One fine morning my father seemed unusually baffled to me. Trying to comprehend the business page of the newspaper which was all covered with the news of start-ups and their mounting losses, he could not stop himself asking me that how do they operate businesses with no profits in sight. Though this is not any novel question raised, but it has its answer always placed somewhere along the lines of ‘Farsighted business model’ or ‘Visionary’ or ‘High valuation’ et al.
These are good responses from a non-skeptical start-up ecosystem optimist but one always ends up contemplating over its plausibility. After all, the basics of business cannot be ruled out and a decade old subprime crisis rings the bell reminding of ostrich mentality where everyone agrees to ignore the reality.
All the sources of media and information go with the regular flow as per the daily dose of happenings in the industry. At one period of time, it reflects the boom that start-up ecosystem has brought with drastic expansion, top edge hiring, innovative products and business models. Also, the kind of astronomical figures that goes as an investment into these businesses, through not to be ignored names of the investors like Ratan Tata, Alibaba, Accel partners, Softbank et al, sounds extremely lucrative. But the same sources of information also reflects news items like Paytm at a loss of 1400+ crore, Ola & Snapdeal combined investment made Softbank lose 2300+ crore, Swiggy at a loss of 160 crore and many other shutting their shop after years of trying to reach breakeven.
Well this is confusing enough for a person relying only on these sources and not able to look through it. Undoubtedly, there have been aggressive investors with vain cash to splurge on creating dream enterprises but do such intelligent minds really fall prey to a bubble. Is it a race where the ones who win would lose the biggest or a world changing transformation wave which will disrupt the horizons?
Recently last week, I came across a few news items from the start-up world. Here are the snippets:
- Snapdeal to retrench 600 employees to save costs
- Flipkart to slash Bangalore office size by half to cut costs
- Stayzilla shuts down after years of trying operational efficiency
These are all technology start-ups with apparently novel business models and innovative ideas and workforce. These are the ones which promise disruption with exponential potentials to unleash. But the facts don’t paint such a rosy bombastic picture as the ones that were supposed to work strategically have been cutting corners for operational efficiency. If there are exponential growth prospects in a business, it certainly has to have a definite competitive advantage instead of primarily operating on mere efficiency with tactical decisions every now and then.
Undeniably the start-up ecosystem, which started with a wave of ‘Tomorrow’s Enterprises’, has stuck in the rat race of today’s competition. Instead of creating the competitive advantage, the start-ups have indulged in vanity of competition itself that gradually has been subsiding the value of the ‘idea’, which it initiated with, by converting it into a mere commodity business serving price-sensitive customers.
What is it that has gone wrong in the whole scenario of expectation vs. reality? The whole approach towards the concept of ‘Growth’ has been redefined by the modern age businesses. The growth parameter which had primarily been assessed by the profitability aspects has taken a more subjective approach of different forms id est. gross merchandise volume (GMV), enterprise valuation (EV), user base, investment amount, workforce size, office infrastructure et al. This needs to be acknowledged that growth for the sake of growth is the ideology of a cancer cell and losing the sight of profitability for chasing the virtual parameters does no good. Somewhat this can be back tracked and related with few of the prime cases.
- Spreading oneself too thin
Wal-Mart was the traditional brick and mortar discount retail business. It was into an industry that did not have many trade secrets or rare skills. In 90s, Wal-Mart ran into huge profits and then stumbled upon expansion bait. The market that it dominated and in which it first enjoyed competitive advantages was not discount retailing in United Stated but within a clear circumscribed region. The hub and spoke model which clearly proved to be differentiator earlier for Wal-Mart got deteriorated when it expanded with additional stores and distribution centres. Certainly, expansion/diversification could not replace the significance of profitability and hence the game of economies and diseconomies of scale becomes an interesting genre.
- Performing all the Core and Non-core activities under one roof
Biting more than one can chew is not a wise idea, considering those who end up controlling nothing in pursuits of controlling everything. The ‘core’ activities of a business are those that define the existence of it while the rest are to be considered ‘non-core’ which includes critical, important, regular and others. These non-core activities cannot be avoided but they are not the ‘soul’ of the idea/business and can be easily replicated. Netflix’s, the video streaming company, understanding of getting into content production side and making it the core instead of creating proprietary streaming technology itself made the differentiation for it and helped to optimise and avoid wastage of resources. Hence, the inability of new age businesses to identify, realise and differentiate between the core and non-core activities makes the differentiator component null and void.
- Innovation and Transformation
It has been said that all that could have been invented has been invented and further path can be carved only through excellence in innovation. Gone are the days when land, labour and capital were the basics of a successful business. Innovation is the substance to swear by. The innovation domain not adumbrated, can possibly be through product itself, technology in use, business model, management practices or even sales and marketing strategy. The smallest example can be taken from Flipkart which was the first to introduce cash on delivery (CoD) system in India which was a novel idea considering the demographics of the country and introduced it as a recognisable name in the industry by reaping benefits of customer acquisition and brand recognition. Though the initiative of CoD was replicated soon enough by other players but still created ripples for the company and probably this is the pace of change with which the innovation is required in today’s business scenario with one constant vision in view.
- Perception is more vivid than reality.
What is it that one online portal offers you that the other doesn’t? What and why is it that you look across websites when you are sure of what product to buy? The answer to both the questions is most obviously a better discount. Perhaps because this is what these businesses have been reduced to. Customers are not in habit of any particular proposition that attracts access to market demand, let alone eliminating the choice of substitute. Successful business leaders put their efforts in creating perceptions like coke does marketing and outsources bottling whereas Nike excels at design and partners for manufacturing. It is no brainer that creating a robust perception in minds of consumer reaps long-lasting benefits. It is daunting but desirable.
Creating value for shareholders, customers, employees and society is the key objective of any business. No doubt start-ups aim at it and deliver it to an extent but it doesn’t hold much water unless it is sustainable. Sustainability for businesses with exponential growth lies in creating the competitive advantages by creating moats through well-strategized business models. Creating moats necessarily doesn’t mean to strive for monopoly but inclusive, comprehensive and sane growth.
After taking the infamous decision of heavy retrenchment, the recent mail from Snapdeal leadership to its employees, where basics of business are being acknowledged, seems like enlightenment dawned upon the stray heads. An excerpt from the mail reads “a conscious departure from a me-too-race to the edge of the cliff. Let’s remember- GMV is vanity, profit is sanity.”
No issues with trying and failure but running a vain race put a lot of matter under evident risk. The path of actualization is certainly through realisation! It’s just that the early the better!