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Conventional wisdom has long held that innovation is the strength of the West and that what gets developed in the West is modifi ed and transferred to “the Rest.” But the reality of recent years does not support this assump- tion. In point of fact, we’re seeing a rise in the number of innovations coming from emerging markets, and we’re seeing even more in the way of infl uence from emerging markets in the way that innovation is con- ceived of, executed, and delivered.

Innovation happens where need meets opportunity. In emerging markets, these needs are often very basic, par- ticularly for those at the bottom of the economic pyra- mid ( Prahalad 2004 ). As creative ideas for meeting those basic needs are translated into compelling innovations, emerging markets are becoming hotbeds of innovation in areas ranging from healthcare to water to transporta- tion. And innovation activities in emerging markets are having profound impacts on the West; indeed, products created in and for emerging markets are now fi nding

Irene J. Petrick is a faculty member at Penn State Uni- versity as well as an innovation and strategic roadmap- ping consultant. She has been a Welliver Fellow at Boeing (summer 2005), a faculty intern on site at CSC India (summer 2008), and an Intel innovation roadmap- per (summer 2010 and 2011). She earned her PhD in engineering science and technology management at Penn State University. [email protected]

Suwan Juntiwasarakij is completing his PhD in social media and innovation at Penn State University. He is a Royal Thai Government Science and Technology Scholar. [email protected]

SPECIAL ISSUE: INNOVATION IN EMERGING MARKETS

Irene J. Petrick and Suwan Juntiwasarakij

THE RISE OF THE REST: HOTBEDS OF INNOVATION IN EMERGING MARKETS

The rise of emerging markets will force Western companies to recognize new

competitors and rethink their own innovation approaches.

DOI: 10.5437/08956308X5404009

eager buyers in developed nations. Once called reverse innovation ( Immelt, Govindarajan, and Trimble 2009 ), and now also known as frugal or constraint-based in- novation ( Economist 2010 ), this reversal of the tradi- tional fl ow of innovation is both reshaping consumer

Figure 1 .— Hotbeds of Innovation

Research • Technology Management24 0895-6308/11/$5.00 © 2011 Industrial Research Institute, Inc.

demands and forcing Western companies to rethink their ideas about innovation and how it happens.

“Emerging markets” have often been associated with the BRIC countries—Brazil, Russia, India, and China—but companies seeking to better understand emerging markets and frugal innovation must now look much further afi eld, as regions around the world emerge as incubators of inno- vation. This article highlights some recent developments in emerging markets and provides some insight into how the innovation model driving these emerging markets differs from the model invoked by their Western counterparts.

Innovation Hotbeds

What does a desalinization project in Israel or the United Arab Emirates have in common with mobile banking in Kenya or the Tata Nano car in India? At fi rst blush, very little. But these places, and these products, are emblem- atic of the innovation power that has been fermenting in the rest of the world and that is now poised to take full advantage of globalization. Bloomberg BusinessWeek ’s 2010 ranking of the 50 most innovative companies in- cluded 15 Asian companies; more than one fi fth of the entrants on the list were anchored in emerging econo- mies ( Arndt and Einhorn 2010 ).

Many of those markets are evolving specializations in areas that are particularly important for their home econ- omies ( Figure 1 ). We’ ve chosen to emphasize four areas: mobile banking, microfi nance, and social media; trans- portation; energy and natural resources; and healthcare. In calling out innovation hotbeds, we’re not attempting to be all-inclusive, but rather to highlight the confl uence of factors that is now driving the emergence of truly in- novative products and services from unexpected corners of the world.

Mobile Banking, Microfi nance, and Social Media

Want to be at the center of mobile banking and the mo- bile wallet? Go to Kenya. The M-PESA program, a joint venture between Vodaphone and Safaricom, has revolu- tionized the way that local farmers and small business owners manage their money. These entrepreneurs and farmers go to market with goods and keep track of pur- chases and expenditures using their cell phones. Cell phones replace the bricks-and-mortar bank, providing the unbanked access to credit, an easy way of paying bills, and seamless tracking of their expenditures and in- cremental wealth accumulations—all via text messages. The underlying enablers of this mobile banking revolu- tion lie not only in a rethinking of the way fi nancial

July—August 2011 25

institutions work, but also in innovations in cell phones to accommodate the habits of emerging-market users, such as phones that can store multiple contact lists to al- low multiple users to share a phone.

An Indian entrepreneur has taken the mobile bank one step further by combining smartphone technology with a biometric fi ngerprint scanner, creating an ATM on wheels—bicycle wheels, that is. In Mexico, it’s motorcy- cle wheels, which Grupo Elektra loan offi cers use to visit potential customers in their homes and, using handheld devices, communicate with the central offi ce to determine on the spot whether or not a potential customer possesses the wherewithal to borrow for a big-ticket purchase.

