As we prepare for our Cohort coming up in a week, LAN will only be funding startups that show the potential to be truly disruptive in Africa. So we decided to write a long form article on what African disruption looks like.
Innovation and disruptive innovation are common buzzwords in the startup ecosystem, often used without a clear understanding of their meaning. Our article aims to help understand innovation, its types, and its historical references in the business world. By exploring these concepts in detail, we can identify key characteristics and strategies that companies and economies have used to grow and prosper, how they can be applied to businesses in Africa, and how investors can use the knowledge of disruptive innovation to guide their investment choices.
As defined by McKinsey and Co, innovation is the systematic process of developing and marketing breakthrough products and services that customers will adopt. In essence, innovation is about creating something new that solves a customer’s problem or fulfills an unmet need in a way that has not been done before; this can involve developing new technologies, business models, or processes that create value for customers and differentiate a company from its competitors. Effective innovation requires a deep understanding of customer needs and the ability to execute and bring new products and services to market. Companies that successfully innovate can drive growth, gain market share, and create new markets, all of which can contribute to long-term success and profitability.
There are three major types of innovation proposed by HBS Professor Clayton Christesen: sustaining innovation, efficiency innovation, and disruptive innovation.
Sustaining innovation focuses on improving existing products or services to meet customer needs and preferences. It is typically incremental and evolutionary rather than transformative or disruptive. The key features of sustaining innovation include delivering more value to customers by improving product features, enhancing performance, or reducing costs. It also helps to maintain profit margins by keeping prices competitive. In addition, companies that sustain innovation aim to capture more segments of an existing market by introducing new products or services that meet specific customer needs.
One example of sustaining innovation is the development of the iPhone by Apple. The company has released numerous versions of the iPhone over the years, each with incremental improvements such as better cameras, faster processors, and longer battery life. These improvements have helped keep the iPhone competitive and meet customers’ changing needs. Another example is a stockbroking firm like Bamboo, allowing its customers to buy European equities in addition to the US equities they already have access to. All these are examples of sustaining innovation, which keeps the customers happy and may lead to increased profit margins.
However, there are some drawbacks to sustaining innovation. For example, it may not lead to creating new business models or developing entirely new markets. It also may not create new jobs or lead to economic growth since the same amount of people can be used to keep creating new iterations of products.
Efficiency innovation, on the other hand, refers to innovation that focuses on improving the efficiency and productivity of existing processes, products, or services. It involves finding ways to do more with less, such as reducing waste, streamlining processes, or improving supply chain management. The key features of efficiency innovation include helping companies to operate more efficiently and profitably, enhancing their chances of survival in a competitive marketplace. By reducing costs and increasing productivity, efficiency innovation can also help to create free cash flow, which can be used for further investment or expansion.
One example of efficiency innovation is the implementation of Lean Manufacturing practices at Toyota. By eliminating waste and optimizing production processes, Toyota was able to significantly reduce costs and increase productivity, leading to improved profitability and a stronger competitive position in the market. Most African funds also practice efficiency innovation as people and technology are often leveraged to maximize management fees as efficiently and effectively as possible.
However, one of the significant concerns with efficiency innovation is its impact on the workforce. Companies often eliminate jobs to streamline operations and cut costs by improving efficiency. This can have considerable social and economic consequences, such as rising unemployment and reduced consumer spending. A classic example is the recent wave of layoffs across the technology world. Big tech companies worldwide, including Google, Meta, Amazon, and Twitter, have laid off thousands of workers as they improve their operating efficiency in an increasingly volatile economy. Companies in Africa aren’t left out too; Chipper Cash, one of the newly minted unicorns in Africa, has laid off workers as they try to do more with fewer people, a classic example of efficiency innovation. In Nigeria, companies like 54gene and Onepipe have also laid off workers to achieve higher levels of efficiency.
