Business Model Innovation Tool Kit

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BUSINESS MODEL INNOVATION– TOOL KIT FOR EMERGING MARKETS

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INTRODUCTION

EMERGING MARKETS ARE DIFFERENT – BUSINESSES MUST ADAPTEmerging markets already offer a wide range of business opportunities and the number of attractive business cases is growing at a rapid pace. Population growth, urbanization, industrialization, improved governance structures and the massive development in modern ICT technology are making the markets even more attractive and accessible for foreign companies.

In spite of the general improvements in business conditions, many companies still struggle to find a strategy that enables them to effectively tap into the markets. Market conditions are typically fundamentally different from the market conditions found in more developed markets and market entry and expansion is associated with a range of challenges.

Low average incomes, poor infrastructure and information gaps in terms of regulation, consumer preferences etc. mean that business models used in more advanced countries are not directly applicable in an emerging markets context. Hence, to unlock the markets, companies often need to go through an innovative process in which existing business models are reviewed and adjusted in order to match the specific conditions in the local market they are targeting.

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THE STRUCTURE OF THIS GUIDE

This guide provides you and your business with an analytical framework that can serve as a practical tool for exploring market opportunities in developing countries. The guide contains an introduction to a framework for a structured evaluation of the most essential elements in your business model – such as the overall value proposition, cost structures, revenue streams etc.

The guide can serve as a check list to ensure that you address the key questions that are most relevant for your company in terms of adjusting your business model to an emerging market setting. The guide does not provide concrete solutions to specific problems. Rather, it is a template for an iterative process through which you challenge and develop your business model together with your colleagues, partners and peers.

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BUSINESS MODEL INNOVATION

EMERGING MARKETS REPRESENT A VERY DIVERSE SET OF MARKET OPPORTUNITIESMarket conditions in emerging markets are typically fundamentally different from the market conditions in more developed markets. International companies often face a wide range of challenges when they try to enter, or expand, their activities in emerging markets.

Low average incomes and poor infrastructure can make it difficult to create a market of a substantial size, while significant information gaps in terms of local market conditions, regulations, consumer preferences etc. often make it very difficult for foreign companies to navigate the markets effectively.

Emerging markets represent a myriad of opportunities and market segments with very different characteristics. In order to succeed in emerging markets, your value proposition must be tailored to the needs and preferences within the market segments that you are targeting. The global elite, the emerging middle class and the Base-of-the-Pyramid (BoP) segment represent very different business cases and each business case calls for a different business model.

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MARKET SUCCESS WILL OFTEN REQUIRE A FUNDAMENTAL ADJUSTMENT OF YOUR BUSINESS MODELIn order to present emerging market consumers with an attractive value proposition you should deepen your understanding of the local market environment in terms of market segments, cost structures, distribution systems, consumer preferences, partnership opportunities etc.

The low level of purchasing power combined with a high level of competition from local producers implies that foreign companies will often need to reach price points that are significantly lower than the prices they are used to dealing with.

Similarly, many companies will be forced to adjust their offerings as public and private sector clients in emerging markets are generally looking for solutions rather than specific products or services. Local business systems do not offer consumers the same range of supplementary product and service offerings as in more developed markets. This means that companies are often forced to either expand their current offerings or engage in a close partnership with other players in order to offer clients an attractive solution.

A reduction in price points; expansion of offerings; or establishment of partnership with local players evidently have implications for how a business model works. An adjustment in one part of the business model will often make it necessary to adjust other elements as well. Market success in emerging markets therefore often calls for an iterative process in which each element in the business model is evaluated and adjusted in turn to develop a winning proposition.

In order to kick start the innovation process, a structured mapping of key market assumptions will often be in place. It provides a good platform for exploring each assumption in a systematic way, while compiling the relevant information and evidence required to make an informed choice. This is exactly what this guide will take you through.

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The Business Model Canvas is a strategic tool developed to support documentation of existing business models and the development of new business models. The purpose of the tool is to provide a holistic overview of the business model and visualize how the different parts of the business model fit together.

