Profitable Growth for the india

7/28/2019 Profitable Growth for the india

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www.pwc.com

October 21, 2012

Learning from the Next 4 Billion markets

Full PresentationStrategy and Research

Profitable growth strategies for the

Global Emerging Middle (GEM)


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Content

1 About me 1

2 Global emerging middle 3

3 Demographics and growth 13

4 New value propositions 205 How are businesses reacting 32

6 Take aways 45

Page


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About me

Section 1

Profitable growth strategies for the Global Emerging Middle (GEM) Kirloskar Institute of Advanced Management Studies

1


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About me..

Section 1About me


2

Professional

PersonalQualification

Principal consultant, Strategy

consulting @ PwC

Corporate planning andStrategy @ L&T

Corporate planning @Reliance Com

PGDM, IMDR, Pune

B.E, RKNEC, Nagpur

Reader, traveller,history enthusiast,and aspiring

gardener Married to Pragya

Stay in Baner, Pune


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Global emerging middle

Section 2


3


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CK Prahalad and Stuart Hart introduced to the corporate world theconcept of the Bottom of the Pyramid

Section 2 Global emerging middle


4

Annual per capita income Population in millions

75-100

1,500 1,750

4,000

More than $20,000

$ 1,500 - 20,000

Less than $ 1,500


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Six assumptions companies make



5

The poor are not our target customers because with our current cost structures, we cannotprofitably compete for that market.

The poor cannot afford and have no use for the products and services sold in developedmarkets.

Only developed markets appreciate and will pay for new technology. The poor can use theprevious generation of technology.

The bottom of the pyramid is not important to the long-term viability of our business. We canleave Tier 4 to governments and nonprofits.

Managers are not excited by business challenges that have a humanitarian dimension.

Intellectual excitement is in developed markets. It is hard to find talented managers who

want to work at the bottom of the pyramid.

Every single one of these assumptions is generallywrong

Source: C.K. Prahalad and Stuart L. Hart, The Fortune at the Bottom of the Pyramid, strategy + business, Issue 26


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6

Company Country / Region Business activities

Unilever (UK) India Selling low-price shampoo and detergent

P&G (USA)Countries in Africa,

Asia, Middle East, etc.Selling water purification powder

Danone (France) Bangladesh Providing low-price yoghurts for children

Yamaha Motor (Japan) Indonesia, etc. Installing compact water purification systems

Nissin Foods India (Japan) India Selling instant foods in individual servings

Wal-Mart (USA) BangladeshEstablishing sewing plants and providing employment for

women previously isolated in rural villages

Grameen Bank (Bangladesh) Bangladesh Offering micro credit services so as to enable lending topoor people

Galanz (China) China Selling compact microwaves

KickStart (Kenya) Kenya Selling low-price water supply pumps

Philips (Netherlands) India Selling smokeless stoves for rural village

...and how did companies react


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High growth and under penetrated markets pose substantialopportunities in emerging economies



* Bubble size indicates countrys population

Algeria

Angola

ArgentinaBrazil

ChinaEgypt

France Germany

India

Indonesia

Japan

Kenya

Mexico

NigeriaPakistan

Senegal

South Africa

United Kingdom

United States

-10,000

0

10,000

20,000

30,000

40,000

50,000

60,000

-2 0 2 4 6 8 10 12

GDP/Capita($),2011

Real GDP Growth, 2011 (%)

Developed nations with low growth forecasts

Emerging economies with high growth potentialas well as large under-penetrated population

Under-penetrated markets

Rich (>$12,000) Middle ($12,000 - $4,000) Lower Middle ($4,000 - $1,000) Low (


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8

Those nations comprising 4 billion of the 7 billion world population, withGDP/capita of $1,000 - $4,000 per year is the next growth horizon

Sources: World Bank

Target population

NEXT 4 BN HORIZON

HORIZON 1 HORIZON 2

Upper1bn

Next4bn

Low1bn

7 Bn Population

Income level > $ 12,196 $ 3,946 - $12,195 $ 996 - $ 3,945 < $ 995

Yrs of education 14.5 13.8 10.3 7.9

Urban (%) 78 74 41 27

Mobile phones

(per 100 people)

106 92 47 22

Internet users(per 100 people)

68.3 29.9 13.7 2.3

Cars (per 1,000people)

435.1 125.2 20.3 5.8

Middle1bn

Difference

Middle vs.

Next

25%

45%

50%

54%

84%


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9

This Global Emerging Middleis concentrated in countries likeIndia, China, Indonesia, Pakistan and large segments of Africa

the Middle 1 bn, an adjoining segment is also largely in Asia, Africa andLatin America

Sources: World Bank

Next 4 bn ($996 - $3,945)

Middle 1 bn ($ 3,946 - $12,195)


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10

Within these countries, the bulk are the Global Emerging Middlecomprising approximately 2.3 billion globally (Only sample countries)

Source: PwC Analysis, World bank, IMF

The Global Emerging middle class has across counties totals to about 2.3 billion, globally. The definition ofGlobal Emerging middle classvaries by country. Our analysis takes a ppp-adjusted view of each country, and estimates a common bracket of emerging middleclass, globally.

