In many industries, there are only a few types of business model. The lack of business model diversity leaves the industry and the businesses in it vulnerable to technological and environmental shocks.
Most industries have a few standard business models
Let’s jump straight in with a few examples. Airlines have Longhaul operators like British Airways, Low-Cost Carriers like SouthWest and Air Asia and Flag Carriers like Garuda. Most airlines fit into one of those three models.
Fastfood restaurants have single operator non-branded business models and franchised chain operations like McDonald’s and KFC. Logistics has shipping companies and NVOCCs. Car companies beyond speciality marques use a part assembler & franchise distribution model. Enterprise software uses on-site server/user licences and cloud-based SaaS models.
In most industries, if you map out your competitors business models using the business model canvas there will be a significant similarity between them. The differences are usually concentrated in what you are selling to who. For example, different lawyers may sell to people getting divorced and to people needing trusts and wills (two different customer groups) and have slightly different value propositions – but everything else remains the same.
This is a problem as it makes you vulnerable to change
Why is this a problem?
In normal times it isn’t. If a lawyer is making money in the next town over it seems likely that if you copy hir business model in your town you will make a similar amount of money (quality of the operations and town demographics being similar).
Through most of the twentieth century, this is what has happened. Some very successful business models spread widely and were almost universally adopted in some industries. Alcohol sales through pubs in the UK. Fish and chips being sold via the chippie on every high street. Milk being sold by dairies via milk floats.
Let’s take pubs for an example. In 1970 just before I was born there were over 75,000 pubs in the UK. Now there are less than 50,000 despite the population growing by 20% and becoming far wealthier. 30% of the businesses died because they weren’t able to adapt to supermarket alcohol sales and the rise of the mass market restaurant model. Their business models were not diverse.
Today the pub model has fragmented into lots of sub-models. Gastropubs, family-friendly pubs, post-work pubs, pre-club pubs and more. The underlying models are still very similar. Sell beer from a fixed location. So with an economic shock like Covid, the whole industry is incredibly vulnerable.
Cloning increases the risk
I am going to switch tack now and talk about bananas. This helps illustrate why business model diversity is so critical, so bear with me for a minute.
Most of the big long yellow bananas that we eat are cavendish bananas. They were developed about 150 years ago by gardeners in the UK trying to grow a banana for the Duke of Devonshire. The thing about these bananas is that they are all clones. That is every single one is identical genetically. A bug or a pest that finds a way to attack one plant can attack and kill every other plant.
That makes the Cavendish banana exceptionally vulnerable to disease shocks. In fact, the reason why the Cavendish banana is so popular today is that its predecessor the Gross Michel Banana, also a clone and grown in vast numbers, was wiped out by Panama Disease in the 1950s.
There are thousands of other banana varieties in the world, I’ve eaten wild ones deep in the Malaysian jungle that are so different that you’d barely call them bananas at all – and always covered with ants! None of these have the right properties that enable them to be handled shipped and priced so that they are economically viable to consumers.
Business model diversity is critical for resilience
What do we learn from this? Three rules.
- Good business models spread far and wide.
- Successful business models reduce diversity.
- Diversity makes business models highly vulnerable.
Under good conditions, most business owners have very little incentive to diversify their business models. Why should they? the business model is there to help them maximise profits.
There’s also a powerful disincentive to switching to a new business model as times become uncertain. You reduce the resources available to a business as battens down to weather the storm. The perception is that you are reducing the businesses chance of survival.
And survival in times of high change
Think back to the bananas.
When Panama Disease infects a banana it starts at the roots. It then works up through the stem killing off all the leaves. They drape down the stem, black and brown. There is nothing the farmer can do to save the banana. If he digs out the banana and plants a new plant it will get infected as well and suffer the same fate.
This makes sense, doesn’t it? How many times do we see a restaurant open and close in a particular plot? Is it because it’s the wrong location or do they have the wrong business model?
The only way that the banana growers can grow bananas on land that is infected by Panama Disease is to grow different types of bananas. That means not growing a clone. It means something different. In times of change, when there is high uncertainty diversified business models makes more sense.
What we see today in the business world is that as business models start to seem vulnerable, that knowledge spreads across the world very quickly. The evolution of low-cost carrier business models since their genesis in South West Airlines has spread across the world and blighted traditional long haul operations.
One of the biggest reasons to do business model innovation is to increase this business model diversity. To innoculate businesses and industries from malign economic effects.
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