26 Jan 2004  Research & Ideas

What Developing-World Companies
Teach Us About Innovation

A mini case study by professor Donald N. Sull and coauthors on how three businesses in developing countries overcome a lack of resources to succeed. From Strategy & Innovation.

 

When most people think of innovation, they envision developed-world companies such as the U.S.A.'s IBM, Japan's Sony, South Korea's Samsung, Finland's Nokia, or Switzerland's Novartis, technology leaders that have stayed at the cutting edge of dynamic industries such as computer hardware and software, consumer electronics, and pharmaceuticals. Such companies hold many important patents and boast R&D labs that rival facilities at the best universities in the world. They are headquartered in countries with myriad institutions that support innovation: liquid financial markets and venture capitalists to fund big bets on technology, research universities that mint PhDs, and a clear legal framework that protects intellectual property.

In stark contrast, companies in developing countries lack these advantages. But does this mean that innovation can't thrive there? The short answer is absolutely not.

To be sure, companies in developing countries face serious challenges, including political instability, volatile exchange rates, and an underdeveloped physical infrastructure. More critically, they must contend with three realities that particularly stymie innovation:

1. Developing countries generally lack a solid technology base of trained scientists and world-class research universities.

2. Companies in developing countries must manage to eke out a profit while serving customers with low disposable income; per capita gross domestic product in the advanced economies is on average ten times that of developing nations.

3. Managers in these companies must often innovate on a shoestring budget, since the high cost and scarcity of capital preclude massive spending on R&D. As a result, they must innovate from other areas of their business's structure, including manufacturing, logistics, marketing, and customer service.

Over the past several years, we have identified and studied companies from developing countries that have overcome these formidable obstacles to become some of the most innovative in the world. Among them are CEMEX (Cementos Mexicanos), the Mexican cement giant; Natura, a leader in Brazil's cosmetics arena; and China's Haier, which sells appliances in one of the world's most demanding markets.

What these companies and others like them share is a distinct approach to innovation: they strategically exploit an intimate knowledge of their customers' mindsets, they innovate around (rather than through) technology, and they scour the globe for good ideas. These strategies, we believe, are as important for managers in developed countries as they are for executives in the developing world. The lessons in this article can help any company, whatever the level of its access to resources, identify and seize growth opportunities.

Know your customers' mindsets—intimately

Innovation comes in two varieties: technology-push and customer-pull. Technology-push—introducing new products based on cutting-edge research—is not an option for most companies in developing countries. As a result, they must rely on the customer-pull approach: finding ways to solve customers' dilemmas without relying on novel science.

Many multinationals entering developing countries pay lip service to serving less-affluent customers but then supply only slightly scaled-down versions of products originally designed for wealthier markets. This approach rarely succeeds. But some companies have committed themselves to understanding the needs of less-affluent customers and using this knowledge to devise creative solutions to customer problems.

Some companies have committed themselves to understanding the needs of less-affluent customers and using this knowledge to devise creative solutions to customer problems.

Employees of China's Haier, for example, discovered through visiting rural customers that they frequently used their washing machines not only to launder clothes but also to clean vegetables. By making a few minor modifications to the washers they manufactured, Haier was able to market the machines as versatile enough to wash both clothing and vegetables, and rapidly became the market leader in rural areas of its home country.

Cement-maker CEMEX provides another example of this approach. Headquartered in Monterrey, Mexico, CEMEX is a nearly century-old company that has become in the past few decades the third-largest cement company in the world by volume, selling to customers in more than sixty countries; its sales totaled $6.5 billion in 2002.

To better understand the needs of Mexico's less-affluent customers, CEMEX assembled a team of employees who agreed to spend ten hours each day for an entire year in an extremely poor neighborhood in Guadalajara.

Consumers in this neighborhood generally bought less-expensive powdered cement in bags, rather than already-mixed concrete delivered by trucks. A more significant finding was that do-it-yourself projects have a special significance for this demographic. Building projects, the team learned, provided more than the functional benefits of extra living space to these consumers; they also conferred the psychological satisfaction of creating patrimonio, something of enduring value to be passed on to the next generation. The insight that buildings represented more than simple utility helped CEMEX position a program aimed at these potential customers by appealing to their aspirations to create an enduring legacy.

