How to avoid the pitfalls of innovation in emerging markets

Photo Alok Bardiya / Director, Cisco Investments, Cisco India & SAARC / October 26th, 2016

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. What does it take 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.

What worked, what didn’t?
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.

  1. 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.”

  1. 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.

  1. 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.
  1. 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.
  1. 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.

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.

This article was first published by Knowledge@Wharton, under the title “How to avoir the pitfalls of innovation in emerging markets.” Copyright Knowledge@Wharton. All rights reserved. Translated and reprinted by permission.

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