be invented had been in­

vented. At the same time, Einstein published his revolu­

tionary paper on the relativity theory-progress is not

foreseeable.

The scientists, engineers and industrialists of the 20th

century produced, among many others, the following

innovations for the coming generations: mobility: aircraft, rockets, space travel

energy: nuclear power, solar photovoltaic panels, fuel

cells, the hydrogen society

chemicals: plastics, polymer fibres and coatings

telecom: movie films, television, mobile phones, Inter­net, SMS

printing: computers, digital newspapers, e-paper

At the end of the 20th century, new scientific opportuni­

ties have been discovered, of which DNA, life sciences,

nano-sciences and the opportunities of a convergence of

sciences are just the most prominent.

The future will tell if the legacy of the 20th century will

be regarded as wealth or burden. However, an assessment

of the scientific success stories of the 20th century will

certainly also reveal a new balance in the innovation be­

tween Europe, America and Asia. China has a much longer

list of innovations that goes back 2000 years-in fact,

many a European innovation has its roots in China.

1.2 Historic development of sustainable thinking

Another approach to look at sustainability is to study its

historic development. In Europe, it has built a number of

steps or pillars that fall into two distinct groups. The one is

environment and health and the other is resources, eco­

nomics and society.

Environment and health includes two steps:

1) the eco-support system for life on the planet (e.g.

biodiversity), a factor of recognising the regional carry­ing-capacity of nature with regard to human populations

and human lifestyles, going back to Jean-Jacques Rousseau (1712-1778);

2) toxicology (a qualitative issue of sometimes accumu­lative toxicity}, a direct danger to man and increasingly the

result of humankind's economic activities - a matter of

reducing micro-grammes of toxins, with kick-off points DDT, Seveso, and ozone.

4 Chinese Journal of Population, Resources and Environment 2007 Vol. S No.4

Resources, economics and society include two steps:

3) resource consumption (a quantitative issue), the flows

of matter and energy as a factor of planetary change to­

wards a re-acidification and climate change, and a possible

hazard to human life on earth-a matter of mega-tonnes of

resources and their "backpacks" of mining waste;

4) the system of societal, cultural and economic struc­

tures that contribute to our quality of life.

The shift from toxicology (step 2) to higher resource

productivity (step 3) corresponds to a quantum leap in the

politico-economic development: from identifying toxic

micrograms to reducing flows of mega-tonnes as a major

issue; from command and control approaches to finding

new solutions based on technical and commercial innova­

tion; from legislative approaches as main tool to free mar­

ket instruments; from a safety, health and environment

(SHE) focus in industrial plants to a corporate responsibil­

ity for society (CSR).

The last step (4} carries the idea of a sustainable society

(Coomer, 1981). It encompasses the broader objective that

includes, besides the natural resource problem, the question

of the longevity and sustainability of our societal and eco­

nomic structures. This insight was at the basis of the

movement in the USA that re-coined the English term

"sustainability" in the early 1970s. In Europe, the emer­

gence of the "green" movement in the 1990s, however,

missed the broader perspective of a sustainable society

with considerations such as full and meaningful employ­

ment and quality of life, only focussing on the issues of

environmental protection.

However, the relevance of pillars 1 and 2 continues in

all countries, as exemplified by a recent OECD report on

New Zealand, asking the government to upgrade water and

waste management and improve environmental reporting at

the national level(OECD urges New Zealand to improve

water and waste management; 4 April 2007).

To better understand the development of sustainability,

we need to understand the development of the industrial

economy.

2 Developmental theory under the scarcity of natural capital

Starting with the Industrial Revolution more than 200

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years ago, the industrial economy has been a recognised approach to overcome scarcities of materials, energy, goods, infrastructures and agricultural produce through mass pro­duction of cheap "goods" in a global market: witness mate­rials such as cement and steel, energy such as heat and power, goods such as white goods, cars, textiles and com­puters. However, as the industrial economy is a linear ap­proach (Fig. 1), it is inevitably coupled with a high re­source consumption of both energy and material at the be­ginning, high emissions to the environment during manu­facturing, and a high volume of end-of-pipe waste of in­creasing material complexity.

• zero-lite-products

RESOURCE•BASE MATERIALS • MANUFACTURING•

POINT Of SALE• UT!LIZATION•WASTE junction O:product-life or waste

Fig. 1 Linear structure of the industrial emoomy (or "river" econ­omy)

Source: Stahel, Walter and Reday, Genevieve (1976/ 1981) Jobs for

Tomorrow, the potential for substituting manpower for energy; report

to the Commission of the European Communities, Brussels/Vantage

Press, N.Y.

In addition, each of these phases of the industrial

economy is characterised by a vertical flow: an input of

material and energy and an output of waste water, material and emissions. Main product life phases are raw material extraction, manufacturing, distribution & marketing, utili­zation & maintenance, and waste collection and treatment.

At the beginning of industrialisation, cheap labour

moves from agriculture to industry and services, which

develop in parallel (see Fig. 2(a)). However, as industrial

wages rise, companies seek to reduce labour costs. Con­

stant reductions of the cost of labour involved in manufac­

turing are a characteristic of a maturing industrial economy and can be achieved by: mechanisation: to increase labour productivity by substituting machines for human labour to achieve a higher labour productivity; immigration: by us­ing cheaper, often unskilled, labour from abroad; out­sourcing: by shifting production from countries with high labour costs to countries with lower one, such as China for the manufacturing physical goods and India the for devel-

opment of software.