The Business Model Canvas was first proposed by Alexander Osterwalder and contains nine building blocks that can be grouped into three broader groups as described below:

Group 1: How you add value for your clients• Value proposition – Which problems you solve - and needs you

satisfy - for your clients

Group 2: How you engage with your clients • Customer segments – Which customer segments you serve• Channels – Which communication, distribution and sales channels

you use to deliver value to your clients• Customer relationships – Which relationships you develop and

maintain with your clients• Revenue streams – Which revenue streams you generate when

you successfully deliver your contribution to your clients

Group 3: How you create and produce your offerings• Key resources – Which assets are required to effectively serve

your clients • Key activities – Which activities are performed to effectively serve

your clients• Key partnerships – Which external/outsourced resources are

required to effectively serve your clients • Cost structure – Which costs you will need to cover in order to

effectively serve your clients

BUSINESS MODEL CANVAS

EXPLORE AND CHALLENGE YOUR BUSINESS MODEL IN NINE BLOCKS

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Using the Business Model Canvas can be broken down in to three phases:

• Phase1 – Mapping of assumptions: A structured mapping of key assumptions regarding value proposition, cost infrastructure and client relationships in order to develop a set of clear hypothesis that can be tested in the market

• Phase2 – Collection of data: Market research based on desk research and reports or on observations in the field to establish a solid fact base for an evaluation of key assumptions and research hypothesis

• Phase3 – Business model innovation: Build a business model that matches the improved understanding of the market in collaboration with relevant internal and external partners

HOW TO WORK WITH THE MODEL:

Designedby:BusinessModelFoundryAGThemakersofBusinessModelGenerationandStrategyzer

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VALUE PROPOSITION

Keythingstoconsiderinanemergingmarketsetting:

• Needs are high and growing, but need is not demand • Offering a solution can be more important than offering a world class product or

service• Price is important, but other factors may be more important

In order to understand how you add value for your clients in an emerging market setting, you should have a clear understanding of which problems you solve and how your product, service or associated benefits add value for the client.

The value proposition is closely related to the location in which your potential customers live or operate. A value proposition that has proven to be successful in well developed markets might not appear attractive in an emerging market setting. Needs and preferences will often vary significantly, while low levels of incomes and lack of access to finance can restrict clients ability to choose.

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Keyassumptions

Keyactionpointstotestassumptions

MOVING FORWARD

Guidingquestions:

• What value do you deliver to your clients?• What problems are you helping your clients to solve?• What are the demands from your customers?• What do you want your clients to remember after doing business with you?• How do your products and services fit into the other needs of your client?

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CUSTOMERS SEGMENTS


• Aggregated purchasing power can be a poor indicator for actual market size as the distribution of purchasing power will often just as important

• Ensuring potential clients access to the products and services you provide might be more important than whether your offering is considered the most attractive offering in the market

• Most clients in emerging markets are 1st generation consumers and their brand loyalty will often be limited

There is rapid growth in opportunities in the emerging markets, both in the B2C, B2B and B2G segments. Each market segment offers a variety of opportunities and challenges and one size does not fit all. The needs and preferences within the high-end market segment of the global elite residing in the economic centers, may have many similarities to the needs and preferences found in developed markets. On the other hand, radical business model innovation may often be required in order to successfully unlock new market segments within the emerging middle class or the BoP.

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MOVING FORWARD

Guidingquestions:

• How do you create value for your clients?• Which factors can prevent a potential client from purchasing your products and

services?• How do your clients in emerging markets differ from your existing clients?• How does the environment in which your clients interact with the products and

services you offer influence the value you bring to them?• Which market segment do you expect to be the most attractive market for your

company in the short term? - And in the long term?

Keyassumptions


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CUSTOMER RELATIONSHIPS


• Most clients in emerging markets are looking for integrated solutions rather than isolated product and services

• Innovative solutions that assist clients in getting access to finance may be more important to the client than the actual products and services that you offer

• Brand loyalty is typically low in emerging markets and long term relationship with clients will often require the use of business models involving a clear link between deliverables, e.g. in terms of service maintenance agreements.

• Emerging markets may lack basic infrastructure, but most customers have access to SMS or internet.

Succeeding in emerging markets is very much a matter of overcoming a range of practical challenges to serving clients. Low average incomes and poor infrastructure can make it difficult to create a market of a substantial size, which in turn implies that it can prove difficult to rely on a business model that builds on direct interaction with clients. Similarly, a lack of access to finance or to ad hoc maintenance services will lead many clients to look for integrated solutions, and this presents a challenge with respect to setting up business models based on stand-alone sales. In consequence, many business models in emerging markets involve an element of automated services and/or self-service.

