This post is an extract of my forthcoming book on business model innovation. The innovation book looks at why business model innovation is needed and how it works. You can read more about it here. These posts are early drafts of planned content and I’m putting them out to get feedback. Please do comment below, or subscribe to these pages to get each new section as it is published. In today’s post, we will be looking at finding opportunities in this new world.
In one of his books, Ernest Hemingway asked, “how do you go bankrupt?”
“Slowly and then quickly.” was his laconic reply.
This is a good approach for considering how business models fail.
I advised a palm oil plantation a couple of years ago. Normally, I wouldn’t work with a company like this. A company that is morally responsible for so much damage to the environment.
Palm Oil Plantation
I remember walking once along the edge of a palm oil plantation. I was on the boundary track that the tractors drive along, towing the trailers that take the palm oil bunches back to the collection area. On my left, bathed in the afternoon sunlight, the palm oil trees reached up high, another tree every ten or twenty yards.
That side of the road was silent. Pretty if you had seen it for the first time as a city dweller.
On the other side was the secondary jungle. It had been logged sometime between 1900 and 1950, and many of the trees were now large again. Malaysia had several logging epidemics. First, to harvest the forests for valuable wood. Then to clear land for successive booms in rubber and then palm oil. Some of the lowlands and more of the mountain forests were able to regrow after the initial wood logging. This was some of the regrowth.
Thick bushes came down to the edge of the track. Every tree was different, every bunch of leaves had different colors, shapes, patterns textures. The eye and the brain quickly got overwhelmed trying to build a coherent pattern from the detail and just say, ‘green’. As well as being visually difficult, it was noisy.
Orang Asli
The indigenous Orang Asli tribesmen taught me what different plants are, I have no idea what the insects are. They sound like cicadas, but dozens of different species, birds, monkeys, and the occasional chicken (jungles are where chickens originated from!)
Noise on the right. Silence on the left.
A graveyard on the left, a noisy schoolyard on the right.
That’s why I don’t like working with Palm Oil companies.
This led me to look at their accounts. First for the last few years. Then I looked at them for a decade, then for as far as records went back. Then I sampled their competitors for the same period and looked at the share price.
Decline of the Industry
To a trained stock analyst, this is fairly simple stuff. Reading through what was obvious, was the industry was slowly going bankrupt. As the economy increased by 5-6% a year, their profits decreased by about the same amount each year. Problems from 2005, that were reported in the annual accounts, shortage of labor, volatile prices, minimal yield improvements, repeated year after year. They were never solved. The pressure that the EU was starting to exert on deforestation for palm oil plantations was making life even harder.
Will this industry collapse? It looks like it at some point. It is still in the phase of going bankrupt slowly. The only companies who seem to make money are those with plantations near cities, which they are chopping down and turning into apartments and condominiums. Real estate companies who grow palm oil on their land bank.
The stock market recognizes this and rewards those who had the foresight 70 years ago to be close to the cities and punishes those who are sticking to their core business.
Similar Cases
If we step back and look at a company like Kodak, we can see the same long-term decline in share prices. We can see similar ones in the telecoms industry. There is a long slow stagnation as new ideas and innovation leave the industry. The problems that it faces are too intractable to overcome. So they are left in place, yields in palm oil haven’t changed for 20+ years, it appears impossible to automate the collection of palm oil punches. So you need people willing to use a 30-foot bill hook in the middle of a jungle to pull down the bunches.
This is the slow move towards bankruptcy.
From an accounting perspective, these companies make profits, they even pay dividends, but the business model is atrophying, becoming withered, incapable of generating innovation, or being able to change rapidly.
As we look back on 2020, and the impact that COVID had on business. The least affected industries were the ones that were already changing. The ones that had static, traditional business models that had been unchanging business models for decades of longer suffered most.
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