Insights for innovating in emerging markets: There are two types of economies

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Sep 13, 2018

In this five-part series, Five insights for innovating in emerging markets, I explore several insights, one by one, that my research has uncovered for innovators interested in emerging markets. This is part one of the series, based on an earlier blog.

Consider the following story. A few decades ago AT&T asked a prominent consulting firm to estimate how many cell phones there would be in the world at the turn of this century. After conducting a careful analysis of the number of mobile phone subscribers on the market at the time, the cost of the devices versus average wages of most people, and the span of existing cellular connectivity networks, the consulting firm estimated that there would be just under one million.

After receiving this report, the executives at AT&T chose not to invest in the new technology. The market would not be big enough to warrant their investment. By the year 2001, however, there were almost one billion cell phones in the world. Today, there are more than 7.5 billion cell phone subscriptions globally. How could AT&T have missed the opportunity to invest in a product that has become such a part of our lives? And more importantly, how could the consulting firm, whose job it is to figure these things out, have been so wrong?

Understanding the difference between consumption and nonconsumption economies

To many of us, the “economy” is simply an abstract hodgepodge of money and businesses, products and advertisements, laws and regulations, and buyers and sellers that interact with one another in some fashion. We typically categorize countries and their economies as monolithic entities, such as the low-, middle-, or high-income designations used by the World Bank. As such, many of the projections and analyses, such as GDP growth, per capita income growth, and even sector specific statistics, offer a high-level view of what’s going on in the economy as a whole. Although these sorts of analyses are informative and useful, they don’t tell the whole story.

From an innovation point of view countries are made up of consumers (those in the “consumption economy”) and nonconsumers (those in the “nonconsumption economy”).  Seeing an economy this way helps cut through the noise of all those other metrics that we tend to use to determine an economy’s health and potential.

The consumption economy

The consumption economy is comprised of customers who have the income, time, and expertise required to purchase and use existing products or services on the market. It is the part of the economy that economists, forecasters, and marketing managers often use to predict the growth of a product or a region. Many innovations are targeted at the consumption economy because it’s relatively easy to see these customers—they are already consuming. When you already know who your customers are, you can find ways to make your products or services better for them so they’ll spend more with you. For example, over the past ten years, sales of cars in the United States have averaged just under seven million. Most of the car buyers in the market are in the “consumption economy.” They are advertised to through regular channels, sold to in dealerships, and their cars are repaired in service shops. Automakers know what they must do to target these consumers. And most do it.

The nonconsumption economy

The nonconsumption economy is made up of those who cannot consume existing products on the market. As explained in the book, The Innovators Guide to Growth: Putting Disruptive Innovation to Work, the four barriers that prevent people from consuming are skill, wealth, access, and time. The wealth barrier is probably the easiest to identify, but sometimes a solution on the market requires more time than nonconsumers are willing to spare, so they don’t consume even if they have the funds to do so.

Of the two economies, it’s the nonconsumption economy that makes fertile territory for market-creating innovations. Market-creating innovations, which we have written quite a bit about, are products or services that transform complicated and expensive products into simple and affordable ones so that many more nonconsumers can access them. In the process of becoming accessible to a whole new segment of society, they create new markets, including new buyers, sellers, distributors, makers, transporters, marketers, and so on. Innovating for a market that does not yet exist can feel risky, but as countless companies can attest to, many of which we discuss in my upcoming book The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty, the benefits can be immense. Not only can these companies reap significant economic returns, but they typically also inadvertently engage in nation-building.

Now back to our initial story. A few decades ago, all the existing data on mobile phones that AT&T had access to pointed to “low opportunity.” Cell phones at the time were heavy, bulky, and very expensive. Most people could not afford them. But if the consulting firm recognized and understood the benefits of targeting the nonconsumption economy, they might have arrived at a different conclusion. Nonconsumption offers a powerful clue that there is enormous potential for innovation. But spotting nonconsumption opportunities requires putting on a new set of lenses to see what others might be missing.

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.