How one company defied the odds and is grossing almost $1 billion… in Nigeria — Part 2
First of all, thank you for the feedback on the Part 1 of this story. As I study market creating innovations and why they succeed in different circumstances I hope you will continue to provide feedback so that I can improve this work.
One of the things I learned early on in the world of research is that there are many things that are correlated with success but not causative. Winged feathers, for instance, are correlated with flight, but they are not the cause. The executives at Indomie are Gujarati and that is correlated with their success in Nigeria but is not the cause.
In other words, if a Nigerian did exactly what the Gujaratis are doing, I hypothesize that the outcome will be identical. If I asserted that their being Gujarati caused them to be successful, that would imply that non-Gujaratis cannot do what they are doing. (I am working on a piece about culture and how that influences success.)
I hope you enjoy the rest of this and will continue to write about innovations in emerging markets that can lead to prosperity and economic development.
Tolaram entered the Nigerian market in 1988 but it took 20 years for the company to gross $100 million. Tolaram spent the first several years figuring out their profit formula. The company was patient for growth, but impatient for profit. Because market creating innovations enter uncharted and untested territory, entrepreneurs and investors must exercise patience as they figure out the right profit formula for their business. This is easier said than done because capital has options.
Once Tolaram figured out the right profit formula, the company has been executing like a well-oiled machine. As the graph below shows, Tolaram has grown at a compound annual growth rate of 36% since 2001. One of the hallmarks of a market creating innovation is remarkable growth once entrepreneurs discover the right profit formula. Because the innovation addresses an important job that has historically gone unaddressed, the growth of the enterprise, once the profit formula is uncovered, tends to be explosive.
Job Creation and Tax Revenue
Today Tolaram employs more than 10,000 people across 17 manufacturing plants in Nigeria. The company has invested more than $350 million building these plants, an investment that also created jobs in the country. Because Tolaram had to integrate across multiple components in the value chain, the company necessarily had to hire people to fill those positions. Consider the company’s logistics operations. Tolaram had to employ truck drivers, maintenance technicians for the trucks, human resource staff, training staff, etc. If Tolaram ever decides to sell its logistics services to other companies, it would have to hire sales, customer service representatives, and a host of other staff in order to fulfil its obligations.
Tolaram is not in the business of creating jobs, however. It is in the business of selling Indomie instant noodles. But in order for Tolaram to take advantage of the vast non-consumption that exists in Nigeria, the company has to hire people. This is the power of targeting non-consumption. It leads to both economic growth and job growth.
Tolaram also provides about $100 million to the Nigerian government in taxes annually. These funds can be used to improve the much needed infrastructure in the country. Understandably there is a chicken and an egg problem with infrastructure and innovation. Entrepreneurs want infrastructure so they can better innovate. Most governments in developing countries complain about their inadequate budgets so investing in infrastructure takes a back seat. Entrepreneurs and investors can indirectly engage in nation building by investing in market creating innovations in their countries. It has worked in the United States, South Korea, Japan, and other prosperous countries.
Nigeria in 2015 — Still not a premier investment destination. Or is it?
Nigeria has changed a lot since 1988. But in many ways it has remained the same. For example, Nigeria is now a democracy but it is still not a premier investment destination today. About 82% of Nigerians live on less than $4 per day; Foreign direct investments (net inflows) in Nigeria in 2014 was about $4.6 billion, down from $8.4 billion in 2011. Nigeria ranks 136/174 on Transparency International’s Corruption Perception Index; Nigeria ranks 169/189 on World Bank’s Ease of Doing Business Index; Nigeria does not have adequate transportation infrastructure (roads, rail, air, etc.) to support a thriving logistics business; Nigeria generates roughly 5,000 megawatts of electricity for more than 174 million people (Romania generates four times that amount for about 20 million people).
But instead of viewing these challenges as show-stoppers, entrepreneurs should consider them opportunities. These opportunities will certainly be difficult to take advantage of, but if pursued using some of the management theory we are studying and developing at the Forum for Growth and Innovation at the Harvard Business School, entrepreneurs and investors can increase their batting averages.
This is not an exhaustive list of why Tolaram succeeded in Nigeria. But I hope it sheds some light on how they have been able to build a billion dollar business and impact the Nigerian economy.