80

0 1820 40 60 80 1900 20 40 60 80 95

Fig. l{a) US employment1826-1995

Percent ofGDP by sector(%)

Africa Average

,.Agriculture/Extraction • Manufacturing •Services

Fig. l(b) GDP of China, Brazil, India, SA, Russia, OECD

Sources: US Department of Commerce OECD

The shift of manpower as a resource between the three

sectors in the economic development has been documented for the USA (Fig. 2(a), US employment by sector). China

today is in a development phase where manufacturing and

services produce almost 90% of GDP; workers will there­

fore continue to move from agricultural jobs to industrial

and service employment. (Fig. 2(b), China 2005, percent­

age of GDP by sector, agriculture/resource extraction 12%,

manufacturing 48%, services 40%). Another key role in the quest for cheaper goods of the

industrial economy has been technical innovation focused

on reducing the costs of resources used in the manufactur­ing processes. Between 1917 and today, the energy con­

sumed to produce one US$ of GNP has been reduced by

75% (in nominal terms) in the US economy. A similar re-

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d\lction was achieved in the energy necessary to produce a

ton of pig iron from 1800 to 2000 (Fig. 3).

.g 7\ •Mineral statistics R.U.M. 1882 (2)

.!:!>6 • J.S. Jeans 1882 (I) !:" .. Blast-turnaces W.Europe with

] 5 ·~ lean ores ~4 ·g. • u 3 •

]~ ~ 0~------~------~------~------~ 1800 1850 1900 1950 2000

Years

Fig. 3 Tonnes of coal equivalent to produce one tonne of pig iron,

1800to2000

Source: Dr. A. Decker, . Energy Accounting of Steel, 9th Int. TNO

Conference, Rotterdam, 26/27 Feb 1976.

Permanent innovation to continuously increase the re­source productivity of manufacturing processes is needed as the impact of most engineering innovations following an exponential curve similar to the curve in Fig. 4.

In the past, major breakthroughs occurred in iron and steel production: the Bessemer process in the 19th century, and the continuous casting of steel in the 20th century, enabled reductions in the energy consumption of steel mills per ton of output by up to 80%.

In the future, the focus may be on chemistry: bio-tech and nano-structured production processes in small-scale chemical processes, which are being developed and applied now, replace high-pressure and high-temperature processes in the plants with large volume of production.

In addition, engineering innovation in the form of sys­tem innovations has regularly led to improvements in the utilisation of goods: lighthouses on dangerous rocks have done more for the safety of shipping than any technical improvement to ships; plane transport systems (PTS) weight 10% of traditional airplane tractors, an resource productivity improvement of 90%, and in addition have improved the safety of aircraft handling on airport tarmacs; optical fibres that replace coaxial copper cables initially increased the capacity tenfold, with a fraction of the previ­ous material input. In the meantime, improvements to the switches of fibre optics have multiplied the initial commu­nication capacity.

6 Chinese Journal of Population. Resources and Environment 2007 Vol. 5 No.4

Then, at the end of the 1980s, eco-design appeared as an

innovative approach to integrate environmental issues in

the design process involving physical goods. The Bauhaus tradition established in the early 20th century had already

been based on the eco-design principles, but its influence

on design had been fading. The following list is 12 eco-design principles, IDSA

(industrial designer society of America) 1992, which sug­gests source reduction and re-use opportunities open to designers:

•

•

•

•

Make it durable. Make it easy to repair. Design it so it can be remanufactured. Design it so it can be reused. Use recycled materials. Use commonly recyclable materials . Make it simple to separate the recyclable compo­nents of a product from the non-recyclable com­ponents. Eliminate the toxic/problematic components of a product or make them easy to replace or remove before disposal. Make products more energy/resource efficient. Use product design to educate on the environ-ment.

• Work toward designing source reduction-inducing products (i.e. products that eliminate the need for subsequent waste).

• Adjust product design to reduce packaging. Yet, leading thinkers soon realised that developing sus­

tainable solutions was the real challenge, not designing ecologic goods (Stahel, 2001). For Western economies, the "hazard warning lights" of the product-focused industrial­ised economies have been flashing for some years, with regard to sustainability: the track record of the industrial economy becomes irrelevant in markets near saturation, when abundance has replaced scarcity. This situation of a consumer society has been reached in most industrial countries within the last years of the 20th century for many types of goods.

The reason why the industrial economies seize to be effi­

cient when markets for goods approach saturation is that eco­nomic growth can now only be achieved by shortening the product-life of goods. The tool to do this is fashion often dis­guised as a technological progress. In many industrialised countries, the markets for most goods have been approaching

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saturation levels.

China, with 5 million new cars sold and 1 million cars

scrapped in 2005, is in a situation that is comparable to

Germany in 1960. However, as the growth rates of China at

the beginning of the 21st century are probably higher than

those of Germany in 1960, the situation of a market near

saturation will be reached in a shorter period than in Ger­

many.

This development path of the industrial economy hides

major risks for exporting countries such as China: overproduc­

tion; the linear flow cannot be stopped if demand at the point

of sale goes back, for instance, if importing countries switch to

a circular economy and start remanufacturing existing physical

assets instead of replacing them by new imports; this situation

can lead to the zero-life products in Fig. 1; dis-economy of

risk comes hand in hand with economy of scale; if few or only

one plant exists on global level to produce a certain compo­

nent, for instance, a destruction of this plant by an earthquake,

or a freeze of world trade due to a pandemic, will paralyze the

global supply chain.

These risks are inherent in the three issues that are at the

base of the winning business model of the industrial

economy:

mass production and economy of scale, leading to lower

unit costs but also a higher concentration of production

capacities;

globalisation of sales and exports of manufactured

goods, implying the uninterrupted availability of cheap and safe global transport;

services supporting manufacturing, such as insurance

and banking, take on an increasingly important role in

production (see Giarini and Stahel (1989) on this issue). A

shortage of these services can jeopardise the further devel­

opment of the industrial economy.

