Emerging Consumer and The New Age of Innovation

Emerging Consumer andThe New Age of Innovation

C.K. PrahaladPaul and Ruth McCracken Distinguished University Professor

The Ross School of Business, The University of Michigan

Building Blocks of Strategy: Financial Services Firms

Life Stage Management ofFinancial Services (Scope of Services:Banking + Insurance)

Number ofConsumers(Scale of Operations)

Innovations inAccess to Consumers(Source of Value )

Agenda for the Session:

Demographic Dividend,Efficiency Dividend,Innovation Dividend

EmergingConsumers,

Reforms,Growth,

Convergence ofTechnologiesand Industry Boundaries,Connectivity

ilitie

Access to Consumers

EmergingOpportunity

Development of Strategy Concepts:Focus on Next Practices

1994 2004 2008 Competing forThe Future

*The Future ofCompetition*Fortune at the Bottom of thePyramid

The New Age ofInnovation

The Changing Roles of the Poor and the Rich:

Emerging Markets as a Source of Innovations?

Conception of Emerging Markets: India

$ 45,000 PPP + 1% ~ 4%

2006 2015

$ 10- 45,000 8% ~ 20%

Per Capita Income

4.5- 10,000 26% ~ 40%

< 4,500 65% ~ 36 %

Which is the Target Market ?

Approach to Understanding Market Opportunity

Per capita Income

Per family Income

Size of the Segment

Rate of Upward Mobility

Possible Revenue Pool

Possible Profit Pool

Conception of Emerging Markets: Mexico

~ $ 12,000 10%

$ 4,650 $ 4,000-5,300 20%

$ 2,600 $ 2,150-3,200 30%

$ 1,320 $ 775-1,830 40%

Which is the Target Market ?

Per capita Range % ofIncome (US$) Population

Source: INEGI

Conception of the Emerging Markets

Potential MarketFor Fin.

Services?

First Level Conclusions…

1. The Market is Significant2. This Market will Demand New Business Models3. The Market is Country/Sector specific4. Consumer Behavior/Expectations are varied5. We Need to Focus on Awareness, Access,

Affordability, Availability

We Need:Global Standards and

Locally Responsive Solutions

The Core Strategy Challenge

Life Stage Wellness Management

Number ofConsumers

New Channels andBusiness Models

TraditionalSegments

IntegratedAccess toConsumer

Number ofConsumers

TraditionalSegments

Number ofConsumers

TraditionalSegments

Accessing Emerging Markets:Challenge # 1:

Creating the Capacity to Consume

1. Easy Payments: Access to Credit2. Lower Costs: 20-50X improvement3. Single Serve4. Pay/use; Focus on Access5. “Last Mile” Distribution

Access to Emerging Consumers

They Live in:

Unorganized, InefficientSystems,

Local Monopolies,Information Asymmetry,Poverty Penalty, Poor Quality, Low Tech.

We Must Create:Organized Sector, National / Global

Competition,World Class Quality,

Affordable Prices,Access to info.

Advanced Tech.New Models

The Core “Mother Industries” forEconomic Development

Productivity =Poverty

Alleviation

Education,Health Care

MicroFinance

Connectivity

Energy

(Private Sector)

(NGOs,PrivateSector)

Is there Evidence that Emerging Consumer can be Source of Wealth

Creation?

The Cell Phone Industry:1. Great growth Story in BOP markets around the world

Sub Saharan Africa, S. AfricaChina, IndiaThailand, Philippines, IndonesiaMexico, Latin America

3.0 billion connected around the world2. The industry has Cracked the BOP Code

3. India is one of the fastest growing Markets: 6 million/month4. Cost of service: Lowest in the world5. Market Cap of 4 firms in India: $ 75 billion

6. Cell phone is becoming the device of Choice not the PC

Participation In Emerging Markets

1. Converting consumers from Unorganized, inefficientmarkets to Organized and Efficient Private sector

2. It is a Market Development Task

3. BOP Markets will Force Breakthrough Innovations

4. We have to think differently;Price - Profit = CostCost + Profit = Price

Desire for EyesightTarget Price

Target Cost

Target Profit

Desire for ConnectivityTarget Price

Target Cost

Target Profit

Desire for a Car?