0

300

600

900

1,200

1,500

US

UK

Spain

Greece

Italy

Brazil

Russia

Alergia

Argentina

Others

China

India

Pakistan

Indonesi

a

Sudan

Nigeria

Egypt

Angola

Others

Mutiple

Population

(Millions)

Reducing disposable income

Rich (1 bn)

(>$12,000)

Middle (1bn)

($12,000 - $4,000)

Next (4bn)($4,000 - $1,000)

Low (1bn)(


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11

By 2021, India will have about 600 million people constituting theEmerging Middle Class segment

Sources: PwC Analysis, NCAER (National Centre for Applied Economic Research), CMI.

* The emerging-middle income bracket, PPP adjusted is $5 - $15 per capita per day. Alternatively $1,850 - $5,550 per capita per year

All figures are reported at 2010 constant prices

Indias Population Distribution (millions) 1.19 Bn 1.36 Bn

Householdincome/year (INR)

$*/dayper capita

2010 CAGR (%) 2021 (Projection) (%)

> 8,50,000 Upper Middle + >$10 9.7% 14%

3,00,000 8,50,000 Middle $5-$10 6.3% 23%

1,50,000 3,00,000 Emergingmiddle

$1.7-$5 1.9% 42%

< 1,50,000 Low


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12

In India, the Emerging Middle Class will constitute a $1 trillionmarket, with a young, largely rural base ready for change

$ 1 Trillion economyA 570 million person market and $1 Trillion economy by2021, additional a large section passing through

Rapid ChangeChanging patterns of needs and wants underpinned byservices economy

Young and rural aspirationsLargely youth located in rural ares with aspirations thatare in sync with higher segments

1.1 Significant demographic shift andaspiration for change over thenext 10 years


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Demographics and growth

Section 3


13

Demographic andGrowth context showsa large, fast changing

and young population


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Section 3 Demographics and growth


14

By 2021, India will have about 600 million people constituting theEmerging Middle Class segment

Sources: PwC Analysis, NCAER (National Centre for Applied Economic Research), CMI.

* The emerging-middle income bracket, PPP adjusted is $5 - $15 per capita per day. Alternatively $1,850 - $5,550 per capita per year

All figures are reported at 2010 constant prices

Indias Population Distribution (millions) 1.19 Bn 1.36 Bn

Householdincome/year (INR)

$*/dayper capita

2010 CAGR (%) 2021 (Projection) (%)

> 8,50,000 Upper Middle + >$10 9.7% 14%

3,00,000 8,50,000 Middle $5-$10 6.3% 23%

1,50,000 3,00,000 Emergingmiddle

$1.7-$5 1.9% 42%

< 1,50,000 Low


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15

We project, by 2021, the emerging middle class segment willconstitute a $1 trillion economy in India

Sources: Rajesh Shukla (2010), `How India Earns Spends and Saves, Sage Publications; PwC Analysis, CMI. (All income figures reported in 2001 constantprices), IMF

The emerging middle class is being increasingly viewed as a market that is growing both in terms of thenumber of consumers as well as their incomes

As per PwC estimates this segment will constitute a $ 1 Trillion economy by 2021. Rising affluence, levels ofthe lower middle income segment, strong pent up demand and low penetration of this market segment willhave a sustainable impact on demand creation in the coming years

India's emerging middle class Consumption share

340

470

570

1,8952,008

2,190

0

100

200

300

400

500

600

1,600

1,800

2,000

2,200

2,400

2001-02 2009-10 2021-22 (F) PopulationofLowerMiddle

IncomeGroup

(inmillion)

AnnualAverage

PerCapita

DisposableIncome(PPP)USD

Population of Lower Middle Income Group (in mn)

Annual PC Disposable Income (PPP) in USD

1,843

3,625

450

1,000

0

1000

2000

3000

4000

2011 2021

$billion

India GDP

Emerging Middle Market Size

24% share

28% share


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16

Emerging Middle Class wallet spend is shifting toward highereducation, ceremonies, and consumer services

Sources: PwC Analysis; Economic Times

* Non PPP adjusted

** Includes non-institutional medical expenses, consumer services,conveyance, savings for ceremonies, higher education

Emerging middle market size by 2021* ($ B)

Misc. Goods & Services**

Food & Beverage

Housing & Utilities

Transport &Communication

Medicare &health services

Apparel

Education,Recreation

Food and Beverage spend of Emerging Middle vis--vis India

200-250

180-230

135-185

170-220

60-80

55-75

40-50

311

460

110-160180-230

2011 2021

$billion

India Emerging Middle

42% share

46% share

Sidebar: Emerging Middle Spending profile in between India andUrban Poor

Spending Pattern: 2010

The wallet size of Emerging Middle Class in India lies between all India

average and that of Urban Poor category.

