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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 US$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 US$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…. Urbanization 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 Centre 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 US$10 to US$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 US$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 US$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.
The decision to target the needs of typical
Nigerians compelled Tolaram to make long-term investments in the country. In
1995, to control the costs of its operations, it shifted noodle manufacture to
Nigeria. To do so, Tolaram had to pull infrastructure, such as electricity and
water, into its operations. Singhal says, “I run a food company, but I know
more about electricity generation than food.” Tolaram is in the education
business as well, recruiting top graduates of Nigeria’s schools and pulling
needed skills through company-provided training in electrical and mechanical
engineering, finance, and other disciplines. Where some multinationals might
push expatriates into an emerging-market assignment, Tolaram pulls its leaders
for Africa from Africa.
The company’s investments did not stop there. To
get its products to market, Tolaram had to integrate its operations both
forward and backward. Nigeria, like many other emerging and frontier markets,
has no thriving formal supermarket sector, and the path from factory to
consumer contains many potential points of shrinkage. So Tolaram’s managers
chose to invest in a supermarket supply chain that began with company-owned
trucks and expanded to include distribution warehouses and storefronts.
Wherever they identified product “leakage,” they pulled honesty into the
business through forward integration, taking ownership of that point rather
than working with external partners and processes. They didn’t try to push
honesty by hiring more police officers, who are often easily corrupted. The
question, “What’s the point if your product is affordable but not available?”
guided Tolaram’s supply chain investments. Looking upstream, the company had to
provide almost all its inputs, because suppliers either couldn’t meet quality
or cost standards or didn’t adhere to contracts. As a result, Tolaram now
controls 92% of the inputs for Indomie noodles and operates 13 manufacturing
plants in Nigeria, many of which supply those inputs.
Tolaram’s dedication to this market-creation
strategy has paid off. Today the company sells 4.5 billion packs of noodles in
Nigeria annually. It owns and operates more than 1,000 vehicles for logistics,
directly employs more than 7,500 people, has created a value chain with 1,000
exclusive distributors and 600,000 retailers, and has revenue of almost US$1
billion a year while contributing approximately US$100 million in tax receipts to
the Nigerian government exchequer. The company is now creating markets in
Nigeria for other fast-moving consumer goods, such as bleach and vegetable oil.
Before Tolaram released its Hypo bleach product, fewer than 5% of Nigerians
used bleach to wash their clothes. Tolaram reports that over the past few
years, leveraging its manufacturing and distribution prowess, it has expanded
that market sixfold, reaching 30% of the population. It plans to do the same
with vegetable oil.
If Tolaram had taken the conventional approach
and invested in the emerging middle class, it wouldn’t have achieved 36% annual
growth—in a market it created—over the past 15 years. If it had waited for the
Nigerian government or international development agencies to address
infrastructure challenges before investing, the company wouldn’t be operating in
Nigeria today. Tolaram internalizes the risks that others perceive in the
Nigerian business environment. The most visible evidence of this strategy is
that the company has taken a lead role in creating a US$1.5 billion
public-private partnership to build and operate the new Lekki deepwater port in
the state of Lagos. Ankur Sharma, formerly Tolaram’s head of corporate strategy
for Africa, summarized the company’s approach to self-reliance in February
2016: “As we create a market, we do what is necessary to ensure success. In
some countries we have built power plants; in others we have invested millions
of dollars in logistics just to move our products from the factory to the
retail sites, in line with our value-chain-integration theme of controlling our
own destiny by driving costs down. We are committed to whatever market we enter
and will do whatever it takes to be successful there.”
As Tolaram closes in on three decades of
operations in Nigeria, a growing number of start-ups are emulating its
strategy. MoringaConnect is a three-year-old Ghanaian company founded by Kwami
Williams, an MIT-educated aerospace engineer, and Emily Cunningham, a
Harvard-trained development expert. It provides Ghanaian farmers with seeds,
fertilizer, training, and financing to enable them to plant and harvest the
moringa, a hardy, fast-growing tree whose leaves are an abundant source of
nutrition and have been used in traditional medicines for centuries. Since its
inception, MoringaConnect has signed up 1,600 farmers, and hundreds more are on
a waiting list. The company has planted 250,000 moringa trees in northern Ghana
and has increased farmers’ incomes as much as 10-fold. It counts the online
beauty subscription service Birchbox among its top customers (moringa oil is an
ingredient in the company’s hair- and skin-care products) and was on track to
gross almost US$1 million in 2016.
Originally Williams and Cunningham simply wanted
to provide farmers with processing machinery for their moringa harvest. But the
two found that this was not sufficient to create a new market, so they had to
integrate to drive costs down. MoringaConnect looks past the market research
suggesting that Africa’s middle-class growth is slowing, that corruption is
rife on the continent, and that Ghana’s debt burden is skyrocketing. Instead
its founders see an opportunity to capitalize on a resource that can generate
immense wealth for farmers and ultimately for the nation.
Two other African companies practicing this
strategy are M-KOPA and Fyodor Biotechnologies. The former, based in Kenya,
provides solar power systems. Fewer than 30% of Kenyans have access to
electricity, highlighting for the founders of M-KOPA an opportunity similar to
that pursued by M-PESA, which started the mobile-payment revolution in Kenya in
2007. M-KOPA has been pulled into more than 400,000 homes as of this writing
and is signing up an average of 550 homes a day. The company has established
100 service centers across Kenya and has created some 2,500 jobs. Although the
World Bank calls Kenya’s economic growth “modest at best,” M-KOPA is creating a
market out of hundreds of thousands of people—left behind by centralized
infrastructure projects—who are pulling the company’s solution into their
lives.
