Internationalisation of Innovation into Emerging Markets

Brunel Business School, July 15, 2010 Incredible innovations How to succeed with new products in emerging markets
Anna Dubiel & Holger Ernst Chair for Technology and Innovation Management WHU Otto Beisheim School of Management Burgplatz 2, 56179 Vallendar, Germany Tel.: +49 261 6509-244 Fax: +49 261 6509-249 mailto: anna.dubiel@whu.edu URL: www.whu.edu/tim

Excellence in Management Education

Introduction of the WHU Otto Beisheim School of Management, Vallendar

Private, state-recognized universitylevel business school Founded in 1984 Wide range of programmes offered from BSc to PhD and customised executive development programmes Ranked as Germanys # 1 business school Approx. 1.000 students and PhDs Large international network (>150 partner schools) 43 faculty members (full-time equivalent) 10 research centres

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About the research

Extensive review of managerial and academic literature to identify core success factors of innovating for emerging markets Identification and analysis of several real-life new products and services developed for emerging markets by companies from developed markets 26 interviews with experienced managers from 12 German and U.S.American companies In-depth case studies with four companies interviewing up to 10 people per company Trips to India to experience on-site NPD for emerging markets

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Agenda

The rise of emerging markets Innovation challenges in emerging markets How to successfully innovate for emerging markets How to profit from emerging market products at home Summary

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Emerging markets are becoming solvent customers for Western MNCs

Countries
18 16 14 12 10 8 6 4 2 0 -2

Households
India China 3,5 3,0 2,5 2,0 1,5 Germany USA 1,0 0,5 0,0 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Number of people with income over US $3,000 in billion

GDP growth rate in %

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

The demand for consumer and industrial goods will increase substantially in these countries in the next decades making them an attractive market.

Sources: Eurostat, Goldman Sachs 2004 , OECD. Note: GDP = Gross Domestic Product, MNC = multinational corporation..
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Emerging markets usually encompass different market segments with different consumer needs und purchasing power
Premium Market Middle Market (Good- Commodity Market enough-market) (Lower-end Market)
Key/decisive user features only Low-end (basic standard user features to meet basic needs; undifferentiated products) Low (typically 4090% of premium price) Low income Local companies

Market segment Criteria Product functionality

High-end (many state-of-theart features)

Product price Customers Players/Competitors Market share (% revenues) Importance MNCs / MNCs competitive position

High (according to status as international brand) High purchasing power Multinationals

Significantly (ca. 2540%) below premium segment Value-seeking with mid-level incomes Local companies with global ambition and multinationals Ca. 6065%

Ca. 1015%

Ca. 25%

Very high / traditionally strong position

Very high / rather weak position

Low / (very) weak position

Source: Adapted and extended from Gadiesh et al. (2007). Note: MNC = multinational corporation. The segmentation was first developed for consumer markets but it can also be applied to B2B markets. The exemplary market share calculated with regard to the market for televisions in China.
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Agenda

The rise of emerging markets Innovation challenges in emerging markets How to successfully innovate for emerging markets How to profit from emerging market products at home Summary

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There are numerous challenges for MNCs in emerging markets

1. Most MNCs have built their capabilities and products on understanding the preferences, technical requirements, and acceptable pricing for consumers/ businesses in developed markets. 2. Domestic and regional competitors are less familiar (e.g. Lenovo, Haier, Huawei) and aggressively competing in these markets. 3. Selling home-developed products with minor adjustments in emerging markets does not lead to significant and long-term value creation. 4. High cost driven by highly featured products and global overheads. 5. Weak local distribution and service networks.

MNCs must often unlearn much of what has made them successful in developed markets to successfully develop far less expensive products that meet the needs of consumers in EMs.
Sources: Ernst, Dubiel, & Fischer (2009), Dubiel (2010), IBM Global Business Services (2007); Deloitte (2006), Hemerling (2007), workshop with industry experts at the WHU. Note: MNC = multinational corporation, EM = emerging market.
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Agenda

The rise of emerging markets Innovation challenges in emerging markets How to successfully innovate for emerging markets How to profit from emerging market products at home Summary

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How to successfully innovate for emerging markets

1. Change the innovation strategy towards emerging markets 2. Acquire deeper customer/market knowledge 3. Define appropriate price-performance ratio 4. Practice Gandhian engineering 5. Localize R&D 6. Adapt marketing and sales 7. Introduce new business models 8. Find a local partner

Sources: Workshop with industry experts at the WHU, qualitative semi-structured interviews with representatives of German and US-American companies, Dubiel (2010), Deloitte (2006). Note: The list does not claim to encompass all possible success factors.
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Siemens entered a new era by introducing its S.M.A.R.T. innovation strategy

S.M.A.R.T. innovation strategy: Simple Maintenance friendly Affordable Reliable Timely to market products

SMART innovations help to succeed both locally and globally.

Source: Ernst, Dubiel & Fischer (2009).

