I spent two years in the early 1970s serving as a Mormon missionary in South Korea, one of the poorest nations in Asia at the time. I witnessed firsthand the devastating effects of poverty: I lost friends to preventable illnesses and saw families routinely having to make impossible choices among putting food on the table, educating their children, or supporting the older generation. Suffering was part of daily life for South Koreans.
I am happy to say that when I visit South Korea today, it bears no resemblance to the South Korea I remember. In the decades since I lived there, South Korea has not only become one of the world’s richest countries but has also joined the respected ranks of the Organization for Economic Cooperation and Development (OECD) countries and has gone from a foreign aid recipient to a foreign aid donor. South Korea’s transformation in just a few decades is nothing short of miraculous.
Working with my co-authors, Efosa Ojomo and former Harvard Business Review editor Karen Dillon, we have set out to investigate how poor nations can become prosperous. Prosperity, it turns out, is a relatively recent phenomenon for most countries. Most wealthy nations have not always been prosperous.
This excerpt from our book, The Prosperity Paradox, explains the idea of market-creating innovation and the critical role it plays in development. We wrote The Prosperity Paradox for those in the development industry who are working diligently to rid the world of poverty, for investors, innovators, and entrepreneurs looking to build successful enterprises in emerging markets, and for policy makers seeking to institute policies that spur development in their countries. Lastly and most importantly, we wrote The Prosperity Paradox for people living in poverty all over the world who want nothing more than to find a better life. — Clayton Christensen
Perhaps the most beloved product in Nigeria is also one of the humblest: Indomie instant noodles. Sold in single-serving packets for the equivalent of less than 20 US cents, the brand enjoys near-universal name recognition in the country and maintains a 150,000-member fan club with branches in more than 3,000 primary schools.
You may not have heard of it, but Indomie is a household brand name in Nigeria.
In 2016, I was honored to speak at Harvard Business School’s Africa Business Club, with approximately 1,500 attendees. In my talk, I referenced Tolaram, only to blank stares in the auditorium. But when I said, “These are the guys that make Indomie noodles,” the crowd went wild. Why would noodles cause a crowd to go wild? And more importantly, what in the world does that have to do with development and prosperity?
What Tolaram, through Indomie noodles, has done in Nigeria is astonishing. Since its entry into Nigeria in 1988 – when Nigeria was still under military rule – Tolaram has invested more than $350 million to create hundreds of thousands of jobs, developed a logistics company, and built infrastructure including electricity and sewage and water treatment facilities. Tolaram has also built educational institutions, funded community organization programs, and provided millions of dollars in tax revenues. Without overstating it, Indomie noodles is development.
Tolaram has shown that out of very little, a market can be created—and with the birth of a market comes the benefits that can lead to development.
Indomie noodles are so woven into Nigerian society it might even surprise Nigerians to recall noodles are not among their traditional foods. The company’s growth track turns the conventional wisdom about development on its head in that, there was little attractive about investing in Nigeria when Tolaram decided to enter the country.
The year Tolaram began selling noodles in Nigeria, the country was far from an investment magnet: life expectancy for its 91 million people was 46 years; annual per capita income was barely $257 (approximately $535 today); fewer than one percent of the population owned a phone; only about half had access to safe water; just 37 percent had access to proper sanitation; a staggering 78 percent lived on less than $2 a day. But even in these dismal circumstances, brothers Haresh and Sajen Aswani saw the opportunity to feed a nation with an affordable and convenient product. For them, this represented an enormous market-creating opportunity.
Indomie noodles can be cooked in less than three minutes and, when combined with an egg, can be a nutritious, low-cost meal. But at the time, the vast majority of Nigerians had never eaten or even seen noodles. However, the Aswani brothers were convinced they could create a market in Nigeria because of the country’s growing and urbanizing population, and the convenience their product offered. Instead of focusing on Nigeria’s unfavorable demographics, they focused on developing a business model that would enable them to create a noodle market.
The decision to target the needs of average Nigerians who were very poor, compelled Tolaram to make long-term investments in the country. In 1995, Tolaram made the decision to shift noodle manufacture to Nigeria to better control its costs. To do so, Tolaram had to pull infrastructure such as electricity, waste management, and water treatment, into its operations.
Tolaram had to make these specific investments because the underlying infrastructure in Nigeria was either nonexistent or subpar. So Tolaram “pulled” them in instead, which created more opportunity for prosperity to begin flourishing. For example, when Tolaram pulls a recent graduate from a local university into its operations and provides employment and training for the new employee, it first, increases the productivity of its own operations and, by extension, that of the region. Second, it reduces unemployment and, as a result, indirectly reduces crime since people with jobs are less likely to engage in criminal activities to try to meet their basic needs.59 Third, it contributes additional income taxes and consumer spending. All of these things might have been core regional development objectives, but for the executives at Tolaram, they were just the natural result of operating their growing business.
Nigeria had virtually no thriving “formal” supermarket sector, and the path from factory to consumer contains many potential points of failure. So Tolaram’s managers chose to invest in a supermarket supply chain. This was by no means trivial as the supermarket supply chain investment required Tolaram to build an entire distribution and logistics business. This meant the company built distribution warehouses and storefronts, purchased hundreds of trucks for its fleet, and hired thousands of drivers who would drive into neighborhoods selling cartons of Indomie noodles to retailers in both independently-owned and Tolaram-owned stores.
The company now controls 92 percent of the supplies essential to manufacture Indomie noodles and operates 13 manufacturing plants in Nigeria.
Tolaram’s investments are paying off handsomely – and Nigeria is reaping significant developmental gains. Today the company sells more than 4.5 billion packs of noodles in Nigeria annually, making Nigerians the 11th largest consumers of instant noodles in the world. Tolaram directly employs more than 8,500 people, has created a value chain with 1,000 exclusive distributors and 600,000 retailers, and has revenue of almost $1 billion a year, all the while contributing tens of millions of dollars in taxes to the Nigerian government. Tolaram also created a logistics company that owns and operates more than 1,000 vehicles. The logistics company now serves both Tolaram and other Nigerian companies, with 65 percent of its revenues coming from external clients.
Tolaram’s investments in distribution may have seemed like overkill, but Tolaram’s executives knew they would never succeed if they couldn’t get the product into customers’ hands.
It’s through this process of making one’s product available, affordable, and therefore accessible, that innovators create the right solutions for new markets. A market-creating innovation then, isn’t simply a product or a service, it is the entire solution: the product or service coupled with a business model that is profitable to the firm.