Therefore, their spend on necessities such as Food is between 33% to

53% of the overall spend basket.

32.6 52.7

67.4 47.3

0%

50%

100%

All India Urban Poor

Others

Food


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Real Growth (%) p.a. of main sectors of the economy(5year averages)

Contribution to growth (Supply)

-

2.0

4.0

6.0

8.0

10.0

-1.02.0

3.04.05.06.07.0

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Agriculture & allied Industry Services GDP



17

Indias economy is predominantly a serviceeconomy. 60% of the GDP is servicedriven, such as financial, insurance, realestate, community social and personalservices

However, Indias manufacturing sector isdeveloping and India topped developingcountries (China excluded) in productionof textiles, chemicals, basic metals, generalmachinery and equipment, and electricalmachinery in 2010.

Though India is growing relatively slower

than China, its domestic consumption-driveneconomy has proven to be both robust and

well insulated against global events

Indias domestic consumption alonecontributes to over 75% of GDP.This is one of the highest among thedeveloping economies.

Indias economy will have a services underpinning over the next10 years

Source: PwC Analysis, World Bank, IMF, OECD, World EconomicOutlook, United Nations Industrial Development Organization report; World

Economic Forum India scenario report

0.0

2.0

4.0

6.0

8.0

1995-2005 2006-2015E 2016-2025E

Agriculture Manufacturing Services


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18

Youth market

Currently 58 % of the population in Indiafalls below 30 years of age

While 73% of the youth is literate, 62.1% ofliterate youth live in rural India.

However, only 9.6 % are graduates.

By 2021, youth population in India isexpected to become 51% of the population

This youth market has a higher propensity tospend and is unique from others inspired bysocial & cultural outlook of society

The firms should design their mediacampaigns & products to appeal to thisconsumer segment

Indias median age will remain less than 30 years by 2021, whichindicates that entire businesses will be built around youth

Source: Economic Times, Planning Commission of India

Population distribution in India

Median Age (in yrs) of selected economies: 2011

45

37

36

29

26

Japan

US

China

Brazil

India

62% 60% 58% 51%

38% 40% 42% 49%

0%

20%

40%

60%

80%

100%

2001 2006 2011 2021E0-29 yrs Others


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19

By Indian statistics, rural is classed asmaximum population of 5,000 andpopulation density less than 400 sq. Km

Small pockets of urbanization are emergingin this segment, primarily due to

migration, natural increase in populationand inclusion of new areas as Urban

This will pose additional challenges andopportunities for those in this segment bothfrom a reach and delivery perspective

Approximately 67% of India will still live in rural areas by2021, posing unique marketing, sales and distribution challenges

India: Rural urban population distribution

India: Rural urban population growth

74% 72% 69% 67%

26% 28% 31% 33%

0%

20%

40%

60%

80%

100%

1991 2001 2011 2021ERural Urban

Source: Economic Times, Planning Commission of India

114

907568

91

70

0

40

80

120

1991-2001 2001-2011 2011-2021ERural Urban


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New value propositions

Section 4


20

Considerable valuecan be unlocked byunderstanding the

new value propositionsthis populationsegment values


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Our analysis shows there are three different segments inthe emerging middle class; we call them migrants, climbers

and settled

Section 4 New value propositions


Birth

Income

3. Migrants

High

Low

Low Income Emerging Middle Class

2. Climbers

Emerging middle income

Want to move

to upper middle

INR 1,50,000

INR 3,00,000

Usually encounteran income ceiling

Perceived income floor

1. Settled

Born wi th a bronze spoon

Aspiration Tradeoffs

21


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Each segment is influenced heavily by media and mobile telephonyand require an aspirational value proposition to connect with them



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Increased media and telephony availability, and rise of aspirations are catalyzing

Demand that seeks to change their lifestyles but in different ways

1. Settled

2. Climbers

3. Migrants

Largely in rural areas orsmaller towns, can fulfillmiddle class aspirations

Born in urban areas, butaspire to climb up rapidlythrough education

Born in rural areas, wantto/have migrated to urbanareas, little aspiration

Reasonable disposableincome, very similar needsto middle

Aspirations of being a

professional in nextgeneration, education

Relatively satisfied withtheir situation, butdisconnected with roots

Profile* Mindset Aspirations

All threecategories arelooking forproducts andservices thatgo beyondlow cost theyneed to connect

with theirdeeper needs

Segment

* Each has been profiled in the appendix



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There has been a 20% shift in consumption away from essentials like food, clothing and shelter tonon-essential and aspirational products:

Consumer expenditure in durables: white goods, electronics, motorbikes and cars

Other non-essentials, such as hair dye, coffee, alcohol, cosmetics, clothing and footwear

Expansion in consumer categories: 9 categories accounted for 80% of private consumptionin 1991. Today (post 1991 liberalization), there are 22 categories accounting for 80% ofprivate consumption

Ex: In the FMCG sector, impulse products such as biscuits, chocolates, salty snacks, andconfectionaries are clocking double digit growth and increased retail presence

Aspirational products and services have significant potential...



