4 Billion Report

8/2/2019 4 Billion Report

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Profitable growthstrategies for the Global

Emerging MiddleLearning from the Next 4 Billion markets

Strategy and Research


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Shashank Tripathi Alastair RimmerForewordThe Global Emerging Middle is a class of citizens and consumers dening a critical growth horizonfor companies over the coming decade. They are found largely in markets we dene as the Next 4Billion: countries like India, China, Indonesia, parts of Africa and Latin America where over 4 billionof the 7 billion people on our planet reside. Not only will this horizon dene how businesses growover the coming years, but strategies to foster protable growth in this segment will determine

whether companies can achieve sustained success.

Our report focuses on strategies adopted by leaders who have tried to grow protably in this market.Their experiences, brought out through case studies and interviews with CEOs, and practitionersgive interesting pointers for success in this market. Our detailed research focuses on the largeIndian emerging middle, which is often seen at the front line of innovations to address this segment.Selected cases studies then take this learning to other parts of the Next 4 Billion markets to esh outthese strategies.

Each company will have to approach the Global Emerging Middle with its own industry axioms.Different Next 4 Billion countries will also have their own variations to the strategic themes our

research has thrown up. This research can only act as a starting point of a deeper investigation for thecompany or the country. However, the nine keys themes that emerge in this report throw up a verylively picture and have some contrarian suggestions.

For instance, the aspirational nature of this emerging middle challenges cost only strategies. Therequirement to complement technologies with brick and mortar presence, to sell and distribute in thismarket, needs careful consideration. And most importantly the mindset shift needed both in buildingtrust with customers and to change internal organisational dynamics for this market is critical.

We hope strategies brought out by this research offer the rst stepping stone in your journey ofdiscovering and engaging with the Global Emerging Middle. Success in this exciting market willchallenge you to come up with new value propositions, innovative business models and new ways ofthinking. However, for those companies committed to this vast new growth horizon, capabilities that

are built through this stretch will allow you to compete globally and win.

Shashank TripathiLeader - Strategy & Research, India

Alastair RimmerGlobal Strategy Leader


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Executive Summary

Chapter 01

7 Bn Population Upper 1bn Middle 1bn Next 4bn Low 1bn DifferenceMiddle vs. Next

Income level > $ 12,196 $ 3,946 - $12,195 $ 996 - $ 3,945 < $ 995

Years of education 14.5 13.8 10.3 7.9 25%

Urban population (%) 78 74 41 27 45%

Mobile phones subscription(per 100 people)

106 92 47 22 50%

Internet users (per 100 people) 68.3 29.9 13.7 2.3 54%

Cars (per 1,000 people) 435.1 125.2 20.3 5.8 84%

Target population

Source: World Bank

Globally, businesses are looking at the Next 4Billion nations for growth, especially now, giventhe slowdown in mature economies. These nationsare dened as having average per capita incomeof between $1,000 and $4,000 per year, and arehome to 4 billion people, or more than half of the

worlds total population of 7 billion. Within thisgroup -- which includes China, India, Indonesiaand Latin America countries in Africa -- businesses

have traditionally focused on the Middle andUpper Middle+ income tiers. We believe theGlobal Emerging Middle (GEM) -- which lies

just below the Middle segment constituting asignicant, expanding and largely untappedmarket.

The Global Emerging Middle (GEM) alreadyaccounts for 2.3 billion people globally. And it isonly going to get bigger, thanks to high birth ratesand above-average economic growth in many

countries in the group. The GEM will representa combined annual market in excess of $6 trillion(USD) by 2021. In India alone, the segment isexpected to cross the $1 trillion threshold by2021 as its ranks swell to 570 million, from 470million in 2010.

Companies seeking growth can ill afford to ignorethe opportunity offered by this GEM market. But

while the segment itself is experiencing sharpgrowth, companies entering the market oftennd that protable growth can prove elusive.Our research shows that pioneers that succeed

in creating protable growth use strategies andinnovations very different from those employedin more developed economies. Multinationalsstand to learn from these pioneers, but only ifthey leave their preconceived approaches andbusiness models behind them and show greaterexibility in addressing this new market.

Once a company has established itself in theGEM, customers will carry their loyalty with

them as they migrate up to the Middle class.By focusing on this large, relatively untappedmarket, companies will be able to build earlyloyalty that will hold them in good stead as thesecustomers acquire greater economic power.

Companies can also use the capabilities they havebuilt in the GEM not only to address the Middleclass in that country but also to compete in otherNext 4 Billion markets that have similar segments.

Whats more, innovations developed in theNext 4 Billion countries can be exported tomature economies, to spur growth and increaseefciencies there. This is particularly relevantin recent years as mature economies are goingthrough a recessionary phase. To protectthemselves from this new competition on theirhome turf, and to turn it to their own advantage,multinationals will need to understand thestrategies and innovations that are nowgerminating in the Global Emerging Middle.


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Protable growth strategies for the Global Emerging Middle 5

In short, companies will either have to enter thisincreasingly important sector during the comingdecade or be prepared to battle those that do.Either way, they need to learn from the leadersin this market and tool up to meet the challengesthat are on the way.

In this journey, the strong innovation and R&Dcapabilities of international companies can be ofhelp. By tapping these strengths, companies can

develop the novel value propositions, businessmodels, and mindset needed to succeed in thisbeckoning but challenging environment.

The value propositions designed for countriesat the upper end of the global income spectrumseldom work sustainably to meet the needsof the Global Emerging Middle class. Instead,companies have to develop a nuancedunderstanding of the aspirations and uniquetradeoffs of this segment and develop solutions tomeet these needs. Value propositions cant simply

focus on low cost if they are also going to connectwith the segments aspirational framework. Norcan companies treat the Emerging Middle classas a homogeneous set of customers. Differencesbased on location (urban vs. rural), age, religion,and language require customised products andservices based around a standard and scalableplatform. However, the right value proposition

will fuel rapid growth.

Companies also need innovative business modelsand processes to address this segment protably,to overcome institutional weaknesses and gaps ineverything from credit systems to supply chains.Companies have to collaborate with key playersin the unorganised or informal economy tocreate an ecosystem that supports their businessmodel. While prototyping and pilots are requiredin the initial stages, scale solutions are essential

Indias Population Distribution (millions) 1.19 Bn 1.36 Bn

Househo ld income/year (INR) $*/day per capita 2010 2021 (Projection) (%)

> 850,000 Upper Middle + >$10 14%

300,000 850,000 Middle $5-$10 23%

150,000 300,000 Emerging middle $1.7-$5 42%

< 150,000 Low


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for success. In addition, successful entrantsemploy a mix of techniques and channels to meetthe segments varied and often-unique needs.Technology is key, of course, but so are networksof brick-and-mortar service centers and otherofine support systems. An appropriate businessmodel will lead to sustained protability.

