A common strategy that we see in emerging markets over and over again is the attempt to replicate business models that previously worked in developed countries. Innovators, entrepreneurs, and investors often believe that a company’s success in a specific demographic will work in the developing world, granted some cultural and operational tweaks are made to adapt to under-developed market constraints.
However, more often than not these successful models fail to catch on in emerging economies. The product, the technology, and the model are outstanding, product-market fit has been proven to work but the product does not reach the consumer – what is the missing piece?
The reality is that emerging and developed economies are governed by vastly different business environments. A country’s economic status is defined by factors of economic growth; including per capita income, regulatory bodies, market capitalization and overall levels of liquidity. These factors determine the readiness of the business environment to adapt to innovation.
In developed markets, mature business environments and solid infrastructure (both hard and soft) made it possible for business model innovation to thrive even in very specific and niche markets. The efficiencies in adjacent sectors and their supply chains supported new agile business models, thus enabling effective cost reductions, better customer experience, and good growth.
On the contrary, emerging markets often don’t have the luxury of a well-established infrastructure base nor diverse industrial development. Startups will most likely need to create the adjacent efficiencies for their own operation, which market-creating innovations can achieve.
The power of market-creating innovation
To succeed at innovation in emerging countries, entrepreneurs must focus on developing new markets that serve people for whom either no products existed, or existing products were not previously accessible – that is, innovators must target non-consumption.
However, reaching the right consumers in emerging markets is easier said than done. While disposable incomes are progressively rising in regions like Latin America, price-sensitivity is still high, and finding the right cost structure to reach the masses requires a lot more than leveraging the right technology or having a good idea.
In order to develop new markets and give middle-class earners access to new products, it’s important to take a long-term, holistic approach to the process of innovation. Instead of trying to “fix” these markets by bringing successful business models from other countries, the process of innovation must be carried out from within – considering business dynamics and inefficiencies across industries and finding operational models that can seamlessly work across multi-sectoral environments.
Market-creating innovation requires highly specialized and multi-disciplinary talent, extensive consumer research and an ecosystem-building approach. Identifying the product-market fit isn’t enough in the emerging world. Specific infrastructure must be built in conjunction with deploying a new product, in order to reach the consumer at the price-point that will trigger the profitable level of consumption.
The original idea behind Alibaba, the Chinese e-commerce giant, was to give outsiders access to Chinese goods. Additionally, Alibaba’s founder Jack Ma realized that the rising middle class was willing to pay for convenient access to a diverse selection of products. Ma saw the opportunity to target non-consumption, to focus on the service to give access to products that the Chinese did not have an opportunity to enjoy.
However, the infrastructure to support a platform like Alibaba did not exist. China did not have great broadband access, product merchants did not have a way to feature their products online, and there wasn’t a trustworthy online payments structure. Alibaba understood that if it wanted to reach their costumer with their core product, they would need to build the infrastructure to support it.
Alibaba built the business infrastructure that was needed to reach its e-commerce customers. By assembling a multi-disciplinary team of logistics, marketing, and financial talent. Alibaba not only built the foundations of e-commerce but also created a local services division that educated SME’s on how to optimize their online business sales – in turn, giving users better access to their core e-commerce services.
Alipay was launched in 2004 to solve the trust issue for online payments. The product was introduced to ease people’s sentiments towards making online payments before actually seeing the product. This payment “infrastructure” that was originally built for Alibaba’s e-commerce business has grown into one the world’s largest unicorn, providing every possible financial service for the massive population of China.
In Latin America, startups have already begun to take a similar approach. The e-commerce and logistics companies Mercado Libre and Rappi are optimizing the logistics and online payments infrastructure, by developing urban logistics networks and embedding user-to-user transfer payments and financial closed-loop systems.
Innovation in inefficient regulatory markets
It is commonly believed that in order for innovations to occur in emerging economies there must be a great regulatory environment in place. However, many studies of entrepreneurial success in China and Africa show that regulation is actually a result of business innovation and not the opposite.
In China, when Alibaba developed an online payments system to give convenient access to its users, the regulatory bodies for payment transactions adapted to the new payments alternative. These bodies saw the rate of adoption of online users and developed policies to secure internet payments and build trust – ultimately supporting economic growth.
In general, regulatory bodies will adapt to innovation as markets always work towards efficiency. However, to justify costly policy changes, it is imperative that the entrepreneurial ecosystem focuses on developing products and services that create multi-sectoral efficiencies.
The Doing Business organization of World Bank clearly defines the business environment as an ecosystem of different players that act in different stages of enterprise development. In emerging markets, these players are often ready to support rudimentary practices but do not sustain new data-driven and agile business models. It is up to the entrepreneurial ecosystem to trigger regulatory change by building profitable markets worth regulating.
Latin American governments are already seeking to promote technology by supporting market-creating innovations. In Mexico City, regulatory entities supported the ride-sharing environment by developing shared-economy policies, improving market transparency and legalizing access to new sources of income.
Innovation opportunities in Latin America stem beyond leveraging new technologies. As a country in the emerging economy bracket, supply chains and regulatory bodies are yet to achieve optimal performance. In order to create new markets, businesses will have to be built to not only reach core consumers but also to make the business infrastructure more efficient, and regulation will follow.
Entrepreneurs and investors will highly benefit from taking an ecosystem-building approach when developing new business models. Identifying non-consumption is a great first step, that must go with a mix of specialized talent and a business model that can support synergies across industries.
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Reach out to Jose Rodriguez with any inquiries or ideas: [email protected]