To compete with global challengers and crack the middle market, multinationals will need to go through the same intense process of analysis and design they did to develop their current successful business models. In most cases, some degree of business model innovation will be essential, given the unique characteristics of emerging markets, such as lower consumer purchasing power, different competitive ecosystems, geographically dispersed customers, varying customer priorities and expectations, rapidly changing infrastructure, and political influence and regulation.
Business model innovation involves creating a new value proposition (which customers do we choose to serve, with which offerings, and how are we compensated?), supported by a distinct operating model (How do we profitably deliver the new value proposition?), to address a new opportunity. This approach can be used to reinvent a dying core business, explore new avenues for growth, or create a durable competitive advantage.
Multinationals that have succeeded at business model innovation in emerging markets think systematically about the opportunities and threats. We have distilled their varied experiences into four steps that can guide executives as they launch their own endeavors.
Uncover opportunities through customer discovery
Business model innovation starts by developing a capability in each local market to understand customer needs, buying habits, and price points and to determine the potential size of the opportunity. Two avenues of discovery can be fruitful here: an analysis of megatrends that will encourage new types of demand and a deep examination of the unmet needs of the middle-market customer. Scoping out new customer segments within the middle should be done as precisely and quantitatively as possible.
Taking the first approach, Philips recognized that the rise of the middle class in emerging markets could greatly benefit several of its businesses. Increasingly affordable health care would spur demand for medical equipment, construction of new and better housing would raise demand for lighting, and greater wealth would spur demand for home health products and domestic appliances. That led Philips to develop a dedicated strategy and business model for emerging markets and an expanded portfolio of products relevant to local middle-class households.
The second type of consumer discovery - deep analysis - was undertaken by Indian conglomerate Godrej. When the company set out to design a new kind of refrigerator for middle-income consumers in India, it worked with many village women to modify its chotuKool prototype, then built the lightweight refrigerator using solid-state technology instead of a compressor and priced it between $65 and $75. Godrej also rejected the traditional channel of sales force plus distributors and dealers and instead enlisted nongovernmental organizations (NGOs) and microfinance institutions to distribute the refrigerators throughout India.
Convert opportunities into viable business models
Once the customers' needs have been identified, a company must create a business model suitable to meet them, often entailing changes to the value proposition, value chain, organization, or cost structure to reach the middle in emerging markets.
KFC, for example, made substantial changes to its model to meet the demands of emerging markets. Developed world locations feature the dominant logic that made the company a global brand: a limited menu, low prices, and an emphasis on takeout. Under new management in the early 1990s, KFC stretched the brand so that it would better appeal to the demonstrated demands of middle-market consumers in China, with a wider variety of foods and traditional dishes than the standard fast-food outlet would offer. Managers enlarged the restaurants to about twice the size of those in the United States. They needed bigger kitchens to prepare Chinese food and more floor space so that customers could linger. KFC China thus positioned itself as a special occasion restaurant within reach of the middle class.
Configuring this new value proposition required operational changes as well. KFC had to reinvent its value chain and the manner in which it procured key resources for its restaurants. Because the network of distributors that KFC relies on in many countries does not exist in China, it built its own distribution arm-including warehouses, its own fleet of trucks, and a unit that monitors safety along the supply chain all the way back to animal feed companies.
Test, scale up and iterate
Business models can be tested cheaply to prove the main hypotheses and avoid ill-advised investments. For example, in developing its micro-entrepreneurship distribution mechanism, called Shakti, Unilever began with just a few micro-entrepreneurs. Only after finding that the concept was profitable did it continue with the new model.
After pilots have paid off, companies can take a variety of different approaches to quickly and efficiently scale up new models. KFC, for instance, shifted from franchises to primarily company-owned outlets, enabling the restaurants to more easily expand geographically, closely control operations, and centralize purchases. Philips, on the other hand, acquired a local producer, which offered a quick route to local expertise, cheaper manufacturing facilities, and closer relationships with hospitals and clinics outside the main cities. Finally, Tesco avoided the risks of going it alone or making a potentially risky acquisition by forming a joint venture with a local partner, RHB Banking Group, to launch cobranded credit/debit cards and in-store branches.
Manage emerging markets like a business model portfolio
Once they reach middle-class customers in several emerging markets, companies will soon find it necessary to manage multiple business models and multiple brands. Just as executives aggregate individual products into a portfolio that can be managed, they should do this for their business models. Taking a portfolio approach allows them to assess and gain a view of the payback, risk level, and launch timing for the entire enterprise and to share lessons with other local units more readily.
As part of any restructuring, it is often advantageous to simplify decision making so that managers at the local level can take advantage of fast-moving opportunities.
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