The third critical element for achieving protablegrowth is a shift in mindset. Companies need

to adjust, both in their external approachto the market, and internally to the specialrequirements of the Global Emerging Middle.Often this requires a strong leadership presence,a bold approach that embraces disruptivesolutions, and a willingness to adopt new valuesand metrics to drive and measure success.

Businesses addressing the market will havedifferent nancial strategies at the adoption,acceleration and steady state stages of growth.For instance, the right nancial approach

emphasises prototyping and experimentation,and can be asset light in the initial stages.However, to achieve such success, investmentsare needed in the acceleration phase to get toscale. In many cases, prot at low cost is onlypossible at great scale.

Global 2012:The emerging middle

will represent an

annual market of

USP 6 trillion

Trusted Endorsements

In India, promotion through word of

mouth is very important and it is very

difcult to substitute it with technology.

Founder, ITES Company

In this report, our research has focused onIndia because it is home to one of the biggestEmerging Middle segments in the world. Thehard-won lessons of companies that havebeen pioneers there will be of interest to thosenow ready to do business in this segment, inIndia or elsewhere. We interviewed CEOs andinnovation leaders, conducted primary research,and compiled case studies, some involving

companies from other geographies such asAfrica, Latin America, and China.

As diverse as the Emerging Middle is withina given country, it follows that the segmentscharacteristics and dynamics vary as well, tosome degree, from country to country. Thatnotwithstanding, the framework and lessons that

we have developed in this report are relevantthroughout the Next 4 Billion and offer a strongstarting point for further investigation.

Our framework recognises that companies will be

at different stages of maturity in addressing theNext 4 Billion growth horizons. Those that arelooking to enter this market will focus on valuepropositions, while those already well entrenched

will require improving their business models. Bothwill require a change in mindset. Ultimately, thisframework will help companies come up with aholistic strategy for protable growth.

AND thinking

You must focus on qualityAND

affordability; quality is fulcrumEx-CEO,Medical Services Company


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Introduction: Nine Themesfor SuccessThe GEM Framework

Chapter 02

More than half of the worlds population about 4 billion people -- live in countries

with per capita income between $1,000and $4,000. And a signicant proportionof these people represent a huge and

largely untapped market: the GlobalEmerging Middle class. In India, China,Indonesia, Nigeria, and other developingnations that we call the Next 4 Billion,untold millions of consumers arecontinuing to climb out of the lowestincome segment, thanks to economies thatare galloping ahead at rates that developedcountries can recall only with nostalgia.

But how do you do business with thisdiverse and sprawling segment, whosemembers are often dispersed over vastrural areas or live in dense urban clustersthat are largely unconnected to the formaleconomy?

The insights gained from our researchreveal that successful pioneers focus onthree key areas:

New Value Propositions Understanding Demand

Innovative Business Models

Creating Supply

Shift in Mindset Managing theConsumer and Organisational Mindset

Strategies for protable growth in theemerging middle need to address all threeareas for success.

In turn, each of these areas contains threekey strategies for success. Together, thesenine elements form the framework andthemes of our analysis.

The PwC Framework - How to win in the market of th e Global Emerging Middle (GEM)


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Shift in Mindset Managing consumer

and organisational mindset

Trusted endorsements (Managing the consumermindset) -- In order to seed and acceleratedemand, companies must build trust throughunconventional proxies and partnerships withinthe community.

Disruptive thinking (New markets, new

sources of value) To win a place at the table,organisations must have a mindset that is opento creating disruptive products, services, andbusiness models.

Values and metrics (Managing performance)-- To protably serve the Emerging Middle,companies must adopt a different set of valuesfor risk taking, customer orientation, researchmethodology, and collaboration with externalplayers. They also need to apply different metricsfor success, particularly at the beginning.

The goal for companies entering any of thesemarkets, and guided by our framework, is tocreate a product or service that is designed forthe requirements of this segment and for thesame product feature is an order of magnitudeless expensive than what is currently offered toother consumer segments. This new product orservice will inevitably lack some of the nice-to-have features of a luxury Western product. Buton the key purchase criteria, it must full thesame high standards used in other segments orglobally. In this sense, a business must produce

more for less.

New Value Propositions

Understanding Demand

Aspiration tradeoffs (Consumer assessment) Solutions must be developed that cater to theaspirational needs of this consumer segment.Companies need to understand the tradeoffs(some counterintuitive) that the consumer isforced to make in purchasing decisions.

Beyond low cost (Pricing and positioning) --Businesses must position their solutions aroundperformance, aspirations, and unmet needs.Leading with a value proposition based just onlow cost is not a recipe for success in this market.

Platform customisation (Solutioncustomisation) Companies need to create afundamental product, technology, or solutionplatform that can be customised, sometimes

with the assistance of partners and the usercommunity. This approach offers a cost effectiveand comprehensive way to cater to the diversityof this market.

Innovative Business Models Creating

Supply

Ecosystem collaboration (Local alliances) --To overcome institutional and market voids inemerging economies, businesses must focus onbuilding an ecosystem. They will need to work

with the government, key gures in the localinformal economy, and others. And they mustcreate value in the system before extracting partof the value for themselves.

Modular scale (Design for scale) Newentrants must aim for economies of scale fromthe beginning. A modular business model canlower costs for the consumer as well as thecompany, provide maximum reach, and enableconsumption.

Smart reach (Value chain design) --Organisations should use a cluster approachto deal with the diversity in these markets.Innovative distribution models, novelapplications of information technology, newnancing mechanisms, and ofine interventionsare crucial for effectively penetrating this sector.

Aspiration Tradeoffs

Fundamental needs of the

market are the same

compromises you are willing tomake will be different based on

your target demographics.

Ex-CEO,Medical Services Company


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Key themes Key Questions Evaluation Parameters

Aspiration Tradeoffs Do your solutions differentiate this consumer segment from other (uppermiddle, middle+ ) segments?

Do you have a clear understanding of what drives purchasing behaviour ofthis consumer segment for your product/service base?

How close are you to the end-consumer?

Beyond Low Cost Are you delivering distinct sources of value to the consumer segment beyondprice? Does your positioning reect that?

Platform Customisation Does your solution have key features that the consumer wants?

Do you vary your solution to cater to regional diversity? Do you have theright mix (protable) in solution variation?



Ecosystem Collaboration Have you partnered with the government to penetrate this segment of thepopulation?

Does the unorganised sector provide a powerful source of competition viasubstitutes? Have you partnered with unorganised sector to serve thiscustomer segment?

Based on institutional and market voids for your industry, what investmentsdo you make to ll these gaps?

Modular Scale Is your solution modular? Can it be scaled in a cost effective manner?

How do you aggregate demand, given the cash ow constraints of your endconsumer?

