Management gurus – most notably University of Michigan’s CK Prahalad – have long urged companies to step up efforts to drive growth in developing markets.
Along some dimensions, it’s just a matter of math. Close to 80 percent of the world’s population and 40 percent of its gross domestic product (adjusting for purchasing power parity) reside in relatively poor countries. This isn’t just the “bottom of the pyramid” – those living on $1 or $2 a day. This is an emerging middle class with significant purchasing power.
Yet success in emerging markets remains frustratingly out of reach to most companies – the average S&P 500 company earns only about 10 percent of its revenues from emerging markets.
When he took over as CEO of Procter & Gamble (P&G) last July, Bob McDonald used a simple calculation to put this challenge in context. He noted that if P&G were to increase per capita consumption of its products in India and China to the levels it enjoys in Mexico, it would be worth $40 billion in incremental revenue.
The challenge for many companies isn’t recognizing the opportunity that exists in emerging markets – it’s actually doing something about it.
Our own fieldwork suggests that most companies overlook – or underestimate – three critical factors.
The need to target a different customer segment. Most companies naturally look for customers in emerging markets who look like customers in their established markets. Success in emerging markets, however, requires reaching what we call “nonconsumers,” or people who face some kind of barrier that inhibits their ability to consume a particular solution.
For example, a few years ago Godrej & Boyce, a leading Indian conglomerate, became particularly interested in driving growth in the refrigeration market. One natural target? Trying to get the 10 percent of Indian households that already had refrigerators to upgrade to bigger and better refrigerators. Or convincing the additional five percent or so of Indian households that could afford a refrigerator to purchase one.
Godrej & Boyce was able to flip the problem on its head and ask what it would take to reach the massive number of Indian households that couldn’t have refrigerators. These potential customers wanted some of the benefits of refrigeration – a cold drink at the end of a long day, the ability to store leftovers so they wouldn’t have to cook every day, and so on. But insufficient wealth, inconsistent electrical power, and cramped living quarters locked them out of the category.
Last year, Godrej introduced the “ChotuKool,” a small, $70 top-loading refrigerator with a battery backup to withstand power outages. By specifically focusing on removing barriers that constrained consumption, Godrej is poised to create a major growth business that could transform the refrigeration category.
The need to rethink the business model. A company’s business model describes how it creates, captures, and delivers value. Success in emerging markets requires re-thinking key business model elements, particularly distribution channels, partners, and revenue models.
Consider Hindustan Unilever Limited, an Indian consumer products company that is majority owned by global conglomerate Unilever. In established markets, Unilever relies on a highly developed retailing system to distribute its products. India’s still developing retailing infrastructure required taking a different approach.
In the 1990s, Hindustan Unilever created a team to identify women in rural Indian villages who could be the company’s direct representatives. It used a variety of means to train and educate these women, such as having trained actors perform skits communicating key brand messages. The women then told villagers of the importance of hand washing and shampooing.
Hindustan Unilever created drop-off points where the women could pick up soap and other goods. By 2006, the close-to-50,000 women in the “Shakti Initiative” had increased Hindustan Lever’s rural penetration in India by more than 50 percent and were generating more than $100 million in revenue. The company expanded the program in India and plans to replicate the model in other markets.
Tata Motors has built some unique business model elements into its plan to transform the automobile industry with its $2,500 Nano. Achieving that price point required outsourcing an unprecedented 70 percent of the car’s components. Tata also is working on a mechanism to distribute almost-finished-kits that could be put together by rural entrepreneurs, allowing it to serve customers in hard-to-reach areas.
The need to drive work locally. Historically, many companies developed ideas in their global headquarters and relied on regional representatives for implementation. But it’s difficult to understand the differences (and difficulties) of working in emerging markets remotely.
For example, in 2008 Innosight began testing a business to provide affordable laundry services in India via a small-footprint kiosk with an integrated washing machine. We hired relatively poor rig operators, some of whom had experience working as village laundrymen (known as “dhobis”).
We naturally thought that offering the dhobis substantially higher wages would help us attract and retain talent. However, we suffered high employee turnover.
Local experts proposed a compartmentalized payment package that included not only wages but a bus pass and affordable sleeping arrangements, as well. The total level of compensation was the same, but the rig operators valued the compartmentalized benefits. There’s no way we would have learned this unless we were on the ground with the business.
General Electric’s (GE) healthcare unit has learned a similar lesson following an approach that it now terms “reverse innovation.” The approach involves tasking local GE teams in countries like India and China with developing innovations that are appropriate for those markets. Shifting power from headquarters to the region facilitates the creation of innovations that are highly attuned to the needs of customers in those markets.
One example of the fruits of the reverse innovation approach is an electrocardiogram machine for the Indian market. The simple, handheld device was about 90 percent cheaper than existing products.
Driving these kinds of changes is not trivial. Chief Executive Officers should make sure they have mechanisms in place to increase organizational understanding of emerging markets. For example, companies can ensure that up-and-coming leaders go on international assignments. Or the leadership team can take “hands on” trips to emerging markets.
For example, when P & G executives go to overseas markets, they almost always visit consumers in their homes to get more of a feel for the market.
It is notable, and perhaps not surprising, that many success stories in emerging markets involve companies based in those markets. Not only are Western companies missing great growth opportunities, they are providing room for tomorrow’s attackers to hone highly disruptive approaches. Western companies seeking to bridge the gap between the potential in emerging markets and their performance in those markets need to approach the problem differently, or suffer the consequences.
Scott Anthony is the managing director of Innosight Ventures and author of “The Silver Lining: An Innovation Playbook for Uncertain Times.”