The decline of business models isn’t something that has been deeply studied. Joseph Schumpeter famously talked about creative destruction, and so I read his book from cover to cover and really creative destruction is covered in only a few pages in the middle of a book talking about different political systems in the 1940s.
Transformation of Stagnant and Declining Business Models
I started talking to a potential client yesterday about helping to transform their business. As part of the background reading, I spent some time looking at the underlying economics of the business. It very much reminded me of my time on the railways.
There, running a train, profitably, was usually good enough to pay for the train and its operations. Sometimes you paid for the use of the track. Rarely could you pay to upgrade the tracks or build new tracks. When I studied it, 15 years ago, the only profitable railways in the world – covering operations and infrastructure – were a few densely packed Japanese commuter lines.
At the same time MTR, the commuter railway in Hong Kong was dismissed because it was a shopping mall with railway lines to bring shoppers to it.
Railway Business Models
For many modern railways, the idea is to make money from the provision of mobility. To monetise the transportation of passengers as you shift them from A to B. Then may cover the cost of moving the train. More than that…
If we go back a hundred years or so the way that many railways in the SE of the UK made money was as property developers. They would run a railway out to a patch of countryside. Then they would build houses. The houses would be profitable because the people who bought them wanted to work in London.
MTR the Hong Kong metro system has a huge amount of passenger supply, and so every station, almost, is a shopping mall or office block. Its stations are destinations in their own right.
Here we have two different ways of playing with supply and demand. Another one is one of the Australian iron ore mines. The railway runs from the mine to the port. Not passengers – just great big ore carts – and a few years ago they automated it. No drivers. no signalmen. Just trains moving up and down as the hoppers are filled.
Compare these to the typically heavily subsidised railways in most countries. The subsidies are effectively a cash transfer to the middle classes with good jobs in the middle of major cities. The government needs to pay the subsidies for political reasons.
Why Railway Business Models Fail
Why has the business model failed so massively that for generations the railways have been unable to show a profit?
A couple of the big ones are the massive capital investment required, and the level of regulation applied because of the safety risk. I remember reading accident reports of early railway accidents when carriages collapsed squishing (worse than squashing) the passengers inside. That doesn’t happen any longer, even at far higher speeds. It comes at a cost to the business model.
A bigger part though has been the inability to innovate. Even by the 1940’s when the government forced the merger of the big 4 railway companies into British rail (nationalisation), the basic business model had been failing for a generation or more. And in the 80 years since the railways have gone through cycles of nationalisation and privatisation to no effect.
The finances have changed but the core aspects of the business model – fixed routes, fixed times have not changed. Why do I say that those are the core aspects of the business model? In the 1840s as entrepreneurs struggled to find the best way to run their railways, they discovered that fixed timetables based on railway time were the easiest to manage and deliver. That idea has remained ever since.
Core Features of Railways
At the heart of the railway model, is the ability to maximise throughput, think of the railways as a set of pipes sending pulses of fluid into a central pool (the city) and pumping it out again at the end of the day.
This worked for an industrial economy with large population movements to the factory and back. It also worked very well without competition from the car and the plane.
The business model didn’t change as those were brought in. If I was to start looking at how to innovate in the railways and create some very profitable rail networks I’d start by going back to basics and think about what it means to be a railway.
What We’d Need to Change (?)
- What happens if we don’t have timetables?
- What happens if the trains don’t run at fixed times?
- What happens if the trains don’t have set routes?
If you work in the railways – or a commuter – you’ll be thinking that “Denis is fucking nuts” at this point. This is a key part of the method.
Most business models as they head into a period of decline and stagnation have these anomalies in them. Anomalies are components of the business model that were used during the early stages of the business model. They became to be seen as necessary to any business model.
A really simple example – cars have 4 wheels. Ask a child to describe or draw a car and they will mention the 4 wheels. We’ve had cars with 3 wheels (Reliant Robins) and maybe 6, but it’s pretty hard for any of us right now to think why a car shouldn’t have 4 wheels.
The Sources of Failure are Earlier Decisions
A key part of what we need to do in business model innovation is to look at what we are doing in the stagnation and decline period. Then look back at the early stages of the business model innovation cycle and ask – why was that feature brought in? What purpose did it serve? Does it still serve that purpose now? What would happen if it wasn’t there any longer?
The reason we have to do this – and the reason why I ask these ‘fucking stupid questions’ is the track record of success of the people who haven’t asked them is appalling.
For a company that is failing because of a business model decline, then changing the details without looking at the core will simply delay the failure at best. Like plastic surgery on an ageing film star. Renewal and rebirth require going into a chrysalis and coming out something different.