Number of durables per 100 households

Motorcycles Colour TV Refrigerator Air conditioner Car

Middle 73 72 63 20 35

Emerging middle 47 40 34 2 4

Source: NCAER, PwC Analysis. 2005 consumer expenditure data

23



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Increased media exposure (connectedness), availability and rise of urban aspirationsare catalyzing this change making way to the rural household

Media exposure, connectedness (mobile), especially in theyouth segments are driving awareness for aspirational products

Variants, price points and packing sizes are acting as a catalyst

Ex: low fat, whole grain, baked, sugar free,...

Neilson, projects 20% growth in FMCG categories such asimpulse, health, lifestyle, and convenience driven by productinnovation, portfolio expansion and aggressive distribution

In FMCG, Marico, Parle, Dabur and Emami are bettingheavily on these categories

Aspirational products and services have significant potential...



Sidebar: Stock market indicators

Urban Aspirations

Rural Households

In a study conducted by VCCIRLE, Bombay Stock Exchange (BSE) 500 stocks were divided into aspirational andnon-aspirational products. Aspirational product firms grew at faster pace of 31% annually, while essentials grew at 14% Consumer durables and automobile comprehensively outperformed FMCG stocks (~0.3% per month difference in performance

over a 5 year timeframe) Aspirational stocks exhibit higher volatility

Source: VC Circle, Economic Time, PwC Analysis

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A number of companies have positioned their products or servicesas aspirational, to penetrate this market



Source: PwC analysis and internet research

25

Titan Sonata: Sonata was launched by Titan as a brand that was for the Titan inclined but who could not afford it These were low-priced stylish watches which appealed to the youth Titan marketed it innovatively by using MS Dhoni as its brand ambassador as he was a small town

boy who made it big in international cricket

Micromax mobiles: Micromax mobiles were an instant hit primarily because of their stylish designs at low prices It was the first company to launch an android phone for INR 6,000 for the masses

Value Added Services in Telecom: Mobile Value Added Services in India account for around 10-12% of telecom revenues. Consumers use

these services for text messages, multimedia messages, caller tunes, video streaming, participation inpolls and contests, mCommerce Infotainment services, content downloads, etc

As per TRAI predictions, its share is expected to grow to 30% in next 5-7 years

Bajaj Boxer: Contrary to conventional beliefs, Bajaj Motors launched a 150 cc bike Bajaj Boxer in the Indian

markets, catering primarily to the rural consumers and positioned it as a SUV of the bikes The bike primarily caters to rural youths aspirations of driving similar bikes as those in urban areas



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Within these three segments, aspirations of youth are particularlyimportant; youth is not a segment - it is mainstream



The rural youth segment comprises the largest single area for growth, as it is both aspirational and lookingfor change. They thrive on discontinuity and have no strings attached to the historical baggage of India

The 25-45 yr segment remains important as a generation that is sandwiched and is at cross roadswith itsaspirations, juggling traditional and modern aspirations. They are characterized by credit/debit living

The 45 -65 yr generation is holding on to traditional values, but has realized that they cannot hold back theirmindset to prosper in todays India. They tend to have a high regard for functionality, and look to thecommunity as a propellant for gaining information and respect

From 15 25

Change Generation

(4 yr old in 1991)

From 25 45

Transition Generation

(19 yr old in 1991)

From 45 65

Partition Generation

(39 yr old in 1991)

168

238

43

27107

97

0%

25%

50%

75%

100%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

Urban Rural

Sources: PwC Analysis, Economic times, livemint.com, WPP, ESOMAR

26

Rural youth segment is a dominant area for growth (Population distribution in Millions)



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To target the youth segment three new approaches are seen to work



Attributes ExamplesApproach

Modern Traditional - Youth

True -Youth

Mature -Youth

While aspiring for modernity this segment is stilltraditional bound by heirarchy, izzat, etc

Deep and different understanding of youth from 15- 25years; need deep focus to understand their driversand aspirations

A large number of adults in the 25-45 year age bracketare behaving in ways similar to youth

Youth are sociallyoriented andtraditional, yetaspire to have the

modern gadgetsthey seearound them

Driven by newpossibilities, desirefor change, behave

like youth

Women YouthFast emerging as a youth segment with aspirations ofindependence which a number of leading companies aretargeting separately

Source: PwC analysis

27



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A number of leaders have used social orientation, aspirations andnew technology to target the youth in this segment



Social Message: 'Jaago Re' campaign of Tata Tea was a hit with both youth & marketers Picked on the most burning social issues which youth could relate to strongly

