Investing and innovating in “developing” economies is often seen as more risky than investing in “developed” economies. However, it is precisely these actions that enable countries to climb up the economic ladder. The question, then, is how can innovators build successful businesses given some of the challenges inherent to underdeveloped economies? Here are five insights our research has uncovered.
1. There are two types of economies: the consumption economy, and the nonconsumption economy.
Innovators should understand that in every city, state, or country, there are two distinct economies. The consumption economy comprises of people or organizations that can afford or “consume” existing products and services on the market. The nonconsumption economy is made up of those for whom existing products or services on the market could help them accomplish something, but they are unable to obtain them often due to the cost or skill required to operate them. For example, before the advent of affordable mobile phone connections in many parts of the world, billions of people were nonconsumers of mobile telecommunications. Understanding the distinction between these two markets is crucial to developing the right strategy for targeting them.
2. “Pulling” often works better than “pushing”
In the global development industry, experts commonly “push” resources, programs, and processes onto low- and middle-income communities based on the experts’ priorities, with little consideration of the recipients’ circumstances. In contrast, “pull” strategies respond to specific needs represented in the struggles of everyday consumers, thus ensuring that efforts are not wasted.
Consider this example. Indian Prime Minister Narendra Modi’s government is currently executing the “world’s biggest toilet-building spree.” The 111 million toilets the government plans to push onto Indian households will cost roughly $20 billion to build. On the surface, it makes sense. India has a colossal open defecation problem which leads to premature and preventable deaths of millions of children annually. But there are signs that the project isn’t working as well as many have expected.
Chaudhary Birender Singh, India’s minister for rural development, explained, “For long, we assumed that if the toilets are built, people will automatically use it. But we have to diligently monitor the use over a period of time and reward them with cash incentives to the village councils at every stage. Only then will it become a daily habit.” What might happen if the Indian government, before pushing billions of dollars’ worth of toilets, tried to understand why hundreds of millions of people open defecate? Answering this basic question would help the government determine how to develop a much better program that people would actually want to pull into their lives.
While this insight is particularly relevant for those working in the development industry, the lesson applies to the private sector as well. Don’t push products that have worked in one market into another without understanding the specific circumstances of customers in the new market.
3. Identifying customers’ Jobs to Be Done opens up innovation opportunities
The Theory of Jobs to Be Done is a framework for better understanding customer behavior. While conventional marketing focuses on market demographics or product attributes, Jobs Theory goes beyond superficial categories to expose the functional, social, and emotional dimensions that explain why customers make the choices they do. The innovators responsible for M-PESA intuitively understood this and developed a mobile money platform that leveraged the vast informal retail network in the country and the proliferation of mobile phones.
In the mid-2000’s, there were just over 1,000 bank branches for Kenya’s 37 million people. Most people in the country were part of the nonconsumption economy as it related to banking, with the job, “Help me conveniently and safely send and receive money.” In response, the mobile telecommunications company Safaricom figured out a way to enable people to send “mobile money” to merchants, friends, and loved ones without going through the cumbersome process of signing up for a bank account. It nailed their Job to Be Done and was a huge success. Today, more than 20 million Kenyans use the service and transact roughly $4.5 billion monthly via their mobile phones.
4. There’s a time to integrate and a time to outsource
In many high-income countries, investors and entrepreneurs can outsource low-value components in their value chain. For example, many companies have outsourced their distribution and logistics needs to organizations such as UPS, FedEx, and USPS. These logistics organizations provide services that most companies can rely on. Unfortunately, it’s not so easy to outsource even some of the seemingly lowest-value activities in low-income countries because of the severe dearth of private and public infrastructure.
The lack of well-developed infrastructure makes it more expensive for companies to develop and distribute products and services to those in the nonconsumption economy. This means that for companies to do one thing, like sell consumer goods, they must do many things in the product’s value chain. For instance, to make and sell bread, a company in a low-income country might need to integrate backward to farming, and integrate forward to retail. The following questions reveal when it’s time to integrate and when it’s time to outsource:
- Do I need this input in order to accomplish the Job to Be Done for my customers?
- Can I depend on suppliers for specifiable, verifiable, and predictable inputs?
If the answer is “Yes“ to both questions, then the company can outsource. However, if the company answers “No” to either question, it is better off integrating. Integrating will undoubtedly come with certain upfront costs, but once the company is able to develop the input it needs specifiably, verifiably, and predictably, other companies in the country will begin buying the input from it.
5. Create the market, don’t exploit the market
Many organizations wait for the demographics in underdeveloped economies to improve before they move in to exploit the market. However, there are two problems with this strategy. The first is that data only tells us about the past and so, when market research data becomes available, it’s usually available to everyone such that the company may not have much of an edge anymore. The second is that opportunities that are focused on the consumption economy in many low- and middle-income countries are often a mirage. For example, many experts thought that Africa would be the next East Asia in the late 2000’s. This caused multinational companies to invest in the coming wave of growth in the continent. But no such growth happened and many companies left, including Nestle which cut 15% of its workforce.
A better strategy is to create a new market that serves the nonconsumption economy. This is what Tolaram, the makers of Indomie noodle, did when it entered Nigeria in 1988. Since then, the company has created a noodle market where there previously was none and it is now expanding to several other African countries. The company grosses upwards of one billion dollars annually today.
When investing, regardless of the level of development of the market, there are risks involved. Few predicted the financial crisis of 2007 and millions in the most developed economies lost jobs, income, and pensions. However, understanding these insights can help innovators derisk their investments in underdeveloped markets, while simultaneously lifting up the communities in which they work.