Doing Business in the Developing World
September 11, 2009
The news this morning coming out of Asia looks very good for the global economy. Emerging markets appear to be recovering at a quickened pace. For some time now, I have been saying that there are opportunities to be found in the developing world. Asia is a relatively straight forward place to do business in comparison to other parts of the developing world. A recent article in the Wall Street Journal declares, “It isn’t easy operating amid poverty, isolation and lawlessness. But some companies have figured it out.” [“Lessons from the Developing World,” by Jamie Anderson, Martin Kupp, and Ronan Moaligou, 17 August 2009]. The authors come from academia and the business world (i.e., representing both theory and practice perspectives). I often discuss Enterra Solutions’ Development-in-a-Box™ offering from both perspectives as well. Theoretically I note that there are some fundamental pre-conditions that can help improve a business’ chance of success — things like infrastructure, security, and an educated and healthy workforce. In practice, those pre-conditions often don’t exist. Anderson, Kupp, and Moaligou are writing about places in the developing world that have met few or none of those pre-conditions. They write:
“The developing world is home to some of the most challenging markets for any business: Urban slums. Rural backwaters. Lawless regions and battle zones. But hundreds of millions of potential customers live in these places, and a few pioneering companies are thriving there. Their success offers lessons on how to tap these complex environments for profits and growth. All of these markets share certain challenges. They often lack functioning legal systems, so contracts are rarely enforceable. Theft, vandalism and physical violence are common. Skilled workers are hard to find. The widespread poverty in these areas makes it difficult for many people to afford whatever a company is selling. Marketing is challenging because conventional advertising media like television and radio don’t reach many of the people in these environments, and more-direct approaches can be dangerous. And winning the acceptance of the people living in these communities, for companies and their products, is tricky because these societies are often a patchwork of religious, linguistic and cultural diversity.”
Because this business landscape is so different from that found in the developed world, the authors recommend that companies “find local partners familiar with the terrain, and rely on those partners to help guide their operations and develop strategies unique to each market.” They also insist that development of the local economy be part of any business strategy. I wholeheartedly agree. They continue:
“‘It has to be a win-win for the company and for local people,’ says Lars Stork, formerly chief operating officer of Celtel Nigeria, one of several telecommunications companies that have been at the forefront of expansion into these areas. ‘If not, any results will be short term.'”
Mr. Stork works in a country with one of the globe’s worst reputations for corruption and instability. Although Nigeria has begun a crackdown on corruption, it remains plagued by significant problems despite (or because) of its oil resources. His company bumped up against unique challenges like having “to win the approval of tribal leaders to install signal transmitters and other equipment and to send its employees to tribal areas to maintain the network.” Advertising company services wasn’t easy either. Potential rural customers didn’t have radios or televisions, billboards were stolen as building materials, and employees involved in direct marketing often found themselves in danger. Security of equipment was as big a concern as security of employees. Vandalism and theft were common, despite the presence of armed guards recruited from the local community. Eventually Stork learned the same lesson that U.S. troops in Iraq learned, he “needed to enlist the help of people in the communities Celtel aimed to serve. ‘Working with local people is the only way to succeed in rural Nigeria,’ he says. ‘They understand the local dynamics and know how to survive in what can be an extremely challenging environment.'”
Instead of trying to bring in outsiders to promote the business, Celtel “franchised” its operations to local small business owners — people who knew how to succeed in the difficult circumstances in which they must operate. “The entrepreneurs are responsible for marketing and distributing Celtel products and services, and for basic maintenance and security at the base stations. Celtel recognized that its partners didn’t need experience in the mobile-telecommunications industry. More important was basic commercial acumen, entrepreneurial spirit and a deep understanding of how to manage the local environment.” Celtel’s “aha moment” confirms what I’ve been saying about the importance of entrepreneurs in developing a sustainable economy. Entrepreneurs are optimistic and persistent (see my post entitled It’s All in Your Head]. The bottom line is that Celtel’s strategy worked.
“By the end of 2008, the Celtel network had grown to some 650 franchisees in the deep rural regions of Nigeria, and the average franchised site produced a 160% return on original investment within a year of launch. Sales by franchisees of recharge vouchers—a form of prepaid air time—exceeded the company’s initial forecasts by more than 120%. Vandalism and theft have all but disappeared in regions with high levels of franchisee site supervision.”