Smart Reach Does your distribution strategy involve a clustered approach for better reachto this consumer segment?

Do you have online as well as ofine interventions to deliver your solution tothe consumer segment? Is it protable?

Have you deployed an innovative nancing strategy for this consumer base?Do you have the risk appetite? Do you know if your competitors have doneit?



Trusted Endorsement What is the promise that your brand makes to the consumer? What choicesdo you need to make to deliver on that promise?

What counterintuitive consumer perceptions do you need to manage with thisconsumer segment?

Does your product design suit this consumer segment?

Disruptive Thinking Does your organisational have an innovation capabilities? Is innovation apriority within your organisation?

Do you have a robust idea to commercialisation model within yourorganisation to test and scale new disruptive ideas?

Values & Metrics How is growth and success measured in your business? Do thesebarometers need to change for sustained growth with this cash strappedsegment?

What research methodology do you favour to understand the needs of this

consumer segment ?

Shift in Mindset

Chapter 03


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Demographics and Growth

Chapter 03

Rise of the Global Emerging Middle

Class and the Next 4 Billion Nations

A demographic shift is under way throughoutthe worlds developing countries that promisesover the next 10 years to profoundly affect theirsocieties and economies as well as the companiesthat do business there.

Huge numbers of consumers are making their

way up from the bottom of the economicpyramid to form an Emerging Middle class.Though they still earn modest sums -- $1.70 to$5 per capita per day in India, for example these consumers collectively have purchasingpower that already will reach $6 trillion a yearover the coming decade. And their numbers arestill growing, thanks to high birth rates in manyof the countries as well as bustling economies.

In India, for example, about 470 million peoplewere in the Emerging Middle class in 2010.

Market size

The Indian emerging middle

class will constitute a trillion

dollar market, with 570

million people by 2021.

Characteristics

The Emerging Middle

consumers aspire for products

and services catered to the

upper income classes, however,

they are extremely cash

strapped, and >60% of their

income is spent on essentials

Source: IMF and World Bank

We estimate that this segment will grow to 570million by 2021. At that time, the segment,sandwiched between the lowest-income groupand the middle class, will constitute about 42%of Indias total population.

Globally, we estimate that the segment nowencompasses about 2.3 billion people , with theincome level dening the group varying fromcountry to country. Majority of the Emerging

Middle class live in nations with annual percapita income of between $1,000 and $4,000.Together, these countries are home to about 4billion of the worlds total population of 7 billion.This group, which we are calling the Next 4Billion, is at the epicentre of the demographicshift, serving as the crucible in which companiesare developing the new value propositions,business models, and mindsets that are needed tooperate protably in this increasingly importantconsumer segment.


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Indias Population Distribution (millions)

Household income/year ( INR) $* /day per cap ita 2010 2021 (Pro ject ion ) (%)

> 850,000 Upper Middle + >$10 14%

300,000 850,000 Middle $5-$10 23%

150,000 300,000 Emerging middle $1.7-$5 42%

< 150,000 Low


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Cost warriors

In my view, over the upcoming

decade, India will need a lot of

innovation, to do more than

labor arbitrage

CEO,

Leading Telecom player

Population Upper 1bn Middle 1bn Next4bn Low 1bn

Income level > $ 12,196 $ 3,946 - $12,195 $ 996 - $ 3,945 < $ 995

Years of education 14.5 13.8 10.3 7.9

Urban population (%) 78 74 41 27

Mobile phones subscription(per 100 people)

106 92 47 22

Internet users (per 100 people) 68.3 29.9 13.7 2.3

Cars (per 1,000 people) 435.1 125.2 20.3 5.8

Target population

Source: PwC Analysis, World Bank, IMF

Indias Trillion-Dollar Market

In India, the Emerging Middle will constitutea $1 trillion market (2010 prices), by 2021 ,representing about 28% of Indias GDP and about16% of the Emerging Middles global market ofsome $6 trillion.

Not only is this segment of the populationincreasing rapidly, but so is its share of disposableincome. The average annual disposable incomefor the Emerging Middle class is expected toreach $2,190 (international dollars) per capita by2021 compared to $2000 per capita in 2011.

Given that this consumer segment is largelyunderserved, there is signicant commercialopportunity for companies to establish rst-mover advantage and build loyalty early.

Youth Is the Mainstream in India

India also enjoys a demographic dividend overother emerging and developed economies, byhaving the youngest median age. Currently 58%of the population are below 30 years. While73% of the young are literate -- the rate is 62.1%

in rural areas -- only 9.6% are graduates withhigher education, which poses a challenge forskilled labour requirements in India.

Businesses cannot afford to ignore this growingsegment of the population. Although manybusinesses have broadly targeted the youthgroup, they need to develop a more nuancedand segmented understanding, especially withregard to the young in the Emerging Middle,and develop products, services, and marketingstrategies that cater specically to this segment.

Largely Rural Population

Approximately 67% of India will still live in ruralareas in 2021 , posing unique marketing, sales,and distribution challenges to companies.

To be sure, urbanisation is continuing in India,primarily due to migration from rural areas,the natural increase in population, and thedesignation of new areas as urban. However,from a 10-year strategic point of view, India,especially its Emerging Middle segment, willremain largely rural. Therefore, strategies forthe segment must address the unique challengesposed by this reality in ve key areas:

Distribution efcacy and cost effectiveness

Gaps in the unorganised sector

Role of government and policy

Different socio-economic circumstances

Different price-quality tradeoffs.

Chapter 04


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The value propositions designed for countriesat the upper end of the global income spectrumseldom work sustainably for the needs of theEmerging Middle class. The problem persists

when companies try to export value propositionsdeveloped for the Middle and Upper-Middle+tiers, with some customisation, to the EmergingMiddle class.

Dening the Problem and ManagingDiversity

While lower spending power and lowerdisposable income of the Emerging Middle classpartly explain why value propositions developedfor the upper income tiers are seldom applicable,the misalignment is broader in scope. Our viewis that companies need to develop a nuancedunderstanding of the set of problems thatthis consumer segment is facing, and developinnovative solutions to meet its needs.

Additionally, companies cannot treat the EmergingMiddle class as a homogeneous set of customers.Differences based on geography (proximity toa city or industry cluster, for example), age,employment, religion, language, and gender poseenormous challenges for businesses.

Dening the problems, in the context of diversity,will enable businesses to think of solutions thatconsumers need and are actually willing to pay for.

Our extensive primary research proposes threekey themes that must be considered to createcompelling value propositions for the EmergingMiddle class:

Aspiration Tradeoffs - Solutions must connecton an aspirational level with this consumersegment. While those in the Emerging Middlefrequently aspire for products and servicesthat cater to the upper-income tiers, businesses

must have a deep understanding of theunusual tradeoffs that are at the heart of manybuying decisions. A solution that can cater toaspirations, while factoring in tradeoffs, has thebest chance for sustained success.

