Frontier Economies and Market-Creating Innovations

This post draws from Christensen et al.'s research as described in their article, Cracking Frontier Markets, featured in most recent issue of Harvard Business Review.

Frontier Economy Opportunities?

"With emerging market giants such as Brazil, Russia, India, and China experiencing slowdowns, investors entrepreneurs and multinationals" are considering "so-called frontier economies such as Nigeria, Pakistan, and Botaswana," according to a new research article published in the most recent issue of Harvard Business Review.

However, the authors suggest that many businesses and entrepreneurs cannot see opportunities in these economies because of the seemingly overwhelming burdens caused by the lack of functioning institutions to enforce rights, protect from corruption, and regulate standards, as well dilapidated or nonexistent infrastructure.

Work before Pleasure?

The authors challenge the concept that institutional/infrastructural development must come before business creation and investment. They challenge this concept by exploring three successful "market-creating innovations" in these frontier economies that have, by their very creation of a thriving market, "pulled" many institutional/infrastructural improvements into existence, while also creating sustainable economic infrastructure to support these new industries.

The authors describe their striking conclusions as follows:

"[O]ur research suggests that the conventional view of how to overcome such obstacles—by first ensuring the presence of adequate infrastructure and institutions and rooting out corruption to create a fertile ground for innovation—may have the thinking backward. That approach, which we call pushing, prioritizes top-down, government- or NGO-led efforts as a necessary precondition. “We can’t build factories until we have good roads on which to transport our products,” goes the argument. 'We can’t attract international partners until we have reliable courts.' And so on.

In practice, the opposite is true. Market-creating innovations don’t wait for such obstacles to be removed by resources that are pushed in. They essentially pull in the necessary resources—creating workarounds or funding the infrastructure and institutions needed to deliver their products—even if those efforts are not initially supported by the local government."

Case Studies

Market Creating Innovation in the African Film Industry: Straight-to-Video

In 1992, Nigerian electronics salesman, Kenneth Nnebue received a shipment of blank VHS cassettes to sell in his store. Facing a Nigerian market in which only 35% of households had access to electricity and only about 20% had a television set, Mr. Nnebue may have considered changing industries, but instead felt the creative urge to start a new film production business venture.

Since there was not a single operational cinema in the entire country, Mr. Nnebue used his shipment of blank VHS cassettes to adapt the straight-to-video distribution model for the Nigerian market.

Mr. Nnebue "wrote a script, found a producer and a director, and hired actors and actresses. The resulting two-part thriller about a down-and-out businessman who uses witchcraft to revive his fortunes was released on those tapes... Made on a $12,000 budget, the film went on to sell hundreds of thousands of copies across Africa, in the process catapulting 'Nollywood'—the then-nascent Nigerian movie industry—to eminence."

Mr. Nnebue's simplification and adaptation of a traditional film industry distribution model that used culturally relevant locally made content, resulted not just in a successful business venture, but created an industry that "pulled" infrastructural/institutional developments into existence as the authors go on to describe:

"Barely a blip on anyone’s radar 25 years ago, Nollywood today produces about 1,500 movies a year, employs more than a million Nigerians, and is thought to be worth $3.3 billion. In terms of volume, it rivals both Hollywood and Bollywood.

This homegrown industry has attracted the attention of banks and other financial institutions, some of which now have 'film desks' designed to invest in its productions. By some estimates, Nigeria is home to more than 50 film schools. The government has established funds for training filmmakers and financing new movies and is beginning to take piracy and copyright protection more seriously. In 2018 both New York and Toronto hosted Nollywood film festivals, while Netflix bought its first Nollywood film, Lionheart."

Takeaways: Market-creating innovations that employ simplified business models and locally-adapted features can create sustainable markets that, in the process of their creation, "pull" institutional/infrastructural developments into existence.

Market Creating Innovation in the African Insurance Industry: MicroEnsure

Richared Leftley, a former London-based insurance industry analyst, first discovered an unlikely frontier market opportunity while reviewing the annual statistical analysis published by a global reinsurer. While review the statistical tables, Mr. Leftley realized the mismatch between the number and location of people who had died as a result of natural disasters and the global insurance payouts. “'The human toll was enormous in places like Bangladesh, Pakistan, and India. But those countries were never even on the total payouts rankings.' It made no sense, he thought, that the people in the world who most needed insurance were the ones least likely to have it."

The authors describe the business model development process as follows:

"Creating a market was a matter of trial and error. In its early days, the company tried simply offering low-cost versions of the insurance products available in advanced economies. Leftley says, 'I had to print brochures that said things like ‘Skydiving and water polo are excluded’—expensive sports that his target customers would never have contemplated. 'It was mad.' And it failed woefully: Despite mounting an expensive advertising campaign, MicroEnsure recruited just 10,000 customers."

