By Jamie Anderson and Ronan Moaligou

Opportunities for growth in the mobile telecommunications industry can be found in some of the most unlikely markets — what we call complex operating environments.

There are three specific kinds of complex operating environments — conflict zones, urban slums and deep rural areas of the developing world — and we have studied mobile network operators that have innovated in these environments in an attempt to understand the reasons behind their success.

We have discovered that success in complex operating environments is about establishing the foundations for an efficient and sustainable operating approach through what we term the 3Cs:

• cooperation with local partners;
• collaborative development of business models; and
• capability building for sustainability.

Cooperation with local partners

To succeed in complex operating environments, mobile network operators first must recognise that traditional business strategies won’t work. Instead, companies need to find local partners familiar with the terrain, and rely on those partners to help guide their operations and develop strategies unique to each market.

And to sustain a business in these environments, companies need to assert their value to their employees, partners and the broader community by supporting their development.

“It has to be a win-win for the company and for local people,” says Lars Stork, formerly chief operating officer of Zain Nigeria, one of several telecommunications companies that have been at the forefront of expansion into these areas. “If not, any results will be short term.”

Here’s a look at how Stork and others learned those lessons. In mid-2007, Zain Nigeria was the second-largest mobile-telecommunications company in the Nigerian market, with a 28% market share and about eight million subscribers. The company had done well serving Nigeria’s cities and larger towns, but had only recently shifted its attention to poorer consumers in rural areas.

Although roughly half of Nigeria’s population lives in rural regions, the challenge of reaching them was daunting. For starters, village-level chiefs and religious leaders held significant power in many regions of Nigeria. Even after national authorities approved Zain Nigeria’s plans for expanding its network, the company needed to win the approval of tribal leaders to build sites and to send its employees to tribal areas to maintain the network.

Many areas of Nigeria weren’t reached by television or radio signals, making the promotion of products and services particularly challenging. Some other traditional marketing approaches were also difficult: billboards were quickly stolen and recycled for building materials or fencing, and it was dangerous in some regions for Zain staff to travel for direct-marketing activities at markets and other rural gatherings.

Security at base stations was a major concern. Theft of equipment was common and even though Zain posted guards on its sites it was losing eight to 10 diesel generators a week.

Stork realized that he was fighting a losing battle and needed to enlist the help of people in the communities Zain aimed to serve. “Working with local people is the only way to succeed in rural Nigeria,” he says. “They understand the local dynamics and know how to survive in what can be an extremely challenging environment.”

Zain Nigeria initiated a franchising programme, recruiting small-business owners to act as its exclusive representatives in their communities.

The entrepreneurs are responsible for marketing and distributing Zain products and services, and for basic maintenance and security at the base stations. Zain recognized that its partners didn’t need experience in the mobile-telecommunications industry. More important was basic commercial acumen, entrepreneurial spirit and a deep understanding of how to manage the local environment.

By the middle of 2009, the Zain network had grown to more than 1,000 franchisees in the deep rural regions of Nigeria, and the average franchised site produced a 160% return on original investment within a year of launch.

Sales by franchisees of recharge vouchers — a form of prepaid air time — exceeded the company’s initial forecasts by more than 120%. Vandalism and theft have all but disappeared in regions with high levels of franchisee site supervision.

Other companies have discovered the importance of local partners in slums and conflict zones. Vodafone Essar, an Indian unit of the UK’s Vodafone Group, serves the slums of Mumbai, some of the most populous shantytowns in the world, with partners chosen from among the local businesspeople.

“The people we work with know the slum,” says Naveen Chopra, Vodafone Essar’s chief executive of the Mumbai circle — or district. “They might be tailors or fancy-good shop owners or outlets selling day-to-day consumables. We cannot simply walk into the slum as Vodafone and start doing business, given the intricacies. But these local businesspeople already run businesses in this market, and we wanted to benefit from their wisdom.”

After the coup against the Iraqi royal family in 1958, Iraq experienced several decades of repression; its market was largely closed and all major activity in the country revolved around government. The liberation of Iraq in 2003 lifted repression across all levels of society, but the foundations for private commerce were very weak.