Fyodor Biotechnologies, in Nigeria, has developed
a urine malaria test (UMT) that will sell for US$2 and can be conducted at
home, freeing people from the need to travel to a clinic for a complicated and
expensive diagnosis. The company is on track to manufacture 2.3 million UMT
kits by mid-2017 and has recently bought land to build a manufacturing
facility. Like Tolaram, it is already developing an integrated value chain.
Finding Opportunity in
Nonconsumption
At once the most challenging and the most
essential trait shared by the market-creating innovators we have studied is
their ability to target nonconsumption—to sense the unmet needs that potential
consumers struggle to satisfy, and to develop solutions and business models
that can meet them. These innovators adopt a different perspective on the world—they
look for what isn’t being consumed. This trait may come more easily
to entrepreneurs steeped in the local culture, but we believe it can be
learned. We have identified four strategies that anyone interested in
stimulating significant long-term economic and employment growth can emulate:
Spot the “struggling moment.”
At its most basic, nonconsumption exists because
consumers lack a solution that will allow them to meet an important need in an
affordable, accessible manner. Perhaps inertia prevents them from seeking to
pull a new product or service into their lives—or attributes of the existing
solutions create anxiety or even fear. (One example: Services that offer
metered access in an attempt to lower the initial cost of purchase can raise
the specter of accidental overspending.) But the desire to accomplish an important
job, combined with the attributes of a novel solution, can bring resolution.
Consumers signal struggle with clear emotional markers, such as anger,
frustration, and anxiety. Spotting these markers through ethnographic research
or field observation is one of the most effective ways to discover
nonconsumption or underconsumption.
Be alert to work-arounds.
When consumers lack affordable, accessible
options, they create work-arounds, or “life hacks.” Africa overflows with
these, because many conventional products and services are simply too expensive
for most people. Understanding the advantages and compromises inherent in such
work-arounds can help entrepreneurs design novel solutions for current
nonconsumers. That is what the Indian conglomerate Godrej did when it created a
low-cost refrigerator for the rural market in India. The work-around that
consumers had devised to compensate for a lack of refrigeration involved the
traditional clay-pot cooler and the deeply entrenched habit of daily shopping
and food preparation. Godrej’s product, chotuKool, is compact, powered by an
innovative cooling technology and a rechargeable battery, and costs a fraction
of what conventional refrigerators do. It has been pulled into tens of
thousands of households and small businesses that are beyond the reach of
reliable electricity.
Learn from law bending.
Perhaps the most extreme form of work-around is
the low-grade, “penny ante” law bending that consumers commit every day to
circumvent restrictions they find irritating or petty. Such behavior is a
reliable signal that a significant, recurring consumer need is going unmet. The
popularity of Napster in 1999 clearly demonstrated that consumers valued the
convenience of file-sharing and were willing to “bend” (record-label executives
said “break”) the law to get access to music they wanted. Africa is rife with
people breaking seemingly innocuous laws. From constructing illegal temporary
structures to selling goods at pop-up stores on the sidewalks of many African
cities, this behavior is easy to spot—and it’s a highly reliable indication
that a legal, affordable alternative would be welcome.
Identify abundant or slack resources.
The fourth strategy mastered by market-creating
innovators is recognizing abundant or slack resources—both human and
natural—that could be incorporated into a novel solution at low cost. The
sharing economy is built on the capture of such resources, with familiar
examples in housing (Airbnb) and transportation (Uber and Lyft). Tolaram
harnessed Nigeria’s plentiful wheat and spices to manufacture Indomie noodles
and spotted the plentiful talent among top graduates of the country’s schools.
Similarly, the founders of MoringaConnect built a business model centered on a
tree that grows bountifully in Ghana.
Looking Forward
The failure of traditional development and
investment models is sobering. How many of the 500-plus World Bank projects now
under way in Africa consist of well-meaning but ultimately misguided efforts to
push resource and infrastructure investments on the continent, and how much of
the US$53 billion those projects represent will be wasted? We might ask the same
question about the US$4.2 trillion in official development assistance offered by
OECD countries over the past four decades. How often has push infrastructure
actually fulfilled its investors’ ambitions and fueled the growth and
development of new business and industry? Pull investments find a ready,
assured market, whereas push investments are a guessing game with a high
quotient of shrinkage and loss.
Given the current unprecedented levels of
sidelined corporate investment capital and abundant liquidity at negligible
interest rates, the global growth slowdown is puzzling. Investors and
entrepreneurs need new approaches and perspectives to stimulate growth, and
they must closely examine the circumstances in which new ventures thrive and
expand.
The starting point is to see nonconsumption not
as a dead end but as an opportunity to create new markets. This insight is
particularly important for innovators and entrepreneurs, and we hope that the
successes we and others are cataloging will give them courage and inspiration.
In our experience, too many budding entrepreneurs, in Africa and elsewhere, are
stuck in the mistaken assumption that they must wait for development agencies
and others to make initial investments in infrastructure and education. The
recognition that 600 million people in Africa don’t have access to electricity
should be a spur to innovation, not a flag of caution.
To our knowledge, no major development agency has established a formal program or an office to spot and nurture market-creating innovations. Imagine the impact that a World Bank unit focused exclusively on documenting, analyzing, and teaching the essentials of these innovations could have on entrepreneurs in Africa and on the lives and welfare of people throughout the world’s emerging economies. Our hope is to participate in a rethinking of the role of development in creating prosperity—a hope that rests on the creativity of the many innovators who spot opportunity in the struggles around them.
Originally published on Harvard Business Review
