Creating innovative business models in emerging markets
Increasingly, emerging markets, formerly known as developing economies, are becoming important platforms for business growth. To compare this, one has only to look at the data surrounding the substantial opportunities afforded by the world’s economies in transition. In 1990, emerging markets represented a miniscule amount of the overall global GDP, registering a paltry 21%, of which 13% came from the BRIC (Brazil, Russia, India, and China). By 2008, emerging markets account for more than 34% of global GDP, as BRIC economies began to reach their strides and a growing number of other transitioning economies emerged.i This total grew to 38% in 2010.ii Even more striking is the trend since 1999 of emerging market growth in terms of GDP. As the following table reflects, the GDP growth in emerging markets has outpaced that in advanced markets even in periods of global economic downturn, such as 2001 and 2008-9 iii
This growth has not only been felt in term s of GDP, but also in industry segments such as mobile telephone subscriptions and steel consumption. According to A.T. Kearny and the United Nations Development Program, emerging markets controlled nearly 82% of the world market in mobile telephone subscriptions and 75% of steel consumption in 2010. Motor vehicles sales in emerging markets for the same period topped 52% of the global total while accounting for 46% of the world’s retail sales.iv This highlights a proportionate increase in disposable income due largely to the emergence of a middle class.
This growth in both macro and micro-economic areas has made emerging markets desirable for both domestic and foreign investment. In fact, in 2010 almost a quarter of Fortune Global 500 firms came from emerging markets, up from only 4% in 1995.v While growth trends in number emerging markets have slowed, there seems to be little reason to believe they will not continue to provide substantial opportunities for investment.
The significant growth in emerging markets has changed the paradigm for investment, creating a new economic development reality with which many companies have y et to address. Achieving success in emerging markets is still fraught with challenges, and it is apparent that new business models must be explored in order to take full advantage of their increased market potential. Some of these business model changes have been driven by increased innovation within the markets themselves, others have been by outside factors, organizational and otherwise, that required companies to transform their mental and organizational structures in order to adapt.
This paper will explore the magnitude of opportunities within emerging markets, as well as the changing business models that are emerging out of and because of them. In doing so, the focus will be companies that have transformed their business models in order to capture opportunities within emerging markets.
Emerging from the Mist: The rise of emerging markets
Noted authorities in emerging markets investment such as Everest Capital, have acknowledged the term all but obsolete, as these markets by 2015 will likely account f or 50% of the world’s total GDP.vi The primary difference in developed and emerging markets is the trends in growth…emerging markets are likely to continue growing while developed economies, according to a majority of specialists, will likely continue tocontract. If it does in fact continue,this will continue to blur the line between emerging markets and developed economies. The following chart highlightsthe growth trend in emerging markets, both in terms of the macro-economy as well as within specific industry segments:
The takeaway from these indicators is that the potential for traditional emerging markets will continue to be vast, but there is also a danger of overheating, which could undermine both near and long-term projections.vii In 2008, the economies of the six largest emerging markets were larger than those of all the G7 economies combined when excluding the United States.viii Overheating could undercut this progress, however, as the supercharged economies especially with BRIC could begin to level off if specific controls are not put in place to manage the rampant growth. In 2011, the International Monetary Fund’s deputy managing director, John Lipsky, noted that “For emerging economies, growing at 6.5-7 percent, their margins of excess capacity have been largely used up, and as a result we are starting to see incipient signs of overheating.”ix While enjoying exponential growth, many emerging economies, including BRIC, struggle to contain inflation and control heavy inflows from investment. This overheating has manifested itself in a number of ways, not the least of which has been in higher food prices, which have an acute and predominantly negative effect on emerging economies.
The ramifications of overheating can be significant, and including currencies that become too strong thus choking off exports or a “slam -on-the-breaks” scenario that could result in an economic meltdown. In some ways, it seems emerging markets could become the victims of their own success, with growth fueling the very overheating that could undermine growth.
The sizzling seven
Emerging-market overheating index*, latest maximum risk=100
Often called the “Sizzling Seven” because of the upward trajectory of their growth patterns, economies such as Argentina, Brazil, Hong Kong, India, Indonesia, Turkey, and Vietnam at the same time provide quality opportunities and unmitigated challenges.x Even so, while some enjoy the benefits of an economic bonanza, others, such as retirees, low-skilled workers, and youth with little experience have suffered from rising prices and increased competition for employment. In smaller markets, growth rates have still been for the most part significant, but from a business model perspective they offer somewhat different challenges since they do not offer massive access to potential customers.
This being said, emerging markets will likely, for the foreseeable future, continue to provide substantial opportunities for international and local investors alike, but accessing these opportunities will depend on the design and integration of a business model that provides opportunities for success.