And, of course, the security situation for any business was chaotic. Zain Iraq CEO Ali Al-Dhawi quickly recognised that his start-up company could not comprehend or manage the multiple levels of complexity alone.

“We recognised very early on that we would not be able to leverage the expertise of our distributors from other Middle East markets, and that we would have to find a local solution,” says Al-Dhawi.

“We discovered that, although there was not a large or established merchant class in the country, there were people who had travelled outside the country and who understood modern business practices. Many of these people had become active very quickly after the liberation of the country, and we sought individuals to partner with us who had entrepreneurial drive, a demonstrated competence in distribution and capital to invest in co-developing our business. We wanted people who would not just sit in the market as a trader, but who would work with us to develop the market.”

Similar to Zain Nigeria and Vodafone Essar, Al-Dhawi recognised that experience in the mobile telecommunications industry was not a prerequisite as the basis for a successful partnership — indeed in many developing and emerging markets this established experience is almost completely lacking.

More important was basic commercial acumen, entrepreneurial spirit and a deep understanding of how to manage the local environment.

Collaborative development of the model

In complex operating environments successful companies develop a deep understanding of the local socio-cultural and business environment, and focus on generating innovation from the ground-up.

Managers need to value the knowledge about the local environment held by a diversity of partners, and to put in place resources to learn from these partners in an efficient way. By maintaining openness to learning, the organisation can allow local partners, who are more familiar with both local customer behaviour and environmental risks, to innovate proactively.

Perhaps most importantly, firms should avoid designing a strategy based on overcoming challenges in the local environment. Instead they should build their own in-depth understanding of the local environment, and then combine their own insights with the knowledge of business partners to develop operating models that fit with local realities.

Mobile network operators that have succeeded in these environments have realised that local partners are crucial not only in establishing their operations but also to building their business.

In Nigeria, the 25 entrepreneurs who became Zain franchisees in the first phase of that programme helped define the responsibilities of franchise holders and suggested ways they could fulfill their roles more effectively.

For instance, at the suggestion of one pilot franchisee, Zain provides four or five motorcycles to each franchised site to help franchisees service surrounding villages more efficiently. Many franchisees have also started to offer instalment financing and barter deals for mobile phones, an extension of established local commercial practices.

In Mumbai, Vodafone’s partners helped Chopra solve a fundamental problem: the difficulty of beaming cellular signals into the inner reaches of the city’s sprawling slums. The density of housing in the slums makes it impossible to erect the same sort of network of transmission towers used to serve other areas.

The company first tried beaming its service from surrounding buildings, but that failed to achieve coverage deep inside the slums. Then a large retailer interviewed as a possible distributor suggested a new approach: recruit large retail outlets around the slum to sell the company’s products and services — and also to hoist mini-transmitters above their shops. The retailers would be responsible for the security and basic maintenance of the transmitters.

The strategy was crucial to Vodafone’s success in the Mumbai slums, where revenue has far exceeded the company’s initial expectations. And not just because of the improved network coverage. The mini-transmitters brought the partnership between Vodafone and the retailers to a new level.

Each retailer “becomes your ear to the ground to the local community”, says Chopra. The retailer “tells you what opportunities there are, where you need to launch a particular tariff plan” to cater to the many different communities within the slum. “So he becomes a very integral part of the way you do the business.”

Zain Iraq’s partnership with local entrepreneurs taught the company many lessons on how to optimise operational processes in areas such as security and distribution, and some very specific measures on how to protect people from kidnapping, and to ensure free passage of cash and other financial vehicles such as recharge cards.

With security a key priority, Zain initially recruited the services of two international security firms to protect its people and assets. But over time Al-Dhawi recognized that security was best managed at the local level, and today Zain has a more regional approach with security managed by ten local firms who are part of the communities in which they operate.

Building local capability

In the face of complexity, accurate knowledge about potential consumers is not readily available and economic structures can be difficult to understand.

