Thursday, February 6, 2014

MBA Entrance Coaching on The Cusp of Disruption - Part I

[Inspired by the article “Consulting on the Cusp of Disruption”]

A Note on Disruptive Innovation
“New competitors with new business models arrive; incumbents choose to ignore the new players or to flee to higher-margin activities; a disrupter whose product was once barely good enough achieves a level of quality acceptable to the broad middle of the market, undermining the position of longtime leaders and often causing the “flip” to a new basis of competition.”- HBR article, Oct. 2013

The quote sums up just what disruptive innovation is, how it works, and how it has changed industry after industry as new technologies have brought with them new business models and different ways of competing. This article is my attempt at explaining how disruption has wended its way through a traditional service industry and predict its impact in a business as usual scenario.

Introduction
I hope to establish that
  • The CAT coaching industry is undergoing a dramatic upheaval with the spread of new distribution channels
  • Traditional coaching will soon be niche/ made obsolete
  • Pure-play e-commerce sites will be the new leaders
  • The business model of those remaining in business is going to be vastly different from the one which opened up this industry
  • The market is going to grow rapidly as these new distribution channels hit the mainstream and increase consumption of CAT coaching

I strongly feel that a business which is unwilling to acknowledge the changing reality is headed on a path of losing market share in a booming market. An organization which does not realize that their competitor is an e-commerce company rather than one just like themselves is in the throes of Marketing Myopia as discussed by Theodore Levitt in his McKinsey award-winning HBR article (1960; reprinted in July 2004).

I shall now proceed to establish the above.

The CAT coaching industry is undergoing a dramatic upheaval with the spread of new distribution channels

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness”. –The United States Declaration of Independence.

In an ideal scenario, this should be self-evident. Ten years ago, testfunda.com did not have 485, 923 registered users (numbers as of 28-01-2014). Six years ago, testfunda.com did not even exist, while CAT coaching did. A website named totalgadha.com has tried out online CAT training and supplemented it with a classroom program, rather than the other way around. Analytics did not become a core offering for training until the advent of TCYonline.com which sold just that, filling a market niche. Pagalguy.com, a site which was originally meant to be a forum and disseminate news, has started offering CAT material on its website. Mindworkzz.in did not offer comprehensive coaching for CAT with live online classes at cut-throat prices compared to the industry stalwarts.

Yet, these changes have been largely ignored by those who have been in this industry the longest. It is not for lack of awareness that this has been so. The management at the traditional coaching institutes are rational, and are acting according to what they perceive to be strategic. The new distribution channels are currently too small an opportunity/threat. The scenario is a classic case of The Innovator’s Dilemma: When New Technologies Cause Great Firms To Fail.

“The technological changes that damage established companies are usually not radically new or difficult from a technological point of view. They do, however, have two important characteristics: First, they typically present a different package of performance attributes—ones that, at least at the outset, are not valued by existing customers. Second, the performance attributes that existing customers do value improve at such a rapid rate that the new technology can later invade those established markets. Only at this point will mainstream customers want the technology. Unfortunately for the established suppliers, by then it is often too late: the pioneers of the new technology dominate the market.” – Disruptive Technologies: Catching The Wave, HBR, Jan. 1995.

The innovators taking advantage of the new distribution channels are currently not appealing to the mainstream of the established coaching institutes’ customer group; they are merely nipping at their heels. The innovator companies are addressing two market segments: the overserved customers and the non-consumers.

Who are the overserved customers..

“Overserved customers consume a product or service but don't need all its features or functionality. Three specific indicators point to this customer group:
  • People complaining about overly complex, expensive products and services.
  • Features that are not valued and therefore are not used.
  • Decreasing price premiums for innovations that historically created value.”
.. and the non-consumers?

“Nonconsumers generally fall into one of these categories:
  • Consumers who lack specialized skills or training, forcing them to turn to experts to solve important problems.
  • Consumers who lack adequate wealth to participate in a market.              
  • Consumers who can use a product or service only in centralized and/or inconvenient settings.

Because nonconsumers lack the ability, wealth, or access to conveniently and easily accomplish an important job for themselves, they typically have to hire someone else to do the job for them or they have to cobble together a less-than-adequate solution.”

Hence, the industry stalwarts do not take them seriously. Given their current business model, the markets served by these disruptors is unappealing. For a company with $200 million in revenues, a 10% growth requires tapping a $20 million opportunity. A disruptive market opportunity with forecasted size of $2 million is simply not worth exploring, and is indeed worth ceding. For an upstart with $20 million in revenues, that $2 million opportunity is tempting indeed. It is when the disruptors move up-market with sustaining innovations and increasingly grab market share from the established players that the consequences become obvious, by which time it is too late. The books The Innovator’s Dilemma and Seeing What’s Next by Clayton Christensen contain numerous examples of this in industry after industry.

