Circular Economy and the Boundaries of the Firm

Circular Economy and the Boundaries of the Firm

• Associate Professor of Environmental Management and Sustainability Weslynne Ashton
• Adjunct Faculty Andre Nogueira, IIT Institute of Design

Abstract:

Over the last century, firms have arisen as the primary engines of the global, industrialized economy: generating value for owners, employees, customers and society, by developing new products and services to meet evolving consumer needs and demands. While the expansion of scale and scope of activities have enabled firms to benefit from the global reach of the economy, the throughput of resources needed to do so has been linear and exploitative. The circular economy (CE) presents an alternative vision of an economy that operates within the planetary boundaries, cycling finite resources as much as possible, and regenerating capital to restore and elevate the functioning of socio-ecological systems. The CE demands that firms think differently about the resources that they use and how they add value to their stakeholders, society and the planet more broadly. We utilize an expanded conception of “capitals” or resources capable of producing additional resources, and define eight types, natural, financial, manufactured, human, social, political, cultural and digital, that firms draw upon to create value. CE requires that firms redefine their business purpose, operations and value network, and collaborate with a broad community of stakeholders to create value internally for themselves and externally with others. Further, firms that want to participate in CE practices have to engage and mobilize larger numbers of actors and collaborators outside of their core activities and networks to access resources that they cannot own or control. By doing so, they increase their capacity to innovate considering their own resources and capabilities, as well as to deploy and activate resources they neither own nor control. We argue that the blurring of existing firm boundaries and new organizational forms will be a necessary feature for implementing CE as contemporary management theories defining firm boundaries, based on transaction costs and resource-capabilities availability, are limited due to development for linear production processes. We develop a framework that challenges how organizational boundaries are being defined, and present an alternative to actualize CE.

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