In previous discussions about Development-in-a-Box™, I have noted that partnering with local businesses is important. The bottom line for my company is that we are trying help local economies grow in a sustainable way. Anderson, Kupp, and Moaligou also believe that partnering with local business people is critical to success. They discuss a number of companies who found success through such partnerships, including Vodafone Essar Ltd., an Indian unit of the U.K.’s Vodafone Group PLC.
“‘The people we work with know the slum,’ says Naveen Chopra, Vodafone Essar’s chief executive of Mumbai Circle. ‘They might be tailors or fancy-good shop owners or outlets selling day-to-day consumables. We cannot simply walk into the slum as Vodafone and start doing business, given the intricacies. But these local businesspeople already run businesses in this market, and we wanted to benefit from their wisdom.'”
The authors note that local partners often use imaginative schemes for growing their businesses and providing insights that are applicable elsewhere.
“In Nigeria, the 25 entrepreneurs who became Celtel franchisees in the first phase of that program helped define the responsibilities of franchise holders and suggested ways they could fulfill their roles more effectively. For instance, at the suggestion of one pilot franchisee, Celtel provides four or five motorcycles to each franchised site to help franchisees deliver more-efficient servicing of surrounding villages. Many franchisees have also started to offer installment financing and barter deals for cellphones, an extension of established local commercial practices. In Mumbai, Vodafone’s partners helped Mr. Chopra solve a fundamental problem: the difficulty of beaming cellular signals into the inner reaches of the city’s sprawling slums. The density of housing in the slums makes it impossible to erect the same sort of network of transmission towers used to serve other areas. The company first tried beaming its service into the slums from surrounding buildings, but that failed to achieve coverage deep inside the slums. Then a large retailer interviewed as a possible distributor suggested a new approach: recruit large retail outlets around the slum to sell the company’s products and services—and also to hoist mini-transmitters above their shops. The retailers would be responsible for the security and basic maintenance of the transmitters. The strategy was crucial to Vodafone’s success in the Mumbai slums, where revenue has far exceeded the company’s initial expectations.”
The authors touch on two other important points — building trust and investing in human capital. I’ve written a number of posts that discuss the importance of trust. Only criminal activity conducted at the point of a gun can achieve the desired result without trust and that kind of transaction is completely one-sided. I’ve also written a number of posts discussing the importance of investing in people. The article continues:
“Trust and loyalty can … be built by helping employees and business partners develop business skills. Celtel set up three-day workshops at regional company offices to train new franchisees in sales and marketing techniques, accounting and financial management, retail operations, basic maintenance of base stations, site security and human-resources management. And once in business, franchisees are provided with regular training events organized at the regional level.”
Successful companies, the authors report, have done more than just provide jobs and training. They have invested in the communities they serve. Celtel, which is now part of the Zain Group and operates as Zain Nigeria, invests a percentage of its revenues in projects sponsored by local authorities and non-governmental organizations. In Iraq, “Zain has helped many Iraqis find medical attention, both inside and outside the country; supported local sporting activities, the Iraqi national soccer team and the country’s Olympic athletes; and helped reassemble the Iraqi symphony orchestra.”
As a sidebar, the authors include ten tips on how companies can succeed in the developed world. They are:
- 1. Identify local partners who understand local customers and culture.
- 2. Don’t rely on existing partners from developed markets to have the skills necessary to succeed here.
- 3. Identify local entrepreneurs with basic business acumen and a willingness to commit to long-term relationships.
- 4. Build own insights, and learn from business partners.
- 5. Take a ground-up approach and be willing to experiment with new business processes.
- 6. Don’t enter into complex agreements with prescribed solutions.
- 7. Provide relevant skills and capabilities to empower local partners for improved performance.
- 8. Strive to build loyalty and trust through sustainable win-win partnerships.
- 9. Internalize skills learned from local partners, and look for opportunities to use those lessons in new markets
- 10. Strive to achieve both economic and social good.
