By Marcus M. Larsen
How do business models evolve in challenging institutional environments? With substantial growth opportunities offered by an expanding population, raising income levels and more household consumption, an increasing number of firms are being established in developing countries. However, market-supporting institutions such as reliable physical infrastructure and competitive regulation are often under-developed, preventing many of these firms from realizing their potential. For example, the World Bank’s Doing Business Index reports that several of the world’s most difficult places for businesses are in Africas. Another study found that as many as 9 out 10 Indian startups go bankrupt within their first 5 years. Understanding how new ventures design their business model successfully is therefore particularly important.
In a recently published article in Organization Science, Augustine Peprah, Claudio Giachetti, Tazeeb Rajwani and I explore how firms develop their business model through learning in environments with weak institutions. We conducted a case-based analysis of Jumia—an online retailing firm established in Nigeria in 2012—that aimed to emulate the success of the Amazon.com across several African countries. Jumia's gross merchandise volume grew from nearly €35 million in 2013 to over €500 million in 2017. By the same time, it had expanded its operations into 11 different countries across Africa. Jumia navigated through initial obstacles with regards to trust, acceptability, and infrastructure in African e-commerce by creating a sustainable ecosystem of digital services and supporting infrastructure for an online and mobile marketplace.
Based on our analysis, we argue that ventures surrounded by considerable uncertainty will deliberately imitate the business models of successful firms. By imitating selected elements of the business models of other successful organizations (such as Amazon), firms can reduce the uncertainty of operating in weak institutional environments. However, because of the same institutional voids, the ventures’ intentional imitation will progressively be replaced by innovation. As managers gain experience and confidence, they start to modify the business model to accommodate for the specific environment in which they operate, and thereby create and extract further value. We propose a process model entitled “imitate-but-modify” that explains how business models evolve through four distinct phases (i.e., clarification, legitimacy, localization, and consolidation).
We believe our findings are useful for firms and managers in developing countries looking to scale up their business models from a start-up phase into a growth phase. Similar to others who have started to explore what constitutes successful strategies in Africa, we explain how weak institutional environments drive, but also impede successful imitation of business models designed for other contexts. As such, we offer insight into how entrepreneurs, teams and organizations should balance imitation and innovation, and also identify strategies to fill and replace market-hampering institutions.