Open Innovation for Circular Business Models: Addressing the Right Challenge at the Right Time

ABSTRACT Academic Summary In response to escalating societal challenges, such as climate change and resource constraints, this article examines the transition from linear toward circular business models (CBMs). It explores the challenges of CBM transitions and how to tackle them through open innovation. We leverage 68 interviews with 45 firms, including 12 focal manufacturers and their open innovation partners. We identify 13 challenges and their relevant time horizons. They concern the product and service portfolio, data governance, life cycle valuation, circular strategy, and the legal environment. By iterating our inductive analysis with insights from the literature, we develop a framework that explains the link between open innovation and CBMs. We develop three mechanisms: (1) capture value by coupling internal innovation and data sharing to incentivize life cycle valuation, (2) technology co‐development with supply chain partners for an improved circular product and service portfolio aligned with data governance to create value, and (3) orchestrate complementary partners to promote circular strategies and resources for the legal environment to deliver value. Our framework contributes to the literature on CBMs and open innovation by explaining when and how different forms of open innovation can help in the transition from linear toward CBMs. Practitioner Summary In response to growing environmental pressures, this study explores how firms can transition from linear toward circular business models (CBMs) by leveraging open innovation. Drawing on 68 interviews with 45 firms, including 12 manufacturers and their innovation partners, we identify 13 key challenges grouped into five strategic themes: product and service portfolio, data governance, life cycle valuation, circular strategy, and the legal environment. Our findings emphasize that CBM transition is an iterative process, rather than a one‐time shift, that comes with many challenges. Our study proposes open innovation as a strategic option to address these challenges. Firms need to deploy varied approaches over time: internal innovation and data sharing in the short term to drive circular value capture; supply chain co‐development in the mid term to enhance circular value creation; and the orchestration of complementary partners in the long term to improve value delivery and system‐wide circularity. We offer a practical framework and a temporal innovation roadmap to help managers structure their CBM efforts. This roadmap provides clear guidance on when and how to apply open innovation strategies, enabling decision‐makers to address challenges, align internal and external partners, and transition their linear business models toward circularity.