June 10, 2010

55) ITC Limited (eChoupals)

危 wēi  danger

As I outlined in a post last year the Indian agricultural market is tough.  Farm ownership tends to be heavily fragmented, the infrastructure is often poor and historically the supply chain has been clogged by middlemen. This makes life difficult for both farmers and the buyers.  For example, often farmers would have to travel for days to a market with no knowledge of current prices, once there the exploitative middlemen could pay below the market rate and refuse to pay any premium for quality.  It has been estimated that farmers were losing up to 60% of the value of their crop as a result.  This in turn disincentivised the farmers from improving their crop quality and made supply to the industry’s big buyers unpredictable.  Large food buyers, such as ITC Limited (an Indian conglomerate), would surely have to accept this status-quo?

机 jī opportunity

No, to the contrary ITC has harnessed technology to overcome these structural problems by investing in internet kiosks in rural villages.  The kiosks, named eChoupals, enable the farmers to sell direct to ITC at an agreed price, give access to best practices and enable them to place orders for agricultural inputs such as seeds and fertilizers.  In order to instill trust in the system ITC trains a local farmer to run the system and places it in their house – on average each serves 600 farmers in the surrounding ten villages.  To ensure that they remain incentivised the sanchalaks receive a small service fee.  Even after this service fee it is estimated that farmers’ profits have increased by more than a third and ITCs costs have reduced. The conglomerate plans to scale up to 20,000 eChoupals by 2012 (from 6,500 today) potentially servicing 15 million farmers.

How About…

  • Harnessing technology to disintermediate inefficient value chains?
  • Empowering local talent to assist in supporting your customers?

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April 6, 2010

45) Netflix

危 wēi  danger

Video stores emerged in the 1980s and enjoyed explosive growth over the next decade. None is better known than Blockbuster, which opened its first store in 1985 in Texas and subsequently grew to 9,000 stores in 25 countries worldwide.  Blockbuster was highly innovative, driving its rapid growth through franchising (at its peak opening one store every seventeen hours).  It also improved on the traditional model of buying new video releases for a large flat fee by negotiating revenue sharing arrangements with the film owners, enabling it to access new releases at low fixed cost.  Blockbuster’s dominance led to its sale to Viacom for a price of $8.4 billion

机 jī opportunity

Surely Blockbuster’s scale, negotiating power, brand recognition and prime real estate made entry into the film rental market a guaranteed failure.  Not if Blockbuster’s ‘strengths’ could be turned into weaknesses – which is exactly what Netflix’s model did when it entered the market in 1997.  Netflix turned Blockbuster’s expensive retail channels into its Achilles heal by distributing via the internet.  Netflix also leveraged the strengths of the internet to improve the consumer experience – offering tailored recommendations, greater movie choice (at lower cost because of centralized stocking) and greater flexibility.  Netlflix even smooths demand by inviting its customers to create a list of films they want to watch and Netflix chooses the order in which they receive them.  Netflix owns more than 55 million discs and, on average, ships 1.9 million DVDs to customers each day.   In stark contrast Blockbuster Inc has spiralling losses and is more more than $1m in debt – forcing it to announce that its European arm was being put up for sale last month.

How About…

  • When looking at disruptive business opportunities start with the incumbents’ P&Ls – where do they spend the most money?
  • When disrupting these high cost aspects of the incumbents’ business models exploring how the new approach can improve the customer experience above and beyond cost?

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March 15, 2010

44) Zara

危 wēi  danger

The $300-billion fashion industry has always struck me as a tough industry to disrupt – after all it’s dominated by global fashion houses that have enjoyed a near monopoly on trend-setting – trends that they drive through expensive fashion shows and enormous marketing campaigns.  The industry is highly seasonal (conveniently improving the fashion houses’ product turnover) and consumers have grown to accept that they have to wait 6 months or so to buy the clothes that they see on the catwalk (the time it takes the incumbents to organize manufacturing through third parties).

机 jī opportunity

Zara’s contrarian approach has turned this model on its head – instead of investing in setting trends (for many years it had a zero advertising policy) it is almost entirely reactive and focuses on keeping its costs low.  Its whole model is geared around speed to market and low cost experimentation – for example unlike other large fashion houses, Zara owns all of its designing, manufacturing and retailing operations – enabling it to retail product that it designed less than 2 weeks earlier. It relies on its frontline employees to feedback on emerging trends, and use PDAs to feedback instantly on the success of its new lines (which are initially made only in medium size to limit investment).  Stock is made to order and can be replenished within 36 hours in any store in the EU.  Zara’s pioneering approach, often described as ‘fast fashion’, has helped it overtake GAP to become the largest fashion retailer in the world – in part driven by the fact that its rapid stock turnover leads its patrons to visit its stores 17 times a year versus the industry standard of 4 visits.  Zara rightly is changing the industry and scaring the traditional firms - Louis Vuitton fashion director Daniel Piette described Zara as “possibly the most innovative and devastating retailer in the world”…

How About…

  • Harnessing your front-line staff to feedback consumer responses and set strategy?
  • Question the status-quo in industries that are structured in a way that detract from the consumer experience?

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