An expert in disruptive innovation talks about how market-creating innovation can reverse the negative effects of the pandemic on emerging economies
Q Everyone has been affected by the worldwide pandemic, but can you speak specifically about the implications on emerging economies?
To be sure, COVID-19 has had an impact on the entire planet. However, emerging economies have suffered in four ways. For starters, there has been a massive loss of cash required to kickstart economies. Global investors who see the risk as too great to handle have drained off more than $100 billion from emerging nations since the pandemic began.
Second, governments in these economies have had to redirect capital resources to deal with the crisis, resulting in a reduction in service levels.
Third, on a social and household level, people all around the world who normally send money home to family members have been unable to do so. Much of the Philippines’ GDP, for example, is derived by remittances, which have been adversely hit by widespread job loss.
The final critical issue is poverty. Emerging economies are at risk of losing decades of progress. Over 50 million people in Africa alone are at risk of slipping back into abject poverty. These are only a few examples of how COVID-19 has influenced emerging economies.
Q You wrote a book called “The Prosperity Paradox.” How do you define it, and what role does it play in all of this?
Simply put, the prosperity paradox holds that focusing on poverty does not truly solve poverty. When you look at the global development industry, you’ll see that there’s a lot of emphasis on addressing the physical manifestations of poverty. If you visit a poor country and notice a dearth of quality education and healthcare, you would understandably think, ‘Let’s build schools’ or ‘Let’s build hospitals.’ This is the method followed by the development industrial complex to alleviating poverty, although the results have been dismal thus far. Many of these measures have risen in various locations, while poverty has remained stable.
Investing in innovation—specifically,’market producing innovation’—is a more effective way to alleviate poverty and create long-term wealth.
Q What do you mean by “non-consumers” and “market-creating innovation”?
Economies are complicated entities made up of government bureaucracy, the private sector, the NGO sector, civil society, institutions, and infrastructure. Our research has attempted to simplify this by seeing the economy through the prism of consumption and non-consumption.
Almost every economy may be divided into two categories: people and organisations that consume and people and organisations that do not. There are always people and organisations who would benefit from acquiring access to specific products or services, but are unable to do so due to barriers that exist within their specific context—typically availability, time, money, and competence. These people are referred to as non-consumers, and the process is referred to as non-consumption.
Market-creating inventions transform complicated and expensive products into simple and affordable products, allowing many more people—non-consumers—to access them. In doing so, they inevitably address consumption restrictions while also generating universal affluence.
Celtel, which set out to develop mobile phone markets for non-consumers in some of the world’s poorest countries, is one firm that has done this effectively.
Celtel was able to make mobile phones more accessible by allowing customers to buy cellular minutes in increments of five minutes—if you can only afford five minutes per month, you buy five minutes of air time. They also worked out how to make mobile phones simple enough for people to use without any prior knowledge. Celtel guaranteed that clients had easy access to the products by using the broad informal retail network that already existed in many emerging economies, which included open markets and people selling products on the side of the road. In terms of time, they made it exceedingly simple to purchase mobile minutes using scratch cards. Scratching the card and entering the minutes onto your phone takes less than a minute.
Celtel began by wondering, ‘Why are people in emerging economies not using cell phones?’ and removing all impediments to consumption As a result of that market’s inventiveness, Africa now boasts about a billion mobile phone subscriptions. The sector generates billions of dollars in tax revenue each year, sustains three to four million employment (at least prior to COVID), and is worth between $150 and $200 billion USD. That is the type of impact that a market-creating breakthrough can have.
Q You feel that today’s innovators can seize possibilities to build whole new growth engines for their businesses. Are there industries where the majority of these opportunities exist?
There are, however I’ve seen that viewing prospects through the prism of specific industries can lead to tunnel vision and stifle creativity. I’d rather push your audience to think about struggles rather than sectors. When you consider prospects through the prism of other people’s challenges, you begin to gain insights into where you may invest to build a new market. People in many emerging economies, for example, struggle to find inexpensive housing, so there is undoubtedly a market-creating opportunity there. Furthermore, the vast majority of people in Africa and South Asia spend upwards of 50% of their income on food, implying that there is a chance to establish a market for healthy, low-cost food. When innovators view opportunities through the prism of difficulties, they will begin to unearth numerous chances for innovation.
Q As time goes on, recurring crises are unavoidable. What actions can executives take to prepare their organisations for this unavoidable event?
