The secret to startup success in Africa


The secret to startup success in Africa

This is an excerpt of an article crossposted from Harvard Business Review.

A tale of two strategies

Why do so many multinationals run up against long-standing obstacles to success in developing markets, whereas other MNCs and local entrepreneurs succeed?

We believe the answer lies in the difference between “push” and “pull” investment. Push strategies are driven by the priorities of their originators and generate solutions that are imposed on markets and consumers. Pull strategies respond to needs represented in the struggles of everyday consumers. The difference in outcomes could not be starker.

Most multinationals hope to achieve breakout growth by pushing current products onto emerging middle-class consumers. They carry with them some large portion of their existing cost structure and operating style, and thus set prices at levels that limit market penetration. As more competitors pile in, these companies face the dilemma of lower growth versus lower margins—and in the end, they get both. Soon enough, the truth emerges: Though they thought they were pioneering in a new market, they were actually targeting a finite base of existing consumption, fighting for every point of share in a highly competitive environment.

The strategy that wins in emerging markets diverges from this conventional approach in almost every respect. The fundamental advantage of pull over push development is that the market is assured—there is no uncertainty about whether sufficient demand exists. When innovators develop products that people want to pull into their lives, they create markets that serve as a foundation for sustainable growth and prosperity.

Our research focuses on ventures that address the unmet needs of everyday consumers instead of seeking high-margin opportunities by chasing the middle class. They purposely follow the lowest-margin opportunities, relentlessly managing costs by integrating as many elements of the activity chain as possible, from raw materials sourcing to final distribution. They pull needed infrastructure and talent into the company and integrate around potential nodes of corruption—choosing to build self-reliance rather than to depend on existing options. Their investments are guided by a desire to increase affordability and accessibility, and the resulting price and cost discipline fuels higher growth, expanding the market by targeting nonconsumption. Higher growth boosts employment, as ever more workers are needed to make, sell, and distribute products and services.

The twin benefits of economic growth and employment growth are signatures of market-creating innovation, differentiating the impact of this strategy on local markets from that of multinationals’ market entry, the ultimate objective of which is simply to increase efficiency. For example, when a major corporation in a developed nation builds a factory to make products at a lower cost (cars in Mexico, for example), its intention is to export those products to richer markets. It doesn’t invest to create sales, distribution, or servicing jobs in the local economy. Likewise, investments in natural-resource extraction rarely create robust economic or employment growth, because the yardstick by which these investments are measured is efficiency. From the day a facility powers up, its operators are measured by their ability to increase efficiency—to eliminate jobs.

Pull strategies driven by market-creating innovators have been behind the migration from poverty to prosperity in Taiwan, South Korea, Singapore, and Hong Kong—the four Asian tigers—whose leading companies have consistently focused on low costs over high margins and on creating markets by targeting nonconsumption. The Tolaram Group in Nigeria provides another notable example.

Introducing noodles to Nigeria

Perhaps the most beloved consumer product in Nigeria is also one of the humblest: Indomie instant noodles. Sold in single-serving packets for the equivalent of less than 20 U.S. cents, the brand enjoys near-universal name recognition, maintains a 150,000-member fan club with branches in more than 3,000 primary schools, and sponsors Independence Day Awards for Heroes of Nigeria to celebrate the accomplishments of exemplary Nigerian children. The brand and Dufil Prima Foods, the Tolaram company that produces it, are so well woven into Nigerian society that it might surprise Nigerians to recall that noodles are not among their traditional foods and that Tolaram has operated in the country for less than 30 years. The company’s growth track turns the conventional wisdom about development on its head.

The Tolaram Group was founded in Malang, Indonesia, in 1948. It began by trading textiles and fabrics and has since evolved into a manufacturing, real estate, infrastructure, banking, retail, and e-commerce conglomerate. In 1988, the year Tolaram began selling Indomie noodles in Nigeria, that country was far from an investment magnet: It was under military rule; life expectancy for its 91 million people was 46 years; per capita income was barely $256; less than one percent of the population had a phone; only about half had access to safe water; only 37 percent had access to proper sanitation; and 78 percent lived on less than $2 a day. But in these circumstances the brothers Haresh (now managing director, Nigeria) and Sajen (now CEO) Aswani saw a huge opportunity to feed a nation with a very affordable and convenient product.

Indomie noodles can be cooked in less than three minutes and combined with an egg to produce a nutritious, low-cost meal. But the vast majority of Nigerians had never eaten or even seen noodles. Deepak Singhal, the CEO of Dufil Prima Foods, recalls, “Many people initially thought we were selling them worms.” The Aswani brothers were convinced, however, that they could create a market in Nigeria because of the growing population and the convenience of their product. Instead of focusing on the demographics that conventional wisdom suggested, they focused on assembling a business model that would allow them to create a market.

The decision to target the needs of typical Nigerians compelled Tolaram to make long-term investments in the country. In 1995, to control the costs of its operations, it shifted noodle manufacture to Nigeria. To do so, Tolaram had to pull infrastructure, such as electricity and water, into its operations. Singhal says, “I run a food company, but I know more about electricity generation than food.” Tolaram is in the education business as well, recruiting top graduates of Nigeria’s schools and pulling needed skills through company-provided training in electrical and mechanical engineering, finance, and other disciplines. Where some multinationals might push expatriates into an emerging-market assignment, Tolaram pulls its leaders for Africa from Africa.