2.1 Impact of sustainability

The industrial economy has opened the path to a con­

sumer society. However, already "Agenda 21", developed

at the 1992 UN Conference in Rio de Janeiro, pointed out

that the resource consumption of this consumer society is

unsustainable, i.e. cannot be spread to LDCs (less devel­

oped countries) without a collapse of the system. Principle

8 of "Agenda 21" also clearly pointed to the location of the

problem: the industrialised countries, which house 20% of

the world population and consume 80% of all resources

(Fig. 4).

The middle pillar in the right diagram corresponds thus

to a sustainable global resource consumption, giving every

inhabitant of planet Earth equal access to resources. What

does this mean for energy and C02-emissions?

In COrintensity, China has the world's second highest

emissions, behind Russia and before India. This can partly

Fig. 4 Global economic disparities

Note: In 2000, the population of industrialised countries consumed 80% of all resources (energy and material). If the less developed

economies reach a pro capita resource consumption comparable to OECD countries, the champagne glass in the left picture will

grow to the figure on the right. This is physically impossible. If we divide the available resources equally among the world popu­

lation, we reach the middle pillar in the right diagram.

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be explained by China's strong involvement in heavy in­

dustries, such as steel and cement production. The COremissions per inhabitant of China, however,

are half the world average, or 10% of the USA. The Kyoto

Agreement is wrongly demanding reduced emissions with regard to 1990, independently of per capita emissions, an approach that is in clear contradiction with "Principle 8" of "Agenda 21" (Fig. 4).

2.2 Key role of sufficiency

With regard to competitiveness in a sustainable econ­omy, there is another shortcoming that threatens the indus­trial economy: it cannot profitably integrate and exploit sufficiency solutions including prevention, which are

among the most sustainable business models: radical savings in electricity consumption lead to a re­

dundancy of production capacity, resulting in higher unit costs ($ per kWh) and reduced economic growth;

loss and waste prevention lead to a reduction in the consumption of goods and thus reduced economic growth.

As sufficiency and prevention strategies are the future road for industrial economies towards sustainability, this clearly demands a rethinking of economics.

Two examples to explain sufficiency strategies follow: the request for not changing towels in hotels, and the use of coldzymes in washing clothes.

Hotels sell performance; they gain from sufficient solu­

tions, such as the reuse of towels. "Help us to save the en­vironment-reuse your towels as long as you stay with us" is such a solution. Many European guests are happy to oblige and waive their traditional right to fresh towels daily

and to help the environment. Yet, this strategy also gives the hotel financial advantages, e.g. fewer expenses for washing towels and a longer life for the towels and wash­ing machines through less wear.

Coldzymes is a European Commission-financed re­search project to use enzymes from bacteria collected in

Antarctica and the Alps for washing clothes in cold water. As 90% of the energy consumed in washing clothes is used

to heat water, coldzymes could reduce the energy con­sumption of washing machines by 90%. However, coldzymes-are a systemic solution; they are successful only if most of the system players involved see an advantage (which is not the case here), or if they are imposed top

8 Chinese Journal of Population, Resources and Environment 2007 Vol. 5 No.4

down. Reversed incentives drive many systemic solutions to

achieve the desired performance with less resource consumption yet without compromise on the desired result.

China has a tradition of successful prevention strategies, based on reversed incentives, for instance in the health

sector, such as the story of the Chinese village doctors that follows.

Some 2 000 years ago (according to what I have been told), every Chinese village had its own medical doctor,

whose livelihood was paid by the villagers in good health;

every villager who became ill was treated by the doctor free of charge. That way, everybody, including the doctor,

was better off if they were healthy. There were few incen­

tives to become ill or have an accident, as that would have been detrimental to one's own vital interests of survival;

the risk of abuse or moral hazard was practically nil. And the doctors' main objective was to teach people to life healthily.

Most modern (Western) medical systems, by contrast,

thrive on sick people. Due to high financial investments, the health systems would be bankrupt if there were no or considerably fewer patients.

If China is able to transfer this tradition of focusing on

wealth instead of flow into the manufacturing economy, it may be able to leapfrog the highly developed industrialised economies.

Some of the foreseeable milestones to a more sustain­able economy are known, such as:

economic focus: a shift from a manufacturing to a knowledge economy (service and functional service economy);

scientific and technological focus: innovations in dema­terialising technologies, such as bio, nano and material sciences;

framework conditions: technical standards and legisla­

tion that are performance-focused instead of product­ocused; for instance, maximum emission limits per kilo­

!Iletre instead of catalytic converter for vehicles; metrics: national accounts based on wealth (stock) ac­

counting instead of flows (such as GNP) allows measuring

the social wealth of a population based on a better educa­tion of the students and a better health of the people, in­stead of measuring increases in related expenses;

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decoupling sustainability indicators to measure pro­

gress.

To some degree, we can choose our future, for example,

by channelling R&D (research and development) funds

into future industries: the future is being prepared today by

the research expenses of the private and public sectors.

A similar choice is open for the business models, which

are applied by corporations.

Some of the options to move to more sustainable busi­

ness models are explained in the following using the ex­

ample of physical goods (excluding pure services and

"knowledge" products):

a circular economy, where goods and molecules are

re-used in loops, with a change of ownership after each

loop and hence (high) transaction costs involved;

a lake economy, where fleet managers maximise profits

from the utilisation of a stock of goods (physical asset

management without change of ownership),

a performance economy or functional service economy,

which sells performance or function instead of goods.

There are major differences between circular, lake and

performance economies that are sketched out in Fig. 5 us­

ing the example of a washing machine manufacturer.

Circular economy: the manufacturer sells the goods and

any economic actor can take back the end-of-life goods. It

is now his choice to repair andre-marketing them, or recy­

cle their materials, depending on his motivatimi for the

take-back.

