Thursday, November 29, 2012

When Escape from a Previously Successful Model Is Impossible

Three visualizations describe the breakdown of PSMs--previously successful models: S-Curves, Supernovas and Rising Wedges.

A successful model traps those within it; escape becomes impossible.

I recently highlighted one historical example of a PSM (Previously Successful Model) in Our Dust Bowl Economy (November 20, 2012): in the ample-rain era of the 1920s, farmers in the semi-arid southern Midwest had reaped huge profits by plowing up and planting fragile native grasslands. 

They poured their profits into homesteads, equipment and more land to enable further expansion.
When grain surpluses pushed prices down, their "model" had only one "solution": plant more land and harvest even more grain to compensate for lower prices. When prices fell from $1 per bushel to $.25/bushel, the model collapsed.

This previously successful model exacerbated the Dust Bowl and left the trapped farmers with no alternative but to either keep trying to make a failed model work or leave and abandon all their sunk capital in land, homes and farm equipment.

A more current example can be found in Microsoft (MSFT a.k.a. Mister Softee), whose previously successful model took a 42% marketshare in smartphones and reduced it to 2%. Here is an excerpt from Microsoft has failed (
Microsoft has three product lines that underpin everything, Windows, Windows Server, and Windows Mobile. On those, the other moneymakers, Office and Exchange, run exclusively. The apps use protocols that are locked down with dubious methods, and will not run on any competition. The competition is likewise excluded from doing what Microsoft can, either directly like Novell, or by raising the cost to the point of it not being profitable. This is how the wagons are circled, with every iteration, the cost of competing go up, and value of alternatives go up too. 
The problem is that if you are locked in with a choice of 100% Microsoft or 0% Microsoft, once someone goes, it isn't a baby step, they are gone. Once you start using Google Docs and the related suites, you have no need for Office. That means you, or likely your company, saves several hundred dollars a head. No need for Office means no need for Exchange. No need for Exchange means no need for Windows Server. No need for Office means no need for Windows. Once the snowball starts rolling, it picks up speed a frightening pace. And that is where we are. The barriers to exit are now even more potent barriers to entry. 
Microsoft bought Nokia to both kill off one competitor and to buy their market share. Microsoft at the time had approximately 12% smartphone OS marketshare, Nokia a bit over 30%. With the collaboration, Nokia and Microsoft, together with all the other OS partners selling Windows Phone 7.x, sales are now hovering around 2% of smartphone market share. 
Microsoft's mobile aspirations have failed so spectacularly that it is almost impossible to account for. Rather than fix the lock in that excludes the overwhelming majority of the market that does not have a Windows phone, Microsoft doubled down with the new iteration playing the same compatibility games they did before to lock out developers, competitors, and innovators. 
The death spiral for Microsoft is in full effect, and management is expending a lot of effort to speed it up. Microsoft is unwilling to change, and that is very clear. Even if they wanted to, they are culturally far beyond the point of being able to. What was a slow bleed of marketshare is now gushing, and management is clueless, intransigent, and myopic. Game over, the thrashing will continue for a bit, but it won't change the outcome. Microsoft has failed.
I would generalize that the Microsoft model of buying competitors and stitching together quasi-monopolies has failed: first in mobile, next in tablets and eventually in operating systems and Office.

We see the immense power of previously successful models. Straying from the previously successful trajectory looks needlessly risky, even as the trajectory has rolled over and is heading for unpleasant impact.

Anyone who questions the previously successful model (PSM) is suppressed, fired or sent to Siberia as a "threat" to the enterprise's success. Anyone who realizes the Titanic will inevitably sink and abandons ship leaves behind all their sunk capital: they leave with the figurative clothes on their back.

I have often covered the S-Curve model of initial development, rapid growth, eventual stagnation and collapse. Here is an example showing how financialization has peaked and will collapse: Our "Let's Pretend" Economy: Let's Pretend Financialization Hasn't Killed the Economy (March 8, 2012).

Since most of the systems and fiefdoms that are trapped in previously successful models are bureaucracies, we can also profitably use the "Supernova" model of rapid expansion, brief equilibrium and sudden collapse: The Lifecycle of Bureaucracy (December 2, 2010):

I have often addressed the way that bureaucracies arise to solve a problem and quickly progress to becoming an even bigger and more intractable problem themselves, generally because they only know how to expand (the ratchet effect) and have no institutional ability to shrink or become more efficient:

We can also visualize PSMs (Previously Successful Models) as a rising wedge, a pattern well-known to technical analysis. The previously successful model essentially charts an expansionary course that the organization is locked into. As the model fails to produce results, inefficiencies and costs rise, pushing the lower boundary of failure ever closer to the actual revenues.

Once the revenues fall below this threshold of viability, the organization breaks down, as there is no organizational capacity to radically reduce costs and headcount while significantly increasing efficiency and return on investment.

This model of breakdown describes all the major systems of local and Federal Government: the Pentagon, Medicare, Medicaid, Social Security, the higher-education/student loan cartel, the mortgage/housing cartel, sickcare, and so on. 

My new book Why Things Are Falling Apart and What We Can Do About It is now available in print and Kindle editions--10% to 20% discounts. 

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

go to print edition1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economyComplex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).
We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

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Thank you, James C. ($10), for your much-appreciated generous contribution to this site--I am greatly honored by your support and readership.

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