Mobile technology also supports microfi nance, which is transforming the bottom of the pyramid by fi nancing tiny businesses with very small loans, one entrepreneur at a time. Microfi nance, pioneered in Bangladesh by the Gra- meen Bank, has become a well-established mechanism for funding innovation at the very bottom of the pyramid. Microfi nance lenders and borrowers track the use of these funds and their repayment via mobile technology. The Grameen Foundation now has a footprint in 36 nations.

Transportation

The Nano automobile is probably one of the best and most well-known examples of emerging-market infl uence in innovation. The Nano, which is designed and produced by Indian fi rm Tata Motors, was priced at a lowly $2,500 when it was introduced. Little more than an enlarged mo- torbike with a fi xed weather shield, the Nano was just what the Indian market needed—a car designed to fi t eas- ily on the streets of the most crowded cities, with a modu- lar design that allows it to be shipped in kits and assembled on site by third parties if needed. The Nano is a complete departure from the Western automobile. But it’s a perfect fi t for the Indian reality, made possible by several key fac- tors: the rise of a growing middle class in India that wants and can now afford transportation solutions; the large amount of time Indian workers spend commuting and the premium on parking, which is very limited; and Indian consumers’ lower expectations with regard to standard features compared to their Western counterparts. The lower maximum speed allowed on Indian roads and an absence of government mandates regarding safety fea- tures also enabled the barebones Tata design.

Energy and Natural Resources

Emerging markets are often rich in natural resources, and their ability to extract, refi ne, and produce products from these resources is gaining in both effi ciency and effec- tiveness. Brazil, for instance, is supplementing its ample oil supplies with a world-class biofuels industry based on sugarcane and ethanol production. But to really take advantage of innovations related to natural resources

requires both the presence of the natural resources and the entrepreneurial spirit and insight to translate those re- sources into compelling, innovative solutions. In coming years, Russia, a major miner of platinum group metals (PGM), may have that golden combination. The country is poised to become an up-and-coming innovative force as new agreements between Russia and Finland will marry resources and entrepreneurial know-how. Five years from now, we expect that this combined force may well propel Russia to hotbed status.

Water, the new oil, is becoming a critical resource all over the world, but especially in emerging markets; both production of potable water and water conservation are driving innovation. The United Arab Emirates (UAE) is the world’s highest per capita consumer of water. In ad- dition to its existing excellence in desalinization, the UAE is expected to achieve innovation in areas related to water conservation and packaging as it seeks to re- duce its consumption by half in the next fi ve years. Is- rael, another leader in desalinization, has developed new fi ltering systems and pioneered effi cient within-plant systems to optimize individual units and reduce the plants’ energy footprint. Additional innovations are ex- pected in the coming years through the use of nontradi- tional energy sources, primarily solar.

Healthcare

Perhaps surprisingly to some, given their lack of infra- structure, some emerging markets are leading innova- tors in healthcare. But emerging-market healthcare innovations are driven by the same factors that drive innovation in other sectors: the need for basic, good- enough solutions to improve the lives of bottom-of-the- pyramid consumers. GE has become a leader in this area, actively innovating in and for emerging markets. GE de- veloped an inexpensive, portable EKG machine, the MAC 400, for the Indian market and has produced ultra- sound machines for the China market. GE’s philosophy is to reduce the products to their essence, emphasizing the features that are core to the device. All other features, such as printers, can be modularized and less expensive solutions can be provided. The philosophy has brought unanticipated dividends in Western markets, where healthcare costs have risen to staggering levels. In a sec- tor that once could take up every expensive innovation introduced into the market, cost-conscious consumers, medical administrators, insurers, and even the govern- ment are seeking less-expensive solutions. GE has been able to leverage its developments in medical devices for emerging markets to grow sales in Western markets.

Emerging-market innovators in countries such as Ghana, South Africa, and Mexico also are leveraging the ubi- quity of cell phones and the power of mobile technology to improve access to healthcare. For example, Mexico’s Medicall uses a subscription model to offer over 1

Research • Technology Management26

million people access to professional healthcare advice for a fi xed fee of $5 per month, far below the cost of a physician’s offi ce visit. And short message service (SMS) technology is being used in Mali to provide more accurate malnutrition diagnoses; healthcare profession- als predict the likelihood of malnutrition based on SMS reporting of body weight and other physical factors. SMS is also being used to reduce the risk of counter- feit medications through Ghana’s mPedigree program, which allows a patient receiving drugs from a pharma- cist to text a code on the medication label to a central- ized clearinghouse for authentication.

