How To Observe A New Global Business Model
More than 20,000 multinational corporations are now active in developing markets. According to the Economist, Western corporations aim to find 70 percent of their future growth in Asia, with China and India accounting for 40 percent of that. However, if the potential is enormous, so are the barriers to grabbing it.
The World Bank rated China 89th, Brazil 129th, and India 133rd out of 183 nations in its 2010 Ease of Doing Business Index. “The only way that corporations can succeed in these markets is to slash costs ruthlessly and accept profit margins close to zero,” the Economist stated, summarizing the bank's findings.
Yes, there are substantial obstacles to overcome. However, we strongly disagree with such a viewpoint. We've seen future opportunities on a street corner in Bangalore, a tiny town in central India, and a Kenyan village—and they don't need firms foregoing revenues.
Nothing could be more mundane on the surface: laundry, a small refrigerator, and a money-transfer business. However, if you look carefully at the firms behind these offers, you'll see that they're pushing the boundaries of business model innovation. These innovative initiatives allow businesses to break free from sluggish domestic demand, generate new and lucrative income streams, and gain a competitive edge.
Given Western corporations' difficulties accessing developing markets so far, it may seem unduly hopeful. However, we think they've suffered not because they can't develop compelling products but because their business models are flawed. In developing areas, many multinationals simply import their local models.
They could fiddle around the margins, cutting costs by offering smaller sizes or employing less expensive labour, materials, or other resources. They may even develop and produce their items in-house and employ local country managers. However, their core profit formulae and operational strategies remain unaltered, relegating these firms to selling primarily in the top income tiers, which aren't large enough to provide significant returns in most developing nations.
Even the savviest of these attempts sometimes lack a structured procedure for rethinking the company model. We've been refining our business model innovation and implementation process for more than a decade via study and work in both mature and emerging industries (see “Reinventing Your Business Model,” HBR December 2008, and “Beating the Odds
When You Launch a New Venture,” HBR May 2010). The procedure consists of three phases at its most basic level: Identify a critical unmet need for a target client; design a model that can perform the job economically at a price the customer is ready to pay; and carefully deploy and develop the model by testing key assumptions and changing as you go.
Begin In The Center
Established corporations entering developing countries should borrow a strategy from start-ups, for whom every market is new: Instead of hunting for new markets for current products, they should focus on identifying unmet needs—what we call “jobs to be done”—that may be addressed for a profit.
Such opportunities abound in emerging markets. It's possible that their enormous populations' fundamental requirements have yet to be satisfied. In truth, the difficult part is deciding which tasks are the fittest for your organization to take on.
The promise of profits from selling low-end items and services in large quantities to the extremely poor in developing nations has already enticed several enterprises. For the few who can afford it, high-end items and services are commonly accessible in these markets:
Almost anywhere in the globe, you can purchase a Mercedes or a washing machine or stay in a decent hotel. Our experience shows that a considerably more viable location to start is in the large middle market, which lies between these two extremes.
Consumers there are identified by a common condition rather than by a specific income bracket: Because they can't afford even the cheapest of the high-end alternatives, current low-end solutions aren't meeting their demands very well. Companies that develop new business models and solutions to fulfill those customers' expectations better while being cost-effective will find tremendous growth potential.
Take, for example, Godrej & Boyce, an Indian consumer durables firm. Godrej began selling locks in 1897 and has since expanded to include anything from safes to hair colour to refrigerators and washing machines.
Refrigerators surfaced as a high-potential area in workshops with senior managers in the appliances division: typical compressor-driven refrigerators had just 18 percent market penetration due to their high purchase and operating costs.
Naturally, the first question these executives had was, “Could Godrej create a less expensive, stripped-down version of our higher-end refrigerator?” Instead, we urged them to think about the basic requirements of those who don't have access to refrigeration or who don't have it at all.
Did they truly understand what those customers wanted? In a nutshell, no. To highlight the task for that untapped market, a small team was assigned to perform comprehensive observations, open-ended interviews, and video ethnography.
The team's semi-urban and rural persons had monthly incomes ranging from 5,000 to 8,000 rupees (about $125 to $200), lived in single-room houses with four or five family members, and moved around regularly. They had to make do with communal, generally used refrigerators since they couldn't afford standard refrigerators in their own houses.