Style Statement: Pepsi introduced mycan,which was sleek and was supposed to be had in a stylish manner Micromax introduced a mobile phone for girls which was smaller & had Swarovski crystals

Youth Connect: Pepsi introduced catchy punch lines like youngistan meri jaan, dil maange more Changed its brand ambassador from Sachin Tendulkar to Ranbir Kapoor for more youth appeal

New Age Media: As a measure to connect with consumers directly, HUL opted cost-effective digital advertising and

consumer engagement modules Gang of Girls campaign for Sunsilk to target young girls; digital campaigns for Bru & Axe

28



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There are a number of social, psychological, vocational andenvironmental factors that influence behaviour8and buying patterns

Profitable growth strategies for the Global Emerging Middle (GEM) Kirloskar Instituteof Advanced Management Studies

Social Factors

Vocational Factors

Psychological Factors

Environmental Factors

Family Heirarchy(patriarchical), Caste, Religion,Gender, Language (15 officiallanguages)

Values/ethics, Ceremonies,Izzat (prestige), Aspirations

Size ofVillage, Town, Neighbourhood,Cyclicality of income, Distancefrom Government

The resulting tradeoffsare surprisinglycounter intuitive:

Balancing: Survival,Prestige and Aspiration(particularly relevant

for the next generation)Education level(women in particular),Occupation, Profession


29



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The tradeoffs an individual is willing to make depends on whichsegment he/she falls in, but are very different from those in the top



Issue(s) Examples

Food tradeoffs Eating less nutritional unhealthy cheaper food/lessercalories than required, only kids/male members havingnutritional items like milk, curd, etc

Living expensestradeoffs

Family members might have to trade-off education forspend on durables, ceremonies

Educationtradeoffs Trade off rent and transport expenses for necessities suchas food, healthcare and education

Disconnectedfrom rootstradeoffs(migration)

Economic opportunities in metros and upper tier citiesforce people staying in tier 3, 4 cities and rural areas tomigrate to cities in search of better job opportunities,higher incomes and more avenues for their children

Survival

Prestige

Aspiration

These tradeoffs create a critical difference between need and demand

Pepsi launched small,single-serving fortified-snackpacks in India for low-incomecustomers, selling for tworupees, or about four cents.

32.6 52.5

67.4 47.5

India Urban Poor

Food Others

Consumption pattern (givenbelow) of emerging middle classshows their propensity to spendhigher on foodexpenses, compared to Indiaaverage.

Source: PwC analysis and primary research, Economic Times

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Background:

Name Alam (42)

Household size 5

Occupation Contract taxi driver in Mumbai

Household income Rs. 240,000 (annual) and

monthly income is around Rs. 15,000 - 20,000

Example of a typical migrant shows he has number ofcounterintuitive tradeoffs to make

Alam is from Asamsul village in West Bengal (eastern India). Like many of his peers, he moved to Bombay for a betterlife. While Alam earns more than his peers, and has a family home in Mumbai (which means no rent), Alam doesnot save.

...all I want to do is to ensure that my children have a better future...Alams thoughts are consumed by trying toprovide his children a quality education, so that they dont have to make tradeoffs (he calls tradeoffs adjustments). Hespends about 40% of his income for his childrens education, at a better school than his peers send their children. Alamhas also paid capitation feeds, to the local school board, amounting worth 2-months of his income to get his children

admitted. This is his reality.Alams family will save on day-to-day expenses (ex: bus instead of train, walk instead of bus) to cope with rising foodprices and save for a bigger purchase. Alam is still optimistic he sees the value in purchasing durables fridge, TV andmobile phone for his family. To finance these investments, he prefers paying the local loan shark he uses the hindislang dalal an EMI (3 5%) for loans collateralized with his wifes jewellery, while some of his peers pay 15 20% tolegitimate banks.

Alam wants to move back to his village, but says it is unlikely due to the poor infrastructure in his village.


TradeoffsChildrens future

Food

Corruption

ReligionParents

Village

No savings Loans


Source: PwC analysis and primary research

31



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How are businesses reacting

Section 5


32


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A climber has little disposable income, but chooses and makes atradeoff for his children's future


Section 5 How are businesses reacting


33

Background:

Name B. N. Patil (46)

Household size 5

Occupation Marathi Teacher in the rural school

Household income Rs. 3,50,000 (annual)

B. N. Patil is the only earning member in his family of 5. He has 2 daughtersand a son. He stays in a rented house in Pen village of Raigarh districtof Maharashtra.

Patil owns a TV and a refrigerator, which they bought 8-10 years back.According to him the brand was inconsequential. Maximum share of hishousehold income is spent on childrens education and savings for expenses likechildrens marriage, donation for school admission, medical expenses, etc.

Mr. Patil is unaware about different in vogue brands andproducts, however, his children are cognizant of these products and influencethe buying decisions in his house. His elder daughter wants to go to Mumbai forhigher education and his son aspires to become a cricketer.

