CompanyIntroduction to Circular Business Models
The circular economy can be defined as an economic system that aims to help remove wastefulness, increase the lifespan of the product and renew natural systems by circulating materials continuously (Ellen MacArthur Foundation, 2020). The growing environmental demands, depletion of resources and rise in regulatory demands have escalated the requirement of organisations to shift from the traditional linear models to circular business approaches. Nevertheless, in spite of the identified economic and sustainability advantages, firms have significant difficulties in adopting circular business models. This essay discusses two key barriers: the first is the high financial and investment cost of redesigning processes of production processes and integrating new technologies, and the second is the complexity of supply-chain collaboration to facilitate the use of reverse logistics and material recovery systems. Practical managerial solutions such as circular financing methods and digital traceability tools will also be evaluated within the essay as the argument that strategic innovation and cross-sector partnerships are key to an effective change in the circle.
Challenge 1: Financial and Investment Barriers
The high cost of redesigning products, restructuring production systems, and adapting to new technology is one of the greatest challenges that organisations face when adopting circular business models. Circular models often compel organisations to invest in resource-efficient processes, refurbishment facilities, product take-back systems, and digital tracking technologies. Such transformations require significant capital investment, and financial rewards can happen only in the long term, so the adoption of circular systems seems rather more costly economically than linear systems that are more focused on speed and short-term profitability (OECD, 2024). The cost barrier is enhanced by inaccessibility to finance and the inability to prove quantifiable returns in many firms, especially in SMEs. It is proposed that uncertainty about return on investment and lack of successful benchmarks turn off investors to financing circular initiatives, which leads to insufficient funding of innovative solutions (Lupu and Allegro, 2024).
Circularity also needs systemic organisational transformation, influencing the design of products and the supply and labour structure, which cost more than initially estimated (UN Environment Programme, 2024). SMEs experience the greatest difficulties due to a lack of economies of scale and the ability to withstand the failure of an experiment. Financial support is also a risk of increasing the implementation gap, which will leave smaller firms in an economically disadvantaged position. Inability to deal with financial restrictions decelerates the evolution of the industry and entrenches the reliance on linear models that put a greater emphasis on low-cost extraction and disposal instead of long-term value creation. Financial obstacles are thus also a decisive factor in circular implementation and need to be resolved by specific financing systems and aligned investment frameworks.
Managerial Solution 1: Circular Funding Mechanisms and Innovation-Driven Investment
Financial constraints can be addressed by managers using specialised financing methods such as access to circular investment funds, sustainability-linked financing mechanisms, and joint public-private partnerships. New types of green and circular bonds, and specific sustainability investment funds, offer structured capital to develop long-term and minimise perceived risk by sharing responsibility and securing finances through policies (Ellen MacArthur Foundation, 2021). Restructuring business cases to focus on life-cycle economic value and not short-term profitability can enhance investor confidence and indicate long-term savings through resource efficiency and waste elimination.
Circular innovation funding has, in practice, worked. IKEA developed a global circular innovation programme to fund material recovery and reuse solutions, and thus the organisation can cut resource dependency and increase profitability due to economies of scale (IKEA, 2024). These methods show that strategic funding opens experimentation, enables the design transformation, and accelerates sustainable growth. The managers can use circular financial measurement and team investing to convert the capital barriers into competitive economic advantage opportunities.
Challenge 2: Supply-Chain Complexity and Reverse-Logistics Barriers
The second significant issue with implementing circular business models is the complexity of the supply chain, specifically the necessity to interact with numerous stakeholders and the technical demands of the reverse-logistics system. Circularity demands the continuous flow of materials around, i.e., companies have to gather, reuse, recycle, and remake products once used by consumers. The current supply chains are built along linear forward distribution, as opposed to multidirectional movement, rendering the infrastructure transformation operationally complex and expensive. Studies show that the adoption of reverse logistics is negatively affected by the lack of information exchange, lack of stakeholder commitment, and the even distribution of responsibilities among supply partners (Quintana et al., 2024).
Circular models rely on digital traceability systems, either RFID, IoT sensors or blockchain, to offer real-time product and material tracking. The technological capacity and data management capacity needed to support such systems are not available to many organisations, especially in developing markets or resource-constrained sectors. Mistrust and a sense of inequity also cause collaboration problems. Suppliers can be unwilling to participate as they see more work with no immediate payoff, and manufacturers find it difficult to forecast the volumes of returns and material quality, and thus production requires scheduling and planning (Lilja, 2025). These barriers are complicated by industry-specific factors, such as the inability to create large-scale collection and refurbishment facilities in the fashion and electronics industries, owing to the globalised distribution network and fluctuating returns based on product condition. The absence of coordinated supply-chain transformation limits circular progress since the inability to establish reverse loops makes firms unable to obtain material-recovery efficiency and diminishes the economic value of circular projects.
