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

Google's China Push Tests Out New Business Models

Last week, the Wall Street Journal (WSJ) delved into Google’s latest strategy to compete with Baidu, a formidable (and market-leading) search engine competitor in the Chinese market. Google has not been shy about its plans to beat Baidu on their home turf and a new joint venture with a Chinese online music company shows they are going for Baidu’s jugular. Baidu’s success rests precariously on popular free, unlicensed music downloads, straining relationships with the Chinese (and global) music industry. Google’s strategy to compete in China features free, high-quality, licensed music downloads in return for a share of ad revenues and download data for music labels.

While the WSJ focused on the horse race between Google and Baidu in China, they undervalued the article’s true technology business nugget – the music industry’s willingness to sign on to an entirely new business model. Universal Music Group has already agreed to participate in Google’s new scheme, and EMI Group, Sony BMG Music Entertainment, and Warner Music are interested. Vital Wave Consulting research has found that a non-traditional partner paired with a new business model can be a potent mix in emerging markets like China. And emerging-market consumers - even those with little disposable income – rank entertainment high on their list of basic needs. With music industry sales down and illegal music downloads outnumbering licensed downloads 20-to-1 worldwide, the timing is right for music labels to consider new ways of profiting from the ubiquitous online distribution of songs. With this solution, Google may manage to find a way to meet user demands for free music with the blessing of the record labels. Moreover, with China Mobile already signed on as a key partner for Android (Google’s open source mobile platform), this could have far-reaching implications for song distribution via mobile phones in one of the world’s largest markets.

If Google successfully applies this model in China, there is little to stop them from expanding it to the developed world. The flow of developing-country innovations to mature markets is increasingly common (e.g., pre-paid phone cards and mobile payments). Google’s music distribution scheme could eventually affect the technology and entertainment industries in the U.S. and Europe. The search giant’s competitors would be wise to secure non-traditional entertainment partners who would value alternative monetization schemes such as ad revenues. These creative partnerships will attract eyeballs and revenues in markets worldwide.

Also in the news:

• Handset manufacturers learn emerging market lessons
• Government rhetoric slows ICT growth in Africa
• Mobile phone, not PC, bridges digital divide

Measuring Gates' Creative Capitalism

Last month’s World Economic Forum provided a good setting for one of Bill Gates’ parting speeches as a Microsoft employee and his personal reflections on the role of capitalism in the modern world. Speaking to global industry and political leaders, Gates urged his audience to find a way to ensure that capitalism serves the world’s poor. Labeling this vision “Creative Capitalism,” Gates advocated a twin mission for corporations: make profits and improve the lives of those who do not currently benefit from market forces. As Gates shifts to management of his $39 billion foundation, he will encourage the world’s largest businesses to design products and services that address the needs of the poor. He suggested that, when profit is not feasible, corporations should be motivated by the recognition that comes with serving the poor.

While “Creative Capitalism” may gain currency as a new buzz word, the concept is not new. Many large multinational corporations (MNCs) have tried to find the right mix of pure philanthropy, market development and business development in poor countries. HP’s e-Inclusion program, AMD’s 50x15 initiative and Cisco’s Networking Academies are (or were) pioneering programs that merge self-interest with service. With a new spotlight on this type of business approach, it is worth noting the most common reason for failure – the challenge of measuring results. While Gates stressed the value of recognition, he did not explain how business managers can measure it. To garner the support of shareholders and ensure long-term company commitment, all forms of value should be quantifiable.

Gates’ spotlight on business in new markets will surely increase public pressure on MNCs to demonstrate efforts in this area. This presents an opportunity for MNCs to apply rigorous business practices to their emerging-market effort. MNCs that are committed to becoming recognizable leaders in the developing world will ensure that programs designed to capitalize on new markets are fully incorporated into the company’s main lines of business, rather than lumped into a soft basket of corporate social responsibility (CSR) initiatives. By developing new methods for quantifying abstract values, business managers can see both the immediate and long-term value of investments in new markets. If companies react to Gates’ call by beefing up their CSR programs, they will be missing out on the lessons learned long before “Creative Capitalism” showed up at Davos.

Also in the news:

• MSI plans to launch low-cost laptop
• China gaining in tech sector while Latin America lags
• Crime fears spread as cheap PCs head to Africa

How to Compete with Emerging Giants

Seasoned business managers know to expect competition from unexpected places. Still, new global players from developing countries have caught many in the global business community by surprise. Last week’s Economist explored the phenomenon of emerging-market companies that are joining the ranks of the world’s largest multinational corporations (MNCs). Emerging-market companies, such as Huawai, Lenovo, and Infosys, are buying out rivals, merging with other small companies in key geographies, and quickly expanding into developed-country markets. These up-and-coming MNCs benefit from fast decision-making processes (common in family-owned and well-connected businesses) and scrappy managers who honed their skills on the tough local markets of developing countries.