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How to successfully innovate for emerging markets

1. Change the innovation strategy towards emerging markets 2. Acquire deeper customer/market knowledge 3. Define appropriate price-performance ratio 4. Practice Gandhian engineering 5. Localize R&D 6. Adapt marketing and sales 7. Introduce new business models 8. Find a local partner

Sources: Workshop with industry experts at the WHU, qualitative semi-structured interviews with representatives of German and US-American companies, Dubiel (2010), Deloitte (2006). Note: The list does not claim to encompass all possible success factors.
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Nokia practices customer orientation through extensive ethnographic and user research in emerging markets
Aim: Make low-cost phones for emerging markets Situation: A Finnish engineer trying to design a phone for a illiterate customer on the Indian subcontinent. Solution: Listening to customers in China, India and Nepal Visits of Nokias executives in customers homes in India Experience tropical weather conditions Visits to outskirts of Nairobi
Sources: Business Week 24.4.2006, Business Week 14.5.2007.
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Understanding how illiterate people live in a world full of numbers and letters Mobiles often the most expensive item customers buy

Iconic menu and address book Phones have to be more durable

Moisture resistance, dustproof keypads, special screens more legible in bright sunlight Learned that people form buying clubs Look for new ways of encouraging self-financing

Taking into account foreign market information as early as possible in the NPD process leads to higher overseas NPD performance

Impact of internationalization

International market information integration in the Concept development stage Firm size 0.24* 0.04 n.s. Product development stage 0.34* International NPD performance International R&D expenditures 0.06 n.s.

R= 0.403 Adj. R= 0.390 Q= 0.284

Commercialization stage

0.02 n.s. Industry effects

Automotive: -0.11* Chemicals: 0.13 Electronics: 0.07 n.s. Metal: -0.05 n.s.

Sources: German manufacturing companies, n = 138. Note: p<=0,10; *p<=0,05; **p<=0,01; ***p<=0,001. NPD = new product development .Descriptive statistics: overseas market information is flowing in all three NPD process stages to a similar extent - arithmetic mean of the answers is 4.66 in the 1st stage, 4.67 in the 2nd stage and 4.72 in the 3rd stage (7-point Likert scale).
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How to successfully innovate for emerging markets

1. Change the innovation strategy towards emerging markets 2. Acquire deeper customer/market knowledge 3. Define appropriate price-performance ratio 4. Practice Gandhian engineering 5. Localize R&D 6. Adapt marketing and sales 7. Introduce new business models 8. Find a local partner

Sources: Workshop with industry experts at the WHU, qualitative semi-structured interviews with representatives of German and US-American companies, Dubiel (2010), Deloitte (2006). Note: The list does not claim to encompass all possible success factors.
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Renault designed from scratch a car for emerging markets for US$ 6,000 by a rigid design-to-cost approach

Focus on what customers really want (e.g. space, robustness), need (e.g. fuel filter, increased ground clearance, special battery, low maintenance costs) and are able to pay: Designed to comfortably accommodate four adults, a pig, 220 pounds of potatoes and a kitchen sink and Stringent design-to-cost approach: no-frills, fewer components, basic safety features, traditional steel sourced locally (originally designed in France, now responsibility in Romania and new design centers e.g. in India) The challenge was to design the car from scratch not to strip features off (higher complexity and higher costs are designed into most Western cars)

Dacia sold about 1.8 million cars since 2004 worldwide making it one of the key model families of the Renault group
Source: Govindarajan & Dubiel (2010), Kukreja & Dubiel (2010).
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How to successfully innovate for emerging markets

1. Change the innovation strategy towards emerging markets 2. Acquire deeper customer/market knowledge 3. Define appropriate price-performance ratio 4. Practice Gandhian engineering 5. Localize R&D 6. Adapt marketing and sales 7. Introduce new business models 8. Find a local partner

Sources: Workshop with industry experts at the WHU, qualitative semi-structured interviews with representatives of German and US-American companies, Dubiel (2010), Deloitte (2006). Note: The list does not claim to encompass all possible success factors.
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Bosch learned that value-engineering and simplification can be very important for customers as well
The challenge

Deliver parts (i.e. car electrics, braking systems, fuel injection) for the Tata Nano selling for 1.700 EUR the price of an air-conditioning or navigation system in a modern German car. The delivered parts have to enable the five-seater to meet emissions standards comparable with the Euro-IV norm expected to take effect in India in 2010 and have the usual Bosch quality.
The solution

Local development at Boschs R&D site in Bangalore (costs down, local mentality) Close interaction with the customer (Tata Motors) Clearly define part specifications (e.g. fewer injections per cycle are accepted) No outdated technological solutions: the market demands a modern, robust and simple solution Application of smart technological solutions For the gasoline injection system, the injection technology for two-wheelers was honed and adapted for use in a car For the diesel engine a tried-and-tested product was simplified The injection pressure is not generated by a high-pressure pump, but by a more cost-effective plug-in pump
Sources: Lamparter 2008, Bosch homepage, personal interview.
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How to successfully innovate for emerging markets