250 Stock or fleet

~ (units in the market)

s:

~ 200 0

-5 5 150 .'!l ·;: ::s 100 ... 0

] 50 E ::s

;z

Time(in years)

Lake economy: the fleet or stock of goods is owned by a

fleet manager that rents or leases the goods and will re-marlret

end-of-life goods or reuse their components as spare parts

within the fleet management

Performance economy: the manufacturer sells the func­

tion of the goods instead of the goods and manages the

stock as a fleet manager in a lake economy. Components

from take-back can now be re-used in the manufacturing of

new goods or as spare parts for repairs.

In all three economies, a mixture of technical and com­

mercial strategies to close the loops opens opportunities for

new solutions with higher resource efficiency (Table 1).

The choice and implementation of the optimal strategy

determines the competitiveness of economic actors.

Table 1 Resource efficiency and business strategies In tbe performance economy (Stahel, 2001)

Resource Efficiency

Reduce the volume of the resource

flow

Reduce the speed of the resource

flow

Implementation of Strategies

Closing material loops

technical strategies

Eco-prodncts

• demJJterialized goods,

• multifunctional goods

Remanufacturing

• long-life goods,

• product-life e:x:tension of_goods and componenrs,

• cascading, cannibalizing

Reduce the volume and the speed of System solutioos

the resource flow • Krauss-Maffei's plane transport system

• engineering systems

Closing liability loops

commercial/marketing strategies

Em-marketing

• shared utilization of goods,

• selling utilization instead of goods

Re-nse and remarketlng

• de-curement services,

• away-grading of goods and components,

• new products from waste

Systemic solutiolls

• lighthouses,

• selling results instead of goods,

• selling services instead of goods

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Sections 3-5 focus on each of the three economic op­

tions separately.

3 A circular economy for physical goods {an economy In loops)

The general characteristics of a circular economy A circular economy consists of a number of concentric

circles which are described in Fig. 6. A circular economy furthermore is ruled by several axioms as follows.

manufacturing utilisation

virgin -t ~ 2 ( '~) -waste resou-rces

Fig. 6 Main loops of a circular economy (Stahel, 1982)

Note: The main loops of a circular economy are: loop I reuse of goods

and components; loop 2 repair of goods and components; loop 3 re­

manufacturing of goods and components with technological upgrading;

loop 4 recycling materials and molecules

Time makes money! A longer service-life reduces

life-cycle costs.

Loops have no beginning and no end! New concepts

such as utilization value need to be developed instead of

value added.

The smaller the loop, the more profitable it is! The ef­

fectiveness of loops is greatly enhanced by keeping them

as small as possible. For durable goods, this means:

do not repair what is not broken, do not remanufacture

something that can be repaired, do not recycle a product

that can be remanufactured.

This "inertia principle" applies to products and compo­

nents: replace or treat only the smallest possible part in

order to maintain the existing economic value.

The common denominators of the four loops are a re­duction in the consumption of virgin

resources at the beginning (left) and a reduction in the production of waste at the end (right).

Loops 1-3 in a circular economy for physical goods: maintain the resource base (materials and embedded en­

ergy), preserve existing wealth in physical assets,

1 0 Chinese Journal of Population, Resources and Environment 2007 Vol. 5 No.4

reduce COTemissions by conserving the energy em­

bedded in materials, integrate pollution prevention by preventing waste cre­

ated in the resource extraction and manufacturing phases

(the backpacks of Material Intensity MIPS),

speed up the market introduction of technological pro­

gress. Loop 4 (material recycling) activities reduce the vol­

umes of extracted virgin resources and of end-of-pipe

waste.

Some of the new business opportunities opened by

loops 1-3 in a circular economy are:

a shift from product design to modular system design,

a shift from product solutions to system solutions,

a reversed logistics organisation profitably integrated

into the supply chain,

reversed manufacturing processes integrated with initial

design and production,

the use of component standardisation as a concept, and of

standardised components as a strategy, to optimise the life­

cycle management of goods.

The standardization of components in manufacturing,

industry and business offers various advantages in a range

of fields:

avoids duplication of efforts,

makes production easier,

reduces production and handling costs,

speeds up time to market of goods,

opens up saturated markets,

improves product information and customer choice,

reduces costs of utilisation, such as training, stock and

spare parts management and lowers the potential for

mistakes in maintenance,

facilitates technological upgrading and repairs and re­

duces its cost,

encourages interoperability.

Depending on the types of goods, the circular economy

offers different opportunities that can be exploited by eco­

nomic actors. Fig. 7 gives an overview of some of the loop

opportunities for products and molecules.

Detailed examples are given in the following paragraphs

for five key types of goods.

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Fig. 7 Processing of raw materials

Note: Circular economy knows a multitude of loops for molecules, the

smallest loop being the one for products

3.1 Circular economy for consumption goods

typical goods: fuel, household (drinking) water, heating

and lighting energy

strategies: waste water treatment plants; C02-sequestra­

tion in refineries and power plants; vehicles with energy

recovery options.

3.2 Circular economy for dissipative goods

typical goods: paint, cement, medicine, energy used in

production processes

strategies: product-life extension of the goods which

contain the dissipative goods (buildings made of bricks or

concrete), re-use of the materials which contain the dissi­

pative goods (cement in prefabricated concrete elements).

3.3 Circular economy for catalytic goods

typical goods: engine oil, solvents, process water, cool­

ing water, nylon

strategies: re-refining oils, solvents, water, de-polymeri­

sation of polymers, such as nylon (Fig. 8).

3.4 Circular economy for mobile durable goods

typical goods: road and rail vehicles, ships, aircraft, small equipment, computers, white goods, tyres, furniture,

Ammonolysis Concept

~ Fig. 8 Loop process to recover PA66 monomer from nylon waste

(de-polymerisation)

clothing, technical modules, such as toner cartridges and

ink modules for printers and copiers, transport packaging,

such as barrels, bags and bottles, ISO shipping containers,

pallets, re-usable transport packaging in reversed logistics.

strategies: re-use, repair and remanufacture in work­

shops.

