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Innovation in Emerging Markets

With emerging markets expected to provide as much as 75 percent of the world's growth in the foreseeable feature, Western multinationals are understandably eager not to fall behind there. Many such companies have exported their operating models to these markets and performed passably in locations that roughly resemble their domestic markets. But if they are to capture the middle and lower part of the income pyramid in countries that encompass approximately 80 percent of the world's consumers, they will need to innovate. Not primarily in products or technology, but in business models that address the myriad difficulties of extremely challenging markets.

The challenges are many: poor distribution systems, government restrictions, cultural complexities, populations widely dispersed over isolated rural areas, potential consumers with small and unpredictable income streams. Companies that master these challenges don't merely tweak their existing business models but rather reinvent them.

Hindustan Unilever devised a model that broke through the income and access barriers that keep hundreds of millions of nonconsumers from the market. Reaching out to government-supported and microfinanced village self-help groups, the company identified and trained a sales force of women who had few business skills but great entrepreneurial ambition. Termed "Shakti Ammas" (literally "strength mothers"), they represent the company and sell its home-care, health, and hygiene products in their villages. From a small pilot program involving 17 women and a few villages in 2003, the model expanded to 45,000 Shakti Ammas covering 100,000 villages across 15 Indian states and reaching 3 million homes by 2007.

Rethinking the Business Model

The Mumbai-based company tapped this vast market by rethinking entirely the "four boxes" that work together to make up any business model: customer value proposition, profit formula, key processes, and key resources.

The customer value proposition—the product, service, or combination of the two that helps customers solve an important problem—represented a major departure for Hindustan Unilever (HUL). In the traditional packaged consumer-goods business, the retailer is the customer and the product is distributed through third parties in population centers. But in this case, the Shakti Ammas are the customers to whom the company delivers not just products but also a business opportunity that often doubled their incomes and gave them greater prestige because of their role in producing social benefits like better hygiene.

HUL also revised its profit formula, which defines the way a company captures value and includes the revenue model, cost structure, target unit margin, and resource velocity. Traditionally, packaged consumer-goods companies make profits through low per-unit cost and economies of scale. Until it came up with its radically new approach to distribution, HUL had thought it not possible to devise a scalable way to reach India's widely dispersed populations in its small villages. Although the Shakti model does produce lower margins, it makes up for it with much higher volume.

Key resources and key processes are the skills, activities, and assets through which the company delivers value to customers and to itself. HUL's network of partners broke with the company's longtime distribution practices, which had previously kept its distribution system entirely in-house. Further, the company had to conceive new ways to provide sales training for the Shakti Ammas—who had varying levels of education—and new ways to provide compelling brand messages to people for whom traditional brand messages meant little.

Repeatable Process

Successful business model innovators like HUL devise systems in which these four elements interact in consistent and complementary ways that together produce an entirely new way of doing business for the company. The very best make business-model innovation a repeatable process, rather than a matter of elusive inspiration, that starts not with your current products or even with thinking about business models at all but rather with identifying an opportunity to satisfy an important need for real customers. The second step is to construct a blueprint—the four boxes—laying out how the company aims to fulfill that need at a profit. The third step is to implement it, incubating it first in a small foothold market, then accelerating it. Finally, once the model reaches a certain scale, the company must decide whether to fold it into the core business or keep it separate and uncompromised by long-established practices.

Unilever isn't alone in business-model innovation in emerging markets. Wal-Mart (WMT), Levi Strauss, and GlaxoSmithKline (GSK) are just a few of the Western multinationals seeking new ways of doing business in these dramatically different markets.

Laggards in business-model innovation who would like to do business in emerging markets should consider this. Their global competitors aren't the only ones getting a head start. Domestic companies in those markets are developing innovative business models as well. And with intimate cultural knowledge and fewer government restrictions, they could make life even harder for those who come late to the game.

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