Innovating for the next 3 billionThe rise of the global middle class -and how to capitalize on itNovember 2011
Introduction
IntroductionRapid-growth markets in Africa, Asia, Eastern Europe, Latin America andthe Middle East are:►   Playing an incr...
The next 3 billion ...►   The middle class in Asia alone = 525 million people (more than the    entire European Union).►  ...
Responding to the opportunity►   Between 2009 and 2030, demand from the global middle class could    grow from US$21 trill...
Shares of global middle-class consumptionPage 6        Innovating for the next 3 billion
About Innovating for the next 3 billion►   Based on a survey of 547 executives from around the world►   In-depth interview...
Respondent profile  Respondent location   %                    Stakeholder                         %  India               ...
Key findings
Summary: key research findings1.    Innovating for the next 3 billion is a major opportunity, but      companies have to b...
The opportunity
The opportunity►   In 2000, only 10% of spending by the global middle class took place    in Asia.►   By 2030, this could ...
Finding opportunity in frugal innovation60                          Total    Developed market companies with rapid growth ...
The size of the opportunity►   Rapid-growth markets account for 80% of the global population and    50% of global GDP at p...
Pricing approach in rapid-growth markets100                                                                               ...
Implications for business
The innovation capabilities model►   Considering all these challenges, we have developed a model to help    you tackle eac...
The innovation capabilities modelThere are four key capabilities to focus on:    1.    Customer insight    2.    People an...
1. Customer insight
1. Customer insightUnderstanding customer needs requires resources on the ground in local markets.This is why companies sh...
Understanding the new customers►   Understanding local customers is the most critical enabling factor for    innovation.► ...
2. Research and development
Reasons for conducting R&D in rapid-growthmarkets                                                                         ...
2. Research and developmentMeeting the needs of the next 3 billion will require companies to ...At a local level:         ...
Local R&D and global R&D►   Local R&D enables local insight into local customer needs, plus a    rapid response to local d...
Location of innovation                                                                       Total80                      ...
R&D opportunitiesThere are several R&D trends that companies can develop in a globalscale:►   Open innovation – companies ...
3. People and culture
3. People and cultureManaging talent and expertise are critical to successfully innovating for this market ...At a local l...
Cultural adaptationWhen serving the next 3 billion customers, you have to consider:►   Cultural barriers can lead to produ...
Tailoring new product development                 Total       Developed market companies with rapid-growth market operatio...
Cannibalization►   Developed market companies often think:          ―Will low-cost innovations made for rapid-growth marke...
Processes for driving innovation  Making the product and service development process more                                 ...
4. Operations and business model
4. Operations and business modelTo be successful in this segment, products need to be affordable andaccessible. Getting th...
Implications: operations and business models►   Changes to the pricing structure or business model in development    produ...
Companies finding opportunityin frugal innovation60                                                       High performers ...
Low-margin mind-setChanging the way you perceive return and profit is key to developingproducts for this new markets:►   P...
Barriers of products for low-income customers                                                                             ...
Closing remarksPage 40      Innovating for the next 3 billion
Closing remarks►   Understanding and developing products and services for rapid-growth    markets is a strategic priority ...
Thank youPage 42     Innovating for the next 3 billion
Ernst & Young  Assurance | Tax | Transactions | Advisory  About Ernst & Young  Ernst & Young is a global leader in assuran...
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Innovating for the next three billion - The rise of the global middle class and how to capitalize on it

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Over the next two decades, rising per capita wealth in rapid-growth markets will generate a significant growth opportunity for multinational companies. Understanding this market, and developing products and services that meet its needs, will become a strategic priority that cannot be ignored.
http://www.ey.com/GL/en/Issues/Business-environment/Innovating-for-the-next-three-billion
Our Growing Beyond program explores opportunities across expanding into new markets, finding new ways to innovate & implementing new approaches to talent.
