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    Harvard Business Review on Thriving in Emerging Markets
    Harvard Business Review on Thriving in Emerging Markets
    Harvard Business Review on Thriving in Emerging Markets
    Ebook238 pages4 hours

    Harvard Business Review on Thriving in Emerging Markets

    By Harvard Business Review

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    About this ebook

    Beat local companies at their game.

    If you need the best practices and ideas for gaining market share in developing economies--but don't have time to find them--this book is for you. Here are 10 inspiring and useful perspectives, all in one place.

    This collection of HBR articles will help you:

    - Manage risk in unstable environments

    - Ward off political threats to your business

    - Customize your business model for emerging markets

    - Tailor your strategy to capitalize on countries' strengths

    - Gain ground on emerging giants

    - Compete in China's new high-tech market

    - Win the war for talent in developing economies

    - Serve the bottom of the pyramid profitably
    LanguageEnglish
    PublisherHarvard Business Review Press
    Release dateMay 10, 2011
    ISBN9781422172155
    Harvard Business Review on Thriving in Emerging Markets
    Author

    Harvard Business Review

    Harvard Business Review es sin lugar a dudas la referencia más influyente en el sector editorial en temas de gestión y desarrollo de personas y de organizaciones. En sus publicaciones participan investigadores de reconocimiento y prestigio internacional, lo que hace que su catálogo incluya una gran cantidad de obras que se han convertido en best-sellers traducidos a múltiples idiomas.

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      Harvard Business Review on Thriving in Emerging Markets - Harvard Business Review

      Bremmer

      New Business Models In Emerging Markets

      Targeting the middle market can be lucrative—but companies won’t be able to deliver unless they start from scratch

      by Matthew J. Eyring, Mark W. Johnson, and Hari Nair

      RIGHT NOW MORE THAN 20,000 multinationals are operating in emerging economies. According to the Economist, Western multinationals expect to find 70% of their future growth there—40% of it in China and India alone. But if the opportunity is huge, so are the obstacles to seizing it. On its 2010 Ease of Doing Business Index, the World Bank ranked China 89th, Brazil 129th, and India 133rd out of 183 countries. Summarizing the bank’s conclusions, the Economist wrote, The only way that companies can prosper in these markets is to cut costs relentlessly and accept profit margins close to zero.

      Yes, the challenges are significant. But we couldn’t disagree more with that opinion. We have seen the opportunities of the future on a street corner in Bangalore, in a small city in central India, in a village in Kenya—and they don’t require companies to forgo profits. On the surface, nothing could be more prosaic: a laundry, a compact fridge, a money-transfer service. But look closely at the businesses behind these offerings and you will find the frontiers of business model innovation. These novel ventures reveal a way to help companies escape stagnant demand at home, create new and profitable revenue streams, and find competitive advantage.

      That may sound overly optimistic, given the difficulty Western companies have had entering emerging markets to date. But we believe they’ve struggled not because they can’t create viable offerings but because they get their business models wrong. Many multinationals simply import their domestic models into emerging markets. They may tinker at the edges, lowering prices—perhaps by selling smaller sizes or by using lower-cost labor, materials, or other resources. Sometimes they even design and manufacture their products locally and hire local country managers. But their fundamental profit formulas and operating models remain unchanged, consigning these companies to selling largely in the highest income tiers, which in most emerging markets aren’t big enough to generate sufficient returns.

      What’s often missing from even the savviest of these efforts is a systematic process for reconceiving the business model. For more than a decade, through research and our work in both mature and emerging markets, we have been developing our business model innovation and implementation process (see Reinventing Your Business Model, HBR December 2008, and Beating the Odds When You Launch a New Venture, HBR May 2010). At its most basic level, the process consists of three steps: Identify an important unmet job a target customer needs done; blueprint a model that can accomplish that job profitably for a price the customer is willing to pay; and carefully implement and evolve the model by testing essential assumptions and adjusting as you learn.