The Patil family does not mind the tradeoffs they are making currently to securetheir childrens future.

Monthly expense distribution

Rent7% Food &

grocery10%

Education21%

Savings35%

Travel10%

Others17%

Education and savings dominateshare of wallet for Mr. Patil



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Bajaj developed an aspirational bike for the emerging middleclass, to cater to an aspirational need of the youth segment

Customer value proposition

Launched an aspirational product catering to youth ofrural India

Launched Boxer bike for rural India, positioned as SUV of motorcycles

Counterintuitive positioning and feature set: Higher enginecapacity and lower mileage for rural India?

150 cc bike, as opposed to 100 cc bike oby competitors, for this

customer segment1. Functional Need: Bajaj understood the true need on their target

consumer segment in Emerging Middle India: Heavy cartage, poorroads, and multiple people on the same bike

2. Aspirational Need: More significantly, Bajaj understood the psycheof the consumer. A more powerful motorcycle appealed to theunderlying need for power, and catered to the young maleconsumer segment.

Accelerating demand

Reached out to local people through word of mouth connecting with key village opinion leaders

Showed 300 Sarpanchs (Village Heads) how a bike is made, who laterpromoted the brand in their villages


Profitable growth strategies for the Global Emerging Middle (GEM) Kirloskar Institute of Advanced Management Studies34

Case study

Product snapshot

Business benefits/value delivered

Scaled model across India:

- With a pilot project in Malda, West Bengal Bajaj has replicated thismodel across smaller towns and villages in India and also, plans toservice emerging middle class customers in urban India now

Acceleration of demand:

- Approval of key powerful opinion leaders in villages accelerateddemand, creating a viable market



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Bajaj developed an aspirational bike for the emerging middle classand implemented innovative channel and financing strategy



Source: PwC analysis, primary research


Launched an aspirational product catering to youth ofrural India

Launched Boxer bike for rural India, positioned as SUV of motorcycles

150 cc bike, as opposed to 100 cc bike of competitors for thiscustomer segment

Focused on lifecycle costs of the mortorcycle

Innovative business model/new ways of workingDesigned business model to work around institutional voids

Appointed ASC owner as sub-dealers a local person with personalrelationships within the community

A different approach to credit checks: via community member whoowns ASC

End of 2012, Bajaj Auto plans to have 600 dealerships along with 2000sub-dealers across India

Combine service plan and payment routine

Ball park pricing

Not to cheap, not to expensive. Price as a signal of quality andaspirational value

Further reached out to local people through word of mouth making right connects

Showed 300 Sarpanchs (Village Heads) how a bike is made, who laterpromoted the brand in their villages


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Bajaj Auto Finance realised the poor banking access in rural India, and devised aDirect Cash Collection Model to enable easy financing of its bikes, which translatedin low default rate

Bajaj Direct Cash Collection introduced a relevant financingmechanism to a cash strapped segment



Bajaj Auto Finance Authorized service centres (ASCs)

Customers

Direct Cash Collection Model

Bajaj enabled vehicle loans for thecustomers through these ASCs

Customers could pay their loan

instalments in these ASCs, where theywould be handed a receipt on payment

Out of 50,000 loans issued by Bajaj Auto Finance every month, currently 50% are issued through DCCM. Approximately 40% of the customers pay their instalments before the due date. Default is now sub 1% (aerial) and loss has reduced significantly (2-3%).

Bajaj Auto Finance suffered INR 400-500 Cr of bad losses andrealized that this customer segment was cash strapped andmoreover, had no access to formal credit documentation

ASC owner is a local entrepreneur from the community who isresponsible for being an informal judge of credit-worthiness ofthe buyer. The ASC are also empowered to let people

default, based on their knowledge of the situation of the

financee.

Source: PwC analysis, primary research

Case studySmart Reach


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Sales graph of Tata Nano

Tata Nano is shifting its original positioning of its car from lowcost to smart to position itselfbeyond cost



3,525

10,012

6,5155,451

3,260

1,202

2,936

0

2,000

4,000

6,000

8,000

10,000

12,000

Apr-10 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11

Tata Nanos repositioning as a car that isaspirational, smart, funky, environmental, is now turning thetide on its sales.

Innovation lifecycle

Source ofinnovation

Tata identified the price gap in the automotive space inIndia -- between INR 80,000 costing 2-wheelers andaround INR 350,000 costing small car segment andlaunched a car for INR 100,000 affordable for middleclass and suitable for a family of 4

OriginalPositioning

Nano was positioned as a cost effective option to the twowheeler with cost leading to a possible uptake

While it has had some success, this positioning missedthe aspiration of the emerging middle class

NewPosition

The Nano is now being re-positioned as a car that hasother features to appeal to the aspirations of thisemerging middle class

Its marketing campaigns with a tagline khushiyon kichaabi symbolised joys of riding a Nano as opposed todriving two-wheelers

Further, Tata did a promotional campaign withGoldplus Nano Car Nano car made with gold, silver

and precious stones

Source: PwC analysis, primary research, economic times

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Product snapshot


Apart from involving village girls in selling the products at a commissionof Rs 150 per item sold (Godrej claims this strategy will reduce thedistribution and marketing costs by 40%), ChotuKool was designedusing several engineering innovations to keep the price point low.

