By DiasporaEngager | on 25 March 2017
The Paradox of Power; A Tale of Two Strategies; Introducing Noodles to Nigeria; Finding Opportunity in Nonconsumption ...
By Clayton M. Christensen, Efosa Ojomo, Derek van Bever.
FROM THE JANUARY–FEBRUARY 2017 ISSUE of Harvard Business Review.
For years now, business leaders and investors from around the world have waited for the Africa Rising narrative to shift from promise to reality. The continent has understandably been the focus of increasing investment and attention since the turn of this century. With a young, urbanizing population; abundant natural resources; and a growing middle class, Africa seems to have all the ingredients necessary for breakaway growth—perhaps even outstripping the so-called tiger economies of East Asia a generation ago. Indeed, a 2010 report by the McKinsey Global Institute titled “Lions on the Move” expressly made this comparison, forecasting that consumer spending on the continent would grow by 40%, and GDP by $1 trillion, from 2008 to 2020.
And yet this tantalizing vision has remained just that—a dream perpetually around the next corner. A number of major business enterprises have recently departed from the continent, their leaders discouraged by the same obstacles that have confronted would-be investors for years: widespread corruption, a lack of infrastructure and ready talent, and an underdeveloped consumer market.
We have spent the past several years closely studying patterns of innovation success and failure in emerging markets, with a particular focus on Africa and East Asia, and we have learned from leaders of some of the world’s great companies how daunting the obstacles can be. But we have also been tracking the success of some innovators in Africa that flout the conventional wisdom—by building franchises to serve poorer segments of the population; creating markets that tap the vast opportunity represented by nonconsumption; internalizing risk to build strong, self-sufficient, low-cost enterprises; and integrating operations to avoid external nodes of corruption. Their experience paints a hopeful picture of an Africa that can indeed fulfill the promise of prosperity. One young entrepreneur summed up the lift that homegrown success can provide by observing, “When the solution comes from within, we start believing in ourselves. We start trusting that we can do this, we can go forward.”
How have these innovators, many of whom are local entrepreneurs, found a path where so many larger, better-resourced enterprises have hit a wall? In this article we outline their market-creating innovation model and describe how it generates significant growth in both revenue and employment. We also describe methods for spotting nonconsumption, the fundamental opportunity on which this model capitalizes. Finally, we offer some suggestions for policy makers, investors, and entrepreneurs about how to increase both the number and the impact of these innovative enterprises.
The Paradox of Power
In their groundbreaking 2002 article “The Fortune at the Bottom of the Pyramid,” C.K. Prahalad and Stuart L. Hart described the vast opportunity facing multinational corporations that can adapt their business models to address the needs of the billions of “aspiring poor” inhabitants of developing countries around the world. In more recent years, Hart and his colleagues have taught us to shift our perspective from making a fortune from the base of the pyramid to creating a fortune with it, and also to be more mindful of environmental consequences when crafting strategy. The compelling vision these scholars have set forth—of an inclusive capitalism linking business, government, and NGOs in common cause—has engaged the best efforts of those constituencies for a decade and a half, with some notable successes.
But now many of the multinationals that pursued this opportunity have become discouraged by its sheer difficulty, and nowhere more so than in Africa. In February 2016 Barclays Bank announced its intention to exit the continent as part of a general pullback from emerging markets that are not developing as quickly as anticipated. In June 2015 Nestlé announced that it was dramatically retrenching in Africa: cutting its workforce by 15% across 21 countries, pulling out of two countries entirely, and reducing its product line by half. Other Western consumer-goods icons, including Coca-Cola, Cadbury, Eveready, and SABMiller, are also leaving African markets once thought to hold great promise. According to recent data from the United Nations Conference on Trade and Development, foreign direct investment in Africa fell by a third, to $38 billion, in 2015, against an overall trend of increased investment in developed economies.