      Idea in Brief

      Many Western multinationals expect to find most of their future growth in emerging economies. But they have frequently struggled to exploit the opportunity, relentlessly cutting costs and accepting profit margins close to zero. The problem, say the authors, who are all with the innovation consultancy Innosight, is not that these companies can’t create viable offerings but that simply transplanting their domestic business models to the new markets won’t work. They must devise fundamentally new models—by identifying an important unmet job consumers need to do; performing that job profitably at a price the customer will pay; and carefully implementing and evolving the model by constantly testing assumptions and making adjustments. Drawing on their experience investing in, incubating, and consulting for companies that have created 20 new business models in developing markets, the authors describe the vast potential demand represented by the middle market in emerging economies—the millions of people who have the desire and wherewithal to pay for goods and services, from refrigeration to clothes washing to money transfers, that will help them do the jobs no current offering adequately can.

      Start in the Middle

      Established companies entering emerging markets should take a page from the strategy of start-ups, for which all markets are new: Instead of looking for additional outlets for existing offerings, they should identify unmet needs—the jobs to be done in our terminology—that can be fulfilled at a profit. Emerging markets teem with such jobs. Even the basic needs of their large populations may not yet have been met. In fact, the challenge lies less in finding jobs than in settling on the ones most appropriate for your company to tackle.

      Many companies have already been lured by the promise of profits from selling low-end products and services in high volume to the very poor in emerging markets. And high-end products and services are widely available in these markets for the very few who can afford them: You can buy a Mercedes or a washing machine, or stay at a nice hotel, almost anywhere in the world. Our experience suggests a far more promising place to begin: between these two extremes, in the vast middle market. Consumers there are defined not so much by any particular income band as by a common circumstance: Their needs are being met very poorly by existing low-end solutions, because they cannot afford even the cheapest of the high-end alternatives. Companies that devise new business models and offerings to better meet those consumers’ needs affordably will discover enormous opportunities for growth.

      Take, for example, the Indian consumer durables company Godrej & Boyce. Founded in 1897 to sell locks, Godrej is today a diversified manufacturer of everything from safes to hair dye to refrigerators and washing machines. In workshops we conducted with key managers in the appliances division, refrigerators emerged as a high-potential area: Because of the cost both to buy and to operate them, traditional compressor-driven refrigerators had penetrated only 18% of the market.

      The first thing these managers wanted to know, naturally enough, was Could Godrej provide a cheaper, stripped-down version of our higher-end refrigerator? We asked them to consider instead the key needs of those with poor or no refrigeration. Did they know what those consumers really wanted? In a word, no. A small team was assigned to conduct detailed observations, open-ended interviews, and video ethnography to illuminate the job to be done for that untapped market.

      The semiurban and rural people the team observed typically earned 5,000 to 8,000 rupees (about $125 to $200) a month, lived in single-room dwellings with four or five family members, and changed residences frequently. Unable to afford conventional refrigerators in their own homes, they were making do with communal, usually secondhand ones.

      The shared fridges weren’t meeting these people’s needs very well, but not for the reasons one might expect. The observers found that they almost invariably contained only a few items. Their users tended to shop daily and buy small quantities of vegetables and milk. Electricity was unreliable, putting even the little food they did want to preserve at risk. What’s more, although they wanted to cool their drinking water, making ice wasn’t a job for which these people would hire a refrigerator.

      The team concluded that what this group needed to do was to stretch one meal into two by preserving leftovers and to keep drinks cooler than room temperature—a job markedly different from the one higher-end refrigerators do, which is to keep a large supply of perishables on hand, cold or frozen. Clearly, there was no reason to spend a month’s salary on a conventional refrigerator and pay steep electricity prices to get the simpler job done. And just as clearly, the solution wasn’t a cheaper conventional fridge. Here was an opportunity to create a fundamentally new product for the underserved middle market.

      Targeting this market has two great advantages. First, it’s easier to upgrade the solution to a job people are already trying to do than to create sufficient customer demand where none yet exists—as would-be vendors of purified water and other seemingly essential offerings have found to their dismay. Second, it’s easier to reach people who are already spending money to get their jobs done. That’s essentially what Ratan Tata did with the $2,500 Nano. He didn’t ask, How can I get people who’ve never bought any form of transportation to buy a car? He asked, How can I produce a better alternative for people who hire motor scooters to transport their families? The goal is to redirect existing demand by offering a clear path from an unsatisfactory solution to a better one.

