EMB
AT A GLANCE
The way we define competition is flawed and misses out one of
the most important competitors of all: non-consumption— the
inability of a person or organization to purchase and consume
a product or service. This competitor is particularly prominent
in emerging markets. Rather than waiting in vain for the
demographics of an entire region to change, investors should
target non-consumption directly by investing in marketcreating innovation. This means transforming complicated and
expensive products into simpler and cheaper products, making
them accessible to more people.
The data in both tables points to an abundance of nonconsumption in these markets. The data is similar for other
industries. To appreciate the gravity of this insight, consider
the cases of the United States and Kenya. The former averages
one car per household and boasts an efficient transportation
infrastructure, while Kenya averages just 0.1 cars per
household without similar transportation infrastructure in
place. In other words, one cannot make the argument that
Kenyans simply leverage other (or better) means of travel.
There is significant non-consumption of mobility in Kenya.
What can entrepreneurs, managers,
and investors do about non-consumption?
As the tables illustrate, non-consumption is prevalent in many
emerging and frontier markets. Must investors wait for the
demographics of an entire region to change before competing
with non-consumption? Or, can they target non-consumption
by investing in a specific type of innovation called ‘marketcreating innovation’?
According to Harvard Business School Professor, Clay‑
ton Christensen, there are three main types of innovation,
namely: sustaining innovations, efficiency innovations, and
market-creating innovations.
The latter, which are of most interest here, transform
complicated and expensive products into simpler and less
expensive products, making them accessible to significantly
more people in society. Companies that engage in these types
of innovations fundamentally change their business models to
target non-consumption. Market-creating innovations typically
take longer to come to fruition, but they give investors the
most return on their investment over time.
Sustaining innovations, meanwhile, target existing consumption.
These innovations have more features, are sold for more money,
and typically have higher margins. When Samsung releases
a new version of a refrigerator with the ability to connect to
a smartphone, or when Toyota releases the latest Camry or
Corolla, these represent sustaining innovations.
For their part, efficiency innovations enable companies to do
more with less. They free up capital and increase company
margins but they do not fundamentally change the business
model of most firms. Examples of such innovation include,
for instance, when companies outs ource operations to other
regions to take advantage of lower cost, or when companies
replace labor with technology.
TYPES OF INNOVATION
Impact on
Market Creating
Sustaining
Efficiency
Capital
uses a lot
uses little
frees up
Jobs
creates a lot
creates few
eliminates
Consumption
increases
substitutive,
so little impact
very little to no
impact
Margins
lower
higher
same or higher
Payback
Period*
long:
3 years and up
short:
1 to 3 years
very short:
0 to 1 year
Payback
Amount
very high
medium
low to medium
Strategy
emergent and
undefined
deliberate and
defined
deliberate
and defined
Value Network
new
same
same
Market
creates new
already defined
already defined
Economic
Development
significant
marginal
can be negative
*Payback period depends on varying factors including the complexity of the product and
regulatory environment.
AS GOVERNMENT OFFICIALS IN
EMERGING MARKETS THINK ABOUT
INFRASTRUCTURE DEVELOPMENT,
IT IS IMPORTANT THAT THEY ALSO
THINK ABOUT MARKET-CREATING
INNOVATIONS THAT ARE TARGETED
AT THE VAST NON-CONSUMPTION
IN THEIR COUNTRIES.
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