The circular economy shifts the factor input of the

economy, with increasing product-life (utilisation), the

share of local labour costs increases, while the share of

energy and materials (purchase price) diminishes. Costs for

parts and oil are relatively constant.

3.5 Circular economy for immobile durable goods

An economy in loops is based on the axiom of the

smallest loop: re-use what is not broken, repair minor de­

fects, remanufacture what is broken, recycle what cannot

be remanufactured.

typical goods: infrastructures such as water systems,

roads and railway tracks, industrial plants and their equip­

ment, power stations, buildings and fixed equipment such

as elevators

strategies: re-use, repair and remanufacture on site.

3.6 Circular economy for inevitable end-of-pipe waste

typical goods: municipal and industrial waste water,

Chinese Journal of Population. Resources and· Environment 2007 Vol. 5 No.4 11

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mixed municipal waste

strategies: water recovery, energy recovery, material re­

covery, environmentally safe elimination of non-recov­

erable waste. A circular economy is relevant to achieve a higher sus­

tainability (in economic, ecologic and social terms) of

Chinese production processes as well as to prepare for the

domestic consumer and investment goods market of the

future. However, in markets far away from saturation-and

this will be the case for most Chinese goods for some

time-industrial mass production is, and will remain for

some time, necessary to increase the number of goods available (stock).

Designing goods for a circular economy is relevant for

the competitiveness of Chinese exporters of investment

goods to industrialised countries, as it enables Chinese

manufacturers to follow up with services, such as repair,

remanufacture and technological upgrading, and ultimately

with the possibility of selling performance instead of

goods. For exporters of consumer goods, a circular economy

becomes relevant as a preparation for the time when Chi­

nese manufacturers start operating manufacturing plants abroad (opening the door for reversed manufacturing), or

selling the performance of their goods instead of the goods.

An additional option open to exporters is to sell goods

with a higher sustainability during the utilisation phase of

goods. This strategy can be used to achieve a competitive

advantage that serves as a door opener to enter saturated markets of goods; witness hybrid cars (CNG cars; Toyota

Prius, introduced 1995, best seller 2006 in the USA and

2007 in Europe) and the standardised flight deck "in­

vented" by Airbus.

What are the impacts of a circular economy?

the opportunity of a gradual shift from centralised pro­

duction to providing decentralised services directly to the

customer, a shift from a global to a regional economy, reducing

energy consumption and COz-emissions in transport, a higher economic competitiveness for nations through a

decoupling of wealth creation and resource consumption, an economic exploitation of sufficiency solutions in ad­

dition to efficiency solutions,

12 Chinese Journal of Population, Resources and Environment 2007 Vol. 5 No.4

a substitution of manpower for energy consumption.

4 A lake economy

In a lake economy, economic actors act as fleet manag­ers which operate a stock of goods over long periods of time. A lake economy uses similar strategies to a circular economy but at considerably lower costs (or higher profits) due to the absence of the double transactions costs that are caused in each "loop" in the circular economy.

Furthermore, economic actors preserve their resource base at present cost. In situations of increasing resource prices for energy and material, economic actors of the lake economy can market "goods as good as new" at a lower price than manufacturers of new goods that have to buy raw materials on world markets.

Similar to the circular economy, a lake economy is based on the axiom of the smallest loop: re-use what is not broken, repair minor defects, remanufacture what is broken, and recycle what cannot be remanufactured. The prod­uct-life extension services can be done in-house by the owner-fleet manager of the goods, or bought as services from third parties.

Detailed examples are given in the following paragraphs for five key types of goods.

4.1 Lake economy for consumption goods (fuel, drinking water)

typical activities: water pollution, emissions, strategies: closed loops systems to re-use waste water in

production processes.

4.2 Lake economy for dissipative goods (paint, cement, agrochemicals)

typical activities: repair and remanufacturing, renova­tion of buildings and infrastructures

strategies: product-life extension of the goods in which the dissipative goods are incorporated.

4.3 Lake economy for catalytic goods

typical activities: melting of scrap metals and their re­shaping into new products by independent smelters; on-site re-refi- ning of solvents; de-polymerisation of engineering plastics,

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strategies: copper cables owned by telecom operators; use of long-life (synthetic) engine oil; re-refining of sol­vents; de-polymerisation of plastics.

4.4 Lake economy for durable mobile goods

typical activities: re-treading and re-grooving of truck

tyres; redesign (remanufacturing) of rolling stock of rail­

ways; re-use and remarketing of goods and components;

equipment rentals,

strategies: re-marketing of goods and re-use of compo­

nents as spare parts in repairs after the take-back of goods,

rental strategies for vehicles. c-lothes, expensive hand bags,

photo and video cameras.

Remanufacturing mobile durable goods is a skilled la­

bour intensive process that goes through a number of steps,

which are best done in regional workshops to minimise

transport distances. The remanufacturing process for Xerox

photocopiers is documented in Fig. 9.

Design for re-use and remanufacturing is greatly facilitated

by the following design principles: design for disassembly,

modular design, consistency of fasteners, minimum numbers

of fasteners.

4.5 Lake economy for durable immobile goods

typical activities: in-situ grinding of railway rails; re­

furbishment of buildings; remanufacturing of elevator

components; real estate rentals, strategies: facility management, private finance initia­

tive, apartment rental.

Remanufacturing of immobile goods is again a skilled

labour-intensive process that goes through a similar num­

ber of steps as mobile goods. The difference is that the

work normally has to be done on site, even if some com­

ponents can be dismantled and remanufactured in regional

workshops.

The lake economy with extensive remanufacturing

facilities already exists in China for military equipment and

diesel engines. Caterpillar, the world's leading diesel engine remanufacturer, has just opened a new plant in the

Lin' gang industrial area of Shanghai.

As remanufactured goods are in average 40% cheaper

than new goods of equivalent quality, these activities can

help China to develop new capabilities, which combine

energy savings and waste reduction with lower production

costs.