The shared refrigerators were not meeting these people's requirements, but not for the reasons one would think. They virtually always included just a few goods, according to the observers.
Their customers shopped regularly and purchased little amounts of veggies and milk. Electricity was erratic, putting even the little food they had on the line. Furthermore, these folks would not “rent” a refrigerator to make ice despite their need to chill their drinking water.
The team came to the conclusion that what this group needed was a refrigerator that could stretch one meal into two by preserving leftovers and keeping drinks cooler than room temperature—a job that was very different from what higher-end refrigerators do, which is to keep a large supply of perishables cold or frozen on hand.
There was no need to spend a month's income on a traditional refrigerator and pay exorbitant power costs to do the same task. The answer was not a less expensive conventional refrigerator. There was a chance to develop a new product for the underserved middle market.
There are two significant benefits to focusing on this sector. First, upgrading a solution to a task that people are already attempting to complete is simpler than creating adequate consumer demand where none exists—as filtered water providers and other vital products have discovered to their dismay. Second, it is simpler to reach individuals already paying money to do their duties.
Ratan Tata achieved the same thing with the $2,500 Nano. “How can I convince folks who have never purchased any type of transportation to buy a car?” he didn't ask. “How can I come up with a better option for folks who rent motor scooters to transport their families?” he wondered. The idea is to reroute current demand by providing a clear path from a subpar solution to a superior one.
Offer One-Of-A-Kind Benefits At A Lower Price
Your customer value proposition (CVP) must address an issue more effectively, simply, efficiently, or inexpensively than the alternatives to redirect demand. We've discovered that price and access are the most critical aspects of a CVP in emerging countries. Let's take a look at each one separately.
Western corporations are well aware that they must develop lower-cost products for developing countries, but they often restrict themselves to supplying less for less.
For example, a 300 ml bottle of Coke cost 10 rupees in 2001, the equivalent of a day's pay on average and a luxury that the firm claimed only 4% of the population could buy. To reach the remaining 96 percent, it developed a 200 mL bottle and halved the price, slashing profits and making Coke more competitive with popular alternatives like lemonade and tea.
However, in our experience, a much more robust strategy for developing a cost-effective emerging market product is to trade off pricey features and functionalities that people don't need for the less expensive ones that they need.
To do so, you'll need a thorough grasp of the environment in which the item will be marketed, which will need further fieldwork, ideally collaborative rather than observational. In every market, this is sound product development advice. It applies to local enterprises working close to homes, such as Godrej and Western corporations facing the foreign territory.
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Godrej's team created a prototype cooling unit from the ground up and tested it with customers in the field. Then, in February 2008, about 600 women came to Osmanabad, India's Marathwada area, to participate in a co-creation event. They engaged with Godrej on every element of the product's design, working with the prototypes and countless more that followed. They assisted in the inside design, suggested lid recommendations, and offered colour advice (eventually settling on candy red).
The ChotuKool (“small cool”) is a top-opening device with enough storage for the few goods customers wish to keep fresh for a day or two, measuring 1.5 x 2 feet and holding 43 litres. It has no compressor, cooling tube, or refrigerant since it only has 20 pieces (rather than the typical 200).
Instead, it employs a semiconductor that cools when a current is supplied and a fan similar to those used to keep desktop PCs cool. When the lid is opened, the top-opening design retains most of the cold air. It consumes half the energy of a traditional refrigerator and may be powered by a battery during power outages, which are frequent in rural areas.
It's very portable, weighing just 7.8 kilos, and costs half as much as the most basic refrigerator at $69. It outperforms the higher-end option on the performance parameters that matter most to these customers since it's the perfect size for the purpose, simpler to transport, and more dependable in a power outage than a traditional fridge.
Given how often ChotuKool clients relocate, it's not surprising that mobility is crucial to them. Obtaining products and services in developing economies might also be more challenging than in the West due to the scattered nature of their inhabitants. This opens up chances for businesses that address access issues.
In Kenya, for example, banking services are few, and money transfers are difficult and costly. Due to a lack of access to regular services, many individuals are forced to rely on risky alternatives such as hawala, an unregulated network of brokers that operate on the honour system or using cash.
Vodafone, located in the United Kingdom, addressed the issue by creating a secure, low-cost mobile money-transfer service. Safaricom, Kenya's biggest mobile network, operates the M-PESA system (M stands for “mobile,” and PESA is for “money” in Swahili).
