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Pulse - March 2012 - Innovating for the next 3 billion - EY - Australia

Innovating for the next 3 billion

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At a time when major developed markets are struggling to sustain an economic recovery, it is easy to forget that opportunities abound in other parts of the world. Rapid growth markets in Africa, Asia, Eastern Europe, Latin America and the Middle East continue to expand rapidly and play an increasingly dominant role in the global economy. Many of these economies are becoming major hubs of entrepreneurship, innovation and trade, as well as investment from multinationals from around the world.

Until recently, growth in Africa, Asia, Eastern Europe, Latin America and the Middle East was dominated by investment, infrastructure and exports, but in the next decade, it is likely this picture will start to change. Major rapid-growth markets will start to steer their economies away from a dependence on exports toward a model of increased private consumption.

The rise of the middle class

Although not rich by the standards of developed countries, a huge middle class is already saving less and spending more, creating big opportunities for companies that can serve them with relevant products and services.

These markets are vast. The middle class in Asia alone currently numbers some 525 million people, greater than the population of the entire European Union.

Between now and 2030, an additional three billion people globally will enter this middle class. Over the longer term, this explosion of spending power has the potential to make a significant contribution to a sustained global economic recovery and unwind long-standing economic imbalances between West and East.

We believe that this emerging demographic, which we call the next three billion, offers companies a rare and highly valuable opportunity to seize a new market of unprecedented size by thinking differently about how they innovate.

How to capitalise

To provide insight around the rise of the global middle class — and how to capitalise on it we teamed up with the Economist Intelligence Unit to survey of 547 C-suite executives, board directors and senior managers in rapid-growth markets in Brazil, Russia, India, China, Mexico, Turkey, Indonesia and South Korea. Half of the companies surveyed have more than US$1b in revenue, and 70% report EBITDA growth in excess of 5% for the last year.

Our findings reveal:

  • Innovating for the next three billion is a major opportunity, but companies are realistic about the challenges.

There is a widespread consensus that innovation in rapid-growth markets represents an important opportunity for growth. More than one-third of respondents to our survey say that they are already reaping rewards from a more “frugal” approach to innovation, while a further 40% plan to do so. Companies with higher-than-average EBITDA growth are particularly likely to be focusing on this opportunity. But respondents are also realistic about the challenges ahead. Many admit that it will be difficult to make these innovations profitable, while others are concerned about the extent of existing competition.

  • Deep customer insight and organisational agility are key to meeting the needs of the next three billion.

An understanding of the needs of local customers is the most important contributor to successful innovation in rapid-growth markets. To solve the unmet needs of the next three billion, leading innovators spend time observing them to spot potential opportunities. They also give autonomy to local managers to roll out new products and services, and ensure that a significant proportion of R&D takes place close to end customers.

  • Companies must balance the need for local customisation with global scale.

Economies of scale are vital to bringing down the cost of innovating for the next three billion and ensuring that it is profitable. Global innovation networks that enable resources and intellectual property to be applied across regions can be a vital channel to share intellectual property with other markets. Some companies focus on developing global “platform technologies” that can be combined with local elements to make them relevant in each market.

  • Low-cost innovations are not just for rapid-growth markets.

Companies that innovate for customers in rapid-growth markets should consider how they can take those ideas and apply them in developed economies. As living standards between developed and rapid-growth markets converge, and as companies seek new efficiencies in their operations and innovation processes, innovations designed with rapid growth markets in mind will become increasingly valued globally as a source of competitive advantage.

  • Successful innovation in rapid-growth markets goes far beyond R&D.

Creating products and services that are affordable for the next three billion requires companies to draw upon a broad range of capabilities. R&D is important, but it is just one piece of the innovation puzzle. To meet the requirements of quality, affordability and access, companies should be prepared to rethink their entire business and operating models. They should build new relationships with stakeholders across the supply chain, seek out new distribution channels, and develop an intense focus on operational excellence to bring down costs and increase efficiency.

  • Local companies have the upper hand in serving lower-income customers, but multinationals are gaining ground.

Companies headquartered in rapid-growth markets currently have the upper hand in serving lower-income customers. They have deep local knowledge and insight into customer needs, and are accustomed to operating in an environment where constraints encourage creative problem solving.

But companies from developed markets are keen to catch up by applying their strengths of global resources and capabilities, a process-oriented approach and strong brands.

The way forward

Capitalising on the demand from the next three billion will not be straightforward. Many companies will need to rethink their product and service offerings to ensure that these offerings are tailored to the needs of this vast customer base. This will mean thinking differently about every stage in the product development process. Strong R&D capabilities will be important, but so too will be innovative business models, deep customer insight, and a culture and a mindset that support innovation.
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