How Innovative Companies Help Frontier Markets Grow

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Welcome to the HBR IdeaCast from Harvard Business Review. I'm Alison Beard. In 1960, South Korea had a GDP per capita of $155. It was one of the poorest countries in Asia. Today, it's one of the most successful, with a GDP per capita of $27,500, and has gone from being a foreign aid recipient to a foreign aid donor. What sparked the transition from frontier economy to developed one in the space of a generation? According to a new book by Clayton Christensen, Efosa Ojomo, and Karen Dillon, the catalyst was not an influx of international aid or government investment and intervention. It was homegrown entrepreneurialism. It was Koreans seeing opportunities where outsiders didn't, creating markets where none had previously existed, and most importantly, investing in the infrastructure they needed to sustain those businesses. These innovators didn't wait for South Korea to grow into a stable, predictable, prosperous country before they jumped in. Jumped in, and prosperity followed. Ifeoso Ojemo, who's in the studio with me today, has studied how this process plays out in markets around the world, from his native Nigeria to India and China. He's also looked at countries that seem stuck in their economic development and believes that executives, entrepreneurs, and investors should find opportunities to both do good and earn a profit in those struggles. He's the global prosperity lead at the Clayton Christensen Institute and co-author of both the book, The Prosperity Paradox, and the HBR article, Cracking Frontier Markets. Afosa, thank you so much for joining me.

It's really good to be here, Alison. Thanks for having me.

So my first reaction, and I think many people's reaction when hearing your premise, is that undeveloped markets, frontier markets, just really aren't easy places to do business. You know, your potential customers are poor, your suppliers are unreliable, infrastructure is nonexistent or unstable, governments might be corrupt. So why are you suggesting that people start looking at these markets rather than, or in addition to developed ones?

Yeah, I mean, I think perhaps the biggest reason we think people should look at these markets is the understanding that at some point we were all frontier markets. There was a time when the demographics in the United States resembled, or even worse than many of the demographics in frontier markets today. Similar Europe, you just talked about South Korea. Where a market is today doesn't necessarily mean that's where it's always going to be. Markets can evolve. And so I think that's the first understanding. The second is if you go into a frontier market with the right strategy, Understanding the role of business innovation and capitalism, even if the circumstances are bad, you can make a significant return on investment. You can also engage in what we call nation building. You can help the country begin to start building many of its infrastructures and institutions and things that can lead it to prosperity.

That seems like such an overwhelming task, though, to while you're trying to build your business, also help build a nation. So how do you get the energy, the vision, the capital for that?

Yes. So it's one of those, you kill two birds with one stone. It's by virtue of developing an organization that makes products and services simple and affordable. You create a new market. When you create a new market, the market tends to pull in many of the resources and things it needs to thrive and survive in an economy. And so it's really understanding that when you go into these markets and you go in with a strategy to create a new market for people who historically haven't had products or services available to them, by doing that, you not only provide jobs for the people, but you also provide tax revenues and the new market you've created pulls in many of the resources that it needs to thrive.

What is the business model for creating products and services for people who are very poor though? How do you actually earn money?

Well, the first thing that I'll explain here is just how do we look at a market frontier or even developed? And there are 3 types of ways you can go in. You can go in with a market creating innovation, and we'll get to that in a second. The second is going in with a sustaining innovation strategy. This is where there's there's already a market that exists. You essentially just make the good products better. You give them a new flavor for the herbal tea, or you give them a new toothpaste flavor. And the third type, which is one that many frontier markets are known for, is what we call efficiency innovations. Now, these are innovations that make good products cheaper. You essentially outsource and you do take advantage of lower wages in a different region, or you do a lot of resource extraction. in many frontier economies, Nigeria, as an example, Ghana, Saudi Arabia, you know, people exploit the natural resources. Now, with regards to market-creating innovations, the first thing that you'd have to identify is what we call non-consumption. Non-consumption is essentially a phenomenon that explains how many people in a region would benefit from getting access to a particular product or a service, but due to cost, due to the technical expertise required to use the product, due to availability, they just don't have access. Once you identify non-consumption, it's a huge marker that there's a huge market-creating opportunity in the country.

