Hugo & Hoby: Using Business Model Innovation to Invade a Bad Market

hugo&hoby

It seems the founders of Hugo & Hoby are off their rocker. When they came to Yale School of Management, they knew they wanted to start an entrepreneurial project together, but instead of entering a welcoming market, Hugo & Hoby have decided to go against the grain.

Ben Young and Frederick Kukelhaus spent the first year of their MBA dedicated to their entrepreneurial dream: selling high quality, affordable wood furniture online. Furniture is not exactly the type of market you would expect a startup to enter head first; the big players dominate with massive scale, niche markets and local players fill the gaps, and Craigslist and Etsy make sure that there isn’t a profit to be made at any end of the market.

The prospect of starting a national furniture manufacturer-distributor without major capital is so difficult that even Yale’s own Entrepreneurial Institute (YEI) didn’t back them the first time they applied. “We’ve had to really change the way we present ourselves because the opportunity we see isn’t obvious to others.” Using local, small scale lumber producers in a sustainable direct trade model that connects high quality, affordable wood furniture with the mass retail market, sounds more like the pipe dream of an FES dropout than the business plan of a former business consultant.

But Ben and Frederick are convinced they can see the forest for the trees–they claim that despite the amount of competition in the furniture market, no one has been able to really give people what they are looking for. “Every time people move to a new home they are facing a life change,” Frederick explains, “no one is giving people the meaningful furniture they want at those times at a reasonable price.”

“Replacing a $120 desk at IKEA with an ‘adult’ equivalent costs $1000 or more,” Ben explains, “and even then, you’re only getting generic, factory-made, impersonal pieces.” The several hundred dollar gap Ben describes is the space Hugo & Hoby are invading, “we are going to give people beautiful, sustainably sourced pieces at around the $350 price point.” Frederick finishes the pitch by explaining the cry of his generation, “your home is a representation of yourself, but there is a disconnect. Furniture is one more conversation piece about what you believe in the world but we don’t have the options to express those beliefs. Clothing has brand, stories, and identity, now we want furniture that tells a story about design, people, sustainability.”

According to the founders, there is already a cult of furniture lovers looking for this product. Certain stores, such as West Elm, are making a foray into sustainable furniture. Hugo & Hoby believe they can beat them. “The customers we are targeting don’t trust the big stores to do it right. We can beat them by doing it from the beginning, giving customers what they want at a price they can afford.”

So what’s the secret? How are two students at Yale SOM going to make a clearing for themselves in the $100 billion furniture market? Ben and Frederickare pretty tight lipped on how they intend to do what no one else has been able to do, but they do provide a few hints. “We’re not building a company with one schtick, we’re innovating on every front, building four businesses at the same time: manufacturing, marketing, distribution, and supply chain.”

They won’t share their secret–with too many competitors watching them closely, they can’t afford to give away the keys to their dreams. But, it’s what they don’t say that explains what they are doing. Most startups provide a product innovation or a market innovation, making sure they have a stronghold on the product-market fit, but Hugo & Hoby are all but ignoring these two important factors. They know that the fit is already there; the product and its peoples are striving to be together, but no one has been able to unite the two.

Hugo & Hoby are heavy-handed on a third dimension of innovation: business model innovation. If product and market innovation is the ‘what’ and the ‘why’, then this form of innovation, often-overlooked by startups, is the art of the ‘how’. By building a specialized value chain with the right scale and considerations, Hugo & Hoby are growing a one-of-a-kind business machine which can take some trees in New England and turn them into a killer product in a Brooklyn studio at a price no one else can hit.

This version of the story is far more compelling, which is one of the reasons Hugo & Hoby is now being supported by the YEI and is receiving interest from partners and investors alike. Explaining how the company is bringing value required an understanding of not only their customers and their product, but also how they were going to achieve the impossible with their business model.

IKEA is a business model innovator. Neat product designs are nice and showrooms are fun, but at the end of the day they provide decent but meaningless furniture at a price no one else can offer. Hugo & Hoby are going to be the ones to provide meaningful furniture at a price no one else can offer. Knock on wood.

Cameron Rout is a dual degree student at the Yale School of Management where he is earning a Master of Advanced Management along with an MBA at IE Business School. He has a background in engineering risk management for the oil and gas industry but also has experience with lean startup methods. Cameron is joining Google as a Product Manager upon graduation this year.

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