The company’s investments did not stop there. To get its products to market, Tolaram had to integrate its operations both forward and backward. Nigeria, like many other emerging and frontier markets, has no thriving formal supermarket sector, and the path from factory to consumer contains many potential points of shrinkage. So Tolaram’s managers chose to invest in a supermarket supply chain that began with company-owned trucks and expanded to include distribution warehouses and storefronts.

Wherever they identified product “leakage,” they pulled honesty into the business through forward integration, taking ownership of that point rather than working with external partners and processes. They didn’t try to push honesty by hiring more police officers, who are often easily corrupted. The question, “What’s the point if your product is affordable but not available?” guided Tolaram’s supply chain investments. Looking upstream, the company had to provide almost all its inputs, because suppliers either couldn’t meet quality or cost standards or didn’t adhere to contracts. As a result, Tolaram now controls 92 percent of the inputs for Indomie noodles and operates 13 manufacturing plants in Nigeria, many of which supply those inputs.

Tolaram’s dedication to this market-creation strategy has paid off. Today the company sells 4.5 billion packs of noodles in Nigeria annually. It owns and operates more than 1,000 vehicles for logistics, directly employs more than 7,500 people, has created a value chain with 1,000 exclusive distributors and 600,000 retailers, and has revenue of almost $1 billion a year while contributing approximately $100 million in tax receipts to the Nigerian government exchequer. The company is now creating markets in Nigeria for other fast-moving consumer goods, such as bleach and vegetable oil. Before Tolaram released its Hypo bleach product, fewer than 5 percent of Nigerians used bleach to wash their clothes. Tolaram reports that over the past few years, leveraging its manufacturing and distribution prowess, it has expanded that market sixfold, reaching 30 percent of the population. It plans to do the same with vegetable oil.

If Tolaram had taken the conventional approach and invested in the emerging middle class, it wouldn’t have achieved 36 percent annual growth—in a market it created—over the past 15 years. If it had waited for the Nigerian government or international development agencies to address infrastructure challenges before investing, the company wouldn’t be operating in Nigeria today. Tolaram internalizes the risks that others perceive in the Nigerian business environment.

The most visible evidence of this strategy is that the company has taken a lead role in creating a $1.5 billion public-private partnership to build and operate the new Lekki deepwater port in the state of Lagos. Ankur Sharma, formerly Tolaram’s head of corporate strategy for Africa, summarized the company’s approach to self-reliance in February 2016: “As we create a market, we do what is necessary to ensure success. In some countries we have built power plants; in others we have invested millions of dollars in logistics just to move our products from the factory to the retail sites, in line with our value-chain-integration theme of controlling our own destiny by driving costs down. We are committed to whatever market we enter and will do whatever it takes to be successful there.”

As Tolaram closes in on three decades of operations in Nigeria, a growing number of start-ups are emulating its strategy.

MoringaConnect is a three-year-old Ghanaian company founded by Kwami Williams, an MIT-educated aerospace engineer, and Emily Cunningham, a Harvard-trained development expert. It provides Ghanaian farmers with seeds, fertilizer, training, and financing to enable them to plant and harvest the moringa, a hardy, fast-growing tree whose leaves are an abundant source of nutrition and have been used in traditional medicines for centuries. Since its inception, MoringaConnect has signed up 1,600 farmers, and hundreds more are on a waiting list. The company has planted 250,000 moringa trees in northern Ghana and has increased farmers’ incomes as much as 10-fold. It counts the online beauty subscription service Birchbox among its top customers (moringa oil is an ingredient in the company’s hair- and skin-care products) and was on track to gross almost $1 million in 2016.

Originally Williams and Cunningham simply wanted to provide farmers with processing machinery for their moringa harvest. But the two found that this was not sufficient to create a new market, so they had to integrate to drive costs down. MoringaConnect looks past the market research suggesting that Africa’s middle-class growth is slowing, that corruption is rife on the continent, and that Ghana’s debt burden is skyrocketing. Instead its founders see an opportunity to capitalize on a resource that can generate immense wealth for farmers and ultimately for the nation.

Two other African companies practicing this strategy are M-KOPA and Fyodor Biotechnologies. The former, based in Kenya, provides solar power systems. Fewer than 30 percent of Kenyans have access to electricity, highlighting for the founders of M-KOPA an opportunity similar to that pursued by M-PESA, which started the mobile-payment revolution in Kenya in 2007. M-KOPA has been pulled into more than 400,000 homes as of this writing and is signing up an average of 550 homes a day. The company has established 100 service centers across Kenya and has created some 2,500 jobs. Although the World Bank calls Kenya’s economic growth “modest at best,” M-KOPA is creating a market out of hundreds of thousands of people—left behind by centralized infrastructure projects—who are pulling the company’s solution into their lives.

Fyodor Biotechnologies, in Nigeria, has developed a urine malaria test (UMT) that will sell for $2 and can be conducted at home, freeing people from the need to travel to a clinic for a complicated and expensive diagnosis. The company is on track to manufacture 2.3 million UMT kits by mid-2017 and has recently bought land to build a manufacturing facility. Like Tolaram, it is already developing an integrated value chain.

Feature image via HBR.

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