Beyond Low Cost - Should a solution thatwas developed with signicantly lower cost bepositioned as a low-cost product to attract theEmerging Middle? Our Research shows that

while lower price points (or other innovativepricing strategies) are critical for this segment,

businesses must position their solutions aroundperformance, aspirations, and unmet needs to besuccessful.

Platform Customisation - Companies must createa fundamental product, technology, or solutionplatform that can be customised, sometimes

with the help of partners or the user community.Although a mass-market solution needs to have astandardised set of features that are most relevantto that market, the diverse nature of the EmergingMiddle requires customisation, carried out in acost-effective manner.


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twofold: to reach this segment with affordableand aspirational products and also to gain anincisive understanding of the segments truedemands given its different economic andsocial environment.

Unusual Tradeoffs

Would you expect someone who is struggling tomake ends meet to purchase a cell phone thatmakes a style statement? Did you know that IndiasEmerging Middle is expected to triple its spendingon recreation and entertainment by 2021?

Although all consumers make tradeoffs based ontheir economic and social realities, the EmergingMiddle consumer makes a set of tradeoffs that arecounterintuitive, a characteristic that is crucialfor businesses to understand. Survival (basicnecessities) certainly takes a large portion of thisconsumers mindshare. However, we found that(Prestige)Izzat, Convenience, Entertainment, andChildrens Education gure disproportionately in

the consumers mind as well.

Alam, a taxi driver in Mumbai who was a partof our consumer study, sacriced meals to saveenough money to get his children admitted toa good school. His situation is not as dire as itmay seem Alam and his family own severaldurables (a refrigerator, cell phone, television,and mixer grinder) as well as a small apartmentin a Mumbai chawl. Alam is very proud that hemigrated to Mumbai and now has a reasonablycomfortable life compared with that of his

peers back home in a rural part of the country.He emphasises the favourable comparisonseveral times during our interactions withhim. Signalling progress in life is a commonphenomenon across all income segments.

If survival is as important as prestige, convenience,and entertainment, businesses need to go beyondcost when they design value propositions andposition their solutions for this segment.

Tata Sky did just that. It disrupted Indias TVtransmission industry, dominated by cable

operators, by positioning itself as an aspirational

Aspiration Tradeoffs

Changing social dynamics, rapid urbanisation,increased media exposure, and the proliferationof mobile services have helped to lift a signicantportion of Indias population into the EmergingMiddle. These factors have also created a powerfulpush for aspirational products and services. But

with per capita income of $1.70 to $5 per day,members of this segment remain perilously close

to the bottom of the pyramid. For that reason,these consumers are forced to make unusualtradeoffs that determine their buying behaviour.

Rise of Aspirations of the EmergingMiddle Class

The shift toward aspirational purchases has beenaccelerating for years in India, especially sinceeconomic liberalisation took effect in 1991. About20% of consumer spending has shifted fromessentials to non-essential goods and services,including consumer durables (white goods,automobiles, electronics), clothing, beverages,and cosmetics.

The share of spending for miscellaneous goodsand services such as non-institutional medicalexpenses, consumer services, and savings foreducation -- is expected to increase from 15% inFY 2010 to 23% in FY 2021.

Major players in fast-moving consumer goods(Marico, Dabur, Parle, and Emami) are bettingheavily that key consumer demands -- relatedto convenience and health, for example as

well as impulse purchases will drive growth.Although pricing innovations and distributionstrategy had been the focal points of such efforts,CEOs interviewed during our research stressedthe importance of innovations that cater toconvenience and a sense of prestige, while alsotaking account of the segments survival needs.

Aspirational purchasing behaviour is also makingits way into the rural household. In a sense,urban aspirations are entering the rural mindset.For instance, value-added services from mobilephone operators -- such as Bollywood callertunes, astrology daily bytes, and participation inSMS-based contests -- have become extremelypopular in rural India.

Such successful penetration of Emerging Middle

India by established players is uncommon. Inthe apparel category, for instance, consumersin this segment tend to purchase look-alikes of

well-known premium brands. This grey marketthrives not just because of the affordability ofcounterfeits but also because of the easy accessit provides to products that are aspirational,at least in terms of brand association. Thechallenge for legitimate businesses is thus

Emerging middle market size by 2021* ($ billion)

Source: PwC Analysis; NSSO (National Sample Survey Ofce)

*Non PPP adjusted; ** Includes non-institutional medical

expenses, consumer services, conveyance, savings forceremonies, higher education.

- Non-institutional medicalexpenses

- Consumer services- Conveyance- Savings (for ceremonies,

higher education)


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product at affordable prices. It identied theunmet needs of Emerging Middle consumers andthen lled those needs with differentiated service.

Tata Sky demographically proled itscustomers and introduced relatively expensive(compared with cable) direct-to-home (DTH)service. This connection gives the customerchoice, convenience, and control, all tied tothe individuals demographic background.

Customers are offered regional channelpackages, superior transmission quality, and such

value-added services as Activ and Showcase.Payment is made easy via the Internet and mobilephones. In 2010, 85% of Tata Sky subscribersused the Internet and mobile phones to pay theirrenewal fees. Tata created a new benchmark incustomer service and invested heavily in it evenunderwriting soft-skills training for its installers.

The service was launched in urban areas beforeit was introduced to smaller towns. This createdan aspirational halo around the product. Whenthe service nally came to the towns, lower-tierconsumers were offered the same brand andproduct that had been sold to city customers.But to meet the nancial and value aspirationsof Emerging Middle customers, the price of theleast-expensive package was kept fairly low. Thecompany focused on improving regional contentfor these customers and also on steadily reducingthe price of its hardware.

Beyond Low Cost

Should a solution that was developed withsignicantly lower cost be positioned as a low-cost functional product to attract the EmergingMiddle? Our view is that while lower pricepoints (or other innovative pricing strategies)are critically important, businesses must positiontheir solutions around other sources of value to

win over this segment.

Bajaj, one of Indias leading motorcyclemanufacturers, recently launched the Bajaj Boxer,targeted to the rural consumer. The Boxer is a

150cc motorcycle (offering more power) that

provides the functional benets of higher cartagecapacity and greater resilience to punishing ruralroads features that are both highly relevant tothe target consumer. The Boxer was positioned asan SUV of motorcycles, directly aimed at the maleconsumer pool on the dimensions of power, sportylooks, and functional benets. The Boxer has beenone of the biggest success stories for Bajaj.

Positioning challenge

Value over Substitutes

As businesses make a transition from focusingonly on low cost to also including suchdimensions as performance and aspirations,

they must understand what job the consumer ishiring the product to perform. For the EmergingMiddle market, substitutes are often abundant.Since it is tough to compete against substituteson affordability alone, businesses must designand position their solutions on other dimensionsof value. Dening the consumer job is a criticalstep. The litmus test during product developmentcomes down to these questions: Does ourproduct provide superior performance vis vissubstitutes? Does it cater to aspirations? Doesit factor in the tradeoffs that this consumer

segment will make?

