Dr Kaustubh Dhargalkar is an entrepreneur-turned-academician, innovation evangelist and startup mentor. He founded three companies from 1990 to 2005 in the domain of productivity-enhancement technologies for manufacturing. Exited all his companies in 2005, took a year off to learn the science of Yoga. He holds a PhD in corporate innovation and design thinking. Currently, Kaustubh works with large corporates (HP, Daimler India, Citibank, Mahindra Group, Capgemini, Honeywell, Eaton, etc.) on ‘how to enhance the innovation quotient’. He trains executives in design thinking and breakthrough concept creation. His views on innovation and strategy are sought by publications such as Knowledge@Wharton, Springer, Engineering & Technology (E&T) Europe, etc.
It’s Logical: Innovating Profitable Business Models by Kaustubh Dhargalkar – Founder – Potentials and Possibilities (SAGE Response, 2020, Paperback (ISBN: 9789353884017) https://stealadeal.sagepub.in/books/
In these disruptive (Post-Covid-19) times, business executives and entrepreneurs need to reimagine their business models going forward. Today, more than ever, there is a strong need for reimagining the way business needs to be conducted through deep empathy and exploring win-win situations for all stakeholders involved. How do you make this happen? Are there any underlying principles that can serve as building blocks for the creation of business models that would create these win-win situations? In my book, “It’s Logical: Innovating Profitable Business Models”, I have enumerated these principles. In the next few paragraphs, I am going to discuss some of them.
Fundamentally a business has two dimensions, the Supply side and the Demand side. Let us examine how we can create win-win situations for all the stakeholders involved (on both, the supply side and demand side). First, let us look at the Demand side: Demand comprises the consumers. Due to the current pandemic, many companies have shut down or are on the brink. People have been laid off or have been subjected to pay cuts. The result is a cash-strapped consumer. Hence, companies have to be able to provide product/services at lower price points, without compromising on quality. How?
Principle #1 Double Whammy
Identifying revenue streams from both, your suppliers as well as your consumers. This enables optimization of costs and ensures a more affordable service for the consumer. Let us understand this through an example:
Duolingo, is a company that gamifies learning foreign languages. It follows a freemium model for the language learning material that it creates. On closer study, we realized that duolingo is actually a company that offers ‘translation services’. The way it has structured its organization is very interesting. The documents that it receives for translation are broken down into small paragraphs/ sentences/words etc. The contents are then animated to create small language learning tutorials, that are fun to use. Duolingo, then uploads these animations on the Google play store and the Apple App store, from where netizens can download and use them for learning the language. Imagine hundreds of thousands of individuals attempting the translations. Duolingo, at the backend captures all these attempts, chooses the best translations from across the games created from the original document, stitches them together and voila…. the entire document is ready, translated, not just at zero cost, but, with its freemium model, Duolingo makes money from ‘paying’ users too. It not only makes money from fees charged for translating the document but also from the users who pay to learn a foreign language. Since, the service is cross-subsidized (with revenue coming in from both ends), Duolingo is able to offer services at a much lower price.
Basically, what it means is that, “Can you figure out a business model, wherein your suppliers double up as paying customers??? J
Principle #2 Monetizing a third-party’s NVA
Identifying someone else’s NVA (Non-Value Adding Asset) and helping them monetizing it.
The most famous example of this principle is UBER. What did UBER do?
UBER launched its beta version in May 2010, with its operations in the city of San Francisco. Initially, the service was restricted to black luxury cars only.
Why only luxury cars? Outside a star hotel, one always sees hi-end vehicles with a T symbol. These are basically taxis that the guests can hire. Are these cars owned by the hotel? No, most of these are leased out by fleet rental companies s.a. Hertz, Budget, Orix etc. Do they have customers all the time? No, they are standing idle for a good amount of time (an independent study claims that around 35% to 40 % of the time they have no customers). Are they happy with this situation? Obviously not. The vehicles in question, usually, are BMWs (5 or 7 series), Mercedes (E-class and above). Any sane business person would want her/his expensive assets utilized to as close to 100% as possible.
The UBER founders, probably, realized this and created the now-famous geo-location platform and approached the fleet rental companies asking them, “Would you take rides when your cars are idle?”