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MOVING FORWARD

Guidingquestions:

• Which kind of relationships have you established with your current clients?• What relationships do your target customers expect you to establish and maintain

with them?• How costly is it to establish and maintain a relationship with your clients?• To what extent is your client relationship based on one-way or two-way

communication?• How does the client relationship fit into your overall business model?• Can you involve your customers in contributing value?

Keyassumptions


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CHANNELS


• Identification of a good, local distribution partner will often be instrumental for market success

• Distributors need to be motivated, educated – and controlled. • The last mile problem still constitutes a significant challenge in most markets• Uncertainty with respect to delivery, will often make it necessary to operate with

a higher level buffer capacity than in more developed markets, e.g. in terms of storage

Business models in emerging markets are often challenged by a limited access to clients. Poor infrastructure and a lack of efficient distribution networks make it difficult to reach large parts of the population. The route to market is often longer and more unpredictable than in more developed markets. The internet, in combination with the expansion of global value chains, has eased the access to clients in emerging markets. However, the last-mile problem continues to be a significant challenge for most companies calling for development and implementation of new innovative solutions.

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MOVING FORWARD

Guidingquestions:

• How do companies usually reach their clients in the market?• How strong are your customer channels and which is most cost-efficient? • How are the channels related to other client routines?• To reach your potential clients, what channels are conceivable, and which have

you explored in other markets?• How are the channels integrated and to what extent are you in control of the

processes?

Keyassumptions


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ACTIVITIES


• The business environment in emerging markets can change very fast, making it instrumental to ensure that you have a certain level of flexibility and autonomy in terms of potential adjustments in non-core activities

• Building the right local partnerships is more time consuming than you expect• A market approach based on a joint venture with existing business partners might

help you reduce the risk associated with a market entry

Companies entering a new market typically go through stages. Initially, establishing sales and distribution, sourcing or manufacturing locally, and in some cases creating a local division for research and development. The business eco system in emerging markets is typically less developed than the business system in more developed markets. One implication of this is that it may prove difficult for potential clients to find suppliers of products and services that complement the product and service that you provide and hence enhances the value proposition you offer, e.g. in terms of maintenance services etc. In consequence, many clients will be looking for integrated solutions. This makes it instrumental to consider which key activities create the value you deliver to customers and which activities need to be lifted by other players – if feasible.

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MOVING FORWARD

Guidingquestions:

• What key activities are most essential for our value proposition?• What activities must be done locally? What is the role of Headquarters at home?• What key activities do our distribution channels, customer relationships and

revenue streams require?• How would your business model change if you increase or decrease the amount

of key activities?• What are the options for outsourcing non-core activities locally?

Keyassumptions


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RESOURCES


• Access to external resources will often be limited in an emerging market setting• In order to ensure stable access to resources locally, it will often be instrumental

to engage in a close partnership with a local partner• Investment in local capacity building may be required to establish a solid platform

for operation

In order to make a business model work in practice, it is essential to obtain a solid understanding of the key resources that are required to effectively deliver your offering to clients. At the fundamental level, a business needs buildings, communication, power, transportation and certain machines to operate. But skills are crucial, too. Companies may need to invest in local capacity building and/or consider innovative ways to provide the resources required, e.g. through establishment of partnerships with local suppliers.

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MOVING FORWARD

Guidingquestions:

• What are the most important resources in terms of your value proposition?• What resources do you require in conjunction with your distribution channels,

customer relationships and revenue streams?• How might you get access to the relevant resources in the specific market and

how much are you willing to invest?

Keyassumptions


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PARTNERS


• Operating on your own in an emerging market may be more challenging than you expect

• Lack of knowledge and resources calls for establishing strong local partnerships• What you see is not necessarily what you get

Market conditions in emerging markets are typically fundamentally different from the market conditions in more developed markets, so international companies often face a wide range of information gaps when they enter developing countries. Therefore, establishing strong partnerships will be crucial in order to navigate effectively in the markets. However, identifying the right partner will often in itself, be a major challenge and may involve a substantial investment of both time and resources as well as further investment in on-going support as the partnership develops.Partners can range from distributors, local manufacturers and suppliers, sources of market insight to relations within large stakeholders and governments.

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MOVING FORWARD

Guidingquestions:

• Which element in your business model is most dependent on access to local partners?

• Which key resources are you currently acquiring from your partners and what are the opportunities for acquiring these resources from local partners in the future?

• Which key activities do your current partners perform and which activities will local partners be able to perform now and in the future?

