Implementing the circular economy (CE) through the design of a restorative industrial system is a major challenge. This study investigates the capabilities that underpin the circular competitive advantages of firms in the textile and clothing industry in Italy, which is one of the country's most polluting sectors. We have developed a framework of dynamic capabilities needed for circular transition, using the theoretical lenses of a natural‐resource‐based view. Using a multiple‐case study, the strategies of pollution prevention, product stewardship, and sustainable development and the associated capabilities of sensing, seizing, and reconfiguring are investigated. Internal practices, the role of the downstream actors in the supply chain, co‐creation dynamics with external actors, and the social potential of the CE emerge as key factors. Managers may also benefit from our recommendations aimed at increasing the environmental performance of their firms and scaling up their born‐circular businesses.

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