An inability to secure credit emerged as a primary obstacle to financing construction projects. The CEMEX team discovered that to raise capital for building, poor Mexicans would organize tandas, lotteries in which a group of families contribute a specific sum each week to a pool and one lucky family wins the entire amount at the end of the week. What they also learned is that although these funds were intended for building, winnings were often diverted to such other purposes as weddings and celebrations of festivals.

Working with local leaders, CEMEX developed a program to help community organizers establish similar financing pools in which, instead of cash, the winners received building materials, including cement. In addition, CEMEX provided construction advice and blueprints to the winners. The program has already helped more than 30,000 families, and the company's goal is to reach 800,000 more within five years.

Innovate around—rather than through—the technology

Companies such as Samsung or Novartis can drive innovation from their R&D labs, continually translating scientific breakthroughs into new products. In contrast, innovation by developing-country businesses looks very different. In general, the innovations come not from product technology but from all the elements of the business model that surround the product technology, including manufacturing, logistics, distribution, and finance.

Consider the challenge of delivering ready-mix concrete. Contractors often change their orders at the last minute, but CEMEX found that, on average, it took three hours between the time when a change order was received and when the order could be delivered. To decrease turnaround time in its Mexican market, CEMEX equipped most of its fleet of concrete mixing trucks with global positioning satellite (GPS) locators, allowing dispatchers to arrange deliveries within a twenty-minute window, versus the three hours CEMEX's competitors require. This system—which did not emerge from a central R&D lab but rather from CEMEX's internal innovation efforts, as described below—has allowed CEMEX to increase its market share, charge a premium to time-conscious contractors, and reduce costs resulting from unused concrete.

Scour the globe for good ideas

One distinctive aspect of the companies we studied was their eagerness to travel around the world to find ideas. This isn't traditional benchmarking, since managers don't simply copy something they see elsewhere. Rather, they take pieces of practice or technology that they find and recombine them in novel ways to solve customer problems. The CEMEX team that developed the GPS system got the idea from a 911 call center they saw in Houston. Having identified contractors' need for just-in-time delivery, the team reasoned by analogy that emergency response teams faced a similar problem of quickly reacting to urgent requests from unpredictable sources. Based on this insight, they studied how the call center dispatched paramedics within ten minutes despite traffic congestion and unpredictable call patterns.

Another example of scouring the globe for good ideas and adapting those ideas for its target market comes from Natura, a leading Brazilian cosmetics company whose revenues in 2002 were $467 million. Voted company of the year by Exame, Brazil's leading business magazine, Natura has from its inception focused on serving the distinctive needs of Brazil's ethnically diverse population.

Recognizing that the company could never compete on technical innovation with global competitors such as Procter & Gamble, Estée Lauder, and Shiseido—all of which spend hundreds of millions of dollars on R&D every year—Natura's executives have developed close connections with universities in France and the United States, and license technology from universities and research centers around the world. Says Philippe Pommez, Natura's R&D director, "The hard part is not finding the new technology; it is knowing what you are looking for. This is where our conceptualization of new products and new lines that serve local needs becomes indispensable."

For instance, Chronos—a skin cream geared toward women over thirty—is one product that emerged from this approach. The cream drew on existing technologies but combined a number of them into an integrated product that specifically served the needs of Brazilian women. Pommez says, "Lancome has three different products for wrinkles—one with vitamin A, another with vitamin C, and another with vitamin D. All sell based on brand recognition. Chronos incorporates the three vitamins into one cream. Why? Because all the vitamins are especially beneficial for older skin, particularly in a sunny humid climate such as Brazil's."

Approximately 40 percent of the company's revenues are derived from products introduced within the last two years. Natura achieved this result with an R&D staff of about 150 and a budget totaling only 3 percent of net income. Compare this with L'Oreal, the parent of Lancôme and Maybelline, which spends approximately one-third of its net income on R&D and employs nearly 3,000 researchers.