Innovative business models in emerging markets
While emerging markets can offer access to customers, they can also stress business models that are not designed to flexibly navigate the inherent challenges presented by these economies. With this in mind, a growing number of companies are approaching emerging markets as entrepreneurs, focusing on market niches and “customer-centric” business models that carve out space in the marketplace. Business models in emerging markets should be customized, tailored if you will, to specific customer groups, not the least of which is the economically disadvantaged.xi
In lower end markets, new entrants and small enterprises will likely find it easier to adopt success-oriented business models than will large corporations, which have more hurdles over which to jump in order to create market-based solutions for lower-end consumers. Corporations will likely do better, however, in more sizable markets where disposable incomes and customer mass are larger. This is especially true in mega-markets such as BRIC, where local competition will likely be severe. Timing is important, but volume is also a key to success, making these markets potentially lucrative if the proper business model is put in place.xii
It is clear, however, that innovative business models in emerging markets are not just a corporate phenomenon. As a matter of fact, some corporations have met numerous challenges in trying to gain a foothold due to their limited knowledge concerning the economy, culture, and market as a whole. Domestic enterprises are rapidly carving out a niche by utilizing innovative business models that can allow them required leverage in the marketplace. In some ways, changing the business model of a large corporation is akin to “turning an aircraft carrier” in that it takes a great deal of pre-planning and requires a substantial amount of time to occur. Domestic enterprises, on the other hand, already have a strong understanding of the market and thus transforming their business models is more like “turning a speed boat” in that they can capture market share rather quickly and efficiently. It is therefore necessary for international firms, regardless of size, to consider utilizing some of the same tactics in developing their business models, specifically gaining a sound understanding of both customer needs and wants, leveraging technology, and utilizing integrated production and distribution processes to name a few.xiii
Companies should be wary of creating market-based solutions that focus on what emerging markets customers, especially those with lower incomes, need instead of what they want.xiv Even economically disadvantaged customers have specific wants that can be addressed through an innovative and flexible business model. Mobile phones are a prime example, as access to communications cuts across socio-economic barriers.
In analyzing business models, this paper will explore four that have served as viable options for accessing economically disadvantaged consumers, as well as five more that have been used extensively to reach consumers with higher disposable incomes. Case studies of specific companies within emerging markets will reinforce the concepts outlined within these models, as well as explore impetus for others that are emerging at present.
Whether reaching lower-income customers or those with higher capacity to access goods and services, several business model trends have proliferated in emerging markets. Dr. Henry Chesbrough, an international experienced on business models and innovation, discusses many such models at length in his seminal work on the topic, Open Business Models .xv There are literally dozens of models being used around the world, but many can be grouped into specific thematic areas. Among them are the following:
- Market-based: This model is designed to allow companies to determine the end-state they desire for their involvement in emerging markets. For instance, does a company want to capture a larger share of the market, increase the market size, or simply generate additional income through added-value processes versus volume? This model can allow for significant customization as the company begins with the end in mind, namely what it wants to accomplish and how it can achieve its goals. This strategy will likely drive many of the others listed here.
- Volume/Price-Based: This business model offers facilities and services to potential customers at prices they can afford, yet the volume of business makes the scenario viable for the company. In other words, the company may sell its products and services for less than its normal rate in other markets, but seek to sell more units. While this model has been demonstrated as viable in many emerging markets, it is difficult to sustain as competition becomes more intense. Innovative new approaches will be needed to help determine whether the company can continue to do volume business. Nokia’s presence in India is an example of a company that created volume and sustained it even in the face of mounting competition by transforming its business model. This model is most widely used to reach economically disadvantaged customers but it can also be effective reaching emerging middle class consumers who are price conscious but still desire products and services that are beyond necessities.
- Tier-based: This model is designed to provide ranges of products and services to customers based on their willingness and ability to pay. Economically disadvantaged consumers, for instance, may choose basic products or packages of services, while middle income and higher income consumers may select a higher “tier” of products/services. This model has been widely used by mobile telephone companies, which offer basic telephones and packages as well as higher end products and services for those who desire them. Typically, these tiers are linked with financing packages that make them more palatable. Nokia developed such a system in India and it resulted in an increase in market share.
- Collaboration-model: This model is designed to allow companies to “piggyback” products and services through existing supply chains, thus enabling economically disadvantaged customers to gain access to products such as solar water heaters without large up-front investment. This is sometimes called the “pull” model as it allows companies to pull resources and mass from its already existing operations. An example of this strategy is the proliferation of MVNO (Mobile Virtual Network Operators), which cellular telephone services to the customers but do not own local infrastructure. By working with and through local providers who own the infrastructure, the companies utilizing MVNO can provide services at far less up-front cost.
- Innovation-based model: This model is typically used by companies, which have the ability to integrate incremental improvements to products and services that add relatively small cost but generate higher value. This may be as simple as a color or design change or as complex as a change in software or components. In the case of services, it may simply be a different/particular way of approaching customer service or marketing. The innovation-based model can be rooted in disruptive processes, as defined later on in this article. Chesbrough discusses a concept called “open business models,” which is a mechanism through which firms utilize both internal and external ideas, as well as internal and external paths to the market, to advance their technology and innovation.xvi This not only created greater understanding of the market, but can allow firms to leverage broad-based resources to help endeavor to facilitate innovative approaches.
- Integrated channels model: This model is designed to allow companies to involve more people in production and distribution processes, thereby providing space for local companies but retaining quality control. Nutriset, a French manufacturer of fortified food for malnourished children, outsourced its production and distribution to local franchises in Africa while still retaining quality control.
