Posts Tagged ‘global’

Tsunami of change – design, brands, marketing and the mobile phone

In the 10 short months since I wrote on the market forces influencing the global mobile phone market, and the implications of the democratization of innovation whose early, weak signals I could already foresee, matters have come to a head. I had written:

The locus of innovation in handset design, product planning and market strategy has moved its center away from the erstwhile first world to the former developing world i.e. India and China.

And along with this re-centering, ideas on business models and profit margins have changed to reflect those prevalent and appropriate for these new operating environments. Just look at this statement from Xiaomi’s Hugo Barra from an interview last week:

“Innovation is not a luxury item. Innovation is for everyone.”

The implications of this positioning are enormous, particularly given the conventional wisdom currently prevalent in the industry that the latest, greatest, cutting edge technology is a much sought after premium piece of hardware.

What are the current manifestations of this seismic shift in the source and diffusion patterns of innovation?

The era of the Apple product/pricepoint strategy is over for everyone, including Apple. Big ticket flagship devices released to much fanfare and  the lining up around corners by fanbois may still continue to work for Apple but even for them the size of this target market has reached its limit. That is, they’ve captured all they could of the share of the market  likely to rush out to buy the latest, greatest shiny at whatever price.

IDC’s latest forecast for smartphone sales until 2019 has this little snippet tucked in:

Markets with the biggest growth opportunity are extremely price sensitive, which IDC believes will not change, and this is the main reason Apple will be challenged to take Android share throughout the forecast. Even if Apple were to introduce another low-cost iPhone (e.g., C version), IDC believes the price will struggle to compete with Android OEMs that are focused on portfolios aimed at price points of $200 and less. This isn’t to suggest that Apple’s success with the iPhone won’t continue, and IDC believes its efforts to maintain significantly higher margins compared to its competitors are much more valuable than chasing share.

The implication is that new entrants should focus on the “cheap smartphone for poor Africans or Indians” shtick. But this would be the biggest mistake any self respecting brand could make. The entry level segment is completely saturated with Shenzen makes, refurbs, grey market boxes, and a hodge podge of low end models from all and sundry. This is the commodification we saw coming 6 years ago.

Here is where I see an opportunity for a maverick like Xiaomi to capitalize on Hugo Barra’s statement that innovation is not a luxury but for everyone.

The growth markets might be price sensitive but they’re neither stupid nor resigned to their fate. Whether it was the poor man’s car – the Tata Nano, or the slew of wellmeaning first worlder’s introducing frugal low cost technology for the social and economic wellbeing of the downtrodden, the downtrodden have turned up their noses to it all.

Not since Nokia’s heydays has any brand succeeded by flaunting its low cost solution as its USP – and Nokia never flaunted their affordability, they just ran a truck over their phones and let you make a call after. You couldn’t help but realize it was worth the price, offering the biggest bang for your buck. Many of us still reminisce over teh good old days of long lasting battery power and rugged Finnish engineering.

In the past 10 years, everything has been changed by the rise of the internet and proliferation of social media. The connected consumer’s aspirations have found their own level, like water, on a global scale.

People have learned that affordable phones don’t feel necessarily cheap

There is no tradeoff to be made if you’re in the market for a new smartphone. This is the result of the democratization of design, exemplified by Xiaomi, and the result of the race to the bottom of the pyramid. Growth markets are part of the prepaid economy, and the considerations around brand positioning, price point and marketing strategy are not what you have been led to expect.

Here are most demanding customers on earth, operating in the most challenging environment. The mass majority for mobile phones isn’t localized anymore, not even on a regional or continental level – its global. And this is tailor made for affordable innovation, a customer experience that makes you feel as special and as unique as any fanboi without the accompanying price tag.

Only two to three years ago, Xiaomi was just a copycat. Ignoring Xiaomi’s ambitions is a big reason why Samsung is now facing a crisis.

Now, we have to ask serious questions: “Who are you, Xiaomi?” and “Where are you going?” Only when we figure out the answers will we know where we will be heading, too.

JoongAng Ilbo, July 27, Page 32

Just a quick search to see where they’re going offers up such tidbits as ordering a new Xiaomi phone online to be delivered by Uber. Who they are is what their competition isn’t – an opportunity seeking conglomerate leveraging gaps in the innovation ecosystem. Business models, marketing, distribution, design planning – they are re-inventing the conventional to suit the flexible, social, frugal world of the prepaid economy’s connected consumers. Its a whole new ballgame. As I said 10 months ago, the era of big brand cellphones manufacturers is over.

