Nykaa and the hedgehog concept

Nykaa & the Hedgehog Concept

I used an entire hour on the flight to clean my whatsapp. Delete images from the groups, exit unwanted groups, delete chats that were no longer relevant, blocked some spam messages etc. That was like Diwali cleaning my whatsapp. As the aircraft touched the ground and the network was back, there were umpteen messages again, mostly of Diwali greetings and then there was this one, a special one: 

The sender had a couple of queries regarding the forward thinking course SHIFT and had messaged me through the website contact page. The concerns I heard and yet didn’t help her with answers, were her own doubts related to age/work experience and if her profile was fit enough to attend a forward thinking course. To clear someone’s self-doubt, one can help only by showing the path, but the bridge has to be crossed by the person herself. That is what I did, I showed the path and left the conversation. By evening, she had paid for the upcoming course cohort starting 19th November. She had crossed the bridge herself and seeing that I smiled, ‘Tum hi ho nayaka’. (You are the heroine of your story)

It is not my line, it is a beautiful line borrowed from Nykaa’s ad1

Kahani koi bhi ho, tum hi ho nayaka 

As the nayaka of her own unique story, each woman in the film charts a journey fraught with challenges to achieve her own success. The film journeys through hardships of women like a biker who tries stunts, a mountaineer, a rapper in hijab, an entrepreneur and some more. This is what the lady, who had signed up for the course did- she created her own storyline. 

Nykaa got its name from the word Nayaka, the heroine. But if I had to relate Nykaa to an animal today, it would not be a beautiful, strong, graceful animal but it would be a small animal with a cone-shaped face, short legs and body that is covered with porcupine-like quills, the hedgehog, the one that remains focussed on its mission. In today’s Habits for Thinking, let me introduce you to a ‘Good to Great Companies’ concept by Jim Collins, called the Hedgehog Concept.  That is what Nykaa is, a hedgehog. 

The Hedgehog Concept is developed in the book Good to Great. A simple, crystalline concept that flows from deep understanding about the intersection of three circles: 1) what you are deeply passionate about, 2) what you can be the best in the world at, and 3) what best drives your economic or resource engine. Transformations from good to great come about by a series of good decisions made consistently with a Hedgehog Concept, supremely well executed, accumulating one upon another, over a long period of time.

The hedgehog concept

Are you a hedgehog or a fox? In his famous essay “The Hedgehog and the Fox,” Isaiah Berlin divided the world into hedgehogs and foxes, based upon an ancient Greek parable: “The fox knows many things, but the hedgehog knows one big thing.” 

Those who built the good-to-great companies were, to one degree or another, hedgehogs. They used their hedgehog nature to drive toward what we came to call a Hedgehog Concept for their companies. Those who led the comparison companies tended to be foxes, never gaining the clarifying advantage of a Hedgehog Concept, being instead scattered, diffused, and inconsistent. 

Here are three circles of the Hedgehog concept explained: 

1. What you can be the best in the world at

(and, equally important, what you cannot be the best in the world at). This discerning standard goes far beyond core competence. Just because you possess a core competence doesn’t necessarily mean you can be the best in the world at it. Conversely, what you can become the best at might not even be something in which you are currently engaged. 

Example: Gillette – could become the best at building premier global brands of daily necessities that required sophisticated manufacturing technology. Notes: Gillette ability to manufacture low cost, high tolerance products, ability to build global consumer brands. 

NYKAA: Could become the best in cosmetics shopping. 

Just some of several initiatives that the company has taken to become the best:  a) understand the customer cosmetics shopping journey- customers like to read blogs, reviews etc. before buying a product. Nykaa has focussed on creating content both on its platform through customer reviews and outside on the internet space through influencers, videos etc. Nykaa has a strong ecosystem2 which includes Network, TV, Beauty Book, Army among others. There are >1,350 influencers; YouTube based platform has >1m subscribers; 3.1m members are in the peer-to-peer community.  b) catering to the sachet market: Nykaa understands the market and has made available samples and mini product sizes for sampling and consumption. 