Eventually, as the theory predicts, the disruptors will improve in the performance dimensions valued by the most demanding customers, moving up-market through sustaining innovations and forcing the established players to cede increasingly higher shares of their market, which brings me to my next prediction:

Traditional coaching will soon be niche/ made obsolete

As established players flee the disruptors and move more and more to the higher-end of the market, to meet the needs of the most demanding customers for whom the disruptive innovation is still not good enough, they will increasingly become a niche player than a mass-market player. When the disruptive innovation can fulfil the demands of the highest tier of the market, the niche player too becomes obsolete.
The best example to illustrate this is the story of Nucor and the mini-mills and how they drove the integrated steel mills out of existence. For further reading, refer Disruption at Work: How Minimills Upended Integrated Steel Companies.

A caveat is in order, however. Traditional coaching relies on increasing their numbers in order to stay profitable and grow. Beyond a point, they would rather fight than flee up-market.

Pure-play e-commerce sites will be the new leaders

The new distribution model which is changing the industry is e-commerce based, where the delivery of CAT coaching is via the internet, in asynchronous or synchrous format, with videos, tests, analytics for feedback and virtual classroom sessions. Once this technology is “good enough” to hit the mainstream, it is going to be as disastrous for the business model of the established “physical classroom based” coaching institutes as the mini-mills were to the integrated steel mills once they upped their quality.

Considering the pace of change of technology, and the new wave of SMAC related growth, it is not too much of an exaggeration to say that this might indeed happen within the next five years or so. (As with any quantitative prediction, the numbers have no justification whatsoever). An increase of Private Equity/ Venture Capital activity in this phase, entry of tech-savvy entrepreneurs might accelerate the growth of the disruptors, causing a “strategic inflection point” in the industry even sooner. *

(Refer Only the Paranoid Survive by Andy Grove. A strategic inflection point is something that changes the industry forever. For Intel, one such point was when a flaw in their chip caused a hue and cry in the market and they spent half a billion dollars in replacement chips. Intel had shifted from being a B2B to a B2C company according to market perception, due in large part to their  ”intel inside” marketing campaign). In the context of the CAT coaching industry, a strategic inflection point would be online resources for preparation becoming more valuable than the offline alternatives.

The business model of those remaining in business is going to be vastly different from the one which opened up this industry

Intel has survived two disruptive innovations: the replacement of the memory chip with the microprocessor, and the introduction of the low-priced Celeron chip in price-conscious markets to ward off low-end threats. IBM has transitioned successfully to an IT solutions provider. Buggy whip manufacturers have survived the collapse of the horse-drawn carriage and the rise of the automobile. Clearly, their business model has changed as well. The institutes which emerge from the disruptive wave are going to be very different in terms of how they handle the new technology in their business.

A possible model might be to handle online distribution the same way the successful bands in the music industry did. Prior to file sharing on the internet, bands used to perform live in order to promote record sales. Now, bands give away their music for free and make money in live concerts. Perhaps the coaching institutes who emerge successful would have the role of their online and offline presence switched too- with their offline efforts promoting online sales.  Or, the disruptors could partner with the established players to bolster the latter’s strength online, while cashing in on their brand value to grow.

The market is going to grow rapidly as these new distribution channels hit the mainstream and increase consumption of CAT coaching

Online distribution removes two major barriers to the consumption of CAT coaching: the constraints of time and space. Quality coaching is simply not available to those who choose to live away from the main coaching hubs, or who cannot commute to these hubs at the time live classes are held. With increasing internet penetration and better technology, online CAT training could address these main barriers to non-consumption, thus growing the market. Also, by reducing cost of operations for the companies and increasing economies of scale in distribution, the new distribution channel, and resultant competition, may reduce the price of quality coaching, increasing consumption, and as a result, the market value of the CAT coaching industry, further.

At the low-end of the market, it becomes possible to offer only particular modules, say Geometry Advanced, to those who wish to buy their education piecemeal. Since such individuals are currently non-consumers, this is another opportunity for growth.

Hence, both non-consumers and overserved consumers will participate in the market, increasing the total consumption of CAT coaching.

Conclusion

Clayton Christensen’s theories of disruptive innovation can be applied in the CAT coaching industry to predict the effects of online distribution on institutes with the traditional business model. It remains to be seen how, if and when the mainstream players of today address the disruptive threats to their business.

I will attempt to use theory from Clay Christensen’s book The Innovator’s Solution to explore the available options for the incumbents to adopt the new technology and compete against the disruptors.

A final note. Predictions are always a tricky business. Good theories can only get us so far. Hence, predictions should always be taken with a pinch of salt. Bill Gates famously predicted that the internet is a bubble, but on realizing its importance changed his views and pushed for the development of the Internet Explorer, eventually replacing the incumbent Netscape Navigator as the means to browse the World Wide Web.

Influenced by:
  • The Innovator’s Dilemma
  • The Innovator’s Solution
  • Seeing What’s Next
  • Only The Paranoid Survive
  • Made in America