Circular Economy Adoption is Possible for SMEs Too

Consensus that the economy cannot continue to function based on the endless extraction and consumption of natural resources is mounting. Four months before the end of 2020, human beings had already used up all the resources produced by the planet that year — despite the industrial unemployment resulting from the global pandemic. Resource scarcity caused by this overexploitation threatens the supply of raw materials, creates volatility in their prices, and, in addition, aggravates climate change.

In this context, companies that fail to adopt sustainability strategies may be compromising their income and even their own survival. The concept of circular economy, which proposes an alternative approach to the current linear model based on take-make-dispose, has become increasingly popular over the past few years. This holistic, systemic strategy seeks to redefine economic growth, creating sustainable value in regions and organizations, thereby improving their environmental, social and economic performance. It has, in fact, been proposed as an alternative capable of decoupling economic growth from natural resource consumption. How? By eliminating waste through the restorative and regenerative design of materials, products, systems and business models; keeping products and materials in use; and regenerating natural systems.

However, the widespread recognition of this concept has not gone hand in hand with a comparable deployment, particularly in emerging economies such as Mexico. When talking about circular economies, European countries such as France, the Netherlands or Germany are usually mentioned, success stories that, apart from enjoying the strong support of the European Union, benefit from an environment that is very different from that of Latin America: they are developed economies, with institutions, legislation and solid infrastructures, and permit top-down approaches to the implementation of circular economy principles.

Efforts to transfer the best circular practices from these countries to emerging economies have been contemplated, under the assumption that it is a simple process which can be tropicalized. However, the successful implementation of a circular economy requires a systemic, disruptive change and cannot be carried out without considering each region’s particularities.

To understand the difficulties of circular economy implementation in Mexico, we conducted a study that was recently published in the article “Learning from Failure and Success: The Challenges for Circular Economy Implementation in SMEs in an Emerging Economy” (Sustainability, 2021). Given the economic importance of SMEs in the Mexican context –SMEs represent 52% of the national GDP end employ 68% of the population—, we decided to focus our research on the barriers and enablers these firms face during circular economy implementation.

Importantly, SMEs have two more limitations in these contexts: their size and their limited resources - technologies, capacities, skills, etc. -, curbing the development of a bottom-up innovation strategy.

After studying the case of five SMEs in Mexico, we determined that the lack of regional enabling conditions and the unsuitability between the circular economy business strategy and the context can further exacerbate implementation barriers. However, we found several enablers with which SMEs can leverage circular economy implementation, including:

• Generation of inclusive business models: One of the barriers found is that sustainable or circular products do not tend to be affordable and many users cannot access them. Our results indicate that some companies developed inclusive business models in these regions to address this challenge. They proposed business models based on long-term savings or renting, for example. Regarding rental models, in many Latin American countries, property is culturally linked to status, influencing consumers’ disregard for rental-focused business models, which are more dominant in European regions.
  Notably, the failed SME in our study was a rental model (peer to peer) for various products, whose owner highlighted users’ reluctance towards this type of business model as the main barrier. Nevertheless, it must be considered that rental-based models can vary in terms of their reception —renting bicycles or baby clothes are not the same. This underscores the need to carry out market analyses before launching any business model. Furthermore, we should not only consider consumers, but also include in our value chain vulnerable and/or low-income groups as production partners, in order to improve their income and quality of life, as well as to increase the region’s economic value.
• Generation of value-added business models: How can we combat our customers’ resistance to change or the adoption of new business models? Our study shows that several companies adapted their strategies and business models to improve the way they address customer needs. For example, the companies’ proposals managed to create value for customers through added-value business models, in which users can choose to buy a bicycle rather than a car because it solves their time-efficient mobility problem, while the car only exacerbates it, forcing them to waste a great deal of time in traffic.
• Alliances and collaboration between companies: One of the key factors for functional circular economy models is building partnerships with other companies, NGOs or universities and research centers. Collaboration is vital in order to overcome the aforementioned limitations of SMEs or those inherent to emerging countries. Alliances make it possible to solve specific problems, create complementary strengths and overcome weaknesses. In addition, when working in a context of limited resources, such as emerging economies, this type of model can help overcome the lack of capacities, technology, and resource and/or logistics scarcity.
• Technology leverage: The results also confirm a key barrier that frequently occurs in these contexts, such as irregular or unavailable infrastructure. In this regard, some studies have found that irregularities are typical in developing and emerging countries, including, but not limited to, the water network, electricity, transportation, and roads or waste management infrastructure.
  In our context, we found that financial infrastructure limits the population’s access to financial services such as credit cards or loans. This barrier has repercussions not only on the creation of new SMEs, but also on consumer participation in new business models. One possible solution is to leverage the available technology by using mobile technology to establish a banking system—such as has been seen in other developing or emerging countries.
• Education and non-market strategies: Lobbying can serve to obtain political support for circular economy processes. This enabler must be highlighted, given its importance in configuring appropriate regional conditions. Our findings show that some companies were related to lobbying practices, for example to generate agreements for the regulation of single-use disposable products. In addition, working on consumer education through environmental awareness strategies is also of utmost importance.

The successful implementation of a circular economy requires a systemic, disruptive change and cannot be carried out without considering each region’s particularities. Our study found that the unsuitability between the business model and the operating context can further exacerbate implementation barriers. Our research analyzes the failed case of an SME that was unable to align its business model with the particularities of the market in which it operates. Its failure was also the result of the lack of financial inclusion, a common problem in Mexico.

In contrast, the other four initiatives successfully adopted strategies that incorporate contextual conditions, such as the available infrastructure, current regulations, or consumer characteristics. For example, designing inclusive business models might provide a solution for financial inclusion and ’consumers’ ability to pay. Other observed strategies include collaboration across different actors (e.g., government and universities) and creating alliances, which are critical for circular economy development and implementation.

Our findings offer lessons on both failing and successful circular economy initiatives implemented by SMEs in emerging economies. In this regard, the barriers SMEs face can be overcome by means of affordable prices, consumer market analysis, transparent communication and collaboration. However, this study highlights that circular economy implementation is only possible when a systemic vision exists, i.e., identifying and achieving synergies among key stakeholders and aligning to the region’s conditions.

Considering the abovementioned barriers and enablers, students from the Ph.D. in Administrative Sciences at EGADE Business School, doctoral and undergraduate students from Tecnológico de Monterrey, and a student from the Open and Distance University of Mexico are currently working on a circular economy implementation initiative called ““Recipe for Leftovers””, and are competing together for the WEGE Prize 2021. The semifinalist team in this international competition is creating a platform/application for a food waste exchange network, where restaurants can donate their leftovers and connect with other users or organizations interested in receiving them.

Reference:

Cantú, A., Aguiñaga, E., & Scheel, C. (2021). Learning from Failure and Success: The Challenges for Circular Economy Implementation in SMEs in an Emerging Economy. Sustainability, 13(3), 1529.