1. Change the innovation strategy towards emerging markets 2. Acquire deeper customer/market knowledge 3. Define appropriate price-performance ratio 4. Practice Gandhian engineering 5. Localize R&D 6. Adapt marketing and sales 7. Introduce new business models 8. Find a local partner

Sources: Workshop with industry experts at the WHU, qualitative semi-structured interviews with representatives of German and US-American companies, Dubiel (2010), Deloitte (2006). Note: The list does not claim to encompass all possible success factors.
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John F. Welch Technology Center in Bangalore is a best-in-class example of an R&D site located in an emerging market
Introduction GEs first R&D center abroad Opened in 2000 this US$120 m investment is home to about 4,200 scientists and engineers Beautiful campus spread over 70,000 m of land All business units are present at the campus (multidisciplinary) it is a mini GE Started as a BOP-operation (business process outsourcing) Reasons for its establishment Talent, talent, talent! to secure GEs innovation leadership for the next decades Better market orientation for future growth markets like India and China Opportunity to save some costs (however not the main long-term reason!)
The JFWTC is a full-fledged R&D facility and an equal partner in GEs R&D network helping to maintain GEs competitive position in all markets.
Source: Dubiel (2009).
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How to successfully innovate for emerging markets

1. Change the innovation strategy towards emerging markets 2. Acquire deeper customer/market knowledge 3. Define appropriate price-performance ratio 4. Practice Gandhian engineering 5. Localize R&D 6. Adapt marketing and sales 7. Introduce new business models 8. Find a local partner

Sources: Workshop with industry experts at the WHU, qualitative semi-structured interviews with representatives of German and US-American companies, Dubiel (2010), Deloitte (2006). Note: The list does not claim to encompass all possible success factors.
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Distribution systems that reach new consumer segments are critical for developing these markets
Dells changes sales strategy and offers PCs in retail shops
Dells reliance on Internet and phone sales has been particularly troublesome in China, where people tend to prefer to pay cash and see products before they buy. Last year, sales to individual consumers accounted for only 10% of Dells China business. Dells has taken steps to make its computers more visible, setting up productdisplay centers in China so people can try them out before buying. Starting Oct. 2007 Dell also sells its PCs through the electronic retailer Gome.

Nokia teaches locals about mobile phones with a fleet of vans

To get a grip of rural India Nokia outfitted a fleet of distinctive blue Nokia-branded vans that prowl the rutted country roads. Staffers park these advertisements-on-wheels in villages, often on market or festival days. There, with crowds clustering around, Nokia reps explain the basics of how the phones work and how to buy them. Nokia has extended the concept to minivans, which can reach even more remote places.

GE builds up a new sales system to penetrate the middle market

GE Healthcare already had a successful business selling highend medical equipment in China. However this existing sales, distribution, and service systems were not geared to the middle market consumers. The company had to reconfigure its network of existing representatives and recruit new ones. GE Healthcare has taken an enormous first step in establishing itself in this new market

Innovations in distribution are as critical as product innovations.

Sources: Gadiesh et al. (2007), Business Week; Handelsblatt.
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How to successfully innovate for emerging markets

1. Change the innovation strategy towards emerging markets 2. Acquire deeper customer/market knowledge 3. Define appropriate price-performance ratio 4. Practice Gandhian engineering 5. Localize R&D 6. Adapt marketing and sales 7. Introduce new business models 8. Find a local partner

Sources: Workshop with industry experts at the WHU, qualitative semi-structured interviews with representatives of German and US-American companies, Dubiel (2010), Deloitte (2006). Note: The list does not claim to encompass all possible success factors.
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NSN has designed the Village Connection solution by combining technology with a franchise-based business model innovation
"The key challenge for the rural connectivity is affordability. Typically consumers in rural areas can only spend very little on mobile services. NSN has designed the Village Connection solution to address these challenges by combining technology with business model innovation" Prashant Agnihotri, Head of GSM/EDGE product management, NSN
What is Village Connection? Extends mobile voice and data coverage to rural areas (ARPU of approx. $2-$3 a month) Combines technology (GSM and IP-based solution) with business model innovation

How does it work? A local entrepreneur forms a partnership with a mobile network operator and a micro-finance provider The entrepreneur acquires an Access Point which can support up to 70 handsets The entrepreneur interacts with village subscribers on the operators behalf (e.g. billing) Whats new? Solution cost effective, easy to implement and operate A GSM Access Point forms a complete mini network where local calls are connected directly within the village The solution architecture eliminating the traditional network hierarchies for traffic between neighboring villages, minimizing the capital and operational expenditure for operators

Wins Excellence in Innovation Award at the 2nd TEMA National Telecom Awards Commercial pilots in India and trials in Tanzania
Sources: Company homepage, www.developingtelecoms.com., personal interview
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How to successfully innovate for emerging markets

