Into Africa

Which area of the world boasts seven of the top 10 fastest growing economies since 2011? Latin America - nope. Asia - so ten years ago! The place to be for real growth is Africa, where private equity investments have doubled in just two years, and the US, Chinese and European governments are tripping over each other to pave inroads for their own corporations. In fact, the World Bank says the collective economy of the entire continent grew by 5.6% last year.

The first US Africa Summit, held in Washington DC in August, was widely reported as a pivotal shift in perceptions of Africa as a place of war, corruption, and disease to a place of economic growth, investment, and grassroots innovation. Many suspect this shift in perceptions is due to a realization among American politicians and business leaders that China is far beyond the US in terms of market creation in Africa. Companies in a wide range of industries are now forging ahead in Africa despite persistent challenges to the business environment (e.g., infrastructure, socioeconomic inequality, corruption, and regulatory obstacles). Technology, pharma, media, and consumer goods companies reason that the burgeoning young, urban consumer class, though still a minority in all African countries, has more disposable income and the tools (i.e., phones and Internet) to buy what they want.

But where exactly are the greatest opportunities? Corporations are approaching the market from the top-of-pyramid down to the middle class, and the development community from the base-of-pyramid upwards. In such an environment, the most potent opportunities are at the intersection of corporate and development community interests. For MNCs, this means designing and delivering digital and mobile services with both a strong commercial value proposition and the potential for social impact. As the development community seeks to bring digital and mobile services to scale, there will be a real opportunity for enterprise-grade solutions and platforms that deliver key financial, health, agriculture, and public services. (At the US Africa Summit, Power Africa was frequently cited as a model initiative.) For their part, local governments are playing the tricky game of encouraging investment without creating dependency or hobbling local industry. Despite the increasing power of the consumer class, few companies will succeed without the collaboration and support of key government and local stakeholders. As Africa grows and flexes its economic muscle, multinational technology companies will do better to be seen as a partner than as a vendor. 

Bandits, Drug Traffickers, and other Barriers to Entry

Last week in Barcelona at the Mobile World Congress (the conference formerly known as 3GSM), attendees got a taste of what it really means to bring technology to frontier markets. Karim Kohja, CEO of Afghanistan telecom operator Roshan, described the challenges of expanding into rural Afghanistan. He woke up his audience with the story of his unexpected entry into the “financial services industry” when he had to carry boxes of cash into bandit-infested mountains. Kohja quickly learned that, if reaching remote customers was easy, they would already be subscribers.

While the Afghanistan telecom example is extreme, it is not unique. Barriers to entry are typically segment- and geography-specific, and mature-market experience does not necessarily help a company prepare for them. Vital Wave Consulting field researchers know this well – before conducting interviews or taking photos of technology usage in the favelas of Rio de Janeiro, they must request permission from local drug traffickers. Oftentimes the more remote the region or poor the market, the greater the challenge. But, emerging-market expansion is not always so treacherous. Many, for instance Eastern European countries, can look and act more like developed markets than their least developed counterparts such as those in Sub-Saharan Africa. And the least developed markets can also offer unexpected advantages. Markets that have not yet been penetrated by technology have fewer barriers to entry (e.g., no legacy systems to upgrade, less competition).

Companies eager to find growth opportunities in emerging markets must balance their appetite for risk with the urgency to grow. Businesses may chose to work with partners to share the risk or to avoid the most extreme situations. Others may chose to embrace the risks and hedge against them with business rigor, including tested business models, credible market and business intelligence, and reliable supply chains. Businesses with such a toolkit will mitigate emerging-market risks and gain a reliable measure of potential rewards. These are the firms most likely to effectively tackle the unique barriers to entry in new markets.

Also in the news:

• $20 mobile phones coming to India
• The marriage of music and handsets
• Low-cost notebook round-up

You Can't Get There From Here

Nugget readers who have traveled in emerging markets have surely witnessed ineffective distribution channels. One Vital Wave employee recently shared a ferry to an island off the coast of Tunisia with a truckload of sheep. Upon arrival at the island dock, she saw an identical truckload of sheep waiting to board the return ferry to the mainland. Distribution channels, especially for physical goods, plague most emerging-market business ventures, and well-intentioned programs are often derailed by this obstacle. OLPC’s Chief Connectivity Officer, Michail Bletsas, highlighted the distribution issues in a recent interview: “Actually, what we're trying to do is not distribute any PC ourselves….but right now, no one else is trying to do that.” Other organizations are naively ignoring this hurdle. The Australia-based “Be A Hero” aid organization and Bigshop.com announced plans last week to provide underprivileged artisans in Thailand, Cambodia, Papua New Guinea, Manilla, Kenya, Zambia and Zimbabwe with the opportunity to sell their wares to a global audience. There is no mention of how the organizations will manage business process issues such as payment, quality control, distribution, warehousing, delivery or support.