      Offer Unique Benefits for Less

      To redirect demand, your customer value proposition (CVP) must solve a problem more effectively, simply, accessibly, or affordably than the alternatives. In developing markets, we have found, the components of a CVP that matter most are affordability and access. Let’s look at each in turn.

      Affordability

      Western companies know that they need to come up with lower-cost offerings in emerging markets, but they too often limit themselves to providing less for less. In 2001, for instance, a 300 ml bottle of Coke cost 10 rupees—a day’s wages, on average, and a luxury the company estimated only 4% of the population could afford. To reach the other 96%, it introduced a 200 ml bottle and cut the price in half, shaving margins to make Coke more competitive with common alternatives such as lemonade and tea.

      In our experience, though, a far more robust approach to creating an affordable emerging market offering is to trade off expensive features and functions that people don’t need for less-expensive ones they do need. To get that right requires a clear understanding of the context in which the offering will be sold—which calls for further fieldwork, preferably of a collaborative rather than a merely observational kind. This is good product-development advice in any market. In fact, it applies to indigenous players operating close to home, like Godrej, as well as to Western companies confronting the unfamiliar.

      Godrej’s team designed and built a prototype cooling unit from the ground up and tested it in the field with consumers. Then, in February 2008, more than 600 women in Osmanabad, a city in India’s Marathwada region, gathered to participate in a cocreation event. Working with the original prototypes and several others that had followed, they collaborated with Godrej on every aspect of the product’s design. They helped plan the interior arrangements, made suggestions for the lid, and provided insights on color (eventually settling on candy red).

      The result was the ChotuKool (little cool), a top-opening unit that, at 1.5 x 2 feet and with a capacity of 43 liters, has enough room for the few items users want to keep fresh for a day or two. With only 20 (rather than the usual 200) parts, it has no compressor, cooling tubes, or refrigerant. Instead it uses a chip that cools when a current is applied and a fan like those that prevent desktop computers from overheating. Its top-opening design keeps most of the cold air inside when the lid is opened. It uses less than half the energy of a conventional refrigerator and can run on a battery during the power outages that are common in rural villages. At just 7.8 kilograms, it’s highly portable, and at $69, it costs half what the most basic refrigerator does. Because it’s the right size for the job, easier to move, and more reliable in a power outage than a conventional fridge, it surpasses the higher-end offering on the performance measures that matter most to these consumers.

      Access

      It’s not surprising that portability is important to potential ChotuKool customers, given that they move frequently. And because populations in emerging markets tend to be dispersed, obtaining goods and services can be more difficult than in the West. This creates opportunities for companies that solve challenges of access.

      In Kenya, for example, banking services are scarce and transferring money is complicated and expensive. Without access to traditional services, many people must use unsafe alternatives such as hawala—an unregulated network of brokers operating on the honor system—or transport cash by bus. The UK-based Vodafone solved this problem by developing a secure, low-cost mobile money-transfer service. Called M-PESA (M for mobile and PESA from the Swahili word for money), the system is operated by Safaricom, Kenya’s leading mobile network.

      Customers register free with an authorized M-PESA agent—typically a Safaricom dealer, but sometimes a gas station, food market, or other local shop. Once registered, they can deposit or withdraw cash at the agent or transfer money electronically to any mobile phone user, even if the recipient is not a Safaricom subscriber. They can also buy Safaricom airtime for themselves or other subscribers. Customers pay a flat fee of about US 40 cents for person-to-person transfers, 33 cents for withdrawals under $33, and 1.3 cents for balance inquiries. Vodafone (which owns a significant stake in Safaricom) manages individual customer accounts on its server, and Safaricom deposits its customers’ balances in pooled accounts in two regulated banks, so their full value is backed by highly liquid assets.

      Since its launch, in March 2007, the service has acquired more than 9 million customers—40% of Kenya’s adult population. As of June 2010, the Economist reported, M-PESA customers could conduct transactions at some 17,900 retail outlets, more than half of them in rural areas. That figure dwarfs the total number of bank branches, post offices, and Post Banks—which is only about 840

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