Genesis of extractive business model is from extractive industries that included a gamut of sectors such as oil, gas, gold, diamonds, minerals and chemicals where all these materials are being extracted from wells and mines. The fundamental theory behind extraction is that resources are extracted without any provision for allowing renewal and once depleted the well and mines transform into dead stock to be abandoned pronto. Parallel situation prevails when business gets entrapped in an extractive business model. How is that?
Extractive Business Model
A handy definition of extractive business model is “a business that faces dead end in the way it conducts business, its products and the process it employs in turning out such products”. In the case of wells and mines used in extraction, these can be abandoned. But business that is outside extractive industries could be rejuvenated provided such business applies innovation. Examples galore in business press about several businesses that have gotten entrapped in extractive business model.
Mass market retailers could easily get into extractive business model if they fail to change track in the way their business is conducted. For example Wal-Mart the largest retailer selling goods from electronics to baby gear and a deep player basically in the mass market got itself shackled not by accident but by way of design. Yanis Varoufakis writing in a blog post touches base with Wal-Mart extractive business model and penned his incisive criticism in his inimitable style thus: ”The Wal-Mart extractive business model reified cheapness and profited from amplifying the feedback between falling prices and falling purchasing power on the part of the American working class. It imported the Third World into American towns and regions and exported jobs to the Third World (through outsourcing), causing the depletion of both the ‘human stock’ and the natural environment everywhere it went”.
Extractive business model could suck in luxury goods as well. Tim Kastelle in a blog post alludes to Swiss watchmakers switching to extractive business model leaving the door for innovations closed permanently. Hard luxury goods including jewellery, specialist watches, pens, accessories are easy prey to extractive business model as these continue to keep the same line of products or fail to look critically into the existing manufacturing process that makes out the products.
In another twist, extractive business model is often the pole mast of monopoly or oligopoly companies. They have huge sunk cost in the form of physical assets and fear innovation as if it could either entail additional capital expenditure or render the existing assets useless. What they do not foresee is that fusion of new technology or processes with existing assets helps bring out new breed of products. Besides, these companies could easily leverage their position in the market place to their favour even if there is going to be marginal losses arising from scrapping few of the existing assets. Innovation fuels previously unknown and unimagined products and uses. Monopoly and oligopoly companies are in better positions to harness innovation better than others.
Finally, I like to add a note regarding the extractive industry that christened extractive business model. Ironically, companies involved in mining and extracting are thinking seriously about lessening the burden of their extractive business model. Though to some extent it is more of rhetoric than reality, these companies are seen incorporating corporate social responsibility as a vital policy, and are putting quite some effort to amend the business model to address the concerns of society. These concerns include, but not limited to, economic well-being, ethical business, social sustainability and developing renewable resources. Admittedly, companies in hydrocarbon and gold & diamond mines are better suited to re-configure their business model from extractive to an inclusive one. On the back of huge financial muscle and sitting pretty well on high valued resources they better do that now than later.
Muthu Ashraff
Business Adviser
Mobile: +94 777 265677
E-mail: cosmicgems@gmail.com
Web: http://www.cosmicgemslanka.com
Blog: http://cosmicgemslanka.com/blog/
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