 

The Big Shift for Device Design

  • The market is global, local, social
  • Aspirations will drive purchase decisions
  • Innovation is not a luxury
  • Experience has a price tag

Uncertainty and The Prepaid Economy: Time and Money

prepaid-globalgsma-2011-2013

Uncertainty characterizes the entire global Prepaid Economy and is the underlying driver for decision making.

Systems are unreliable

Inadequate infrastructure, variability in basic services (will we have electricity this morning?), obsolete or incomplete systems; all of these, and more, are part and parcel of life in the emerging regions of the world. Will we wake up to find the capital city grinding to a halt because riots have erupted over the price of onions? None can say.

All of these elements act together to create a far more volatile operating environment which adds up to an uncertainty around timing. Will an accident along the main artery cause hours long grid lock familiar to anyone from Lagos to Lahore?

Cash flow is irregular

For the vast majority employed in the informal sector, regular predictable paychecks are not the norm.  Irregular unpredictable income streams from a variety of sources are the norm, and daily wage workers are not guaranteed that work will be available the following morning.

Even the farmer faces uncertainty, though her fields might be fruitful and ready for harvest. Seasonal ebbs and flows in cash flow are part of the rhythm of daily life outside of the formal economy’s calender year with its predictable regularity.

Smaller businesses too may feel less secure in cash intensive markets, dependent as they are on ensuring that incoming revenues must cover outgoing expenses.

Uncertainty is the only certainty

No one, however is immune from the larger uncertainties of their environment. Strikes, riots, power cuts or floods – these can bring entire cities grinding to a halt.

And the lower down the income stream you are, the greater the impact of this uncertainty. Without float, planning becomes a challenge and community is your insurance in times of need. Juggling to minimize the volatility between income and expense is an ongoing exercise in trade-offs.

Empowering oneself through control of time and money

In the prepaid economy, the greater the span of control you have over timing of a payment – its frequency and periodicity, and the amount to be spent, the greater your ability to plan and manage your finances. From chaos and disorder, one can find ways to negotiate and be flexible, whilst striving to keep one’s head above water.

This characteristic manifests itself in a wide variety of forms – purchasing patterns; choice of cooking fuel; social and flexible weights and measures; a wee bit of wriggle room to negotiate in case of the unexpected.

This is the second article in The Prepaid Economy Series. Here is a link to the IntroductionThe next one will take a closer look at the importance of flexibility and negotiability – that wee bit of wriggle room, left for the unexpected.

Introducing The Global Prepaid Economy

This week, that venerable newspaper The Financial Times, published an original piece of writing on the World Economic Forum’s Agenda blog. Its not a reprint from their own publication. It proposes the end of “Emerging Markets” (EM) as we know them:

Now, commentators say, it is the world’s mental map that is in dire need of an overhaul, particularly when it comes to the practice of categorising countries as “emerging” or “developed” markets.

The current economic hierarchy, which places emerging nations at the periphery and developed markets at the core of world affairs, no longer accurately describes a world in which EM countries contribute a bigger share to global gross domestic product than their developed counterparts, when measured by purchasing power parity. Nor does the capacious category, which lumps together countries of such diverse economic strengths as China and the Czech Republic, serve to illuminate crucially different realities between these nations.

“The EM term has outgrown its usefulness,” says Michael Power, strategist at Investec, a fund management company. “The term today embraces big and small, developed and under-developed, industrialised and agrarian, manufacturing and commodity-based, rich and poor, deficit runners and surplus runners, and I could go on,” he adds. At issue are not merely the niceties of symmetry and order.

As someone who has been looking at emerging markets, one way or another, for the past 10 years, both in my writing as well as in my work, this comes as a welcome relief. These markets can’t still be emerging, I thought, when I was in New Delhi at the beginning of June this year.

