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Innovation From Emerging Economies

What is the result of innovation blowback from emerging economies?

World Turned Upside Down
• Emerging Economies reinventing business models & systems of production & Distribution • W t Western MNCs regarding emerging economies as MNC di i i sources of economic growth & high quality brainpower • Western & Emerging economies targeting people beyond upper class – Opportunities & Threats • West exporting capitalism to the world, emerging world economies coming back with frugal innovation • West – the proponents of globalisation becoming hostile to it due to disruptive nature

How are emerging nations turning the tables on developed economies? What lessons can be learnt from their success stories?

What is driving emerging market innovation?
• Emerging markets are far more varied and volatile than mature ones • Th There is little money around i littl d • Cultural complexities are confounding and tastes are extraordinarily fluid • People who are not used to brands move easily from one to another • Heavy investment in education

What is driving emerging market innovation?
• As companies work their way down the income pyramid, distribution becomes tricky • M d Modern retail chains account f only a thi d of consumer t il h i t for l third f goods sold in China and a fifth in India • Dealing with distribution problems can lead to some surprising innovations and even generate entirely new bus esses businesses • Companies in search of fortune at the bottom of the py pyramid have to start not with consumers but with nonconsumers

The New Business Model Innovations
• Replacing scaling up by scaling out – Decentralization – Outsourcing • Th P ll model The Pull d l – Designed to help companies mobilise resources when the need arises – Flexibility increases • Application of mass-production techniques to sophisticated services • Disruptive/Frugal Innovation – Redesigning both products and processes from scratch to take out costs • Value-for-money strategies for recessionary times

Frugal Innovation
• “Constraint-based” innovation or “reverse innovation” • Different from fiddling with existing products • Taking the needs of poor consumers as a starting point and working backwards • I t d of adding more bells and whistles, th strip th Instead f ddi b ll d hi tl they t i the products down to their bare essentials – Tata Nano – Hand-held electrocardiogram (ECG) called the Mac 400 from GE health care

Frugal Innovation
• Frugal innovation is not just about redesigning products • It involves rethinking entire production processes and business models • Companies need to squeeze costs so they can reach more customers, and accept thin profit margins to gain volume • Apart from being cost efficient, frugal products need to be tough and easy to use • Nokia handsets – flashlights (because of frequent power cuts) – multiple phone books (because they often have several different users) – menus in several different languages

Frugal Innovation
• Frugal does not mean second-rate – GE’s Mac 400 ECG incorporates the latest GE s technology • Frugal often also means being sparing in the use of raw materials and their impact on the environment • Three ways of reducing costs 1. Contract out more work - Bharti Airtel 2. 2 Use existing technology in imaginative new ways – TCS is looking at using mobile phones to connect television sets to the internet 3. To apply mass-production techniques in new and p unexpected areas such as health care – Dr. Devi Shetty - Narayana Hrudayalaya Hospital

From Jugaad to Shanzhai
• We are not alone in laying claim to frugal innovation • Jugaad – Making do with what you have & never giving up • Chinese have made two distinctive contributions to frugal innovation • Use of flexible networks—powered by guanxi or personal connections—to reduce costs and increase flexibility • “Bandit” or “Guerrilla” innovation, known as shanzhai

Organisation Structure & Innovation
• Most emerging countries have a penchant for highly diversified conglomerates – Inability of capital markets y p – Talent shortages – Brand bu d g a d building • Many emerging countries also rely heavily on stateowned enterprises p – Local entrepreneurs can use them to seize business opportunities – Multinationals can use them to gain access to difficult markets

Disruptive Innovation – Why will it be quicker than in the past?
• Markets for corporate control are much more liquid p q – Emerging economy companies keen on M&A • China in 2007 – 30 billion $ outbound deals (60 % more than p previous y ) year) – 5 billion $ inbound deal more than previous year • India in 2007 – 35 billion $ outbound deals (5 times more than previous year) – 10 billion $ inbound deal more than previous year

Disruptive Innovation – Why will it be quicker than in the past?
• Sh Sheer size of the emerging markets i f th i k t – Japanese expert in few engines i.e. cars & electronics – But emerging-market export machine has engines in almost every industry • E – A l Mitt l I f E.g ArcelorMittal, Infosys and TCS , H i etc d Haier t – Producing world class products & processes