New Category, New Market

This approach often leads to the creation of awhole new category of product or service. Godrej,one of Indias leading refrigerator manufacturers,realised that it could not develop an effectiveproduct for the Emerging Middle by just cuttingfeatures from its standard offering. Not only wouldsuch a stripped-down product underperform, butits positioning also would not work it would be

too hard to sell a poor mans fridge.Godrejs consumer research team spent asignicant amount of time understanding theneeds of Emerging Middle India. Their keyinsight: the consumer was hiring a fridge topreserve food, supplies (when the buyer wasa small entrepreneur such as a fruit seller or

vegetable vendor), and necessities for at mosttwo nights. These consumers often changed theirresidence, making portability a key requirement.

Additionally, power outages and the high cost

of energy to run a regular refrigerator wereimportant considerations for potential buyers.

Armed with this information, Godrej engineersdesigned the new ChotuKool refrigerator forthe mass market. The ChotuKool is a smallrefrigerator (1.5 feet X 2 feet) catering to smallliving spaces. Instead of a compressor it usesa cooling chip and a fan, similar to those ina computer. It can survive power surges andoutages common in India. In fact, its high-endinsulation enables it to keep its contents cold forhours without power. Priced at about $80, it ts

the budget of this consumer pool. Arguably, theChotuKool isnt really a fridge at all, at least notin the traditional sense. But how it is categorisedis not as important as the fact that it is solvinga specic set of consumer problems that wereinadequately addressed by other products andsubstitutes.

Ballpark Pricing

If your price it too low, people will think there is aquality issue; if your price it too high, it will be out

of reach for too many consumers, says K. Srinivas,CEO of Bajaj Auto India.


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Clearly, the challenge with pricing for this marketis the uncertain and relatively small cash ow thatthis consumer segment can afford. Additionally,price is a critical signal for this market in terms ofquality. When introducing a new product in anestablished category, businesses should try to stickto a ballpark price range.

There are no hard and fast rules for ballparkpricing. The Tata Nano created signicant buzz

in the market when it was introduced in 2008with a price of $2,000. Tata identied the pricegap in the automotive sector in India -- between$1,600 for two-wheelers and around $7,000 for asmall-car-for-the-masses segment. The Nano wasaffordable for the Emerging Middle class and theMiddle class, and suitable for a family of four.

Tata is now turning the tide on sales of the Nanoby repositioning the brand as a smart car. Nanosnew advertising and marketing efforts are gearedtoward establishing aspirational connections

with its target consumers. Additionally, Tatahas introduced a nancing plan that calls fora downpayment of just $300, with monthlypayments for ve years to match the cash owsthat Emerging Middle consumers can handle.

Even though there are no xed rules for pricingin this market, companies should evaluate theenvironment in which they are operating andadhere to certain principles:

1. Consider the impact of ballpark pricing:Understand what the price is signaling

2. Match the consumers cash ows: Think bite-sized payments

3. Position the product on value and aspirations:If the price is extremely attractive, it is notnecessary to lead with the price.

Platform Customisation

The diverse nature and very different needs of theEmerging Middle nations call for an approach thatgoes beyond localisation. What is often requiredis a complete redesign and reengineering of theproduct solution. However, taking a redesignedsolution and then localising it to account forregional and social differences can push costs upand make the business hard to manage.

To deal with this challenge, companies shouldcreate a fundamental product, technology, orsolution platform that can be customised by theorganisation, sometimes with the assistance ofpartners and the user community. While a mass-market solution needs to have a standardised setof features, cost-effective customisation is a criticalrequirement for serving the Emerging Middle.

An international electronics manufacturer,entered rural India by introducing a new line ofTVs. It launched colour TV at a price point of $60

to bridge the gap between colour and black-andwhite models in the rural market. It focused onvalue engineering and design innovations toreduce costs without compromising on qualityfor this lower-income segment. It achievedthese economies by building new versions of itsproducts with a more compact set of featuresand cost-efcient materials, thus lowering itsmanufacturing expenses.

The company also focused on productlocalisation and introduced Hindi and regionallanguage menus for this consumer segment.In addition, it integrated technology featuresto provide better picture and sound reception,overcoming the poor signal quality in rural areas.

As the standard of living has improved in ruralIndia, the company has raised the prices of itsrural television line, which currently is sold at a

premium to other competitors. Despite the pricedifferential, sales have been strong because of thevalue delivered beyond cost.

There are many other examples of businessescreating completely redesigned platform solutionsthat can be customised to cater to the heterogeneityin this market in a cost-effective way.

Each of these solutions, besides catering toaspirations and correctly positioning products,should address at least one of the followingcrucial demands:

1. Demand for information: bridginginformation asymmetryFor example, ITC,the Indian conglomerate, created a platformthrough its e-chaupal initiative to deliver real-time information and customised knowledgeto farmers to improve their decision-makingability. With this platform, ITC enriched thefarmers with useful data, elevating them to anew order of empowerment.

2. Demand for services: providing productsupport Idea Cellular, the Mumbai-based

mobile operator, has focused on its after-salesand service delivery. It has built a networkof 2,000 service centres across the country,making sure that its customers dont have totravel more than 30 minutes to reach one.The availability of services has improvedcustomer satisfaction while building rapport.

Access to informationData and decision support

systems will be critical for

scaling as it is harder to get

skilled labor, so if you have to

use Para-skilling, you must

provide enabling systems.

Promoter, Hospital Group


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3. Demand for quality, affordability, andaccessibility: opening the door to more GEHealthcare, a British-based unit of GeneralElectric, found an opportunity to providenew mother-infant care with its baby warmerincubators. The baby warmer is part of GEshealthymagination initiative, which is gearedto reducing cost while improving quality andaccess through local solutions.

In short, Indian consumers, and more generallyEmerging Middle consumers throughout the Next4 Billion nations, are demanding value for theirmoney. It is up to businesses to fully understandthe kinds of value they are seeking and to createthe cost-effective solutions that will address thefull spectrum of those needs.

Relevance in Other Next 4 Billion Nations

The need to develop new value propositionsto serve the Emerging Middle is a commonchallenge throughout the Next 4 Billion nations.

The lessons and experience of companies doingbusiness with this segment in India are ofparticular relevance to those entering the sectorin Africa. As in India, the Emerging Middle in

Africa is young and increasingly conscious of itsneeds, and is just as diverse and spread out.

