Sub-Optimal Business Models: Part 2 – Sub-Optimal Checklist

Part 1 talked about the process by which business models become sub-optimal and examined how the business models of Britannica and Encarta became sub-optimal over time with the arrival of successive new technology enablers.

In this post, I attempt to give a ‘checklist’ to determine if your company’s business model is in danger of becoming sub-optimal. Let us call this the ‘Sub-Optimal Checklist’.

1. The Number of Non-Consumers

Non-consumers are those who have certain ‘jobs-to-be-done’ but who cannot afford an incumbent solution to get the job done but strongly demand one. The reason we have to check on the number of non-consumers is this: A more optimal business model almost always expands the market and provides a solution to those who could not access one earlier. For example, the first Walkman expanded the access of rock music to teenagers. Companies like Lending Club expand the market for Credit. Khan Academy expands the market for those who can listen to Physics or Economics lectures. Wikipedia expands the market for Encyclopedias.

Are the number of non-consumers high? Then beware: a new technology enabler will enable startups/new entrants to cater to this customer segment first while you focus on your mainstream customers. Then over time as it so often happens in disruptive innovation, the new entrants will move upmarket and gradually take away your mainstream customers as well.

It is worth noting that for a number of incumbent solutions, non-consumers are very high. Millions of non-consumers are not served by banks, millions are not served by schools and colleges, millions don’t have access to proper hygiene, millions cannot afford to go to prep classes etc.

Put simply, if the number of non-consumers is high, then when a new technology enabler arrives, new solutions will also arrive that will make your business model sub-optimal.

It is worth reminding again that non-consumers will be the first ones to flock to the new solution and a gradual exodus of the mainstream customers is imminent.

2. Level of intervention of new technology enablers

New technology enablers over time become better and can support new uses. The internet was able to support just text only web pages and we know how much it has improved.

Is a new technology enabler part of your current business model? If not, then there might be opportunities for constructing new business models around the new technology enabler which might be bad news for incumbent market leaders and good news for new entrants, market followers and customers.

Has a new technology enabler enabled a new albeit inferior solution with a new business model to serve a customer segment that is not your main-stream customer? Then it is a serious red flag of danger that your business model might become sub-optimal. As the Innovator’s Dilemma predicts, the incumbent leader will begin to move upmarket facing pressures at the lower end from the new entrants.

3. Barrier-Compromise Match

Customers face some barriers to getting their jobs done. Most notable of these barriers are Wealth (affordability), Time, Skill and Access. A technology enabler often is notable for removing or reducing one or more barriers.

Rent-the-Runway using the internet reduces the ‘wealth barrier’ in accessing high status designer clothes. EBay using the internet reduces the ‘access barrier’ and helps customers access more collectibles than any previous solution. Uber reduces the ‘time barrier’ using the Mobile to access taxi rides. Lending Club using the internet reduces the ‘access barrier’ in getting small amounts of credit. Salesforce uses Cloud Computing to reduce the ‘wealth barrier’ and ‘access barrier’ in accessing important enterprise solutions.

Therefore technology enablers are known to break down particular barriers. Internet reduces time, wealth and access barriers often. Cloud computing reduces wealth and access barriers.

Identify the compromises your mainstream and non-mainstream customers have to make while accessing your solution. See if that is a barrier a new technology enabler can potentially override. If there is a match, then clearly your business model is in threat of becoming sub-optimal.

Let us take the current business model of Banks. List down the compromises a bank customer has to make:
1. Have to stand in a queue to apply for credit
2. Have to travel to a bank branch that may be far away
3. Have to wait for many days to get it approved
4. Have a limit on credit cards
5. High transaction fee that is added to the cost

Internet, Mobile and Cloud Computing in addition to Big Data Analytics can pretty much challenge the above compromises and have done so in many other solutions.

4. Number of components that dominate the cost structure

List down the components that make up the cost structure of a business in the decreasing order. Do one or two components dominate the cost structure? For example, do employee salaries make up a significant amount of your cost structure? Do real estate and rental costs make up a significant amount of your cost structure?

Management Consulting or ‘The Advice Industry’ in general has a very high cost component of Employee Salaries. Hotels have a high cost component of real estate costs and employee salaries. FMCG companies spend a very high percentage of revenues on marketing during the growth phase of products. Technology intervention will likely eliminate or drastically reduce that component and introduce a new optimal business model.

5. Does a solution scale?

Does a school need to add new teachers in the same current ratio when new students are added? Does a bank need to add new tellers or new buildings in the same current ratio when new customers are added? Ubiquitous internet connectivity is slowly becoming capable of introducing solutions to these at scale.

Are you a call center service company providing services to clients? Do you need to add new headcount for handling increased volume of calls in a fixed ratio? SmartAction scales up the solution by using Artificial Intelligence enabled voice self-service and natural language speech recognition. The company claims that it replaces human operators with a savings between 75-95%.

Let us say you are a hypothetical company that offers the service of grading test papers of students. Do you have to employ more human graders for grading more test papers? A company called Measurement Incorporated has developed a technology that enables a computer to grade student responses (including essays), as well as a skilled human grader. The company won a prize from Hewlett Foundation in 2012.

Therefore, a solution that does not scale may have some components in the cost structure that can be reduced by an intervention in technology – be it production, marketing or distribution.

6. Presence of Experts in a solution

Does your solution employ people who are termed as ‘experts’? Experts in a solution are required for their expertise and knowledge that makes a solution very reliable. Here is the problem. Experts are expensive and add significantly to the cost structure. This exposes such a current business model to disruptive attacks with technology intervention.

Earlier, to build beautiful websites you need skilled programmers or ‘experts’. Many companies offered such a service by hiring many programmers and helping companies build websites. But today companies like Wix and Weebly offer a simple solution to people who don’t know programming but want to build websites – just drag and drop different features onto beautiful templates and put together a website quickly.

Earlier, there used to be loan officers whose expertise was essential to sanction a loan. Credit scores have all but eliminated most of them.

Solutions that employ management consultants, financial analysts, chefs, data scientists, programmers, designers, doctors etc. beware. Your business model maybe rendered sub-optimal by technology intervention.

7. Number of intermediaries in a solution

Are there intermediaries in a solution? Intermediaries add to the cost structure and decrease the amount of money that can be passed to the consumers as a benefit. When there are intermediaries and especially when there are a high number of intermediaries, then it is a flag off that the business model might be rendered sub-optimal. New entrants have a disruptive opportunity by clipping off one or more intermediaries in the value chain.
The Sub-Optimal Checklist can be a quick guide to assess the threat to an incumbent business model. I would recommend to use the checklist to reveal ‘cracks’ in a business model quickly sort of like a pilot checking the essentials before a flight. That does not guarantee the safety of the flight however. Similarly, detailed analysis of a business model is required to formulate any strategy.

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