Joseph Schumpeter, an Austrian economist, highlights how the gales of ‘creative destruction’ shape the modern economy. The old must give way to the new and improved. Destruction is the very seed of creation, as while companies may come and go, what remains are industries and economies. The present gale of startups in India is a testimony to how the economy is becoming robust, with new-age upstarts usurping the behemoths of the bygone era. 

Think of how Myntra and Flipkart have pulled the carpet from under the feet of BigBazaar, or how Indigo accrued a lion’s share in the fiercely competitive low-cost airlines market, while veterans went bankrupt.

What favours startups? Are all startups destined to be successful? Why does David grow into the vulnerable Goliath?

More importantly, how can businesses safeguard themselves from the vagaries of economic cycles? These and many similar questions are answered here with a global plank and an Indian perspective.

Innovations Exist At The Interstices Of The Markets

An interesting question is: How is it that large companies miss out on new economic opportunities? If you have the brand, capital, access, customers, investors, influence and even top-notch talent, how is it that you can’t do what an upstart can? The answer is simple: you get tied to your value network which blinds you to upcoming opportunities, that are often too insignificant for you to even consider. 

Consider this scenario – if you deem a 20% operating margin as a must for your business and an opportunity arises that doesn’t fit your criteria, you are likely to forego it. It appears too small to pique your interest. You would rather wait for this to become big and then enter. What if it’s too late by then?

This is the dilemma most large companies face – should they stick to their value network and cater to their incumbent customers with sustaining innovations, or should they venture into uncharted markets demanding disruptive innovations? 

In the wake of their economic growth, most large enterprises leave several gaps in the market unaddressed, which they deem insignificant. For instance, Indian banks overlooked those who don’t avail banking services at all in the pursuit of serving customers with bank accounts or going after new bank accounts. This paved the way for the mobile payment ecosystem, pioneered by PhonePe, Paytm and the like.

So, what is the advice for startups? Begin with examining the breadcrumbs, and not the share of pie. Instead of taking on the enterprises and attacking their markets, which they would fiercely guard, you must start with what they have overlooked. 

For instance, Paras Pharmaceuticals, a Gujarat-based pharma company that focused on lifestyle diseases and built compelling brands like Moov, DermiCool, D’Cold, ItchGuard and Krack. These were therapies overlooked by the large players like GSK, Pfizer, J&J, Sun and Dr Reddy’s. The company did exceedingly well because it understood the unique and unstated needs of the Indian customers like an itch in private parts or the cracked heel.

The startup founders should invest in sharp market intelligence, identifying the interests left by the large players, while avoiding any direct conflict with those. The large players would happily cede that space to startups as it complements their offerings and completes the solution from an end-customer perspective. Consider how the payment gateways have helped ecommerce ramp up. Most ecommerce companies rely on other gateways, like Razorpay, Cashfree, PayU and others. So, the best is to avoid confrontation on the incumbent’s home turf.

Startups Must Experiment With Disruptive Technologies

When it comes to technology choices, what should a beginner opt for – the tried and tested, or the risky but promising? The answer lies in the stakes at hand. Enterprises have built their entire empire on time-tested technologies. For instance, IBM stood on mainframe computers for the longest time, and Big Pharma on chemical synthesis-based new drug discovery technology. 

It has served them well for so long, so why question it? They would be very cautious while embracing the new and untested technology, as the downside of trying and failing far outweighs any potential upside. Thus, they would prefer waiting and observing, or, in the worst case, acquiring.

However, for a startup, there are different stakes. They are unknown entities, operating under the radar and innocuous to both regulators and competitors. If they embraced the old technologies, they would be killed by the enterprise: After all, the incumbents mastered the very game the upstarts are entering. But if they choose to embrace the untested, they can leapfrog the incumbent’s trajectory. 

Startups don’t have much to lose but they stand to gain significantly. The stakes for enterprise and startups are opposites, and if the new technology is indeed promising, the startups will march ahead into the future.

In India, the electric two-wheeler market is dominated by big players like Ola Electric, Okinawa, Ather Energy, Ampere and others. The established players like TVS, Bajaj, Hero, Honda and Royal Enfield are nowhere in the lead. They are holding steady to their declining gasoline technology, but not for long. Similarly, the electric vehicle revolution globally is led by Tesla and not the Big Three automakers, the Germans, or even Japanese auto majors who have been pioneers of efficiency and emissions. 

Why is this the case? Sustaining technologies are too lucrative for the incumbents to give up. Their entire value chain and reputation are tied to those technologies. Often, it takes a complete revival of strategy or a near-death experience to take a leap towards adopting new technologies.

Another approach is acquiring a promising startup in a new technology and hoping it serves their interests. However, for these incoming competencies to do magic for the parent organisation, they must have invested in building some absorptive capacity through their R&D efforts, or else the incoming technology would have little chance. The ill-fated acquisition of Nokia Mobility by Microsoft and Motorola by Google are reminders of how acquisitions seldom work when you have missed a big wave.

However, in India, some successes have been seen. The acquisition of speciality ecommerce companies like 1mg and BigBasket by the Tata Group bolsters the case of narrowing the technology and market gap by pumping hard cash. 

However, much remains to be seen how such one-off acquisitions help seed new competencies in a century-old conglomerate. The value networks are hard to break. Other examples include early investment by Hero in Ather or the acquisition of Reva by Mahindra.

As for a startup, a continuous scan of technology is crucial and being late is never a problem if you come riding a new technology wave. That calls for technology intelligence. Even large enterprises have technology functions that scan the horizon, but the investment decisions are highly guided by current interests and most of such technology remains at the fringe, even within the organisation.  

