Italian Textile Firms Build Circular Economy Capabilities

A Very Old Industry Learns a New Trick

The wool comes from sheep in New Zealand. The cashmere arrives from Mongolia. The silk, if you want the good stuff, still comes from Lake Como. And then, in the small factories scattered across Prato, Biella, and Carpi, something strange happens to it. The scraps that fall to the floor, the fibers too short to weave, the bolts of fabric that didn't quite match the Pantone swatch: none of it is supposed to go to waste.

For most of the 20th century, Italian textile firms treated waste the way everyone else did. They shipped it somewhere. They burned it. They buried it. But a small number of firms in Italy's textile and clothing industry are now doing something different. They are treating waste not as a disposal problem but as a redesign problem. And according to a new study by Carla Coppola, Agostino Vollero, and Alfonso Siano (Coppola et al., 2023), the firms that succeed at this do not just buy better recycling machines. They build entirely new capabilities: the ability to sense which materials can be recovered, the ability to seize new business models built on circularity, and the ability to reconfigure their entire supply chains around materials that were never designed to be reused.

The paper, published in Business Strategy and the Environment, is based on case studies of eight Italian textile firms. It is one of the first serious attempts to understand what actually makes a company capable of circularity, rather than just talking about it. And what it finds is not about technology at all. It is about power, relationships, and the uncomfortable fact that circularity often requires a firm to share control of its own supply chain.

The Problem with Circularity Is Not the Recycling

We should be honest about what the textile industry does to the planet. The fashion industry produces roughly 10 percent of global carbon emissions. It consumes enough water to fill 32 million Olympic swimming pools every year. And it generates 92 million tons of textile waste annually, most of which ends up in landfills or is incinerated. The industry is, by any measure, a catastrophe.

The standard answer to this problem is "circular economy." The idea is simple: instead of taking resources, making products, and throwing them away, you design products that can be repaired, reused, and eventually broken down into raw materials that become new products. Nothing is wasted. Everything is a nutrient for the next cycle.

But here is the problem that Coppola and her colleagues identify: circular economy is not just a technical problem. It is a capability problem. A firm that wants to be circular cannot just install a new machine or sign a recycling contract. It has to learn how to see the world differently. It has to develop what the authors call "dynamic capabilities" for circularity.

The authors draw on something called the natural resource based view of the firm, a theory that says a company's long term competitive advantage depends on how well it manages its relationship with the natural environment. The theory has three strategic layers: pollution prevention (stop making waste), product stewardship (design products that can be recovered), and sustainable development (grow the business in a way that regenerates natural systems). Each layer requires different capabilities.

Coppola et al. (2023) studied eight Italian textile and clothing firms, ranging from small family owned businesses to larger companies with international supply chains. They conducted interviews with founders, CEOs, sustainability managers, and production directors. They toured factories. They analyzed documents. And they looked for patterns in how these firms had managed to build circular business models.

What they found is that the firms that succeed do not just do one thing well. They do three things, in sequence, and each one is harder than the last.

Sensing: The Art of Seeing What Nobody Else Sees

The first capability is sensing: the ability to identify and interpret opportunities for circularity before they become obvious.

This sounds abstract, but it is deeply practical. Take the case of one firm in the study, a wool recycler in Prato. For decades, this firm had been taking post industrial textile waste from other factories, shredding it, and turning it back into fiber. That is not new. The wool recycling industry in Prato dates back to the 12th century. What is new is that this firm started sensing opportunities that its competitors missed.

The firm's managers noticed that many of their customers were throwing away not just fabric scraps but also finished garments that had failed quality control. These garments were perfectly good material, but they were contaminated with buttons, zippers, and labels. Most recyclers would not touch them. It was too much work to separate the components. But this firm invested in a system to remove those components by hand, then shred the fabric, and then sell the reclaimed fiber at a premium to luxury brands that wanted to advertise their use of recycled materials.

That is sensing. The firm saw value where others saw only cost.

Coppola et al. (2023) found that sensing capability in these firms often depended on what they call "boundary spanning." The firms that were good at sensing did not just look inside their own factories. They looked at what their suppliers were doing. They looked at what their customers were throwing away. They looked at what regulations were coming down the pipeline. And they looked at what their competitors were not doing.

One firm in the study, a manufacturer of technical textiles, developed a sensing capability by hiring a materials scientist whose sole job was to track innovations in biodegradable polymers. The scientist attended conferences, read academic journals, and built a network of researchers at universities in Milan and Bologna. When a new biodegradable fiber came out of a lab, the firm knew about it within weeks. That gave them a head start on developing products that could be composted at the end of their life.

The authors note that sensing capability is not just about having information. It is about interpreting that information in the context of the firm's own capabilities. A firm that sees an opportunity but does not have the production capacity or the supply chain relationships to act on it has not really sensed anything useful.

Seizing: The Hard Work of Actually Doing It

The second capability is seizing: the ability to act on the opportunities that sensing reveals.

This is where most circular economy initiatives fail. It is one thing to realize that you could recycle your waste into new fiber. It is another thing to actually build the system that does it. Seizing requires investment, organizational change, and often a complete rethinking of how the firm makes money.