As stated previously, companies entering emerging markets should take the lead from the strategy of startups by looking to fill unmet needs instead of looking for additional outlets for their products and services.xvii In doing so, they can utilize innovation and entrepreneurship to deliver what consumers want but currently cannot access either because the products and services do not exist or because they cannot afford them. This mentality will likely lead to a business model that can allow companies to compete on value and customer demand instead of on price. Even if the innovation is incremental, it is likely more effective and more profitable for companies to focus on incremental innovation of products and services that are already in demand than to create customer demand where none exists. In addition, it is easier to reach consumers that are already spending money.
Regardless of the type of business model used in emerging markets, there are some commonalities in building customer value, which is the “holy grail” for companies, which seek to favorably integrate their products and services into the marketplace. One such commonality is affordability, which should be demarcated from the terms “inexpensive” or “cheap.” Affordability is an element of a business model whereby a company introduces a product or service at a price consumers can afford, even if it has to change the design or approach to the product or service to do so. For example, Coca Cola’s decision in 2001 to offer a 200 ml bottle of Coke in the Indian market, thereby cutting in half the price of 10 rupees it was charging for a 300 ml bottle. This allowed it access to the approximately 96% of the population that could not afford to spend 10 rupees, a day’s wages on average, for a Coke but would spend 5 rupees.xviii
Another commonality among effective emerging market business models is access, specifically reaching customers that theretofore have been unreachable. ETranzact Ghana helped accomplish this by developing a mobile application for banking designed to allow customers to conduct most if not all of their transactions on their mobile phones, thereby alleviating a major impediment to accessing the financial system in many African countries. This helped allow even customers in rural areas to access their accounts, make payments, and deposit funds. This application led to ETranzact Ghana’s market growth, and it now serves customers in six countries.xix
Effective recruitment of talent is also a commonality within effective emerging markets business models. Many companies have addressed the talent issue by utilizing predominantly expatriates or diaspora in key management/supervisory positions. Experience indicates this is typically neither practical nor particularly effective. Building the capacity of local talent, offering a reasonable pay structure, flexible working hours, and providing benefits that can put the company in a strong position to retain key personnel are keys to effectively recruiting, training, and retaining talent.
Integrating the elements of strategy, customer value, affordability, and access is also a commonality in the creation of a workable business model for emerging markets. It is not enough for companies to simply focus on a one-dimensional approach to market access, but rather it should fully integrate its strategy with its operations in order to create the demand and the scale necessary to reach profitability.
Salient to the development of a business model, and yet often left out of the equation, is market recognizance that can allow a company to determine what market demands are unmet or under-met. Instead, many companies attempt to simply “sell what they have” in great volume or at prices they perceive consumers can afford. This has shown to be a self-defeating strategy for a growing number of companies, especially large corporations that are not as “fleet of foot” in embracing market opportunities. There are four ways that companies can explore unmet needs in preparation for creating a viable business model to meet them. First, a company should study what consumers are doing with its product. In doing so, company officials will quite likely find that the traditional use(s) they intended for the product or service are not what is being embraced by the consumer, thereby giving the company the space to meet emerging demand. Secondly, a company should explore the alternatives to its products or services that customers’ purchase. Understanding the competition in emerging markets is a key element in developing a viable business model.
A third element of identifying unmet needs is to determine what products or services are being produced or provided poorly…where consumers would benefit and pay for an upgrade in quality and or service. Finally, a company should take nothing in an emerging market at face value. Company officials should dig deep into the layers of the market to unearth the real reasons why consumers do what they do, buy what they buy, and want what they want. Eyring, et al argues that an open mind is likely the most important asset one can bring to an emerging market.xx
It is clear from a business modeling standpoint that integration into emerging markets is not just an opportunity for large multi-national firms. On the contrary, as has been stated previously, it is these firms that sometimes have the most difficulty in establishing a workable business model because they tend to be steeped in tradition and “tried and true” approaches that turn out to be otherwise in emerging markets. Small firms, both indigenous (home grown) and international can in many ways take advantage of opportunities that are either unnoticed or unworkable for large and multi-national firms. With this in mind, some indigenous and small firms, which better understand the market and have the flexibility in their processes, products, and services to deliver on-demand and affordable offerings to consumers have reaped and are reaping the rewards of developing a sound business model.
This being said, reaching customers with higher disposable incomes is somewhat less complicated for larger and international corporations, as it typically requires less adaptation of their normal business models. Still, there are emerging models that have shown to be useful in accessing a growing number of higher-end and middle class consumers in emerging markets. Often these business models include elements of disruptive innovation, which is defined by Harvard University’s Clayton Christiansen a “a process by which a product or service takes root initially in simple applications at the bottom of the market, eventually displacing established competitors.”xxi Elements of the business models mentioned above can provide the impetus for disruptive innovation, but regardless of the method(s) used, the mindset of the company is critical in achieving the desired results.