1. Change the innovation strategy towards emerging markets 2. Acquire deeper customer/market knowledge 3. Define appropriate price-performance ratio 4. Practice Gandhian Engineering 5. Localize R&D 6. Adapt marketing and sales 7. Introduce new business models 8. Find a local partner

Sources: Workshop with industry experts at the WHU, qualitative semi-structured interviews with representatives of German and US-American companies, Dubiel (2010), Deloitte (2006). Note: The list does not claim to encompass all possible success factors.
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GE profits from its local Indian networks in a number of ways

Ties with Indian universities and research institutions to secure a steady stream of topnotch graduates for its R&D sites Invitation of local professors from well-known local higher education institutions to spend a sabbatical at GEs R&D facility in Bangalore Excellent connections to the National Chemical Lab, Pune, helpful for establishing the R&D center

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Agenda

The rise of emerging markets Innovation challenges in emerging markets How to successfully innovate for emerging markets How to profit from emerging market products at home Summary

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GE Healthcare recently introduced its portable ECG device originally developed for India and China in the USA
Origin Developed in India for the Indian and Chinese market Designed to reach remote rural areas First time buyers Typical emerging market good-enough approach Easy to operate even for a nurse: analysis inbuilt indicating whether a patient needs a specialist doctor or not Easy portable: weights 1,3 kg only Efficient: with one battery charge about 100 ECGs Cost effective: one ECG costs US$ 1 Robust against dusty environment: the machines printer is adapted from a device used in Indian bus terminal kiosks Advantageous also in the USA (especially for new market segments e.g. nurses) Lightest GE ECG device offered Attractive price of US$ 2,500 (an 80% markdown from products with similar capabilities)
A new way of thinking called reverse innovation: create entry-level goods for emerging markets and then quickly and cheaply repackage them for sale in rich nations?
Source: Business Week 11.3.2009, Bharat Entrepreneurs 15.2.2009, Immelt et al. 2009, personal interviews. Note: The device is sold as a MAC 400 in India and a MAC 800 in the USA.
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Agenda

The rise of emerging markets Innovation challenges in emerging markets How to successfully innovate for emerging markets How to profit from emerging market products at home Summary

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What firms need to do to master innovation for emerging markets?

Change the innovation strategy with top-management support to fully leverage the opportunities in emerging markets Be market/customer oriented in new product development Design new products from scratch with an appropriate price-performance ratio Practice Gandhian engineering Strengthen the local content along the entire value chain (esp. R&D, marketing, production and management) Adapt marketing and sales Introduce new business models Find local partners

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Thank you very much for your attention!

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Back-up

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Buying local rivals or entering into a JV with them can shorten the companys learning curve and help to gain local market momentum
Gillette and Nanfu
Gillettes Duracell division 1990s was losing market share in China to lower-priced competitors. () Gillette decided to buy into the good-enough market, acquiring a majority stake in Nanfu. () The dual branding, cost synergies, sales growth, broadened product portfolio, economies of scale, and distribution to more than 3 million retail outlets in China have paid off for Gillette, which has seen significant increases in its operating margins in China.

Colgate-Palmolive and Sanxiao

In 2000, Colgate-Palmolive Co. invested $21 million for a 40% stake in Sanxiao a low-cost toothpaste brand in China. The domestic company had a 30% cost advantage over Colgate. By localizing manufacturing at a Sanxiao facility, Colgate was able to reduce its costs by 60%, which allowed the company to lower the price of its goods by an equal percentage and thus expand into the good-enough segment. Colgate's benefits multiplied when it started using the factory as a worldwide distribution center.

Frito-Lay and Uncle Chipps

In India, Frito-Lay Inc. increased its market share - and profits when it bought the local brand Uncle Chipps in 2000. The Indian chips complemented Frito-Lay's brand portfolio, both in price and flavors. After the acquisition, Frito-Lay relaunched the Uncle Chipps brand at a lower price, positioning it as cheaper than Lay's, its flagship potato chip brand. Instead of competing against each other, Frito-Lay has two products targeted at different consumer

Obtaining local rivals may help to decrease costs and enter local distribution systems faster as well as broaden the own product portfolio.
Source: China Daily 22.03.2003, Gadiesh et al. (2007), Gadiesh/Vestring 2008,, Shankar et al. 2008. Note: JV = joint venture.
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Global R&D organization of General Electric (GE)

GEs R&D organization consists of four equally powerful sites:

Each location specializes as a center-ofcompetence in a certain R&D area :

Munich, Germany

Shanghai, China

Niskayuna, USA

Bangalore, India

Sources: GE.com; Business Today (2008), Internet search, personal interviews.