Yet, in some ways, we need the conceptual means to capture their dynamic potential, as they’re still in motion. As the article concludes:

These contradictions threaten to consign the term emerging markets to the dustbin. But if it follows the likes of “third world” into virtual extinction, its passage will raise the question of what, if anything, should replace it.

prepaid-globalgsma-2011-2013

The Global Prepaid Economy. (Data: GSMA Intelligence)

In November 1996, Vodacom South Africa was the first network in the world to introduce prepaid airtime on an Intelligent Network platform, which made it possible to debit customers’ accounts while they were speaking. Two years later, they went on to win the Global Mobile Award for the “Best GSM Service” for the VodaGo prepay system. Less than twenty years later, prepaid airtime is the dominant business model across the entire planet.

And, interestingly, if you look at the map above, the economies where the prepaid business model dominates are more or less those which were formerly known as emerging markets, frontier markets, developing countries and/or the majority of the erstwhile third world.

2014 prepaid data gsmaAcross emerging markets and developing countries, the preference for prepaid mobile services cuts across income range, socio-economic class or type of employment. Choosing to pay as you use seems to have little or nothing to do with regular paychecks, bank accounts, credit cards or age.  So vast is it that one can consider it an economic characteristic in its own right.

The global Prepaid Economy.

What do all the regions where the prepaid business model dominates have in common?

  • Cash intensive
  • Informal sector employs more than the formal
  • Still developing
  • More volatile
  • Higher uncertainty
  • Less social safety nets
  • Faster growth

What does the prepaid business model do for the customer?

It empowers them. Control over how much to spend (the amount), and its timing (the frequency and periodicity of purchases) is in the hands of the end user, the mobile subscriber. There’s no bill at the end of the month, to be paid by a deadline, for an as yet unknown amount. That is, there are no surprises.

Why does this matter?

In cash intensive operating environments, where expenses must be managed within the constraints of cash available on hand, the prepaid model offers manageable access to voice, text and data. Where the informal sector might be the source of employment for a greater majority of the population, uncertainty is a defining characteristic as incomes may be irregular, unpredictable and/or seasonal. That is, there is a greater degree of volatility to be managed. And, where there are fewer social safety nets to rely on, surprises in the form of a bill at the end of the month might make the difference between going hungry to bed or putting meat on the table.

In this series of articles, I’ll be taking a look at the nature of the prepaid economy and characteristics common across many geographies. Next part will look at the relationship between Time and Money.

Smartphones and the internet across the developing and emerging world

PG_15.03.11_Internet-Access_640px_WebThe Pew Research Center has just released a report on my favourite topic – mobile phones in the emerging economies of the developing world – with some surprising results.

Technology-Report-14And it demonstrates the so called leapfrogging of legacy infrastructure, in this case, the landline.

Technology-Report-13These numbers demonstrate the emergence of globally connected consumers, regardless of whether they have smartphone access or not. The implications for economic impact, not just e-commerce or conventional retail, are far more than we may perceive at the first instance.

As first noted back in 2006, when your friendly neighbourhood vegetablewallah has a phone in her hand, it changes the rate of speed of information flow, with significant impact on social and economic evolution. Upward mobility now includes aspirational values, not just income related status symbols.

Some earlier thinking on this topic:
Liminal cyberspace: The next billion online Dec 15, 2007
Lowering barriers: Its about access, not the device Dec 15, 2012

Perspective: Pondering cultures of design and design’s cultural fit

LukeW’s post on design left me in a thoughtful mood after I read it. He’d linked to an article about Samsung’s design culture and the clashes between Bay Area rockstar designers and the inhouse product development teams.

It wasn’t the content of the article that struck me, as it was rather balanced, quoting former Samsung designers as well as pointing out the arrogance of insisting your concept be manifested exactly as presented. It was the headline that Fast Company magazine selected to accompany the article that was revealing.

Why Samsung Design Stinks isn’t the sort of headline one would expect from a mainstream business and design magazine. Its clickbait of the very worst sort, one imagines they’d have a page 3 girl covering her nudity with an iPad cover or some such thing.

Its also very revealing, given the magazine’s audience is primarily those active in the design and innovation industry, of the sort of culture they’re intent on cultivating. The sentence that Luke left out in his quote from the article was this one:

The designers would dig in their heels, refusing to budge on their grand idea or see how it might fit into Samsung’s vast production line.

This kind of brings us back to the old conversations about business and design. Luke’s post offers hints of the challenge, as he touches upon the issue from all sides.

Yes, he’s saying, design has definitely clambered up the value chain, just as it was hoping to do so all these years we’ve been thinking and writing on this overlap between business and design. But it struggles to effect change. It struggles to be heard. And it struggles to find its voice even though the boardroom door has been opened.

