Wednesday, May 05, 2010

Safaricom: King of Innovation

A detour from the constitutional debate. This week there has been a very public back and forth between Safaricom on one side and CCK, Yu, Zain, and Telkom on the other. The brouhaha is over a set of regulations published by CCK, which you can view here and here.

Now, I'll be honest I tried reading the regulations but I got bored, but if I'm to believe the arguments of CCK and Safaricom then I'm going to give this one to Safaricom. Why lie Safaricom deserves to be market leader. Not only have they cranked out great product after great product, they've done this while keeping their business very profitable using the "just good enough formula".

In case you have not read The Innovator's Solution, by Clayton Christensen and Michael Raynor, then I'll explain. The just-good-enough formula means that a product need not be perfect to be marketable, it must only meet the minimum threshold of the job the consumer is trying to achieve. The clearest example of this is call clarity, Safaricom's is far from perfect but it is just good enough to allow us to communicate (which is what we're trying to do) and being the market leader in low denomination scratch cards wisely ensured that we would not feel the pinch of low quality calls as bad.

Remember back in 2000, Kencell now Zain was the market leader, but they decided to go for high-profit customers (per minute) while Safaricom went for the low profit customers (per second). Eventually because of Kencell's management and ownership intrigues, Safaricom consolidate its base and moved into higher profits segments, continuously grabbing more market share. Fast forward 10 years later, and Safaricom can sit proudly on its throne as king of the telecoms.

In case you might not be able to buy the book, here is an excerpt which is a perfect description of what happened in the telecoms cellular market. (If Safaricom is the disruptor, then Kencell/Celtel/Zain is the incumbent.)

In low-end disruption, the disruptor is focused initially on serving the least profitable customer, who is happy with a good enough product. This type of customer is not willing to pay premium for enhancements in product functionality. Once the disruptor has gained foot hold in this customer segment, it seeks to improve its profit margin. To get higher profit margins, the disruptor needs to enter the segment where the customer is willing to pay a little more for higher quality. To ensure this quality in its product, the disruptor needs to innovate. The incumbent will not do much to retain its share in a not so profitable segment, and will move up-market and focus on its more attractive customers. After a number of such encounters, the incumbent is squeezed into smaller markets than it was previously serving. And then finally the disruptive technology meets the demands of the most profitable segment and drives the established company out of the market.

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