Even if the specific product or service that you're selling to each person is very cheap.

Absolutely. So once you identify non-consumption, your strategy has to be, how do I get this product that I believe these people need and make it simple and affordable. Now, an example that illustrates this really well is Celtel. It's a cell phone company that went into many countries in Africa. But if you think about it, 20 years ago, the cell phone penetration in Africa was less than 2-3%, and majority of the phones were in South Africa, one country. Moh Ibrahim, who was a Sudanese entrepreneur who was living in London at the time, said, I can see a lot of non-consumption, but when I look at their lives, it would be improved if we provided this service to them. If I wanted to go see my mom, I had to make the trek to the village. If I wanted to send a message to a friend or an employer, I had to actually physically go there. There was no mechanism to communicate. Mo Ibrahim decided that there was a huge market opportunity for this. He told a bunch of his friends in London. They said, Mo, you're crazy. This is Africa. They've got AIDS. They got corruption. They got poverty. I mean, the list was endless. Now, the interesting thing is they weren't wrong, but Mo Ibrahim was also not wrong because he saw it through a different lens. Well, he decided in 1998 to begin building the cell phone infrastructure in about 7 countries in Africa. He was able in 7 years to not only build a company that attracted millions of people who at the time bought into using his products and services, but he was also able to create thousands of jobs for people. And really trigger this mobile phone revolution on the continent that's now worth upwards of $200 billion to the African economy.

Again, though, that sounds like it was a lot of upfront investment building cell towers, you know, educating a workforce, everything that he needed to do. So how do you raise the money to do it when no one believes it's possible?

It's— an incredible amount of work. There's no doubt about it. Now, what's fascinating about it though, is as we were doing research for this book and the article, what we found is what Mo Ibrahim did is not vastly different from what an entrepreneur we all love, Henry Ford, did in the United States about 120 years ago. Now, you know, you go back early 1900s, Cars were toys for the rich. It was sort of like private jets today. Now, Henry Ford, Detroit farm boy who barely had a high school education, comes around. He was brilliant. He comes around and says, I'm gonna figure out how to make a car affordable and accessible to the average American. Now, Henry Ford had a ridiculously hard time convincing investors. He actually lost a lot of investors because he had a car company that made high-end cars and custom-made cars for wealthy people. When he said, I wanna make a car and try to sell it for under $1,000 at the time, he lost investors. They said, you're crazy. It's never happened. How do you make cars in a country that didn't really have roads? But he stayed committed. He was able to raise the funds typically from individual investors. But what's interesting to look at is what he did with those funds. Henry Ford didn't just revolutionize the assembly line, but he built steel mills in order to provide the necessary steel he needed. He built glass factories. He built railroads in order to move his cars around. He built gas stations. He built a lot of the infrastructure necessary for him to be able to provide the car for people so that when people used the car, they could experience wonderful service. We see a similar thing happen with successful companies that go into frontier markets. If you're patient enough to create the market and build the infrastructure around the things you need to provide the product and service to as many people as possible, I mean, your future is going to be vastly bright.

How much time does it typically take though?

Now that, that's a question. I'm not, I'm not, I'm not punting it, but it depends.

So, so I sort of knew you were going to say that.

So it's okay.

It depends. Now, Mo Ibrahim, who I talked about, was able to sell his company in 7 years for $3.4 billion. Now he's comfortably sitting as one of the richest Africans today. Right. But another company called Tolorum, they went into Nigeria about 30 years ago in 1988. And they said, we're going to go into this country that has a military dictator, 80% people living on less than $2 a day poverty, no infrastructure, education is abysmal. I mean, you name it, we got it. I'm originally from Nigeria. And so they go in about 30 years ago and they say, let's figure out how to sell Instant noodles to these people. Now you gotta understand, this is West Africa. We didn't eat noodles. Many Nigerians thought noodles were worms, but they went in with a similar strategy that Henry Ford, Mo Ibrahim went in with, said, we believe there's a lot of non-consumption. This country is urbanizing rapidly. People are pressed for time and they can't cook whole meals or have the time to cook whole meals like they used to. And so they began to invest. So they trained people, they educated people on what noodles were, they modified the taste so that it fit the population. They began building factories. They provided their own power and water. Now, these are things they did over time, but the focus was always to figure out a way to target this mass non-consumption that they saw. Now, in doing that, this company now grosses about $1 billion a year, provides employment directly to about 50,000 people in the country, runs 13 manufacturing plants, and has tens of thousands of retail and distribution sites. Now, it's that process of creating a new market that really begins to trigger the development of many countries.

