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 this section, I am going to introduce the idea of business model depreciation.
If you’ve done an accounting course or read financial reports, you’ll be aware of deprecation. Assets decrease in value over time.
If I buy a new Nissan, the resale value decreases by 1/3 the moment I put the key in the ignition and drive it away from a forecourt.
This is because depreciation assumes that assets degrade over time.
A business model is a corporate asset, and its value decreases over time.
A traditional asset will degrade. After all, it has been used, from environmental effects. As it gets old and the materials don’t perform.
A business model depreciates for similar reasons.
Business models depreciate because they are in essence a cultural illusion.
A 10-pound note has no intrinsic value. At one point, you could exchange your ten-pound note at the bank of England on Threadneedle street for a weight of gold and silver. Now, they will just give you a newly minted note. The note has value because most people believe that it is a useful store of value.
A business model has value because most people believe that it is an efficient way of generating value at that place and time.
Historical Business Model
Let us take an example of a historical business model that suffered rapid depreciation.
I went to university in Bristol. A building named after the Wills family was the building where I gave my exams. This family made a vast amount of money from Cigarettes. The Colston family inspired the name of my yoga place. They made their money from Salve trading.
It was an elegant if disgusting business model.
They would buy lots of small manufactured goods from the city of Birmingham, a hundred miles up the Severn River from Bristol. They take these, plus cases of muskets and gun powder and sail down the West African coast to Nigeria, previously called the Slave Coast, and dock at the great slave-trading entrepots of Dahomey and Benin.
Local chefs bought manufactured goods for slaves. The slaves came from raids and wars of conquests. They were fuelled by the power that the muskets gave them and the status of high technology goods from overseas.
Slaves would be loaded on board in a coffee. Chained ankled to ankle in a long chain and forced to lie next to each other under the decks. The passage was about three weeks – eating, sleeping, lying in their own piss and shit. Often almost half the slaves died. You could tell a slave trader from afar. Not just because of the stink. Because of the sharks that followed it, it ate the corpses that were thrown overboard.
Today when we bring flowers from Kenya by plane or grapefruit from South Africa, they are treated far better. They get air conditioning. Boxes are used to stop fruits from getting bruised. Often individual bags to protect the fruit.
Sugar for Slaves?
The profit margin on slaves was so high that the masters of the slave trips did not need to bother with process improvements like this.
When the ships reach the Caribbean islands (many went to the American South and Brazil, but because I’m British, I will focus on our own shame), the slaves were sluiced and then sold to the owners of sugar plantations.
Sugar was so profitable that in its heyday (before the slave revolts), Haiti had the highest GDP in the world. Every single Caribbean island was incredibly wealthy. As it shipped sugar back to England, France, and the rest of Europe.
The problem was that sugar plantations were difficult places to live and work.
I’ve spent some time in the jungles of southeast Asia hacking through bamboo with a machete. To say that it is tougher than a HIIT session on Peloton is an understatement. I would often walk out of the jungle after a few hours with my arms and legs a mass of scratches and embedded thorns. Once with two fingers hanging from my hand by a little flap of skin.
I didn’t get an infection. All because of modern medicine, antibiotics, and plenty of freshwaters. One of my friends got gangrene from an ankle cut. He died after multiple leg amputations. Ankle, knee, upper thigh.
The Slaves had the worst
The slaves didn’t have these benefits, and life expectancy was less than two years. In those two years, they harvested enough sugar to pay for their own lives, the lives of all the slaves who were though stinking from the deck of the slave trader into the sea, and the bloodshed across west Africa.
What paid for it/ Little white and brown crystals of sugar that went into the meringues of Versailles, the Viennese pastries, and the chocolates made in the industrial factories in Birmingham, York, and Brussels. Sweet crystals, that went into gobstoppers and lemon sherberts and tea, coffee, and chocolate cups in high and low society.
And those crystals build great universities across the UK and northern Europe and financed the industrial revolution and the growth of capital.
