I wrote yesterday about business model clones and thought that it was worth expanding on the concept. In normal business, if we make an undifferentiated product, one that is like all the other products, it’s effectively a clone. Identical indistinguishable products.
Cloned Products
Here are a few that I have bought over the last few days – non-branded TENS machines, an electric scooter, and an iPhone to TV HDMI cable. All clones. For most entrepreneurs it is pretty clear that sell a product that is identical to the competition is a tough play.
You have to compete on price. Marketing (as I have learned to my cost) can only get you so far. Profitability comes from cutting your production and distribution costs down so that you can sell at the lowest price.
Cloned Business Models
Business model cloning is similar.
It happens in a couple of ways. One obvious and preventable. The other is far more insidious.
The obvious one is when an entrepreneur sees a successful startup in a different country or field. She thinks, “Wow, Great!” and then clones the idea, coming up with gems like “Uber for X” or the “Airbnb for Y”.
I’m not going to say much more about this other than point out that the clonal success rate is very very low. Worse than normal. That’s normally because an idea has been grafted onto a new industry with little thought of how it will work.
Business Model Clones in Mature Markets
The second one is when markets mature.
Here’s a sketch of the typical business model lifecycle. What I haven’t shown on this graph is the diversity of business models. Typically in the introduction phase there are a very large number of business models. Entrepreneurs try lots of different approaches as they try and figure out what works.
As they get into the growth phase most of the ‘out there’ models have gone bankrupt or been acquired. There are fewer business models. Then as the market mature and scale and efficiency becomes ever more important the number of business models declines still further.
Reduction in the Number of Viable Business Models
In a lot of mature industries, the number of viable business models has been reduced to a very small number. Let’s give a few examples. In fast food, you either have to be a larger chain (usually franchised) or a family business using cheap labour. In steel and chip making you have to have exceptionally large and well-capitalised plants or be a secondary producer – melting down scrap to keep costs low. In beer, you need to own huge breweries – or be a micro craft beer producer. In two of those three cases, the alternatives have arisen from business model innovation. Bland beer and expensive steel have driven innovation to increase diversity.
Looking at the UK now that I have come back after many years – lawyers, doctors, petrol stations, shopping centres, high street shops. Most players in the industry have similar or identical business models. They sit at the top of the maturity curve, having figured out that their current models are the best at maximising revenue or profits.
Low Resistance to Infection
The problem with a lack of diversity is that there is very little resistance to infection. If an environmental or technological change happens that will hurt one business – then it will hurt them all.
Stack ’em up, baby!
- Digitalisation
- AI
- Blockchain
- IoT
- Amazon
- Brexit
Whatever list of changes you want to make will be hammering these huge homogenised blocks of businesses that make up so much of the economy.
The answer of course is diversity.
Imagine that you have a species of fox with just one type of gene. When the environment changes, global warming, or house building, that fox can’t survive.
If some of the foxes have better sweat glands or Urban Traction Foot Pads (TM) then those foxes have a much better chance of surviving. Evolution 101.
Increasing Diversity – or Changing your Business Model – is the Route to Survival
If your industry is doing well then increased diversity is definitely counter profitable. You may well have found a local or global optima position. Any move away from that is bad for financial reasons.
As your industry faces increased competition or rates of change then the trade-off between optimising for local conditions and increasing diversity of the business model starts to change.
And here’s a quick video that explores that idea further