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Yeah, so South Korea is a very interesting country. After the Korean War, it was pretty much decimated. Many people might not know this, but North Korea was actually a lot more industrialized and richer than South Korea after the war. Now, after the war, South Korea did get some funding from the United States in terms of rebuilding and aid. But what was interesting about that was the aid that went to South Korea was essentially termed aid to end aid. In other words, there was no, it wasn't this endless supply of funds. It was, we're going to help you guys rebuild your economy, but we're going to have an exit strategy, a date that we're going to, we're going to go out. So first of all, that was, there was a focus there. Now, in order to do that, South Koreans understood we have to become economically viable. And so in this particular circumstance, the government did play a role in making sure that the South Korean economy became more productive. The reason that I struggle to talk about the South Korean government is a lot of times when people hear that story, they take away The idea that, okay, that means we have to have some sort of authoritarian-esque government and we have to go in and just push an agenda. That's been tried in many countries in the world, and that often doesn't work. Our win-loss ratio is quite unfortunate. And so instead of that, what we like to focus on is what were the underlying mechanisms really that helped the country prosper? And when you look at it, The mechanism remains the same. It is this notion of creating products, making them simple and affordable so that many people in the economy and actually outside could afford them.

Right. And one of the more prominent examples is Kia, right?

Yes. So Kia, when you look at where Kia is today, you know, 70, 80 years ago, it's not really, really where it began. The company began by making cars for South Koreans in South Korea and cars that really fit the South Korean or Southeast Asian demographic, so to speak. They had to make them so that they could drive on the rugged roads. They had to make them in such a way that they were affordable to many South Koreans. And they had to also make them in a way that integrated well with other industries that the Koreans were building at the time, one of which was steel. Well, in making these cars, they found that, oh wow, we can create a lot of employment. And over time, as you create this new market, you begin to invest to make the product better and better and better. And then you start to export the product and you can start to be more and more competitive. All these layers create jobs and opportunity for people in your economy.

So Does this process work best when the entrepreneurs are homegrown, when it's people who know the market in and out?

So, um, yes, but then there's an explanation. As long as you as an investor and an entrepreneur are focused on creating a new market that helps many people make progress in a society, then it really doesn't matter where you're from. It just so happens that you're most likely going to be from the region because you understand the struggles, you understand the cultures. But if you're an outsider, you do also have opportunities to participate in market creation activities. I think it's having the understanding that when I go into this market, I can't go in for just a short-term play. I can't go in, invest, and If the political situation changes, I'm out. Or if the exchange rate fluctuates a bit, I'm out. You have to go in with a little bit more of a long-term view with the knowledge that we can actually create a market.

In areas of the world where there are high levels of corruption, how do you deal with that specifically?

So corruption is a big problem in many countries in the world. And it's also one of the things that we, we addressed in the book. Let me be the first to say there are no easy answers. Okay? There are no easy answers for corruption. Now, what we try to do, especially when it comes to telling investors to go somewhere long-term and invest a lot of capital, is we try to understand what is corruption and why do people engage in corruption? And what we found is corruption for many people in these economies is to them, the best way they can use to solve their problems. It's not like people wake up and just can't wait to be corrupt. It's that the economy does not provide productive means for them to take care of their families, send their kids to school, pay healthcare bills, and so on and so forth. Once we understood that, we began looking at how other countries have solved their corruption problems, and we realized that It really was an evolution. Many countries started out when they were all overtly corrupt, like most poor countries today. But as entrepreneurs began to create new markets in these countries in circumstances that, that were not inviting, people began to have more options and the monies that they made was now able to begin to fund the building of better governments and better institutions. And so if you're a company today looking at frontier markets, number one, it's really understanding that first and foremost, these people are not from a different stock or they're just weird, they're just corrupt. No, no, we also have a journey of corruption. Number two, it's because a country is corrupt today doesn't mean it will be corrupt tomorrow. And so developing a strategy that says, I'm gonna go in and I'm not gonna engage in corruption. Instead, I'm gonna provide economic opportunity. The best way we know to do that is to make things simple and affordable, create a new market. Admittedly, it will take a little longer because you're not paying people off. People can hold your products at the port and so on and so forth. Those things will happen. But the minute people begin to understand this organization is here for the long term, it's now part and parcel of our economy, In fact, you start to be a beacon of hope to many people in the economy. And one of the companies we talk about is Rushan in Afghanistan that is identified as one of the most corrupt countries in the world. But this company has never really paid a bribe. They provide mobile telecommunications to many Afghanis and they've never actually paid a bribe. You think about that kind of industry where you have to get licenses from the government, have to employ a ton of people, build cell towers, and they've never paid a bribe. And now they're at the point where they're sort of corruption watchdogs right now. It took them a little longer than if they paid bribes, but that's really how you begin the process of getting rid of, of corruption.

