SPRING ELECTIVE Effective Business Models in Frontier Markets

15.232 Effective Business Models in Frontier Markets

SPRING H1 20173253298189_1a2318c199_z

Students: Interested in innovating amid constraints?

Across Africa, Latin America, and Asia, a fascinating mix of established companies, start-ups, non-profit enterprises, and private-public collaborations are innovating in serving low-income customers. In 15.232, Effective Business Models in Frontier Markets, examples from a variety of sectors reveal what works, what doesn’t, and why, in the quest to reach scale, sustainability, quality, and social impact. We investigate ambitious startups and inspiring leading-edge organizations that have found new ways to deliver services and goods in frontier markets where customers have little to spend and business infrastructure is still developing. Such markets have often failed to deliver the healthcare, energy services, education, water, sanitation, consumer products, connectivity, entertainment, and income generation opportunities that people seek. What enables some enterprises, governments, and non-profits to meet these needs effectively?

Exploring this question will sharpen your ability to look at any new business idea from multiple perspectives. Operations, revenue, marketing, finance, and strategy all factor in to the business model perspective developed in this class.

Case examples anchor our analysis. We’ll draw lessons from pioneers who are bringing cost-effective, scalable, high-quality solar power services, eye surgery, software coding education, and HIV prevention to those who most need it. Far from the labs and corporate sites where others develop new technologies, these innovators are forging novel business models on the front lines. You will learn about new approaches to education, energy services, water, sanitation, healthcare and more through cases, projects, and discussions with thought leaders. Class topics draw on strategy, marketing, operations, systems thinking and other MBA tools and lenses. While some case examples address global health, others tackle different sectors, yet the insights they offer apply to many domains, as you will discover in a mini project of your own choosing.

Join us if you’re interested in applying business thinking about scale, sustainability, quality, and impact to one of the world’s most pressing problems: serving the people in greatest need.

More about the class: Student Advice

Former students came up with great reasons to take this class:

  • Spring H1-only (half semester, February to mid-March) class taught by MIT Sloan School of Management’s Anjali Sastry, an expert in global health, frontier markets, and System Dynamics who has worked in many of the settings we explore.
  • Not just for people interested in healthcare, but anyone interested in innovation and business models in low-resource settings–and in understanding and analyzing new business models anywhere.
  • The class offers a rare opportunity to integrate and contextualize what you learn in other classes, including action learning projects.
  • A wonderful line-up of guest speakers includes case protagonists, experts, investors, business innovators, and thought leaders. Past guests include tech entrepreneur/philanthropist Desh Deshpande, global industrialist Ratan Tata, corporate and venture capital investors, and top government leaders.
  • Follow your passion by selecting a cutting-edge organization to analyze for the class, then benefit from expert guests’ thoughtful feedback on your assessment.

Check out what past students had to say about this class.

More about the class: Official

15.232: Effective Business Models in Frontier Markets | 6 Units | H1: 7 Feb to 16 Mar 2017 | Tu Th 1-2:30 pm | E51-376

This MIT elective class examines how new approaches that link innovations in operations, revenue generation, marketing, finance, and strategy enable improved social outcomes in resource-limited settings across Africa, Latin America, and Asia. Uses perspectives from system dynamics, design thinking, and strategic analysis. Explores success and failure in attempts to innovate and scale in product and service delivery. Analysis of novel business models draws on case studies, videos, industry reports, research, and guest speakers. Students present their assessments of innovative base-of-the-pyramid enterprises that aim to do more with less.

MIT or cross-registered students who have not taken at least three management or business classes must apply to the instructor for permission to enroll before the first day of class.
See a complete archive of past version of this class (earlier focus on healthcare, now broadened): Business Model Innovation: Global Health in Frontier Markets.

photo source: https://www.flickr.com/photos/morganmorgan/3253298189/

Why won’t markets take care of global challenges?

Markets have delivered world-changing innovations across history. Consider the rise of the mobile phone or the acceleration of medical interventions in recent decades and the vast improvements they brought to many lives.

But there’s a down side. Highly scalable technologies can generate such large profits that they increase income disparity between those selling the technology and others (think of Silicon Valley gazillionaires). Or, they can shore up the power of specific actors to shape public decisions in their favor and as a result deliver less of a good or service (or unleash more harm) than the world would otherwise want. The overall result is a market that falls short of pareto-optimal. (This term defines a form or inefficiency: if the market fails to allocate scarce resources in a way that delivers the highest total social welfare, it is not pareto-optimal.) To better understand why profit alone may fail to deliver preferred outcomes, let’s consider specific ways in which markets fail.3281195599_020b6a7e7e_z

Market failure occurs in particular situations where costs and benefits of a given activity cannot be fully allocated to all participants by prices that markets would generate. The result is the over- or under-provision of services and goods. The system fails to produce outcomes that its participants would otherwise prefer. Markets fail when, left to their own devices, there is insufficient incentive to produce what economists would call the efficient, pareto-optimal solution.

Residents want street lighting, but no individual would pay for it, the cost of organizing a customized system to share costs and manage are too high, and companies cannot find business models that would make it efficient to provide street lighting for everyone. Absent a collective intervention, such as local government, street lighting would be undersupplied.

Public goods—vaccines, street lighting—are involved in one type of market failure. Pollution and congestion also create market failure. See this discussion of climate change as a market failure.

To better understand market failure, let’s map out three situations in which markets tend to fail.