Target Price

Target Cost

Target Profit

The Desire for Connectivity

Target Price

Target Cost

Target Profit

Focus on Emerging Consumers Lead to Breakthrough Innovations

It can Create Global Opportunities

Making Products/Services Affordablee.g. Prosthetics for the Poor

Evidence: Jaipur Foot, India

Approach: Barefoot Walking,Squat on the FloorSitting Cross leggedWalking on Uneven GroundPaucity of DoctorsNeed for Custom Fitting in a day

Defaults As good as US ModelsSize and Scope Largest in the WorldViability Profitable

Basic Foot Movement is Complicated

The Functionality Requirements in India are Different from the West

Activity Functionality:1 Functionality:2

Squatting Need for Dorsiflexion

Sitting Cross Need for transverse Legged Rotation

Walking on Need for Inversion andUneven Ground Eversion

Barefoot Walking Need for Natural Look

Work Needs,Poverty,Lack ofTrained manpower,

Time forFitting

Comparison of Scale and Quality

Jaipur Foot 16,000/year As good as US

Aravind 280,000/year As good as UKEye care

NH 7,500/year Better than NY State

Scale Quality: Outcomes

The Health Care Revolution:

Jaipur Foot Prosthetics 200 x 16,000/year

Aravind EyeHospital Eye care 100 x 250,000/year

Escorts Cardiac care 15 x 7,000/year

Narayana Pediatric 30 x 7,500/yearHridayalaya cardiac care

Field of Group Specialization

Cost Adv.Over USA Size

Cost Comparisons

USA India Thailand

Typical Costs in US $

Coronary ArteryBypass Surgery 70-133,000 7,000 22,000

Heart valve Replacement 75-140,000 9,500 25,000

Hip Replacement 33- 57,000 10,200 12,700

Prostrate Surgery 10- 16,000 3,600 4,400

Source: US News and World Report, May 12, 2008

Do We Need a New Methodology for Innovation at Emerging

Markets?Creating Micro Consumers

Constrained Innovationor The Innovation Sandbox

Case Study # 2

Current Practice: Typical Cooking System

The “Innovation Sandbox” for Energy in India

Aspirational, Intelligent

Scalability

NewPrice-Perf.Levels

SafetyStandards,Eco.sensible

What is the Opportunity in India for BP?

1. Rural Poor is a Target Market2. Extreme Variety in Cooking Habits3. Choice of Fuels based on Cooking Habits,

Availability of Funds, and access to Biomass4. We need a very Flexible, Personalizable Solution5. There is a great Opportunity for Improving Energy

Efficiency and Health of Women and Children6. It must be affordable

The Combination Chula

BiomassPellets,Efficient,No Smoke

Combination Stove used in Market Research

The Combination Chula

BiomassPellets,Efficient,No Smoke

New Pelletizers,1 KG bags,Supply Chain

LPG Supply ChainDecentralizedStorage

Manufacturing and Logistics of the Chula

Creation of Village level Entrepreneurs: Jyoti AmmasPartnership with NGOs and IISc. as Co Creators

First Stoves

Stabilized Version

Current Version

Chinese StoveNext Version (India & Vietnam)

Where is the Experiment?

1. Successful Piloting in India during 20062. Scaling in India during 2007-20103. Experiments in SA and piloting4. Opening up 8 New Geographies in next 3 years5. A New Category for BP- Emerging Consumer6. New Approach to participation in Non OECD markets

Emerging Consumers Creating a New Global Competitiveness Agenda for

Market Development

Distribution/Logistics,

Price-Performance

Hybridtechnology

DeskillingWork,

Remote Delivery

Creating the Capacity to Consume

Leanmanagement

New Forms of Governance

Key Takeaways……

1. Emerging Markets a New Source of Efficiency and Breakthrough Innovations,

2. Awareness, Access, Affordability, Availability as Key building Blocks

3. The Innovation Sandbox – Embrace constraints

4. Collaboration with Civil Society, Public Sector andPrivate Sector

Critical Innovations1. Last Mile: Innovations in Distribution

Micro Finance FirmsNGOsTelecom FirmsRetailers (Casas Bahia, Elecktra)

2. Innovations in Payment MethodsCell Phones (Globe telecom)

3. Who is the Competition?Coke?

Rethinking Innovation andValue Creation

The New Age of Innovation:The Basic Thesis

Globalization Connectivity,Digitization,Convergence,Social Networks

A New ApproachTo Innovation &Value Creation

Price-Performance Envelopes are Changing Faster than anyone Expected

1. Transistors/chip 103 106 109

2. Decrease in size of micro-devices 10-1 10 -6

3. Computing power 1011 1015

4. Cost per MIPs($1000) 1 1M 5. DNA sequencing cost

($/BASE PAIR) 10 0.05 6. Magnetic data storage 104 1011

(bits/dollar)

1970 80 90 2006

Source: Ray Kurzwell

The New Age of Innovation:Core Drivers:

Connectivity, Convergence,Digitization, Social Networks

Shifting Balance of Power:C < F to C ≥ F

New FirmsN=1; R=G

Traditional FirmsMigrate toN=1; R=G

LooseCompetitive Advantage

Build New Capabilities:Social and Technical Architecture

Talent Matters IT Matters

Value Creation Process in:1. Google2. Tutor Vista3. Li & Fung4. Netflix5. Starbucks6. Amazon7. Aviva8. Nike9. ICICI- Prudential10. Automotive -OnStar11. Bridgestone12. Madras Cements13. Medtronics14. UPS

One Consumer atA time (N=1);

Multiple Vendors(R=G)

What Are the Building Blocks of a New Managerial Framework for

Innovation and Value Creation?

