new business models in emerging markets

leemahen53    April 08, 2023    Business , Emerging , Markets , Models    Comment   

Summary. Reprint: R1101E 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 those 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 that 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 with 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 better than any other current offerings.

Multinationals are looking to emerging markets for future growth. But in trying to transplant their domestic business models, they end up slashing margins or confining themselves to the higher-income tiers, which aren’t big enough to generate sufficient returns.

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They are overlooking a vast opportunity: the underserved “middle market” of people who struggle to meet basic needs such as refrigeration and clothes washing with low-end options because high-end alternatives are beyond their reach.

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To exploit this market, companies must identify important unsatisfied needs, devise fundamentally new business models that can meet them profitably and affordably, and carefully implement and evolve the models by continually testing assumptions and adjusting them.

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

Wrote, “The only way that companies can prosper in these markets is to cut costs relentlessly and accept profit margins close to zero.”

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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, ” December 2008, and “Beating the Odds When You Launch a New Venture, ” May 2010). At its most basic level, the process consists of three steps:

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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.

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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.

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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.

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.

Rethinking Emerging Market Strategies

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