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Innovating for the next three billion - The rise of the global middle class and how to capitalize on it

  1. 1. Innovating for the next 3 billionThe rise of the global middle class -and how to capitalize on itNovember 2011
  2. 2. Introduction
  3. 3. IntroductionRapid-growth markets in Africa, Asia, Eastern Europe, Latin America andthe Middle East are:► Playing an increasingly dominant role in the global economy► Major hubs of entrepreneurship, innovation and trade, as well as investment from multinationals from around the world► Trending away from a dependence on exports toward a model of increased private consumption► An unprecedented opportunity for companies that can serve the huge new middle class with relevant products and servicesPage 3 Innovating for the next 3 billion
  4. 4. The next 3 billion ...► The middle class in Asia alone = 525 million people (more than the entire European Union).► Between now and 2030, an additional 3 billion people globally will enter this income bracket .► We call this emerging demographic ―the next 3 billion.‖► It represents a valuable opportunity to seize a giant new market by thinking differently about innovation.Page 4 Innovating for the next 3 billion
  5. 5. Responding to the opportunity► Between 2009 and 2030, demand from the global middle class could grow from US$21 trillion to US$56 trillion.► Many companies will need to: ► Understand the unmet needs of new middle-income customers ► Create different pricing and distribution strategies for these markets ► Rethink their product and service offerings to meet these needs and the new customers characteristics ► Create entirely new products and services tailored to these customersPage 5 Innovating for the next 3 billion
  6. 6. Shares of global middle-class consumptionPage 6 Innovating for the next 3 billion
  7. 7. About Innovating for the next 3 billion► Based on a survey of 547 executives from around the world► In-depth interviews with some of the world‘s leading entrepreneurs, senior executives and thinkers► Explores: scale of the opportunity and approaches companies are taking to develop affordable products to meet the needs of customers on lower incomes► Concludes: with a model that describes the necessary capabilities for companies seeking to target the next 3 billion consumersPage 7 Innovating for the next 3 billion
  8. 8. Respondent profile Respondent location % Stakeholder % India 15 CEO/President/Managing director 21 Mexico 15 SVP/VP/Director 19 Russia 14 Head of department 18 China 13 CFO/Treasurer/Comptroller 12 Brazil 13 Head of business unit 11 Turkey 12 Other C-level executive 9 Indonesia 10 Board member 5 South Korea 8 Head of M&A/Corporate development 3 CIO/Technology director 3 Revenue % EBITDA growth in last year % $20b or more 12 Over 20% increase 16 $10b – 19b 6 10% to 20% increase 29 $5b – 9b 8 5% to 10% increase 25 $1b – 4b 22 1% to 5% increase 16 $500m – 999m 15 No change 11 $250m – 499m 8 Decrease 4 $100m– 249m 13 Less than $100m 17Page 8 Innovating for the next 3 billion
  9. 9. Key findings
  10. 10. Summary: key research findings1. Innovating for the next 3 billion is a major opportunity, but companies have to be realistic about the challenges.2. Deep customer insight and organizational agility are key to meeting the needs of the next 3 billion.3. Companies must balance the need for local customization with global scale.4. Understand that in the current economy, low-cost innovations are not just for rapid-growth markets.5. Successful innovation in rapid-growth markets goes far beyond R&D.6. Local companies have the upper hand in serving lower-income customers, but multinationals are gaining ground.Page 10 Innovating for the next 3 billion
  11. 11. The opportunity
  12. 12. The opportunity► In 2000, only 10% of spending by the global middle class took place in Asia.► By 2030, this could rise to 40%.► In 2009, the middle class in Asia-Pacific spent just under US$5 trillion.► By 2030, this could rise to almost US$33 trillion (according to the OECD).Page 12 Innovating for the next 3 billion
  13. 13. Finding opportunity in frugal innovation60 Total Developed market companies with rapid growth market operations Rapid growth markets 40 41 4040 37 36 34 22 2020 18 6 4 2 0 A major opportunity and we are A major opportunity and we intend to A major opportunity for some Not something that we consider to be a already taking advantage of it take advantage of it companies but not one that we see as major opportunity a major priority Q: Please complete the following sentence based on the statement that best describes your company‘s view on the opportunities for frugal innovation in rapid-growth markets - Adopting frugal innovation to create products and services is ... Base: Total (547), Developed market companies with rapid-growth market operations (240), Rapid-growth market companies (307) Page 13 Innovating for the next 3 billion
  14. 14. The size of the opportunity► Rapid-growth markets account for 80% of the global population and 50% of global GDP at purchasing power parity.► But the average S&P 500 company earns just 10% of its revenues from these economies.► Many companies are missing a significant and increasingly important opportunity.► A fundamental rethinking of innovation and go-to-market strategy is required.Page 14 Innovating for the next 3 billion