Organizations such as Peoplink and Novica have built similar businesses and continue to struggle with distribution. Delivery times can exceed one month, and the need to warehouse stockpiles of products drives up costs. Distribution presents challenges for all suppliers – those selling products out of the developing world into the developed and vice versa. Some of the predominant issues include lack of reliable infrastructure (roads, railways, electricity, fuel access and postal service), corruption (stolen merchandise and unjust taxes), and extreme environments (dust, rain and heat). While reliance on volunteers and aid organizations may get a program off the ground, distribution is more likely to be successful when sustainable business models provide clear and compelling incentives along the entire distribution chain. Thamel.com, a Nepal-based marketing company that provides gift-giving services for the Nepalese diaspora, stresses the importance of business benefit for all involved. Even with one of the more successful developing-world distribution networks, Thamel.com sometimes puts the burden of product distribution, at least for goat delivery, on the gift recipient.

For businesses expanding into developing-country markets, whether delivering goats or laptops, it is essential to address distribution with creative and reliable solutions. Business managers may be required to invest in local infrastructure to ensure reliable product delivery. For this level of investment, businesses would do well to work closely with senior government leaders to ensure benefits for such investments (similar to traditional benefits given for investments in manufacturing facilities). Local partners, such as Thamel.com, have regional knowledge and established delivery systems that can also point to successful distribution strategies. As effective distribution models are built in developing countries, local industries will benefit from increased efficiencies, and fewer truckloads of sheep will pass each other on the dock.

Also in the news:

• HCL releases Classmate PC for consumers
• Sears sells sub-$200 Linux desktop PCs
• Businesses make progress in designing for developing world

Emerging Markets First, Traditional Markets Second For IBM

This week’s nugget was buried in a New York Times article by Steve Lohr on the lowering of IT-spending projections for 2008. The article contained the complete text of a memo by IBM’s CEO Sam Palmisano to the company’s senior executives. In the memo, Palmisano describes a major change in strategic direction – IBM “will focus first on how to capture all the growth in emerging markets, and then adjust our plans to serve the more traditional markets appropriately.” Palmisano underscores IBM’s continued investment in Brazil, Russia, India and China (BRIC), and announces a $1.6 billion initiative to capture growth opportunities in other parts of Southeast Asia, Eastern Europe, the Middle East, Africa and Latin America. A special emerging-market-based group will drive the initiative, which Palmisano expects to contribute significantly to the company’s revenues by 2010.

Palmisano deserves credit for recognizing the near-term opportunity “beyond BRIC” and providing strong leadership on strategic growth in “second-tier” developing countries. He has a proven track record of backing up past announcements with solid action. The number of employees in India, for example, has increased 40% to 73,000 in a year, reflecting the company’s rapid growth in the region. The BRIC countries have yielded a compound growth rate of 22 percent since 2004. Despite this success, Palmisano clearly understands the importance of bracing senior management for a strategic shift away from more comfortable traditional markets. “This is quite a change in mindset,” he says in the memo, “but that’s what is required to exploit today’s most exciting growth opportunities."

The overt change in focus by IBM and others (Cisco, GE, Microsoft, Nokia) presents an opportunity for regional offices to contribute more directly to the corporation’s strategic direction. With a spotlight on growth opportunities in their local markets, senior leaders in those countries (whether they are from the local area or moved there by the company from abroad) can contribute to company growth by influencing how products and services should be designed to meet local needs and preferences. For IBM to be successful in emerging markets, it will require a sustained commitment to innovation and understanding local markets. The details of Big Blue’s new emerging-market growth initiative will govern its degree of success, but the announcement alone is a bold step in the right direction.
Also in the news:

• Nokia Village Solution due out in Q108
  Cisco WiMax focus on developing countries
• China-based Hasee enters low-cost PC market

Bypassing the Network May Connect the Unconnected

This week’s nugget was unearthed when a little-known telecommunications company promised to bring to market a mobile phone that can bypass operator networks and enable users to text and make free calls to people within a one kilometer radius. Sweden-based TerraNet believes the technology addresses the need for communication in developing countries, especially in rural areas where operator networks do not exist, and could also aid in disaster relief. The technology can even be used for free phone calls outside the immediate vicinity if there is a broadband-enabled PC with Voice over Internet Protocol (VOIP) capability within range. Focusing on areas without existing operator networks, TerraNet intends to launch a commercial network in 2008 with revenue models based on licensing and handset sales.

