Poor Defenders

Some incumbents are poor defenders against disruptive threats by new entrants. As a result when the opportunity arrives they are excellent targets for disruption. Four main categories come to mind:

1. Regulated and Protected Businesses

Highly regulated and protected businesses are poor defenders precisely because for a period of time they are under no pressure to defend. In the western world, they are stodgy old private companies and in developing countries like India they are owned by the Government themselves.

But two major changes may threaten these businesses:

  • These traditionally non-technological businesses are being converted into technology businesses. New York Taxi Cabs and Marriot would not have dreamt they would be challenged by tech businesses like Uber and AirBnB
  • The new tech entrants often operate as platforms and operate under grey areas of regulation but grow very, very fast before the protected businesses can react

And new tech entrants challenging these businesses need not necessarily follow the traditional disruptive path – hiding behind ‘asymmetric motivations’ by initially serving a different customer than that of incumbents and gradually upwards. These new tech entrants can focus directly on the main customer of these protected businesses. This different route has prodded Clayton Christensen to pronounce Uber as ‘not disruptive’ in the strict technical definition of his theory of disruption.

The jury is still out on AirBnB and Uber but it is far from a foregone conclusion that it will favor protected incumbents as has traditionally been the case.

More protected businesses may be opened up in the future because of rising customer costs. Combine that with stagnant labor wages and the Government will ultimately be left with no other choice but to open businesses like healthcare, education and insurance up for technology innovation.

The fate of Indian state owned telecom provider BSNL after the telecom business was opened up is a good example of what happens to protected businesses.

2. Non-Technology Businesses

When non-technology businesses can be converted into technology businesses, the non-tech incumbents suffer and may not have any appropriate defense.

With internet and mobile and other new technologies, traditional non-tech businesses like education, taxi services, hotels, consulting services will have a technology core. And when such industries acquire a technology core, the new business models built are radically different and will have far lower prices. If there is overlap of such incumbents with the previous category, rent seeking and lobbying is the often the only resort.

3. Bundled Businesses

Bundling made a lot of sense (to the businesses more than the customer) in a particular context. Bundle hundreds of channels with your cable TV subscription. Bundle lecturing, sports and games, hostels etc. into a university. Cater to multiple industries and themes as a consulting company. Bundle all types of healthcare – diagnosis, advice, surgery, care etc. in a hospital.  Bundle all news topics – politics, international events, sports, entertainment in a newspaper. Bundle loans, deposits, payments, wealth management into a bank. Bundle multiple songs into an album.

But as tech intervenes more and more, bundled businesses make far less sense for different reasons:

  1. Customers are happy to pay a far lower price for some specific services and not the entire bundle. Pay for one song than an entire album. Pay for three channels than for a hundred.
  2. Different solutions in the bundle may be affected by technology differently. One reason for this is because the business model is vastly different. For example, in a hospital, you pay a doctor for his expert advice and his reputation. Your pay for a surgery depends on the procedure and associated costs.
  3. Focusing on one service rather than a bundle can yield far greater results for customers. Hypothetically consider the example of a university (online or offline) which wants to excel only in teaching. They are fanatic about their pedagogy and continuously try to test how different methods yield different results. They invested in teachers who can motivate students and who may not necessarily be the best researchers. My guess is this will result in far greater outcomes for customers than a bundled university which offers all bells and whistles.

Check out this fantastic image by CB Insights on different startups going after different services offered by a bundled bank!


Death by a thousand cuts!

In fact Jamie Dimon, JP Morgan CEO had the following to say in his annual letter to shareholders:

“There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking. The ones you read about most are in the lending business, whereby the firms can lend to individuals and small businesses very quickly and – these entities believe – effectively by using Big Data to enhance credit underwriting. They are very good at reducing the ‘pain points’ in that they can make loans in minutes, which might take banks weeks. We are going to work hard to make our services as seamless and competitive as theirs. And we also are completely comfortable with partnering where it makes sense.”

Just to be clear, bundled businesses are different from conglomerates. Bundled businesses often price their bundled solution or at the very least are overseen by the same manager.

4. Asset Heavy Businesses

Asset heavy businesses operating in a prior technology are under serious disadvantage. When new entrants with a new technology, threaten their businesses, the manager of the incumbent makes a ‘rational decision’. Rather than investing in the new technology, he decides to produce with the old technology.

Why? Because the huge capital investments have already been made. If you have two options:
1. Produce under the old technology. You will incur lower marginal costs of producing a product because the fixed costs have already been made.
2. Invest in new technology with fixed costs again and a lower variable cost.

It is tempting to choose the first option. But remember that you have to treat the old technology with old capabilities as a sunk cost and invest in new technologies as soon as possible.

The Indian company Moserbaer which was the market leader in manufacturing DVDs missed this crucial point and continued producing DVDs because they made the high fixed costs investment and went bankrupt. Mini mills taking on integrated mills is another good example of this.

Asset Heavy Business models are also prone to be attacked by asset light platforms like Uber, AirBnB, Netflix etc.

From an investment point of view, investing in startups attacking ‘poor defenders’ is a great idea. Poor Defense + Large Market!!!


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