The New Game:

( Co creation of Personalized Experiences)

(Multi-Institutional and Multi –Geographic Access to Resources)

The Transformation from a Product/Firm Centric View to N=1: R=G

1910 2010

The Centrality of Personalized Experience

UndifferentiatedCustomers(Model T)

CustomerSegments

(e.g. Adolescents)Mass

Customization(e.g. Dell) Personalized

Co Creation(e.g. Diabetes,

The Need for Accessing Distributed Resources

VerticalIntegration(e.g. River Rouge)

Creation ofA Supply base

GlobalSupply Chains

Emergence ofNodal Firms andSupply Webs

Rethinking Innovation

Custom madeProducts

Mass ProductionOf Products

Services

Solutions

Unique,PersonalizedCo createdExperiences

Case Study # 3

Consider Type II Diabetes Next Practice Solutions?

The Spread of Diabetes

Type IIDiabetes

Kidney

Cardio-Vascular

Amputations

DiagnosisMedication

Compliance,Life Style

AffordableInsurance Delivery

Infrastructure

New Principles:1. Life Style Diseases Need Effective Management by Individuals.

Compliance to a Prescribed Personalized Routine is Key Focus on N=1 (Individual’s Behavior)

2. Economic Incentives are a Source of Feedback to IndividualsPricing Based on Behavior can Improve Compliance

Focus on Variable Pricing Based on Compliance

Variable Pricing Strategy

Base Premium

Strong Compliance;Reduced RiskReduced Premiums

Poor ComplianceIncreased RiskIncrease Premiums

2. Economic Incentives are a Source of Feedback to IndividualsPricing Based on Behavior can Improve Compliance

Focus on Variable Pricing Based on Compliance

3. No Single Firm can Create the Eco System for ComplianceNeed to Build a Multi-Vendor Ecosystem with a Nodal Firm

Focus on R=Global for Serving N=1

The Diabetics Management Ecosystem

ICICI-Prudential

WockhartBiocon

NicholasJ&J

Metropolis,Well Spring

Gyms &HealthClubs

RuralAccess?

PharmaMonitoring

Diagnostics

HospitalNetworks?

Channels ConsumersHealthMgt.

What are the New PrinciplesInsurance Perspective Health Perspective

A Class of customers and One customer at a time; N=1Actuarial data Real time Behavioral data

Pricing based on segment Pricing based on compliance ofan individualEconomic Incentive to stayHealthy

Protect from Catastrophic Help customers improve theirIllness, death Life Style, contain disease,

Protect from Catastrophic illness and death

Customers are on their own Customers get help; Feedback andCertified Periodic Testing

The Basic Transformation

Suppliers The Firm Channel

SCM ERP CRM

NodalFirm

N=1, R=G Changes the Innovation Dynamic

BusinessUnits

Corp. as aPortfolio Of

Competencies

ExtendedSupply

Network

Enhanced Network of suppliers,Partners,

Consumers

The Sources of Competence is Changing

Pre 1990 1990 - 1995- 2001 -

The Meaning of Innovation is Changing

Product Innovations

Customer Specific

Solutions

Customer Experiences:Co Creation

Pre 1995 1995 - 2001-

We can Identify an Innovation Continuum

Locus ofCompetence

Locus of Innovation

Build & Sell Build Co CreateProducts Solutions Experiences

Corp.As a Source

ExtendedSupplierNetwork

Enhanced Network:Customers

InnovationCollaborativeCapacity

Common, SharedStandards, Platforms

Global TalentLeverage

New Business Models

InvestmentCapacity

The New Age of Innovation

What are the Enablers?

N=1, R=G Increase in the Numberof Activities, and Players:Orchestrating an eco system

Value Creation Understanding and ManagingTensions and Frictions

Innovation in anN=1, R=GEnvironment

Managerial Mindset, Systems,Measurements, and Talent

What are the Impediments toBuilding New Capabilities ?

Social InfrastructureOf the Firm:Legacy MindsetsDominant LogicSkills, Attitudes and

BehaviorsDecision ProcessesIncentives

Tech. InfrastructureOf the Firm:Legacy Systems

DatabasesICT ArchitectureApplications

BusinessProcessesAnalytics

Access toTalent

The New House of Innovation

The Technical Architecture of the Firm:(Information and Communication Technology –ICT-

Backbone of the Firm)

The Social Architecture of the Firm:

(Values, Skills, Attitudes, Decision Processes,

Performance Metrics in the firm)

Flexible and ResilientBusiness Processes andFocused Analytics

Strategy for Financial Services

Life Stage Management ofFinancial Services (Scope of Services)

Number ofConsumers(Scale of Operations)

Innovations inAccess to Consumers(Source of Value )

Transformation Requires:

ImaginationPassionCourageHumanityHumilityIntellectLuck !

Emerging Consumer and The New Age of Innovation

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