According to Christensen, disruptive innovation is the most potent and transformative of the lot. Disruptive innovation creates a new market or disrupts an existing market by introducing a product, service, or business model that is significantly different from what is currently available. Disruptive innovation often starts with serving a niche or underserved market but gradually grows to challenge and displace established players.
The key features of disruptive innovation include focusing on a new market or segment rather than simply improving an existing one. In addition, disruptive innovation often involves developing products or services that are simpler, cheaper, and more accessible than those offered by established players. It may also involve the creation of new business models that are more efficient, scalable, or innovative than those currently in use.
What makes disruptive innovation special is that it has the potential to bring about net growth in the economy rather than just shifting market share from one company to another. Disruptive innovations can also create more jobs and lead to increased prosperity.
Case study of how organizations and countries have used disruptive innovation to grow.
Mainframe computers were the dominant computing platform in the 1960s and 1970s. They were large, expensive, and complex machines requiring specialized knowledge. Large organizations typically used mainframes for data processing, scientific research, and other high-end computing tasks.
However, a new type of computer emerged in the late 1970s and early 1980s: the personal computer. These computers were smaller, cheaper, and more user-friendly than mainframes, making them accessible to a much wider audience. Although, initially, personal computers could not be used for very advanced purposes as compared to the mainframe computers, they were used for mundane tasks like word processing, gaming, and other personal productivity tasks; they quickly became more powerful and capable and were eventually adopted for business and scientific use as well ultimately allowing companies that produced personal computer to displace established companies like IBM, Burrough, and Control Data Corporation out of the market.
Although this disruptive innovation is known to put some established companies out of the market, it still led to net positive job growth, and the overall impact on the economy is significant.
Companies in Japan and South Korea have used disruptive innovation to drive economic growth by making low-end products available to the mass market. One of the most well-known examples is Toyota’s introduction of low-end vehicles to the United States market.
In the 1950s and 1960s, Toyota was a relatively small and unknown company outside Japan. However, the company had developed a reputation for producing reliable and efficient cars. In the late 1960s, Toyota decided to expand into the United States market, dominated by large American car companies such as Ford and General Motors.
To compete in this market, Toyota had to find a way to differentiate itself from the established players. Rather than trying to compete head-on with the American car companies, Toyota focused on producing smaller, more fuel-efficient cars that were affordable for the average American consumer, i.e., Toyota Corolla. This was a disruptive innovation that challenged the existing business model of the American car industry, which was focused on producing extensive, expensive cars for a relatively small segment of the market.
Toyota’s disruptive approach to the US market was a huge success. The company’s small, affordable cars were extremely popular with American consumers, and Toyota quickly gained market share in the United States, with its Toyota Corolla becoming a best-selling car. Over time, other Japanese and Korean car companies followed Toyota’s lead. They began producing low-end vehicles for the mass market, further disrupting the traditional business model of the American car industry.
This disruptive innovation profoundly impacted the Japanese and South Korean economies. By focusing on producing affordable, low-end products for the mass market, these companies were able to create jobs and drive economic growth in their countries.
Nubank and Banking in Latin America
Nubank, a Brazilian financial technology company, is using disruptive innovation to revolutionize banking in Brazil by making financial services available to millions of unbanked individuals who previously had limited access to banking services. An estimated 60 million people in Brazil alone are unbanked, and many working-class citizens must travel long distances to access banking services. By focusing on this unserved segment and removing many of the barriers to finance for Brazilians, Nubank has had a significant impact on the financial ecosystem in Brazil, bringing many people into the formal financial space and offering them many services in the process. As a result, Nubank has become the biggest Neobank in the world. The bank is estimated to have 70 million customers in Brazil and a growing number in Mexico and Colombia. Nubank hit a yearly revenue of almost $2bn in 2021, with a market capitalization of $21bn and employing more than 2,000 people.
