Why Emerging Economies make for Ideal Strategy Incubation Ecosystems

Emerging economies represent opportunity for companies displaying signs of saturation in their growth strategy: a new market to understand, develop products for, and conquer. In other words, globalization, a symbiotic strategy: the country is happy for the money the economy earns overall, and the MNC with slowed growth finds an opportunity. Increasing growth rates, upcoming middle class with an exploitable purchasing power, a younger and cheaper workforce, trade and infrastructure contributing to the growth strategy, to name a few advantages.

Very early on, however, it became clear that the same strategies for marketing, sales, or even segmentation could not be applied to these new markets, with their own set of preferences and indicators. Customers wouldn’t go for high priced products: the products would have to be "innovated" for them.

Challenges characteristic of developing economies are innovating for affordability. There is a large Base of the Pyramid population making up for much of the volume of the sales. Winning their pockets has always been a challenge. Unilever innovated with smaller packet sizes, relevant local marketing techniques in countries like India and Indonesia. Their edge over their peers was conspicuous: Unilever’s sales are double that of P&G’s, for example, in a consumer goods section worth US$7 trillion.

The emerging market is lucrative, but also hard to crack: smaller purchasing power requires bit-sized products. This is where the soaps and the shampoo sachets debuted to a wild success and acceptance. Companies would have to optimize their products and services for the emerging markets. In 2012 alone, the combined R&D spend of India and China was 20% of the global R&D spend. The total sum invested for a better understanding of how a company can tap the market worth US$10 trillion of India and China by 2020 (a BCG estimate) is quite obviously snowballing. Emerging markets have gone from cheaper production sites to innovation hubs.

These innovations have a lot in common with social enterprises, which seek to dispense essential products and services: Nutritional food, better sanitation, cheaper and quality healthcare, all packaged for the low income customer. The rationale behind this: the changes could, over the long term, contribute to higher purchasing power through less of healthcare spend, more productivity.

Today, just about every multinational invested in the developing market growth story, for better or for worse (as emerging market growth has proven difficult, especially in the recent times) has a base of the pyramid strategy. This strategy is driven by in situ managers for the representative companies, who sometimes outsource the business challenge to seasoned BoP Consulting professionals. Total, a French multinational has a decentralized solar lantern program in countries like Indonesia and Burma, when BP ventured into India, they spent considerable R&D on FirstEnergy’s clean cooking apparatus ("Oorja" stoves) seeking to replace the indoor air polluting chulha. Eureka Forbes has a village based model of smart card dispensed water supply at the rate of INR 1 per litre. IndiGo’s pay-as-you-go model sells solar home systems and takes mortgage as part of a monthly "prepaid" system, which also accommodates for service rentals. Out of sheer necessity, a number of finance healthcare initiatives in the sparsely populated lands of Africa have leveraged mobile phones to their use, long before mobile healthcare or mobile money become mainstream in developed countries.

Emerging economies are the hotbeds of disruptive or radical innovation. The ingenuity of a nation with tighter purse strings requires no less than that. Today, this innovation is boosted further by the use of Big Data. A simple study performed by Haydn Shaughnessy in his 2011 HBR post talks about how executives in India are more primed and eager to proactively look for and adopt disruptive innovation (in terms of prices, marketing, etc.) than their American counterparts. These companies collaborate more easily to get "local" market insights, driven by the fastest ways (including M&As) to make a presence in the new markets.

In contrast, a GE study including executive across the world proved the hypothesis: developed economies seek incremental innovation to existing strategies and structures. Indeed, a number of product and service innovations developed in emerging economies have been applied to company strategies in contracting developed economies, usually, to perceive some form of success. Interestingly, the same executives in emerging markets ranked high for their tendency to seek protection from new, disjoint and alternative solutions to problems perceive their counterparts from the United States as being more "innovative".

SaiKiran Kadam is an Analyst working with Mordor Intelligence, a market research consulting firm which specializes in Market Research Consulting, Market Research Reports, Market Sizing Reports, Industry Research Reports.