Dynamic Capabilities and their Microfoundations in the Growth of Born Circular Firms : A case study of Finnish born circular firms

Abstract

In view of the global environmental and climate challenges facing our society, a linear economic system is no longer sustainable. New resources are constantly being used for products, and their production, use, and disposal generate tons of waste. The alternative is a circular economy in which renewable raw materials are used and resources are used efficiently, with the aim of achieving a closed material cycle. Companies have a particularly important role to play in the transition to a circular economy by developing processes, products, and technologies that are based on the principles of avoiding waste and pollution and reusing materials for as long as possible. Despite a growing interest in the circular economy, researchers have mainly focused on companies that are transitioning from a linear to a circular business model. Companies that have been founded on the principles of the circular economy from the outset, so-called born circular companies, have been largely ignored. One branch of literature follows theories of business growth, demonstrating that the implementation of circular principles can lead to cost reductions, access to new target groups, and a greater competitive advantage. Other studies are based on theories of dynamic capabilities, claiming that companies need to develop certain capabilities to sense opportunities in the circular economy, seize them, and constantly reconfigure their resources. In order to close the gap on dynamic capabilities in the business growth of born circular firms, this study examines the following main research question: “What are the key dynamic capabilities that enable Finnish born circular firms to achieve business growth?”. To answer this question, qualitative case studies were conducted with Finnish born circular companies. In seven semi-structured interviews with company representatives, the growth path of the respective organization was discussed, using similar guiding questions in each of the interviews. Subsequently, all interview transcripts were organized into themes to conduct data analysis. This data analysis revealed the dynamic capabilities that helped the interviewed companies to grow their business. In addition, the microfoundations, referring to the internal actions and mechanisms that form the basis for the development of dynamic capabilities, were examined. The findings of this study reveal specific dynamic capabilities that can be categorized as sensing threats and opportunities, seizing opportunities, and constantly reconfiguring resources. In addition, the results provide detailed insights into the microfoundations underlying these dynamic capabilities. Sensing capabilities include “market monitoring and external sensitivity”, “customer analytics”, and “regulatory intelligence”. Born circular companies must recognize changes in their environment at an early stage, understand the demands of their customers, and stay informed about the legal framework in which they operate. Seizing capabilities include “financial resource acquisition”, “talent acquisition and development”, “strategic alliance building”, and “brand management”. Born circular companies need to secure a financial base, employ the right staff, collaborate with other stakeholders, and present their company and its products or services credibly. Reconfiguring capabilities were found to include “organizational flexibility”, “agile resource allocation”, and “leadership and change management”. This means that born circular companies must constantly be able to adapt to new conditions, reallocate their limited resources accordingly, and apply a leadership style that can build trust to effectively communicate the necessary change. Consequently, this study provides new insights into born circular companies and thus expands the knowledge of circular entrepreneurship. By combining theories of business growth and dynamic capabilities for the theoretical framework, it was demonstrated that these theories complement each other and provide an important approach to understanding the growth of born circular firms. Furthermore, managers of circular economy firms are provided with recommendations on which factors can be crucial for their business growth and how they can develop the necessary dynamic capabilities. At the same time, research limitations were unavoidable. These can be found in the narrow sample of seven cases from Finland, the fact that all of the interview participants are in leadership positions, and the application of theories on dynamic capabilities and business growth to establish a theoretical framework. Hence, future research is needed to study a larger amount of case firms, produce quantitative findings, and validate the applicability of theories on dynamic capabilities and business growth to study born circular companies.