Disruptive innovation, and elements of other creative approaches, have allowed a growing number of companies to develop models that have allowed them to “emerge from the mist” surrounding emerging markets to develop thriving businesses based on demand-driven and on -time, on-target products and services. The next section of this paper will feature case studies of companies that have effectively implemented viable business models in emerging markets. While their stories vary in scope and focus, the common theme is the utilization of innovative and flexible approaches to customize the design, production, and delivery of products and services.
The canvas: One approach to developing a business model
There are a number of approaches to developing innovative business models, but one that has been increasingly used by companies considering emerging markets is the canvas approach, whereby the company develops its model around nine specific approaches. The following graphic describes this approach:xxii
The Canvas consists of 9 building blocks:
- Value Proposition
- Customer Segments
- Customer Relationships
- Revenue Streams
- Cost Structures
- Key Activities
- Key Resources
- Key Partners
The canvas approach links strategic planning and a traditional approach to the development of business models, with a collaborative, inputoriented process designed to increase innovation and promote synergy. Many of the companies highlighted below used a variation of this approach in determining the appropriate business model for entry into target emerging markets. Regardless of the planning mechanism used, however, these companies are some examples of the need to carefully plan entry in or expansion within emerging markets, as what is not known is potentially damaging.
In essence, they used a process-oriented approach to strategy development, which led to the creation of a customized business model for entry into targeted markets. In doing so these companies, a) identified the need/opportunity with targeted markets, b) determined gaps that needed to be filled either technologically, industrially, or service –oriented, c) innovated to fill the gaps, and d) emerged with a new or customized business model
Emerging markets, emerging profits
Entering emerging markets is not for the faint of heart and should not be considered a strategy for every company. For those that decide to enter these markets, it is clear that a flexible and innovative business model could be integral to success. The following mini-case studies highlight companies that have been able to effectively navigate emerging markets through the creation of sound business models, as well as some that have not. In many cases, their stories focus on elements of business modeling highlighted previously, while in others the companies were able to innovatively exploit on-the-ground opportunities in a timely and “consumer-centric” manner.
Wal-Mart in India
In December 2006, Wal-Mart hypothesized that by the year 2015, 35% of India’s retail sales could be from chain stores.xxiii This was a significant increase from the prevailing 2%. In May 2009, Wal-Mart opened its first store in the Amritsar, Punjab in northern India, with its focus clearly on the emerging Indian middle class. With over 50,000 sq/ft, it employed 200 workers initially and created approximately 500 indirect jobs.xxiv
The retailer had been working on its strategy for India for around two years, which included working with small and disadvantaged Indian producers, which had theretofore led the $375 billion retail market. By 2010, Wal-Mart’s purchases from Punjabi producers were more than $125 million annually.xxv Wal-Mart’s strategy in India, unlike in the United States and Western Europe focused on the “wants” of the Indian middle class, who were not as price conscious as they were focused on the products and services they desired. Also, unlike in other areas of the world, Wal-Mart partnered with a local firm, Bharti Enterprises, in a 50/50 joint venture.xxvi This provided Wal-Mart with a local partner that understood the marketplace and had integral knowledge of consumer values and attitudes.
Wal-Mart and its partner also established training centers to develop the skills of disadvantaged youth to work in their stores throughout the country. In doing so, Wal-Mart provided not only a well-known location to purchase products and services, but also integrated itself into the communities it served by helping to increase economic capacity.
Wal-Mart’s retail footprint in India opened up other opportunities as well. For instance, the company plans to establish a research and development center in Bangalore similar to its facility in the Silicon Valley. This center will employ about 100 developers to focus on solutions for Wal-Mart’.xxvii
From the outset, Wal-Mart sought a different business model for India…one that could position itself to capture an increasing share of a potentially huge market. Raj Jain, President of Wal-Mart India highlighted this in 2009 by saying, “India is not a homogeneous market, so ours is not a cookie- cutter approach from the U.S. …Wal- Mart is in no hurry to unfurl the Wal-Mart flag nationally. The easiest thing is to roll out stores, but the most difficult is to sustain and feed them.”xxviii The “care and feeding” of its Indian operations has provided Wal-Mart with a profitable and sustainable footprint within the country.
