Why e-commerce companies in growth markets should learn this innovation theory

In an interview with TechCrunch, David Yu, founder and CEO of e-commerce company Wasoko (formerly Sokowatch), explained that his company’s previous model “wasn’t efficient because Sokowatch couldn’t guarantee that the goods were delivered to the customer when they made orders.” 

The company had developed an asset-light model and depended heavily on partners to fulfill orders. David noted, “We realized that to deliver the quality of service these shops deserved, we needed to get more involved. In managing the operations directly ourselves… we went from an asset-light backend distribution software platform to this market-facing platform that was out there delivering goods directly to shops themselves.”

Why did Wasoko transition from an asset light strategy to one where the company managed “operations directly?” Was this transition necessary or could it–and the many other e-commerce companies in growth economies–have maintained its asset light strategy? 

To answer these questions, it’s important to understand the Modularity Theory. 

Modularity Theory is a framework for understanding how to piece together different elements of a system in order to achieve different goals. 

A system can be modular when there are no unpredictable interfaces between the elements in it. In other words, different elements of the system fit and work together in crisp and well-understood ways. In such systems, the connecting interfaces between elements are specifiable, verifiable, and predictable, enabling different elements to plug-and-play.

In contrast, an interdependent system is one where a change to one element in the system affects or necessitates a change to the entire system. Interdependent systems are required when the performance of a product or service isn’t yet “good enough” for the majority of users.

For example, in the infancy of the mainframe computing industry, mainstream customers were not satisfied with the functionality and reliability of the products on the market. In addition, there were no predefined standards that connected one component to another–operating system to hardware design, for instance. 

As a result, most companies who wanted to compete couldn’t simply choose to design or manufacture just one or two components. In their book, The Innovator’s Solution: Creating and Sustaining Successful Growth, Christensen and Raynor put it this way, “you could not have existed as an independent supplier of operating systems, core memory, or logic circuitry to the mainframe industry because these key subsystems had to be interdependently and iteratively designed…” To be successful in this market, companies had to wrap their arms around multiple components–operating system, hardware design, assembly, product design, and so on. 

The cycle repeated itself with minicomputers and personal computers. The companies that dominated those industries at their infancy–Digital Equipment Corporation for minicomputers and Apple for personal computers–developed proprietary and interdependent architectures that were designed to maximize performance. 

This wasn’t simply a computer industry phenomenon however. The same thing happened in the automobile industry. Ford and General Motors rose to the top because they developed integrated systems. Ford for instance, built and managed steel mills, iron ore mines, glass and paint factories, and even invested in distribution to get the Model T car to mainstream customers. (See The Innovator’s Solution: Creating and Sustaining Successful Growth for more on Modularity Theory).

In essence, when performance–typically reliability and functionality–isn’t good enough, organizations should build interdependent systems. By wrapping their arms around a particular problem, they can increase the coordination necessary to improve the performance of the product or service.

Now back to Wasoko’s new model and, more generally, retail in growth economies. 

Retail in most growth economies is highly fragmented which leads to inflated prices, unpredictable service, and highly inefficient markets. The “performance” of the sector isn’t good enough for most customers. As Wasoko learned, not being able to deliver goods to customers after they order them isn’t good for business. 

To improve performance, it was necessary for Wasoko to invest in building out the system. Just as Ford couldn’t have reduced the price of a car and delivered it to the masses predictably without investing in steel mills, iron ore mines, glass and paint factories and so on, Wasoko–and other e-commerce companies–will struggle to deliver goods to its customers predictably without making the investments necessary to build an interdependent system.

On the bright side, once companies build interdependent systems necessary to improve the performance of their products or services, they can sell the innovation to other customers. 

Amazon built its cloud computing technology (Amazon Web Services) to ensure it could build an e-commerce platform that scaled–the everything store. Today, Amazon’s AWS revenues surpass $60 billion.

In years to come, as the e-commerce market in Africa and other growth economies expand, the investments that Wasoko is making will not only directly serve African customers better but also other companies in the sector.

The post Why e-commerce companies in growth markets should learn this innovation theory appeared first on Christensen Institute.