One of the reasons why I like doing these daily posts is that they allow you and me to think deeper about how business models develop. Over the last few days, we’ve spent some time thinking about how business models decline and are replaced. Today we are going to talk more about what happens when business models form. Rather, what happens when a new market opens open and lots of business models start operating in it.
Introducing the Rubber Sheet Theory
One way of thinking about what happens in a market as it develops is to imagine a sheet of thin rubber stretched between the four corners of a room. This rubber has the nice characteristic that when you place something on it you will get a small localised dip. The rest of the sheet stays nice and flat. (if you used a cotton bed sheet the whole sheet would stretch towards the weight.) Fig 1
How Business Models Effect the Rubber Sheet
Let’s imagine that there is an existing group of companies in the market. They all have a very similar business model. We can simulate them by putting them on the rubber sheet together. Because there are a number of them the sheet will droop down around them. Fig 2
If they have substantial market power then they will take a greater share of the sheet – causing the depression to spread out across it. If they don’t they will be a localised dip. Fig 3
New entrants will tend to fall into the dip and make it deeper. That is new entrants will tend to adopt similar business models to the existing players if they have a large enough existing effect. I make this sound like gravity or a physical rule. It is much more prosaic. Entrepreneurs see existing success and copy it. Business models that have an impact are imitated. Fig 4
As a group of business models increases in strength ever more new entrants, and existing business models will adopt the prevailing business models. The rubber sheet will dip down even further. This process continues until the market has adopted a single business model.
This is a very simple mental model of what happens in a new market with a number of existing companies serving it. (They’ve moved in from adjacent spaces)
New Markets, Business Models & Rubber Sheets
In a brand new market, perhaps search in the 1990s, you have business models hitting the rubber all over the place. (Fig 5) There were a lot of them. A lot of them just roll over the surface, and then fall off onto the floor. Bankruptcy. For a while, you had multiple competing depressions – Yahoo, AltaVista, AskJeeves and Google. Eventually, there was just Google, Yandex, and Baidu, with Bing and DuckDuckGo around the periphery.
The final rubber sheet image I’d like to give you is what happens as business models decline. Business models don’t decline, the market changes and they become less fit. As this happens, the rubber sheet becomes less elastic. It becomes flatter. Some or all business models have less impact on the market. (Fig 6)
If you imagine our rubber sheet and pour on a bunch of railway business models. Over the 50 years from 1820 to 1870, they slowly coalesced into the integrated railway business model. That gave a huge depression in the middle of the rubber sheet. Sometime around 1900, the market changed and the railway rubber sheet was discovered to be the personal transportation rubber sheet. Cars were added to the mix and the rubber under the railways lost its elasticity. Car business models made a bigger impression and the railway business models wilted.
Why is this rubber sheet metaphor useful?
It’s useful because it helps us to think in terms of business models in a market, not companies. It helps us to see the fitness of business models (and yes there is quite a lot of evolutionary theory that we will be using in the coming weeks to try and explore this) in a market.
More than that the shape of the distortions in the rubber sheet helps us to map markets. If we have a dominant business model that massively distorts the rubber sheet – there is often little point in attempting to introduce a new business model into the market.
For example, Google’s impact on the search market is too big to allow other business models, for example, DuckDuckGo’s privacy based search model, to have much impact. Fig 7
In other cases, such as food delivery, there is space for hundreds of different business models – even if many clusters in certain areas of the sheet. (Fig 8)
Rubber Sheet Rules
Thinking visually about markets and business models like this gives us a few simple axioms
- Where there is massive existing distortion in the sheet new business models have little chance.
- Where no business models have made much distortion there is unlikley to be much business model market fit. Leave the market or adopt a new type of business model
- When there are multiple distortion patterns, estimate how groups of business models are likley to prosper or fail, and adjust your business model to align – deepening the best distortion for you.
Finally – the inspiration for this came from thinking about gravitational potential energy and how it distorts space-time – but I couldn’t draw in 3D…
