Innovation models change

15 November 2011

NEW YORK: Major brand owners are taking a highly diversified approach to research and development as they seek to gain ground in emerging markets, a study from Ernst & Young has revealed.

The consultancy polled 547 executives globally, and found 36% of international firms have embraced "frugal innovation" - i.e. adapting goods, services and business models - in countries such as Brazil, China and India, and a further 40% plan to do so.

"It's really about providing the tools for innovation that will enable a country to make the most of its competitive differentiators," said Josh Nash, a senior strategist at Microsoft.

At present, 54% of multinationals are targeting the top end of the market in fast-growth economies, while 40% prioritise mid-tier customers and 6% emphasise the "bottom of the pyramid".

By contrast, 51% of organisations based in emerging economies are aiming for middle class shoppers, versus 40% primarily manufacturing premium lines and 9% focusing on the poorest buyers.

"We try to look at fundamental technologies that can apply across a broad range of products and services in different regions," said Dr Meera Sampath, director of the Xerox Research Centre India. "I like to think that what we do is create locally inspired but globally relevant technology."

Among the featured firms, an average 37% of R&D activity occurred in developing nations, but just 38% created entirely new products for these outlets, whereas 52% had modified their pricing architecture.

Overall, 67% of the panel agreed big companies headquartered in such nations were best-placed to achieve "frugal innovation" and thus deliver quality products at a price appropriate for the growing middle class they contain.

R Gopalakrishnan, director of Tata Sons, the India-based holding group, argued: "Western companies tend to place greater importance on process, while those that are based in a country like India tend to pay greater attention to culture."

Some 55% of firms now boast dedicated innovation teams for emerging markets, and 52% agreed detailed consumer insights were a key factor for enhancing their R&D output, the highest score here.

"You have to understand the local market needs and develop products that are not only going to help consumers to improve their lives but that also fall within their purchasing capability," Jeff Weedman, Procter & Gamble's vice president, global business development, said.

Operational excellence was vital for 47% of respondents, exploiting new technology hit 45%, rapidly bringing ideas to market logged 26% and sharing knowledge across borders generated 15%.

Data sourced from Ernst & Young; additional content by Warc staff