I would advise CEOs to keep a portfolio of different forms of innovation. As previously said, market-creating inventions establish new markets, but there are other significant innovations that, when combined, keep companies alive. Sustaining innovations improve on existing products that were already “excellent.” Consider an enhanced smartphone camera or new digital functions in a car. Then there are efficiency breakthroughs, which enable businesses to do more with less.
Many firms, it turns out, are over-indexing on sustaining and efficiency innovations. Few businesses have a well balanced portfolio that includes breakthroughs that develop new markets.
On an organisational level, creating a new market will yield big profits since you will be servicing people who have previously gone unserved. Market-creating technologies generate additional jobs and expand the tax base on a societal level. As a result, they ultimately increase prosperity.
That should be a significant selling point for investors, because it implies you can help emerging economies prosper. As a result, when the next crisis strikes, individuals in emerging economies will suffer less than they did during the COVID-19 pandemic.
Q When famous innovation expert and Harvard Professor Clayton Christensen died recently, you lost your mentor. What did he teach you about creativity?
He taught me a lot about management, innovation, and economic development. But, perhaps most crucially, he taught me how to frame problems correctly so that we have a higher chance of finding the right solution.
He taught me three things about invention. To begin with, not all innovations are made equal. Innovations do not have to be high-tech or feature-rich. Some have an economic development influence because they increase efficiency in a certain industry, some because they generate new markets, and some because they improve existing products. Each type is important for long-term economic development, but market-creating innovations are frequently the bedrock upon which many strong economies are formed.
Second, invention is a process rather than an event. Which American city is regarded as the birthplace of the Industrial Revolution? What about New York? Boston? It is, in reality, Lowell, Massachusetts. Lowell thrived as a great industrial city in the 1850s, thanks in part to its textile industry, and was home to the largest industrial complex in the United States. However, by the early 1900s, it had begun to lose jobs to the Southern United States. It was classified as a “depressed industrial desert” by 1931.
Lowell rose to prominence as a result of enterprises that innovated to satisfy the requirements of customers both locally and nationally. Textile entrepreneurs in the city created the Lowell system, a labour production model that substantially reduced the cost of textile manufacture, made work more humanising for workers, and ultimately resulted in a textile manufacturing boom. However, Lowell’s textile manufacturers were unable to adapt to changes in their industry over time. For the city to remain affluent, entrepreneurs would have had to alter their business models. They’d have had to keep innovating.
Third, innovation is the driving force behind our infrastructure and institutions. It is not something that happens on the outskirts of society; rather, it is the process through which civilization grows. Societies can only create jobs, pay taxes, and build infrastructure and institutions through innovations that create or connect to new markets.
Take, for example, the city of Detroit. Once home to 1.8 million people, the city was one of the most prosperous in America. Detroit was a thriving city, from Motown to the Big Three (General Motors, Ford, and Chrysler). Today, its population is around 700,000, with a violent crime rate that is three times the national average. Detroit has the highest unemployment rate in the country, at 20%.
Detroit’s problems began in the 1950s, when major automakers appeared to lose touch with customers, particularly non-consumers and those at the bottom of the market. According to some estimations, Ford’s 1957 Edsel launch was a $250 million flop (more than $2 billion in today’s money). It was both overpriced and a gas guzzler.
During the 1970s oil crisis, when Americans preferred smaller, less expensive vehicles, Detroit automakers continued to produce larger, more expensive vehicles. During the Japanese car frenzy, a Ford engineer observed, “This small-vehicle thing won’t persist forever.” I don’t think American drivers will be content with manual gear-shifting and limited performance for long. The pendulum will return.” Unfortunately, this never happened, and Americans were forced to look to foreign automakers to meet their need for smaller vehicles. Detroit automakers were forced to lay off thousands of workers and close major operations, prompting many residents to seek employment elsewhere.
As people departed Detroit, so did the city’s tax base. Without a rising and gainfully working population, the city struggled to fund its infrastructure and organisations. As they say, the rest is history. Today, Detroit is attempting to reinvent itself as a city conducive to business and creativity. Detroit’s rise should be studied thoroughly, with a particular emphasis on the business strategies that rocketed it to worldwide prominence.
Institutions and infrastructures are vital in economic progress, but it turns out that innovation is the engine that drives both. Without it, good institutions and functional infrastructures are extremely difficult to establish—and nearly hard to maintain.
Efosa Ojomo is the Global Prosperity Practice Lead of the Clayton Christensen Institute for Disruptive Innovation, a Boston and Silicon Valley-based think tank. He co-wrote The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty with late Harvard Business School Professor Clayton Christensen (Harper Business, 2019). This essay first appeared in Rotman Management, the publication of the Rotman School of Management at the University of Toronto.