How much of this is due to design’s culture?

Over a decade ago, I signed up for the first prototype of a semester long class with the working title of Design Languages. Conceptualized by John Grimes, it had less to do with the form factor of a device – how we traditionally interpret the phrase ‘design language’ – and more to do with Aristotle’s rhetoric. If I recall correctly, Brandon Shauer was also in that class – it was meant to teach us a structured argument for making an effective case for a particular design direction or concept, from the business perspective.

Grimes said (in his curmudgeonly way) that we designers were completely useless at standing up in front of a roomful of finance types, product managers and brand gurus and had no skills worth mentioning in making a powerful business case for our design concepts. Our design schooling had only taught us how to say “Its cool” or “I like this one in pink and black”. And for the money men and MBA types that simply wasn’t good enough to invest in a production line or product launch.

The class went on to evolve into a proper course but as the guinea pigs in the first prototype I think we had a better deal – we were video taped making our  attempts at persuading a roomful of sceptical left brain suits to put cash down on our concepts, and if you knew Grimes, you’d know the devastating critiques we received in return.

Learning how to talk the language of business, as a designer, and thus having the skill to make the investment case for why one’s concept must see the light of day is the part that’s missing in the scenario painted by LukeW’s post.

Its not enough to be valued, one must be able to justify one’s value as an investment decision and demonstrate the returns.

If there is a cultural clash, its embedded here. On one side it’s inarticulate designers expecting their concept’s value to be comprehended and understood, implicitly; feeling like they’re banging their head against the wall of Excel pushing philistines in ties and suits. On the other, its middle managers who must justify their bottomlines and their market shares dealing with the demands of design’s divas.

To note, I too have worked with one of Samsung’s global design teams. Yes, there are elements of truth in the article about their corporate culture and approach but at the same time, its also design’s responsibility to find a way to be heard, since they’re the ones who claim to own the concept of being ‘user centered’, right? Snarky headlines really aren’t the way to build bridges.

PS. I developed a workshop for the Stanford ME 310 program held here in Finland based on the original principles of Grimes’ worksheet, simplifying the language for a multicultural classroom. I’ll put that up in a post soon.

Design’s future is a global perspective and an inclusive mindset

Matthew Milan’s thoughtful piece reflecting on the turmoil engulfing the design industry is definitely worth reading. There’s been a lot published on the topic ever since Adaptive Path was bought out by Capital One, a bank. Most of it has been either hand wringing over the death knell of the independent design industry, or rebuttals on the future of the agency model. Matt’s piece makes us think about future of design itself, both as a practice as well as a discipline.

A caveat here is that the design being referred to in most of the articles is broadly related to technology – software, user interfaces, websites, interaction, user experience, applications and possibly, all things smartphones. Wholly new areas of practice that have emerged in our lifetimes, and for some of us, since the days we were in design school.

This is what makes this conversation so interesting. In the past decade since I started pondering and writing about trends in the global design industry, the patterns once seen as weak signals of an emerging future are now showing up quite clearly.

“If you don’t know where you are coming from, you don’t know where you are going.” ~ African Proverb

A look back at what was said in 2006

Dirk Knemeyer, who calls himself a social futurist, set the tone for conversations on both Design Futures and Design Globalization. Keep in mind this was written by him back in July 2006!

Over the last few years, conversations here in the U.S. about the future of digital product design typically have an undertone of fear because of the perception that India and – especially– China are presenting a critical long-term threat to U.S. business and design hegemony.

One of the typical threads in this conversation is a belief that, while the lower value and more production-oriented jobs might be in danger, the more creative and higher thinking jobs remain safe. That is an incredibly shortsighted – not to mention condescending – view. The reality is that emerging markets such as China, India, Eastern Europe and others represent a broad and total future for our industry. The long-standing dominance enjoyed here in the United States is going to diffuse and result in far more global balance. Ultimately that is a good thing, even though we might expect the standard of living for average, middle class families here to suffer a bit in the years ahead. Obviously that is the result of myriad factors, only one of which is the impact of emerging centers of digital product design leadership. ~ Dirk Knemeyer Design Futures 2006

And a few months later,

While the offshoring of jobs from the U.S. continues to get most of the press, the reality and impact of globalization is so much more nuanced and complex. At the most basic level, globalization is:

