Learning Disruptive Business Models from Prof C.K. Phahalad


One of the greatest Strategic Management experts and co-founder of the concept of Core Competencies, the late Prof Coimbatore Krishna Prahalad or C.K. Prahalad of the University of Michigan, USA, was one who talked about next practices and about industries that did not exist at all. His contribution to disruptive business models was unique. Some dimensions of his thinking are discussed in this article.

Introduction

Prof C.K. Prahalad was ahead of his time. Though he is no more, his ideas continue to captivate millions of managers. His ideas were very original and born out of a massive amount of research. As early as 2008, in a superb interview to Indian Management, the journal of the All India Management Association, May 2008 issue, pages 62 to 71, he had explained what it takes to make disruptive models change the entire course of business in a particular industry. We will take an entire lot of key information from this interview and then anchor it in the particular Indian context. It is another story that there are a large number of examples from our own Corporate India to illustrate the revolutionary ideas.

Asked what does the disruptive business model mean, Prof C.K. Prahalad went on to describe it in terms of five criteria. (pages 70 to 71) .

"Five criteria are critical to understand what disruptive business models mean.

* Does it radically alter the economics of the industry?

* Does it maintain and improve functionality? "It is not just about lower cost, it is about improving functionality. In fact, both of them go together if you know what to do.

* Does it make it difficult for incumbents to react? In other words, you do not want other people to be able to copy what you have done rapidly. You want to make it difficult for them because they have to forget what they have learned and they have to readjust their asset base in order to compete with you and therefore make it difficult for them.

* Is it sustainable? Is it based on logical internally consistent business principles?

* Does it enlarge the size of the market?"

We will now discuss each of the five criteria in some detail. "

Does it radically alter the economics of the industry

Jio came in and destroyed the "pay for voice" market of Airtel, Vodafone, Idea and every other single player. Reliance is gone. Aircel is gone. Airtel and Vodafone are bleeding. The combo packs are so common. Now comes the real threat. It is now being said that when Google comes out with its futuristic products, data may either become much cheaper. If that happens, even Jio will find it so difficult to survive. And what will happen to cell phone providers? Their ARPU ( Average Revenue Per User) is coming down day after day. The massive number of new contract jobs have opened up the market for low priced products. Even the big players like Britannia are forced to continue "20% extra" offers and this reduces their margins. ITC is closing in with a large number of products, that rival each offering of Britannia. The game is on. It is a ruthless game. The profit margins are always down. Britannia may have come out with superb products, but the market is tight. The economics of the industry keeps on changing.

Does it maintain and improve functionality

Just a decade ago, one never had the online agencies like makemytrip.com. This has reduced cost. They also offer good discounts on various other services too. If there is an issue, they immediately follow up with the service provider. OYO rooms is growing by leaps and bounds. There is low cost and it does improve functionality. Ola is improving the functionality of providing low-cost car travel to customers who were fed up with the auto drivers in the cities like Chennai, Coimbatore and so on. The functionality comes at a very minimal cost and the business models of Ola, MakeMyTrip and so on have helped the middle-class customers to enjoy the cost advantages. It is now happening to online food agencies too. They accept bare minimum orders. It is another story that the boys who deliver are not paid so well and do slog it out. This is the price of massive unemployed educated youth. For them, these kinds of jobs keep them in the city. Period.

The disruptive IT-enabled business models will continuously cut down on travel costs too. For example, imagine the petrol expenses saved when one can sit at home and do the online booking of rail tickets through what is called the irctc website. The game is a big game. The present trends will continue and the customer is pampered.

Does it make it difficult for incumbents to react?

This depends on so many factors. However, in some markets, there cannot be any new player at all. Consider the cell phone industry. The service providers will just be three or four. Even they are finding it so difficult. The functionality that is already there in the product offering does make it very difficult for others to copy. Hence, when the new competitors think of coming in, they can't. However, in cities like Chennai, there are local players who cater to different tastes. There is a big market for what is called "home cooked food". Some intelligent guys, with some IT background, have started the rival product offering. They have simply roped in housewives who already prepare good food. The orders are based on the bookings received before a particular time, say 8 AM. The money is paid in advance. The lady has to prepare the vegetable side dish, for example, for five more people. The delivery boys carry this stuff and deliver it in the respective houses. This enables the housewives to make a cool Rs.15,000 per month. There are many who have also started supplying the non-vegetarian dishes. They earn even higher. This game is different. It is also an IT lead but it does take away the "from restaurant" market to some extent. Every single customer does know that continuously eating online ordered food does give them health problems. Those who go for safer alternatives prefer the home cooked food. However, it should be noted that the market is just a fraction of the total market. The market itself is growing by leaps and bounds even in cities like Bangalore and Hyderabad. Hence, disruptive business models keep on working. For example, there is one shop that is open right through the night. It caters to the late night travelers and the early morning shift IT employers who grab a bite. This is in the Velachery area of Chennai city. Such innovations that are also disruptive will continue to happen.

Is it sustainable? Is it based on logical internally consistent business principles?

This is another aspect that we need to consider. What Prof. C.K. Prahalad talks about is the kind of competency that is available throughout the organization. For example, in any middle-class restaurants, the cooks, or "masters" as they are called, are a highly competent lot. In the likes of branded restaurants like Saravana Bhavan, they bring with them, years of experience, where they have honed their competencies. The training to others is also done so systematically. For example, those who prepare the vital sambar at Saravana Bhavan, Chennai, do it with such competence that it has never been understood as to how it is being done. This competency has enabled the restaurant to accept very large party orders. They serve even one thousand employees on a particular evening, at one International Conference in the city. Everything is so wonderfully organized. When the two questions are answered satisfactorily, the business keeps expanding. It should be noted that Saravana Bhavan itself was a big disruptive innovator decades ago. It innovated a business model where it could satisfy the relatively richer class of customers and the floating population to the city of Chennai. The relatively richer classes of this transit population are around three lakh customers. It also includes the Hindi-wallah population, who have one full day to roam around, eat at Saravana Bhavan and catch their trains at night. This crowd is growing by leaps and bounds, every single day. There are other examples too. Apple Computers have been able to sustain their fabulous products only because they have been able to build the competencies so quickly.

Does it enlarge the size of the market?

Contrary to public perception, the upper-middle-class market in the metro cities does not mean only the IT crowd. It also means the hundreds of thousands of small businessmen who laugh all the way to the bank, with incomes of over one hundred thousand every month. It is this class that is also increasingly seen in all the shopping malls and the beauty parlors. In the multiplexes and in the theme restaurants that are ideal places for summer retreats. Every single such product offering keeps on increasing the size of the market. Each and every product that is a disruptive business model will simply make it big. The market is huge and it does enlarge the size of the market, every single day. To give one simple example -- Ola customers are reportedly growing at over 25% per annum. Any such disruptive business model will keep on growing in India. Look at the theatres in the multiplexes, Even the worst of movies make money for two continuous days. This is because the crowd there is the "freak out" crowd and more on weekends. It is also the same snobbish crowd " it is fine yaar. Watch the movie only at Phoenix mall" kind of yuppy crowd. Any single business model that disrupts the market for the discerning young crowd that is relatively rich, will prosper.

Conclusion

Prof C.K. Prahalad is no more. Yet, the ideas that he came out with, were so highly original. He had the knack of making everything look so simple. The aforesaid discussion is only indicative. It is so easy to find his ideas at work, after a decade. 2008 is gone. 2019 is in, So, in 11 years, a number of new businesses have proved him right. Hats off to him!!


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