It has tapped an underserved/poorly served market by providingproduct that was affordable, and exactly met the needs and price point ofthis consumer segment

Godrej designed ChotukoolA completely reengineeredrefrigerator with key features critical for the mass market



New value propositions

Introduced a mini refrigerator suitable for needs of Emergingmiddle India

What job is the consumer trying to do? Godrej understood thatEmerging middle India, and its poorer consumer pool does not buy foodin bulk, but just needs to keep food cold over night

The ChotuKool is a smaller refrigerator, 1.5 feet tall by 2 feet wide,catering to smaller living space (especially for urban emerging middle

Indian segment. Ex: Migrants)

Mass customization: Smart reduction in feature set andprice-position sweet-spot, while meeting latent needs of theEmerging middle

Product reengineering:

- Godrej reduced the components from 200 in a regular refrigerator to20, to reduce the price to $70 less than one third of the price of aregular bottom-of-the-line fridge.

- It also consumes only half the power so it keeps electricity billseconomical for poor families.

- Cost savings for the consumer: Instead of compressor, it runs on acooling chip and fan similar to those used to cool computers.

Environmental factors:

- It can survive power surges and outages common in India and evenhas the option of running on batteries.

- It uses high-end insulation to stay cool for hours without power.


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Product snapshot

Did you know that infant mortality rate(mainly due to preventable conditions)in the state of UP is 75/1000?

Did you know that infant mortality ratethe most underdeveloped of countries isabout 100/1000?

Did you know that in more than 25,000

primary/tertiary health centers in Indiado not even have a single working

baby warmer?


Collaborated with Phoenix medical systems bought their technology tolower cost with vertical integration(2000+ warmers sold in Bihar district during pilot)

GE adopted a hybrid model of using its own and collaborativedistribution network for channel innovation

Used its distribution network to sell these units to tertiary healthcare

centers in rural India Partnered with Embrace a NGO based in San Francisco to get access

to differentiated technology (low power consumption)

Piggybacked on Johnson &Johnsons distribution network to tap their3000-4000 dealers channels

GE developed a low cost Baby Warmer suiting rural India, and alsoadopted a hybrid distribution model to expand its reach




Customized Baby Warmer reengineering product to meet

mass market requirement (80/20 rule), and reduce cost 4 times

from $10,000 $2,500 Care for pre-term and full term (low weight) infants

Radically different components than western model. For instance, usedwax that regulates the babys temperature for 4 hours without electricity.

Simple yet powerful understanding of local needs: included Jaundiceattachment, since 50-60% of infants contract such waterborne diseasesin Emerging middle India

Removed sophistications such as software to monitor baby's pulse,introduced digital scale to monitor its weight, and LCD monitors todisplay data to reduce the cost of device.

Reduced product cost by 3-4 times:

GE effectively reduced the cost of standard Baby Warmer from $10,000to $2,500-3,000 in India

Design thinking, and end-to-end solution driven approach

GE adheres to a broader mandate of reducing Infant MortalityRate (IMR).

Solution approach: product +service + trainingInvestments in education for user base, training of tertiary healthcareprovider technicians healthcare for infant after she leaves thehealthcare centre

Source: PwC Primary research

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Case study


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Aravind Eye Clinics treat low income people in India suffering fromcataract, using simple and economic tools and techniques



Source: PwC analysis, primary research, CK Prahlad: Fortune at the Bottom of the Pyramid


Low cost high quality cataract diagnosis, operation andafter-care

Cost of $50/operation compared to the average $300 for treatment in aconventional Indian hospital ($1650 in a US hosp.) making it extremelyaffordable for rural Indians

Education camps set up to educate people on better eye-care

Innovative business model/new ways of working

Model based on standardisation and engineering cataractsurgery for high volume production

Cost of an imported intra-ocular lens was reduced significantly from$100-$150 to $6 through value engineering the design and setting upmanufacturing within a division of Aravind Aurolab

Key elements added a dedicated factory for producing lenses, a trainingcentre to provide key skills, specialist ophthalmic research centres, andan international eye bank

Paraskilling: To ensure an adequate supply of key skills 900ophthalmic assistants are trained each year to support the specialist

doctors. This enables high productivity where each surgeon works on twooperating tables alternately, and is supported by a team of paramedics tocarry out less-skill dependent aspects such as washing the eye, putting insutures, giving anesthetic injections etc

Product snapshot


Innovation for bottom of the pyramid

Largest and most productive eye care facility in the world in the year2007/2008, about 2.4 million persons received outpatient eye care andover 285,000 underwent eye surgeries at the Aravind Eye Hospitalsacross Tamil Nadu

