How to Avoid the Pitfalls of Innovation in Emerging Markets
There was an idea that caught popular attention a few
years ago: basic, affordable products from emerging markets for use in their
home countries could eventually move up and disrupt global markets. But the
record has been mixed, according to this op-ed by Alok Bardiya, a senior
executive and entrepreneur based in India who has worked across countries and
now heads the venture capital arm of a Fortune 500 company. He is also on the
board of several companies and is an active member of the startup ecosystem. In
this opinion piece, he explains what it takes for successful innovation.
Two products caught global attention several years ago.
They both aimed to provide an alternative to refrigerators to consumers in
emerging markets who could not afford a conventional fridge or lacked the
electric supply to run it. One was ChotuKool, a small box-like device (chotu
means small in Hindi) with a unique design that cooled using a thermoelectric
chip running on batteries. The second was MittiCool (mitti means clay or earth),
a clay container with shelves that uses water evaporation to cool items.
Chotukool was priced at $60 and Mitticool sold for $40.
Both products were disruptive and had a potential market
of hundreds of millions. The actual sales though were underwhelming. Mitticool
has not scaled up beyond few tens of thousands of units over several years.
Chotukool had similar volumes in a market of 8 million-10 million conventional
refrigerators annually in India.
The idea – that basic, low-cost products from emerging
markets will first tap into the unmet needs of billions of people in home
countries and then eventually move up and disrupt global markets as well – made
sense. Terms like “frugal innovation” and “reverse innovation” gained currency,
and there was a lot of excitement about these ideas back then, coinciding with
the emerging markets boom.
A reality check now, however, shows that the actual
success has been underwhelming, and most of these products have not scaled
beyond a few million dollars in revenues or beyond targeting small niches.
New products do succeed in emerging markets, of course,
but they tend to be global products or local clones with some incremental
innovation. These tend to take the more common approaches to product
introductions, such as “lift and shift” or “fast, better, cheaper.” Think of
consumer durables like refrigerators or TVs, cheaper mobile phones, or of
services such as a Google or a Facebook, or their local-language clones. Here
the path to success is smoother, while the challenges of succeeding with
disruptive innovation are far greater.
One clear lesson from all of this is that the assumption
of “if we build, they will come” doesn’t work, even for previously unmet needs.
Several other lessons stand out:
1. Pricing needs to be disruptive – ‘lower’ alone may not be
sufficient. Lower incomes in emerging markets make price
a key driver of buyer behavior, naturally. Yet there are several instances
where even a 30%-40% price cut has not been disruptive enough for potential
first-time users.ChotuKool fell into this category, and while it was 40%
cheaper in absolute terms, it was only $40 lower than a small conventional
refrigerator, which costs $100.
Sectoral price inefficiencies will matter. It
will be harder to disrupt already price-competitive markets like consumer
durables, but industries like health care with its huge price inefficiencies
can be a good hunting ground. Interestingly multinational subsidiaries and
startups, including non-profits in emerging markets, are targeting the huge price
disruption potential in health care. From ECG machines from GE that cost $500
(versus $10,000 for the standard product) to a startup selling an ultra-cheap
phototherapy device (Firefly) to a prosthetic limb (Jaipur Foot) made by a
non-profit for $50, there are an increasing number of health care devices
looking to disrupt the market.
2. Make the product an aspirational choice – even for basic
needs.Aspirations matter – probably even more to
people buying for the first time.
Tata’s Nano, launched as the world’s cheapest
car, presents an interesting study. It came out of a bold vision to provide a
car to existing two-wheeler owners at a price point of 100,000 rupees ($2,000).
It redefined the concept of low-cost engineering and led to several disruptive
innovations – from a newly designed two-cylinder rear-mounted engine, to a new
body design, to getting suppliers to innovate and meet extremely low price
points.
So radical was the approach that Nano’s
development process became a showpiece for “frugal engineering” or “Gandhian
engineering.”While the car aroused interest across the world, Nano’s actual
sales were a fraction of the company’s original estimates. Later analysis
showed that the “world’s cheapest car” wasn’t really an attractive positioning
for what would have been an aspirational purchase for first-time car owners.
Consumers were still fine paying premium for an existing product and even saw a
used car as a viable option versus buying a no-frills, lower-priced new Nano.
Similarly ChotuKool was also not seen as
meeting customer aspirations. As one of the senior executives responsible for
ChotuKool noted: “We realized that the aspirations of the lower income people
come from the richer people, and unless the rich buy, the lower income segment
won’t.”
3. Bring discipline to product design and development. This is the most important — but probably also the
most glossed-over – aspect relating to innovative products from emerging
markets and why they struggle to scale. Such innovation has been more about
entrepreneurs creating nifty solutions for local problems, but they tend to
skimp on design and rigorous product development processes. The result is that
the final product lacks quality and scalability. Lack of manufacturing
ecosystem adds to this challenge.
Unfortunately this approach was nearly
glamorized as “jugaad” innovation — a colloquial Indian word that can mean an
innovative solution, a temporary fix or a simple work-around, but also is
sometimes used pejoratively for solutions that cut corners or bend rules. There
is now increasing recognition that innovation in emerging markets needs to move
from “jugaad to systematic innovation.” Rishi T. Krishnan, director of the
India Institute of Management, Indore, has written extensively on this.
