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Making the case for market-creating innovations: a look at Tolaram Industries

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Sep 14, 2016

People buying and selling food at a market in Nigeria. | Flickr: International Institute of Tropical Agriculture

In 1988, Tolaram Industries, maker of Indomie Instant Noodles and a myriad of other products, decided to target nonconsumption in the food industry in Nigeria. Today, as was the case in the 1980s, the average Nigerian makes less than $2 a day and spends more than 50% of their income on food. Typical modes of segmentation would have deemed this market unviable. To make matters worse, Nigeria was ruled by a military dictator in 1988 and did not begin to experience sustained democracy until 1999. Still, Tolaram Industries was committed to figuring out a viable business model to sell their product to the Nigerian masses, and would do so for roughly ten cents.

In order to target this market, Tolaram had to integrate across necessary interfaces. For instance, in a speech that Deepak Singhal, the company’s Africa CEO, gave in 2015, he said, “I am in the food business, but sometimes I think I am in the transportation business.” Because of the lack of adequate logistics in Nigeria, Tolaram has had to build networks of trucks, vans, and staff in order to fill this void. The company also provides its own power in all 13 plants it runs across the country. This way, it does not have to depend on unpredictable power supply from the grid. Additionally, Tolaram has invested millions of dollars in training its staff because the poor education infrastructure in Nigeria limits their ability to absorb already knowledgeable workers.

One of the most important theories necessary for development is the theory of interdependence and modularity. The theory explains that when a company is managing two components with an interface between them, in order for the components to deliver a “good enough” performance, the company has two options. If the interface is specifiable, verifiable, and predictable, allowing for parts to fit together in understood, crisply codified ways, it can build a modular architecture. However, if the way the parts within the given system are not well understood and are unpredictably interdependent, the company must integrate by controlling every component of the system to make any part of it function. For example, if a company plans to build a manufacturing plant in a country without reliable electricity, in order for the company to get “good enough” electricity, it must  create its own interdependent system. The same goes for training its staff, building a logistics system, and developing an actual product. This is what Tolaram has done so well.

From a cost center to a profit center

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While integration might seem expensive at the onset, it can lead to a significant competitive advantage for companies operating in emerging markets. One of the struggles Tolaram had when the company began manufacturing in Nigeria was finding a good supplier of “wrappers/packets” for their noodle product. In the absence of a reliable supplier, Tolaram build a plant that supplied these wrappers for their product. But today, that arm of the business now sells its services to other companies in Nigeria, including several multinational fast-moving-consumer-good companies. What started out as an expensive cost center has quickly grown into a profit center for the company.

From logistics to energy, by taking ownership of other links in the value chain, Tolaram was able access swathes of Nigerian consumers who had previously been out of reach. The company’s business model facilitated the creation of an affordable product for the average Nigerian, as well as the channels to deliver it directly to them. In doing so, Tolaram leveraged the opportunities presented by nonconsumption and developed innovative strategies to create a whole new market in the process.

While difficult, Tolaram’s commitment to nonconsumption in Nigeria is paying off handsomely. The company now sells more than 4.5 billion packets of Indomie Instant Noodles yearly; it grossed almost $1 billion in 2015; and it recently sold a 50 percent stake in its distribution business, Multipro, to Kellogg for $450 million. To get there, however, it has had to invest more than $350 million in manufacturing facilities, logistics, training, and other aspects of its business in Nigeria. It began importing noodles into Nigeria 28 years ago, but today resembles an entirely different company.

The impact that Tolaram has had on the Nigerian economy by targeting nonconsumption has been equally impactful. In 1988, Nigeria had no noodle market, but Tolaram created one.  It has since created almost 8,000 direct jobs and created an industry, with 17 companies, that now employs more than 100,000 people. Also, Tolaram’s value chain leverages 1,000 distributors, 25,000 wholesalers, and 600,000 retailers. This value chain gives Tolaram the opportunity to target nonconsumption of other products, thereby creating an opportunity for it to impact people’s lives and its bottom line.

Targeting nonconsumption is difficult, but the payoff can be immense.

Efosa Ojomo

Efosa Ojomo is a research fellow at the Clayton Christensen Institute for Disruptive Innovation. Efosa’s work focuses on using disruptive innovation theory to fundamentally change the discourse in the global development community, thus enabling nations to engender their own path to long-term growth and prosperity.

  • Tunji

    Thank you Efosa, keenly following your discourse on marketing-creating innovations.