The shortcut to growth is bought, not built

KIRAN MATHUR MOHAMMED and EDWARD INGLEFIELD

kmmpub@gmail.com

The fastest way for TT-based firms to compete aggressively in developing markets like Mexico or Costa Rica is if our larger firms partner and invest with innovative startups.

Given our mature and declining local market (even before the pandemic, GDP shrank by 9.5 per cent between 2015 and the end of 2019), we are running out of options.

Our larger firms, particularly in food manufacturing, already have strong brands that can travel, and have already established footholds in Latin America.

But for all the usual reasons (our exchange rate among them), quite a few firms exploring international expansion have found their products are at once too expensive to compete with mass-market Asian goods, but not yet high-quality enough to compete in higher-end market segments. It is difficult to “travel” with a mid-segment product (like most of those developed for local markets) unless you have vast economies of scale.

And many companies, not just in the capital-intensive energy sector, have a ton of sunk costs that make it more difficult to pivot as quickly as they need to.

So how can we find ways to crack a Mexico or a Uruguay?

First, there is immense potential for product design in simple process maps, particularly if you can derive from them a product that fills a specific developing-country need, which services in US or European markets are often not designed for. How many companies are already mining their operational processes for products?

This approach has resulted in companies like Shopify, which noticed that small companies were spending large sums on building standalone e-commerce websites. By deciding to turn that process into a product, Shopify has made its plug-ins almost ubiquitous for small businesses. And its most basic level this approach can be as straightforward as doing something like opening spare manufacturing capacity to produce white-label products.

Of course, product and technical innovation is a highly specialised field that even companies with vast resources struggle with. Companies can become mired in bureaucracy and turf battles that executives must grapple with at the best of times. These, of course, are not the best of times.

The simplest way is therefore to acquire or invest in the talent that can develop new products and enable access to new markets. That way large firms can focus on their own advantage: access to hundreds of thousands of customers and a testing base for new products before they are launched internationally.

Sure, the ideal would be to change the whole culture of a large organisation. But far easier to simply buy that energy and jolt it with cash and customers. If done right, investment and acquisitions of standalone startups is also a way of managing risk. It allows for a growth environment without sacrificing the stability of the core business.

When Microsoft founder Bill Gates recently reviewed Disney CEO Bob Iger’s memoir, one incident struck a chord: Disney’s acquisition of Pixar Animation for US$7 billion. At the time, Disney was short of new content and in slow decline: “No one else had managed to solve the problem by rebuilding from within, and Iger didn’t think he could do it either.” Rebuilding from within is hard. According to Gates: “By keeping his ego in check and realising that he wasn’t the guy who was going to rebuild Disney’s animation studio, Iger was able to make a big bet that paid off phenomenally well.”

But internal resistance can very quickly kill new deals. The problem is that internal incentives often do not reward growth found by this kind of collaboration. That is why internal staff from the C-suite down need to be appropriately incentivised to aid collaboration and integration of new companies, lest they bury deals early on.

Ensuring start-ups keep their autonomy is particularly crucial to success. The key is to offer the tools for scaling, while recognising that micro-management can destroy much of a deal’s value. Start-ups need to wise up as well, and make sure they are audit-proof and that their processes are well mapped. Too many founders still shy away from the boring work.

In TT, executives have already started setting aside cash for investments. Republic Bank has paid US$10 million for just under 20 per cent of a subsidiary of online payments company Wipay, which allows consumers without bank accounts to make online payments, while the Massy Group has made US$1 million available for smaller investments. This should make other firms less wary about the risks.

How big is the risk of standing still?

(This is an excerpt of a piece that will appear in AmCham TT’s forthcoming Issue 1 of its 2021 Linkage magazine)

Kiran Mathur Mohammed is an economist and entrepreneur. Edward Inglefield is an entrepreneur and former chef. Inglefield and Mathur Mohammed are co-founders of medl, an IDB Lab-backed social-impact enterprise.