Startups need to focus on their inability to create customer value or compete on it.

Unicorns seeking protection have deeper issues need to say ola to flipping strategies
Voices Opinion Wednesday, December 14, 2016 - 12:13
Written by  Archana Venkat

Last week eCommerce unicorns (a term used to describe start-ups valued at over USD 1 Billion) Flipkart and Ola sought protectionist policies from the Indian government that could help them grow in the face of competition from foreign players. The absurdity of these demands has been well discussed by Ramanathan S of The News Minute and Harsimran Julka of Money

However, seeking protectionist policies is only a symptom of the deeper malaise that appears to be plaguing Indian businesses, start-ups more than established companies – the inability to create customer value or compete on it. Unfortunately, this is a white elephant that no one mentions, lest it takes the shine out of the Indian start-up revolution story. Let me explain how.

Absence of tangible customer value creation

Many start-ups discussed in the media today are at best intermediaries or middlemen. They don’t manufacture anything themselves and only link service or product providers and customers on a technology platform. The primary customer value capitalized on seems to be convenience. However, convenience is a value that can conflict with product/brand loyalty.

For instance, while buying grocery items, does the customer really care if they are ordered from Amazon or Big Basket, or from the nearby kirana store? As long as the items needed are available at all stores at a fair price, it becomes a question of who delivers faster, who is selling the product cheaper and who has a simpler shopping interface and payment mechanism. The loyalty fundamentally remains for the manufacturer of the grocery item, not necessarily the delivery organization.

To counter this obvious dependency on price as a driver for purchase, some companies have started creating and selling white label products/in-house brands. However, the brand-building and product support around these items can be improved.

For example, Happily Unmarried sells niche products for male grooming under its Ustraa brand. I purchased an expensive straight razor as a gift for my husband’s birthday from the portal. To understand how to use this product – such as what shaving cream/ foam to use, how to maintain the blade etc. - he called up the company. They were unable to help him and instead asked him to purchase their Ustraa shaving cream at the third conversation. Eventually, my husband found someone in his friend circles who helped him. He also discovered several videos on YouTube on the topic. This was an opportunity for Ustraa to nurture a high value customer. Yet, they didn’t bother going beyond their area of expertise – which was primarily making the product available, collecting payment and shipping it.

Continued focus on price as the growth engine

This is the most logical fall-out of starting a business that essentially creates no tangible value for the customer. I have explained this partially in my previous article on how price may not be the best differentiator for eCommerce companies in the long run. However, if price is consciously chosen as a differentiator, start-ups need to revamp their existing business models and emulate the large companies that tend to compete on price-based models. In that case, courier companies and India Post would be a better example to follow (considering they also provide logistics support) for start-ups than aspiring to be Apple or Google or an FMCG giant.

Ironically, start-ups have typically launched business to fulfil a niche customer-segment’s needs. They do very well in addressing that problem and grow fast. The trouble appears to be when they think the larger market has the same problems and needs as their pilot market. So, they tend to stretch the same business model to satisfy entirely different customer needs.

Lack of vision for long term growth

Companies tend to change course depending on market conditions. Several businesses can be terminated for lack of growth potential and new revenue streams can be identified.  However, most of these decisions tend to be taken in the interest of short term growth and there is no investment in long term growth. For example, Flipkart’s initial growth came on the back of the books and electronics business. One could buy a wide range of items at huge discounts. However, the brand chose to not grow beyond that and to create an ecosystem for sustaining its business by either backward integration of forward integration. (Backward integration refers to the process in which a company purchases or internally produces segments of its supply chain. Reliance getting into the petroleum and refinery business to ensure supply of polyester for its fabrics is a well-known example of backward integration. Forward integration involves expansion of business activities to include control of the direct distribution or supply of a company's products. Reliance’s move to set up the Vimal brand of retail stores to sell its polyester fabrics is a well-known example of forward integration)

For instance, the e-publishing space in India is still blue ocean territory and Flipkart could have created a business that identified new Indian writers, given them a platform for self-publishing and sale. Alternatively, they could have created better technology based interfaces / devices for customers to download e-books and read them (like what Amazon has done with Kindle to secure their book sales). Had they made these investments, it would have been difficult for any competitor to make a dent in their customer base in the long term.

While media reports in the past have talked about Flipkart terminating its music and grocery businesses, I am not sure if the Flipkart team ever assessed growth beyond mere diversification of product range.

It is often blamed that investors don’t want to wait for long term gains and would rather cash out in the short term. In the case of eCommerce, a significant proportion of these investments come from outside India, where markets are conditioned to expect quarterly/ annual growth. Perhaps if funds were sought from Indian investors, it might be possible to convince them to see the merits of long term growth in India. If Indian policies pertaining to operations of companies are a challenge, maybe the eCommerce industry needs to collectively represent its woes to the government and seek a solution to enable ease of business. Considering the government’s focus on Make in India and Digital India, a resolution may be possible.

Poor people management

The average start-up owner today is no different from a pre-liberalization era Lala. He/ She seeks to control every aspect of business, despite the fact that his/her own experience may be limited to 1-2 aspects. Most Indian start-ups are founded by alumni from the IIT-IIM network. The primary skills honed at these institutes is the ability to analyse data and make fast decisions.  Unfortunately, business is about people also – employees and customers. While data may indicate the average salary for certain employee groups, it cannot indicate the underlying motivations of the potential recruit. Similarly, knowing what the customer may buy is different from designing compelling communication to enable the purchase. This calls for different skills and there needs to be autonomy given to leaders who manage functions such as Human Resources and Marketing, for instance.

If these enabling functions are leveraged better, they may help create sustainable differentiators. Take the case of the Tata Group and the Reliance Group. They are both conglomerates invested in large businesses that generate good returns, however the brand sentiments evoked by both organizations are different. This is a result of enabling the human resources and marketing functions.

A similar comparison can be made between Hindustan Unilever and Patanjali. One is a multinational that projects its product quality and community service as planks to gain customer mind share, whereas the other touts its roots in yoga and ayurveda to promote ‘nationalist’ products. Ironically, both may target the same customers in metro cities.

There are several reasons for companies to fail but competition isn’t one of them. In my view, competition should present an opportunity for companies to introspect their practices and course correct for survival. In seeking protectionist policies, eCommerce giants are discounting the possibility of homegrown competition. Instead, they need to focus on strengthening their business, and gaining customer loyalty to face competition.

(The author is a marketing leader and believes competition is essential to create sustainable business)