Would the fleet rental company refuse? Why would they? That offer would enable them to monetize their expensive asset to the maximum possible and that too without hampering their existing business.
For the cab commuter, it’s cheaper than hiring that expensive car.
A perfect win-win situation:
The fleet rental company gets business during its idle hours (when its car is actually a non-value adding asset, NVA)
The commuter gets a reasonable price for his commute
UBER gets a commission and creates a transportation business without investing in a single vehicle
Post the success of this ‘Monetizing a third party’s NVA’ model, with the fleet rental companies, UBER quickly sold the idea to individual cab owners. Gradually, people bought cars on their own and logged onto the UBER platform.
Going forward, businesses have to identify NVAs in the ecosystem, help monetize them and optimize their costs to reach out to a cash-strapped consumer (as mentioned at the beginning). In today’s times, with broken supply chains, there are a lot of vendors who have installed capacity but no work. So, Uberization of industrial assets is the way forward. Synergies will have to be forged creatively.
Companies will have to look for such synergies not only within their existing domains, but across the entire ecosystem, what I refer to as ‘Cross-domain Synergies’.
e.g. Visualize a scenario: You are an appliance manufacturing company in a developed country, say, Germany and currently you ship out completely knocked down (CKD) kits to a subsidiary in an emerging economy where they are assembled to create the final product. Such a manufacturer, usually, has a logistics partner company that transports these CKD kits from the parent company to the subsidiary. At present, both, the parent as well as the subsidiary companies are suffering due to the pandemic situation. Operations are in disarray, the market cannot absorb the current pricing. The subsidiary has almost shut down. To perk up demand, the pricing has to be optimized.
How to tackle such a situation?
By virtue of being a logistics company, your logistics partner has access to large warehousing space. So, can there be a tie-up between the manufacturer and the logistics company such that at the warehouses of the logistics company, compact assembly lines could be set up for final assembly? OR
Can the logistics company be allowed to use the real estate of the subsidiary as a ware house, while the production lines could continue running. Since the logistics gets access to real estate, they would subsidise your transportation costs.
Thus, cutting costs for the manufacturer. The overall cost of manufacturing would drop by a good amount. Thus, creating a cheaper product for the consumer, with no compromise on quality.
Principle #3 Pay as you use
Don’t charge a customer a penny more than what she uses (no hidden charges).
Cloud computing has made this possible in the services domain. I feel the physical products domain too would accept this at much faster pace now than they would have otherwise. In the physical space too, we have seen companies like Furlenco which enables you to lease out furniture without having to buy it. Or a company like ‘Rent the Runway’ where you can rent expensive brands of clothing without owning it. These business models will have to be looked at in other domains too, where you are selling physical products.
e.g. if you want to change the tyre of your car, today you have to buy the tyre for somewhere between Rs 3000 to 50000 depending on the car you own. Tomorrow, with sensors embedded in the car, the tyre company might say, “don’t pay us the entire amount of the tyre: pay an upfront amount of say 20% and rest can be paid as you use the tyre”. Today’s cars are equipped with all kinds of sensors that can capture how the car is being driven and charge the customer accordingly like say Re. 1 per kilometer if you are driving on a smooth road and say Rs. 1.5 if you are driving on a rough country road. This kind of a model enables the consumer to acquire the product at much lower acquisition cost and a pay as you use option. For the company, it’s an opportunity to generate revenue all through the life of the tyre. And also capture a lot of data about the performance of the tyre, which would be very useful for R&D. Data about the driving skills of the driver too could be captured , this data could be shared with the car insurance companies which could determine insurance premium according the driving skills of the individual. Thus, the tyre company could monetise the data collected to generating an additional revenue stream.
In essence, reimaginging business in disruptive times is no rocket science, It’s Logical J
For more such underlying principles and a lot more insights, check out the book, “It’s Logical: Innovating Profitable Business Models” by Dr. Kaustubh Dhargalkar. It proposes frameworks (with Design Thinking as the backbone) for creating Win-Win situations to visualize sustainable business models in times to come, which should prove useful in the prevailing, unprecedented circumstances.