UNFOLDING THE MYSTERY

Back in the 1990s, India was a

foreign exchange starved economy, that
is, there would barely be Forex reserves to cover a
of the
couple of months
import bill for crude oil.
Hence, Indian exporters would be
heavily incentivized through various schemes, since
exporters bring
the much-needed dollars into the
country. One such scheme was
referred to as Duty Drawback policy. As per the policy (back in 1999),
an Indian exporter would be entitled to an
import icense in the ratio
of 1:1, that is, if you exported
goods worth RX from India, you would
automatically be entitled to an import license of X.
Now, understand how the Delhi manufacturer was using this Duty
Drawback policy.
As mentioned earlier, the Mumbai manufacturer's
export shipment
would be worth about 55 crores. An exactly identical
shipment
wasbeing exported by the Delhi manufacturer at approximately
36 crores.
Export price of the Delhi manufacturer/Export price
of the Mumbai manufacturer = 128/195 = 0.656

0.656 X 5 5 crores = R36.1 crores

Against an export shipment of 36 crores, the Delhi manufacturer

was getting an import license of an equivalent amount (R36 crores).
Very smartly, on that import lieense, he was inporting such itenms th.
could fetch around 300 per cent markup in the Indian market, that
that
the goods he imported at the rate ofK6 crores, he could sell at around
is,
R105 crores in the Indian market.
Now, understand the math carefully.
How much was the loss that the Delhi nmanutacturer was incurring on
his export shipment?
5 5 crores-36 crores = R19 crores

How much profit was he earning on his import shipment?

105 crores-36 crores = k69 crores

So overall, he was making a surplus of

6 9 crores-19 crores = k50 crores

Hence, the apparently loss-nmaking business of exporting frying pans at

a price well
below his cost of material, was actually a
profit-making
transaction for the Delhi manufacturer.
Now, my questions to you, all my readers:
1. Was there any hi-end technology involved?
2. Was there any product innovation introduced by the Delhi
manufacturer?
Neither of the above.
But the Delhi manufacturer
nmanaged to beat a much larger and well-
entrenched incumbent. In fact, the Mumbai-based never
company
recovered from this shock..
They wound up operations ana
shut down about eleven
months later. They could not recover froma
20 per cent hit to their
revenues.
Now, this raises a
question:
Why did the Mumbai manufacturer r in
not follow the Delhi manufactut
utilizing the Duty Drawback policy?
Well, that's easier said than done.
Due to the sudden hole of
their revenue, their cash flows suffered badly. Once cash 20
in
per
Hows**
for a toss
 They could not pay their vendors on time and as a result, their
purchase schedules suffered.

They could not pay their workers on time. The workers

went on a 'go-slow agitation. A section of them, affiliated to
a particularly strident union, went on strike. This led to the
company being unable to fulfil customer orders.
Delayed deliveries to customers were enough to spread all
kinds of rumours in the market. When customers (even long-
standing ones) heard about the striking workers and the 'go-
slow' agitation, they began to look for other manufacturers.

All in all, it proved to be a downward spiral, more like a black hole,

from which there was no return.
Another important question might have come to your mind:

Why hadn't the Mumbai manufacturer utilized the import licenses effectively
against their earlier shipments (after all, they were exporting to the Gulf for
many years prior to this incident)?

Well, they would definitely use those import licenses. But they
would buy fancy machineryand equipment from Germany, Japan
and Taiwan to upgrade their assembly lines. They never looked at the
import licenses as creatively as the Delhi manufacturer did. In fact,
many a time, their import licenses would lapse (due to disuse within a
particular financial year).
The Mumbai manufacturer looked at itself as a frying pan manufac-
turer only, while the Delhi manufacturer, probably, looked at his
business as a means to manage and multiply his funds.... Frying pan
manutacturing, for him, was just a means to manage and multiply
his funds.

This is a classic case of Business Model Innovation, going beyond

product and technological innovation. More about Business Model
Innovation in the next chapter.
 IMPRESSIVEIMPRESSIONS
When you think of innovation, think beyond just the product and

technology. Pay close attention to your business model.

Ty not to let one customer over-populate your order book

The Gulf-based importer comprIsed around 20 per cent
a lesser
of the Mumbai manufacturer s order book. f it was
Component, probably, the Mumbai tolks might have been
able comeout of the shock, albeit with a little damage, but
1moreimportantly, with a valuable lesson learnt.

Keep looking for alternate revenuestreams The Delhi

manufacturer was always on the lookout for direct/indirect

opportunities.

. 'Scan the ecosystem ike a hawk with no let-up:

.

Constantly, keep scanning the entire value chain in the

ecosystem. You never know where the next opportunity
couldcome from.
ABusiness Modelis perpetually in a WIP (Work in Progress
mode: Consequently, with the changing ecosystem, keep
re-examining your business model and tweak itwhenever
necessary

Business ModelInnovation vs Product or Technology

Innovation
Coming up with a new product or new technologyis far more
difficultthan relooking at the business model, The journey of product
or technology innovations is an arduous one, involving time, eftofort
and deep domain knowledge. I am not saying that these attributc
are not necessary tor bringing about business model innovation. a
odel
only evaluating the two on a comparative scale and business mo
innovation appears the easier of the two.
Moreover, from a manager s perspective, business model innovation
:

seems easier because most of the parameters required to make that

happen are more or less under her/his control and are more easily
.

tweakable (ifsuch a word exists)

.
: ::

reiterate anm not, for a moment, saying that business model

1nnovationIs superior to either productor technological innovation,
amjust sayingthatit isthe casier of the two for a bus1ness executive.
::.