Though TerraNet's technology requires special handsets, the company hopes it will eventually be a feature available on standard phones. Phone manufacturers, however, will have to overcome the objections of operators if they intend to offer a service that bypasses the operator’s network to make free calls. Indeed, many operators – focused relentlessly on competition from other operators and maintaining ARPU (average revenue per user) – may not be prepared for a competitive threat like TerraNet’s solution. Because consumer needs and user habits differ considerably in emerging and mature markets, a solution could quickly become formidable competition in emerging markets while not posing a threat in developed countries.

While TerraNet’s solution poses a threat to telecommunications companies, Vital Wave Consulting suggests that it may also present an opportunity for PC maufacturers and local entrepreneurs. Mobile technology that taps into a connected village PC for free VoIP calls could present not only a lifeline to the outside world but a strong enough value proposition to prompt community or entrepreneurial investments in PC-based connectivity for longer-distance communications. TerraNet’s solution is also a reminder that multinational technology corporations doing business in developing countries would do well to look far outside traditional technology and business model solutions to understand competitive threats and accurately identify growth opportunties.

Also in the news:

• Motorola loses ground because of ultra low-cost segment
• Everex partners with Zonbu for low-cost laptop
• OLPC signs Peru for 260,000 laptops

Translating the "Huge" Opportunity into Actionable Forecasts

Market research firms and the business media have finally caught the emerging market bug and are yelling from the hilltops that the opportunity is “huge.” Forrester’s recent study received considerable media attention by stating that by 2015 most PC growth will occur in Brazil, Russia, India and China and the world will have 1 billion PCs in use by the end of 2008. The research says that in order to capitalize on this growth, hardware and software manufacturers will need to make a fundamental shift in their businesses and it gives nods to some of the heavily-marketed multinational initiatives.

With such compelling numbers and media attention, it is no wonder that technology companies are investing in programs targeting developing countries. Indeed, there has never been a more compelling time to invest. Senior executives no longer need convincing and emerging-market consumers are prioritizing technology spending. However, many large-scale emerging-market initiatives have failed in spite of the overwhelming opportunity, and business managers are advised to proceed thoughtfully.

Emerging markets are different and less intuitive, even for experienced business managers. Corporations that insist upon actionable analyses, sound data, and scenario forecasting will gain a competitive advantage in navigating the gauntlet of emerging-market opportunities. Business managers are well advised to apply the same sound strategic analyses to emerging-market endeavors as they would other business opportunities. Using new dynamic tools and broad sources of data, corporations can mitigate the risks associated with emerging markets and secure their share of the “huge” opportunity.

Also in the news:

• Ericsson edges ahead of rivals in emerging markets
• Migrant works could pave the way for SMS money transfers
• Sun sees networked computers as the key to bridging the digital divide

Nokia's Emerging Market Strategy Connects the Dots

Nokia quietly demonstrated a solid emerging market strategy this week with technological, marketing, sales and distribution innovation in India.

The world’s leading handset maker launched seven new mobile phone designs with functions and features to meet the needs of rural Indians. The new phones have ruggedized exteriors, longer battery life and discrete user phonebooks and call-time limits to make sharing easier. Nokia’s announcement received more coverage by local Indian press until Business Week reported sightings of colorful Nokia vans in rural areas – part of an innovative marketing scheme to promote the new phone models among first-time buyers and potential upgrade customers.

Nokia’s comprehensive strategy may help boost their market leadership in India, which fell from 80% last year to about 67% today. As more high-tech multinational companies successfully penetrate rural and mass markets in developing countries, the opportunity will expand for application providers. Enabling the delivery of relevant services such as electronic remittances and health information will benefit an underserved consumer base and the companies that serve them.

Also in the news this week:

• One-Laptop-per-Child and Microsoft become strange bedfellows
• Indian researchers claim they are on the way to a $10 laptop
• Microsoft explores split-screen technology for shared-use environments