Among the obstacles frequently cited by multinationals, four stand out for both their stubbornness and their familiarity; indeed, we’ve heard the same objections for decades. Most pervasive, perhaps, is the enervating effect of corruption. Corporations are understandably leery of institutionalized corruption and so seek to invest in countries that pass a litmus test dictated by the company itself or by international agencies that measure perceptions of corruption. Here, regrettably, Africa does not show to advantage. Its countries are typically found toward the bottom of the World Bank’s ease-of-doing-business index and Transparency International’s corruption-perceptions index. In explaining his company’s decision to exit Nigeria in 2015, Jan Arie van Barneveld, the CEO of the Dutch staffing firm Brunel, said, “We had the feeling that we were being constantly cheated and bribed.”
“We thought [Africa] would be the next Asia, but…the middle class…is extremely small and…not really growing.”
The second obstacle is infrastructure, or the lack thereof. Would-be entrants cling to the view that investment should follow infrastructure—that in effect, the World Bank and other international development agencies should provide access to electricity, roads, sanitation, and other shared services, enabling businesses to move in and take advantage of those investments. This view was evident at a recent World Economic Forum on Africa event at which speakers offered a range of ideas for stimulating development on the continent, from land reform to a focus on education to larger financial markets—along with higher taxes on both corporations and wealthy individuals to pay for all these supposed prerequisites.
A third obstacle to multinationals’ efforts to grow in Africa is the widespread skills shortage, general across sub-Saharan Africa and most acute in markets that have experienced rapid growth, such as Kenya, South Africa, and Nigeria. A recent study by Russell Reynolds on executive talent in Africa revealed, according to the Wall Street Journal, that companies “are eager to recruit good hires in the region, but find that candidates with traditional management skills—such as the ability to drive change or build teams—are in short supply.” In a detailed analysis of the situation in South Africa, a World Economic Forum “Future of Jobs” study laid much of the blame on the country’s tertiary schools for failing to feature adequate STEM-oriented courses and for omitting training in complex problem solving, critical thinking, and cognitive flexibility.
Finally, and ironically, more than a decade after Prahalad and Hart’s prescription for growth in the so-called Tier 4 market that forms the wide bottom of the pyramid, most multinationals still try to peg their efforts—and fortunes—to the emerging middle class. Indeed, disappointment over its growth and size in Africa was the largest factor in Nestlé’s decision to retrench. In an interview with the Financial Times, Cornel Krummenacher, the chief executive for Nestlé’s equatorial Africa region, explained the company’s actions: “We thought this would be the next Asia, but we have realized the middle class here in the region is extremely small and it is not really growing….Urbanisation is usually very good for manufacturers, but in this case many people are literally living in slums, so they have nothing to spend.”
Much of the emerging-market investment community, which closely tracks trends in the growth of the middle class when deciding where to focus, shares this pessimistic outlook. Recent research by the Pew Research Center suggests that although the middle class worldwide swelled to 783 million in 2011 from 398 million in 2001, fewer than 6% of those 385 million new members are in Africa. By that measure, the number of middle-class African workers, which Pew defines as those earning $10 to $20 a day, barely changed across the decade.
Exacerbating the situation is the African Growth and Opportunity Act (AGOA), a trade deal signed in 2000 by the United States and many African countries, which allowed the latter to export more than 7,000 products to the United States duty-free. AGOA was meant to diversify African economies and boost development. Instead a majority of those economies invested heavily in the resource-extraction sector and came out even less diversified. Exports grew, but development didn’t.
A Tale of Two Strategies
Why do so many multinationals run up against long-standing obstacles to success in developing markets, whereas other MNCs and local entrepreneurs succeed? We believe the answer lies in the difference between “push” and “pull” investment. Push strategies are driven by the priorities of their originators and generate solutions that are imposed on markets and consumers. Pull strategies respond to needs represented in the struggles of everyday consumers. The difference in outcomes could not be starker.
Most multinationals hope to achieve breakout growth by pushing current products onto emerging middle-class consumers. They carry with them some large portion of their existing cost structure and operating style, and thus set prices at levels that limit market penetration. As more competitors pile in, these companies face the dilemma of lower growth versus lower margins—and in the end, they get both. Soon enough, the truth emerges: Though they thought they were pioneering in a new market, they were actually targeting a finite base of existing consumption, fighting for every point of share in a highly competitive environment.