International Case Study

Bajaj Boxer: Innovation from Indiafor Egypt

Recently, an innovation in India by Bajaj wasadapted for the Egyptian market. The Bajaj Boxermotorcycle, which was designed for the IndianEmerging Middle, is now serving the needsof Egypts emerging middle class. The Boxer

is viewed as both aspirational and practical,a product that will improve living conditionsas it helps consumers with their trade andprofessional projects.

The Boxer has an engine capacity of 150cc,giving it more power than its competition, and isequipped with ExhausTec technology, which isenvironmentally friendly as well as fuel-efcient.The bike has been designed in accordance withthe requirements of the Egyptian market: It hasbeen made safe, solid, stable, and reliable forthe toughest road conditions. Previously, thebikes being sold in Egypt had a lot of problems

with vibration, engine overheating, and noise,making those models very unreliable. Theresearch conducted by Bajaj Auto revealed a needfor a better bike as an alternative to the Chinesebrands being sold in the market.

Bajaj Autos candidate was the Boxer, which itmarketed as a No Problem bike. The companyorganised a Bajaj Marathon to showcase thestrength and quality of the bikes. Starting at thefoot of the pyramids, 15 riders toured throughout

Egypt over 13 days, travelling 2,500 kilometers tointroduce the bike to potential buyers.

To assemble and market the bikes, Bajaj Autopartnered with Ghabbour Auto, the leadingcompany in Egypts automotive industry.Ghabbour has a wide network of branches anddealers across the country.

Beyond Cost Position

While low price is a

consideration, the Indian

market is complex. In recent

years while Indian consumers

wants low price they would

not sacrice comfort orprestige for it.

Vice Chairman,Automotive Company

GE Baby


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18 PwC

GE BabyWarmer

Background

GE Healthcare entered a global partnership witha non-prot rm, to distribute a infant warmer,

which looks like a small sleeping bag and canhelp keep a baby warm for hours. GE workedtowards launching the product in India in therst half of 2011 and then moving to other partsof the world.

Customer InsightGE introduced a low cost Baby Warmer suitingthe price limitations of rural India, and alsoadopted a hybrid distribution model to expand itsreach. The warmer is a reengineered product tomeet mass market requirement; unlike traditionalincubators that cost up to $20,000, this warmercosts less than one per cent of this price, and

works without a constant supply of electricity.The product is designed to care for pre-term andfull term (low weight) infants.

Innovative Strategies

Value Proposition

One of the major contributors to death andillness in infants is hypothermia, a reduction incore body temperature below 95 Fahrenheit.The warmer has three components--a sleepingbag, a sealed pouch of wax and a heater. The

warmer swaddles the baby and a heated pouchof wax is placed in an adjacent compartmentin the sleeping bag. The technology in this

warmer involves heating the wax that goes in acompartment of the warmer. The pouch is heated

via the electric heater. The wax heats to 98.6degrees Fahrenheit, a critical temperature for achilds survival. The wax will keep the bag warmfor at least four hours with an indicator signalling

when its time for reheating.

Business Model

GEs baby warmer is part of its healthymaginationinitiative, which is about reducing cost whileimproving quality and access through localsolutions like this one.

GE removed sophistications such as software tomonitor babys pulse and introduced digital scaleto monitor its weight, and LCD monitors to displaydata to reduce the cost of device. They made it

simple yet powerful by understanding local needs:included Jaundice attachment, since 50-60%of infants contract such waterborne diseasesin emerging middle India. GE used radicallydifferent components than their western model;for instance, used wax that regulates the babystemperature for four hours without electricity.

GE adopted design thinking, and an end-to-end solution driven approach. The companyadheres to a broader mandate of reducingInfant Mortality Rate (IMR). They have made

investments in education for user base, trainingof tertiary healthcare provider technicians toprovide healthcare for infant after they leave thehealthcare centre.

GE adopted a hybrid model of using its own andcollaborative distribution network for channelinnovation. They used their distribution networkto sell these units to tertiary healthcare centresin rural India. They partnered with a NGO basedin San Francisco to get access to differentiatedtechnology (low power consumption). They alsopiggybacked on Johnson &Johnsons distributionnetwork to tap their 3000-4000 dealers channels.

Shift in Mindset

GE decided to launch the product in theemerging markets of India and then scaling itglobally subsequently.

Moreover, they were able to introduce a productwhich suited the requirements of the consumerat affordable prices without compromising onthe quality.

GE was also able to partner and collaborateeffectively with a smaller non-protorganisation to achieve effective cost structuresand disruptive technologies and therefore add

value to their offering both for the consumerand the organisation.

Through the baby warmer, GE Healthcare getsan opportunity to further their commitment tomaternal-infant care while increasing local accessand reducing infant mortality. In alignment withthe United Nations Millennium DevelopmentGoals (MDGs), GE is focusing its efforts on

MDG 4, reducing by two-thirds the under-vemortality rate by 2015.

Chapter 05


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Besides developing new value propositions,companies that want to engage with theEmerging Middle class must reinvent theirbusiness models and processes. Traditionalmodels are simply not up to the task ofaddressing the broad diversity and variety ofthis segment. At the same time, companiesmust regularly reinvent the technology used toreach Emerging Middle consumers and to secureeconomies of scale.

According to our research, the new businessmodel must create a collaborative ecosystem,achieve scale via modularity, and employ acounterintuitive approach to reach:

Ecosystem Collaboration - Partnerships withthe unorganised sector, the government, andother stakeholders are critical in EmergingMiddle nations. Businesses must build anecosystem to ll or overcome the institutionaland market voids in this sector.

Modular Scale - Within this ecosystem,organisations need to employ a modular approachthat will increase logistical efciency and lead tolower costs, of benet to both the company andthe consumer. Aiming for economies of scale fromthe beginning and aggregating demand are crucialfor a protable business.

Smart Reach - A cluster approach is neededto deal with the diversity in these markets.Innovative distribution and nancingmechanisms are also essential. Moreover,appropriate technology, along with ofineinterventions, is key to providing importantfeatures to consumers.

Ecosystem Collaboration

Collaborate to OvercomeInstitutional Voids

The customer value proposition needs to bebuilt and delivered despite institutional voids inemerging markets. These gaps are numerous anddeep, affecting areas as diverse as governmentregulation, logistics and transportation, credit

and capital markets, supply chain maturity, IPmanagement, and labour markets. We found thatCEOs repeatedly point to the lack of a functioningregulatory framework as a major impediment forgrowth in an emerging economy like India. Poorinfrastructure, shortcomings in the supply chain,skills shortages, and the questionable quality ofeducation are some of the other cited reasons.

To overcome these challenges, companies needto create a collaborative ecosystem that identiesand lls the voids, or nds ways around them.