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Managerial Solution 2: Collaborative Supply Chains and Digital Traceability Systems
Managers need to focus on collaborative relationships, visibility systems, and the adoption of digital tracking systems to overcome the challenges of supply chain and reverse logistics. Long-term multi-stakeholder contracts can also facilitate shared responsibility and enhance information exchange and operational goals, which revolve around material recovery. Electronic systems like blockchain and RFID tracking enable the use of data to make decisions and improve quality control since they allow tracing the product life cycles (Brandín and Abrishami, 2021).
Evidence-based practice proves successful. Philips launched product-as-a-service leasing in the medical equipment business by keeping the devices under ownership as a way of guaranteeing reuse and refurbishment (Kasvosve, 2025). This enhances efficiency in recovery and creates recurrent service-based revenue streams. Specialist logistics partners would be mutually agreed upon using reverse-logistics contracts that facilitate managed collection and refurbishment processes. Through digital traceability and collaborative systems, managers can convert the complexity of operations into strategic value and catalyse the scalable circular change.
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Conclusion
Circular business models are necessary to deal with the environmental pressures, resource exploitation, and the increasing sustainability demands. Organisations continue to face considerable obstacles in becoming circular, even though it has apparent long-term economic and ecological benefits. The essay highlights that one of the biggest bottlenecks, in particular in SMEs, is financial and investment bottlenecks due to the high start-up cost and the fact that it is not guaranteed that investing will be recouped. A limitation of the practical implementation of the proposed circular systems is the supply-chain complexity and the operational needs of the reverse logistics, especially in the first place. The solutions considered highlight how circular financing systems, joint ventures, and digital traceability systems can assist firms to overcome these issues. Circular transformation requires a strategic approach to succeed, innovative and multi-stakeholder action to scale, and the development of sustainable industrial resilience.
REFERENCES
- Brandín, R. and Abrishami, S. (2021). Information Traceability Platforms for Asset Data lifecycle: blockchain-based Technologies. Smart and Sustainable Built Environment, ahead-of-print(ahead-of-print). doi:https://doi.org/10.1108/sasbe-03-2021-0042.
- Ellen MacArthur Foundation (2020). Financing the Circular Economy Capturing the Opportunity. [online] Available at: https://content.ellenmacarthurfoundation.org/m/40e9896bc9131b6b/original/Financing-the-circular-economy-Capturing-the-opportunity.pdf.
- Ellen MacArthur Foundation (2021). Completing the picture: How the Circular Economy Tackles Climate Change. [online] www.ellenmacarthurfoundation.org. Available at: https://www.ellenmacarthurfoundation.org/completing-the-picture [Accessed 19 Nov. 2025].
- IKEA (2024). IKEA Sustainability Report FY24. [online] Available at: https://www.ikea.com/global/en/images/IKEA_Sustainability_Report_FY_24_2025_02_06_0aaa025249.pdf [Accessed 20 Nov. 2025].
- Kasvosve, N. (2025). Innovation Spotlight: How a Circular Economy Is Driving Sustainable Healthcare. [online] Philips. Available at: https://www.philips.com/a-w/about/news/archive/features/2025/innovation-spotlight-how-a-circular-economy-is-driving-sustainable-healthcare.html.
- Lilja, M. (2025). Improving Cooperation between Supply Management and Internal Suppliers in Complex Projects: a Case Study. Lutpub.lut.fi. [online] doi:https://lutpub.lut.fi/handle/10024/170190.
- Lupu, A. and Allegro, I. (2024). Circular Financing Mechanisms for Adaptive Reuse of Cultural Heritage. pp.523-544. doi:https://doi.org/10.1007/978-3-031-67628-4_20.
- OECD (2024). Financing SMEs and Entrepreneurs 2024. [online] OECD. Available at: https://www.oecd.org/en/publications/2024/03/financing-smes-and-entrepreneurs-2024_015c0c26.html.
- Quintana, R.A., Donoso, M.R., Quintana, C.A. and José, F. (2024). Barriers to Reverse Logistics and the Circular Economy in Supply Chain Arrangements: a Qualitative Study in Ecuador. Revista Galega De Economía, pp.1-18. doi:https://doi.org/10.15304/rge.33.2.9228.
- UN Environment Programme (2024). UNEP Annual Report for 2023. [online] UNEP Annual Report. Available at: https://www.unep.org/annualreport/2023 [Accessed 19 Nov. 2025].
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