The Next Economy
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Philips on Redesigning for a Circular Economy

At Sustainable Brands ’14 San Diego next week (June 2-5), the circular economy will be a major topic as we search for ways to decouple economic growth from resource consumption.

In 2013, Philips committed to reimagining its products through the lens of a circular economy approach that focuses on customer access over ownership and business models for services and solutions, rather than transactions. The company also became a global partner of the Ellen MacArthur Foundation, a global nonprofit dedicated to advancing the concepts of the circular economy.

I spoke with Nestor Coronado Palma, director of the Circular Economy Program for Philips Healthcare, to learn more.

How does Philips define circular economy?

For a sustainable world, the transition from a linear to a circular economy is a necessary boundary condition. A circular economy requires innovation in the areas of material, component and product reuse, as well as related business models. By using materials more effectively, economic growth can be decoupled from the use of natural resources and ecosystems. In such an economy, the lower use of raw materials allows us to create more value.

Can you explain what’s meant by a boundary condition?

We are limited in resources. Copper won’t be available in nature somewhere around 2040, so that’s a boundary condition. Water also is an issue in regions around the world, and it’s getting worse. Boundary conditions are the scarcity of resources, elements or materials we use in our daily lives or industry processes.

What goals have been set for circular economy initiatives at Philips?

We’ve set three goals:

• To raise awareness about the circular economy opportunities across the organization and through the whole value chain.
• To develop training modules on closed business loops and the building blocks of design, business models, reverse network management and collaboration.
• To implement circular initiatives with a particular focus on performance-based business models.

What is “reverse network management”?

The building blocks of a circular economy — according to the report produced by the Ellen MacArthur Foundation and the McKinsey Group — are design, new business models, collaboration and reverse logistics.

Reverse logistics is the physical movement of goods at the end of use back through repossessing entities of the value chain. “Reverse network management” is even broader. It includes not just physical movement, but also information, residual values and customization. It is the reverse management of stakeholders, information and components of products and services.

Philips also has a goal of “improving the lives” of 3 billion people a year by 2025. How do circular economy ideas help achieve that?

Focusing on access to our services and solutions, rather than traditional selling models, will allow Philips to reach more people. Similarly, ensuring an optimal use of resources and developing product platforms will enable more than one cycle of our services and solutions.

How do product platforms increase the number of viable cycles?

Standardized parts and components among different products within the same platform allow for greater modularity. This in turn allows for interoperability and more efficient repair or refurbishment.

But platforms need to be not just at product level, but also at system levels. When we look at system platforms, we look at where the product will be operating — the whole system around that product.

The aspiration is to create system platforms between products—or technologies, such as X-ray, CT, MR, nuclear medicine and ultrasound. For instance, the tables where patients lie could be standardized across several of these imaging technologies — maybe even between brands.

How far along are you in developing these platforms?

We are working on product platforms that could evolve into system platforms across imaging technologies. We do have plans but we still don’t have concrete examples.

In each imaging technology, we are focused on improving the modularity of components so we can increase the serviceability of the products, which allows us to decrease costs, increase equipment uptime and replace only specific parts when repairs are needed.

With modularity we can better configure, or reconfigure, equipment to fit customer requirements. Also, if we want to look at certain materials in our equipment, we know their specifications and how to reuse them.

What about the business models around these platforms? Is it challenging to bring these to the market?

In our industry we have been mainly selling equipment, and on top, we sell services. The challenge is to sell the functionality, the performance of that asset, instead of selling the asset itself. Even further, if we talk about ecosystems, the challenge is to develop business models and partnerships based on required customer outcomes.

Hospitals are accustomed to thinking they must own the asset to save money in the long term. We need to refocus the conversation on the customer’s requirements and shift to an approach where the best solution depends on the performance and outcome at a system level.

A hospital might not need state-of-the-art equipment to perform routine procedures. If you have a simple broken bone — you don’t need the most expensive X-ray technology to diagnose and define what you are going to do.

So if we move into discussions about this performance-based model and away from talking about asset ownership, the financing becomes simpler.

How is the financing simpler?

It is easier when we talk about financing hundreds of millions of euros. For instance, the deal we won with the Georgia Regents Health System — that deal is for 15 years of services, an agreement worth approximately $300 million USD.

It’s not just selling something and having a one-year guarantee, or a 10-year service contract. It’s a comprehensive arrangement to fulfill the needs of these hospitals with the appropriate technologies and services across 15 years.

This approach also works well on the other end of the financing spectrum, because then it comes down to individuals. An individual — particularly in emerging markets — may not have the ability to invest €100,000 or more in a piece of equipment. Now they have the option to pay just for the usage — ‘pay-per-scan’ we call it. They can set up their own shop to offer the scanning service without the up-front investment.

How are circular economy concepts being applied in Philips’ other two business areas — lighting and consumer lifestyle?

Healthcare has a defined business-driven program where customer service, refurbished systems, parts harvesting and new business models are at the core of the developments.

Consumer lifestyle has started to focus on recycling of plastics and has started to move on exploring other areas like new business models and design.

Lighting is a business that has moved from incandescent to fluorescent to LED technology. LEDs can be produced by anybody, but not the luminaires and systems needed to control them and provide integral solutions to customers. So that’s where it makes sense to move into services and solutions for lighting. For them it is part of the business model.

How and where are you prioritizing your circular economy initiatives in the marketplace?

Consumer lifestyle depends on the perception of the end-users and the infrastructure available in each country. In the Netherlands, for example, there is a recycling center in every community where you need to take your end-of-life items. If you dispose them differently, you could receive a fine. So there is an infrastructure for dealing with consumer devices.

But if you go to other countries, besides maybe Japan, US and Canada — roughly 80 percent of the world — that infrastructure probably won’t be in place. So the infrastructure, the law and the perception of consumers are critical to deciding where to launch initiatives.

When it comes to healthcare, it’s mainly about legal conditions. When we lease a device or service to a hospital and they stop paying, how can we enforce that? Obviously we can’t just go to the hospital and take a machine out. Or if there is insurance on the equipment, who is the insurance covering? Is it covering the hospital, or Philips? It’s complex, and it varies between countries or states. So for healthcare it’s about defining what type of proposition and business models we want to bring to each market.

Scandinavian countries are very much open to these models, but we also have examples in Brazil, North America and Europe. So we will further investigate emerging opportunities in other markets.

Lighting is focused on commercial buildings and outdoor facilities like stadiums, monuments and other public areas that have specific requirements. We can easily move into a circular economy model here, because we will maintain and upgrade the technology as it evolves through the years.