  15. 15. Pricing approach in rapid-growth markets100 Premium: Top end of market 90 Mid market Value: Bottom end of market 80 40 46 54 70 60 50 40 51 30 46 40 20 10 8 6 9 0 Total Developed market companies Rapid growth market companies with rapid growth market operations Q: How do you typically price your products or services in relation to competitors in your main rapid-growth markets? Base: Total (547), Developed market companies with rapid-growth market operations (240), Rapid-growth market companies (307)Page 15 Innovating for the next 3 billion
  16. 16. Implications for business
  17. 17. The innovation capabilities model► Considering all these challenges, we have developed a model to help you tackle each one of the areas where innovation capabilities need to focus on.► The model focuses in the four areas, and develops insights for each: 1. Customer insight 2. People and culture 3. Research and development 4. Operations and business modelPage 17 Innovating for the next 3 billion
  18. 18. The innovation capabilities modelThere are four key capabilities to focus on: 1. Customer insight 2. People and culture 3. Research and development 4. Operations and business modelPage 18 Innovating for the next 3 billion
  19. 19. 1. Customer insight
  20. 20. 1. Customer insightUnderstanding customer needs requires resources on the ground in local markets.This is why companies should ...At a local level: At a global level:► Have resources available to observe ► Use analytics and technology to gather potential customers and assess where information about specific markets and their unmet needs lie turn this into actionable insight► Develop the capability to conduct in- ► Conduct quantitative research and build depth research, including extensive a rigorous understanding of market size ethnographic research and qualitative and expected customer behavior fieldwork ► Spot linkages across markets and derive► Engage customers and treat them as economies of scale from reapplying partners and collaborators in the knowledge about customer needs innovation processPage 20 Innovating for the next 3 billion
  21. 21. Understanding the new customers► Understanding local customers is the most critical enabling factor for innovation.► Traditional analytical tools give basic information about customer demographics and opportunity, but very limited in rapid-growth markets because: 1. There is a shortage of good-quality data. 2. Target customers have no history of buying similar products. 3. Demand strength unknown until products and services are offered.► Therefore: qualitative research is essential to gain genuine insights from customers and understand what new products and services they might need.Page 21 Innovating for the next 3 billion
  22. 22. 2. Research and development
  23. 23. Reasons for conducting R&D in rapid-growthmarkets 44 Proximity to key growth markets 43 45 42 Ability to access low-cost skills 42 43 Ability to gain a better understanding of 40 36 local customer needs 43 Ability to operate in a low-cost business 39 38 environment 39 Relevant expertise of local engineers and 36 42 scientists 31 25 Proximity to key inputs and resources 30 21 19 Total Ability to transfer skills obtained to compete 21 in developed markets 17 Developed market companies with rapid- 16 growth market operations Ability to partner with local organisations 12 Rapid-growth market companies 20 Q: What might be the main reasons for conducting R&D in rapid-growth markets? Base: Total (547), Developed market companies with rapid-growth market operations (240), Rapid-growth market companies (307)Page 23 Innovating for the next 3 billion
  24. 24. 2. Research and developmentMeeting the needs of the next 3 billion will require companies to ...At a local level: At a global level:► Develop an increasing proportion of their ► Set up global innovation networks that R&D close to where these customers link R&D centers across both developed are located — in rapid-growth markets and rapid-growth markets to share relevant intellectual property► Develop ―reverse engineering,‖ where affordability forms the baseline to ► Think about ―platform technologies‖ that develop new products and services are globally relevant and that can be combined with local components at the► Make sure that local R&D centers have point of delivery autonomy to make their own decisions about which projects to pursue ► Make decisions about how to allocate R&D resources around the globe — and► Put in place mechanisms for new ideas move them from one location to another to reach decision-makers, regardless of as the need arises where in the organization they originatePage 24 Innovating for the next 3 billion
  25. 25. Local R&D and global R&D► Local R&D enables local insight into local customer needs, plus a rapid response to local demand. ► But a purely local approach to innovation is both inefficient and expensive.► Companies must balance local relevance and global scale. ► Building a global network of R&D centers enables application of innovations across multiple markets.► Developed market companies are taking innovations from rapid- growth economies and finding new markets for them in the developed world. ► 81% agree that frugal innovation has as much relevance in developed markets as it does in rapid-growth ones.Page 25 Innovating for the next 3 billion