At Natura, an innovation cycle starts with a monthly meeting among the company's three presidents, its marketing director, and the R&D director where new ideas and technological advances are discussed. Because Natura has a network of more than 200,000 direct sales consultants (much like the U.S.A.'s Avon or Mary Kay), new product ideas can be quickly tested in the market and immediate customer feedback can easily be obtained. Says Pommez, "The close relationships between customers, consultants, and promoters can give us a good idea of a product's acceptance within a week. With one of our perfumes, we realized it would be a failure from the consultants' reactions, even before the actual product was put into the market. It was removed from our catalogs within three weeks."

Natura's faith in the concepts behind its products often challenges industry precedents. One of the company's most daring ideas was its mother-baby product line, launched in 1993. Although research showed that Johnson & Johnson, with a 90 percent share, had an unassailable lock in this market, Natura decided to enter anyway and succeeded in capturing a significant piece of the sector for its creams, soaps, and shampoos. The company did so by linking their products with Shantala massage, a popular technique in Brazil for strengthening bonds between mothers and their infants. The Shantala method posits that mothers can forge stronger relationships with their infants by gently massaging them during bathing and while applying creams and lotions. Natura's Mother & Baby line provides instructions on Shantala massage and outlines its benefits.

Managers in developing countries sometimes despair of closing the gap with larger and better-funded multinationals. Clearly, there is hope for companies anywhere in the world to win through innovation and creativity. Moreover, the practical innovation tools used by developing country champions can be used by managers anywhere to innovate on a shoestring.

Where Good Ideas Come From: One Company's Example

by Donald N. Sull, Alejandro Ruelas-Gossi, and Martin Escobari

Good ideas may surface from the farthest reaches of the organization. Thus the challenge for top executives is to stimulate experiments across the entire organization, select the most promising, and disseminate them quickly and widely throughout the business.

In 2000, CEMEX's Mexican unit created a special Innovation Committee to stimulate creative thinking about how the company could better serve its customers. Composed of three VPs, three directors, and one outside consultant, the committee has three key responsibilities:

1. To define a small number of broad themes to guide innovation and ensure alignment with corporate strategy. Recent themes include manufacturing breakthroughs, integrated construction solutions for affordable housing, ways to support regional development, and making it easier for customers to do business with CEMEX. Note that none of these innovation themes relate to improving the product itself-cement remains cement. Rather, they stimulate creative thinking in every other element of the business model.

2. To select four to six teams each year to identify three significant opportunities consistent with a broad theme, thereby producing twelve to eighteen big ideas each year. The teams consist of up to ten people who devote about one-quarter of their time to the project for three or four months. Participating on a team is considered a plum assignment because it provides exposure to top executives. Team members also recognize that they must develop an actionable plan for pursuing the opportunities because the innovation committee frequently taps team members to implement the idea.

3. To provide structure to the innovation process. Team members receive training in identifying an opportunity, generating ideas to address a market gap, and formulating a plan of action to seize the opportunity. In some ways, the process resembles an entrepreneur's boot camp. CEMEX has developed tools for stimulating creativity. One, for example, is called "Ping-Pong," in which the team splits into two groups. The first one proposes an idea to pursue a specific opportunity, then the second group improves on the idea. The two groups knock the idea back and forth until they can envision no further improvements. Every proposal follows a template that clearly articulates the targeted segment, spells out the benefits to the customer, and quantifies the financial benefits to CEMEX in terms of cost reduction or increased revenues.

About the authors

Donald N. Sull is an assistant professor at Harvard Business School.

Alejandro Ruelas-Gossi is director of the Institute of Senior Management at the Institute of Technology in Monterrey, Mexico.

Martin Escobari is the founder of Orange Advisory in Sao Paulo.

Reprinted with permission from "Innovating Around Obstacles," Strategy & Innovation, Harvard Business School Publishing, November/December 2003.

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