Creating sustainable business models

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SME Times News Bureau | 17 Feb, 2020
As we move ahead with the next phase of growth and dynamic changes in sectors across the spectrum from consumer-related businesses to infrastructure in India, a focus on long-term sustainable business models that can deliver both growth and cashflows will be essential.

Sectors from retail to energy have seen old business models challenged and, in some cases, upended. As businesses, investors and the government look at the next phase of growth, a focus on the sustainability of the business in the medium to long-term is vital, besides promoting new business models and technologies.

Regardless of what sectors we look at, the two fundamental questions to ask are whether the business can realistically make profits? And, who will pay? These two questions need to be asked by investors and policymakers alike.

The above discussion applies across the spectrum from energy to retail. For example, when pricing the sustainability of models in the energy space, a focus on the entire supply chain is crucial. For instance, a focus on the cost of energy production is important when one looks at the business model, but if there are significant changes required to the grid and the distribution networks, then the question in terms who finances the concomitant infrastructure changes assumes great importance. Mainly, low-cost energy that can't be consumed isn't a sustainable business model.

The focus needs to be on a model that can price in all the costs involved and, more importantly, access the financing required. Access to the funding required immediately translates into creating business models that focus on the source, price and availability of financing. For an energy business, the ability to pinpoint the infrastructure needed and the funding source will be vital even as India looks to transform its energy production combination with a much more significant focus on renewables and natural gas.

The same argument applies to brand building space. Creating a disruptive consumer brand is one that has attracted attention. While creating a great product is a critical component, as consumer-facing businesses will admit in selling to consumers, one of the biggest drivers along with product quality, if not the biggest, is the distribution network. Therefore, as investors look at the Indian market, a focus on understanding businesses that have deep and entrenched distribution networks will be crucial towards creating sustainable and profitable companies in the long run.

To further elaborate on the point above, a great product will appeal to a consumer if the value delivery in that consumer segment is over and above what the market offers. However, the long-term sustainability of the business is primarily driven by the capacity to reach a broad consumer base through an extensive distribution network to create the economies of scale required. Strategies that allow for the creation of extensive distribution networks and ensuring that the costs involved are priced into the model is essential.

Mainly, the focus must be not just on what can be sold, but more importantly, how? Consumption habits in India, including the propensity to consume online, can be significantly different from those in other markets. Success in India may be driven through the capacity to create India-centric business models. While it is true that for new models there is a significant challenge in pinpointing exact business models that will work, the critical aspect that needs to be kept in mind is a constant focus on profitability and cashflows is required in addition to innovation.

Additionally, regardless of what sector one is in, it is essential to realise that India is a very different market from the more developed economies. While India is a large market at an aggregate level, per capita incomes are still significantly lower than some other developed economies. Therefore, business models, whether in infrastructure or consumer side, need to price in the complex dynamics that at times can be the difference between success and failure in India.

The next phase of investing and policymaking in India needs to have a renewed focus on creating India centric business models. For sustainable cashflow generating profitable models, having a broad view of the market structure and pricing in all the costs involved will be crucial.

(The views expressed in this article are personal and that of the author. The author heads Development Tracks, an advisory firm. You can contact him at taponeel.mukherjee@development-tracks.com or @Taponeel on Twitter)