Back

Non-consumption is your fiercest competition—and it’s winning

By:

Jul 27, 2016

Non-consumption - Rio FavelaSanta Marta favela in Rio de Janeiro. In Brazil, less than 14% of people own an air conditioner, and less than 1% own a car.

The Oxford dictionary defines competition as the person or people with whom one is competing, especially in a commercial or sporting arena; the opposition. For businessdictionary.com, it stands for rivalry in which every seller tries to get what other sellers are seeking at the same time. Bringing these definitions to life, a 2013 Fortune article titled: ‘The 50 Greatest Business Rivalries of All Time,’ highlights competition between some of the world’s most well-known companies, pitting Coke against Pepsi; Ford against GM; Nike against Reebok; Airbus against Boeing; Procter & Gamble against Unilever. These examples embody the way we view competition. But the view is flawed.

The way we define competition, and the method employed by companies to assess the competitive landscape, leaves out the most important competitor of all: nonconsumption. And nowhere is this feisty competitor more prominent than in emerging markets. According to research from McKinsey & Company, leading companies in the developed world earn just 17% of their total revenues from emerging markets, despite the fact that they represent 36% of global GDP.

Nonconsumption is the inability of an entity (person or organization) to purchase and use (consume) a product or service required to fulfill an important job-to-be-done. This inability to purchase can arise from the product’s cost, inconvenience and complexity, along with a host of other factors—none of which tend to be limitations for the rich, skilled, and powerful in society. For its part, a job-to-be-done arises when an entity is struggling to make progress in a particular circumstance, such as when someone gets sick and tries to recover. If there are not adequate facilities that can aid their speedy recovery, then that person is a non-consumer of basic health services.

Health, of course, is just one in a long line of sectors and industries plagued by lack of consumption. Consider the markets for cool air (typically served by consuming air-conditioners), food and drink preservation (typically served by refrigerators), and mobility (typically served by automobiles) in Nigeria. According to market intelligence firm, Euromonitor, in 2015 only 2.5 percent of households had access to air-conditioners, while just 19 percent had access to refrigerators and barely 9 percent had access to cars. Over the past five years, those percentages barely changed. Compare these numbers with those in the United States, where 83.4 percent of households have air-conditioners, 99.9 percent have refrigerators, and 86.5 percent have automobiles.

If nonconsumption were a company in Nigeria, or in almost any other emerging market, it would have a monopoly in most industries. Let us consider the ownership of the three products mentioned above in ten emerging markets and eight frontier markets (those undergoing significant development yet considered too small to be emerging). The tables below show the ownership percentages per household for both refrigerators and air-conditioners and the number of passenger vehicles per household in these different countries.

Table 1:  Emerging Market Data

Table 1

Source: Euromonitor

Table 2: Frontier Market Data

Table 2

Source: Euromonitor

The data in both tables points to an abundance of nonconsumption in these markets. To appreciate the gravity of this insight, consider the United States and Kenya in terms of car ownership. The former averages one car per household and has an efficient transportation infrastructure, while Kenya averages just 0.1 cars per household without similar transportation infrastructure in place. In other words, one cannot make the argument that Kenyans simply leverage other (or better) means of travel. If many Kenyans have a difficulty in traveling or in moving their goods from one place to another, then there is significant nonconsumption of mobility in Kenya.

What can entrepreneurs, managers, and investors do about nonconsumption?

Entrepreneurs, investors, and managers can invest in a specific type of innovation called ‘market-creating innovation’. According to research from Harvard Business School Professor, Clayton Christensen, there are three main types of innovation, namely: sustaining innovations, efficiency innovations, and market-creating innovations.

The latter, which are of most interest here, transform complicated and expensive products into simpler and less expensive products, making them accessible to significantly more people in society. Market-creating innovations pull people from nonconsumption into consumption. Companies that engage in these types of innovations are the engines of economic growth in an economy. It is through market-creating innovations that the other types of innovation are birthed.

Sustaining innovations, meanwhile, target existing consumption. These innovations have more features, are sold for more money, and typically have higher margins. When Samsung releases a new version of a refrigerator with the ability to connect to a smart phone, or when Toyota releases the latest Camry or Corolla, these represent sustaining innovations.

For their part, efficiency innovations enable companies to do more with less. They free up capital and increase company margins but they do not fundamentally change the business model of most firms. Examples of such innovation include, for instance, when companies outsource operations to other regions to take advantage of lower cost, or when companies replace labor with technology.

The table below illustrates some of the attributes between market-creating innovations and the other types of innovations.

Figure 3

*Payback period depends on varying factors including the complexity of the product and regulatory environment.

As government officials in emerging markets think about infrastructure development, it is important that they also think about market-creating innovations that are targeted at the vast nonconsumption in their countries. These innovations, if executed properly, can provide much needed tax revenues.

Efosa Ojomo

Efosa Ojomo is a research fellow at the Clayton Christensen Institute for Disruptive Innovation. Efosa’s work focuses on using disruptive innovation theory to fundamentally change the discourse in the global development community, thus enabling nations to engender their own path to long-term growth and prosperity.

  • Sunday Negedu

    With the current economic challenges faced by our very dear country Nigeria, I had often wondered: ‘Where are the Adam Smiths?’. I call this concept of market creating innovation: economic revelation for the 21st Century economic burden faced by Africans.
    The education sector in Nigeria is one of non-consumption that, in my candid opinion would require experts in this area to adopt the market creating innovation to make education affordable and accessible to our children and young and even the older ones who require skills to be able to sustain their family, economically.

    I appreciate your creative and profound research very dear Mr Efosa Ojoma and the Clayton Christensen Institute. These are great thoughts that are powerful in reviving the socio-economic terrain of growing economies like ours.

    Many thanks.

    • Efosa Ojomo

      Thank you for your comments. They are deeply valued.

  • This is the business solution to poverty in less than 1000 words. Very insightful post. Keep pushing boundaries.

    • Efosa Ojomo

      Thanks a lot for your comments.

  • Very profound insights

    • Efosa Ojomo

      Thank you very much for your comments, Mr. Okere. We value your feedback.

  • Kunle Ayodeji

    Well written article. A new perspective of possible areas of growth for Entrepreneurs and Governments of Developing Economies.

    • Efosa Ojomo

      Thank you very much for your comments.

  • Isioma Utomi

    I find Clayton Christensen’s work quite interesting. I hope to see more market-creating innovations in Nigeria and other developing countries. Thanks for the article!