Fig. 9 Steps of a typical remanufacturing process (source Xerox)

Chinese Journal of Population. Resources and Environment 2007 Vol. 5 No.4 13

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5 A perfonnance economy

A performance economy, this term was "invented" by

Stahel in his book The Performance Economy (Palgrave

London, 2006) that will be available in Chinese translation

in 2007. Many of the diagrams in this text are taken from

this book. A performance economy or functional economy

(Stahel, 1997a) has to reach down to the customer, and that

often means to be present locally. A performance economy

can profitably exploit prevention and sufficiency solutions,

as well as reversed incentives (less resource consumption

means higher profits). In this sense, a performance econ­

omy is similar to the old Chinese village doctors mentioned

before, where a better general health of the population

benefits both the medical doctor and the patients.

Whereas, the industrial economy focuses on the optimi­

sation of the process to manufacture goods up to the point

of sale (POS), the performance economy is focused on the

optimisation of the utilisation of the goods. Selling utilisa­

tion, performance and results instead of selling goods in a

performance economy enables an economic actor to

achieve sustainable profits without an externalisation of the

costs of risk during utilisation and the costs of waste at the

end of a product's life (Fig. 11).

Fig. 10 shows the performance economy as a more so­

phisticated version of the circular economy (Fig. 7, Giarini

and Stahel, 1989).

PRODUCTION and production-supporting serv1ces

centralized strategies

- nowsofgoods -- - tlows of secondary maleria.ls

SERVICES and utilizati.o~-supporting capabil1t1es

---------------~------REGIONALIZED ECONOMY

Fig. 10 A performance (or functional service) economy is opti­mising the utilisation or goods

14 Chinese Journal of Population, Resources and Environment 2007 Vol. 5 No.4

The main strategies of a utilisation-focused performance

economy are: A long-life products and systems, M multifunctional

goods, S (system solutions), V (commercial strategies, such

as selling performance instead of goods, remarketing of

used goods, shared utilisation of goods and using tools to

determine the remaining service-life of goods), B (product

loops), C (component loops).

Additional strategies to optimise utilisation become now

visible and offer profitable business options (such as

long-life goods A, multifunctional goods M, system solu­

tion S). For economic actors, the focus on utilisation means

that the utilisation value becomes the new central notion of

economic value, replacing the exchange value of the indus­

trial economy. In general economic terms, this questions

concepts such as value depreciation over time and supports

the idea of patrimony over dowry as the base of societal

law (Giarini, 1980).

In a sustainability view, the performance economy has a

high ranking because it provides economic actors with

economic incentives for loss and waste prevention. The

highest possible quality of products not only in manufac­

turing but over the full life-cycle of products (see Fig. 11)

thus becomes a profit-making strategy.

Outright sale to consumer and short-term rental by operator

Waste costs/waste liability roducer consumer

co en[rated waste

costs paid by. and liabilities "ith. states

aste costs and liability are internalised cost paid for, and liability borne by. producer-tleet manager

.-----------,

RESULTING IN ECONOMIC INCENTIVES FOR WASTE PREVENTION BY PRODUCER-FLEET MANAGERS

Fig. 11 Economic incentives for loss and waste prevention in the performance economy

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Detailed examples are given in the following paragraphs

for five key types of goods; one of the common denomina­

tors is the long-term management of physical assets.

5.1 Perfonnance economy for consumption goods (fuel, drinking water)

typical activities: selling of heat and cold instead of heating

energy; providing infrastructures to supply drinking water and

waste water collection and treatment to private households,

designing waterless products,

strategies: sufficiency, such as drip irrigation in agriculture,

waterless urinals in toilets, buildings that need a minimum of

non-renewable heating energy, (electronic) goods with no

need for stand-by energy,

systems optimisation: maintenance must become a priority;

in some cities, 50 per cent of the water that is treated and put

into the distribution network is "unaccounted" for; ESCOs

(ESCO, Energy Saving Contracting Organisations); private

finance initiatives; water saving contracting.

5.2 Perfonnance economy for dissipative goods (paint, cement, medicine)

typical activities: repair and remanufacturing, renova­

tion of buildings and infrastructures

strategies: selling painted car parts instead of paint; in­

tegrated crop management; selling the performance of

goods; exploiting product-life extension of the goods in

which the dissipative goods are incorporated.

5.3 Perfonnance economy for catalytic goods

typical activities: guaranteeing/providing the perform­

ance instead of selling the goods,

strategies: selling diagnostic monitoring instead of en­

gine oil (motor diagnostic service (MDS) of Mobil 1 ).

5.4 Perfonnance economy for durable mobile goods

typical activities: design, build and finance, repair, re­

manufacture and technologically update equipment and

goods,

strategies: selling guaranteed results for a fixed price

(PFI, PBL), examples helicopters, turbines and jet engines,

space satellites (PPP).

5.5 Perfonnance economy for durable immobile goods

typical activities: design, build and finance, repair, re­

manufacture and technologically update equipment and

infrastructures, strategies: selling guaranteed results for a fixed price

(PFI, BOO), examples Channel tunnel, viaduct of Millau in

France, Incheon bridge in Seoul, hydroelectricity plants by

JayPee Group in India, airports.

New business models for selling results and perform­ance are advancing in many sectors, concentrating design,

manufacturing, finance, operation and maintenance and the cost of risk in one hand:

Build Own Operate (BOO) Private Finance Initiatives (PFI) Public Private Partnerships (Galileo) (PPP)

Performance Based Logistics (for military projects) (PBL)

Energy Management Services (EMS) Chemical Management Services (CMS)

Facility and Plant Management (FM) Space and Satellite Services (Paradigm) What does the performance economy mean for China?

The performance economy can be a strategy to sell goods, infrastructures and services as a package to other

countries, in accordance with the UN Marrakech agree­ment.