A tale of two business models: Whirlpool in China and Nokia in India
Since 1988, Whirlpool has followed an aggressive globalization strategy under the leadership of former CEO, David Whitman. China had been one of its main entry targets and also fit into its global strategy of becoming the market leader in Asia.xxix Whirlpool formed several joint ventures in China and India in the mid-1990s signaling its entry into the Asian market. Due to its size and global presence, market analysts took it for granted that it would build a brand presence in China. xxx However, in 1997, only two years after entering the Chinese market, Whirlpool had not been able to better the performance of its Chinese partners prior to the joint ventures. One of its local brands, Whirlpool Narcissus, was an example of the overall challenge, as it lost $6 million in 1997 alone.xxxi According to industry experts, Whirlpool’s main challenge was it nascent understanding of local culture. The Chinese saw Whirlpool as just another foreign brand and thus its size and global recognition did not resonate with customers.xxxii Faced with mounting losses, Whirlpool decided to restructure its operations in China, ending the relationship with Snowflake, its Peking-based refrigerator manufacturer and reducing its interest in Raybo, another Chinese partner, ending this arrangement entirely in 2000.xxxiii Industry reports estimated that these two decisions cost Whirlpool nearly $300 million. xxxiv
Whirlpool’s efforts in the world’s most-populous country proved initially ineffective due to lack of cultural awareness, unsatisfactory communication between the company’s international management team and local management team, and lack of control over the actions of the Chinese management team.xxxv Whirlpool’s 1997 annual report justified the realignment of the company’s China strategy by noting, “As we looked at our capacity in this environment, it became clear that we needed to refocus our resources to allow us to grow from our strengths, while reducing costs and simplifying our structure throughout the region.xxxvi Eventually, Whirlpool overcame the challenges inherent in the China , increasing sales to $18.67 billion in 2011, but its initial difficulty in adapting an effective business model is a lesson for other companies considering business opportunities in emerging markets.xxxvii
Nokia, on the other hand, crafted its business model for entry into the Indian market in 1995. Early on, Nokia saw the potential of the Indian market, as it was adding more than 10 million users a month and had a rural penetration of only 13%.xxxviii By rolling out a business model focused on flexibility, openness, and not underestimating its competition, it captured 54.1% of the mobile phone market share by 2010. While this shrank to 38% in 2011 due to increasing competition, the market still accounts for 12% of the company’s global sales.xxxix
India’s vast sales platform also opened up other opportunities for Nokia as well, specifically in the manufacturing space. In 2006, it opened a $250 million facility in Chennai that now provides 50% of its production to more than 59 countries. Nokia also embraced innovative ways to increase its market share by rolling out two Nokia Mobile Microfinance projects in 2009 where it sold mobile phones on weekly installments of 100 rupees ($2.00) over 25 weeks. xl Nokia also used an aggressive marketing campaign and inter-connected distribution network as pillars of its business model. The result was more than just profits, as in 2010 Nokia received the designation as “India’s most trusted brand” in a survey conducted by the Economic Times –Brand Equity.xli
The difference in these business models speaks directly to the results achieved by each company. In Nokia’s case, it achieved positive results through innovative approaches to sales, manufacturing, and even financing, which carved out a niche in the market that has survived even with the onset of significant competition. Whirlpool’s initial experience in China, however, was less successful due perhaps in part to a business model that did not fully integrate knowledge of the marketplace.
Taking care of business: Softwin helps facilitate a Romanian Information Technology Surge
Since 1989, when sweeping unrest led to the deposing of dictator Nicolai Ceausescu, Romania has struggled to gain its economic footing. Its entrance into the European Union in 2007 provided it with the visibility, credibility, and the institutional support it needed to gain momentum, but much of its economic growth was halted by the recent global economic crisis. The World Economic Forum’s Global Competitiveness Report ranked Romania 67th out of 139 countries in 2010-2011, while the Legatum Prosperity Index ranked it as 48th out of 104 countries, a ranking that highlights Romania’s increasing focus on creating a prosperous environment for its citizens. xlii This indicates that even with its difficulties (a relatively mediocre ranking in the Global Competitiveness Report but a higher one in the Legatum Index), Romania has and continues to produce innovative companies that are increasing economic capacity as well as establishing innovation models for the future.
One such company is Softwin, founded by Florin Talpes in 1990. It began as a software development company, but expanded into other verticals such as e-content solutions (1993), data security solutions (1997), e-learning solutions (1998), contact centers (2000), help desks (2001), IT consulting (2002) and solution integration (2004). Through continuous innovation and expansion of services, Softwin has become a company with global scope, having offices in six countries. It has also helped bring recognition to Romania, being listed by Business Week in 2005 as one of the most prominent home-grown companies.xliii
Because the enabling environment for innovation was nascent in Romania, the company had to be agile — adapting to changing trends in the information and communications technology (ICT) sector and taking advantage of opportunities. Softwin’s ability to do this was enhanced by its workforce, which continues to enhance the Romanian information technology industry.
Virtual reality: Rubicon in Jordanxliv
Jordan has a stable business environment for accessing the lucrative Middle East and North African (MENA) market. In recent years, it has endeavored to embrace innovation as a core component of competitiveness in order to address the growing demand for knowledge-based jobs by its young and educated workforce. A bi-product of Jordan’s stable economy and economic development strategy is that a small group of Jordanian entrepreneurs has emerged to embrace disruptive innovation, while at the same time increasing prosperity. Rubicon is one such company.
In 1994, Rubicon’s CEO and founder, Randa Ayoubi, raised $100,000 in capital to launch her company, but it was ten years before she was able to move beyond the nascent stage. Then, in 2004 she raised the remaining capital and took her message to major movie studios in the United States. Eventually Ayoubi’s persistence paid off and a large Hollywood movie studio partnered with Rubicon to do animation for an iconic cartoon series. xlv The company’s work on this series won international awards and earned it the credibility it needed to work with other major studios. Rubicon’s experience in animation was certainly a catalyst for the venture, but equally important was Ayoubi’s tenacity.
“I sometimes think they agreed to partner with us just to get rid of me,” she said in jest.