First, if production entails increasing economies of scale, the winning firms can become monopolies that charge too much, thereby limiting consumption that would otherwise be beneficial, which explains why telephone services were heavily regulated much of the last century and some of the current debates about the consumer impacts of dominance of firms like Amazon.

Second, markets tend not to work for public commodities—the street lighting example, or national defense. Such cases involve commodities that are open to all (nonexcludable), where one person’s use doesn’t preclude another (called nonrivalry), and where no person can opt out of using the good (nonrejectability). For these common needs, the service or good is ripe for exploitation by free riders who would otherwise opt out of paying, and firms tend not to enter.

The third type of market failure happens when production or consumption has externalities. Negative externalities include pollution: the costs imposed by pollution are borne by many but the benefits accrue to the producer and the end user. Positive externalities include the case of home renovation (renovating your house increases the value of others in the neighborhood, but as the full benefit is not realized by the investor, people tend to underinvest in renovation). Source used in this paragraph.

If you want to explore this topic in more depth, economist Edward Morey offers a more detailed teaching note discussing market failure (he identifies six types of causes: common property, externalities, public commodities, excess market power, lack of markets, and distortions in capital markets).

Lack of information can drive market failure. Economists call this information asymmetry. Individuals who are unaware of the potential effects of poaching may hunt endangered species and impose greater costs on everyone than they would want to. In a sense this market failure means that rational decisions are not made because knowledge is lacking. If people were better educated about the impact of their actions on others and their environment, they might make different decisions. The reduction in smoking in the West over the past half-century is the result of correcting an information asymmetry.

And in other cases, a lack of markets (for instance, for the absence of markets for air or oceans) can mean that the effects on these things are excluded from consideration by communities and firms whose consumption decisions affect them.

Investment in innovation and research may also be subject to market failure because these activities cost more to a firm than it may be able to recoup from the market even though they deliver net benefits to society. Uncertainty–in the form of unpredictable returns to investment–also plays into this form of market failure. One antidote is industry consortia or collaboration to share costs and pool risks in developing new technologies.

 

Global challenges at the heart of NEXT Lab involve market failures. Markets alone cannot deliver the best solutions for reducing the pollution impacts of air travel, increasing the quality and accessibility of higher education, providing the new vaccines we need, or enabling healthcare information to flow across stakeholders with the right protections and ease.

But how can one organization make a difference when the usual business incentives fail to deliver a preferred outcome? To inspire your thinking, let’s look at one antidote to a market failure: The XPrize Foundation’s work on oceans.

The thinking behind the XPrize is that a well-designed prize—which includes not only money, but also guidance, support, and publicity—can incentivize change in cases where the market would otherwise fail. The XPrize Foundation has created three efforts to address unmet needs to improve our oceans:

  1. The Wendy Schmidt Oil Clean-Up XChallenge
  2. The Wendy Schmidt Ocean Health XPrize
  3. The Shell Ocean Discovery XPrize

As XPrize’s Dr. Jyotika Virmani explains,

They all fit within the overall vision we have to be on an unstoppable path to a Healthy, Valued, and Understood Ocean by 2020. We have a number of post-Prize activities underway, so we have impact stories as well. The Wendy Schmidt Ocean Health XPrizes were designed to provide the impetus for technological innovation that would not otherwise take place.

New physical technologies are needed to both map and clean up the oceans–but so too is the availability of useful data that can in turn spur other innovations. In November 2016 XPrize and its offshoot HeroX launched a related effort, the Big Ocean Button Challenge. As we are learning from the XPrize experience, designing the right sequence of prizes and challenges is key.

In general, the XPrize Foundation asks the following questions in pinpointing potential prize domains:

  • Is the market failure clearly defined?
  • Will successes and failures stretch the bounds of art, science or engineering?
  • Will the results spark a new industry?

In our first NEXT Lab class, we traced how one set of prizes did exactly this, thanks to our class guest, Dr. Virmani.

Then, in our six NEXT Lab projects, teach eam’s early research allowed them to develop their initial thinking about market failures in order to set the stage for your creative thinking about the potential for partner organizations to work with others to address the global challenge. In our final class, we return a full circle to the ideas behind the XPrize Foundation’s approach to consider what teams uncovered about the other ways that innovation might be supported in a given challenge domain. What might the next XPrize tackle?

photo source: https://www.flickr.com/photos/uw-eric/3281195599/

For my new class, NEXT Lab, we invited leaders to pose their crucial question about their world in 2025

New Executive Thinking on Global Challenges gives final-semester Executive MBAs an opportunity to shape the future. We have a fascinating set of projects and a class designed for our advanced MIT students to cultivate the essential leadership capability of managing in the present with an eye to tomorrow.untitled

In NEXT Lab, each faculty-mentored student team crafts answers to their partner organization’s focal question about a specific global challenge. Students learn about complex challenges by taking on a real-world project that calls for field research, team ideation, and interaction with a great bench of experts and seasoned faculty, all designed to inform a five-month dialog with corporate leaders. 100 person-years of experience may be represented in each team, offering students the opportunity to connect what they have learned about global leadership, analytics, operations management, system dynamics, innovation, and behavioral perspectives—and to put it to the test by building an effective collaboration. Students work from December to May, with guidance from NEXT Lab, to understand their partner organization, map out scenarios for 2025, and scout for new ideas using library and field research (including a week on the ground in March) to develop data-driven, creative, and practical ideas for immediate actions to enable a better future.

Building on our experience with hundreds of action learning projects across the world, NEXT Lab is planned to maximize learning and impact. It is designed for students with every interest and background who seek to change the world—and for partner organizations who aim to create a better future.