The performance economy is sustainable because less accidents and less waste avoid individual hardship and save

resources, as well as reducing emissions at both the micro­and macro-economic levels. These factors reduce the re­source throughput of the economy.

However, there are key differences between selling a good and selling a performance that need to be taken into account; they are summarized in as follows:

1) Efficiency strategy

Sale of a product (industrial economy):

- The object of the sale is a product; Liability of the seller for the manufacturing quality (de­fects):

- Payment is due for and at the transfer of the property rights ('as is where is' -principle); - Work can be produced centrally/globally (production), products can be stored, re-sold, exchanged;

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- Property rights and liability are transferred to the buyer; Advantages for buyer:

- right to a possible increase in value,

- status value as when buying performance;

Disadvantages for buyer:

- zero flexibility in utilisation,

-own knowledge necessary (driver licence),

- no cost guarantee,

- full risk for operation and disposal;

Marketing strategy = publicity, sponsoring;

Central notion of value: - high short-tenn exchange value;

- at the point of sale.

2)Suf6ciencysua~

Sale of a performance (functional service economy):

- The object of the sale is performance, customer satisfaction is the result;

Liability of the seller for the quality of the performance (usefulness):

- Payment is due pro rata if and when the performance is

delivered ('no fun no money'-principle);

-Work has to be produced in situ (service), around the clock, no storage or exchange possible;

- Property rights and liability remain with the fleet man­ager;

Advantages for the user: - high flexibility in utilisation, - little own knowledge necessary,

- cost guarantee per unit of performance, -zero risk,

- status symbol as when buying product;

Disadvantages for user:

- no right to a possible increase in value; Marketing strategy = customer service;

Central notion of value: - constant utilisation value,

- over long-term utilisation period.

6 Quality Issue

In the lake economy and performance economy, de­signing long-term quality into products becomes a highly profitable strategy.

The performance economy introduces "time" into the existing concept of technical efficiency optimisation, and

16 Chinese Journal of Populllli.oo. Resowces and Environment 2007 Vol. 5 No.4

applied in new business models based on quality defined as achieving the best technical system performance and utili­sation performance, while minimising potential liabilities over longer periods of time (Fig. 12).

loss prevention

waste prevention

Liability Optimization

product-life optimization

-rime

F1g. 11 Quality defined as system optimisation over long periods

of time

The new definition of quality further enables economic

actors of the performance economy to maximise their profit

by exploiting opportunities from the lake economy, such as

long-life maintenance-free components and better use o(

their regional service activities.

In contrast, the industrial economy optimises production

up to the point of sale. Its optimisation concerns mainly the

"efficiency" dimension in Fig. 12. The long-term therefore

has a very limited meaning in the industrial economy.

This also has repercussions on manufacturing. The ideal

quality curve in the lake economy is shown in Fig. 13

(ideal case). All products passing the factory gate (the point

of sale between manufacturing and use) should be as per­

fect as possible in order to avoid breakdowns and problems

arising during use. Quality costs are incurred upfront.

However, this does not mean that the process is slower than

present manufacturing! The increased time input in the

concept and design phase can be more than recovered with

such strategies as small hub innovations, standardised

co~ponents and modular system design. The quality im­pact of the ideal curve can be greatly enhanced by the use

of standardised components with a proven track record.

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+

Ideal Curve

~ System ~ Life

0 Cycle

Actual Curve ~~~--~--~----~~~~~

Fig. 13 Safety and quality efforts during consecutive product-life cycles

In the industrial economy (the actual curve), priority is given to the criteria of shortest time to market, accepting that corrections will be necessary during use (product re­calls, Microsoft's updates), leading to low customer satis­faction-a key issue of competitiveness!

7 lnnO¥BUonlssue

The following is a short overview, as innovation is not the focus of this paper.

7.1 Circular economy

Efficient logistics and process technologies for each of the loops 1-4 will be spontaneously developed and opti­mised by independent economic actors if they have a fi­nancial incentive.

Fresh ideas in the field of re-use and remarketing to turn waste into new products are often coming from outsiders.

WMF, Wiirttembergische Metallwaren-Fabrik, for many years had a policy to take-back its cutlery when clients pur­chased new knives and forks. Over the years, these used goods accumulated with no future, until some design stu­dents were looking for an eye catcher at a major furniture

exhibition. They acquired the used knives and turned them into can

openers-each unique and different. The story turned into a big success, financially and ecologically, and created new jobs.

A similar potential is hidden in many companies; new capabilities will often be developed in-house. Caterpillar started its first plant to remanufacture diesel engines under pressure from a major client in 1972. In the mid 1990s, remanufacturing began to be accepted as a separate busi-

ness area, as the capacity of the original plant in Corinth, MS, reached its limits. By 2005, Caterpillar had two re­manufacturing plants in the USA, one in Great Britain, and had successfully negotiated opening another remanufac­

turing plant near Shanghai.

7.2 Lake economy

Similar success stories are known from GE Medical Systems and further major corporations that are leasing their equipment. GE adapted its Six Sigma tool to integrate the needs of the remanufacturing process into the design of

new equipment. Traditional fleet managers, such as railways, also start to

discover the innovation aspect of service-life extension in a Lake Economy. After 15 years of service, the first genera­tion of German high-speed trains, the ICE1, had done over 15 million kilometres and needed to be replaced or go through a design upgrade combined with a remanufactur­

ing. The German railways took a decision for the unknown -

a complete redesign of the 59 trains. The Redesign pre­serves 80 per cent of the material resources and the energy embedded in the existing trains and prevents 60,000 tonnes of C02-emissions, compared to the purchase of new trains. The cost of the redesign was 3 million EURO per train, compared to a cost of 25 million EURO for each new train. The work was done in one of the railway's own workshops in Nuremberg, which acquired a number of new skills and capabilities in the process that will now be used to redesign other rolling stocks.

