Strategic development of circular economy business in industrial firms

Industrial firms are increasingly seeking ways to develop business that improves their environmental sustainability while maintaining or improving their ability to create value and compete. The circular economy, which suggests that firms can improve both environmental and economic performance by maintaining the value of products and materials in circulation for longer while minimizing the generation of waste, has quickly gained the interest of businesses. To achieve these benefits, industrial firms need to implement circular economy principles by transforming existing or developing new business models. Meanwhile, by influencing what type of operations are valued by customers and supported by policymakers, the circular economy is also changing the environment in which industrial firms conduct business. Thus, the development of circular economy-aligned business that creates value is a strategic consideration for industrial firms.

This thesis aims to identify ways for industrial firms to strategically develop business that creates value in the market change surrounding the circular economy phenomenon. The extant literature on strategy has identified the potential of improving business sustainability for value creation but has lacked implementation methods for industrial firms towards this goal. Simultaneously, the extant literature on the circular economy has adopted strategic concepts such as the business model to explain how firms could adopt circular economy in their business. However, this research has focused on how to technically enable maintaining resource and product value through a business model, rather than on the ability of the business models to create economic value. Furthermore, the connection to the changing environment of businesses, important for making strategic decisions about adopting circular economy in industrial firms, has been lacking in circular economy research.

The present research focuses on this strategic perspective of value creation through circular economy. Circular economy can influence regulations and norms of what is valued from businesses; thus, the perspective of institutional theory about institutions that guide social behavior, and thus the ability of firms to create value, is adopted to understand the connection of circular economy implementations to the environment of industrial firms. The research was conducted as a literature review and three multiple-case studies using primarily document-based data about business models and customer value propositions of industrial firms with circular economy implementations. The findings indicate that recycling is currently the most institutionally legitimate way to implement circular economy and the dominant way for industrial firms to capture value from the circular economy. However, the legitimacy of reusing and reducing is increasing comparatively, motivating industrial firms to focus on these implementations going forward. Within industrial firms’ business models, four distinct value creation logics—resurrect, share, optimize, and replace value—were identified, each with key internal considerations for value creation. With regards to the institutional environment, institutional work towards improving the legitimacy of the business and thus value creation was identified in the customer value propositions of circular economy business models, with the approach to institutional work depending on the legitimacy of the underlying implementation. Thus, the findings imply that to develop business that creates value from circular economy, industrial firms need to identify a suitable value creation logic, identify the legitimacy of the developing business, and conduct institutional work to improve legitimacy to enable improved value creation.

The research contributes to strategy, circular economy, and institutional theory literature and has further practical implications. In terms of strategy literature, the research highlights the institutional environment's role in value creation, contributing to the emerging literature on institutional work to improve value creation. With regard to circular economy literature, the research identifies economic value creation aspects of circular economy business models by developing four central value creation logics. Also, it shows misalignment in the current institutional legitimacy of circular economy principles and their ability to improve environmental sustainability. For the institutional theory field, the research highlights that institutional work is not only separate actions towards the institutional environment but also embedded into a firm's business model. For managers, this research provides guidance for implementing circular economy aligned business by developing value creation logics to embrace based on the firm's existing strengths and highlighting the importance of institutional work for value creation in a changing institutional environment.