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.
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