7.3 Performance economy

Business models that can profitably exploit the sale of performance including sufficiency and prevention strate­gies have started to spread with increasing speed in a number of investment goods sectors since the mid 1995.

Most jet engine manufacturers have changed their busi­ness model to selling hours of flying. One of them, rolls-royce, had no previous experience in this domain but, after two years, has become a convinced user of the busi­ness model of the performance economy. In 2006, more than 50% of revenues and profits came already from sell­ing performance.

Since 2005, PBL-buying performance-is the pre-

Chinese Journal of Population, Resources and Environment 2007 Vol. 5 No.4 17

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ferred form of procurement by the US Department of De­

fence. In early 2007, the French tyre manufacturer Mich­

elin won the contract to equip all vehicles of the US Army

world-wide with its tyres under a performance based logis­

tics (PBL) contract.

7.4 A more sustainable economy

Dematerialising the industrialised economies (the cham­

pagne glass of Fig. 5) also means to increase the value­

per-weight ratio of goods and corporations. One strategy to

do this is scientific innovation, as was highlighted in the

past by quantum leaps such as the Bessemer process in

steel making, or nanotechnology in digital memory

devices. Another strategy is the business models of the perfor­

mance economy, selling performance instead of selling

goods, and especially sufficiency strategies.

The objective of dematerialising the economy without

"negative growth" is summarised in Fig. 14. Industrialised

countries with markets near saturation will have to change

to the new performance-focused economy to achieve this

objective. However, the change from the present prod­

uct-focused throughput economy will lead to stranded in­

vestments and abandoned technologies. Less industrialised

countries may succeed in leap-froging to a performance

economy, avoiding the issues of stranded capital and

stranded technologies.

$Per ton

10 --Q, ' ' ' ' ' ' ' ' ' ' ' ' ' '

' 0 0 10

Tons

Fig.14 Dematerialising the economy without negative growth

A first successful leap-froging by Chinese industry was visible at the Shanghai Car Show in April 2007. Several Chinese car manufacturers, including Roewe and Cherry,

18 Chinese Journal of Population, Resources and Environment 2007 Vol. 5 No.4

presented their coming hybrid car models, while the Ger­

man manufacturers showed off with their models using big diesel engines, which will become dead ducks once the

environmentally-motivated new EU legislation comes into force, limiting C02-emissions to 120 grams per kilometre.

Selling one ton at 10 $/per ton, instead of 10 tons at I $/ton, has the effect of dematerializing the economy by a factor of ten without a reduction in GDP. This is the chal­lenge for every corporation with a high resource through­put and each industrialized country-if the world wants to strive for equal economic development for all and stay within a sustainable ecologic footprint.

In his book The Performance Economy, Stahel (2006) defined two metrics with the character of decoupling sus­tainability indicators to measure the path towards a dema­terialised economy: value-per-weight ratio ($/kg), and la­bour-per-weight ratio (man-hour/kg).

These metrics can serve to analyse, and follow the de­

velopment, of the dematerialisation of corporations and

nations.

8 Summary and conclusions

This paper has tried to identify and analyse a number of

points, and to show part of the strategic thinking that is

embedded in sustainable development (SD). However, SD

is based on cultural values that differ regionally. Interna­

tional Institute for Management Development (IMD) in

Lausanne has a collection of over 300 definitions of sus­

tainability. Sustainable development should be understood as a dy­

namic concept that includes and fosters science and tech­

nological progress. Sustainable development in combina­

tion with strategic thinking thus opens options to a higher

competitiveness in global markets.

This paper shows that strategic thinking depends on the

phase of industrialisation of the region or country con­

cerned, as well as on the types of goods involved. The in­

dustrial development of a country or region is inevitably

linked with a high consumption of resources, of both mate­rials and energy. A minimisation of negative impacts in the

fields of safety, occupational and general health as well as environment (resource extraction and environmental im­

pairment issues) is of primary importance during this in-

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dustrialisation phase to overcome situations of scarcity.

Design for environment (eco-design) principles can con­

tribute to reducing the negative impact of the manufactur­

ing process and of end-of-life waste.

In the second phase of industrialisation, when the mar­

kets for some industrial items, such as infrastructures,

buildings, equipment and durable consumer goods ap­

proach saturation, strategic thinking should shift to the

sustainable management of these physical assets. An opti­

misation of the utilisation of the goods and of the positive

impacts over the full product-life of these assets should

then take priority. For many goods, a circular economy is

now more efficient than the linear industrial economy.

Quality defined as system optimisation over longer periods

of time becomes a major design criteria; systems innova­

tion instead of product innovation a key factor of competi­

tiveness. A circular economy as part of SD has a positive impact

on the economic, ecologic and social issues of SD.

However, with competitiveness in mind, it is important to

distinguish different degrees of sophistication of the circu­

lar economy, such as an economy in loops, a lake economy

and a performance economy.

A circular economy obeys different rules from the in­

dustrial economy, such as the axiom of the smallest loop

(in transport and product terms). It also has clear priorities

to optimise profits while minimising environmental costs:

reduce wastage (through waste and loss prevention), before

re-use strategies, before remanufacture strategies, before

recycling, before disposal.

Modular system design using standardised components

will speed up manufacturing and enable later adaptations of

goods and systems, such as technological up-grading and

fashion upgrading.

A performance economy is the most efficient form of a

circular economy, selling utilisation and performance in­

stead of goods and directly profiting from dematerialisa­

tion. Innovation leading to a higher sustainability can have its

leads to: scientific and technological progress (the integra­tion of nano- and bio-technologies results in a substantial

dematerialisation of a multitude of manufacturing proc­esses); in engineering (system thinking instead of product

development); and in commercial strategies based on utili-

sation-focused new business models with an overall higher

efficiency in the long-term (such as private finance initia­

tives, public private partnerships).

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