What nonconsumption means for investors and managers in emerging markets

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Aug 10, 2016

nonconsumption emerging markets investorsBuilding a business that targets nonconsumption is hard and requires perseverance, but the payoff can be significant. If managers and investors in emerging markets are experiencing tepid growth, they should consider the following strategies outlined below.

First, reframe the competitive landscape. Managers and investors should consider nonconsumption in their competitive matrices and analyses. Doing so allows them to focus on the reasons why nonconsumers are not purchasing. While this approach might require a new product or business model, it gives a true picture of the competitive landscape and the magnitude of the opportunity.

Second, assess the organization’s capabilities. An organization’s capabilities are made up of its resources, processes, and priorities (RPPs). Resources are usually the most tangible of the three and include assets such as employees, cash, buildings and equipment. Processes are the ways in which resources get used. Some processes are codified, like how an organization does annual budgeting or hiring, while others are simply “how we do things around here.” An organization’s priorities, meanwhile, are restraints on how the organization can use its resources. These priorities are typically affected by the size of an opportunity and the margins the company needs in order to stay profitable.

An organization’s capabilities are usually aligned with a certain customer segment. Assessing its RPPs allows the organization to predict how it would perform if it went after nonconsumers. For example, if an organization’s priorities constrain the organization to go after business with a 40% margin, it is important that executives understand how that will affect the organization if it decides to go after non-consumption opportunities that offer only 10% margins.

Third, create a separate business unit that goes after market-creating innovations. The priorities of a business targeting nonconsumption are vastly different from those of a business that targets sustaining or efficiency innovations. As such, executives need to create a new business unit that is designed to meet their specific needs.

Consider the evolution in the computing industry; mainframe computers sold for roughly $2 million while personal computers, a market-creating innovation, sold for $2,000. A CEO working for a mainframe computer supplier would find it very difficult to prioritize the allocation of resources to go after personal computer sales, and rightly so. But if the CEO created a new business unit with priorities aligned with customers of personal computers, the company would be better able to tackle the new market.

This, in many ways, is what happened with IBM in the 1980s. The company created a new business unit in Florida focused on developing the personal computer, allowing it to remain competitive when other makers of mainframe computers went out of business.

The lesson here is that while targeting nonconsumption is difficult, it has the potential to breathe new life into companies, industries, and countries. Companies such as Kia and Hyundai in South Korea and Sony, Toyota, and Honda in post-war Japan targeted nonconsumption in the 1960s and effectively helped develop their economies. Investors, managers, and entrepreneurs in emerging markets today have the same opportunity to significantly impact the lives of hundreds of millions of people with market-creating innovations. Taking advantage of this opportunity makes great business sense.

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.