Manufacturing innovation and emerging markets

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According to a new study by Deloitte Touche Tohmatsu - Innovation in emerging markets: Strategies for achieving commercial success, manufacturing companies need to stop relying on their existing products and innovate if they are to be successful in selling in emerging markets:

Global manufacturers are focused intently on the opportunities to source, develop, manufacture, sell, and service their products in emerging markets. But long-term success will take far more than simply making minor adjustments to existing products, lowering prices, or replicating existing sales channels. Instead, a new set of competencies and organizational structures will be required to generate a continuing stream of innovative products and services tailored to the needs of consumers and industrial buyers in emerging markets.

However, their survey shows that very few companies offer very different products in emerging markets: only 12%! Of the rest, 36% offer somewhat different products and 50% offer similar products. Instead of changing the product, they adjust their pricing, promotion/discounting and service.

The study appears to directly challenges the standard strategy (at least standard when I was teach International Business) of going global by modifying existing products to suit local markets ("glocalization" - also sometimes known as mass customization). The idea was to marry the advantages of mass production of a base product with customization to the specific market.

According to the study, the new strategy:

is a matter of customer knowledge. Companies should avoid assuming that what works or meets customer needs in developed markets will also work in emerging markets. Companies need to invest the resources required to gain a deep understanding of the requirements of customers in emerging markets. Each country is different, and the needs within a single country can vary widely.

By the way, this is the same message of CK Prahalad's influential book The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits. Prahalad is building a consulting firm The Next Practice specifically around the idea of innovation in emerging markets.

As a result of this new thinking, R&D is following manufacturing, as the Deloitte Touche Tohmatsu survey explains:

Manufacturers are increasingly locating and expanding their R&D operations in emerging markets. One important motivation is cost reduction, through lower costs for skilled engineers and also the potential for tax credits and other government incentives. But perhaps even more importantly, placing R&D close to suppliers and customers in emerging markets allows design by engineers who better understand their needs, facilitates collaborative product design, and simplifies the resolution of engineering-related problems. When it came to introducing new products in emerging markets, almost half of the executives surveyed said they had designed these products locally.

98% of the executives of large multinationals surveyed said they either had R&D facilities in emerging markets (66%) or were planning such facilities (32%)!

While obtaining a better understanding of the local market was cited as an extremely or very important reason for locating R&D facilities in emerging markets, lower cost was also a major factor (cited by 51% as an extremely or very important factor).

One especially interesting finding concerned the role of intellectual property. The report discusses how some firms cite key facilities due to a desire to protect intellectual property and trade secrets by not citing plants in certain areas or keeping the most advanced facilities close to home.

But the citing of key facilities is also a form of risk management:

Some companies are using “operational hedging”—distributing their operations across different countries—to minimize the potential impact of political, economic, and operating risks. For example, when a country accounts for five percent to six percent of sales, Emerson will relocate key manufacturing, labor, and sourcing operations to other locations to reduce its risk exposure.

This is an interesting twist on the concepts of comparative and jurisdictional advantage: a place's advantage is that it is not someplace else. I guess that is the ultimate differentiation in the I-Cubed Economy!

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    Note: the views expressed here are solely those of the author and do not necessarily represent those of Athena Alliance.

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