  • Creating a dramatically larger knowledge workforce
  • Creating a culturally and geographically diverse knowledge workforce
  • Creating new, emerging consumer markets
  • Extending the capitalist paradigm into heretofore “underdeveloped” cultures
  • Creating new cross-culture complexity (and opportunities) for expansion-minded companies and products
  • Creating myriad new companies, originating in new cultures and with different mindsets, vision and strategies

And this is just for starters. But what I hope this list clearly communicates is the real breadth and impact of globalization: for designers, business, culture, governments – everyone in the developed or developing world. ~ Dirk Knemeyer, Design Globalization 2006

Where are we at in 2015?

Back then we were just entering the age of the internetworked society, barely scraping the surface of its global reach and scale. Social media had not been transformed into the Facebooks and Twitters of today; blogging was the way to go if you wanted to connect and communicate.

Digital product design had not yet met the iPhone. And sending an SMS from your Nokia would only get you so far, in Africa, in Asia and the rest of the erstwhile developing world.

“If you want to understand what society is becoming and why it’s becoming that way, look at how people communicate. Look at their technology.” ~ McLuhan’s spirit

Today, as social networks like Facebook claim a user base counted in billions, we have the globalization Dirk foresaw. Applications and utilities designed in Boston, Toronto and Palo Alto are in use by netizens in Ghana, in Brazil, in Papua New Guinea. Design’s reach, and thus, the power to shape and influence, has never been so vast nor so ubiquitous.

“When an entire design industry follows a single mindset, commoditization quickly sets in.” ~ Matthew Milan

Yet the industry and its conversations seem to imply a self perception that feels parochial and inbred. The very same technology that the design industry had a hand in creating has now placed them in the global spotlight. As originators and creators of the future that is now, their ideas and concepts are followed by lakhs of emerging designers from app studios in Lagos and Nairobi to enterprise developers in Bangalore, not to mention the OS tweakers in Shenzen and Seoul.

 “To design is to communicate clearly by whatever means you can control or master.” ~ Milton Glaser

The future of design and globalization is now

But nowhere in these conversations about the “future of design” is the acknowledgement that a far more global and diverse audience of practitioners is emerging, who must now use these very same methods and tools to develop solutions for their own local context and operating environment. Instead, when the noobs seek to learn through the eons old practice of following the hand of the master, they’re mocked and shamed for imitation.

And nowhere do I see any acknowledgement of the challenges of designing apps and solutions for the frontier markets, nor any new methods or tools or processes to help emergent designers create for their own context. Experience is clutched tightly and conversations are held in huddles.

“What is design? It’s where you stand with a foot in two worlds – the world of technology and the world of people and human purposes – and you try to bring the two together.” ~ Mitchell Kapor

Matthew points out that design will compete on mindset. I wrote recently on the value creator’s mindset, one that doesn’t think its a zero sum game. There is an irony inherent in the manner of an industry whose life work is in the craft of creating delightful human experience while communicating, connecting and collaborating across timezones and geographies. The so called sharing economy means that a taxi driver in Nairobi is using your Uber app.

You can’t compete on a platform of cooperation.

“Eventually everything connects – people, ideas, objects. The quality of the connections is the key to quality per se.” ~ Charles Eames

And its distribution has never been faster, cheaper and easier than getting online to Facebook.  China has just opened a Bauhaus Museum. The products of Indian design schools are writing these words you read. There is greater value in shifting the mindset of design to be open to the external influences and new perspectives the industry claims to offer their clients.

Design has a future, its global and inclusive

Your future success depends on it.

While you were outsourced: Last 10 years of mobile design, business and emerging markets

There’s a lot to be said here and I’ve been trying to sort it all out into some kind of logical flow. The global landscape of mobile phones is undergoing a huge shift, and like the iceberg that sank the Titanic, much of it is still under the radar. If I hadn’t gone down the rabbit hole of links after seeing peterme’s latest post which led me to Khoi Vinh’s note on the evolution of Apple’s iPhone design language, I might never have noticed the rest of it. When leading design bloggers start questioning design’s leaders, its a signal of greater problems than maybe apparent.