Using animation as foundation upon which to build the rest of the business, Ayoubi expanded into other areas of digital content including e-learning, electronic game development, and virtual reality technical training. Today, Rubicon focuses on creating animated programming by controlling the various parts of the production process from concept to finished product.
Many ex-Rubicon employees have opened their own companies and Ayoubi outsources smaller projects to them in an effort to assist in their growth, providing them with mentorship as John Chambers, CEO of Cisco, did for her beginning in 2004. This has contributed significantly to the prosperity of local firms, building a growing cluster of subject matter specialists (SMEs) that are focusing on digital content.
Rubicon’s effectiveness has expanded beyond the country’s borders, as it has licensing and merchandising agreements with several major movie studios. It has offices in Los Angeles, Dubai and Manila, providing it with broader visibility.
The company’s effectiveness in the digital content industry was achieved through Ayoubi’s vision and perseverance, and also because she focused on the development of a strong business plan that focused on niche verticals with the digital content industry. She also recruited and retained a high-quality workforce, providing them with the latest technology and creating an environment where ideas are highly valued. As a small company, Rubicon helped to create momentum in the market by taking on small projects, building a portfolio, and eventually using this experience to land large contracts.
Rubicon is one of the companies creating a renewed focus on innovation in Jordan, dispelling the image of Jordan as a strictly agriculture and tourism-based economy, while creating momentum for innovation in other knowledge-based sectors such as medical services, pharmaceuticals, clean technology and ICT. Largely due to the effectiveness of companies such as Rubicon, the Government of Jordan has adopted a focus on the knowledge economy and is actively pursuing investments that will likely increase the prosperity of its citizens through the creation of high-quality jobs.
A study in business model transformation: AGD in Argentina
Founded in 1948 by Adria´ n Urqu´ıa, Aceitera General Dehaza, S. A (AGD) transformed itself from an oil-processing factory into a larger indigenous firm in the industry in the 1990s. A leading edible oil export company in Argentina, AGD is also one of the leaders in the retail bottled oil industry, sporting several successful brands. It ranked 40th among the 1,000 top companies in Argentina in 1999 and it is considered the fifth most important exporter in the country.xlvi
AGD’s transformation was based largely on a business model that was crafted through the vision and dedication of its founder, and included improvements in technology that led to increases in production and the improvement of economies of scale.xlvii In addition, the model focused on enhancement of logistics, through which the company was able to link the various parts of its value chain.
The transition was not easy, however, as in 1968 the company was forced to close due to a series of unfortunate events including a global increase in oilseed prices and a flawed commercial strategy. By changing its business model to take better advantage of logistical and technological advances, the company was able to get back into profitability from 1968–1985.xlviii
From 1985–1999 the company weathered a number of economic and political storms, thriving by again transforming its business model to take advantage of opportunities within the industry.xlix Specifically, it began to manufacture branded products to compete within Argentina as well as strengthening its logistics chain to reduce costs. The company was able to achieve this by not only looking externally at market forces, but also internally at its own values and vision.
The AGD story is consistent with the basic tenants of business modeling in emerging markets. The company already had significant understanding of the Argentine market, but it was able to build its business by addressing innovative ways of producing, selling, and shipping its product. It transformed its business model not once but multiple times in order to become effective in the industry.
Helping to change the paradigm of banking: eTranzact Ghana Ltd.
The World Economic Forum’s 2010–2011 Global Competitiveness Index ranks Ghana 114th out of 139 countries. For the same period, the Legatum Prosperity Index, which measures the relative prosperity of country’s citizens relative to nine criteria, ranks Ghana at 79th out of 104 countries, which records a modest improvement over previous years.l One would not necessarily expect innovation within this climate. But an emerging group of Ghanaian companies is leading a technological and service revolution that has established a model for the country and also for other emerging markets. One such company is eTranzact Ghana Ltd, which was featured in The International Trade Center’s Service Pioneers: Stories of Innovative Entrepreneurship.li
In 2006, a group of Ghanaian entrepreneurs started eTranzact Ghana Ltd, with the purpose of building a cashless society in Africa. eTranzact is designed to offer electronic payment platforms for banks, companies and individuals in order to create a virtually cashless society. eTranzact’s system, banks, merchants and individuals can transfer cash in a number of ways, including using mobile applications for banking, telecom services, merchant services (e-billing), ordering and payment, web- based payment, online cash collection and facilitation of export services. The company’s services are customized for each of its commercial and banking clients according to their needs.
One of the larger challenges for the company, according to CEO George Babafemi, was overcoming the cultural norms of doing business by moving people from a predominantly cash society to an electronic format. Over time, it was able to overcome cultural paradigms of doing business by offering leading/effective services. Today, the company has branches in Cote d’Ivoire, Nigeria, South Africa, the United Kingdom and Zimbabwe and is also doing business with foreign companies that are investing on the African continent.
While Ghana has traditionally been a stable country, companies like eTranzact have helped to galvanize the government around a platform of increasing reforms, including infrastructure upgrades and reductions in bureaucracy and regulations. This highlights the effect that companies embracing disruptive innovation techniques can have on a country as a whole, establishing an innovation model that can be copied by others.