Even with these advantages and homegrown talents, emerging-market companies will have to work hard to compete globally. Developed-country consumers often consider products from emerging-market countries as inferior. Even “made in Japan” once carried a stigma that Japanese companies had to overcome. To reassure consumers and compete in the global marketplace, emerging-market companies will face an up-hill battle even with the benefit of low-cost resources, tenacity, and drive. For U.S. and European MNCs, maintaining their position as Fortune 500 companies requires quick and decisive action to create locally relevant products and services for developing countries. The final business frontiers are quickly morphing from a potential growth opportunity to a business necessity equal in importance to traditional markets. Neither market can be left unattended for long.

To compete in emerging markets, developed-country MNCs have to use their traditional strengths (brand, influence, wealth and depth of business experience) PLUS all the same tools their new competitors will bring to the game (low costs, quick decision-making, creative distribution, local knowledge and a tolerance for low margins). For developed-country MNCs, this points to the creation of highly autonomous regional branches, innovation along the value chain, or acquisition of well-run organizations (without the imposition of parent-company baggage to slow them down). These are disruptive changes to any business and have impact on traditional methods of performance measurement. Publicly traded MNCs would benefit from ensuring clear and compelling explanations of their strategies in emerging markets to both internal and external audiences to increase their appreciation of the necessity and benefits of change.

Also in the news:

• Bill Gates says businesses should design for the poor
• India adds 8 million mobile subscribers last month
• Nokia says emerging markets will keep sales 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

CES Hype Ignores Emerging-market Innovations

The dust is still settling in Las Vegas after 140,000 techies gathered for the annual Consumer Electronics Show (CES) last week. A hotbed of trends, gadgets and futuristic predictions, CES hints at the year’s soon-to-be hottest products and establishes solid predictions for the direction of the industry. This year’s show, responding to increasing media attention, attempted to shine a spotlight on solutions designed for developing countries. With industry representatives from the One Laptop per Child initiative, Qualcomm, Voxiva, AMD, Intel, Microsoft, and Cisco, CES hosted “Technology and Emerging Countries: Advancing Development through Technology Investments.” Even with the emerging-market star power of some of the world’s largest companies, coverage of the session was noticeably absent from CES press reports.

The absence of media attention on technology solutions for developing countries is not surprising. CES, traditionally, has been focused on the bells and whistles of the technology industry. The demand for sexy gadgets and flashy form factors keeps announcements comfortably far from reality and, as a result, only a fraction of the technology gizmos demonstrated make it to market. Successful emerging-market solutions are less often about flashy technology and more about shifts in business models to address day-to-day user needs. While new business models for and investments in emerging markets are not of particular interest to CES bloggers, they continue to be of interest to Wall Street.

Strategic investments that drive growth and true innovation in developing-country markets may be overlooked in the coverage of this year’s CES, but IT analysts are responding to them favorably. IBM, for instance, was rewarded by investors this week when their earnings report showed continued strong growth in emerging markets, making up for a slowing tech spending in the US. For companies just getting into the emerging-market game, there is still time to generate near-term revenues through smart investments. But newcomers are advised to ignore the tech-show drama of “devices in search of a market”, and balance technology innovation with business models and internal restructuring that will enable emerging-market growth.

Also in the news:

• NComputing takes on enterprise
• Apple loses negotiations in China
• OLPC to make XO laptop available in United States

Focus on Affordability Would Help Low-cost Device Makers

2008 is off to an interesting start for the technology industry. Analysts are forecasting slower growth in IT spending globally and banking on emerging-market growth to keep the global economy afloat. Topping the list of IT drama this week is the collapse of the partnership between Intel and OLPC. Though this may not be earth-shattering for the industry, it hurts an initiative that has influenced the growth strategies of many computing device companies.

Even before Intel’s move, it was clear that OLPC is a troubled organization. Many industry and education experts have provided candid recommendations on how the organization can improve its business model, support and installation plans, and usage models in the education environment. However, there remain many positive opinions of the XO machine itself, which features great innovations – a useful monitor, low power consumption, a simplified user interface, and a pull-cord generator. These innovations, accompanied by bold claims and abundant PR around the OLPC initiative, prompted some of the world's largest companies to develop rival low-cost computing solutions. In this way, the OLPC initiative has changed the landscape of the PC industry in developing countries. Regardless of whether this non-profit organization can move beyond its current challenges to successful scale, recent sales and shipments suggest that, at least for now, the OLPC initiative is competing in some way against industry giants.

The dramatic price reductions of low-end PCs are an enormous step for the IT industry in penetrating low-income markets. But IT organizations keen on maximizing their growth, and doing so profitably, would do well to understand the difference between low-cost and affordable. Vital Wave Consulting research shows that affordability is less aligned with actual price than it is with customer cash flow. The majority of computing customers in developing-country markets struggle to make a one-time payment even at the lowest end of PC (and even mobile handset) prices. Yet, they are increasingly willing to take on debt to accelerate their ability to purchase a computing device. Technology acquisition in emerging markets would be dramatically increased through business models that provide a financing component to overcome the cash flow limitations of aspiring yet low-income customers. These business models would also relieve the pressure for ever-decreasing prices and allow the providers of computing devices to maintain reasonable profit margins.

Also in the news:

• Samsung competes for low-end mobile space
• OLPC to dual-boot Windows and Linux
• Laptop sales growing faster in emerging markets