October 05, 2008

Understanding the Critical Factors of your Business - By Sanjay Anandaram

In the late 1990s, a large number of internet entrepreneurs emerged in India, spurred no doubt, by the successful acquisition of Indiaworld by Sify. All of these young entrepreneurs were convinced that they had the makings of the next Yahoo or Amazon (Google wasn’t that big then!). With very impressive looking web-sites the only thing missing for success, in their minds, was the money. Almost everyone who started an online business in that period believed that THE critical factor for business success was in building a really good web-site which would generate traffic (eyeballs) which in turn would lead to advertising revenues and then the magical acquisition!

But hardly anyone survived that era. And the very few that did, are doing rather well. All those who’re still around and flourishing realized early on that having a good looking web-site wasn’t the most critical factor for the business since the reality in India was rather different. PC and Internet penetration was very low and broadband was unheard of; fulfillment of online transactions had to be managed through a complex network of vendor and supplier relationships, online advertising revenues were mythical and internet payments weren’t going to happen because apart credit card penetration was abysmal and the infrastructure to process payments online wasn’t up to the mark. Therefore they figured out two things - an alternative mechanism for generating revenues and the need to also have an offline or physical world presence. Building a web-site was the easy part, ensuring reliable service and fulfilling customer needs was a very different kettle of fish indeed.

Fast forward to 2008. There still are a lot of consumer internet sites that haven’t internalized the lessons of ten years ago. A lot of startups are also chasing the same dreams in the Mobile Value-Added Services (MVAS) area.

Lets take another example from the last 12 months. Realising that travel was going to be a hot sector, this company invested heavily in acquiring state of the art vehicles. They then launched a web-site and unleashed a marketing blitz that included very attractive prices and options. Sales started booming and the vehicles were on the road all the time. The vehicles started developing small problems which then became big problems. The company had not invested in creating an auto workshop to cater to matters of minor repairs and overhauling. Every time a problem arose, the vehicles had to be sent to the manufacturer for checks and repairs, replacing parts, tuning and the like. Naturally these resulted in delays leading to vehicles being off the roads and very high costs. The company now realizes that having its own workshop, mechanics and spares leads to far lower costs and much faster vehicle turn-around times.

A fast food company decided to be different from the competition by focusing on the guaranteed delivery of its food within a certain number of minutes of an order being placed. Else, the customer received the food free. They then advertised this heavily and soon enough orders started pouring in. The company poured its energy and resources in meeting its promise of guaranteed delivery within the promised time. Given the conditions in India, the costs of ensuring this started mounting. The company invested more in planning its delivery routes, restaurant locations and in technology. It was able to, in general, honour its time commitment. But then sales started slowing down. Upon researching the reason, they found that most customers didn’t like their fast food anymore. The company had focused so much on its logistics that it had ignored the fundamental reason for its existence, namely quality and tasty food! In addition, those who were ordering the food were those customers who weren’t very profitable to the company since they ordered low margin items.

It is important in each business therefore to understand what the critical factors for success really are. Many times, the reasons that appear to be attractive are just mirages while the “unglamorous” activities of the business are the most critical. It is important therefore to really understand this and spend time and energy in ensuring that these activities of the business are built on a solid foundation.

What do you think?

Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own.