  26. 26. Location of innovation Total80 Developed market companies with rapid-growth market operations Rapid-growth market companies operating internationally Rapid-growth market companies operating domestically 6460 51 45 4540 30 27 2420 17 17 18 16 14 9 5 5 3 3 3 3 2 0 Gobal network of R&D centres Network of R&D centres in Network of R&D centres in Single R&D centre in a Single R&D centre in a rapid- across both developed and developed markets only rapid-growth markets only developed market growth market rapid-growth markets Q: Which of the following best describes where innovation generally takes place in your company? Base: Total (547), Developed market companies with rapid-growth market operations (240), rapid-growth market companies operating internationally (154), rapid-growth market companies operating domestically (153)Page 26 Innovating for the next 3 billion
  27. 27. R&D opportunitiesThere are several R&D trends that companies can develop in a globalscale:► Open innovation – companies combining both internal and external partners from around the world to generate ideas and solutions► Joint-venture partnerships between multinationals and entrepreneurs in rapid-growth markets to move up the innovation value chain► Acquisitions can be a way of gaining access to frugal innovation capabilities and taking aboard new products, process or business models► Cross-fertilization of talent between different R&D centersPage 27 Innovating for the next 3 billion
  28. 28. 3. People and culture
  29. 29. 3. People and cultureManaging talent and expertise are critical to successfully innovating for this market ...At a local level: At a global level:► Delegate decision-making responsibility ► Manage talent globally so that managers to local teams in rapid-growth markets can be rotated among key markets and gain experience across diverse business► Ensure that local managers have the environments ability to make recruitment decisions ► Work to build a culture and set of values► Be able to develop new product or that are global in scope service ideas to meet local needs ► Develop a global mindset and the ability► Embed P&L responsibility to ensure that to tolerate ambiguity and integrate managers have accountability multiple perspectives► Set pay and reward structures for local ► Understand interdependencies among teams that are appropriate for the pace different regions and how decisions and growth rate of the market made in one region will affect anotherPage 29 Innovating for the next 3 billion
  30. 30. Cultural adaptationWhen serving the next 3 billion customers, you have to consider:► Cultural barriers can lead to product rejection and venture failure.► Developed world products at developed world prices are not likely to sell well in rapid-growth economies.► For this reason, companies need to: ► Embed the product in the culture ► Adopt a mind-set where the product will be tailored to customer needs► Developed-market companies often think innovation means adding sophistication and features, but innovation can also be making products streamlined and affordable.Page 30 Innovating for the next 3 billion
  31. 31. Tailoring new product development Total Developed market companies with rapid-growth market operations rapid-growth market companies60 55 52 50 42 38 3940 37 35 36 28 26 2420 0 We change the pricing structure or We create entirely new products with We simplify current premium products We re-package products and services business model of existing products to lower-income customers in mind aimed at higher-income customers (eg, make them more affordable in smaller sizes) Q: Which of the following approaches do you currently take to developing products and services aimed at lower-income customers in rapid- growth markets? Base: Total (547), Developed market companies with rapid-growth market operations (240), Rapid-growth market companies (307)Page 31 Innovating for the next 3 billion
  32. 32. Cannibalization► Developed market companies often think: ―Will low-cost innovations made for rapid-growth markets ‗cannibalize‘ the sales of our premium products?‖► Lower-cost innovation creates new consumption and demand.► The added revenue from both the lower-priced and premium products is far greater than the unadapted model (that fails to reach the next 3 billion).► Even if there is some cannibalization, competitors will innovate in these markets – a greater risk is to lose out on the giant growth markets of the future.Page 32 Innovating for the next 3 billion
  33. 33. Processes for driving innovation Making the product and service development process more 65 64 efficient 66 55 A dedicated innovation team 60 50 42 Incentivizing employees for successful innovation 40 44 37 Formalized measurement of return on investment 41 34 36 Formalized testing, launch and review process 40 34 36 Direct oversight by local market management 30 40 31 Agreed process of financing for new product launches 35 28 29 A formalized ―go/no go‖ decision process 26 31 Relocating experts from developed markets to rapid growth 28 31 Total market location 25 Partnerships with local entrepreneurs or organizations that 26 Developed market companies with 25 specialise in innovation 26 rapid growth market operations Partnerships with non-governmental or academic 19 Rapid growth market companies 12 organizations 23 Q: Which of the following processes or approaches do you use for innovation in rapid-growth markets at your company? Base: Total (547), Developed market companies with rapid-growth market operations (240), rapid-growth market companies (307)Page 33 Innovating for the next 3 billion
  34. 34. 4. Operations and business model
