Much has been written about how such multinationals as IBM (IBM) and General Motors are shifting more research and development work to emerging markets like India and China. Although most innovation currently sourced by multinationals from emerging markets primarily consists of new products or services, our research shows that some smart multinationals such as PepsiCo (PEP) and General Electric (GE) are using emerging markets to try out disruptive business models. These changes could radically transform the very essence of these firms and the way they do business globally—not just in India or China, but also in the U.S. and Europe.
The pilot efforts share two things. They are completely dependent on local partner networks for success and they strive to make high-quality products and services affordable to a large number of people in a sustainable fashion. We outline two cases we have studied: PepsiCo and GE Healthcare.
In March, PepsiCo Chief Executive Officer Indra Nooyi announced her vision of transforming the company from a traditional food and drink supplier to a wellness-solution provider. She is committing PepsiCo to make healthy food and beverages affordable and accessible to more consumers worldwide while simultaneously promoting economic and environmental sustainability. To deliver this commitment, Nooyi is radically shifting PepsiCo's business model by flipping the ratio between fun-for-you products (e.g., Pepsi drinks and Frito Lay chips) and good-for-you products (sold under brands such as Tropicana and Quaker). Specifically, Nooyi wants to increase good-for-you revenues to $30 billion by 2020, up from $10 billion today.
Nooyi is using emerging markets—where packaged food consumption is still low—to pilot this new business model. She believes that consumers in emerging markets will jump onto the wellness wagon much faster than consumers in U.S. or Europe, just as they leapfrogged into using cell phones. Much of the inspiration for constructing her vision came from India, a country facing widespread scarcity and a growing population. It is no surprise, in a way, that India is ground zero for testing PepsiCo's new business model of delivering greater value to more consumers, using fewer resources.
PepsiCo's Alliance with Tata Tea
Partnering is one area in which PepsiCo's India unit has proven especially adept. The company has a dynamic partner network made up of local R&D labs, government bodies, nongovernmental organizations, and universities to help identify new market needs and to design and deploy affordable and sustainable solutions that bring benefits to all stakeholders in PepsiCo's business ecosystem. In 2006, for instance, PepsiCo India and the Punjab Agricultural University co-developed a tractor-driven machine that enables direct seeding of rice (DSR)—an eco-friendly technique that eliminates holding water for rice cultivation, reducing water use by 30 percent and cutting carbon emissions by 70 percent. After piloting DSR successfully in a few Indian states over the last three years, PepsiCo has partnered with the Indian Agricultural Research Institute to deploy this water-efficient rice farming technique nationwide. The company even plans to export DSR to other markets facing growing water scarcity.
PepsiCo forged an alliance in April with Tata Tea (part of the Tata Group, India's largest industrial conglomerate) to co-develop a range of healthy food and beverage products. Finally, PepsiCo is exploring ways to open its R&D labs and share some of its proprietary inventions (for, say, addressing iron deficiency) with other food companies in order to scale up the deployment and adoption of healthy solutions that tackle chronic malnutrition in emerging markets, especially among women and children.
Like PepsiCo, GE has expressed a commitment to help build healthy societies worldwide. Last year, GE announced Healthymagination—its vision of bringing better health to more people at less cost. Healthymagination is expected to draw on the capabilities of all GE businesses, including GE Healthcare, which sells technology-based solutions to healthcare providers. Healthymagination calls for radically new business models that rely heavily on partnerships to make health delivery affordable and accessible to more people, especially in emerging markets and the rural areas of developed nations.
In India, GE Healthcare has turned Healthymagination into a practical reality by building partner networks anchored in innovative business models that have been tried nowhere else. For instance, few hospitals in India can afford to set up molecular imaging centers for early detection of cancers. Setting up and maintaining a center is cumbersome and expensive. More important, such devices need a regular supply of a biomarker (glucose) called FDG, which is injected into patients before scanning in order to pinpoint diseased cells. Unfortunately, FDG has a very limited shelf life and needs to be used within hours after production, necessitating on-site production. That requires a medical cyclotron that can cost twice the cost of the scanner, consumes a lot of energy, needs radiation protection, and must be operated round the clock.
GE Shaped India's PET/CT Network
Because few Indian hospitals and clinics can afford this expensive combination, most have traditionally imported FDG. This has led to high transportation costs, import duties, and critical loss in quality from lengthy transportation lead times—14 to15 hours. When a hospital orders FDG for 10 patients, there's usually enough for only three to five patients by the time it arrives.
In response, GE Healthcare created a collaborative business model. GE first convinced entrepreneurial private diagnostic centers in strategically located cities across India to invest in cyclotrons. The company then worked with local airlines to ensure that FDG produced by these centers could be transported safely, quickly, and inexpensively to hospitals across the country. To create economies of scale for domestic FDG, GE connected these diagnostic centers with hospital that already had invested in PET/CT scanners but were underutilizing them. In some instances, the company persuaded hospitals that didn't yet offer cancer treatment to venture into that service because the overall cost of setting up and running a molecular imaging center was now reduced by as much as 70 percent. This low-cost "on-demand" FDG delivery model has led even hospitals in small cities to invest in PET/CT scanners, thus making early cancer detection services affordable and accessible to people in many remote parts of India.
Today, just-in-time delivery of FDG—100 percent domestically produced—works like a well-oiled machine. Whereas India had only one PET device from 2000 through 2007, the number has gone up to 25 (all managed by GE) in the past two years. It keeps growing, thanks to the timely and cost-effective availability of FDG. Everyone wins: Patients gain access to high-quality cancer diagnostic and treatment, hospitals operate their PET/CT devices profitably, the diagnostic centers generate a new revenue stream, and GE sells more scanners and cyclotrons.
PepsiCo's Nooyi calls emerging markets such as India her company's "biggest learning labs," developing ways to deliver affordable and sustainable products and services to a large number of people. We couldn't agree more. It's time for multinationals to start leveraging emerging economies as a seeding ground for frugal and sustainable business models.