Reaching out to the poor in emerging markets has long been a laudable social goal. But in India today, it also represents the biggest business opportunity of the coming decade. While a number of obstacles stand in the way, some manufacturers are finding ways to capture “inclusive growth” by reaching the lowest-income segments as both employees and consumers.
Inclusive growth has long been heralded as the key to reaching the poor and geographically remote. But more than that, it is on the brink of becoming a major opportunity for businesses in emerging markets in the next decade. Such growth embraces the have-nots of society and brings them into the mainstream of the economic system as customers, employees, distributors and intermediaries. Over time, these groups climb the economic ladder and form the backbone of the middle class.
To do business in this market, companies must make products and services available not just at low cost but at ultra-low cost – requiring innovative manufacturing, marketing and delivery solutions. The challenges presented by these and other hard business realities have proved daunting in the past. In India, it’s critical that those challenges be met. The obstacles they face, and their efforts to overcome them, hold lessons for companies throughout emerging, high-growth markets.
At a time when the global economy is still shaky, India’s business frontier lies in the thousands of small towns and tiny villages in the countryside as well as in the many poor sections of cities. Armed with the latest information and communication technologies, Indian manufacturers now have the means as well as the motive to reach the hundreds of millions of India’s poor – and to use innovative business models to drive inclusive growth.[ms-protect-content id=”9932″]
To better understand how India’s manufacturing sector is approaching growth through inclusive innovation, Accenture talked to and surveyed 55 senior executives at a cross-section of companies, complementing this primary research with case study analysis and secondary research. (See “Research methodology.”)
One key finding: Recognition of the benefits of becoming inclusive is rising among executives. In our 2010 survey, around 68 percent believed that inclusive businesses will outperform their non-inclusive peers over the long run and nearly all – 98 percent – said inclusive business models will be important to future success.
Drivers of inclusive growth strategies
Manufacturing companies in India have a big advantage over many of their counterparts in other countries. India’s population in the income group of $4 to $20 a day, its emerging middle class, is expected to explode, increasing from 16.5 percent of the population to 49 percent by 2030 (see Figure 1). The 725 million people who will make $4 to $20 per day in 2030 will coexist with 710 million people earning less than $4 a day.
Large consumer demand spread across a range of low- and middle-income segments will provide Indian businesses with opportunities to experiment with different scaling strategies. The cost of pursuing inclusive business models will be substantively lower for companies in India than for many competitors in other emerging markets.
The continuing spread of information and communication technologies also makes poor and rural people more accessible than ever. New connection points arise daily as government funding and low-cost innovations – such as a $35 touch-screen laptop developed in India – make purchasing computing hardware more feasible. Mobile connection points with low-income populations are proliferating rapidly. Even during the economic downturn, India added 10 million mobile connections each month, thanks largely to a surge in new cell-phone accounts among the poor.
India’s also benefits from a large pool of entrepreneurial talent. Companies in India that want to implement inclusive business models can access a vast young talent pool adept at working under severe constraints in the tradition of jugaad – workarounds to find quick-fix, low-cost solutions.
Businesses now also have the Indian government as their ally on this journey. It has recently formed a National Innovation Council with the mandate to evolve an Indian model of innovation focusing on inclusive growth.
Constraints along the way
Although more and more Indian executives are aware of the benefits of inclusive innovation, only 30 percent of the companies we contacted are currently incorporating inclusive objectives as critical components of their core innovation processes.
This “commitment deficit” – as one senior executive put it – continues to hinder Indian manufacturers’ development and adoption of inclusive business models. Their reluctance to commit more resources to inclusion is driven primarily by continuing uncertainty about the profitability of low-income markets as well as the lack of the organizational culture needed to compete in these markets (see Figure 2).
There are good reasons why so many executives continue to question the profitability of doing business in low-income and geographically remote markets. It is challenging – especially for manufacturers – to obtain clear visibility of demand; the markets’ fragmented nature makes it tough to gather reliable data. Few manufacturers are committing to the significant up-front investments usually required to build inclusive businesses. And the razor-thin profit margins found in many inclusive businesses mean those producers must achieve significant scale before they reach profitability. Continued investment to build and scale an inclusive business can hurt short-term profits.
Furthermore, few manufacturers have the organizational culture needed to be successful in low-income and geographically remote markets. Most Indian producers are geared for the middle- and high-income markets. For instance, incentives for employees have been designed to encourage them to deliver on the needs of wealthier consumers. And then there are the many Indian companies that might be persuaded to commit to inclusive business – if they knew how to go about it. In our interviews, a significant number of executives confessed that they simply don’t know how and where to start on the journey of inclusion.
