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Practical approaches to innovation in emerging markets

by: Merijn ten Thije, Joost de Waard - K plus V

 

Introduction - Practical approaches to innovation by EU SMEs in emerging markets

 

Europe’s competitive potential is dependent on the capacity to be innovative and creative in launching successful new products and services. Innovation can, however, be very challenging for many organizations, not the least for Small and Medium sized Enterprises (SME’s). While innovation requires a lot of resources and a high level of expertise, innovation also provides large opportunities for the future. Innovating in an emerging market will be even more challenging, given that internationalization is a challenge on its own, but benefiting from the development of these countries could be a great source of growth for your company. Two forms of innovation which can be practiced in emerging markets are reverse - and frugal innovation. 

 

Frugal innovation describes the innovation process where new products/services are strongly tailored to the emerging market. Although many frugal innovations characterize themselves by low (R&D) costs and  weak technological sophistication, their main trait is their focus on basic needs. Many consumers in emerging markets have specific unsatisfied needs, for example, they seek ways of effective transportation rather than a fancy car. Reverse innovation describes the process in which frugal innovations are applied to developed markets, like Europe. A practical example of this is mobile banking, which originally was introduced in markets with a very weak IT infrastructure but a strong mobile network. After development gets to a mature stage, these products/services can make their way to developed markets.

 

When doing business in emerging markets you have to understand that customers in emerging markets will not respond to the mentioned ‘fancy’ innovations. They  will look for products/services that are tailor made for them - a frugal innovation. For most companies in developed countries, innovation means the development of new products with more advanced features at premium prices. However, in emerging markets, where products/services often must appeal to the base of the pyramid (the millions who don’t have millions) you need to master the art of frugal innovation. Understanding frugal innovation and learning how to practice it is much easier said than done, however. 

 

For that reason, in the following we describe ten ‘DOs’ for EU SME’s executing on frugal/reverse innovation. The paper aims to keep it as practical as possible. The first seven DOs provide advice for SME’s preparing to do business in an emerging economy, since it is unlikely the SME would have experience in this specific emerging market. Moreover, you cannot focus on innovation alone, not taking into account the basic rules of doing business in an emerging economy. Following this, we will elaborate on DOs more specified to the innovation process itself with an emphasis on frugal and reverse innovation. 
 

 

 

In a nutshell: Ten practical DO’s for EU SME’s wanting to innovate in emerging economies

 

  1. Pre-research the emerging market you set foot in 
  2. Find the right local partner 
  3. Team-up with local government
  4. Approach each country as an individual one
  5. Physical presence is a must, but much more manageable nowadays through better communication tools and skilled labor in emerging economies
  6. Be patient when starting in emerging economies
  7. Affordability is essential for frugal/reverse innovation
  8. Know your customer in the emerging economy
  9. Build a new value chain
  10. Use the innovation you initiated in the emerging economy to become more efficient and  ingenious in your home (European) market / reverse innovation

 

If you want to know more, please read the explanation per ‘DO’ in full in the following.

 

Why should any SME read wanting to innovate in an emerging economy read this?

 

Focusing on innovation and especially in emerging economies is a challenge and great opportunity at the same time. After having read the information provided to you in the following, you should be extra motivated and be even more prepared. Propper preparation before going into direct execution in an emerging economy can save time, and can be vital for kickstart! In this paper we try to keep it as practical as possible so it should be ease to read for everyone.
 

 

 

Ten practical DO’s for EU SME’s wanting to innovate in emerging economies

 

1  Pre-research the emerging market you set foot in 

 

Before setting up business in an emerging economy, proper pre-research is key for any SME. What does setting up your business in the emerging economy require in terms of preparation?

 

  • Visa / Passport: Especially in emerging markets the visa application process can take a long time. Make sure you start early.
  • What legal entity should you start with in the emerging economy and what are the advantages and disadvantages for you as an entrepreneur? In the Netherlands you could for example start as ‘Vennootschap onder Firma’ or ‘Besloten Vennootschap’ which have significant differences and business implications. In the emerging economy you start, there will be different legal forms as well with similar differences between each other. Make sure you make the right choice and make it a good fit with your company structure. Also ensure you check the timelines of the registration processes (which can take a long amount of time).
  • Accountancy and tax issues: National vs. international laws. Try to find the most optimal international company structure. 
  • Protect your intellectual property right locally and start with local registrations (e.g. trademarks) as soon as you can.
  • Research political stability and its potential impact on your business (e.g. import / export bans).
  • Check the strength and stability of the local currency in the emerging economy you are going to be active in. When the currency value fluctuates, this can have an effect (either positive or negative) on your business. Ensure you find the right balance and benefit from potential fluctuations. Set up your team of financial advisors in both your home country and the emerging economy and make sure they cooperate to create win-win situations. 
  • You might encounter difficulties when trying to get local money out of the emerging market. Pre-research is essential in order to make sure you set up a company structure to avoid these problems. 

