Innovation key to economic success

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IN recent years, the pathway to economic growth has become less predictable than ever. Resource endowment and access to capital can no longer explain the prosperity of nations, much less companies. The speed at which dominant companies are disposed by competition has never been this swift.

By Investment Specialist Ray Chipendo

As one chief executive officer of a major corporation once remarked “you’re always one innovation from getting wiped away by a new competing product”. Unsurprisingly, tens of our own companies are being wiped away every month. For an entrepreneurial nation such as Zimbabwe, innovation represents the missing catalyst for rapid economic growth.

Despite the buzz about innovation, the concept is often seen as fuzzy and a preserve for corporates with huge research and development budgets. But nothing is further from the truth. Disruptive innovation, the kind that results in the creation of entirely new markets and business models, is conceivable for the township start-up venture as it is for a listed company.

A disruptive product is not a breakthrough improvement in technology but rather a means to transform complicated and expensive products into simpler and more affordable ones. Such products appeal to consumers who previously lacked the money and skill to own and use the incumbents’ products. Overtime, the disruption predictably improves making the product better and more affordable. Ultimately, it begins to serve a much wider audience including the high end market.

In 1997, Clayton Christensen coined the term “disruptive innovation” in his book titled The Innovator’s Dilemma. In almost any industry you care to examine, the most dramatic stories of growth and success were launched from a platform of disruptive innovation, he claimed in the book. Today, we witness such dramatic stories in developing nations, Zimbabwe included.

Three litmus tests need to be met before a product or service innovation is branded “disruptive” otherwise it simply is a sustaining innovation.

Test 1: Is there a large population of people who historically have not had the money or skill to consume this product or service.

Christensen believes that it is much easier to target potential customers who are not buying at all than to steal customers from an entrenched competitor. Therefore entrepreneurs and companies seeking to create disruptive products ought to come up with ways to compete against non-consumption.

Mpesa system that was adopted by Econet as Eco-cash in Zimbabwe is a case in point. The product has simplified and made affordable a service that has been traditionally expensive and complicated. Before Eco-cash, to transfer and receive money one had to open a bank account at a commercial bank; pay monthly fees to maintain the account; and in most cases obliged to leave a minimum balance sitting idle in the account. In an environment where cash liquidity is everyone’s headache, such a business model was simply unsustainable.

At the time of Eco-cash’s inception it is not inconceivable that commercial banks might have scoffed at the initiative.

After their failed attempts at entering the low end market, they may have justifiably questioned Eco-cash’s business case. But Eco-cash had truly simplified the job that needed to be done. Apart from making the service ultra-cheap, the product has been made simple and available. Unlike the tag of exclusivity and complexity that banks carried, Eco-cash approached the market as a user-friendly product available at every other corner for the ordinary man.

In reality, the banks are yet to see the full effects of disruption at the command of Eco-cash. Statistics show that the platform now houses more accounts than held by all the other banks together. With an increasing uptake among SMMEs, and corporates beginning to use the platform to pay their employees, Eco-cash is entering the second phase of a disruptive innovation: the product not only takes the low end market but creeps up the chain and starts to appeal to high end market.

As the assault continues, commercial banks are being forced up the chain (high value services) to avoid competing with Eco-cash. But they can only go so far, and therefore chances of being driven into the sea are not hard to imagine.

Test 2: Are there customers at the low-end of the market who would be happy to purchase a product with less (but good enough) performance if they could get it at a lower price.

toyota corollaOn an international stage, Christensen explains how an initially good enough product selling at a lower price disrupts the market. He uses the example of how Toyota disrupted Detroit’s car manufacturers (Ford, General motors and Chrysler).

Toyota did not launch its brand with the high end models such as the Lexus. Instead, Toyota started with a very low end car in the 1960s called the Toyota Corona which was not half as good as the Fords and Chryslers. With this model, Toyota targeted non-consumers, the people who could not afford the American big engines but were content with a good enough performance.

The rest is history. With new and up market models such as Tercel, Corolla and finally the Lexus, Toyota crept up the food chain to target the same markets that Detroit fed on. As the story is told, Toyota was found guilty of bankrupting Detroit.

Test 3: Will the innovation help customers do more easily and effectively what they are already trying to do?

As Christensen pointed out, the things that people want to accomplish in their lives don’t change quickly. Hence if an idea for a new growth business is based on customers wanting to do something that hadn’t been a priority in the past, it stands little chance of success.

With 65% of Sadc migrants living in SA remitting money through informal and unsecured channels such as bus and taxi drivers, Mukuru.com has turned transference of money from being a risky task into an easy and efficient process. Targeting African diaspora especially Zimbabweans living in South Africa and UK, Mukuru.com is a platform that is becoming the largest money transfer facility.

In contrast to traditional bureau de changes such as Western Union and Moneygram, Mukuru.com has partnered with retail channels such as Spar, Pick n Pay and Pep as deposit and withdrawal centers thus providing simple access points for ordinary people. Also, unlike traditional players who have stringent documentation requirements such as proof of employment documents, Mukuru.com goes an extra mile to cater for self-employed Zimbabweans such as hair dressers, house maids, plumbers, builders and all other freelancers.

Recently, the money transfer platform has launched a new cell phone based debit card that acts as a bank account for the hundreds of thousands of migrants who cannot meet requirements for opening a bank account in South Africa. Not only is the card helping migrants transfer money it is being taken as a temporary savings account.

Takeaways for aspiring disrupters

A common thread among all profound disruptive innovations in developing world is that they focus on the bottom of the pyramid. In this part of the world, the bottom of the pyramid consists of the masses which are not participating in most of the markets for reasons discussed. Contrary to popular belief that business only makes sense at the high end market, disruptive innovation demonstrates otherwise.

Secondly, all disruptive innovations start with the desire to make people’s lives better by making what was previously unattainable more affordable, simpler and available. And along the way money is made.

When you reach the top, keep climbing. Another trait common among the three disruptive products discussed above is the courage to keep going for the brass ring. Even after the entire low end market has been subdued the disrupters are not content; they go for broke, unafraid to face the beast in the eye.

The discussion above is not meant to simplify the immense macro challenges that Zimbabwe faces.

Zimbabwe is one of the most difficult environments to do business but the scope and opportunity to make a difference through thinking and acting differently exists.

At a time when many are greedy and short term oriented, opportunities are abound for the long term thinker and actor.
Ray Chipendo is a director at Emergent Capital Management, an investment management and research firm focused on Zimbabwe. Ray can be reached on email: rayc@emergentcapital.co.za and twitter: @ray_chipendo

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