here was an idea that caught popular attention a few years ago: Emerging markets would produce a stream of new products designed for developing economies that would upend traditional models – even in developed countries — based on innovation and lower prices. But the record has been mixed, according to this op-ed by Alok Bardiya, a senior executive and entrepreneur who has worked across countries and now heads the venture capital arm of a Fortune 50 company in India. He is also on the board of several companies and is an active member of the startup ecosystem. In this opinion piece he explains what it takes for successful innovation.
Two products caught global attention several years ago. They both aimed to provide an alternative to refrigerators to consumers in emerging markets who could not afford a conventional fridge or lacked the electric supply to run it. One was ChotuKool, a small box-like device (chotu means small in Hindi) with a unique design that cooled using a thermoelectric chip running on batteries. The second was MittiCool (mitti means clay or earth), a clay container with shelves that uses water evaporation to cool items. Chotukool was priced at $60 and Mitticool sold for $40.
Both products were disruptive and had a potential market of hundreds of millions. The actual sales though were underwhelming. Mitticool has not scaled up beyond few tens of thousands of units over several years. Chotukool had similar volumes in a market of 8 million-10 million conventional refrigerators annually in India.
The idea – that basic, low-cost products from emerging markets will first tap into the unmet needs of billions of people in home countries and then eventually move up and disrupt global markets as well – made sense. Terms like “frugal innovation” and “reverse innovation” gained currency, and there was a lot of excitement about these ideas back then, coinciding with the emerging markets boom.
A reality check now, however, shows that the actual success has been underwhelming, and most of these products have not scaled beyond a few million dollars in revenues or beyond targeting small niches.
New products do succeed in emerging markets, of course, but they tend to be global products or local clones with some incremental innovation. These tend to take the more common approaches to product introductions, such as “lift and shift” or “fast, better, cheaper.” Think of consumer durables like refrigerators or TVs, cheaper mobile phones, or of services such as a Google or a Facebook, or their local-language clones. Here the path to success is smoother, while the challenges of succeeding with disruptive innovation are far greater.
“Pricing needs to be disruptive – ‘lower’ alone may not be sufficient.”
What Worked, What Didn’t?
One clear lesson from all of this is that the assumption of “if we build, they will come” doesn’t work, even for previously unmet needs. Several other lessons stand out:
- Pricing needs to be disruptive – ‘lower’ alone may not be sufficient. Lower incomes in emerging markets make price a key driver of buyer behavior, naturally. Yet there are several instances where even a 30%-40% price cut has not been disruptive enough for potential first-time users. ChotuKool fell into this category, and while it was 40% cheaper in absolute terms, it was only $40 lower than a small conventional refrigerator, which costs $100.
Sectoral price inefficiencies will matter. It will be harder to disrupt already price-competitive markets like consumer durables, but industries like health care with its huge price inefficiencies can be a good hunting ground. Interestingly multinational subsidiaries and startups, including non-profits in emerging markets, are targeting the huge price disruption potential in health care. From ECG machines from GE that cost $500 (versus $10,000 for the standard product) to a startup selling an ultra-cheap phototherapy device (Firefly) to a prosthetic limb (Jaipur Foot) made by a non-profit for $50, there are an increasing number of health care devices looking to disrupt the market.
- Make the product an aspirational choice – even for basic needs. Aspirations matter – probably even more to people buying for the first time.
Tata’s Nano, launched as the world’s cheapest car, presents an interesting study. It came out of a bold vision to provide a car to existing two-wheeler owners at a price point of 100,000 rupees ($2,000). It redefined the concept of low-cost engineering and led to several disruptive innovations – from a newly designed two-cylinder rear-mounted engine, to a new body design, to getting suppliers to innovate and meet extremely low price points. So radical was the approach that Nano’s development process became a showpiece for “frugal engineering” or “Gandhian engineering.”
While the car aroused interest across the world, Nano’s actual sales were a fraction of the company’s original estimates. Later analysis showed that the “world’s cheapest car” wasn’t really an attractive positioning for what would have been an aspirational purchase for first-time car owners. Consumers were still fine paying premium for an existing product and even saw a used car as a viable option versus buying a no-frills, lower-priced new Nano.
Similarly ChotuKool was also not seen as meeting customer aspirations. As one of the senior executives responsible for ChotuKool noted: “We realized that the aspirations of the lower income people come from the richer people, and unless the rich buy, the lower income segment won’t.”
- Bring discipline to product design and development. This is the most important — but probably also the most glossed-over – aspect relating to innovative products from emerging markets and why they struggle to scale. Such innovation has been more about entrepreneurs creating nifty solutions for local problems, but they tend to skimp on design and rigorous product development processes. The result is that the final product lacks quality and scalability. Lack of manufacturing ecosystem adds to this challenge.
Unfortunately this approach was nearly glamorized as “jugaad” innovation — a colloquial Indian word that can mean an innovative solution, a temporary fix or a simple work-around, but also is sometimes used pejoratively for solutions that cut corners or bend rules. There is now increasing recognition that innovation in emerging markets needs to move from jugaad towards “systematic innovation.” Rishi Krishnan, director of the India Institute of Management, Bangalore, has written extensively on this.
- Invest in a multi-dimensional, go-to-market (GTM) strategy. Distribution has always been a key challenge but disruptors also need to think of the broader GTM plan and the overall value proposition.
One interesting example: Vortex Engineering, which launched a low-cost ATM machine that had several features meant for emerging markets. It is extra rugged and can run on solar power and without air-conditioning, which significantly lowers operating cost. But Vortex has not been able to sell more than a few hundred units annually in a market of tens of thousands of ATMs. Winning against existing global players requires an end-to-end value proposition that takes into account distribution networks, skilled after-sales support, and attractive financial terms or a pay-per-use model. All this takes time and significant investments.
“Emerging market innovation skimped on design and rigorous product development processes — the final product lacks quality and scalability.”
- Customer education also needs to be an integral part of the GTM. Changing the user-behavior for