Enjoy one of the highest EBITDA margins in the industry

Case study


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Product snapshot


Profit from economies of scale

Dr. Shettys family-owned hospital group reports a 7.7% profit after taxes(compared to an average of 6.9% in US private hospitals)

Mortality rate within 30 days of coronary artery bypass surgery is 1.4%. atNH, compared to 1.9% in the US

Reduces the cost of average cardiac procedures by a minimum of 50%

Dr. Shetty of Narayana Hospitals, radically reduced the costof heart surgery through economies of scale and specialisation




Applying economies of scale to the health care system to provideefficient, affordable heart surgeries

Original hospital at Bangalore consists of 1000 beds as compared to anaverage of 160 in US hospitals

Focuses only on cardiac procedures better purchasing power, machinesused at a higher rate, better value for money and surgeons become moreefficient at procedures

Sliding scale of fees used for operations so that richer customerssubsidise poorer ones


A business model that is based on the belief that higher volumeslead to better quality

Established video and internet links with hospitals in India, Africa andMalaysia so that surgeons can give expert advice to those less experienced

Clinics on wheels to nearby rural hospitals to test for heart diseases

Dr. Shetty and team of 40 cardiologists perform about 600 operationsa week

Indias high level of manufacturing and expertise allowed the hospital tosource equipment from affordable Indian suppliers

Three other hospitals have been built a trauma centre, a 1400-bedcancer hospital and a 300-bed eye hospital

Case study


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Tata low cost Housing focused on providing quality ANDaffordable housing solutions using disruptive technology

Tata Housing

Case study


Product snapshot


The margins in this model have been close to 15-20%, compared to 40%in conventional housing segment.

Tata plans to expand the model to Delhi and Bangalore. Apart from the open market opportunity, the company is also pinning

hopes on the mass housing schemes taken up by various stategovernments for its houses.


These low-cost houses will be made available in the form of prefabricated(prefab) kits, which can be assembled at the site.

Completing project on time within 15 months is another significant areaof cost reduction for the project

Cost reduction achieved by using cheaper, however, more

durable construction material No bricks are used and walls are made wholly of cement, which makes

them much stronger and also maintenance-free, lowering long-termcosts for the residents.

These homes would have a significant amount of non-steel componentsfor wall cladding and other interiors.

Rooms are designed in such a manner that tiles can be fitted withoutbeing broken. This led to a construction cost of Rs. 650 Rs. 700per sq. ft

Further, frills were cut down to optimize cost

Cost of construction was reduced by building the flats outside big cities,where land is much cheaper.

Marketing usually makes up 3-4% of costs for a housing project. Thiscost was reduced significantly by eliminating the sales function where,the marketing team took over and worked on advertising campaigns.


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Cost warriors True innovators

1 Rely solely on cost to attract customer Rely on understanding what the customer wants inthis segment

2 Try to take market share through price Build new markets by positioning products and serviceas aspirational

3 Low, zero investment in understandingcustomer need

Invest in research, customer understanding

4 Mindset lacking to scale up beyond initial success Invest in infrastructure both hard and soft to scale up

Since this segment is value conscious and not just cost conscious, anumber of pure cost warriors have fallen by the wayside



Beyond low Cost


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Take aways

Section 6



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The global emerging middle class offers a robust growth horizon butneeds different strategies for profitable growth

Section 6 Take aways


The world is split into four categories with the next 4 Bn residing in countries that are large, growing fastand having largely underpenetrated markets, India with 1.2 billion citizens is a significant segment

In the Indian context, the emerging middle class with 570 million people by 2021 will constitute atrillion dollar economy, and see a significant number churn through this segment.

In the global context, the Global Emerging Middle (GEM) comprises over 2.3 billion people and over thecoming decade is expected to be a $6 Trillion economy

The Emerging Middle class in India is significantly youth oriented, and rural in its composition but

is aspiring for change, given the strong connectivity and communication with the rest of India. Across the 5 sectors analyzed by this study, we see three areas where leaders have focused to succeed in this

market place: NewValue Propositions, Innovative Business Models, and Shift in Mindset.

Successful companies create new value propositions which focus on Aspiration Tradeoffs, Beyond CostPosition and Mass Customization

Those companies that are able to successfully address this segment create strategic capabilities thatallow it to address the upper segments as well as other countries with similar emerging middle classes

Professionals entering this market have the opportunity to work

on new challenges across areas of marketing, operations,

finance, human capital and technology


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We have to find a wayto make the

aspects of capitalism

that serve wealthierpeople serve poorer

people as well.

Bill Gates, on creative capitalism

(World Economic Forum inDavos, Switzerland)


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2012 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Private Limited (a limitedli bilit i I di ) hi h i b fi f P i t h C I t ti l Li it d h b fi f hi h i t l l tit

Profitable Growth for the india

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