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Numerous MNCs open R&D centers in India and China to address the demand for products tailored to local consumer needs in EM.
Philips in Shanghai
The ULC Design Center will be focused on the development of ultra low cost (ULC) mobile phones for emerging markets with Philips Nexperia Cellular Systems Solutions. The new centre is part of an initiative to address growing consumer demand for low-cost mobile communications in China, India, Africa, South America and Eastern Europe. Philips hopes to drive total handset costs in these areas below $15 by 2008.

HP in Bangalore
Research at HP Labs India focuses on the opportunities and challenges faced by our customers that include significantly different technology infrastructure, complexity of interfaces due to diverse languages and scripts and very rapid and distributed economic development.

Ericsson in Chennai
Ericsson follows Motorola, Nokia, Lucent Technologies, metro-Ethernet solution vendor Riverstone, LG Electronics and Qualcomm in investing in R&D facilities in India. Economic arguments underpin the relocation of R&D effort, given the relatively low labor costs and availability of skilled personnel in the country. The vendors also hope to better tap local demand in India through more locally informed product development.

Locating R&D locally helps to better understand the local market, achieve faster time-to-market and lower costs!
Sources: Deloitte (2006), press, homepages of the mentioned companies.
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New price-performance ratio P&G designed a disposable nappy for low-income consumers in China
Aim: Produce a nappy that should cost no more than a fresh egg or about 10 cents for the Chinese mass market Situation: Until recently selling a Pampers-like product Few Chinese parents are familiar with disposable nappies and can afford them Most use cloth rags or they dress their babies in clothes designed with open slits between the leggings Cultural barrier: many Chinese believe disposable nappies cause infertility or bowSolution: Understand the consumer researchers went to poor homes in Shanghai where nappy use is almost zero Computational modeling and simulation using virtual babies to tweak the design Experimental factory in Vietnam with low-cost manufacturing line from China (cuts cost by 30%) Network of 150 low-cost machine builders in Brazil, Vietnam and India providing P&G with manufacturing systems assembled in Shanghai

leggedness

Sources: Financial Tomes 14.11.2005.

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P&G goes to great lengths in emerging markets in order to learn more about different consumer needs
New ethnographic consumer research approach (Rather than mostly using focus groups and quantitative research, P&G staff spend time in consumers homes to gain insights into daily habits and how these help in the design of a product) Application of Stability environmental rooms (We test the resilience of our products, copying conditions found in merchants shops in faraway places we replicate the heat of a Chinese summer or a winter in Russia) Connect & Develop Program (With a clear sense of consumer needs, we can identify promising ideas throughout the world and apply our own R&D, marketing, and manufacturing capabilities to them to create better and cheaper products, faster.)

By separating consumer needs and willingness to pay, P&G ensures that it does not overspend on innovation at the low end and delivers functionality desired by the customer.
Source: Financial Times 14.11.2005, Huston/Sakkab (2006).

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BASF as well as Telenor established a social business joint venture with Grameen Bank in Bangladesh

About the partners Grameen Bank: established in 1983 by Noble prize winner Prof. Muhammad Yunus, known for its micro-credits approach, 90% of shares belong to its customers mainly women. So far about 7 million micro-credits given to people in Bangladesh. BASF: Multibillion Euro revenue chemical giant based in Germany Telenor: Aim of the joint venture Sell instead of donate mosquito nets and nutrition zustze Credits for

Advantages for BASF Establishing a social business boosts reputation and positive image in established markets and in Bangladesh Novel cost-effective pre-marketing measure in 140 million inhabitants market of Bangladesh where BASF does not have lots of presence so far

Source: Handelsblatt 24.10.2007, 04.03.2009.

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Rising business opportunities even at the low end of emerging markets evidence from management-oriented publications

Source: Amazon.de.
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Western companies increasingly invest in emerging markets some evidence from business press titles 2006-2009

Sources: Handelsblatt 23.10.2007, 2.12.2007, 14.12.2007, 29.8.2008, 27.4.2009, 7.04.2009, Business Week 6.6.2006, 17.4.2008, 1.8.2008, 20.4.2009, 23.4.2009 FAZ 22.10.2007, 4.12.2007.
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NPD programs for emerging markets have to have strategic priority and top-management support some more voices from the field
Take early action in emerging markets this allows to defend the own position against local upstarts! E.g. We want to make it big here; We are here for the long run comments on the Indian R&D centre. John F. Welch, CEO General Electric Put emerging markets innovation visibly on the companys agenda! E.g. Siemens S.M.A.R.T. initiative as a top+ initiative from the Fit4 2010 program

We want to make China our second home market after Europe () It adds to our credibility in China () The CEOs strong commitment to a highspeed strategy is crucial. I am the chairman of our Chinese company, and its president reports directly to me. Jrgen M. Clausen, CEO, Danfoss

"In 1995, to ensure Renault's profitable growth, I took the decision to expand the company to markets outside Europe Louis Schweitzer, CEO Renault Intels World Ahead Program aims to speed our progress in making technology available to the next billion people, and a big part of this effort is focused within India, for India Paul Otellini, CEO Intel