Nokia Money, the nancial arm of the Finnishcommunications company, had to build a newecosystem when it decided to become the rstcompany to offer basic nancial management andpayments from a mobile phone in India. Initially,the Nokia Money service was operated inconjunction with Obopay. But then Nokia madeit interoperable with other payment companies.Designed to work in partnership with mobilenetwork operators and nancial institutions,Nokia Money enlisted distributors and merchantsin a dynamic ecosystem to seamlessly provide the

new service to consumers and thus overcome avoid in the market.


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20 PwC

Unorganised Sector

The unorganised sector understands localneeds best, and newcomers from the outsidehave developed a collaborative model to gainaccess to the consumers trust. More than80% of the workforce in India belongs to theunorganised sector, accounting for about 60% ofthe net domestic product. Because the sector isessentially composed of one person enterprises,

it is usually efcient but tough to scale.The corporate sector must learn how to collaborate

with the unorganised sector. Tremendous valuecan be created through such efforts.

For one thing, important players in theunorganised sector often belonging to theEmerging Middle - are proxies of trust andreliability for the consumer. To promote its Boxermotorcycles, for example, Bajaj Auto contacted300 (village heads)sarpanches to show them howthe bikes were made. The result was extremely

powerful word-of-mouth support for the brand.For another thing, collaboration can reducethe threat posed by substitutes, particularlycounterfeit branded goods. The use of banksand microcredit can make it possible for moreconsumers to buy the real thing.

Indeed, organising the unorganised sectorcreates value for the consumer in many ways,including greatly improved efciency. Handlingnancial transactions through a mobile phone,for example, has numerous advantages over

traditional dealings with local loan agents.Finally, because they understand local needsso well, key actors in the unorganised sectorcan show newcomers the way. National andregional retail chains benet greatly by forgingrelationships with small local players like the(mom and pops) kirana stores.

Public-Private Partnerships

In addition to working with the unorganisedsector, successful companies in the EmergingMiddle have learned that they must alsocollaborate with the government. But that isntalways easily done.

So far, evolving PPP models have beenimplemented in India in these sectors:

Healthcare services for reaching out to the poor

Education for skills development

Infrastructure development for the effectivedelivery of services

The private and government sectors bringdifferent assets and capabilities to the table. Theprivate sector offers industry skills, resources,technology, capital, and innovation. Thegovernment can provide help in areas such aslegal clarity, seed nancing, payment systems,and administrative structures.

More business sectors would benet from a PPPmodel and the role the government can have as abuyer, channel, and catalyst to inuence demandin the Emerging Middle.

Given the huge size of this market, companieshave no choice but to collaborate and invest increating an ecosystem. Working in partnership

with the unorganised sector and the governmentas well as other key stakeholders allowscompanies to overcome institutional voids as wellas to achieve smart reach and economies of scale.

Smart Reach

Financing is an enabler to get

the product within the reach

of consumers. If you have

to tap the market, you have

to understand the nancial

ability of the consumer andhave a different model of

selling.

Vice Chairman,Automotive Company


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Modular Scale

Modular Design and Economies of Scale

As a result of ecosystem collaboration, companieswill be able to achieve economies of scale byincreasing the efciency of their processes. Amodular business model can lower costs forthe consumer as well as the company, providemaximum reach, and support growth.

Demand Aggregation

Aggregating demand in a cost-effective manneris crucial for a scalable and protable businessmodel. Since the size of an individual transactionin the Emerging Middle will inevitably be small,aggregating demand is essential in order todetermine demand uctuations, settle on supplyplans, and make decisions about risk. It can alsooften serve as an effective means to involve other

stakeholders. Demand aggregation involves thefollowing elements:

Bundling of demand - An aggregation ofcustomer demands for the mass play

Cross-collateralisation of risk Minimisingportfolio risk

Predictability of demand - Estimating demandand thereby managing the inventory for anoptimum supply chain

Partnerships with informal players -

Collaborating with informal channels tomaximise demand

Supply-side aggregation - Streamlining andaggregating the supply side to improve itspotential and operate more efciently

A modular approach will help the organisationby minimising delivery and logistics costs whilemaximising reach and increasing proximity to endconsumers. For the customer, it will minimise thecosts of product downtime by making it easierto obtain upgrades and replacements and byimproving overall maintenance and service.

Dr. Devi Shetty, founder of Narayana Hospitals,radically reduced the cost of heart surgery byusing a combination of economies of scale andspecialisation. Narayana Hospitals is able toprovide efcient, affordable surgeries by focusingon certain procedures for which the operatingequipment is used at a higher rate and thesurgeons can become more procient. Narayanahas established video and Internet links with

hospitals in India, Africa, and Malaysia so thatsenior surgeons can advise those less experienced.It also runs Clinics on Wheels in nearby ruralhospitals to test for heart diseases. The mortalityrate within 30 days of coronary artery bypasssurgery is 1.4% at Narayana, compared with 1.9%in the United States. It has achieved that lowrate while managing to cut the cost of the typicalcardiac procedure by 50% or more.


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22 PwC

Smart Reach

Cluster Approach

The immense regional diversity in the EmergingMiddle sector calls for a cluster approachto maximise reach. Clustering can center on

various criteria, such as economic orientation,trade ows, migration patterns, income, anddemographics.

Nokia Money, for example, conducted a year-long analysis of migration clusters in India,and targeted specic clusters with customisedadvertising and services, acquiring newcustomers with an optimised spend.

A cluster approach can produce insights aboutconsumer behaviour and preferences throughan analysis of the segments marketing,distribution, nancing, demand, technology,and information needs.

Collaborative Distribution Mechanisms

A collaborative distribution mechanism is keyto solving the challenge of supplying productsand services at the right cost. Distribution solelythrough a companys own channels is typicallycost prohibitive in this market, not to mentionlimited in reach. Instead, companies must alsopiggy-back on the distribution networks ofalready established players. Finding informallocal channels is another must.

Bharti Airtel, the Indian telecommunicationscompany, decided to piggyback on the pan-Indian distribution networks of such consumerproduct companies as Godrej and Unilever.To penetrate rural India, Bharti Airtel teamedup with a large micronance institution. Thepartnership enabled customers to take loans forthe Nokia 1650 and pay for the phone through 25instalments of 85 rupees a month. Bharti Airtelalso collaborated with a fertilizer manufacturer,IFFCO (Indian Farmers Fertiliser Cooperative),selling co-branded subscriber identity modulecards through retail outlets and providing free

Cluster criteria Type

In India, migration from rural to urbanareas tends to follow a predictablegeographic pattern. While migrationto centers of trade and SME clustersoccur from rural areas), theremittance ow tends to bereverse.

Nokia Money conducted aoneyr+ analysis on suchmigration clusters in India,and targeted specicclusters with customisedadvertising and services acquiring more customerswith optimised spend

Consumer Behavior and Preferences

Cluster approach:1. Marketing, distribution2. Demand analysis3. Financing4. Technology, system design5. Information relevance

voice updates to farmers about market prices,

farming techniques, weather forecasts, andfertilizer availability.