4. Invest in a multi-dimensional, go-to-market (GTM)
strategy. Distribution has always been a key
challenge but disruptors also need to think of the broader GTM plan and the
overall value proposition.One interesting example: Vortex Engineering, which
launched a low-cost ATM machine that had several features meant for emerging
markets. It is extra rugged and can run on solar power and without
air-conditioning, which significantly lowers operating cost. But Vortex
was initially not able to gain much traction. It soon realized that winning
against existing local and global players requires an end-to-end value
proposition that takes into account distribution networks, skilled after-sales
support, and attractive financial terms or a pay-per-use model. All this takes
time and significant investments and that’s exactly what Vortex started doing
as it raised more capital.
5. Customer education also needs to be an integral part of
the GTM.Changing the user-behavior for first-time
users – even for life-changing products – is very difficult and requires
customer education. When Hindustan Unilever (HUL, Unilever’s India subsidiary)
launched Pureit — a low-priced water filter — it made educating the customer
integral to the GTM activities. It partnered with non-profits, and also ran ad
campaigns bringing out the risks of drinking contaminated water and how the
traditional method of boiling is expensive and time consuming.
6. Have a longer-term management view — results will take
five to 10 years or even more. Businesses
in many emerging markets require a longer time to start delivering results.
This needs to be factored in both by startups and large companies. Startups
will need patient investors who can support the entire time needed to scale.
Resource allocation in large companies is based on the ability for a product to
deliver quick results and this needs to be re-thought.
Companies that adequately empowered and resourced the new
product team for a longer run have showed success. HUL’s Pureit is a good
example. It is priced $20-$30 — at the low end of the range – and does not
require running water or electricity. The water filter was launched in 2005 and
emerged as the market leader in in India and also scaled up well in other
emerging markets riding on Unilever’s global strength. Estimates put sales at
more than 50 million units worldwide.
Long-term focus was integral to this effort. Unilever
identified water as one of the 10 global opportunities for the long term, which
combined business returns with social impact. Water was structured as a separate
business unit reporting to the HUL CEO. The group also invested significant
time and capital to first test market the product for three years before
rolling it out nationally.
Bringing It All Together
One example shows how the key elements work together. D.Light makes
off-grid home solar devices and has sold products to more than 50 million
households in many emerging countries in Asia and Africa. A combination of
factors helped d.light succeed. The founders brought deep customer knowledge —
one lived in Africa for many years and observed the risks associated with
kerosene lamps. The company invested close to three years in building the
product. The final product, designed by a San Francisco firm, was high quality,
rugged, and came with a two-year replacement warranty.
For a customer, this meant fulfilling a critical
immediate need (light) with a product that was also desirable to own. Pricing
was kept low but more importantly, d.light introduced pay-as-you-go models both
in partnerships with small financial groups and other payment businesses
(M-KOPA in Africa). Given that disruptively low-priced products for “bottom of
pyramid” segments may not bring profitability unless the volumes are very high,
d.light built a broader product portfolio ranging from $8 for a lamp to a “home
solar system” priced in the $100 range.
D.light also showed flexibility and patience in
overcoming the GTM challenges. In India, it started by selling through
retailers but later partnered with oil companies to sell at gas stations. This
was a win-win outcome given that the oil companies were seen as selling an
environmentally friendly product.
The Sectoral Lens
Sectors that hold the potential for emerging market
disruption to impact other markets are health care and software — software as a
service (SaaS) and mobile-based plays. Some of the commonly encountered
challenges – like pricing inefficiencies and GTM – work to the advantage of
disruptors here.
What gives SaaS such potential to scale globally? Several
things are coming together: the explosive growth of smartphone and internet;
the engineering and software skills pool; how the internet removes GTM hurdles
(web discovery, digital marketing, etc.); the customer adoption of the cloud
and SaaS; global investors who provide capital and access; and, entrepreneurs
who understand global customers’ needs from their past software industry
experiences.
Most of these software products target enterprise
customers, and for some of these SaaS companies more traction has come from
developed markets. The innovation is not just in the product and pricing but
also in the sales/business development model with an in-bound, web-based sales
and support engine managed by teams based in the home country. As these
companies scale up, the model is being tweaked to create a front-end presence
with top executives in the key markets, typically in the United States. In fact
several of these companies register themselves in U.S., which helps in funding
and future exits.
There are several examples where emerging market players
are scaling up globally – WSO2, an open source middleware software company
based in Sri Lanka; Freshdesk, a customer support platform; Zoho, a full suite
of business software; and several other cloud/infrastructure platform players.
An Unfolding Story
As emerging markets continue to grow, disruptive
innovation in services, products and business models will continue to thrive.
In some sectors, innovative players from emerging markets will start creating
global impact and start matching up to the original expectations. In other
sectors, a disciplined business management approach and due investment in
educating and driving adoption will help.
http://knowledge.wharton.upenn.edu/article/how-to-avoid-the-pitfalls-of-emerging-market-innovation/?utm_source=kw_newsletter&utm_medium=email&utm_campaign=2016-10-20
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