Unwilling to wait
These companies are examples of entrepreneurs in emerging markets who have not waited for donor organizations or governments to lay the groundwork for innovation. They represent a new mentality in emerging markets, one that infuses disruptive innovation to promote productivity, competitiveness and ultimately prosperity. Hundreds of other emerging markets entrepreneurs are following their examples and if buoyed by a practical strategy and focused support, they are expected to grow rapidly into generators of jobs which help promote competitiveness.
These companies can be models of innovation in emerging markets, but how did they gain the desired results when others did not? Arguably, it was because their leaders rejected conventional notions that would focus on quick wins without providing sustainable and prosperous growth. In other words, they focused on innovation rather than convention while many of their competitors were unable to see past the obvious challenges they faced in their respective countries. These companies managed to not just survive in the chaos that is sometimes prevalent in emerging markets, but move passed it to achieve their desired results.
Conclusions from the Chaos
In many respects, the leaders of companies have been trying to address persistent issues related to market access using the same techniques in an attempt to find the magic bullet that leads to profitability. They have not found it because it does not exist.
While poverty is a significant challenge for emerging markets, this does not mean they are not viable platforms for business. As C.K. Prahalad and Allan Hammond have pointed out, entrepreneurial companies both small and large are “already serving the world’s poor in ways that generate strong revenues, lead to greater operating efficiencies, and uncover new sources of innovation.”lii The key component in this success can be a company’s ability to break down rigid mindsets and focus on the growth potential of these markets.
While emerging markets can appear chaotic, there are several strategies that can lead to the emergence of a sound business model. In summary, they include the following: liii
- Do not assume. Assumptions are risky in any business venture, but this is especially true in considering emerging markets. For instance, companies often assume that because people are poor, they do not spend money which, according to Prahalad and Hammond is incorrect when considering aggregate purchasing powerliv. Collectively, the poor do have money and they are willing to spend it on non-essentials as well as items of need. Additionally, companies may assume that a recognized brand can capture a share of a huge market if it is available. Companies such as Whirlpool in China helped to reinforce that this is not necessarily true. Despite infrastructural deficiencies, technological change has in many cases made it cheaper to conduct business in most emerging markets, which increases profit potential. In many countries, reforms are now beginning to intersect with economic potential to make them attractive markets for business expansion and new investment. In eTranzact Ghana’s case, it has built an effective business model through an understanding that even those with low disposable incomes require and desire banking and financial services.
- Find a niche (value proposition). Companies that are able to find a business niche in emerging markets can greatly increase their profitability. Finding such a niche requires understanding of the market, creative approaches, and significant research. Quite simply, a niche in a specific emerging market may be a need or response to a dilemma that does not exist in more developed economies. The upside potential can be worth the effort. Rubicon, for instance, was able to carve out a niche in digital content that up to that point had not been explored in Jordan. This helped it to capture significant market share in a relatively short amount of time.
- Start small and grow from there. Small companies can potentially make a big impact in a short amount of time by focusing on niche markets, starting with small projects, and taking advantage of opportunities in which larger companies in more advanced markets are not interested. Softwin, for example, grew from a small software development company to a larger ICT company in just over twenty years by focusing on innovative approaches that led to incremental milestones.
- Focus on innovative approaches. Companies such as Nokia, Rubicon, eTranzact Ghana and Softwin focused on innovation, disruptive and incremental that allowed them to break through the assumed limitations of their geopolitical and economic circumstances by focusing on new technology and approaches. With no powerful incumbents, leapfrogging was based on technology in the case of eTranzact Ghana’s bypassing conventional ways to move money and instead focusing on technology. In Nokia India’s case, innovation came through a creative way(s) to deliver its product to the market. Innovative business models helped make these companies market leaders rather than followers, with the perhaps unanticipated advantage that no paradigms existed in some cases. They were able to begin from a clean slate and use innovation as a catalyst for growth. Disruptive innovation in emerging markets differs from the strategic situation in developed markets primarily in that it can help drive success not only for companies, but also can create models that generate opportunities for the entire country — again, a type of cycle that creates its own fertile ground for further innovation and market development.
- Build alliances with key stakeholders. Collaboration is important to any business, but Rubicon helped establish that by building alliances with local and international stakeholders, innovation and profitability can occur more rapidly. Wal-Mart achieved significant results through its partnership with an Indian firm. This is especially important in emerging markets because these stakeholders play a key role in overall development and have resources that can be harnessed to embrace innovative approaches. It also ingratiated itself to local and national authorities by sourcing many of its products locally, as well as providing jobs for underprivileged citizens.
While many companies are still looking for conventional mechanisms by which to enter emerging markets, others have found success by embracing innovation as a growth strategy. By removing psychological and bureaucratic barriers to market access, a growing number of companies are defining a new age for entrepreneurship and innovation in emerging markets — an age that could redefine the paradigm of development.
