Why Operations matter more than you think

In my previous post, I wrote about why food delivery companies, like Munchery and Sprig, were not really technology companies — and the reason for their failure was that they tried to grow as a technology company. Which brings me to the heart of the issue — when it comes to disrupting a traditional industry, how do we define a technology company?

Technology can streamline processes, not replace operations.

Uber disrupted the taxi industry, yet does not own a single-vehicle. It did so by building a platform that connected drivers and passengers. Similarly, Airbnb disrupted the hotel industry without owning a single property. Again, it is a platform to form connections. The core competency of these companies is the technology platform. The investment made to serve the first 100 users saw a thousand times return when they reached a million users.

A few years ago, Uber's success gave rise to multiple startups trying to disrupt other traditional industries, labeling themselves as “Uber of XYZ.” It seemed the founders were raining large amounts of VC funding without really understanding the product-market fit or the economics of the use cases. Not surprisingly, though, many of these companies are now defunct.

One such company was the on-demand valet company, Luxe. Neither of the founders or the VCs that funded them thought through the costs of operating such a service. Had they accounted for all the human touchpoints and the high price of parking in prime locations, it would have been pretty clear the cost of providing such a service would not match the price customers would be willing to pay.

[ It is sometimes quite frustrating to see millions of dollars being wasted on companies that create zero value while contributing to a startup ecosystem that is driving home prices up and adversely impacting local communities.] Evaluate the business process when you evaluate the business idea.

When evaluating an operationally intensive business idea, set your expectations accordingly. If run well, an operationally intensive business can be profitable — and profit margins are typically 10% or less. Do not look for the hockey stick return because there isn’t one. Expenses and revenue will grow tangentially.

Here are some questions to ask:

1. What is the total unit cost of the product and/or service? Consider all the costs from when the order is received to when the order is delivered.
2. Is the selling price viable? That means, are customers willing to pay a 30–40% price above the unit cost?
3. What is the potential market size, and how much of it can this business capture (the market share).
4. Does anyone in the founding team have experience in operational management — real experience — have they worked on a factory floor, hotel, a restaurant kitchen, or at a retail store?

Amazon has an operationally intensive retail business. It has a considerable market share and has drastically increased the market size by changing consumer behavior. Even so, Amazon’s record profits are boosted by non-retail revenue streams — the prime subscription fees, advertisement revenue, and Amazon Web Services.

The food industry is operationally intensive.

Yes, food businesses can be profitable, but only if you understand the economics — the time and cost involved in every step of the business process. Your sales and marketing strategy has to be aligned to support business operations. For example: if you are mass-producing an item at relatively low cost, then a marketing tactic that offers steep discounts aligns with your sales strategy (to get repeat customers) and operations (excess inventory). However, if you produce an artisan product handmade in small batches, do not use marketing tactics to drive spikes in sales and put excess pressure on operations.

The recipe for success is to scale operations and sales in the most optimum way while maintaining quality, safety, and brand values. Chipotle is a good example of a business that became a victim of its own success. The company’s strong growth fell out of alignment with its operations, and the company failed to put in place the safeguards needed to ensure food quality and safety. The principles of scaling a technology company cannot be directly applied here. Moreover, the repercussions of selling unsafe or just bad quality food are far greater than releasing a product with a few bugs.

Originally published at https://www.linkedin.com.