The strategy that wins in emerging markets diverges from this conventional approach in almost every respect. The fundamental advantage of pull over push development is that the market is assured—there is no uncertainty about whether sufficient demand exists. When innovators develop products that people want to pull into their lives, they create markets that serve as a foundation for sustainable growth and prosperity. Our research focuses on ventures that address the unmet needs of everyday consumers instead of seeking high-margin opportunities by chasing the middle class. They purposely follow the lowest-margin opportunities, relentlessly managing costs by integrating as many elements of the activity chain as possible, from raw materials sourcing to final distribution. They pull needed infrastructure and talent into the company and integrate around potential nodes of corruption—choosing to build self-reliance rather than to depend on existing options. Their investments are guided by a desire to increase affordability and accessibility, and the resulting price and cost discipline fuels higher growth, expanding the market by targeting nonconsumption. Higher growth boosts employment, as ever more workers are needed to make, sell, and distribute products and services.
The twin benefits of economic growth and employment growth are signatures of market-creating innovation, differentiating the impact of this strategy on local markets from that of multinationals’ market entry, the ultimate objective of which is simply to increase efficiency. For example, when a major corporation in a developed nation builds a factory to make products at a lower cost (cars in Mexico, for example), its intention is to export those products to richer markets. It doesn’t invest to create sales, distribution, or servicing jobs in the local economy. Likewise, investments in natural-resource extraction rarely create robust economic or employment growth, because the yardstick by which these investments are measured is efficiency. From the day a facility powers up, its operators are measured by their ability to increase efficiency—to eliminate jobs.
Pull strategies driven by market-creating innovators have been behind the migration from poverty to prosperity in Taiwan, South Korea, Singapore, and Hong Kong—the four Asian tigers—whose leading companies have consistently focused on low costs over high margins and on creating markets by targeting nonconsumption. The Tolaram Group in Nigeria provides another notable example.
Introducing Noodles to Nigeria
Perhaps the most beloved consumer product in Nigeria is also one of the humblest: Indomie instant noodles. Sold in single-serving packets for the equivalent of less than 20 U.S. cents, the brand enjoys near-universal name recognition, maintains a 150,000-member fan club with branches in more than 3,000 primary schools, and sponsors Independence Day Awards for Heroes of Nigeria to celebrate the accomplishments of exemplary Nigerian children. The brand and Dufil Prima Foods, the Tolaram company that produces it, are so well woven into Nigerian society that it might surprise Nigerians to recall that noodles are not among their traditional foods and that Tolaram has operated in the country for less than 30 years. The company’s growth track turns the conventional wisdom about development on its head.
Pull strategies have accounted for the success of the so-called Asian tigers.
The Tolaram Group was founded in Malang, Indonesia, in 1948. It began by trading textiles and fabrics and has since evolved into a manufacturing, real estate, infrastructure, banking, retail, and e-commerce conglomerate. In 1988, the year Tolaram began selling Indomie noodles in Nigeria, that country was far from an investment magnet: It was under military rule; life expectancy for its 91 million people was 46 years; per capita income was barely $256; less than one percent of the population had a phone; only about half had access to safe water; only 37% had access to proper sanitation; and 78% lived on less than $2 a day. But in these circumstances the brothers Haresh (now managing director, Nigeria) and Sajen (now CEO) Aswani saw a huge opportunity to feed a nation with a very affordable and convenient product.
Indomie noodles can be cooked in less than three minutes and combined with an egg to produce a nutritious, low-cost meal. But the vast majority of Nigerians had never eaten or even seen noodles. Deepak Singhal, the CEO of Dufil Prima Foods, recalls, “Many people initially thought we were selling them worms.” The Aswani brothers were convinced, however, that they could create a market in Nigeria because of the growing population and the convenience of their product. Instead of focusing on the demographics that conventional wisdom suggested, they focused on assembling a business model that would allow them to create a market.
Learn more at: https://hbr.org/2017/01/africas-new-generation-of-innovators