  35. 35. 4. Operations and business modelTo be successful in this segment, products need to be affordable andaccessible. Getting the business model right and ensuring that operations areoptimized across the value chain is therefore critical. Companies need to ...At a local level: At a global level:► Select local partners carefully across ► Have clear policies, including risk every stage of the value chain management and compliance frameworks► Ensure operations are highly efficient to lower cost and maintain margins ► Ensure accountability and ethical behaviour across the value chain► Understand the needs of local customers and ensure that pricing and ► Use global supply chain and CRM the business model are appropriate systems to optimize the value chain and ensure that it is efficient and resilient► Develop the agility to respond quickly to new opportunities and risks ► Decide what to localize and to maintain at a global level of the value chainPage 35 Innovating for the next 3 billion
  36. 36. Implications: operations and business models► Changes to the pricing structure or business model in development products and services for lower-income customers.► Companies with higher-than-average EBITDA growth are more likely to create entirely new products and services for lower-income customers.► Involve options like reformatting products or adjusting pricing (e.g., single-use shampoo sachets for customers who are paid daily).► Thinking about the underlying business model and ensuring that it is tailored to the unique business environment.Page 36 Innovating for the next 3 billion
  37. 37. Companies finding opportunityin frugal innovation60 High performers Low performers 4440 37 38 30 2720 15 4 5 0 A major opportunity and we are A major opportunity and we intend to A major opportunity for some Not something that we consider to be a already taking advantage of it take advantage of it companies but not one that we see as major opportunity a major priorityQ: Please complete the following sentence based on the statement that best describes your company‘s view on the opportunities for frugalinnovation in rapid-growth markets - Adopting frugal innovation to create products and services is ...Base: EBITDA growth high performers (241), low performers (167)Page 37 Innovating for the next 3 billion
  38. 38. Low-margin mind-setChanging the way you perceive return and profit is key to developingproducts for this new markets:► Profitability is the most important challenge and requires rethinking the business and process to understand how to tackle it.► Companies in developed markets are used to high margins on premium products.► Rapid-growth markets have smaller margins, but large volumes.► Companies need to shift to a ―low-margin mind-set‖: ► Process efficiency is essential. ► Find the right local partners across procurement, distribution and sales. ► Ensure a lean approach to distribution and the supply chain.Page 38 Innovating for the next 3 billion
  39. 39. Barriers of products for low-income customers 54 Profitability of products and services 56 52 43 Existing or future competition 50 37 35 Distribution of products and services 40 31 26 Poor infrastructure in target markets 26 26 24 The market is currently too small and fragmented 24 25 23 Lack of education and awareness among customers 18 27 12 Total Concerns that products and services aimed at lower- 11 Developed market companies with rapid-growth market operations income customers will cannibalise premium offerings 13 Rapid-growth market companiesQ: What do you consider to be the main barriers for your company to developing products and services that meet the needs of lower-incomecustomers in rapid-growth markets? Shown top seven responses.Base: Total (547), Developed market companies with rapid-growth market operations (240), rapid-growth market companies (307)Page 39 Innovating for the next 3 billion
  40. 40. Closing remarksPage 40 Innovating for the next 3 billion
  41. 41. Closing remarks► Understanding and developing products and services for rapid-growth markets is a strategic priority that cannot be ignored.► Innovating for the next 3 billion means formulating a rapid-growth market strategy while keeping a global perspective.► Efficiency and adaptation are key – companies should aim to recognize cross-pollination opportunities, identify key similarities and adapt to increasingly integrated market forces.► Product development and strategy execution needs to be localized, but can draw on global resources and re-apply ideas across wider markets.Page 41 Innovating for the next 3 billion
  42. 42. Thank youPage 42 Innovating for the next 3 billion
  43. 43. Ernst & Young Assurance | Tax | Transactions | Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and Growing Beyond an unwavering commitment to quality. We make a Global growth is the business issue of today. difference by helping our people, our clients and our wider communities achieve their potential. In Growing Beyond, we‘re exploring how companies can grow faster — by expanding Ernst & Young refers to the global organization of into new markets, finding new ways to member firms of Ernst & Young Global Limited, each of innovate and taking new approaches to which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not talent. It‘s an ongoing program to help you provide services to clients. For more information about grow beyond your expectations. Join the our organization, please visit www.ey.com. discussion at www.ey.com/growingbeyond. © 2011 EYGM Limited. All Rights Reserved. EYG No. EX0052 This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.Page 43 Innovating for the next 3 billion

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