It’s no secret that most companies are looking to emerging markets for future growth. According to the Economist, Western multinationals expect to find 70% of their future growth there—40% of it in China and India alone. But there’s no longer a simple entity called ‘emerging market’. Markets are changing and a key to growth is learning how to create opportunity from those changes.
In trying to transplant their domestic business models, companies end up slashing margins or confining themselves to the higher-income segments, which aren’t big enough to generate sufficient returns.
One often overlooked opportunity is targeting a certain group in the huge middle market of consumers. These consumers are stuck in the limbo that our colleague Clayton Christensen calls “nonconsumption”; many of their basic needs are being met very poorly by existing low-end solutions and they cannot afford even the cheapest of the high-end alternatives.
The story of a little red refrigerator called ChotuKool shows the powerful opportunities for companies when they target this frustrated segment of the middle market. Chotukool was developed by Indian multinational Godrej & Boyce, with our help at Innosight.
Godrej is a diversified manufacturer of everything from safes to hair dye to refrigerators and washing machines and was faced with a pressing growth dilemma: traditional compressor-driven refrigerators had penetrated only 18% of the Indian market because of the high cost to buy and maintain them. But rather than developing a stripped-down version of a standard refrigerator—offering “less for less”—the company ended up creating a category-defining product by fundamentally reconceiving its business model.
The process they followed consists of three basic steps: identify an important unmet job a target customer needs done; blueprint a model that can accomplish that job profitably for a price the customer is willing to pay; and carefully implement and evolve the model by testing essential assumptions and adjusting as you learn.
A small team at Godrej & Boyce was assembled and assigned to conduct detailed observations and open-ended interviews to help identify the job to be done for that untapped market. The semi-urban and rural people the team observed typically earned 5,000 to 8,000 rupees (about $125 to $200) a month, lived in single-room dwellings with four or five family members, and changed residences frequently. Unable to afford conventional refrigerators in their own homes, they were making do with communal, usually secondhand ones.
The shared fridges weren’t meeting these people’s needs very well, but not for the reasons one might expect. The observers found that they almost invariably contained only a few items. Their users tended to shop daily and buy small quantities of vegetables and milk. Electricity was unreliable, putting even the little food they did want to preserve at risk. What’s more, although they wanted to cool their drinking water, making ice wasn’t a job for which these people would “hire” a refrigerator.
So why would this group of consumers “hire” a refrigerator? The team concluded that what this group needed above all else was to stretch one meal into two by preserving leftovers and to keep drinks cooler than room temperature. Clearly, there was no reason to spend a month’s salary on a conventional refrigerator and pay steep electricity prices to get the simpler job done. Nor was the solution a cheaper conventional fridge. The unmet job would require an entirely new product, supported by a new business model.
A business model consists of four components, key resources (brand and people, for example), key processes (R&D, for example), a profit formula, and the customer value proposition (CVP).
Within these four, there are a range of levers, including distribution chain, revenue model, which can be one where the customer pays one time up front (purchase model) or month by month (leasing model).
Successful entrepreneurs have long found success when developing new products by conceiving of offerings that are somehow more convenient, affordable, accessible, or simpler than anything that currently exists. In developing markets, we’ve found that affordability is key, of course, but equally critical is improving access.
Take ChotuKool’s potential customers. Their low incomes and living circumstances—for example, they changed residences frequently—meant that affordability and access were important barriers to consumption. In blueprinting its new business model for ChotuKool, Godrej started with price first, as the key that would unlock the access issue, and then worked toward the cost structure, and finally the processes and resources required to develop and distribute the product.
Godrej’s team consistently questioned its assumptions and course corrected as it learned more from field experiments and went eventually to implementation. For example, in one of our initial sessions with them the first thing managers wanted to know, naturally enough, was “Could Godrej provide a cheaper, stripped-down version of our higher-end refrigerator?”
After initial field work indicated that low-end refrigerator wasn’t even something people needed, Godrej’s team designed and built a prototype cooling unit from the ground up, testing it first in the field with consumers. Then, in February 2008, more than 600 women in Osmanabad, a city in India’s Marathwada region, gathered to participate in a co-creation event. Working with the original prototypes and several others that had followed, they collaborated with Godrej on every aspect of the product’s design. They helped plan the interior arrangements, made suggestions for the lid, and provided insights on color (eventually settling on candy red).
The result: a top-opening unit that, at 1.5 x 2 feet and with a capacity of 43 liters, has enough room for the few items users want to keep fresh for a day or two. With only 20 (rather than the usual 200) parts, it has no compressor, cooling tubes, or refrigerant. Instead it uses a chip that cools when a current is applied and a fan like those that prevent desktop computers from overheating. It uses less than half the energy of a conventional refrigerator and can run on a battery during power outages. At just less than 8 kilograms, it’s portable, and at $69, it costs half what the most basic refrigerator does. Because it’s the right size for the job, easier to move, and more reliable in a power outage than a conventional fridge, it surpasses the higher-end offering on the performance measures that matter most to these consumers.
If Godrej considered the ChotuKool to be simply a no-frills refrigerator for the middle market, it might be content with a moderate penetration rate. But the company’s managers regard it as a new product category, based on new technology, that has the potential to perform jobs for people at many income levels. In areas with frequent power outages, the owners of conventional refrigerators might want an inexpensive and reliable backup. Small shops, offices, and manufacturing sites might use it to maintain a supply of cool drinks. As the technology improves, Godrej believes, it can enter mainstream markets as ChotuKool changes consumers’ expectations about refrigerator prices and performance and addresses a need that previously went unmet.
Many companies view emerging markets as one large foothold market, and in this they are right. Classic disruptive innovation theory holds that, ideally, innovations should first be introduced in markets where the alternatives fall short on some dimension (typically price) or are utterly unavailable.
Emerging markets fit that bill in spades. They are excellent arenas for trying out product innovations far from competitors’ prying eyes. But we are convinced that a much greater opportunity lies in viewing these markets not as one vast lab for product R&D but as unique environments filled with poorly done jobs that could be creatively addressed with business model R&D.
By Matthew J. Eyring, Mark W. Johnson, and Hari Nair
This article is adapted from their Jan-Feb 2011 article in Harvard Business Review, “New Business Models in Emerging Markets.”
Matt Eyring is President of Innosight, a strategic innovation consulting and investing company with offices in Massachusetts, Singapore, and India, where he co-leads the healthcare practice, helping clients in the health and medical industries find, develop, and commercialize high potential growth opportunities. Matt co-founded and currently serves on the board of directors of Innosight Ventures.
Mark Johnson is chairman of Innosight, a strategic innovation consulting and investing company with offices in Massachusetts, Singapore, and India, which he cofounded with Harvard Business School professor Clayton M. Christensen. He is the author of the award-winning book Seizing the White Space: Business Model Innovation for Growth and Renewal.
Hari Nair is a Venture Partner at Innosight Labs, the business-building arm of Innosight where he advises and consults with range of Fortune 500 companies on building and incubating new growth businesses, with a focus on emerging markets.