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 five of the series, based on an earlier blog.
Businesses often assume that when it comes to emerging markets, resource extraction and low-wage manufacturing are the only ways to turn a profit. This assumption, though grossly inaccurate, is understandable. Much of the local population has little to no spending money, so it would seem that exploiting resources, low wages, and low labor standards are the only feasible options.
Yet in joining markets that are already filled to the brim with competitors, many of these businesses engage in what we call efficiency innovations, where profits hinge on their ability to reduce costs and increase efficiency. This ultimately leads to a “race to the bottom” phenomenon, in which companies continually reduce labor standards and wages to stay ahead. With a strategy like that, the moment competitors offer cheaper products, companies lose their competitive edge.
What hope then is there for companies operating in low- and middle-income countries? Simply put, the creation of new markets in their economies.
In our research we have discovered that market-creating innovations present immense opportunity for those who launch them, while also resulting in sustainable economic development. What makes them so special? As we explain in our upcoming book, The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty, they make historically complicated and expensive products and services simple and affordable, effectively making them available to many more future consumers.
Invest in market-creating innovations
For an example of a company that’s reaped the benefits of creating a new market rather than exploiting an existing one, look no further than EarthEnable.
Located in Rwanda, where the GDP per capita is less than the price of a new Apple iPhone—approximately $740—other companies might assume their only options are to extract resources or exploit low wages. EarthEnable, however, sees Rwanda differently. The company is creating a new market for affordable flooring in one of the poorest countries in the world.
Cement flooring, which is what the few who can afford it use, is out of reach for the typical Rwandan household due to cost and so, approximately 80% of Rwandan homes have dirt or mud floors. Instead of competing with other companies that provide cement solutions for the 20% of Rwandans who can afford cement, under the assumption that other Rwandans are too poor, Gayatri Datar and Rick Zuzow are creating a new and vibrant market for hard and earthen floors that targets the other 80% of Rwandans.
For as little as $4 per square meter, EarthEnable allows a family to floor their home with a proprietary solution which comprises of clay, sand, fiber, and plant oils. Considering that the average home is roughly 20 square meters, flooring a home can cost as little as $80. This represents more than a 70% reduction in cost compared to a cement solution. In addition, EarthEnable provides payment options for customers who cannot afford to pay all at once. This seemingly simple tweak in its business model helps the company increase the pool of Rwandans who can access its product.
By creating a new market of affordable flooring that targets the majority of Rwandans, EarthEnable has been able to identify economic opportunity with nonconsumers—those currently not able to consume existing solutions. In targeting nonconsumers, the company simply needs to provide a solution that’s better than the alternative—mud floors. And by creating a new market, rather than join an already saturated one, Datar and her team have the opportunity to become market leaders with little to no competition at the onset. Compare that to if the company decided to enter the fiercely competitive cement market.
After a few years of business, EarthEnable’s numbers are adding up quite nicely. By July 2017, the organization had installed more than half a million square feet of earthen floors in over 300 different villages.
Perhaps the best part about market creation is that the economic benefits extend to society. For instance, EarthEnable is training a new generation of masons who can safely install affordable new floorings for many in Rwanda. This training has led to employment for hundreds of Rwandans and is expanding to other East African countries. There are often additional benefits, too. In targeting unmet needs, market-creating innovations help consumers make progress. In this case, having earthen floors, compared with mud floors, has been shown to reduce childhood asthma, diarrhea, malnutrition, and parasitic infestations.
EarthEnable is still a small company with just over a hundred employees, but the principle behind the organization is what makes it exciting. Instead of exploiting existing markets which are crowded and competitive, or forsaking the country altogether because most households are poor, the company is creating a new market. In doing so, it should provide significant economic gains for investors, and help alleviate poverty in the process.
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