 

2  Find the right local partner 

 

You are about to start innovating in an emerging economy.  Do not re-invent the wheel or expect the emerging market you want to focus on to be similar to your home country. Save time by obtaining the right local knowledge and team-up with local partners. A strong local partner can be very valuable. 

 

  • How to obtain valuable local knowledge

 

From your home-country

 

- Find through the Embassy of your country, local existing networks (e.g. Holland House in Bogota)
- Reach out to local connections from your own country and try to take advantage of their existing network in the new country. A quick Linked-in or Facebook search can already link you to so many interesting people in the emerging market you are going to be active in. 
- Join ‘trade missions’ which are organized by the government of your home country in collaboration of the Embassy of the respective emerging economy. 
- Check the Enterprise Europe Network from the European Commission.

 

From emerging economy

 

- Join local fairs or visit fairs. Fairs, especially dedicated to your topic (e.g. water, energy) could be an ideal ground for meeting and connecting with many organizations within a limited amount of time.
- Team-up with local knowledge institutions to make sure that you have more leverage within the country (e.g. universities, federations). It will enhance your local credibility.
- Find local partners and outsource to them (outweigh efficiency – effectiveness).

 

  • Always background check integrity of local partners 
Make sure you are doing business with a reliable local partner and not just do a quick scan online or consult solely one reference. Background check the partners by consulting local authorities like the chamber of commerce. 

 

  • Defining what your perfect partner is

 

It is often hard to decide after the exchange of several e-mails and one face-to-face meeting if you are doing business with the right company. Usually it will take some time to understand each other and to conclude if you have found the right one. Websites and social media in emerging markets are sometimes not an accurate representation of the company in an emerging economy. The power of companies in developing and emerging countries is often their relations and their network, something that is not always reflected by their online exposure. Also in some Asian countries Facebook or equivalent social media platforms are more important than the standard website or LinkedIn. 
Especially in emerging markets joint-ventures in an early stage are proposed frequently. One recommendation would be to agree on a short-term (one year) collaboration with a simple agreement (also to avoid all kinds of legal costs at an early stage). Both parties can use this time to get to know each other better. If the collaboration turns out to be successful, the next steps can be made to formalize a more elaborate and legally binding agreement. 

 

3  Team-up with local government

 

Do not underestimate the power of governmental institutions and supporting programs they can offer your enterprise. They can help significantly, in both the emerging country as in your home country. A recommendation would be to convince the local government (and other local stakeholders) what the presence of your company could bring to their emerging country. What’s in it for them? Why should they help your company? At the same time, the government from your home country might have programs to help companies who want to go abroad specifically to emerging economies.

 

  • Explain to the government from the emerging country what the added value of your innovation will be to their country. Convince them with:

 

- The direct foreign investment that accompanies the company going there
- The growth potential and impact on GDP of emerging country
- The amount of local jobs you will create
- The example your company can set for other companies to set foot in the emerging country
- The knowledge and expertise which will come with the innovation
- Media/press in your home country which will promote the emerging economy

 

  • Find a governmental institution that helps foreign entrepreneurs. In several emerging economies these institutions are very professional. An example in Colombia is ProColombia, which has a presence all over the world.

 

  • Look for grants / subsidies from home country government or emerging country which will cover (part of) the costs of setting up business in an emerging economy. ‘Trade not aid’ is an angle a lot of Western governments have. If you can prove the innovation will increase trade with or from the emerging economy, it is likely you might find subsidies / grants. An example initiated by the Dutch government is the DHI-grant. 

 

4  Approach each country as an individual one

 

Not every emerging market can be treated like the other. There are significant differences between them and when wanting to innovate in these countries, one should be aware of them and treat them respectfully. Even within the same continent, differences can be immense. For example:

 

  • Local laws.
  • Cultural differences: Power distance / Individualism / Uncertainty avoidance / Masculinity / Long Term Orientation and Indulgence vs. restraint (Hofstede).
  • Languages (even regional).
  • Different weather conditions per country can have a significant effect on the product and frugal innovation itself.
  • Infrastructure and distribution possibilities.
  • Local habits can affect the actual innovation which is required in the emerging economy.
  • Spendable income.

 

If you have a product-market combination specified for one country, it is an easy choice to focus on one country. If you have a product-market combination that could be suitable for more countries you have to decide if you are going to approach all countries or approach them step-by-step. 

