New R&D models needed

30 November 2011

NEW YORK: Brand owners from North America and Western Europe must adapt their innovation models to succeed in emerging markets, a study by McKinsey has argued.

The consultancy estimated that 40% of the global population will be classified as "middle class" by 2020, compared with 20% today, resulting in roughly a billion new buyers for certain types of goods and services.

"They will demand products tailored to their needs and of the same quality as those found in more advanced economies, but at much lower price points – as little as 30% of developed market prices," McKinsey said.

Such a "mismatch" between prices and features makes "breakthrough innovation" vital, as offerings for developing nations require cost structures at least 50% lower than the norm. Modifying existing goods typically reduces costs by, at best, 30%.

Having surveyed 395 companies, McKinsey discovered 44% thought pursuing global R&D schemes helped trim R&D expenses, a figure standing at 26% when discussing localised efforts in emerging markets.

However, 39% of organisations agreed specialised innovation in fast-growth economies gave them stronger consumer insights, measured against 36% for the worldwide R&D.

Similarly, 24% of respondents suggested the proximity to where goods were manufactured was an advantage of the nationally-targeted approach, versus 20% for the international model.

Accessing proprietary relationships and government incentives were also perceived as clear benefits of the country-led strategy, while the two models were largely equal in terms of finding talent.

One case study cited was Wheel, a detergent made by Unilever, which originally cost 40% more than rival brand Nirma. Unilever chose to cut the number of active ingredients used and launched new smaller packs, boosting sales and enhancing its own knowledge.

Nokia was praised for using India as an "emerging market laboratory" as early as 2000. For example, its research in rural regions highlighted the unreliability of electricity supply, resulting in the development of a phone with a longer battery life and a torch sold for just over $10.

Many companies from fast-growth economies are also pursuing equivalent programmes, as demonstrated by Huawei, the Chinese appliances manufacturer, which applied for more patents than any other firm in 2010.

Galanz, the electronics group, launched a microwave in China with six settings for cooking rice. Priced at less than $50, it went on sale when only 2% of households owned such an appliance. Galanz now leads the microwave category worldwide.

Data sourced from McKinsey; additional content by Warc staff