The success stories of business model creation in emerging markets are well-publicized, as are many failures. The question that remains is whether or not companies that have not already accessed these markets may be too late, even with a strong business model. Edward Tse poses this challenge in relationship to China, stating,
“CEOs are losing sleep over expectations that their one time (Chinese) partners are morphing into predators-and that their own technology and know-how will be coming back to them globally in the form of cut-priced products from subsidized state-owned behemoths.”lv
While these concerns are real, the fact is companies that are not in emerging markets today can still find ways to integrate them. Whether focusing on BRIC or on one or more smaller economies, a company’s business model is still the most important aspect of its location decision. Tse poses five questions that CEOs should ask before entering an emerging market:lvi
- How open is the market?
- What business model should we use?
- Can we live with the uncertainties?
- How can we integrate our emerging markets operations with our other operations around the world?
- Can we move more parts of our value chain to emerging markets?
Based on the answers to these questions, companies can help crystalize a customized, “consumer-centric” strategy that includes a sound business model. It is not too late to explore the potential of emerging markets, but it is also not too early to build a business model to do so.
i Everest Capital (November 2009). The end of emerging markets. Miami, USA.
iii Davies, G. (2011). Emerging vs. developing countries GDP growth rates 1986-2015. Financial Times
iv Power shift (August 2011). The Economist. Downloaded from http://www.economist.com/blogs/dailychart/2011/08/emerging-vsdeveloped-economies
v Everest Capital (November 2009). The end of emerging markets. Miami, USA.
vii Wroughton, L. & Freeland, C. (March, 2011). IMF: Signs of overheating in emerging markets. The Economist.
viii Everest Capital (November 2009). The end of emerging markets. Miami, USA
ix Wroughton, L. & Freeland, C. (March, 2011). IMF: Signs of overheating in emerging markets. The Economist
x Some like it hot. (June 30, 2011). The Economist and the International Monetary Fund, 2011.
xi Eyring, M.J., Johnson, M.W. & Nair, H. (2011). New business models in emerging markets. In Thriving in emerging markets. Boston, MA: Harvard Business School Publishing Corporation.
xii Hout, T. & Ghemawat, P. (2011). China vs. the world. In Thriving in emerging markets. Boston, MA: Harvard Business School Publish Corporation.
xiii Bhattacharya, A.K. & Michael, D.C. (2011). How local companies keep multi-nationals at bay. In Thriving in emerging markets. Boston, MA: Harvard Business School Publishing Corporation.
xiv Eyring, M.J., Johnson, M.W. & Nair, H. (2011). New business models in emerging markets. In Thriving in emerging markets. Boston, MA: Harvard Business School Publishing Corporation.
xv Chesbrough, H. (2006). Open business models: The new imperative for creating and profiting from technology. Boston, MA: Harvard Business School Press. ISBN: 1-57851-837-7.
xix E-tranzact website, downloaded from https://www.etranzact.com.
xxi Christensen, C. Key concepts of disruptive innovation. Downloaded from http://claytonchristensen.com/disruptive_innovation.html
xxii Osterwalder, A. & Pigneur, Y. (2009). Business model generation. ISBN-978-2-8399-0580-0.
xxiii Walmart in India. (February 11, 2010). Downloaded from Case Study, Inc. http://www.casestudyinc.com/wal-mart-india-case-study
xxix Whirlpool’s problems in China. (August 31, 2010). Downloaded from Case Study, Inc. http://www.casestudyinc.com/whirlpool-problems-in-China.
xxx Yang, T.L. & Sethi, K. (2005). Whirlpool’s roadmap in China 2004. Asian Research Center. University of Hong Kong.
xxxi Xudong, F.G.Z. “Death of Narcissus: Breakthrough in China’s Stock Market”, Xinhua News Agency, April 24th 2001, [www.document] http://www.chinabyte.net/20010424/171738.shtml
xxxii Yang, T.L. & Sethi, K. (2005). Whirlpool’s roadmap in China 2004. Asian Research Center. University of Hong Kong.
xxxvi Whirlpool Annual Report (1997). P. 18.
xxxvii Whirlpool’s problems in China. (August 31, 2010). Downloaded from Case Study, Inc. http://www.casestudyinc.com/whirlpool-problemsin-china.
xxxviii Nokia’s Business Strategy in India. Downloaded from Case Study, Inc. http://www.casestudyinc.com/nokia-strategy-india
xlii Sources: 2010 World Economic Forum Global Competitiveness Report and 2010 Legatum Prosperity Index.
xliii Business Week. December 2005.
xliv Source: Author interview with Rubicon CEO Randa Ayoubi.
xlvi Hatum, A. (2011). The transformation process of AGD, Argentina. Emerald Emerging Markets Case Studies. Emerald Group Publishing Company, Ltd.
li Service Pioneers: Stories of Entrepreneurship. International Trade Center. 2009. Geneva.
lii Prahalad, C and Hammond, A. Serving the World’s Poor, Profitably. Harvard Business Review. September 2002.
liii McCord, M.T. (July 2010). Tearing up the box: Rethinking innovation in emerging markets. Deloitte Review.
lv Tse, E. (2011). Is it too late to enter china. In Thriving in emerging markets. Boston, MA: Harvard Business School Publishing Corporation.
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