Disruptive Innovation – Why will it be quicker than in the past?
• Emphasis on volume – Emerging-market companies are obsessed by finding new markets to make up for their slim p p profit margins g • Mobile-phone companies have been adding 8m10m new subscribers a month • West’s best companies have grasped the potential of emerging markets – West is ripe for frugal innovation. – Western consumers and governments have been on a debt-fuelled spending spree for many years

The twin facets of Emerging Market Innovation
Heads
None of this ‘innovation’ is new innovation new. Customers have always been put first and the objective has been to cut costs. No such thing as single emerging market, let alone emerging market paradigm - India in se ces, China services, C a in manufacturing , Russia a d a u actu g uss a and Brazil in energy & commodities

Tails
Putting things together in different ways also counts as innovation. Extending Henry Ford’s Innovation to heart & eye surgery – Very Innovative. Similar Challenges – Large number of people below poverty line . Similar opportunities- Rapid eco o c growth. Jo t e tu e economic g o t Joint venture - Mahindra a da working with Chinese companies, Huawei has opened research center in Bangalore, GE sells its electrocardiograms as successfully in China as in India India. India & China investing heavily in business schools –ISB (16), Hong Kong University of ( ), g g y Science and Technologies (14) Emerging markets firms are leapfrogging there Western counterparts such as Mobile money in Kenya, Mobile for video gaming Shift in interest towards emerging nations for leading business gurus like CK Prahalad

Overselling Emerging Markets - India ranked 133rd out of 183 for ease of doing business. g

What are the emerging MNCs from these economies?

The TATA Group
• Accounts for 6% of India’s GDP • S b idi i in automobiles, h Subsidiaries i t bil hospitality, t l it lit telecom & others th • Uses Capital from established businesses to support growth in new ones • Uses resources to attract & train the best people • U Uses b d name t sell all ki d of products brand to ll ll kinds f d t • Brand is estimated to be worth about 100 billion rupees • TATA M t Motors
– World’s Cheapest Car, $2,200 TATA Nano

The TATA Group
• Tata Consultancy Services
– Water Filter
• • • • • Innovation for India’s most pressing problem – Drinking Water Uses Rice Husks Initial Investment of $24 & recurring expense of $4 every few months I iti l I t t f i f f th Already developing new & improved version for future Produced 1m, hopes to sell 100m in the future

– Fortune At the Bottom Of the Pyramid
• Installed sensors in rural areas to gather local soil & weather conditions • Farmers call help lines on their mobile phones & receive advice on best products to use which creates a market • Box that connects television to the Internet through a mobile phone • Elegant & Frugal idea can connect millions of people to the Internet

– Bought Citigroup Global Services
• Outsourcing Division of Citibank

Indian Heavyweights
• HCL
– Acquired Britain s Axon Group for $672 mn Britain’s

• Reliance Industries
– Pursuing LyndollBasell Industries for &14.5 billion

• Bharti Airtel
– – – – Acquiring Zain for $9 billion q g Charges Lowest Fees in the industry Outsourced all its work to Ericsson & IBM Made companies rethink their business models

• Hindalco
– U d succession of well planned acquisitions Used i f ll l d i iti – Revenues grown from $500 mn to $15 bn in seven years

Indian Heavyweights
• ArcelorMittal
– In 1990, unknown producer in Indonesia – Today, world s largest Steel Company world’s

• ITC
– One of the biggest Indian conglomerates gg g – Internet Kiosks called E-Choupals help farmers manage demand & supply efficiently

• F t Future Group G
– Innovation through organised chaos in its stores

• Godrej & Bo ce Man fact ring Boyce Manufacturing
– Developed $70 fridge that runs on batteries

Other Emerging Economy Heavyweights
• Group Elektra (Brazil)
– Retail Stores that offered line of credit to customers – Huge amount of financial information, so started a bank – One of the country’s biggest network of banks & retail stores

• Dachangjiang (China) gj g ( )
– Motorcycle maker works with 100s of part suppliers

• Li & Fung (Hong Kong)
– Works closely with 12,000 companies in more than 40 countries – Puts together customised supply chains & ensures quality& ontime order fulfilment

Other Emerging Economy Heavyweights
• Haier (China)
– Extremely good at market segmentation – Makes washing machines for rural users & young professionals

• SAB Miller (South Africa)
– Prior to 1990 was a local South African brewer, now the world’s , 2nd largest

• Lenovo (China)
– Did not exist in 1990 – Bought IBMs PC business & is now world’s fourth largest PC maker after HP & Dell

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