The circular economy is promoted as a contributor to sustainable development; however, the process of circular business model innovation remains under‐explored to date, hindering its implementation. Dynamic capabilities research provides a theoretical perspective to explore how incumbent firms can innovate in rapidly changing environments. An abductive qualitative research is done through an exploratory multiple case study on 10 incumbents that implemented a circular business model innovation. We identify 26 practices, aggregated in 12 micro‐foundations of the dynamic capabilities of sensing, seizing, and reconfiguring. By integrating the few empirical studies characterizing dynamic capabilities for sustainability‐oriented business model innovation, we offer a comprehensive framework of 33 practices. This study proposes that the most relevant practices for circular business model innovation processes are adopting a lifecycle perspective, employing sustainability‐oriented instruments, ideating sustainable value propositions, developing a sustainability strategy and culture, and engaging and coordinating stakeholders in the business ecosystem. We also suggest seven particularly relevant practices for long‐term business model transformations (e.g., top management commitment), four for innovations focused on short and medium loops of the circular economy (e.g., early customer engagement), and four for long loops (e.g., business ecosystem coordination). This study corroborates and expands recent research on dynamic capabilities for sustainability‐oriented innovation and provides practitioners with a set of 33 skills, processes, procedures, and activities to be prioritized to successfully innovate their business models for the circular economy.

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The circular economy concept is gaining traction in academia, industry and policymaking as a strategy to reduce resource depletion, waste and emissions. Many authors see business model innovation as a critical lever for the concept's implementation on the organisational level. Despite the importance of the topic, the drivers and barriers to different types of circular business model innovation remain unclear. We address this gap by comparing drivers and barriers for four generic circular business model innovation types: start‐up, diversification, transformation and acquisition. Relying on a structured comparative literature review using cross‐reference searches, we develop a theoretical framework of drivers and barriers that we apply to a multi‐case study of 21 organisations covering three of the four types, with some additional insights on the fourth. We identify 25 barriers and 10 drivers, clustered into seven categories, and outline how they distinctively affect the innovation types. Start‐ups and diversifications are more commonly driven by market and financial factors, while transformations are led by market and organisational factors. These three types are highly affected by legal and financial barriers; however, while start‐ups are more prone to face value chain challenges, incumbents are more susceptible to market and organisational barriers. Our study provides novel empirical data that validate and complement previous research and offers an additional analysis perspective in the transition towards a more sustainable and circular economy.