IMG_1196

Me holding Matti’s Xiaomi, July 2014

What’s going on? A quick synopsis

There’s a new kid on the block and its name is Xiaomi. To be honest, its not a name that had been on my radar until earlier this summer when a friend working in Shanghai showed off his phone to me. As a Finn, his decision to purchase a low cost Chinese smartphone was unusual, and his explanation was that he saw it taking over the market in the future so why not get used to it from now.

Form follows function

There’s been the usual kerfuffle over who copied whom, yet again, and this time Apple’s been whining about Xiaomi not their old favourite, Samsung. I’d tweeted on this a few weeks back saying that the issue wasn’t one of copycats and imitation, and in fact there was no real problem. There’s been a shift in the form factor of handsets and no amount of patenting and protecting was going to change that fact. Look at this random image of “phones” taken from a quick image search.

phone_typesA large screen with a control thingamabob or two encased in an approximately rectangular form. This is what symbolizes a mobile phone these days. And it all goes back to 2006, when the conceptual design shown below won an IF award.

da2fcfb64388baf20ca676c5981de86c

Market share churn

The second shift that we’re seeing is one of increasingly shorter durations of leadership positions. Just a couple of years ago, I wrote about Samsung’s rise to the top and reflected on patterns seen with previous leaders such as Motorola and Nokia. I’d said that Samsung should keep an eye out by 2016, and am now surprised at the end of 2014 to discover that their hold on the number one position is already under attack by newcomers like Xiaomi.

Saturation and smartphones

Much of their troubles are in the formerly emerging markets of India and China, and this leads me to speculate on a third and more fundamental shift taking place. Earlier, the emerging markets of India and China were where big names made big gains in sales, allowing them to garner that market share required to catapult them into first position and/or hold on to their leadership, such as was the case for Nokia. This doesn’t hold true anymore. A fact to be noted is that for the first time smartphone sales have overtaken feature phones, globally.

Emerging Trends impacting the global, mobile landscape

What’s interesting here is that I don’t see Xiaomi, who just became the 3rd largest phone manufacturer by sales this past week, becoming the next leading brand either. Certainly not in the way a Motorola or a Nokia did, in terms of market creation, product innovation and global impact.

Instead, their emergence is more a signal of the larger shift that’s taken place. The locus of innovation in handset design, product planning and market strategy has moved it’s center away from the erstwhile first world to the former developing world i.e. India and China.

And along with this recentering, ideas on business models and profit margins have changed to reflect those prevalent and appropriate for these new operating environments.

Just look at this statement from Xiaomi’s Hugo Barra from an interview last week:

“Innovation is not a luxury item. Innovation is for everyone.”

The implications of this positioning are enormous, particularly given the conventional wisdom currently prevalent in the industry that the latest, greatest, cutting edge technology is a much sought after premium piece of hardware.

Looking beyond the cliches at Africa

Once we step back to take a look at this price point strategy, and add an overlooked element to the mix, we have dots that connect in ways they have never done so before. And that’s the emerging African consumer market.

Mobiles are the backbone of Africa’s emergence. [Refuses to insert a paragraph here on the critical importance of this device] And that technology is being democratized.

Tecno is another brand you’ve never heard of that has taken on the African market in the vacuum of innovation left behind by Nokia’s faltering in the race to the bottom a few years ago. They do business only in Africa, have set up manufacturing in Ethiopia and painted every wall in rural Kenya with their blue logo.

While they’re the biggest and the best known among the hundreds of Chinese brands on the market, they’re are neither your “cheap chinese fakes” nor OEM devices distributed by operators. These are the original brands who’ve scaled up the classic OEM–>ODM–>OBM–>OSM value addition ladder and there will be more of them.

So what does all this blather actually mean?

The handset is the next form factor in the evolution of personal computing which began with the desktop computer and progressed its way through ever more portable devices such as laptops, netbooks and tablets.

Its importance and position in the developing world relative to the lack of infrastructure and systems is greater than we are able to see from our own perspective.

This means that innovation in services and applications using this device will come from these new markets. Fintech in Africa is a great case in point.

The era of big brands and market dominance is coming to a close.

 

 

Europe could stop fighting it and see if informal economy has lessons to teach

Wastepickers in Athens, Greece 2012

Scanning recent writing on the informal economic activity in the wake of the Great Global Recession brings to light the ongoing struggle to deal with it.  Is it good or is it bad? Will it help or is it hindering? Don’t forget the taxes being left unpaid by the economically challenged citizens trying to feed their children. The contradictory articles seem to imply that its perfectly alright for the unemployed in the third world to seek ways and means to earn a dollar but its evil and unthinkable for the same response to occur in the first.