While these cultural and structural barriers are slowing the rate of progress with inclusive innovation, they are not hindering some companies from developing the capabilities they need to succeed in low-income and rural markets.
Creating the capabilities for inclusive innovation
Accenture has identified four capabilities that companies need to develop in order to generate profits while doing business with those markets. Armed with such capabilities, businesses will be in a position to acquire timely information on customer needs; price risks effectively; scale their operations efficiently; and secure better margins.
The four keys are:
1. Develop strong customer empathy
Developing strong customer empathy is challenging, especially when one is doing business with the poor. On many occasions, poor customers or those living in remote locations are reluctant to express their real views on products because of fear of comparison with peers. Companies therefore need to devise innovative ways to build a sharper understanding of customer needs.
The team at Godrej & Boyce that was responsible for developing the Chotukool – an innovative cooler designed for the poor – spent a long time in the field to learn about the habits and lives of consumers in low-income groups across rural India. By systematically applying tools such as observation and interview methods, language and image-processing skills, and reflective thinking, the Godrej & Boyce team was able to unearth insights that ordinary surveys would not have divulged. For instance, they learned that the few people who owned second-hand refrigerators kept them largely empty; there was nothing to keep except water!
Drawing on this knowledge, the company developed the Chotukool. With its combination of small size, low price and easy mobility, the cooler represents the first technologically viable and affordable option for poor communities to store perishables. (The cooler, which has a capacity of 43 liters and weighs 7.8 kilograms, is solid state, uses no compressor or refrigerants and operates on a 12-volt battery. It is priced between Rs. 3,250 and Rs. 3,500.) For several small businesses, like flower sellers, snack vendors and kiosks, Chotukool has the potential to become an earning asset by extending the shelf life of products and reducing waste.
2. Partner with the right ‘inclupreneurs’
Forming partnerships with appropriate ‘inclupreneurs’ (entrepreneurs who have successfully implemented inclusive business models) to complement in-house functional capabilities makes inclusion initiatives more viable and sustainable. Companies must not hesitate to join forces with diverse companies across their value chain (even companies from nonrelated industry sectors or nonprofit organizations), but only after conducting a robust evaluation exercise.
When Eureka Forbes launched AquaSure, a water-storage purifier, through its traditional distributor-dealer channel in rural markets, sales did not pick up. It then teamed with Basix, a microfinance company, to sell the product. Sales jumped by 20 percent. Eureka Forbes built on Basix’s network of loan officers, who serve as the link between the company and rural populations, providing customer intelligence while also marketing the purifiers to the self-help groups that it meets regularly.
3. Use ‘fail-fast’ prototyping
A business model that is successfully inclusive must be able to scale rapidly once launched. Therefore, even if a model is the product of careful planning, it must undergo rapid prototyping, incorporating all necessary adjustments, once the company starts feeding back data from the field. The idea is to think big, start small and scale up fast, but with minimum investment.
Marico continues to occupy the number one position in the hair-oil segment across rural and urban low- and middle-income groups. The “low-cost/fail-fast” prototyping model has been key to Marico’s success. This model has helped Marico repeatedly fine-tune product characteristics and packaging of coconut oil to suit the budgets and usage requirements of low-income populations.
4. Leverage inclusive innovations in higher-income markets The most successful companies maximize the value of inclusive innovations by building an organization that can quickly transfer benefits to other parts of their business. From new products to innovative supply-chain capabilities, these companies leverage innovations for low-income markets to enhance efficiency and market relevance in their traditional, higher-income markets. In so doing, they help offset the significant investments and lack of profits that often define the early development of inclusive businesses.
ITC-Aashirvaad is India’s premier brand of packaged flour. ITC has attained the lead by building on key attributes of its network of village-based Internet kiosks to create best-in-class products for middle- and high-income households. With the help of its network, largely made up of farmers in 40,000 villages in 10 states, ITC is well positioned to consistently and cost-effectively procure different varieties of high-quality wheat.
ITC also returns a portion of the profits from every pack of Aashirvaad product to water conservation efforts. This initiative has already employed 26,000 people, made possible irrigation on 31,000 acres, and implemented soil moisture conservation measures on more than 37,000 acres. Inclusive innovation is sure to become increasingly important as all emerging markets – not just India – begin to find ways to bring poor and rural people into their economies. In the decades to come, those groups will become critical to business growth in much of the world.
Inclusive innovations will spin off new technologies, give rise to disruptive business opportunities, and create new avenues for employment and consumption. This snapshot of the innovative approaches of a few Indian manufacturers only scratches the surface of activity. For those companies seeking to join their ranks, it will be critical that they address the barriers that may be holding them back.
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