Reverse innovation from emerging markets

The model of emerging market innovation that most people have in mind is a multinational corporation pioneers a novel product or service in their sophisticated home market, drops some features and cuts the price, and then exports the stripped-down innovation into emerging markets.

Increasingly, however, innovation flows the other way. Companies develop a product that appeals to emerging market consumers who combine discerning tastes with low disposable income, then managers quickly recognize that these products would appeal to some segments within mature markets as well.

At a recent London Business School panel on multinationals in emerging markets, I had the chance to discuss this reverse innovation with Paul Bulcke, CEO Nestlé; Anshu Jain, who runs Deutsche Bank’s investment banking business; Vittorio Colao, the CEO of Vodafone; and John Connolly, the global chairman of Deloitte.

  • Distinguish between emerging consumers and emerging markets. Paul noted that Nestlé distinguishes between emerging markets and emerging consumers, the one billion people who will enter the cash economy in the next several years and purchase branded food for the first time. Nestlé has identified consumer segments in mature markets that share characteristics with emerging consumers. In Europe, Nestlé has identified pensioners, students, migrants, unemployed adults, and single parents overseeing a large household as categories that respond well to products introduced in emerging markets.  In France, for example, Nestlé promoted Maggi brand Halal products to that country’s estimated 5 million Muslim consumers, and experienced a sales spike of almost five times average during Ramadan
  • Reshape business model not the product alone. Nestlé has created a category called “popularly positioned products,” PPP for short, to target these consumers.  The business model for these products is tailored to the emerging consumer, including daily purchasing in mom and pop shops, radio versus television advertising, nutritional supplements targeted at local needs. Paul mentioned that emerging market competitors excel at building these new business models because they are unencumbered by traditional models. Nestlé has also set up R&D centers in emerging markets including the Ivory Coast and Chile to understand local tastes and nutritional requirements. In China, the company’s researchers are trying to understand how traditional medicine might influence new product development.
  • Encourage replication as innovation. Vittorio noted that reverse innovation sometimes sometimes stalls when employees in mature markets believe that a product or process has to be novel to qualify as innovative. Vittorio mentioned that on a recent trip to India, a local sales manager showed him a clever way of handling people waiting in line. Vittorio asked who invented the system, and the sales manager responded that they didn’t invent the system, but copied it from a store in Calcutta in fifteen days. Local management called the process of copying whatever is smart “innovation replication,” and Vodafone executives are trying to instill a pride in copying good ideas throughout Vodafone. Deloitte last year established the “steal of the year award,” given to someone within the firm who can demonstrate they stole a great idea from somewhere else in the firm.
  • Innovate on processes as well as products. Vodafone Turkey recently developed a new way to handle calls into call centers using digital signatures, and is currently exporting the process to the company’s German operations. Anshu mentioned that Deutsche Bank’s biggest challenge when entering emerging markets is competing on costs with local rivals, which typically enjoy a 30-50% advantage in cost/income ratio. In Mumbai, for instance, Deutsche has moved all non-customer facing activities to a separate hub in North Mumbai where compensation costs are one quarter what they run in South Mumbai. Deutsche replicated the similar approach, for example, by moving prime brokerage or equity research from New York to Florida, where wage rates are much lower. And it pays to look broadly when looking for opportunities to improve processes. Deloitte has found that some of the most sophisticated processes for managing corporate social responsibility originated in their South African operations.

Leading in turbulent times

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Don Sull is professor of management practice in strategic and international management, and faculty director of executive education at London Business School. This blog is dedicated to helping entrepreneurs, managers, and outside directors to lead more effectively in a turbulent world.

Over the past decade, Prof Sull has studied volatile industries including telecommunications, airlines, fast fashion, and information technology, as well as turbulent countries including Brazil and China, and found specific behaviours that consistently differentiate more, and less, successful firms. His conclusion is that actions, not an individual’s traits, increase the odds of success in turbulent markets, and these actions can be learned.