Why would the head of a food company know more about generating electricity than food production? That’s one of the questions I asked in my first meeting with Deepak Singhal, CEO of Tolaram Africa, after he told me that he knew more about electricity generation than food.
Deepak explained how access to reliable electricity is one of the biggest performance limiting factors to creating a new market for his company’s products. And so, in order to deliver on Tolaram’s promise of making food affordable and accessible to millions of people, the company had to build its own power plant. In fact, when you hear Deepak talk about compressed natural gas and power generation, you’d think he worked for a utility company. But alas, he simply runs a food company in Africa.
On the surface, Deepak’s decision to not only understand electricity generation, but also to integrate it into his company’s operations may seem overkill. But when you consider how other organizations managed to succeed in creating new markets—especially in regions with little to no major infrastructure—you notice a pattern.
For example, when Gustavus Franklin Swift, 19th century American executive and founder of Swift & Co., wanted to create a new market for accessible and affordable beef in the United States, he similarly had to integrate non-core operations into his business. At the time, the main operations of meat packing companies in the US were raising, butchering, and selling beef on an exclusively local basis; because there was no technology that would enable meat packing companies to transport refrigerated beef, the industry couldn’t experience economies of scale. Meat-packing companies essentially had to transport live cows. But Swift, much like Singhal, became a refrigeration and rail expert. He designed the world’s first ice-cooled railcars, and also sold ice cabinets to retail shops throughout the Midwest and Northeast United States so that his company could safely transport and store beef at low costs.
Another example of this phenomenon at play happened at Singer & Co. When Singer & Co. wanted to create a new market for millions of people in Europe who couldn’t afford sewing machines in the early 1900ss, the company decided to invest in a railway station in order to more predictably transport sewing machines from the manufacturing site to distribution warehouses. Integrating transportation into the company’s operations reduced costs and enabled Singer to supply customers more reliably. At least one of the company’s railway stations is still in operation today, and transported almost 600,000 people in Scotland in 2019. Singer’s company also built a turbine power station for their factory in Podolsk, Russia, which eventually provided electricity to the whole town.
From past entrepreneurs such as Henry Ford of Ford Motor Company and Akio Morita of Sony, Inc. to more recent ones including Mo Ibrahim of Celtel and Liang Qingde of Galanz, investing in operations that aren’t seen as core competencies of an organization’s business, especially in less mature and under-developed markets, is absolutely necessary when creating new markets. Modularity Theory explains why.
Understanding interdependence and modularity
Modularity Theory is a helpful framework that managers can use to understand which activities in their business model should be done internally, and which should be outsourced to a supplier or partner. The theory explains that businesses (even entire industries) have architectures that dictate how various components in the value chain should fit together. We call the place where any two components of the value chain fit together an interface, and interfaces can either be interdependent—meaning the activity is done in-house—or modular—the activity is outsourced.
According to the theory, a product’s architecture should employ an interdependent interface when two components do not fit together predictably, and a modular interface when two components fit together seamlessly. In the case of Deepak’s Tolaram, the national grid provided unreliable electricity, such that the interface between the power grid and his manufacturing operations was highly unpredictable. As such, instead of Tolaram leveraging a modular business model as it relates to its electricity supply, the company had to integrate or develop an interdependent business model where it pulled in electricity.
No organization’s business model is entirely modular or interdependent; it’s usually a mix of both. But for organizations looking to invest in market-creating innovations, especially in emerging markets, integrating across unreliable and unpredictable interfaces is the norm. Although modularity standardizes the way in which components fit together and can be fairly easily scaled, it’s important to note that modularity is only possible after predictability is achieved.
Understandably, not every entrepreneur can develop a mostly interdependent business model where they integrate components such as power generation, staff training and education, and other infrastructure requirements into their organization. But for the multinational companies and large investors looking to create new markets in emerging economies, integrating across critical, unreliable components is the only way to successfully deliver affordable products and services.
In emerging markets, you just might find that you’re less defined by your industry, and more by the critical component in your business model that’s hard to provide predictably. That’s why the CEO of a food company is also an energy expert.