Source: Fast Company 2001, McKinsey Quarterly 2006, Gadiesh/Vestring 2006, WiWo 11.10.2007, Intel homepage.. Note: NPD = new product development.
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GE extensively worked with target customers in order to find out what they needed and were able to pay

GE knew that it could design new products and business models to serve this market [medical devices for Chinas good enough market]. () A team was charged with observing operations in the target hospitals and meeting with the hospital administration and physicians to help determine what sort of medical equipment customers wanted, the specified features they needed, possible price points and the kinds of distribution and services that would be required. Armed with this information, the fact-finding team considered stripping out some of the expensive equipment features and adding others that these target customers valued more. For instance doctors in Chinas high-end hospitals preferred to program the medical equipment themselves, whereas physicians in the midlevel and low-end hospitals, who considered themselves less computer savvy, preferred pre-programmed machines.

Source: Gadiesh et al. (2007), p. 86.

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German automotive supplier Continental/Siemens VDO successfully equipped the Dacia Logan with cheap and reliable components

Sources: Company material.

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Affordable products do not comprise watered-down technological solution the reverse is often the truth Top
Nokias mobile models for $45, $59 or $89 can go more than 2 weeks without a recharge, have a built-in-flashlight handy for people who live in home without electricity, reflective displays, iconic address books, built-in FM radios, talking clocks and come in a variety of colors The same clinical excellence of the Marquette 12SL algorithm in GEs premium ECG devices are used in the MAC 400, helping physicians perform reliable ECGs on every patient It was essential to offer a modern product. It would be simply unthinkable to sell an old model on emerging markets as was done before J-M. Hurtinger, Logan Project Director
Often top-class science/technology is needed to solve simple problems at a reduced cost for the customer.
Sources: GE homepage, Balu 2001, Business Week 12.6.2006, Business Week 30.7.2007, Business Week 29.1.2007, Renault 2004.
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Flop
Motorolas low-cost phone for India has been a flop despite a $35 price tag, in part because its limited features didnt convey a sense of status to potential buyers!

SAP manages its software development teams on a global basis where teams have an equal status regardless of geographical location
Employees in India are no longer an extended workbench
Das Herz der Entwicklung schlgt nicht mehr ausschlielich in Walldorf () Erstmals berichten Entwicklungsmanager in Walldorf an einen Chef in Indien (). Die Entwicklung neuer Produkte muss auch knftig zentral gesteuert werden aber nicht unbedingt in der Zentrale.
Clas Neumann, Chef SAP Indien

High degree of team autonomy and responsibility

Wenn wir die besten Leute anlocken und motivieren wollen, mssen wir ihnen auch Entscheidungsgewalt abtreten. Am effektivsten ist es, komplette Entwicklungsbausteine an einen Standort zu vergeben und dort auch die Verantwortung anzusiedeln. Dann knnen Probleme lokal gelst werden (). Den Schlssel fr die intelligente Vergabe von Zustndigkeiten sehe ich in einer Balance aus streng standardisierten Ablufen und klar definierten Zielen bei gleichzeitig mglichst groen Freirumen fr Einzelne bei deren Umsetzung.
Georg Kniese, Leiter SAP-Lab

Opportunities for professional growth and advancement

Aufstiege hngen zunehmend von der Fhigkeit ab, reibungslos ber Kulturen und Sprachen hinweg arbeiten und virtuelle Teams managen zu knnen. Das karrierefrdernde Interesse eines zeitlich begrenzten Wechsels nach Indien ist daher inzwischen grer als das Angebot an Stellen dort. Das war lange Zeit anders.
Source: Handelsblatt 20.3.2007.
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P&G adjusted its R&D organization to better serve emerging markets consumers

R&D spending distribution (P&G devotes about 30% of its US$1.9 billion R&D budget on developing products for low-income consumers, a 50% increase from five years ago.) Innovation productivity with Connect & Develop (More than 35% of new products have elements that originate outside P&G. Our R&D productivity has increased by nearly 60%, our innovation success rate has more than doubled, while the cost of innovation has fallen. R&D investment as a % of sales is down from 4,8% in 2000 to 3.4% today.) Lean innovation (P&G uses proprietary technology and computer imaging () to design low-income products more cheaply than before.) Local R&D (40% of P&Gs R&D staff are local employees based in their home market)

Source: Financial Times 14.11.2005, Huston/Sakkab (2006).

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Emerging markets can become a source of innovations for the developed markets as well
Companies are creating formal processes to streamline ways to borrow from emerging markets. Xerox just hired two researchers the company calls "innovation managers" who will hunt for inventions and products from Indian startups that Xerox might adapt for North America. HP is using its research lab in India to see how it can migrate Web-interface applications for mobile phones in Asia and Africa to developed markets.