Consider the case of a denim manufacturer in the study. The firm sensed an opportunity: denim waste is mostly cotton, and cotton can be recycled into new yarn. But the firm quickly discovered that the recycling process was not straightforward. The indigo dye that gives denim its color contaminates the recycled fiber. The cotton fibers are shorter after recycling, which makes them harder to spin. And the recycling process itself requires water and energy, which creates its own environmental footprint.

The firm had to seize the opportunity by investing in new technology: a mechanical recycling system that could separate the indigo from the cotton fibers. They also had to reconfigure their production line to accommodate the shorter fibers, which meant adjusting their spinning parameters and accepting a slightly different fabric texture. And they had to convince their customers, mostly fashion brands, that denim made from recycled fibers was not lower quality.

Coppola et al. (2023) found that seizing capability often required what they call "co creation" with external actors. The denim manufacturer did not develop the recycling technology alone. They partnered with a machinery manufacturer in Germany that specialized in fiber separation. They worked with a chemical company in Switzerland to develop a new dye that was easier to remove. And they collaborated with a fashion brand that was willing to test the recycled denim in a limited product line.

The authors also found that seizing capability depends on the firm's position in the supply chain. Firms that are closer to the end consumer, like brands and retailers, have an easier time seizing circular opportunities because they can directly communicate with customers about the value of recycled materials. Firms that are upstream, like textile manufacturers, have a harder time because they depend on brands to demand circular products. One manufacturer in the study told the researchers: "We can make the most sustainable fabric in the world, but if the brands do not buy it, we have to sell it as conventional."

Reconfiguring: The Painful Part

The third capability is reconfiguring: the ability to transform the firm's existing resources, processes, and relationships to support circularity over the long term.

This is the hardest capability to build. It requires letting go of old ways of doing things. It requires changing relationships with suppliers and customers. And it often requires the firm to accept that it will make less money in the short term.

Coppola et al. (2023) found that reconfiguring capability was most visible in firms that had moved beyond pollution prevention (just reducing waste) into product stewardship (designing products for circularity). These firms did not just recycle their waste. They redesigned their products so that the waste never happened in the first place.

One firm in the study, a manufacturer of luxury knitwear, completely redesigned its production process to eliminate cutting waste. Instead of cutting sweater pieces from a roll of fabric, which inevitably produces scraps, the firm invested in "whole garment" knitting machines that knit the sweater in one piece. The machine knits the body, the sleeves, and the collar simultaneously, with no cutting and no waste. The firm also redesigned its yarns to use a single fiber type, instead of blending different fibers, because blended fibers are nearly impossible to recycle.

That kind of reconfiguration is expensive. The whole garment knitting machines cost three times as much as conventional machines. The single fiber yarns are more expensive. And the firm had to retrain its entire production staff. But the firm's CEO told the researchers that the investment paid off because it allowed the firm to sell its products at a premium to environmentally conscious luxury brands.

The authors also found that reconfiguring capability often requires the firm to change its relationships with suppliers. A firm that wants to use recycled fibers needs suppliers who can provide those fibers consistently. A firm that wants to eliminate toxic dyes needs suppliers who offer alternatives. And a firm that wants to take back its products at the end of their life needs a reverse logistics system that most suppliers do not have.

One firm in the study, a manufacturer of workwear, solved this problem by vertically integrating. They acquired their own recycling facility and their own fiber spinning mill. That gave them control over the entire supply chain, from waste collection to finished fabric. But that kind of integration is not possible for most firms, which lack the capital and the management capacity.

What the Research Does Not Prove

The study is rigorous, but it has limits. The authors studied only eight firms, all in Italy, and all in the textile and clothing industry. The firms were not chosen randomly. They were selected because they had already demonstrated some level of circularity. That means the study cannot tell us how many firms in the industry are actually building these capabilities, or whether the capabilities are transferable to other industries or countries.

The study also does not prove that building these capabilities leads to better financial performance. The authors found that circular firms can charge premium prices, but they did not measure profitability directly. It is possible that the costs of circularity outweigh the revenue benefits, especially for smaller firms.

And the study does not address the most uncomfortable question about circularity: whether it actually reduces total resource consumption. A firm that recycles its waste is still producing waste in the first place. A firm that uses recycled fibers is still using energy and water to process those fibers. The authors acknowledge that circularity is not a panacea. It is a strategy that can reduce environmental impact, but it cannot eliminate it entirely.

What This Actually Means

• ▸Circularity is not a technology problem. It is a management problem. The firms that succeed at circularity do not just buy better machines. They build the ability to see opportunities, act on them, and transform their organizations. That requires investment in people, not just equipment.

• ▸Supply chain relationships matter more than recycling rates. The firms that built circular capabilities did not do it alone. They partnered with suppliers, customers, and even competitors. Circularity requires sharing information and control, which many firms are not comfortable doing.

• ▸The hardest part is changing what you already do. Pollution prevention is relatively easy. Product stewardship is harder. Sustainable development is hardest of all. Most firms will never get past the first stage because they are unwilling to reconfigure their existing operations.

• ▸Being upstream in the supply chain is a disadvantage. Textile manufacturers have less power to drive circularity than brands and retailers. If you are a manufacturer who wants to be circular, you need to either partner with a brand that demands it, or find a way to sell directly to consumers.

• ▸The research does not tell you whether circularity is profitable. It tells you that some firms have made it work. Whether it works for your firm depends on your market, your supply chain, and your willingness to invest in capabilities that take years to build.