Sunday, August 12, 2018

Biodiversity and Market Diversity




When ecosystems move toward a single species, they become more unstable and subject to disruption.   When markets move to only a single player or a few players, similar instability can occur.

Alaska is an interesting place - sort of stuck in the 1990's.   For example, it is the last bastion of Blockbuster video rental stores - which went out of business in the lower 48 during the Bush era.   We drove by a mall in Anchorage, and not only was it not abandoned, but it was being remodeled.   They were remodeling the Sears store, if you can believe that!

While they have a lot of chain stores and restaurants up here, there are far more small mom-and-pop businesses run by locals.    If you want a slice of pizza, you don't look for a Poppa John's (racism in every slice!) or a Pizza Hut, but some local shop that you find on the advice of a local or a fellow traveler.

Believe it or not, much of the marketplace in America was this way at one time.   In the small town I grew up in, we had no chain restaurants, department stores, or indeed, even a chain grocery store (unless IGA counts as a chain - it does stand for Independent Grocer's Association).  Today, that same small town has a McDonald's - and the local diner is out of business.   The IGA is gone, but now they have a Wegman's.

Just as dominant species evolve over time and force out weaker life forms, dominant businesses evolve over time and force out competitors.   In any business, you see this.   The car industry once had hundreds, if not thousands, of name plates.   Today, there are maybe a few dozen brands of cars in the world, and most of those are made by a handful of companies.

To some extent, this is a good thing.   Small companies that have established niche ecosystems can be wiped out by more successful species that supplants them.   You may think you have a nice little business building Hupmobiles, but then Ford comes along with a cheap car that takes over your habitat, and you become extinct nearly overnight.   The strong survive and the weak fail - it is true in the marketplace as it is in nature.

But what happens when our marketplace devolves into a monoculture?   Many scientists are arguing that the same is happening to our ecosystem, as we humans take over more and more of the available habitat, forcing out other species, particularly those who occupy narrow and fragile niches.  And some argue that biodiversity is a good thing for our ecology and that monoculture could be an unstable system - as the dominant species could be wiped out, once it consumes all the available habitat.

It is an interesting argument, with regard to the environment.   Over the millennia, there have been a few mass-extinction events in the history of our planet - and some argue that one is going on right now, as we take over more and more of the habitat portion of the planet.  When the Earth's axis tilts, or the comet strikes, huge swaths of species are wiped out, and it may take millions of years for new species to evolve from the few survivors of the apocalypse.

The problem for a monoculture, or an ecosystem with few species, is that if the cataclysmic event destroys the ecosystem of that monoculture, all life is wiped out and nothing will survive and evolve.  Without biodiversity, the system becomes more unstable and vulnerable, even as it seems more and more robust.

The markets today are seeing disruptions and cataclysms of their own - and not just in terms of market crashes or recessions.   The way we spend and behave has changed over time, and the big dinosaurs of industry and retail are dropping dead, one by one.  The smaller and more agile competitors - in this case, online retailers - are able to adapt and grow and take over the habitat once occupied by lumbering brick-and-mortar dinosaurs.

I think the analogy is apt - in business it is adapt or die, and many a strong company has gone under doing "business as usual" and not bothering to change things.   Why rock the boat when big SUVs are selling so well?   Then a comet strikes in 2008, and two of the most venerable car companies - including the largest one on the planet - go bankrupt.   That is why today, GM and Ford are plowing money into self-driving cars and whatnot.  Not because they will sell today, but perhaps tomorrow or the next day.   It is also why people love to hate Elon Musk.   He may be an evolutionary dead-end, but he may spawn more diversity that in the end is a threat to the existing monoculture.

Of course, the ultimate monoculture in business and industry are the regulated utilities, and how they operate illustrates how monoculture in business can be vulnerable.   The utility business has largely remained unchanged since, well, its inception.   Other than the introduction of nuclear reactors in the 1950's, the means of power generation and distribution and metering has remained largely the same since Westinghouse's time.

The companies make money - by law - and the shareholders are happy.  The unions are happy and the workers are happy.    And so long as rates are "reasonable" the customers are happy, too.   No need to update to a "smart grid" or even a national grid - things are fine the way they are.   There is little incentive for innovation or change.  And the few companies that do innovate often find themselves bankrupted by taking risks in a business that ultimately is risk-free, if you keep your head down and don't make any waves.

Then along comes Elon Musk and his solar shingles and energy storage pods.   In theory, you could set up such an installation and then cut the cables to the utility company for good.   The solar panels could generate more than enough electricity for your home - and store the excess in Lithium-Ion battery packs for use at night or on cloudy days.   It is only the horrific cost of installing all this technology that has prevented it from becoming mainstream.

The evolution of such disruptors may, however, be brief.   Donald Trump believes in business-as-usual, and is willing to use tariffs and regulation changes to squelch innovation.   High tariffs on solar panels will make solar shingles a stillborn dream.   Abolishing tax incentives will be the nail in the coffin - for solar, as well as for electric cars.   Easing CAFE and emissions requirements for cars and trucks will mean it will be more profitable to stamp them out of good old rust-prone mild steel, instead of esoteric materials like aluminum and high-strength steel, as Ford and GM are presently doing with their trucks and SUVs.

On a personal level, I think that diversity in the marketplace is usually beneficial to the consumer.  When we have a market devolve into a monopoly or a duopoly, innovation in products languishes and prices ratchet upwards.   I can go to the local family-run Mexican taco joint in my home town and have food that is not quite like any other store.   Or, I can go to Taco Bell and have a fake taco that is exactly like the ones served at a Taco Bell on the other side of the planet.  Oh, and the small, family-run taco place is cheaper, too. And they serve beer.

Chain restaurants and chain stores are successful because a lot of people like things to be certain.   And large chains can afford saturation advertisements on television - prompting the great unwashed to show up.   The rise and fall of all the major chains and franchises is usually linked to advertising campaigns.   Arby's made news a few years back when franchisees went into revolt.  They argued that the corporate parent wasn't keeping up their end of the deal, specifically in terms of nationwide advertising and promotion.   And some argued that this was no accident, but rather an attempt to weed out weaker franchisees and acquire their franchises as corporate stores (Domino's went through a similar weeding-out, early in its history).

The local Mom-and-Pop store can't afford to advertise on a national scale.  So they have to find a market niche - such as a college town environment or tourist-town environment - where they can thrive in a protected preserve.   Either that, or be swallowed up.   In Central New York, there was a chain called Carrol's which was pretty much like McDonald's or Burger King.  They sort of invented the Happy Meal even before Micky-D's did.   But they could not compete as a local chain because they couldn't afford to advertise like McDonald's could.    So they did the smart thing - sold out to Burger King in exchange for a number of franchises.  And today, Carrol's has like 800 B-K franchises worldwide.

Success in business has a lot to do with advertising, more than anything else.   And that is yet another reason not to watch television.   What you think is your idea to "deserve a break today" is actually an advertising jingle bouncing around in your head, after you've heard it 1,000 times on the television and radio.

But I digress.

I am not sure what the point of all of this is, other than I prefer to nurture those businesses in niche ecosystems, rather than patronize the dominate species.   McDonald's doesn't need my money, and the food there has the texture and taste of poop.   No, really, it is designed to be eaten without any teeth whatsoever.  But I digress again.

This is not to say I patronize businesses that should rightfully become extinct.   Paying more for shoddy service or products is just not a smart move.   Rather, I think you can seek out and find bargains with some niche players who have more incentive to compete in order to survive.  Whether it is a restaurant meal or a new car, odds are the best bargains are not going to be where the herd has stampeded.

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