 

5  Physical presence is a must, but much more manageable nowadays through better communication tools and skilled labor in emerging economies

 

Although much can be arranged from large distances, physical presence from EU management and/or founders is still required. Not permanently, however. It is especially important to kick-start your company in the new environment and start the innovation process. For the founders and/or responsible managers it is essential to show presence to both suppliers and (potential) clients.

 

  • In most emerging markets meeting face to face with your founder / CEO is still very important.  
  • Select your local team carefully. Hire persons in the emerging economy yourself. That way you know exactly who you delegate to and collaborate with.
  • Slack, Skype and WhatsApp make it much easier to communicate with local teams in emerging countries nowadays.
  • Having someone with knowledge from your home country present in the emerging economy is relevant but also costly, and there are a lot of factors to take into account. Can someone you send over from the European Union actually adapt to the local (business-) culture? Can a local from the emerging country not be found with comparable skills (and 1/3 of the salary)?

 

6  Be patient when starting in emerging economies

 

Doing business and initiating innovation processes in emerging countries could take extra time. Several factors will have impact:
  • Business is often based on trust, and it take time before this trust can be established.
  • Building intercultural relations takes time and cannot be rushed. Be careful in building-out your company network and enable yourself to do it in the right way. 
  • Do not make your business planning too rigid. Have a short-term horizon in emerging economies because everything takes longer than expected. Build in room for error, so you can learn from mistakes along the way. Time pressure should not affect the quality of your innovation in the emerging economy.

 

7  Affordability or local cost-price reduction is essential for innovation in emerging economies

 

Money is in short supply for the bottom-of-the-pyramid customers, so you need to employ frugal innovation if your products are to offer the right value proposition. While planning innovations for bottom-of-the-pyramid customers, affordability becomes the key issue. You need to understand what customers feel is an affordable price. Questions to ask for you as a EU SME, starting your innovation process in an emerging economy:

 

-    What is the price to value perception of our customer?
-    What price does the customer feel is an affordable price when it comes to fulfilling the need that the company is trying to help the customer fulfill?

 

This approach has worked well in the cellular telephone service category. Brands like Vodafone have been able to penetrate the Indian market by selling pre-paid cellular phone service vouchers for a very low price. Reaching mass consumers has been made possible by selling the vouchers through grocery and convenience stores.

 

The challenge for companies is to use innovation to drive down the price to a level that economically disadvantaged consumers feel is affordable. This is what is meant by frugal innovation. 

 

Frugal innovation needs to be driven by developing a model wherein affordability is the central issue. The business model needs to be structured and innovated upon, but only after taking into account the aspect of affordable pricing.

 

8  Know your customer in the emerging economy

 

Begin the journey in the emerging economy by identifying your target customers’ critical considerations. This implies that you must understand the real conditions under which your customer lives and (potentially) uses your product.

 

Just an example from a multinational. When Nokia planned its low-price mobiles for emerging markets like India, it realized that the product had to be very rugged and withstand exposure to dust, high variations in ambient temperatures, and offer the facility of a torch, since large parts of rural areas suffered from frequent power cuts. The low price point was maintained but the aforementioned features enhanced the appeal of the product for the economically disadvantaged customers in small towns and villages.

 

What are the considerations your customer has with regard to the fulfillment of the need? How can you innovate to ensure that your customer’s needs are fulfilled at the price your customer considers affordable?

 

9  Build a new value chain, a fresh start

 

Perhaps the biggest barrier in crafting frugal innovations is your possibly inflexible value chain. Though several companies pride themselves and feel that they possess exemplary value chains, the chains pose a serious hurdle when it comes to creating offerings for economically disadvantaged consumers. In fact, the value chain needs to be tweaked at both ends – suppliers and vendors as well as distributors and channels. 

 

The aspects of affordable pricing, addressing critical considerations of customers and re-constitution of the value chain will decide the winners and losers in frugal innovation. How should your value chain be re-constituted to enable a successful rollout of the innovation for your product?

 

10  Use the innovation you initiated in the emerging economy to become more efficient and ingenious in your home (European) market

 

As discussed before, reverse innovation is a new product development strategy where an innovation is designed and adopted first (and modified) in emerging economies before transferring it to a developed economy.

 

You as a SME have now been forced to create more value with less in order to overcome significant local constraints in the emerging economy. With resources becoming increasingly limited, even in the European Union, in your home market you might be faced with a similar mantra —to “do more with less”. Thus, frugal innovation has also become relevant to make you  become more efficient and ingenious by adopting frugal principles with ways of doing more with less. This is a great opportunity for business growth!