Emerging markets are also becoming healthcare pro- viders for Western patients in search of good care at a lower price, feeding a relatively new market in medical tourism. India, with the emphasis on understanding ac- tivities and reducing them to repeatable processes that served it so well in business-process outsourcing, is emerging as a leader in this fi eld. Devi Shetty an Indian heart surgeon, has pioneered the use of mass-production techniques applied to surgical procedures. At their Ban- galore facility, the 1,000-bed Narayana Hrudayalaya Hospital, Shetti and his team of cardiologists perform over 600 operations per week. This brings the cost down to almost $2,000 per open-heart procedure while main- taining the same quality standards and success rates of a world-class U.S. hospital—where similar operations cost more than ten times that. Thailand, another popular medical tourist destination in Asia, serves tourists from more than 190 countries worldwide.

What Drives Emerging Markets?

“Innovation and new product development do not work the same way in emerging markets as in the U.S. or other developed markets — the needs of the consumer and professional customer are different. For example, in the U.S. we see many companies focused on mobile health or web-based applications. Yet in India, the ma- jority of people don’ t have laptops or smart phones. So, simpler technologies are required. In addition, in rural markets just getting access to basic care is a bigger is- sue than in urban areas. So, the types of products that can help are different than those typically used in a hos- pital or physician’ s offi ce.”

Kevin Ruffe, Vice President IT Innovation, Johnson & Johnson

So what makes emerging markets so compelling as a source of new ideas and innovations? There are actually two factors driving the migration of ideas and innova- tions from Rest to West. On the one hand, the emerging markets have a very fast-growing consumer base. More- over, these consumers are earning more and the burgeon- ing middle class—particularly in India and China—has

increased spending power and a pent-up demand for con- sumer goods. And even at the bottom of the economic pyramid, spending is rising ( Economist 2010 ).

On the other hand, both consumers and companies in these emerging markets are familiar with doing more with less, a concept Indians embrace as jugaad . This means that companies compete based not only on prod- uct or service features, but also on the value of these features for consumers. Value, in emerging markets, means reducing products and services to their essence. Products have to meet the needs of the consumer and work reliably in challenging environments.

Fred Davis, managing director of Invetech Australia, a product design and development company, describes the challenges of designing for the various segments of the economic pyramid in emerging markets. “At the top are a small number of wealthy and sophisticated users,” he says. “Closer to the bottom are people earning less than $2 a day, many in remote rural locations struggling with basic needs such as clean water and adequate sanitation.” His company’s experience working with the bottom of the pyramid suggests that (1) minimum price dominates, (2) durability and reliability in adverse con- ditions are very important, and (3) repairability must match local skills. Considering these three aspects, the feature sets that might be compelling to Western consum- ers have completely different prioritization in emerging markets. For example, the Western consumer preference for replacing products when they break is completely foreign to many emerging-market consumers, who place a high priority on the longevity of the product and its repairability. In this context, a design that uses widely available parts or a modular construction that makes re- placing components easy is far preferable to one with a full range of features.

“If you are selecting between alternative product concepts and design solutions for people further down the pyramid, then minimum price dominates. Low-cost adequate is better than higher-cost supe- rior . Think lean, really lean.”

Fred Davis, Managing Director, Invetech Australia

Finding the Path

Designing and innovating products and services for emerging markets requires a different development path than Western methods usually call for. In the West, we are often tempted to design for higher-end consumers who are price insensitive and then, through increasingly larger volumes, gradually lower the price to appeal to more cost-sensitive segments of the market. Instead, companies wishing to compete in emerging markets need to consider two distinct paths to market—one local and one global. This combination specifi cally acknowledges

July—August 2011 27

the extreme market-pull infl uences of the local emerging markets. At the early stages, a funnel model still applies in which market and technology forces act in concert to infl uence the development of proven product or service concepts ( Figure 2 ). Here we mean “proven” in the sense that these concepts could be reduced to practice and oth- erwise manufactured and distributed. At the point at which the proven concept is evident, the path to market may follow one of two paths. On the one hand, when the product or service offers technology developments that exceed currently available solutions (creating a techno- economic affordance), innovations can be launched di- rectly to the markets where these products and services are sold—which may be global. Some high-technology examples exist in which emerging-market fi rms are pro- ducing feature-rich products for the global market through technology and process enhancements. This techno-economic affordance results in highly valued products and services that are not defi ned by local condi- tions. A good example of this is the medical tourism that we discussed earlier.