The work we do to focus on more of the worlds consumers actually makes us more effective even in premium countries than we were previously. Gilbert Cloyd, CTO We are developing a scarcity mindset so we can do more with less: it applies to every step of the value chain. Associate Marketing Director Fabric & Home Care, Greater China Big volumes of low-end phones also unleash scale economies that reduce costs even for high-end models. As sales shift to low-end phones, such savings should help Nokia maintain overall operating margins.
Sources: Business Week 14.11.2005, 19.7.2005, 11.03.2009, personal interview.
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Siemens Medical develops an entry level CT device for emerging markets in Shanghai and successfully sells it in established markets
Aim: Develop a good enough CT device for the Asian market Situation: New market opportunities through emerging customers (e.g. small private hospitals, mid-size hospitals), hospital staff inexperienced with sophisticated technological equipment, limited funds for maintenance, price sensitiveness Solution: Developed in Shanghai with a Chinese team and local project leader Basis is existing product platform a broad local supplier base Chinese lead users involved Manufactured mostly in China but some highly sophisticated parts still in Germany Easy user interfaces Additionally: Successful also in segments of developed markets! Won numerous design awards!
Sold at considerably lower prices its not enough to shave off 10%-15% of the high-end price!
Sources: Press, Siemens Med Homepage, personal interview. Note: CT = Computer Tomography.
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Intel takes the hostile infrastructure in emerging markets into account when designing its new PC platform
Aim: Design a PC for remote Indian villages after intensive ethnographic studies in rural India showing that a clear desire for technology access exists in these communities. Situation: Voltage fluctuations between 90 and 350 volts, sudden surges in the current, very uneven supply of electricity, often available for only 2 or 3 hours per days, weather conditions (heat, dust, humidity), low income Solution: PC platform developed exclusively to meet the needs of rural villages in India Computers expected to be used in Internet kiosk centers in villages where those who cant afford computers of their own share a common machine Fully functional, expandable and shared-access computing solution Rugged chassis withstands dusty conditions, varying temperatures and high humidity Removable dust filter; integrated air fan regulates the temperature of the motherboard Customized power supply unit maintaining power in the event of a power outage Overall low power consumption Costs of about U$550 Can run on a car battery when blackouts occur Equipped with a one-button recover feature in case of crashes
Sources: Business Week 12.6.2006, Intel Homepage.
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How to successfully innovate for emerging markets

1. Change the innovation strategy/corporate mindset towards emerging markets 2. Keep local (heavyweight) competitors at bay 3. Acquire deeper customer/market knowledge 4. Define appropriate price-performance ratio 5. Apply smart technological solutions 6. Localize R&D 7. Tailor talent management 8. Adapt marketing and sales 9. Introduce new business models 10. Miscellaneous

Sources: Workshop with industry experts at the WHU, qualitative semi-structured interviews with representatives of several German and US-American companies, Deloitte (2006). Note: The list does not claim to encompass all possible success factors.
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A bunch of other measures: cost effective manufacturing sites, less components reusable in several product

Unilevers labs and pilot plants are replete with manufacturing machines that its scientists built themselves to make them cheaper or applicable in a specific new setting P&G has an experimental factory in Vietnam with low-cost nappy manufacturing line from China (cuts cost by 30%) and a network of 150 low-cost machine builders in Brazil, Vietnam and India providing P&G with manufacturing systems assembled in Shanghai Nokia keeps cost and complexity under control by sharing components among devices and designing phones that have fewer parts than competing models P&G: Computational modeling and simulation using virtual babies to tweak the design of nappies

Source: Balu 2001, Financial Tomes 14.11.2005, Business Week 30.7.2007

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Local product development at independent local R&D sites is a vital precondition for success

Nur separate, vom Hauptquartier weitgehend unabhngige Entwicklungsabteilungen in Schwellenlndern knnen Produkte schaffen, die bei unteren Einkommensschichten ankommen.
James Abraham, BCG-Partner, India

Ich kann mir nicht vorstellen, dass jemand in Hannover oder Frankfurt Systeme fr Affordable Cars in Indien entwickeln kann.
Heinz-Gerhard Wente, Personalvorstand, Continental

I think a low-cost product must be designed from scratch, something our European engineers cant easily do. They dont have the right mentality and would set excessively high standards for even the smallest details, ending up with an over engineered and too expensive product. Jrgen Clausen, CEO, Danfoss

Sources: Handelsblatt 29.1.2008, 20.11.2007, McKinsey Quarterly 2006.

