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Re-Innovating Innovation: The Case for Emerging Markets

Date post:30-Jun-2015
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Market players that have learnt to compete on volume despite low margins in a tough environment have also developed a lethal capability to explode premium market barriers in mature markets. Western incumbents will only be able to win this race as long as they can compete and excel not only at home, but more importantly, in the rough-and-tumble of emerging markets. Know more: http://www.infosys.com/building-tomorrows-enterprise/emerging-economies/Pages/index.aspx
  • 1. Insights Re-Innovating Innovation: The Case for Emerging Markets- Dr. Martin LockstromIts often being said that innovation is the mother of competitiveness. Thats true, but only to a limited extent. The fact isthat innovation is only a means, and not an end. So whats the end then? Adaptation. Only those companies, which adaptto a changing environment will withstand the test of time. From a Western perspective, the notion of innovation as thekey source of competitive advantage held true for most of the 20th century, as companies in developed markets couldrely on global business models and reap benefits from cost differentials and arbitrage opportunities across geographicregions. However, as globalization keeps its momentum, the traditional paradigm of inventing in developed markets andproducing in developing markets is becoming increasingly obsolete. www.infosys.com

2. A World in FluxGlobalization is the key driver behind the need for a new innovationparadigm. The reasons are two-fold. First, globalization is a self-nurturing process, which requires companies to globalize, which inturn drives globalization further. Historically, companies started downthis path by sourcing from low-cost countries, followed by localizingproduction, and so forth. This was a model of global production, inwhich products were mainly developed by Westerners, in Westerncountries, for Western consumers if products were in demand inother markets, it was a bonus. In todays marketplace, however, thingslook radically different.Developing economies are generally growing very fast, often at twicethe rate of developed economies. As a result, they are increasing theirshare of world economic output. For instance, over the last decade,China has overtaken both Germany and Japan, to become the secondlargest economy in the world, and is estimated to overtake the U.S inless than a couple of decades if current forecasts hold true. India is alsocatching up, albeit at a slower rate, and is today among the top tenglobal economies. Its the same story for other emerging economiesthroughout South and South-East Asia, as well as Latin America andparts of Africa and the Middle East. Meanwhile, in the wake of thefinancial crisis, developed economies in Europe and North America arestruggling to stay competitive and revive slumping consumer demand.So in order to adapt to this brave new world, it is imperative thatcompanies reap benefits not only on the supply side by securingcritical factor inputs such as raw materials, but more importantly,adapt to the needs of local consumers in emerging markets, to offsetthe declining demand in mature ones. Put simply, in order to remaincompetitive in the future, companies are required to re-innovateinnovation. On an ongoing basis.Learning from the LocalsIts often been claimed by pundits that inventiveness andinnovativeness is virtually non-existent in emerging markets, andparticularly in China. However, this cannot be further from the truth.The problem here is that were talking semantics what is perceivedas innovativeness in emerging markets is not necessarily perceivedso in developed ones, and vice versa. This is a dangerous fallacy, asit prevents companies from thinking about innovation in new andnecessary ways that are required to succeed in novel markets. Whereaspeople in the West tend to think about innovation as a highly linear,structured, long-term process with the aim of creating radical ordisruptive innovations, innovation in emerging markets is often theopposite unstructured, chaotic and opportunistic.Why is this the case? For starters, besides cultural aspects, theinnovation approach in emerging markets is simply a result ofenvironmental factors. First, the economies are growing fast, andrising middle-class consumers have not yet developed the same levelof brand loyalty that we see in mature markets. Therefore, agility isessential in order to exploit opportunities, which could be perceivedas short-term opportunistic behavior by those from the Western world.2 | Infosys 3. Second, the purchasing power is often orders of magnitude lower in Impact on Western Companiesemerging markets whereas the savings rate is higher. This limits theability of local consumers to absorb the cost of breakthrough R&D. The traditional Western approach to innovation has been basedAs a consequence, innovation in emerging markets is often more on increasing product sophistication with functions and features;focused on reducing rather increasing product/service sophistication increasing product customization; and shortening product lifecycles, a concept usually referred to as frugal innovation. Whereas