Sharing economy and circular economy as Industry 5.0

Fundamental changes

Digitalization is not the first major change that has revolutionized the global economy. Economic development had already been shaped by four successive stages of development:

Power from water and steam

The first industrial revolution began at the end of the 18th century. The geographically and technologically limited availability of rotational energy from water and wind turbines gave way to steam engines with significantly higher torques. Manufacture became industry, which maximized its geographical orientation according to the availability of fuels and drove significantly larger machines due to the increase in power. It drew masses of unskilled labor away from agriculture and brought about an enormous increase in efficiency.

Assembly line and electricity

The use of the electric motor enabled the decentralization of the drive train (transmission) and thus the orientation of production away from the drive train of the steam engine towards the logic of the product flow. In combination with the invention of the assembly line, the basis was laid for manufacturing products in even less time and in even larger quantities with decreasing labor costs: the beginning of mass production. Much broader sections of the population were now able to buy products from factories, partly because they could be manufactured more cheaply and partly because more people were earning higher incomes.

Automation, computers and electronics

The introduction of electronic controls in industry in the 1970s accelerated the automation of production. Machine processes and controls could be controlled highly efficiently and human intervention reduced to a minimum. Industrial productivity increased dramatically once again.

Digitalization, networks and the Internet of Things (IoT)

The networking of intelligent automation devices and all other systems involved in production has created revolutionary possibilities in the coordination of systems with each other, self-optimization and self-control, and thus the smart factory. Data from the life cycle of the product flows back into development and has a direct influence on current production. Machines share their status with other IT systems, which in turn react to it so that customer requirements can be optimally incorporated into production. This change is ongoing and far from complete. Digitalization is opening up previously unimagined possibilities and making business models possible that were previously inconceivable. Purely digital products are freely available, can be replicated indefinitely without any loss of quality, and are available in unlimited quantities at almost no marginal cost.

Platforms have a special place among the business models made possible by digitalization. Only by combining digital services with physical products can the latter also benefit from complementary and platform effects.

Sharing economy and circular economy

The phases of increased efficiency described above are taking place at ever shorter intervals. Currently, while the changes triggered by digitalization are still in full swing, the next wave is already on the horizon. This is based on the spread of platforms (e.g. ebay, Airbnb or Uber) and is taking our economic system to the next level. Sharing platforms are the starting point for the next efficiency leap, with their sharing economy services:

1. provide access-based (e.g. car or bike sharing) exchange,
2. value-based (no free neighborhood help),
3. based on multi-sided platforms (Airbnb: host or guest, Uber: driver or passenger).

Access-based means that digitalization, through its global networking, suddenly connects people who would otherwise never have met and thus creates access to each other, i.e. connecting their ability to lend something on the one hand and their need for something on the other.

Value-based means that the transfer is designed to create value and, depending on the platform, is billed directly or indirectly via a platform fee.

Platform-based means that complementary and/or platform effects ensure a leap in efficiency that goes far beyond a singular linear individual relationship between lender and renter.

Building on this, the circular economy describes an alternative to the linear model of resource consumption and the associated idea of keeping resources in a cycle, for example through reuse, repair or recycling. It is based on the idea of a sustainable cycle, whereby the path from a linear to a circular economic model can be taken through various business models.

Circular economy service products are one of these options, with the focus on replacing linear pay-and-own models with access-based models. This enables use by multiple consumers and incentivizes longer product lifecycles on the industry side, and thus the fifth efficiency leap in industrial history.

An example from our own work

PROSE advises companies in the mobility sector on technological and business management issues, and currently also on circular economy topics. In a project with companies from the rail industry, it was confronted with the following challenge.

Traction vehicles in the rail industry are designed for a service life of 30 years. The maintenance costs exceed the acquisition costs by a factor of three to ten, depending on the source, and thus keep the book value of the vehicle high. It is not uncommon for technical upgrades to ensure the value of the capital commitment through product life extensions. Worn parts, such as the inter-vehicle cable connections shown here, are either replaced with new cable connections (not sustainable, as valuable raw materials are lost), recovered from decommissioned fleets and used as spare parts (recovery & recycling), or refurbished by suppliers (product as a service, PaaS).

With the PaaS approach, the owner of the traction unit solves the obsolescence issues by ensuring the availability of supplier products over the entire service life of the traction unit and also receives significantly cheaper products because all non-worn parts of the cable connection (e.g. expensive aluminum flanges for mechanical fixation to the car bodies) are recycled as new with minimal effort.

The PaaS approach also offers advantages for the supplier of the cable connections. It reduces its supply chain risks by reusing the aluminum flanges, the procurement of which is severely compromised by pandemics and wars in countries of origin (circular supply chain). In addition, it creates a strategic lock-in with its customer, the owner of the traction unit, as only it can ensure the reconditioning of its products and is contractually guaranteed to do so.

Conclusion and application guide

Many SMEs in Switzerland are not yet fully affected by these new strategic changes. For the most part, they are preoccupied with more pressing operational problems - such as inflation, shortages of skilled workers, supply chain disruptions, etc. Changes are perceived and interpreted in different ways. For some, the main focus is on the dangers, while others recognize opportunities and possibilities. This currently applies in particular to the numerous possibilities offered by digitalization. If we then turn our attention to the sharing economy and the circular economy, we can see a promise that they could fulfill in relation to the more pressing problems of SMEs. Targeted recycling of worn parts, as in the example discussed above, the reuse of available resources that have already been processed into products or the sharing of expensive equipment are just the immediate possibilities that are conceivable for SMEs.

Every company should consider in which areas the sharing economy and circular economy approaches can contribute to solving its more pressing problems. Practical solutions are increasingly available for use, but they often have to be developed first. After all, the task of company management is precisely to shape the future of the company. Cooperation with research institutions, associations, suppliers and other partners can speed up the search for solutions and make it more effective.

(First publication: Unternehmerzeitung No. 3, June 2023)

Authors

Prof. Dr. Andrea L. Sablone, Head of Research Field «Innovation & Strategy», Institute for Management and Innovation

Bernhard Frei, Dr. Business Administration, MSc. Mechatronics, is a lecturer in strategy development, service transformation and digitalization at various universities in Switzerland and Director of Corporate Development at PROSE AG in Bern, the leading European engineering consulting company for mobility.