The second path to market is locally focused and often defi ned by socioeconomic necessity. Here, products and services are reduced to their essence, resulting in lean- featured offerings that capture essential functionality. Often, however, these local innovations are so success- fully conceived that they appeal to other geographic re- gions. Both of GE’s emerging-market focused medical imaging products—the Indian-market electrocardio- gram and the China-focused ultrasound machine—are fi nding markets in rural areas of the West, where reduc- ing cost per patient is a very strong motivator for buying decisions and where portability is critical. The differ- ence between this model and existing models for West- ern innovators is the focus and starting point. The more common Western approach is to consider high-end con- sumer needs and then slowly introduce lower-cost ver- sions of the product over time, as market share and the technology develop. While this approach does have

value, in emerging markets, it completely misses the larger opportunity offered by lean-featured products for the large volume of consumers at the bottom of the pyra- mid. Finding what works for these consumers offers the chance to springboard successful local innovations to the larger global stage.

Tapping the Talent Pool in Emerging Markets

“ One of the biggest challenges we have in innovation is fi nding the right people that can bring a new and fresh perspective to solving our customer problems. One of the most effective ways in addressing this is to reach into our global organization to people outside of our core markets. They often bring the kind of in- sight that, quite frankly, would never have occurred from people so close to the problem and from the same culture. It’s not just the economics of low cost labor arbitrage; it’s about accessing that talent and creativity.”

R. Lemuel Lasher, President, Global Business Solutions Group

Chief Innovation Offi cer, CSC Corporation

Emerging markets have more to offer Western fi rms than a new approach to innovation and a massive consumer base. They also possess a growing talent pool that is in tune with the realities of their locale, a rich resource that companies from GE to IBM to Boeing are tapping to their competi- tive advantage. GE has one of its largest R&D facilities in Bangalore and Boeing’ s Bill Lyons, general manager of research and technology, Australia, notes that tapping technology leadership worldwide is a differentiator in the marketplace. “Even with one of the most diverse, edu- cated, and talented workforces anywhere,” he told us, “we know we can’t corner the market on innovative ideas or technical skills. Working with technology leaders through- out the world helps Boeing assimilate new ideas and in- novative processes into our products and program.”

Figure 2 .— Innovation Paths for Emerging Markets

Research • Technology Management28

And real success will demand something beyond simply working with technology leaders; it will require a com- mitted local presence. Honeywell’s Paul McLaughlin, director of HPS architecture, has been spending the last couple of years managing global work that links their Philadelphia, Pennsylvania, offi ces with engineers and designers in India and China. After extensive travel and hands-on product development management, his obser- vations suggest that regardless of the specifi c industry, multinational business success will come not only with the participation of global team members but with a local presence. “It is Honeywell’s belief that the most effective method to achieve sustainable growth in a spe- cifi c region or country is to have a core infrastructure in that region or country. This not only includes the requi- site sales, marketing, and after-sales support, but in ad- dition, engineers and innovators that can defi ne and develop fi t-for-purpose products and solutions tailored for the local market, a supply chain for sourcing locally provided materials, local manufacturing, local distribu- tion, and fi eld service engineering.”

Conclusion

Ultimately, regardless of their location, successful com- panies of the future will

• balance the feature-rich expectations of the traditional Western consumer with the “good-enough” approach emerging-market consumers expect;

• leverage the growing pool of talent in emerging mar- kets in situ to tap into both the talent and their knowl- edge of local needs and practices; and

• morph traditional management processes to incorpo- rate emerging-market practices that emphasize per- sonal relationships, rapidly reconfi gurable supply networks, and unorthodox delivery methods.

Madhavan Satagopan, chief technologist, manufacturing and technology, for Wipro sums it up best. “While there is a lot of talk of reverse innovation, the key to innovating in and for emerging markets is to address the market and consumption rhythm and patterns, to understand the im- portance of scale, and to cater to engrained preferences where utility is valued above cutting-edge effi ciency.” The innovation landscape is shifting. Companies seeking sustained growth through innovation need to rethink their strategies for engaging in and with emerging markets.

Special thanks to those who provided background on this piece and agreed to be quoted on their companies’ beliefs and experiences with innovating in and for emerging markets.

References

Arndt , M. , and Einhorn , B. 2010 . The 50 most innovative companies . Bloomberg BusinessWeek , April 15. http://www.businessweek. com/magazine/content/10_17/b4175034779697.htm (accessed May 3, 2010) .

Immelt , J. , Govindarajan , V. , and Trimble , C. 2009 . How GE is disrupting itself . Harvard Business Review , October. http://hbr. org/2009/10/how-ge-is-disrupting-itself/ar/1 (accessed May 3, 2011) .

The Economist . 2010 . The world turned upside down: A special report on innovation in emerging markets . Special issue , April 15. http://www.economist.com/node/15879369?story_id=15879369 (accessed May 3, 2011) .

Prahalad , C. K. 2004 . Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profi ts . Upper Saddle River, NJ : Wharton School Publishing .

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