Westernall with the objective of increasing margins, even at the cost ofcompanies often try to serve niche premium market segments withvolumes. This has set off a vicious cycle of organizational complexity,limited volumes and high profit margins, companies in emerging rising overheads and in turn the need to recover that with a highermarkets are doing the opposite. A good example here is Bharti Airtel,price premium.which redesigned its entire value chain in order to be able to serve This approach has worked very well in B2B businesses where qualitythe mass market with rock-bottom prices. Another excellent example and performance requirements are high, and reasonably well withis Aravind Eye Care Hospital, which so far has provided inexpensiveluxury consumer goods and certain proximity-dependent servicesor even free eye surgeries to more than 32 million patients during such as upscale hairdressing or fine dining. For most other industriesits 36 years of existence. Both cases are manifestations of jugaad however, premium prices are harder to command and makes them(Hindi for improvised arrangement or work-around), where novel vulnerable to emerging market competitors. The reason for this, asapproaches have to be deployed in order to overcome institutionalexplained earlier, is that emerging market players are often adeptvoids and a lack of resources. at reducing complexity, producing in large volumes, and keepingThird, consumers in emerging markets often have special needs, overhead costs low enough to survive on razor-thin margins. Onceand hence any product/service features that are added are usuallythese competitors get access to crucial technology, they penetrateidiosyncratic, often low-cost, and almost always highly impactful. Anpremium markets with lower prices to turn them into volume markets.excellent instance of such innovation is the Chinese phenomenon of There are numerous examples of these - particularly from China -Shanzhai (Chinese for mountain stronghold), which is a term used tosuch as battery manufacturer BYD (also a carmaker), and microwavedenote inexpensive, often inferior-quality imitations or knock-offs of oven manufacturer Galanz who now command impressive marketWestern products with a local twist nevertheless the innovativenessshares. These companies are among those who won big deals fromand speed-to-market is truly impressive. Examples include mini iPhoneforeign customers; received training and technology transfer throughknock-offs with two SIM card slots or cell phones resembling cigarette supplier development activities; and by staying cheap and flexiblecases (sometimes even combining the two) among many others.by using inexpensive labor instead of automation, ultimately turned into global juggernauts. Infosys | 3 4. New Strategic Imperative for Innovation Reaping Benefits from Innovation HubsSo, two things are clear: First, companies can no longer rely on pure It is clear that these voids cannot be overcome from a remote overseasglobal innovation, developed in one place and sold in another.location; in virtually all cases, this means having local teams withSecond, companies that rely heavily on generating revenues from sufficient on-the-ground resources who can make necessary changespremium markets are inherently at risk. The following sectionsto products, services and processes, but more importantly, build solidelaborate three key drivers of innovation advantage.relationships with local institutions in order to get access to timelyinformation and fair treatment. Companies like GE for instance, haveBuilding Growth Momentumset up global R&D centers in key locations across the globe (e.g.Bangalore and Shanghai) in order to tap into the local talent base.As mentioned earlier, the organization governing innovation inemerging markets needs to be reshaped in order to be effective. ThisBy doing so, companies are able to pursue what is commonly referredis due to the fact that the environment in emerging markets, with to as reverse innovation, wherein products are developed and testedits institutional voids, is often radically different compared to the in emerging markets, before being launched elsewhere in the world.West. Overcoming these is pivotal for getting a market foothold and Because they have to counter institutional voids, they are forced togenerating growth; this is also where local players have competitiverethink everything from products to processes to even businessadvantage. Hence merely replicating existing innovation processes models, which actually opens up new market opportunities.in emerging markets is doomed to failure. This is opposite to the traditional innovation paradigm in whichInstitutional voids exist in many shapes. An overview is given below: products are developed in mature markets and launched elsewherein downgraded versions. Political/Legal: Different/weak legal systems, frequently changing regulations, frequent changes in the political landscape, opaque Another important aspect of reverse innovation is the identification political processes, trade barriers, lack of Government support, of new consumer needs, or more properly, consumer needs that werepreviously unknown. Companies have taken different measures to Social/Cultural: Different customs and religions