Technology, Venture Capital, Private Equity

Apart from the Five Forces model, which I discussed in my previous post, another of Michael Porter’s contributions to business economics has been the concept of  the “Diamond Model”, which describes the competetive strengths of a nation. One of the important arms of a nation’s “diamond” is the so called “Demand Conditions” of the local market. This essentially refers to how evolved and sophisticated the domestic consumer market for products and services is, which in turn will dictate how innovative the businesses catering to those markets will be. Its not a difficult concept to grasp. Most often, producers of innovations are cutting edge users of that genre of products themselves.  That explains why most of the mobile innovations come from mature consumer markets like Japan, Korea or Nordic countries or why web innovations primarily emanate from the US.  On the other hand, this could be a discouraging prognosis for innovation in emerging countries like India since that would essentially mean that once we are lagging the technology adoption curve, it would lead to a viscious loop where the market for the most innovative solutions will never exist and hence innovation never happen.

However, in contrast to this, CK Prahalad, another management guru has come up with what has now become a popular business theory pertaining to emerging markets, which is – “Fortune at the bottom of the pyramid”. Amongst the many things discussed in this treatise, one that is relevant to this discussion, and somewhat contrarian to Porter’s reasoning is that – low cost less sophisticated markets can actually engender innovations of another kind that wouldn’t otherwise stem from the advanced markets. And in the past few months, I have actually seen a handful of tech business plans here in India that seem to corroborate that reasoning. These companies, mainly in the telecom space, but some in the enterprise space as well have successfully developed and sold products to the local Indian market. Talking specifically of the telecom market here, two characteristics that are too well documented to require further elaboration are – the size in terms of volumes and the low cost economics (one that caters to the lowest ARPUs in the world). Hence, a successful telecom equipment supplier would simultaneously have to meet both these requirements of – being able to handle huge loads and also offer the lowest price possible. So, once he has done that, there are few other markets elsewhere, where he wouldn’t be in a position to market to. In fact, in most of these proposed b-plans, the vendors are targeting the overseas markets as a means of improving their margins since they will stand to get a better price despite offering substantial discounts to the incumbent suppliers in those markets. Hence, in a way, we are seeing the toppling of the “sophisticated market need for innovation” argument on its head. Of course, I’ll quickly add that this may not be applicable for all types of technology, but for ones that have reached a certain level of maturity. Nonetheless, it is an interesting trend, and a new theme for VCs like myself in emerging markets to keep abreast of. And, as our local consumer markets grow in size and scale, this trend could be expected to get only more pronounced with time.