• What are the opportunities for establishing a strategic alliance with existing partners in order to develop a more solid value proposition?

Keyassumptions


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COST STRUCTURE


• Emerging markets offer opportunities for both low cost and high cost offerings• The total cost of ensuring stable access to key resources might be much higher

than the price of the resources in themselves• Many costs are not fixed and they can be reduced significantly through targeted

investments or interventions

The cost structures in emerging markets can be very different from cost structures in more developed markets. Many resources, such as manual labor might be cheaper, but some factors may actually be more expensive. Hiring employees with a specialized skill set or getting access to certain kinds of financial services or imported goods can, for instanse, be more costly in an emerging market setting due to the scarcity of such resources.

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MOVING FORWARD

Guidingquestions:

• What are the most important costs inherent in our business model?• Which key resources and activities are the most expensive for your business?• Which kind of investments can improve your business by reducing the cost of

resources and or increasing the efficiency of processes?

Keyassumptions


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REVENUE STREAMS


• Willingness to pay may be quite different from the ability to pay• Business models that are based on a series of small transactions rather than one

large transaction will often be more attractive for clients with low purchasing power

• Flexibility in terms of payment has high value in an emerging market setting due to volatility in income and earnings.

One of the most fundamental difference between emerging markets and more developed markets is the massive difference in purchasing power – in particular among regular consumers. The challenges associated with the low level of family incomes and business earnings, are aggravated by the lack of financial infrastructure and access to credit. Consequently, simply due to liquidity constraints, many consumers and businesses are forced to choose low quality products and services - even though these products and services will often be economically inferior to more expensive solutions in the long run. In terms of business model, the low degree of purchasing power implies a need to explore alternative ways to engage with clients, e.g. by applying business models that rely on patient capital or generates revenue stream linked to the total cost of ownership rather than the up-front investments. An example could be business models based on renting or leasing as opposed to models based on ownership.

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MOVING FORWARD

Guidingquestions:

• How much does your different revenue stream contribute to your overall revenues?

• What opportunities do your potential clients have in terms of getting access to finance?

• What are your customers willing to pay for your product and how much can they pay?

• How do your clients prefer to pay?

Keyassumptions


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ABOUT THE INNOVATION CAMP PROGRAMThis guide has been produced as part of the “Emerging market Innovation Camp program” – pioneering innovation program sponsored by Nordic Innovation.

The purpose of the program is to assist Nordic companies in identifying concrete market opportunities in emerging markets and to develop tools and networks that enable the companies to explore new innovative ways to unlock the markets.

The program includes a series of innovation workshops throughout the Nordic countries and on-site Innovation Camps in emerging markets with Nordic participants. During the program, companies engage with local experts, innovation specialists and Nordic peers with the capacity to contribute to business success by driving sales, improving profits and reducing risk.

More specifically, the objective of the Emerging Market Innovation Camp program is to support the realization of Nordic companies emerging market aspiration by…

• Introducing practical innovation tools and enhancing market understanding: In-depth understanding of innovation practices and local market conditions to increase companies ability to effectively navigate new markets together with local partners and Nordic peers.

• Building strategic capacity to realize opportunities: Internal capacity building and practical business development to give companies a chance to realize short-term opportunities and enable proactive approaches towards opportunities in new markets.

• Developing enduring and innovative partnerships for emerging market success: Engage a range of public and private sector players from Denmark, Finland, Norway and Sweden to become part of a Nordic network that creates a strong foundation for peer learning and establishment of partnerships.

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PROJECT MANAGEMENT

PROJECT PARTNERS

CONTACTS

Dalberg Research Hans Uldall-Poulsen, Director of Research Phone: +45 25 61 03 24 Mail: [email protected]

Inclusive Business Sweden Mike Debelak, CEO Phone: +46 (0) 761 855 655 Mail: [email protected]

Dalberg Research Stig Tackmann, Program Management Phone: +45 22 31 38 40 Mail: [email protected]

Confederation of Danish Industries Sara Ballan, Senior Consultant Phone: +45 33 77 37 42 Mail: [email protected]

Aalto University, Aalto Global Impact Petri Allekotte, Business Engagement Manager Phone: +358 50 344 0612 Mail: [email protected]

SIGLA Karoline Teien Blystad, Analyst Phone: +47 912 41 191 Mail: [email protected]

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Business Model Innovation Tool Kit

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