Adopting a circular business model improves market equity value

• Published date: 01 September 2018
• DOI: http://doi.org/10.1002/tie.21922
• Author: Anas Aboulamer
• Date: 01 September 2018

COMPANIES IN THE CIRCULAR ECONOMY

Adopting a circular business model improves market equity

value

Anas Aboulamer

School of Business Administration, American

University of Sharjah, Sharjah, United Arab

Emirates

Correspondence

Anas Aboulamer, Visiting Assistant Professor,

Finance, School of Business Administration,

American University of Sharjah, SBA Bldg

R-2153, University City, P.O. Box 26666,

Sharjah, United Arab Emirates.

Email: aaboulamer@aus.edu

The circular economy is set to be the future paradigm in business. Consumer preferences and

demographics changed the way companies design products, market them, and interact with

their customers. In this conceptual article, it is argued that the positive externalities documen-

ted in the circular economy literature (environmental impact, creating of a sustainable econ-

omy) can also be translated into a financial gain for shareholders. This article focuses on only

one aspect of this potential multifaceted financial gain: an improvement in the customer rela-

tionship. The finance–marketing hybrid model of consumer life value is used to explain the

extent of this possible increase in the market equity value of the firm when adopting this new

economic paradigm.

KEYWORDS

circular economy, consumer life value, Millennials, sharing economy, sustainable investment

1|INTRODUCTION

The circular economy is a new way of reinventing the traditional lin-

ear model of take, use, and dispose. Global leaders are considering

the shift from an economy where the misuse of resources and the

creation of waste and pollution is no longer sustainable, into a more

collaborative, efficient, and wise use of the limited resources availa-

ble. Meanwhile, consumers are becoming more astute to sustainabil-

ity and have started demanding that companies be more sustainable.

Lourenço, Branco, Curto, and Eugénio (2012) found that investors

tend to penalize firms for not adopting a corporate sustainability

(CS) strategy. Many companies have seen this trend coming in con-

sumer behavior with the insurgence of the sharing economy, where

companies like Airbnb and Uber are using existing products and shar-

ing their use among customers. From a pure economic perspective,

these companies use resources (empty house space or a parked car)

that are idle and turn them into financial revenue for the owner. The

Pew Research Center estimates that 15% of Americans used a ride-

hailing service and 11% used online housing sharing apps (Smith,

2015). The increase in the use of sharing services improves the effi-

ciency of use of idle resources. Many start-up companies identified

customer needs to use or lease space, time, machinery, or transporta-

tion modes and started to play the role of intermediaries using the

new advancement in technologies.

The concept of ownership changed over the past decade

because of technological advancement and customer attitude toward

ownership. Customers are not interested in owning an asset that

could be used for a limited time; there is a tendency to share its use

with others. Furthermore, the digital revolution provides them with

tools to find others with the willingness to share products with them

(“Peer-to-Peer Rental,”2013).

This change in consumer attitude and the move toward a

product-as-a-service paradigm provides firms with a tremendous

opportunity to gain financially and to shift from a linear to a circular

business model. In a circular business model, firms can design their

products for longer life, and given their resources, they can service

customers better than any other intermediary, hence guaranteeing a

higher level of interaction with customers and eventually retaining

them for a longer time period. There are a multitude of ways that the

circular model increases the market value of shareholders’equity.

However, this article focuses on only one aspect: the market value of

an extended consumer interaction due to the conversion into the cir-

cular economy.

This article is organized as follows. Section 2 discusses the mar-

ket value of firms. Sections 3 and 4 detail the change in consumer

behavior and explain its motivations. Section 5 provides a framework

to evaluate the impact of the circular business model on a firm’s

equity market value. Section 6 concludes the article.

DOI: 10.1002/tie.21922

Thunderbird Int Bus Rev. 2018;60:765–769. wileyonlinelibrary.com/journal/tie © 2017 Wiley Periodicals, Inc. 765