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Affordable value innovation

19 April 2017

The article at a glance

For multinationals, the real prize in developing countries is in ‘good enough’ rather than high-end products, which can be very profitable, says …

For multinationals, the real prize in developing countries is in ‘good enough’ rather than high-end products, which can be very profitable, says Professor Jaideep Prabhu of Cambridge Judge Business School.

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Professor Jaideep Prabhu
Professor Jaideep Prabhu

From food to electronics to pharmaceuticals, major companies and brands seek market penetration in the world’s emerging economies, where there are billions of potential customers.

However, for as long as multinational brands continue to focus their efforts at the top end of the market, says Professor Jaideep Prabhu of Cambridge Judge Business School, they will continue to miss the real emerging market opportunity: the middle market. They can win over millions of customers in these developing economies if they just work harder to appreciate what consumers in these nations actually need, rather than what you just want to sell them. Or in other words, they need to focus on affordable value innovation.

“Most organisations understand that the growth global market is in emerging economies – India, China, Africa,” says Prabhu. “By 2025 it’s estimated consumption in these economies will hit US$30 trillion – half the total global consumption. That’s an enormous untapped base of potential customers. But many of them are outside the formal economy – they live in slums and have no access to banking or clean energy. Most large multinationals simply aren’t geared up to providing service in these markets. But it can be done and has been done, and very successfully.”

The first step, says Prabhu, is to understand that this is a consumer base shaped by need and practicality. “These customers won’t buy high-end, but products that are ‘good-enough’ – simple, low-cost, reliable – are potentially hugely profitable. These markets are very often dominated by trusted local firms. The traditional export model for premium products simply does not work in this price-sensitive arena.”

Prabhu and his research team studied the experience of nearly 50 companies in Forbes‘ list of 500 top multinationals as they attempted to launch a total of 103 new product development projects in emerging markets. Those projects include chemicals and pharmaceuticals (22 per cent, communication and computer equipment, and food and drinks (each 20 per cent), financial institutions (14 per cent), electronics (12 per cent), and industrial supply and components (12 per cent).

The results showed three factors drove their capability to succeed: bricolage, standardisation and the extent they were embedded locally.

“Bricolage creatively combines innovation with existing resources to come up with solutions,” he says. “Vodafone did this brilliantly. Thousands of people in rural Kenya had very cheap mobile phones but living where they did had no access to banks. Vodafone developed software to create M-Pesa, a branchless banking system which allows people to send money to each other via their mobiles.”

Five years after the system’s launch, 17 million M-Pesa accounts had been registered in Kenya. Says Prabhu: “A family could, say, have a son working in Nairobi who could send money to his mother in a tiny rural village, and she could cash it in at her local corner shop. It revolutionised local economies.” It also brought in plenty of pesa (the Swahili word for money) for Vodafone – M-Pesa has since launched in Tanzania, South Africa, Afghanistan, India, Romania and Albania.

Another telecoms giant demonstrates the power of embedding in the local market, says Prabhu, who is Professor of Marketing and Director of the School’s Centre for India & Global Business. “Our study found multinationals that parachuted in to emerging markets were far less successful than those who established themselves there. Nokia’s home market in Finland is tiny so it went after the Indian market. And it completely dominated it, because it went ‘full Indian’, basing its R&D, manufacturing, everything within the local community.

“This enabled it to develop a device that was so affordable, and included little touches so relevant to the local environment, such as special dust covers, that it became known as the ‘handset of the slums’.” Indeed, the device, the simple Nokia 1100, became and remains the world’s biggest selling mobile, having shifted 500 million units – more than all incarnations of Apple’s iPhone combined. A relaunch is now planned for another classic Nokia phone model of yesteryear, the 3310.

“Local embeddedness also compensates for any lack of formal distribution channels needed to successfully launch a product in emerging markets,” finds the research. It also enables multinationals to strike non-traditional deals with alternative partners such as community-based organisations, health services, NGOs and even community members themselves – all of whom have the much-needed local knowledge and networks.

“General Electric is a great example of this,” says Prabhu. “It recognised the local need and worked with local communities to create an ECG (electrocardiogram) machine for doctors that was both affordable and portable. Siemens’ emerging markets strategy includes a range of products called SMART – simple, maintenance-friendly, affordable, reliable and timely-to-market – and has worked in communities to develop a range of medical devices including a foetal heart monitor that uses highly affordable and easy-to-maintain microphone technology.”

However the other driver, standardisation, impacts negatively on companies’ success rates in emerging economies, found Prabhu and his fellow researchers Ernst Holger, Nari Kahle, Anna Dubiel and Mohan Subramaniam. “Standardisation enables you to cut cost, to scale up efficiently and economically, but if your product doesn’t take into account the needs of the local market, you’ll fail,” says Prabhu.

“Apple didn’t bother with emerging markets but as Samsung and lower-cost products from Chinese and Korean firms exploited the gap, they found themselves offering cheaper, second-hand phones to take them on. Even McDonald’s, the poster child of standardisation, has realised it has to adapt its product to fit in with local need rather than impose its global standard on it.”

The burger chain’s most recent variation, the masala dosa burger, was greeted with a mix of amusement, anger and scepticism by locals when it launched in southern India in January. But the principle is broadly sound, says Prabhu. “Success in these markets depends on just how much the company is willing to adapt – whether it’s price, product, how it is marketed or all of the above.

“It remains to be seen how locals in India react to the dosa burger. Many people in developing economies are extremely hard-nosed consumers – they don’t have much money and they won’t waste it on things they don’t perceive as of value. But if you meet a need in these markets, and the people trust you as a reliable brand offering a price that’s fair and affordable, there’s enormous potential for you to grow your business there.”