This is not just true for foreign managers who might be entering a new market: these complex environments can be equally enigmatic for local managers who are not from the deep rural areas, slums or conflict regions that the firm chooses to enter.

Al-Dhawi was a returning Iraqi national and Chopra is a native of India, but both issued declarations of ignorance when entering their respective market spaces. Stork commissioned a large scale field-based market research study in rural Nigeria in partnership with the consulting firm Globalpraxis before launching the pilot project, an investment the provided valuable insights into the reality of the local market situation.

Indeed, virtually all of the successful firms that we examined as part of our research took three key steps: they dedicated internal resources to understanding the complexities of the new market and to develop appropriate structures and processes; they recruited local people, and; they supported business partners in developing and extending their own capabilities.

Al-Dhawi’s first office in Iraq was a secure private villa near to Basra as there was virtually no commercial real estate available to house the start-up company.

Under the terms of its licence agreement to operate in Iraq, Zain was given just 60 days to build a functioning network in Basra in the south of the country, but Al-Dhawi had a problem — no vendor was willing to send people into Iraq to support network planning or roll-out, and there was an almost complete absence of local Iraqis with the engineering knowhow required to build and operate a mobile network.

A similar situation existed for other core functions such as sales and marketing: there were simply very few Iraqis with commercial experience and skills.

Zain Iraq embarked on a search for local Iraqi engineers, and was not concerned whether these people had telecoms experience or not. The company was fortunate in that Iraq had maintained a strong higher education system, and the locally qualified engineers who had traditionally worked in the oil industry had a high degree of grounding in core engineering concepts.

Al-Dhawi and his HR team brought these people into the company, and sent them outside the country for rapid training courses on building and operating a mobile network — in effect becoming a corporate university that provided the education and skills required to run its business.

Zain had a functioning network within the 60-day period that had been set, and today has more than 80% population coverage. And the effort that Zain put into developing highly skilled local network engineers has been replicated across functions, with the company developing a cadre of young Iraqi professionals in disciplines such as marketing and communications, distribution and customer care.

The need to build skills of employees and long-term relationships with local partners was also recognized by Vodafone Essar in India, especially in the absence of legally enforceable contracts.

According to Chopra: “It is about a relationship. Once the economics are right, once you have a win-win, you have a relationship that is resilient even. It is about respecting the fact that your slum distributor may do only a small turnover, but for that person a small turnover is a big amount and you call him for the same meetings that you call your other business partners. He gets recognition and respect, and in turn this builds trust and loyalty.”

Zain Nigeria also worked hard to develop the capabilities of both its own people and its business partners in the deep rural areas of Nigeria.

Once recruited, franchisees are hosted to a three-day welcome workshop hosted by the local Zain regional office. The workshop consists of training modules developed by the project team in Lagos covering sales and marketing techniques, accounting and financial management, retail execution, basic site maintenance, site security and human resource management skills. And once in business, franchisees are provided with regular training events organized at the regional level.

Significant rewards

The rewards can be significant for mobile network operators that are able to adapt to the reality of doing business in the world’s deep rural areas, urban slums and conflict zones. Through its experience in the urban slums of Mumbai, Vodafone Group is now in a strong position to leverage its learning into its own operations in Africa where the firm’s partly or wholly owned subsidiaries serve major urban slum populations.

Zain Group now has the potential to leverage its learning from Nigeria and Iraq to strategically innovate in other complex markets where it has operations, such as Sudan and the Democratic Republic of Congo.

Entering complex operating environments requires a recognition that traditional views of business strategy might not apply. Successful companies avoid reliance on ‘legacy’ operating approaches, and understand the shortcomings of strategies based on overcoming challenges. In addition to extending their own knowledge and capabilities, companies must partner with local people who understand the intricacies of the complex environments in which they live, and work with these people to develop sustainable strategies that are ‘bottom up’ rather than top down. GTB

Jamie Anderson is professor in strategic management at the TiasNimbas Business School in Tilburg, the Netherlands. Ronan Moaligou is a senior manager at consulting firm Globalpraxis Group in Barcelona