The sugar was insanely desirable by millions. The operation to get trinkets to West Africa and Slaves from there to the Caribbean was feasible, the whole process was viable even with the wastage and occasional loss of ships at every stage.
Business Model a Social Construct?
This section is about business model depreciation, not to glorify an abhorrent long-dead business model.
Why did it die? What caused it to depreciate?
Remember when I said that a business model is a social construct? A business model works whilst people believe in it.
Well, at some point, people other than the poor slaves, who weren’t considered to be people, decided that it was immoral that we should not buy and sell people like this. William Wilberforce led the process in the UK. The laws changed. Despite the money that it generated, and the fact that plantation owners and merchants were well represented in the Houses of Parliament. Slavery became illegal. Plantation owners received compensation. For the next 50 years, the British empire then spent 1.5% of GDP on anti Slavery patrols – as much more than it now spends on its nuclear weapons, its army, its navy, and its airforce.
The business model had value only whilst ‘people’ believed that it had value. And without slavery as the key leg of the tripod, it collapsed. Its productivity collapsed and sugar was refined from other sources breaking the Caribbean island monopolies.
The East India Company
Let’s look at another example of business model depreciation.
This one is equally repulsive. And equally British.
For over two thousand years, there has been a flow of silver from West to East. China has made amazing goods – silks and porcelains. Western countries desire their goods. But they have little that China wanted. So China was paid in bullion.
This was true from at least the time of the Romans. They faced a currency crisis. Through a lack of species. As a lot of silver was shipped east to pay for imported luxuries.
As the Western World industrialized, the British East India Company flourished. It found that the traditional profits on spices were slowly declining, and the costs of ‘administering’ India were increasing. It discovered that it could make money importing products from China to the West. The problem was that it had no great source of silver to pay them.
Opium
Then it made the discovery. Opium was the Chinese’s weakness. They loved getting blasted out of their heads on it. Refined a bit more opium becomes heroin. The East India Company had vast areas of land suitable for poppy cultivation to make the brown sticky opium. So it did. They started shipping it up the Yangtze to every Chinese city that it was allowed to trade at.
This is not unlike the business model that the Colombian drug cartels have had in the twentieth century. And in the same way that the US government has been rather upset at people selling drugs on the streets. The Chinese government did not take kindly to this.
With cries of ‘Free Trade’, the Eats India company protested. They were permitted to do what they needed to. To be able to sell its products peaceably without disruption by the Chinese. The result was two opium wars.
It’s estimated that the EIC managed to get over 30% of the Chinese population addicted to opium. They paid in silver, and with the silver, the wonderful Chinese products started flowing back to the west once again.
The End of EIC
Over time the business model depreciated again. The EIC crippled. And then disbanded because of corruption and incompetence in India. The market fragmented, and eventually, the Chinese communist made opium illegal and confiscated and destroyed the opium traders.
The profits that the EIC made paid for the maintenance of an empire. So as a business model, it was hugely successful. Possibly one of the most successful business models ever conceived.
The opium was massively desirable. The low cost of opium and the naval and military power of the EIC (and its competitors) versus a weak and fragmented Chinese state made it feasible. And by Jove, it was viable, saving the company hundreds of chests of silver that it didn’t have.
These are wonderful stories (for non-British readers please pick up on the irony there), but why am I telling them?
Today we look out on a vastly richer world. There are many corporations out there with business models that make vastly more money than either sugar or opium did in their heydays. They also create vastly more positive (in some cases) value.
All those business models are just as vulnerable as these. We can go through history picking up business models that have depreciated down into nothing, worn away by the public, their customers, abandoning them.
We can look at steam engines and deep coal mining and we can look at the tea trade, match making (not dating – wooden sticks with phosphor heads), scythes, stables, swordmaking, and a hundred more.
Business models depreciated.
Business models are depreciating.
We can now look at why this happens. Knowing that every business model is doomed to slowly age and die.
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