Hoist by their own petard is the cliche that comes to mind, yet it seems as though the conflict is more due to the long established demonization of this natural behaviour, one that has documented benefits such as resilience and cooperation, thus few attempts are being made to bridge the chasm between the formal and informal or pause to understand if there may be some value for the future.

John Sullivan asks What Does the Informal Sector Mean for Global Economic Growth? where he offers insights from the situation in North Africa:

Most of the countries involved in the Arab Spring do not yet have the resources available to create the jobs that they promised. They lack the money to simply build new factories, and government sector employment is no longer the solution it was during the strongman days. Governments must mobilize the informal sector and give them a voice. […] The street vendors of Cairo have already spoken out by partnering with the Federation of Economic Development Associations to develop a draft law and begin working toward its implementation.

But from Europe comes writing whose word choices imply that the neighbourhood kid out to make some pocket money is as much of a tax dodging criminal as more shadowy members of society:

This informal economy is spreading almost to everywhere in the world. It does not only affect developing countries but it is also part of the everyday life of high-income countries, such as the EU member states. Entrepreneurs operate in the unofficial economy because they want to get free from the taxes and regulations that make official transactions unprofitable or unfeasible. Thus, the farmer who sets up a roadside stall selling produce is a participant, so is a construction company that does not report its income to the government in order to avoid meeting legal standards such as minimum wage. Parts of this informal economy also include the children who sell homemade lemonade outside their houses in summer, or their private French classes paid for by adults under the table.

Its a terrible virus, apparently, and its infecting our kids. In Greece – hardest hit of the eurozone nations – Prof Friedrich Schneider, who has researched the Shadow Economy, as he calls it, shares his point of view:

Schneider said that the greater the difference between gross and net income of citizens the more likely it is for the informal economy to deepen.  High social security deductions and taxes predispose individuals to seek ways of avoiding these costs. “No one is hiding taxes in order to save money. All who evade taxes want to gain something in the short term.”

A major prerequisite for the development of informal economy is the complex and complicated legal system. European countries are hyper-regulated by default and the more severe cases are on the periphery of the euro area and in the countries of the Eastern bloc. Corruption there is particularly strong. Schneider explained that the system should be simplified and facilitated.

The quality of services in the public sector can also affect the deepening or reduction of the informal economy. The more severe the procedures in the public sector, the greater the risk of avoiding the implementation of established procedures.

The European version is all about the formal structures, laws and regulations, taxes and services – sounds like a bureaucracy, while the very nature of the informal is the flexible and adaptable. Is it any wonder that its sprouting up in response to the perceived collapse of the global formal economy, as we saw in Spain last week?

I wrote the following 3 years ago, after reviewing the writing on the informal economy, then focusing primarily on the lower income demographic in the developing world:

Because as long as you lump together the activities of the people like selling hotdogs door to door (although buying it from a wholesaler informally), distilling wine for the village, keeping small shops within walking distance when towns are far away or even urban services ranging from garbage disposal to dishwashing to repairing shoes – with the “firms that are hiding from formal regulations and don’t want to pay taxes etc” any formal programs or activities, whether from the social and economic development angle or the corporate profitability angle are going to act at cross purposes.

Martha Alter Chen writes in “Rethinking the Informal Economy” that India stands out as an example where the informal economy has been accepted, acknowledged and now slowly being addressed by government policy. Not in order to dissolve it or remove it but to work with it simply because the incomes of far too many people are dependent on it and no formal systems can be put into place to take care of each and every corner of the country nor her billion citizens.

One can then take what seems to be working, called “creative, resilient and efficient” by Hart, quoted by Chen, and enable systems that support it further, fostering development and increasing success rates at the touchpoints where the informal and formal meet.

Perhaps there is a lesson here about flexibility and adaptability for formal, structured Europe and her economy, hurting as it is right now? After all, as the Jamaica Gleaner puts it, people have to spend all that money somewhere:

Everton McFarlane, deputy director general, said informal activity is being reflected in the formal economy via consumption and investment.

“If there was this informal sector that somehow was not being captured, then where are these people spending their money?” asked McFarlane.

“Are they not spending their money on agricultural goods? Would you not see that in the GCT sales? Are they not spending on electricity consumption? Are they not spending on housing?

