Demand and Supply side optimization: The convergence and opportunities
This is a post on a topic that I’ve found myself discussing rather regularly and have written on some of the themes in the past here and here. It essentially a world of two types of companies:
Type 1: the ones that primarily focus on optimizing demand.
Type 2: the ones that primarily focus on optimizing supply.
For the most part, these two types of companies have operated in silos. As with many things with innovation, it’s fascinating to understand potential opportunities when it’s not either or, but and.
Type 1 companies thrive on having a deep understanding of their consumers / users. Oftentimes, it might be more than what the users actually know themselves. As a result, these companies, all in technology, have created new categories and some of the largest companies in the world.
A few examples. It’s not uncommon to go on YouTube to watch a video on the topic of your choice. As soon enough, the recommendation engine, knowing your preferences, suggests next. And off you go to the next and the ad revenues click in. In addition to providing all the benefits to Prime members, it’s not uncommon that Amazon’s recommendation engine has led to many more things in the shopping cart than you might have originally planned. Apple, with many products customers have come to love, has a growing base of repeat customers who shell out for the new product at every new release cycle. I’m guilty of all three.
As a result, Type 1 companies, many of which have become monopolies in their categories, have primarily solved for revenue growth, user growth or similar metrics.
In contrast, Type 2 companies, primarily non-technology companies, have thrived by having a deep understanding of the supply chain and operations; and optimizing for it.
It’s not uncommon for a large materials companies to have a maniacal focus on, say improving the process yield by one tenth of percent, because it lowers the of the material by few cents per lb. A big deal in industries with thin margins. Or a solar company to have a 3 year cost roadmap with well resourced programs lower the cost by a few cents in metal frame or glass. Again a big deal for margins in highly competitive industries. Many of the Type 2 companies have fractional R&D budgets (vs Type 1 companies), and it’s not uncommon to have R&D teams focus on things that can help the sales team do more sales. Lowering cost is pretty high on the list.
The Type 2 companies, oftentimes operating in highly competitive industries, have thus been solving for lowering costs. Any gains in price, wherever possible, is cherry on top.
What we’re seeing is the convergence of these two worlds, with Type 1 companies moving into asset heavy industries, and Type 2 companies getting built with focus on users.
As many technology companies are investing in infrastructure, focus on commodities — storage, energy, servers; and the associated costs become more important at scale. We’ve seen Google, Meta, Amazon and many other technology companies invest in solar and wind farms. Amazon’s investment in Redwood Materials, which focuses on minerals in the lithium-ion battery supply chain, is operating in an industry where the battery prices have decreased by almost 80% in the last decade. These are only a couple of examples of many. To be clear, there presumably are other reasons — e.g. decarbonization goals, in addition to costs why the companies might have taken these actions.
A handful of Type 2 companies have also gotten formed by focusing on users. Tesla is chapter 1 in that story, where the company has epitomized the focus on user experience and has technology first principles to delight the users. In another industry, synthetic biology, Ginkgo is aspiring to do to the synbio tech stack what happened in technology almost four decades back. And in the process, delight a number of customers across several traditional industries and grow the top line. GAF Energy, a subsidiary of one the largest roofing companies, has focused on gaining users by having an innovative roofing + solar product which has gained many accolades. These companies are growing their top line in Type 2 industries with focus on innovative products and services.
These are just a few examples of the convergence. In the Silicon Valley and other innovation ecosystems, there are many attempts across numerous companies to bridge this divide. It often takes the shape of an innovation group, venturing group, scouting team or something similar. While it’s not a single recipe, the mindset, letting go of traditional biases, and having a right time horizon is important.
I’m bullish on the growth opportunities at the intersection of Type 1 and Type 2 companies. Not only will it lead to revenue growth, healthy P&L, but also solutions to some of the pressing problems of our times like climate change.
What are the other interesting examples that you’re seeing in this area? I invite you to leave it in the comments and join the discussion.