Startups Create New Markets 

In the realm of innovation, much has been said about product innovation, but not so much about market innovation. 

New products are visible and fancy, patent-protected and branded, but new markets are often obscure, hidden in plain sight and receive little attention. That leaves startups with two choices: either introduce a new product or create a new market from scratch.

Since new product creation, or classic innovation, requires funds, maturity, marketing and legal prowess, it is a challenge for most. However, while new market creation isn’t that demanding, it remains quite tricky.

A market is characterised by a set of customers with a well-defined demand and a certain willingness to pay. For instance, online executive education is not for all, but for those who seek online learning as a means of career enhancement. These individuals share similar value propositions: part-time learning, self-paced progress, affordability, recognition and certificates to validate the investment. 

Similarly, there is a market for tattoos in most Indian cities. Not everyone is keen on a tattoo, but for those who are, there is a sophisticated supply system to cater to their needs. Food, garments, entertainment and others, have mini markets, which are self-styled, with specific value propositions and price points. One can consider the market as a congregation of mini markets, each with a distinctive idiosyncrasy.

As a startup, you can penetrate a crowded market by targeting the underserved or the overserved, the marginalised or the overwhelmed. 

The flight aggregator company, Cleartrip, discovered how cumbersome and confusing the current crop of aggregation engines are and came up with a clean user interface and intuitive features. Likewise, Paytm pioneered the QR code-based payment system looking at the difficulty faced by illiterate merchants.

Such efforts are often labelled as ‘Blue Oceans’ – creating uncontested markets thereby making the competition irrelevant. What’s not emphasised enough is that Blue Oceans are best created by startups. They can see the futility of the infested Red Oceans, in which the incumbents thrive. Market creation involves looking across the value chain, at different buyer groups, various time scales, or even emotional-functional orientations.

For instance, Titan analysed the unorganised market of prescription eyewear in India and tilted the appeal from dry functional to rich emotional by creating aspirational brands and attractive designs across age groups. They followed a similar approach with ethnic wear, especially sarees, through the franchise Taneira. Taneira is as much a startup to Titan as Titan is to the Tata Group, with each discovering and building on new markets.

Startups Thrive On Innovative Business Models 

There are broadly three classes of innovations: products, processes and business models. Each of these could further be classified into sustaining versus disruptive, and the sustaining could be of an incremental or radical nature. 

While a lot more attention goes to product innovation for their visibility, followed by process innovation, equally powerful are the business models. A business model depicts how a company generates, delivers and appropriates value. The internet has made several different business models possible and further given a shot in the arm to startups who look at usurping enterprises.

Consider the open-source model of product development, where the core product is free whereas the associated services and upgrades are priced. Another example is the cloud computing era, where you pay for what you use and how you use it as you scale on a need basis while minimising your upfront cost. 

Business models offer startups a level playing field, where they can quickly ramp up their infrastructure on the cloud, hire coders from across continents, and reach new customers through previously unexplored channels. 

Think of how quickly new apps can be commercialised on Google Play Store or how small enterprises can use Instagram to display their creations and garner new markets. This is how startups are adopting disruptive technologies to further disrupt markets. The dropping revenues of conventional media channels, like print and television, is an indication of this disruptive effect. 

Increasingly, the competition is shifting from my-product-is-better-than-yours to my-business-model-is-superior-to-yours. It could well be an inferior product wrapped around a more compelling business model winning the day than a world-class product. That’s how Betamax cassettes from Sony gave way to the VHS standard of JVC Japan, as the latter had a richer ecosystem around it.

The simplicity of UPI payments coupled with a zero transaction fee-based business model has pushed the likes of Visa and Mastercard to extinction in the Indian market. This is not based on superior technology but smart adoption of emerging technology to an old problem while focusing on an unaddressed market.

Business models, if adopted wisely, can give wings to a startup, without much upfront investment. What do all of these indicate about the internal organisation of a startup? Let’s have a look at it now.

Startup’s Two Core Functions: Marketing And Innovation 

Peter Drucker, the dean of modern management, said, ‘Marketing and innovation produce results: all the rest are costs.’ Nothing can be truer in this era. With pervasive new business models, specialisation of skills, and democratisation of technology, a lot can be done better outside the boundary of the firm than internally.  

Ronald Coase famously observed that the firm exists for as long as the cost of bureaucracy is lower than the cost of market transactions. But today, the boundaries of firms are shrinking, for a lot of work can be well done by external experts at competitive prices and without worrying about moral hazard. But then what is left for the firm to do?

Startups, with conservative budgets and sky-high aspirations, must focus their scant attention on two key activities: market intelligence to understand the unmet and unstated needs of the customers, and innovation to build solutions that address those needs in novel and profitable ways. These two functions can’t be outsourced. 

Ironically, most startup founders chase investors instead of chasing customers. If they would rather spend time reading markets, talking to lead customers and working with those to generate fresh insights on problems and then even new concepts, the investors would naturally be drawn to them.

Unfortunately, market intelligence is often outsourced. So, it is the same pack of consultants who keep dishing out similar information and advice to aspiring entrepreneurs. They would tell you exactly what you would like to listen to, for nobody likes to venture into the uncharted. It is within your prerogative to develop a distinctive understanding of your customers, going beyond the stated and the obvious, and then building something remarkable. 

The importance of a startup’s marketing function, not as a mouthpiece, but as an ear, can’t be overstated.