In other words, the intersection of the formal and informal economy is not an island by itself that is divorced from the formal sector.  Whatever is taking place, people must consume.

Questioning the value of the term Base or Bottom of the Pyramid aka the BoP

Siim Esko wrote a short piece on his blog BoP Strategies after a conversation we recently had. Since much of his work focuses on the BoP in India and I’d just returned from the Kenyan tour, it was but natural for us to compare and contrast the challenges and the conditions of the lower income demographic in both these countries.  He refers to recent posts on NextBillion.net when he starts:

Ashoka is targeting the top of the BoP with their Housing for All project, but they can still say they are targeting the base of the pyramid – those who can’t afford current housing solution, but who are not the poorest of the poor. But Aneel Karnani talks about the destitute poor and how the BoP is misconstrued. It’s apples and oranges.

Its apples and oranges indeed but by only referring to them as fruit, that is, the BoP, one tends to forget that this acronym actually refers to the more than 4 if not 5 billion of the entire planet’s population. And they are not all alike in any way, shape or form.  And that’s why I told him that I’m increasingly concerned about unqualified use of the general term BoP for this market.  Siim continues in his post:

There is much use for there being one definition for what we used to call the poor segment. But it seems like people get confused by the ‘bottom’ in ‘bottom of the pyramid’. In fact, it’s a rabbit hole and the rabbit hole goes deep.

We don’t take the whole World and consider that our market. You will never get VC funding with an idea like that. We zoom in on the continent, which can be divided into countries, which divide into regions, into areas. The people in different micromarkets have different buying behaviour, different wants and aspirations. And catering to those wants and needs is different. Selling snow mobiles in Helsinki is different than selling them in the north of Finland where Santa Claus lives. For one, it is entertainment, for the other, about survival. We know that. Think of the BoP in the same way – divided into tiny segments all over. Some marketing strategies are replicable across areas, income segments and sexes, but many are not.

And maybe the use of the term by an Ashoka in their own context of what they are trying to achieve – affordable housing or by Karnani in what he’s attempting to say may work but in the context of the entire global community of people who are increasingly focused on this space (that is, for example, the audience of a site such as a NextBillion) it implies that one BoP reference is the same as another. And why not, they are all the Base of the Pyramid you say?

Kenya is very different from India, and Africa from Asia. Yet due to the singular BoP label, the implications often are that one’s BoP experience with big bad messy India will prepare one for those in Kenya (or that success in a favela necessarily implies success in the basti). How different is this current situation from the early days of globalization and mass production of consumer goods across the world, based on the now debunked theory that Theodore Levitt espoused?

Any global advertising agency will tell you that localization and understanding regional differences is critical for the sales of your detergent or shampoo – the challenges that multinationals who rushed into India and China in the closing years of the previous century are well documented. Those hundreds of millions of middle class housewives were, in fact, nothing like Mrs Saunderson back in Toledo or Cincinnati, were they? So why, now, as we extend our reach down the income stream to the rest of the world’s population, are we on the point of making the same expensive errors of judgment and assumption?

In the early days of awareness creation, that here was a world changing opportunity to effect positive change and impact wellbeing, the concept of the 4 billion micro producers, consumers and creators at the base of the global economic pyramid was a valuable and compelling visualization. It captured the imagination of many and much good has come out of this – CK Prahalad has left us with a legacy.

However, as the BoP market matures and competition increases, it will only get more difficult if this single label continues to be used – it implies a single monolithic entity, segmentable only by “income” – in itself a challenging proposition in an environment where most are on irregular income streams from a variety of sources and unable for the most part to evaluate what their weekly/monthly/annual income may be, much less feel they have $2 or $3 or $5 to spend each day.  We see this in our work and we see it in the field.

If there are truly to be outstanding successes in this area, then perhaps its time to consider this market with the same degree of seriousness that advertising does its audience, regardless of whether you are making a profit, sustaining yourself or simply giving it all away.

Socially networked mystery shopfront

Just before Mtwapa, Kenya Oct 11 2011

We spotted this closed shopfront just before entering Mtwapa – a midsize town about 10km from Mombasa, when returning from a day trip north to Kilifi today. There was no signage to tell us whether it was a cyber cafe or internet center of some sort. But we’re sure they are extremely networked socially.