"So Leftley tried again, changing both the product and the way he reached potential customers—offering them free insurance through their mobile phones. People could sign up without paying any premiums; they simply had to buy a certain number of extra minutes. They could keep earning this insurance by renewing the purchase each month. When a customer buys the required minutes, the telecom company pays his or her premium to both MicroEnsure and the partner insurer. Over time customers are offered additional insurance products, such as 'double cover' (for a spouse) and “family cover,” which cost extra—from three cents to $1 per month, with payment collected through their phones. Revenue from the supplemental plans is split among MicroEnsure, the partner insurer, and the phone company."

"Still, the offer of free insurance initially failed. Leftley realized that although sign-up required answering just three supposedly simple questions—name, age, and next of kin—even that was too much. “Those three questions caused 80% of people to not complete the process,” he says. In many frontier markets, questions about age and next of kin are far from simple; people often don’t know or care about their age, and designating next of kin in a complex family structure is difficult. So MicroEnsure had to radically innovate its business model again."

"What if the company didn’t ask customers anything? It would know only a person’s mobile phone number. With that one piece of information, it would agree to provide insurance and make payments directly to that phone number; no paperwork, answers, or proof of anything would be required. “This was very freaky for insurance companies,” Leftley says. To cover a customer without knowing even his or her age, in an industry built on data, forecasting, and actuarial tables, was a truly radical thought. But with that innovation, he explains, “buying insurance became as simple as signing up for a ringtone.” And the free insurance became a powerful marketing tool: Once a customer had been educated about the concept of insurance, it was easier to upsell and cross-market other insurance products."

"'We had cracked the code,' Leftley says. Indeed, MicroEnsure signed up a million customers the first day it offered a new life-insurance product in India—one that had no age limit or exclusions and required nothing more than a mobile number."

Takeaways: Abandon sophisticated business models adapted for rich world economies; Simplify and adapt for frontier economies.

Market Creating Innovation in the Chinese Microwave market: Galanz

In 1992 entrepreneur Liang Zhaoxian faced a Chinese economy that had a per capita income of just $366—$49 less than Ghana’s. Nonetheless, Mr. Zhaoxian saw opportunity in the millions of people "living in apartments with no stoves and, at best, with hot plates that overheated their cramped quarters. He also saw that the last thing anyone living in a small, stuffy apartment wants to do is cook."

The authors describe Mr. Zhaoxian's founding of appliance manufacturer Galanz to solve the market need as follows:

"It was in this '1992 China,' where destitution was the order of the day, that the entrepreneur Liang Zhaoxian created a market for microwave ovens and went on to build one of the largest appliance companies in the world.

Today that company, Galanz, accounts for almost half the microwaves sold globally. But Liang didn’t build that empire by focusing on how to exploit China’s low wages to create exports. He concentrated first on creating a market for microwaves in China—an opportunity his competitors couldn’t see. In 1992 only 200,000 microwaves were sold in China, most of them in cities. The average price was about 3,000 yuan, or $500—well beyond most citizens’ reach. Chinese people typically saw the microwave as a luxury they didn’t need—and manufacturers saw them as too poor even to consider such a purchase.

So the business model he developed was predicated on creating a market in China. Even though Galanz took advantage of the country’s low labor costs, as did many other manufacturers, it would be incorrect to suggest that it was just a low-cost maker of microwaves. From the start it had the typical Chinese customer in mind.

To successfully target that customer, executives had to think in novel ways. In the mid-1990s the capacity utilization rate for most microwave manufacturers in China was about 40%—but Galanz ran its plants 24/7. While other manufacturers advertised on TV, Galanz opted for newspapers, where it introduced “knowledge marketing”—providing information on how to use its products and including details about new models. This strategy drastically reduced its advertising and marketing costs; companies with similar sales spent almost 10 times as much.

An article in China Daily, a popular English-language newspaper, credited Galanz with educating many first-time consumers about the appliance. “In 1995, the company popularized the knowledge of the use of microwave ovens nationwide,” the piece said. “It started running special features such as ‘A Guide to Microwave Oven Usage,’ ‘A Talk on Microwave Ovens by an Expert’ and ‘Recipes for Microwave Oven Dishes’ in more than 150 newspapers. It spent nearly 1 million yuan [$120,481] in publishing books like ‘How to Choose a Good Microwave Oven.’” These efforts created powerful brand awareness and helped Galanz sell its initial microwaves for about 1,500 yuan—half as much as most others on the market.

Galanz also developed capabilities that contract manufacturers focused primarily on low-wage exports did not require in China. When the company needed design engineers, salespeople, and marketing experts, it recruited them. When it needed distribution channels, it established them. When it needed offices, factories, and showrooms, it built them. To serve the Chinese market, Galanz had to create many local jobs.

Takeaways: Non-existent markets can be developed through novel consumer-education campaigns. Manufacturing, sales, and distribution infrastructure need to be developed as the business scales.