Collaborating Downstream in Emerging Markets

Not so long ago, internal R&D activities were considered one of the most valuable assets a company could have. The rather “outmoded” concept of closed innovation, in contrast to open innovation, was built on self-reliance and on the principle that successful innovation required control and secrecy.

However today even the ‘closed door’ innovation capabilities (both upstream and downstream) are getting more and more dispersed in organizations owing to globalization, faster rate of breakthroughs and decentralization. Managing these dispersed capabilities and aligning them to a coherent innovation strategy is becoming a huge challenge. Also, not all innovation capabilities exist inside the organization.

A Value Network of these capabilities based on collaboration hence, not just inside the organization but also incorporating capabilities existing outside the organization can open doors to a huge potential for growth. This Value Network with a right governance framework can have a threefold impact- reduce costs to develop and to market, broaden the innovation pipeline and improve time to develop and time to market considerably. Although this phenomenon is not new to consumer products industry with the likes of P&G with their Connect and Develop Program already biting a piece of the Value Networks cake, even some companies in the relatively conservative pharmaceutical industry have started to embrace collaboration lately.

As people become more and more mobile, pace of innovation increasingly becomes discontinuous and disruptive, and organizations grow large and decentralized, collaboration is slowly becoming an imperative for organizations.

…collaboration can trigger an increasing pace of innovation at substantially low costs.

This sort of collaboration can trigger an increasing pace of innovation at substantially low costs in business models, products or services (both upstream and downstream) and processes. By taking a portfolio approach and implementing a right governance structure, many companies in consumer products industry have started to embrace the virtue of collaboration. Especially in these challenging times of a downward spiral of consumer spending, decreasing margins and declining market share, a holistic innovation framework holds the key to the future.

In this context however, it is important to lay down a greater emphasis on downstream innovations in emerging markets as these countries still are riding the market maturity curve upwards. Adapting products features, pricing strategies as well as architecture, delivery conditions, credit terms, branding, packaging and sales campaigns can hold the key. In order to achieve this, collaboration is key. It not only helps a new company ride the learning curve in a market faster but also ensures lower costs.

Innovation is becoming a corporate priority that affects every aspect of an organisation’s operation. But being innovative is not a strategy itself. It is a result of a successful strategy. Innovation exists in a context where complexity is high and the unpredictable occurs far more frequently than predictable. In response to the rapidly changing business environment, new technologies and emerging markets like India with its almost 1.1 billion inhabitants, the ability to innovate has become the most important capability for sustaining growth over a longer period of time, as I mentioned in my last Blog already.

For companies from industrialized nations like Germany innovation capabilities are the prerequisite to compete with new competitors from emerging countries.

Innovation capabilities are crucial to deal with differing demands of new markets like India but also to create product or service leadership for other matured markets from products or services emanating from India. For companies from industrialized nations like Germany innovation capabilities are the prerequisite to compete with new competitors from emerging countries that more and more are able to serve mass markets with innovative products at low costs. German companies have to think about building up new innovation capabilities to secure a piece of this cake not restricting themselves to premium markets.

Innovation does not only mean to be successful in R&D and developing new technologies, it also means to develop new market segments. Therefore, we differentiate two types of innovation: upstream and downstream innovation. Upstream innovation is the development of new technologies which is certainly an important strength of German companies.

Downstream innovation is the process of turning the inventions and processes into economic value. One well-known example from India is the Tata Nano with parts from several German automobile suppliers like Bosch, Mahle or BASF. The Nano is the world’s cheapest car at a price of a motor bike (ca. 1500 Euro) and a unique example of innovation. It is perfectly modelled for the Indian market – to address the needs of the Indian consumer.

Without the vision and the faith of the Tata Leadership that Tata and its supplier network will be able to create a car like this and constantly challenging existing paradigms and beliefs, this invention would not have been possible. The technology was there, the challenge was more to have the right vision for the Indian consumer and to bring the right players together to make it happen.

One other example how an Indian company was able to set a footprint in a new market is the ICICI Bank, India’s largest private sector bank, has set up an “ideas laboratory” that has generated more than 40.000 ideas of which more a big portion could be implemented. One of its latest innovations is mobile banking. ICICI bank has built the technological capability to handle large volumes of small ticket-sized transactions which differentiates the company from its competitors. So customers can execute transactions such as paying utility bills and insurance premium by using their cell phone quite easily.

The challenge is to achieve a cognitive competitive advantage, or a preferential position in the consumer’s mind. Here the ability to co-innovate with other companies or academic institutes becomes critical in keeping a firm’s competitive positioning, in a sustainable way. South Korean Samsung Electronic has found its way in India and connected with IIT Delhi to set up a “usability lab” where all its products are studied for customization for India. Outcomes are for example unique product features like the “saree wash course” and “memory re-start” (to deal with frequent power cuts) in its washing machines.

Therefore, the development and management of a company’s Innovation Eco-System plays an important role and increases the capability to create value through incremental innovations that might be the right ones to explore new market segments. The availability of highly-skilled human capital, existing R&D facilities and innovation capabilities of companies in India are the best precondition for German companies to boost also their downstream innovation capabilities for the Indian market.  I already mentioned in my earlier blogs, big OEMs developing Indian ‘Car and Truck concepts’ not just to copy paste but to develop products specifically suited for the Indian market.

I was in Brazil a few weeks ago and learnt that VW had collaboratively opened one of its first (and probably only) truck plants in any emerging market (or probably only one) in Brazil quiet some decades ago and they are one of the most successful ones in that market. Bottom line- it’s important to be collaborative downstream in these markets and to time these collaborations right!

By Gunjan Bhardwaj

About Gunjan Bhardwaj

Gunjan Bhardwaj, advisor, senior editor and member of the editorial board. Gunjan is the leader of the Global Business Performance Think-tank of Ernst&Young. He is also the solution champion for Pricing strategy and effectiveness as well as Innovation management in the advisory services of Ernst & Young with a focus on Pharmaceutical and FMCG sector.

Gunjan is also a guest professor for Growth and Innovation management at European Business School (EBS) in Germany and a member of the scientific advisory board of Plexus Institute in the US which researches on complexity in health sciences.

Gunjan has published a number of papers and articles in various Journals and magazines and has been a frequent speaker in conferences on marketing and innovation related topics. He is also the chief editor of the quarterly journal of Ernst & Young’s advisory practice called Performance.
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