Customers may register for free at an approved M-PESA agent, usually a Safaricom dealer but also a petrol station, a grocery store, or another local business. After enrolling, they may deposit or withdraw cash at the agent or send money electronically to any mobile phone user, even if the receiver is not a Safaricom customer.
They may also purchase Safaricom airtime for themselves or other Safaricom customers. For person-to-person transfers, customers pay a fixed charge of around US 40 cents, 33 cents for withdrawals under $33, and 1.3 cents for balance enquiries.
Safaricom deposits its customers' balances in pooled accounts in two regulated banks, ensuring that highly liquid assets back their total value. Vodafone (a significant stake in Safaricom) manages individual customer accounts on its server. Vodafone deposits its customers' balances in pooled accounts in two regulated banks, ensuring that highly liquid assets return to their total value.
Since its inception in March 2007, the program has grown to over 9 million users, accounting for 40% of Kenya's adult population. According to the Economist, M-PESA members may perform transactions at 17,900 retail shops as of June 2010, with more than half located in rural regions. The total number of bank branches, post offices, and Post Banks in the United States is just approximately 840.
The service has grown to encompass bill payments, business-to-customer payments such as paychecks and microfinance loan disbursements, humanitarian relief distribution, and international money transfers, thanks to the popularity of its initial operations.
M-PESA accounted for 9% of Safaricom's total income after just three years. More importantly, it has become the corporation's business engine since its earnings have switched drastically from voice to data traffic. Similar services have already been implemented in Tanzania, Afghanistan, and South Africa, with ambitions to expand to Egypt, Fiji, and Qatar.
Failure to solve the access issue is one of the main reasons why so many firms struggle to adapt their present business models to growing regions.
The greater volume they anticipate would compensate for lower profit margins doesn't always result in profits since the expenses of supplying far-flung clients in underdeveloped developing nations are just too expensive. Companies that develop unique ways, such as Vodafone, may discover that they are broadly relevant in various markets.
Combine The Elements
Business models come in a range of shapes and sizes. Our approach focuses on the fundamentals and elements that make transitioning from one model to another difficult—margin needs, overhead, and “resource velocity” (the capacity to generate a given volume of business within a specific time frame).
The four components are the customer value proposition, a profit formula, essential procedures, and key resources the organization must utilize to provide the CVP regularly and at scale.
Integrating these factors to provide value for the client and the firm is the key to gaining a competitive edge. It's simple to say but very difficult to accomplish. By mapping your company's typical operations to these broad categories, you may understand how much you'd have to modify to incorporate those functions into a new business model (see “Building a New Model”).
Constructing A New Model
Consider the foundation on which you compete—differentiation or price—once you've created a CVP for your proposed service. Offerings that compete on differentiation necessitate the question, “What do I have to do to produce this?”
This leads you counterclockwise around the model, first looking at what resources and processes are required, the cost of which (both fixed and variable) determines what price can deliver the desired profit margin. That's exactly what Whole Foods did when it pioneered the organic food industry. Costs determined prices.
For products that compete on price, start with the CVP, define the price, devise a rough cost structure, and then determine what procedures and resources (sometimes drastically different from those in your existing model) are required to satisfy your pricing needs.
Because affordability is so important in developing countries, the decision-making process nearly always follows a clockwise path. Innovators start with a revenue model—”We believe we can sell this product to X number of people for price Y”—and then figure out how to generate a specific unit margin.
Operating at a given resource velocity to become profitable at that margin entails making judgments about how to structure operations, what materials to utilize, and other issues.
This experiment often indicates that a firm can't fulfill its profit targets in growing countries only by lowering variable costs in its present profit formula. A viable model would also include modifications to fixed expenses or overhead. He found this when Ratan Tata went out to build his $2,500 automobile. He couldn't just send the automobile down the assembly line and save money.
He cut fixed costs by creating a vehicle with considerably fewer components and modifying assembly procedures and other essential processes. It's no surprise that incumbent organizations struggle to implement models that involve changes in costs, margins, or resource velocity, which is why start-ups typically have an advantage in bringing solutions that require new methods to make money to market.
Perhaps the most valuable thing someone can offer to develop markets is an open mind. When we set out to address a simple but difficult cleaning issue for a large number of disgruntled customers, we learnt that lesson.
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