Efosa Ojomo – Harvard MBA grad, engineer and co-founder of Poverty Stops Here writes about why more African entrepreneurs need more market creating innovations.
Successful market creating innovations typically have the following attributes:
Business models and capabilities that target non-consumption.
An enabling technology that provides improving levels of performance at progressively lower cost.
A new value network.
An interdependent architecture.
Capital that is patient for growth and impatient for profits.
An emergent strategy.
Executive support (typically at CEO level).Creates jobs faster than the forces of efficiency can eliminate them.
Creates jobs faster than the forces of efficiency can eliminate them.
Market creating innovations are difficult to pursue so we are developing a list of attributes that will help entrepreneurs and investors better seek out these opportunities and manage their development. So far, we have identified the following attributes of market creating innovations that we hope prove helpful. In future posts, I will write about the importance of these attributes and specific sector opportunities that exist in Africa and other developing regions in the world.
In the 1900s, only extremely wealthy people in the United States could afford automobiles so when Henry Ford informed his partners and investors that he wanted to develop cars that the average American could afford, understandably they were skeptical. In fact, Alexander Malcomson, Detroit’s largest coal dealer and Ford investor, sold his stake in the Ford Motor Company because he did not agree with the direction Henry Ford was taking the company.
Malcomson’s banker and uncle, John Gray, put in $10,500 into the venture but was skeptical about the long-term viability of the automobile business. Unfortunately he died in 1906, but Henry Ford bought his stake in the business in 1919 for more than $26 million. While it is easy to look back at these investors as shortsighted because of the obvious potential of automobiles, it is also important to appreciate how difficult it is to convince investors to pursue market creating innovations (MCIs).
MCIs pull people from non-consumption of a particular product or service to consumption by developing a profitable business model targeted at the majority of people who, historically, could not afford the product or service. These products typically start out simple and affordable. Our research suggests that by investing in market creating innovations, entrepreneurs and investors reap outsized returns, create jobs, and engender economic growth that stimulates national development.
For example, when Henry Ford decided to democratize automobiles in the 1900s, less than 10% of U.S roads were paved. But a massive effort to develop American roads went underway shortly after with funds from gasoline taxes. In this case, as it is with most others, the innovation caused the economic development and infrastructure spending.
Market Creating Innovation’s Competition
One of the biggest reasons it is hard to invest in MCIs is that investments in MCIs are always in competition with investments in sustaining and efficiency innovations. Sustaining innovations improve existing products on the market by adding features that appeal to some of the most demanding customers. Examples of sustaining innovations are improvements made in the latest version of the iPhone or Samsung smartphones versus previous versions. Those innovations, while important, typically have marginal effects on a company’s and an economy’s long-term viability.
Efficiency innovations, as the name implies, improve the efficiency of a company’s operations. Sometimes it involves leveraging technology that enables the company to produce more products with less staff.
With efficiency and sustaining innovations, the markets are typically defined thereby making targeting these markets more comfortable for investors and entrepreneurs and making metric for success easier to develop. The markets for MCIs are not defined so metrics for success or failure are difficult to develop.
Sustaining and efficiency innovations are important but they do not have the kind of impact on job creation, economic development, and investor returns as MCIs. For example, before Henry Ford democratized automobiles, there were more than 1,000 automobile manufacturers in the United States. Most of them focused on sustaining and efficiency innovations that were targeted at the richest members of society and as such, had limited impact on the U.S economy when compared to Ford Motor Company.
As the table shows illustrates, these different types of innovations have different impacts on capital, payback periods, a firm’s strategy, and other factors that investors consider when making investments.
*Payback period depends on varying factors including the complexity of the product and regulatory environment. The main message is that MCIs typically take longer to come to fruition.
Contact Efosa here: Senior Researcher, Forum for Growth and Innovation