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Consumers in emerging markets are very brand conscious

Users in the developing world dont want cheap phones, especially since a handset represents a major purchase for many people, akin to a car in the developed world. People want features and even fashion. Business Week

Brazilians want brand names and are willing to pay a bit more for Nokia and Motorola Srgio Pelegrino, Director for GSM, Brasil Telecom

Rural consumers want value, not just volume M. Vankatesh, Sales manager, Hindustan Unilever

Everybody wants brands. And there are a lot more poor people in the world than rich people. To be a global business you have to participate in all segments Keki Dediseth, Director, Home and Personal Care of Unilever

Brands as a promise of a products distinctive qualities and features are as important in emerging markets as they are in developed markets!
Sources: Balu 2001, Business Week 14.11.2005.
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Hybrid solutions blending advanced technologies with local infrastructure example of Unilevers iodine enriched salt
Situation: The primary source of iodine for Indians is salt. They do eat a lot of salt, but only 15% of it is iodized. Salt Iodized in a traditional way looses the iodine during cooking and harsh conditions of storage and transportation. Solution: New technology allowing molecular encapsulation of iodine the technology encapsulates iodine particles between inorganic layers, protecting iodine from harsh external conditions Tested in co-operation with the Indian Atomic Energy Agency Iodine is released only upon ingesting food Salt enriched with iodine still retains its attractiveness regarding whiteness and texture It is priced comparable to salt iodized with traditional methods and non-iodized salt Unilever patented the process Unilever is selling this innovation already to other emerging countries
Advanced technology creatively combined with existing infrastructure (e.g. harsh transportation). A watered-down technology solution from developed markets would not be sufficient.
Sources: Prahalad (2006).
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Top-Performers outperform other companies on both success dimensions simultaneously and have higher operating profit margins
Participants of the IsP come from all industries: Superior innovation performance leads consistently to better market performance:
Profitability of Innovations (e.g. ROI from innovations) TopPerformer Higher market performance (profit margin)

WorstPerformer

Growth with Innovations (e.g. sales impact of innovations)

Innovation is the basis for a sustainable competitive advantage!

Source: Ernst (2001), data base: N > 250 SBUs. Note: IsP = Innovation Success Panel Prof. Ernst.

II s P eP
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International expansion and innovativeness of emerging Chinese MNCs

Source: Ernst, Dubiel, & Fischer (2009), p. 32.

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Definition of the relative product advantage and its impact on innovation performance

The relative product advantage (unique selling proposition) of the innovation over competing products as perceived by the customer is the most important success factor of innovations.

To be a business success, an idea needs not only to be better than it rivals it needs to be seen to be better. (Carter, 2005, p. 15)

Research clearly shows that products with higher USP perform better in the market (e.g. market share, met sales/ revenues expectations)!
Source: Kleinschmidt/Geschka/Cooper (1996).
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Siemens CT India is looking for highly skilled candidates eager to pursue challenging tasks in a stimulating environment

These roles call for very strong technopreneurial skills and offer a very high degree of challenge. The candidates will have a high degree of flexibility and freedom to pursue their passions for creating innovative solutions and will find it particularly rewarding to create solutions from scratch.
Source: Monster India. Note: SMART Innovation = Simple, Maintenance friendly, Affordable, Reliable, Timely to market. A similar approach of Siemens can be also found in China.
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Companies are less likely to adapt product features and types to the requirements of emerging markets

How specific attributes of companys products compare in emerging markets and home markets:

Source: Deloitte 2006a, p. 2.

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 but those who do are more likely to achieve greater success.

Source: Deloitte 2006b, p. 9.

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Dacias product family is helping Renault to grow also in developed markets

+0.9%

+48%

+17.2% units

-1.5%

E.g. in Germany sales jumped from 6,000 cars in 2006 to 17,300 in 2007).
Source: Kukreja & Dubiel (2010), Renault Annual Report 2007, Welt am Sonntag 15.06.2008.
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Numerous companies are already offering tailored products for emerging markets
Consumer goods Industrial goods

Sources: Press, Internet.

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Main success factors of establishing the John F. Welch Technology Center in Bangalore

Presence of a long-term global R&D strategy Clear communicated long-term investment Top management support Selection of the centers managing director Selection of an appropriate location Ownership at the R&D site Reputation and visibility Recruiting top-tier talent Retaining top-tier talent Excellent contacts to local scientific and industry communities Close collaboration with business units Integration of foreign R&D site into the global R&D network

Source: Dubiel (2009).

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New processes (e.g. finance) Example of Pay-as-you-go PCs for consumers with variable or uncertain income

Introduced in India, China, Russia, Mexico and Brazil Co-operation of Microsoft and Lenovo High-quality, mid-range Lenovo desktop PC, loaded with features attractive to consumers Pay-as-you-go model enabled by new Microsoft FlexGo technology Model very similar to prepaid mobile telephone services users are accustomed to that: Pay about one third of the computers street price up front A third party financial institution pays the retailer the remaining cost of the PC on the buyer's behalf Pay the rest over time through the purchase of prepaid cards from local vendors activating the machine for a defined amount of time (usually 800 hours) Benefits for the budget-constrained consumer: Allows owing a high-quality PC without being locked into a fixed monthly loan payment Enables management of the PC time in accordance with monthly finances After a predetermined number of usage hours the balance of the PC is paid off and the consumer does no longer need to purchase prepaid cards
Source: Microsoft Homepage.
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