The developing world needs successful businesses because they provide jobs, increase capacities, improve standards of living, and encourage best practices for local circumstances. I particularly like the recommendation “to achieve both economic and social good.” According to a BusinessWeek book review, Harvard’s Rosabeth Moss Kanter agrees and “makes a persuasive case that social good is good for the bottom line” [“Kinder, Gentler, Richer Companies,” by Nanette Byrnes, 10 August 2009 print issue]. Byrnes writes:
“The book’s most persuasive sections are those that clearly tie corporate acts of social good to financial growth and success. A complex series of steps IBM staffers took to help victims of the 2004 Indian Ocean tsunami and other natural disasters provided both a crash course in management for young Indian workers and technical innovations IBM went on to sell through its ‘Smarter Planet’ initiative. But it doesn’t take an act of God, or even a new mission statement, to get the ball rolling. An emphasis on social good at Brazil’s Banco Real began with cleaning up dirty alleys near its offices. That eventually morphed into, among other things, a line of profitable loans for environmental upgrades to cars and homes, as well as microloans to small businesses. Those loans have a default rate of just 4%, compared with 7% for banks in general. Handheld devices with fingerprint readers developed by India’s ICICI Bank to help illiterate customers in remote locations have proved both cost-effective and fraudproof—and are becoming the gold standard in the industry for all sorts of transactions and customers. At the root of these innovations is a corporate philosophy that strives for some kind of good beyond mere profits. At the same time, goodness can be good for the bottom line, too. David Kenny, former CEO of Digitas, an advertising agency now owned by Publicis Groupe—and one of the companies Kanter lauds—sees a shift in the landscape. ‘You cannot sell things anymore, because digital empowers people to make their own choices,’ Kanter quotes Kenny as saying. ‘So we should be generous [or] they will not choose you. … Generosity breeds returns.’ At a time of financial crisis, climate change, vast economic disparities, and pandemics, the existence of companies trying to right wrongs and fix things is certainly soothing. … Her chosen companies together make a compelling argument that social imperatives, as much as an open corporate culture and a focus on problem-solving products, will characterize leading businesses in the decades to come. They won’t replace nongovernmental organizations and proactive political leadership. But they are sure to be increasingly involved in making the world a better place.”
Of course, we don’t have to go to the developing world to make the world a better place. We can do much good in the neighborhoods in which we live. However, for businesses looking for opportunities, emerging markets are a good place to start. Not only are there profits to be made, there are other non-monetary rewards as well — like watching people’s lives improve.
In a closing note, I would like to take a moment and reflect on the events that took place 8 years ago. It hardly seems possible that so much time has elapsed since those events. The memories of the terrorist attacks remain fresh in my mind. I appreciated the words written in today’s New York Times by an ecologist named Eric Sanderson [“After the Storms, an Island of Calm — and Resilience“]. He writes:
“It’s been eight years since the horrors of 9/11. The pain and the loss remain indelible. In New York, at least, the sadness is magnified by the lack of progress at the World Trade Center site. Efforts to reclaim and revive Lower Manhattan with a memorial and a complex of new towers have proceeded at a frustratingly glacial pace. In light of this, it is possible to take some comfort from the past — to know that while the lives lost almost a decade ago will never return, this place on earth has the capacity to be reborn.”
He recalls that 400 years ago this month “Henry Hudson, guided his small wooden ship into the Muhheakantuck (later Hudson’s) River” and began a chain of events that would eventually lead to the present-day New York City. He recounts the surprising environmental diversity that existed on Manhattan Island 400 years ago. Today New York City is no less diverse, but in a much different way. Sanderson concludes:
“There is a process in ecology called succession — the orderly advance of ecosystems from one state to another. There are moments of terror and unfathomable destruction, and then stability returns and life takes hold again, often with a firmer grip. This applies, of course, both to nature and to human society. As Jane Jacobs wrote, ‘Lively, diverse, intense cities contain the seeds of their own regeneration.’ Resilience is a hallmark of any successful system, whether for a forest, a wetland or a city. Today, we honor the memory of all that was lost and sacrificed on 9/11. But in thinking back 400 years, in imagining the Lower Manhattan of the distant past, we can join that memory to another realization: that we, and the world we live in, have a remarkable capacity to recover and renew.”
I agree with Mr. Sanderson and the optimism expressed in his op-ed piece. It was 9/11 that started me thinking about resilience and those thoughts eventually led me to establish my current company. For me, the day will always have a deep, personal significance. It represents both the worst and the best that humankind has to offer. As Mr. Sanderson asserts, it will also always stand as an example of recovery, renewal, and resilience.