2. What drives your economic engine?

All the good-to-great companies attained piercing insight into how to most effectively generate sustained and robust cash flow and profitability. In particular, they discovered the single denominator—profit per x—that had the greatest impact on their economics. (It would be  cash flow per x in the social sector.) 

Example : Gillette-Shift from profit per division to profit per customer reflected the economic power of repeatable purchases e.g. razor cartridges.

NYKAA: Strong Unit economics, a key differentiator3 

While most e-commerce players in India have been burning cash to acquire new customers and drive adoption/ penetration, Nykaa stands out given its strong focus on unit economics. At an Ebitda level, the company has been making steady progress with break-even achieved in FY19, and since then, Ebitda margin expanded to 6.6% in FY21. With growing scale, Nykaa also achieved PAT break-even in FY21. A high Average Order Value, good intake margins and focus on assortment over discounting are the key factors that drive Nykaa’s strong unit economics.

I remember visiting one of the first stores of Nykaa, in 2015 or so. This one was at the airport. Barely stocked with some perfumes, the store was barren of both products and customers. Over the years, not just that store but several other stores came up. Had it been a focus on profit per store, it would not have survived even a few months. Focus on unit economics has been a great strength for Nykaa. 

3. What you are deeply passionate about.  

The good-to-great companies focused on those activities that ignited their passion.  The idea here is not to stimulate passion but to discover what makes you passionate. 

Example: when Gillette executives made the choice to build sophisticated, relatively expensive shaving systems rather than fight a low margin battle with disposables, they did so in large part because they just couldn’t get excited about cheap disposable razors. “Zeien talks about shaving systems with the sort of technical gusto one expects from a Boeing or Hughes engineer.”wrote a journalist about Gillette’s CEO in 1996.

NYKAA: Customer experience:

Nykaa, from its early days and unlike other market places, initiated stocking of inventory to manage customer experience for timely, quick delivery and for authenticity of products. “We didn’t want to be a discount store,” Falguni Nayar said in an interview. “We’d rather sell the right color of lipstick at full price, than the wrong shade at half off which would make the buyer unhappy within minutes of wearing.”

This is just a suggestive hedgehog4 concept for Nykaa. It takes years for companies to find the right hedgehog alignment. When asked how do we accelerate the process of getting a hedgehog concept- Jim Collins replies- “It is an inherently iterative process, not an event. The essence of the process is to get the right people engaged in dialogues to ask right questions guided by three circles.”

The Hedgehog concept is not only applied for companies but also for individuals. It is not a strategy but it is a reflection tool that helps one understand what one can be best at. 

I feel that I was just born to be doing this/ I get paid to be doing this/I look forward to getting up and throwing myself into the daily work

 A Hedgehog Concept is not a goal to be the best, a strategy to be the best, an intention to be the best or a plan to be the best. It is an understanding of what you can be the best at. The distinction is absolutely crucial.   

Falguni Nayar, the nayaka of Nykaa, crafts the path of a success story. The Hedgehog concept, very similar to Ikigai, stands true for both companies and individuals. The framework to reflect, build, reiterate a growth path is a necessity for both an individual and companies. This is the path to growth, this is the path from good to great. 

This Diwali, this festive season, like the lady who signed up for the course, like Nykaa, remember to be the Nayaka of your own story!

  • 1Brand: Nykaa; Advertising Agency: Sideways 
  • 2,3Excerpts from Nykaa IPO: Growth and Profitability Need Not Be Mutually Exclusive by Jefferies dated 18 August 2021.
  • 4I, the author of this piece, have not spoken to anyone from Nykaa before writing this piece. The Hedgehog Concept for Nykaa is based on my years of observing Nykaa, conversations with people in the industry, secondary research that is interviews and equity analysts’ documents. 

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