Companies that develop new strategies to attack competitors and enter new markets often accomplish this by introducing architectural or business-model breakthroughs. They identify gaps in how an industry is organized, go after those gaps and then find ways to turn them into profitable markets. They find new customers (“new whos”), new products or services (“new whats”) or new ways of promoting, producing or distributing them (“new hows”). Although there has been a burst of interest in recent years in how economic growth is unfolding in the developing world, most of the research on strategic innovation is focused on developed markets. However, based on our research, companies that understand the dynamics of growth at the base of the economic pyramid in emerging markets have significant opportunities to unlock value.

We have studied strategic innovators in developing markets from a variety of industries to understand the reasons behind their success, and to explore how the success factors differed from what we have observed about innovators in the developed world. (See “About the Research,” p. 85.) We found that strategic innovation in developing markets differs in three important ways. First, the issue is not finding “new whos”— indeed, assuming products are affordable, there are plenty of under- and nonconsuming customers to tap. Second, it is not about creating new product features but adapting existing products to customers who have fewer resources or a different cultural background. And third, it is less about creating new business models or differentiating how you compete than establishing basic market ingredients such as distribution channels and customer demand from the ground up. (See “A Framework for Strategic Innovation: The Four A’s,” p. 84.) Companies that are able to confront theses issues have often been able to achieve strong market share and profit growth.

Developing Affordable Products and Services

In many cases, finding customers is not the issue. The 20 biggest emerging economies have a total of more than 700 million households earning an aggregate of some $1.7 trillion per year, roughly equal to the gross domestic product of Germany.1 Brazil’s poorest 25 million households have an annual income of around $73 billion per annum; China’s 286 million lowest-income households have an annual income of about $691 billion; and India’s 171 million poorest households have spending power of about $378 billion.2

Perhaps the biggest hurdle that companies must overcome is ensuring that products or services are affordable. Low-income consumers have low disposable incomes and therefore do not consume at all or are infrequent buyers of products and services. Strategic innovators need to design products that match the cash flows of customers who are often paid on a daily rather than weekly or monthly basis. For example, two-thirds of Indian villagers are in the lowest-income category, making them acutely sensitive to price. They spend more than two-thirds of their income on food, and must pay for products such as soaps, scents, shampoos and telecommunications services with whatever funds are left over.

With close to 50% of the population in the Philippines living below the poverty line, the most pressing issues for mobile-telecommunications operators such as Smart Communications Inc. was affordability. Paying for mobile service was not a problem for middle- or upper-income customers. But for poor people, the lowest-price prepaid phone card available in 2002 was about U.S. $2, a major cash outlay and more than 80% of daily income for more than half of the population. At those rates, analysts didn’t see mobile-phone penetration going beyond 30% of the population until 2008 at the earliest.

In thinking about how to reach customers at the bottom of the market, Smart did not bother to benchmark others in the mobile industry; few, if any, mobile-network operators had successfully developed offerings for very low-income consumers. Instead, it studied successful players from other industries.

Procter & Gamble Co. and Unilever PLC, for example, have been particularly effective at developing strategies to keep product prices low, offering micropacks for items including shampoo, soaps, cigarettes and food. Although buying in small quantities, or sachets, was not the most economical way to purchase such goods, it did allow consumers to stay within their budgets. They bought the products through the country’s small sari-sari stores, which survived on high-turnover, low-value transactions. Indeed, buying goods in small amounts was part of daily life. Customer surveys revealed that low-income Filipinos made an average of four to five trips per week to their local sari-sari store.

To appeal to low-income consumers, Smart developed an over-the-air recharge technology and introduced prepaid pricing plans that offered airtime in sachet-like packages. Prices were broken down into small denominations that were not previously available (as low as around U.S. 50 cents). The new pricing strategy was a huge success; within ten months the small packages were generating revenues of more than $2 million a day. Smart subsequently launched a feature that made reloads more accessible for low-income customers. The new service, called Pasa Load, also allowed consumers to transfer values of as little as a few cents from one account to another.

Smart found that the profits margins on the sachets matched or exceeded what it made on prepaid cards. The result: At the end of 2006, the company’s earnings before interest, taxes, depreciation and amortization margin of 64% was among the highest of any mobile network operator in the Asia-Pacific region, despite the fact that its average revenue per user was among the lowest.

Other companies in other industries have fashioned similarly creative strategies to boost revenue and profit. In India, for example, small towns often experience long power outages lasting 8 to 12 hours a day. For many shopkeepers, an alternative source of power is essential, but many cannot afford to buy a generator; even the smallest Honda Motor Co. generator costs more than $400, and banks do not make unsecured loans to small retailers. In response, a Honda distributor in Uttar Pradesh came up with a solution. He organized 20 shopkeepers into a group, encouraging them to make monthly payments of $22 each month into a common pool. Then, through a lottery, one shopkeeper would win a Honda generator set every month; after 20 months, all 20 members of the pool would have their own generator. Honda subsequently expanded this financing mechanism to other parts of the country.3

(Reprint #:49116)

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