How disruptive innovation can be applied in Africa
Africa is no stranger to disruptive innovation. The rise of telecommunications and mobile money is a testament to that. In the past, telecommunication services in Africa were dominated by state-owned companies, resulting in poor services and high customer costs. However, the introduction of mobile phone technology disrupted the market by making telecommunication services more affordable and accessible to the mass market.
The rise of mobile phone usage in Africa began in the early 2000s, with affordable “handsets” and the expansion of mobile networks across the continent. This disruptive innovation allowed everyone to communicate with each other regardless of economic status. This led to immense economic growth. Telecommunications companies in Africa are worth hundreds of billions of dollars, employing thousands of people in direct employment and millions in indirect jobs. Apart from this, the emergence of mobile phones enabled Africans to be 100x more connected to each other and the world, effectively enabling further commerce and innovation.
Mobile money services such as M-Pesa also emerged from telecommunications, enabling people to perform financial transactions using mobile phones. This was particularly useful for those who did not have access to traditional banking services, further driving financial inclusion and economic growth.
While the telecommunications industry in Africa has experienced significant growth and disruption through innovative technologies and business models, other sectors of the economy still have the potential for similar growth and impact. Sectors like healthcare, trade, financial services(cross-border payment, wealth management, and investment), insurance, and logistics present opportunities for disruptive innovation that can bring about improvements in people’s lives and contribute to economic growth. In healthcare, for example, mobile clinics are an example of innovative disruption by providing medical care and health education to the low-end segment of the market who naturally do not have access to healthcare services. Regenboog, an organization in India, operates a Mobile Medical Clinic that serves very remote villages in India that lack access to basic infrastructure. The modern clinic is fully equipped with separate rooms for nursing care, doctor consultation, and a pharmacy. It is staffed by a team consisting of a doctor, two nurses, a pharmacist, a driver cum social worker, and an assistant. The clinic visits these remote areas three days a week, treating over 31,000 patients yearly. In addition, it provides health education to the village people, a sustainable solution to any of their health issues. Although this is still highly rudimental, by treating more than 30,000 patients per year, it’s already showing signs of massive adoption and will continue to improve until it can provide quality healthcare to all market segments, including those in urban areas.
The experience of Japanese companies’ expansion into developed markets like the United States also offers valuable lessons that no market is too big for disruption by smaller players. No market is disruption-proof as long as segments of the market aren’t being catered to. The emergence of new technologies such as artificial intelligence and crypto levels the playing field even further for small players as more prominent players focus on broader segments. This leaves some not-so-obvious but critical market segments overlooked. For example, insta-deep, an AI company that builds AI systems for enterprises founded in Tunisia, was acquired by BioNTech, a German biotechnology company, for more than Half a Billion Euros. This shows that by applying disruptive innovation and focusing on solving the need of a market segment that is underserved or ignored entirely, products of global impact can be built from Africa and exported, which will not only create value but also lift the economies of their host nations – as the likes of Toyota did with the economy of Japan.
What Should Angels Learn from This?
Investors in Africa can use the knowledge of disruptive innovation to identify and allocate capital to products and services that have the potential to serve the often ignored mass market. By understanding the needs and preferences of these customers, investors can identify opportunities to disrupt established industries and create new markets. One way to identify disruptive innovations is to look for products or services that are simpler, more convenient, and more affordable than the existing solutions. These innovations often start small and gradually gain traction as more and more people adopt them. Investors who recognize these trends early on can capitalize on them by investing in startups working on disruptive solutions.
Another way to identify disruptive innovations is to look for technologies or business models that are fundamentally different from the existing solutions. These innovations often require significant investment and may take longer to gain traction, but they can potentially transform entire industries. Angels willing to take a long-term view and provide patient capital can help bring these disruptive innovations to market.
Angels can also look for startups that deeply understand their target customers and are focused on serving their needs through verifiable data. These startups may target underserved or overlooked market segments like low-income consumers or small businesses. By investing in these startups, angels can help bring products and services to these customers that can improve their lives and create new markets.