Yeah. So you've shared a lot of really compelling success stories, but surely there are many companies and people who have gone into these markets and failed spectacularly too. So when that happens, What do people get wrong?

Yeah, I mean, I think you can go into frontier economies and focus on what we call the consumption economy, the people that are already consuming many products and services. Ultimately, that is a very small market. And so you go in and you end up competing a lot of times on just price, and it's hard to differentiate yourself. The other thing that we noticed is many companies that go into these countries and ultimately don't do well is they follow demographic trends. And so they follow, for instance, the Africa rising trend and this big middle class that's coming, and they think they can port the business models that have worked in more developed economies right to different economies where people say there's a rising middle class without really understanding the specifics in how they need to go into those economies, understand the culture and systems, and then create business models that speak to people in those economies.

So I know that you initially came at this problem in a very different way in trying to help your fellow Nigerians live better lives. So tell me about your personal journey, sort of from really believing in international aid to thinking that we need to take a broader approach.

Absolutely. I came to the United States, immigrated in 2000, came for college, and I kissed Nigeria goodbye. I was never going back. And then I read this book written by a professor at NYU, an economics professor. It's called White Man's Burden. And it was really explaining why the efforts in the West had really failed to create economic prosperity. He dedicated the book to a 10-year-old Ethiopian girl who had to wake up at 3:00 AM in the morning, walk miles, fetch firewood, and take it to the market to sell so that she could fend for her family. That was February 2008, and that rocked my world. And I said, we have to do something about this. So I got some friends together. We started an organization called Poverty Stops Here. And the focus was let's go in and build wells. Let's provide funding for education. And let's give people some, you know, $200, $300 microloans so they could run businesses. After a couple years, wells broke down and there was no mechanism to fix it. And I just felt, man, I'm asking people for a lot of cash that they work hard to get. I'm going to invest it in building a well, and in 6 months to a year, the well's going to break down. Something is wrong with that equation. And that's really what began the process by which I said, I need to learn this. And I came to business school and I was fortunate to meet with Professor Clay Christensen. And he said, Ifosa, let's actually write a book about this. I think innovation has something to say. And now instead of focusing on just trying to alleviate poverty or seeing all these countries, these frontier economies as just a bunch of poor people, there's no opportunity there. If we change the lens with which we looked at them and said, oh my, by virtue of the fact that they wake up every day and struggle, that presents a lot of opportunity. Now, we don't know what the answers are, but I can guarantee if an entrepreneur or an investor goes in, looks at the problem through a different lens, tries to provide a solution that's simple and affordable, they will reap a lot of rewards, but they will also have the added benefit of making life better for millions of people.

Thank you so much. It's been such a pleasure talking to you today.

Oh, pleasure was all mine. Thank you.

That's Ifeosa Ojumo. He's the Global Prosperity Lead at the Clayton Christensen Institute and co-author of The Prosperity Paradox. You can find his article, Cracking Frontier Markets, on hbr.org. This episode was produced by Mary Dooe We get technical help from Rob Eckhart. Adam Buchholz is our audio product manager. Thanks for listening to the HBR IdeaCast. I'm Alison Beard.