For its part, Bajaj Auto tapped a localorganisation to create a new channel to serveits needs. To sell its Boxer motorcycles in ruralareas, Bajaj Auto entered a partnership withlocal authorised service centre agents and madethem sub-dealers. These sub-dealers had a betterunderstanding of local economics and wereexcellent judges of credit. Moreover, the agents

were trusted by the community, and that trustwas extended to the Boxer brand.

Local FinancingAnother insight from our research was thatinformation asymmetry between the lenderand the borrower in the Emerging Middlesignicantly pushes borrowing costs up.Establishing the borrowers trustworthiness andthe nature of their business takes time, effort,and money and results in higher interest rates.

Micronance bridged this gap in threefundamental ways. First, it aggregatedborrowers, collateralising the risk but also

enlisting the borrowers in an arrangement tokeep checks on each other. Second, it held outthe threat of no further loans in the event of adefault. And third, it was less exible than theinformal lending system because of its structuredpayback mechanism. However, the lack ofexibility in payback terms remains a key issuefor the Emerging Middle consumers. For thatreason, local lenders continue to be a signicantsource of borrowing.

Our research shows, an empowered local

nancier is the better option providingexibility to the consumer, albeit imposing credit


23/40


decisions on the lender. This option must providefor checks and balances to avoid predatorylending and to ensure that the local agent hasskin in the game.

The hard reality is that the Emerging Middleconsumer is cash strapped -- and to drivean aspirational value proposition, a relevantnancing mechanism is key.

Companies proceed at their peril, however, if

that mechanism doesnt have enough safeguards.Bajaj Auto Finance suffered losses as it cameto realize that this segment was not only cashstrapped but had no access to formal creditdocumentation. It then devised a Direct CashCollection (DCC) model to provide easy nancingfor its motorcycles while ensuring a low defaultrate. With this model, the customers one-timecontact with the company after the purchaseis with the Authorised Service Centre (ASC).The ASC owner is a local entrepreneur whois responsible for judging the buyers credit-

worthiness. The ASC owner is also empowered tolet people default, based on personal knowledgeof the buyers nancial situation. The default rateis now below 1% with losses reduced signicantlyto about 2-3%.

TechnologyandOfineIntervention

Appropriate technology, along with ofineinterventions, is another key element in theEmerging Middle business model. Technologyenables the delivery of important consumer

features, customised to meet the appropriateneeds of this diverse sector. Technology serves asan enabler by:

Bridging language and regional barriers

Connecting industries

Building smart systems

Training and para-skilling

Providing access to information

Managing supply chains

Using technology as an enabler, ITCs e-chaupalinitiative provided farmers with valuableinformation about crop prices, weather, scienticfarming practices, farmer peer groups, and soil-testing services, enhancing their buying power.

At Columbia Asia, the Kuala Lumpur-based chainof hospitals, technology was used to build abetter system: all medical records and lab reportsare maintained digitally and are accessible viacomputer by doctors across all of Columbia Asias

hospitals, in India, Indonesia, Malaysia, andVietnam. The company charges 15 to 20% lessthan comparable hospitals in the same service area.

But technology alone is not enough to effectivelyserve the Emerging Middle segment -- a brick-and-mortar infrastructure has to stand behind it.Ofine interventions are necessary to build trustand to provide consumers with the education andexperience that they need to take full advantageof the wide range of products and services thatare now becoming available to them.

Nokia Money educated its prospective customersby using ofine interventions. When Nokialaunched its Mobile Money software, it partnered

with retailers, both self run and franchisees(300,000+), and with banking institutions to usetheir brick-and-mortar facilities as the sites forthose interventions.

An international electronics manufacturerdeployed a tiered approach to reach out to townsand villages, building ofces in the remote smalltowns that could not support a larger channel.

The company soon blanketed the country witha distribution network encompassing close to4,000 access points.

Similarly, ITCs physical presence in villages wascritical to the success of its e-chaupal initiative.The company opened countless Internet kiosksthat were managed by village farmers thekiosks not only provided the latest informationto the farmers, but they also served as classroomsin which Internet training was offered and trust

was won.

Relevance in other Next 4 Billion

Nations

Many of the innovative elements of the EmergingMiddle business model developed in India aredirectly applicable in other Next 4 Billion nations.

The need for ecosystem collaboration is just asdeep in China and Africa as it is in India. So, too,is the value gained from liaising with the centralgovernment and local agencies. And keepingthe diversity of this segment in mind, along withits vast numbers of customers, it is increasinglyimportant for companies to achieve economiesof scale and employ a modular design no matter

which country their business is in.

But one aspect of the model, smart reach, is ofparticular relevance to the complicated mosaicof Africas markets. (see section VII, page XX).

As is the case in India, companies enteringpartnerships in Africa with local players andnetworks can reach customers faster and more

efciently.

Offline interrentionsAppropriate technology along

with ofine interventions is a

key element in the emerging

middle business model


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24 PwC

International Case Study

Vodafones M-PESA initiative in Kenya

Africas Emerging Middle has been getting a lot ofattention recently from big corporations aroundthe world. Walmart, the worlds largest retailer, setup a base in Africa by acquiring Massmart, a South

African retailer that has a presence in 13 countriesacross the continent. Similarly, Bharti Airtelacquired the African assets of Zain, the Kuwaiti-

based mobile telecommunications company, totake advantage of this sectors growth.

One of the most successful examples ofinnovation in the Emerging Middle Africanmarket is that of M-PESA in Kenya. Thisinitiative by Vodafone, the London-basedmobile telecommunications giant, tapped intothe exponential growth of mobile telephony inKenya. M-PESA is a service that offers mobilemoney transfers to its customers. It fullled aneed that existing money-transfer methods wereunable to satisfy. PostaPay had a presence in ruralareas but there were complaints of inefciencyand cash shortages. M-PESA introduced amodel that was faster, cheaper, safer, and moreconvenient.

The model was piloted rst to ensure success,and the marketing and technical teams workedtogether to create a simple product that waspromoted aggressively through the mass mediaand supported by ofine interventions via anetwork of service agents.

Recalling the experience of Nokia Money inIndia, M-PESA gained success by targetingKenyas large and sprawling unbankedpopulation, offering low transfer charges andbroad availability in rural areas. Its customerbase soared, growing from 52,000 in April 2007to 9,673,000 just three years later.

Unmet need

M-PESA fullled a need that

existing money - transfers

methods were unable to satisfy

Smart reach

Model was faster, cheaper

and more convienient

offering low transfer charges

and broad availability in

rural areas.

Wipro GE


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Public-PrivatePartnership

Background

As recently as ve years ago, the public healthinfrastructure in India suffered from broadshortages of technology, skilled resources,and capital. Surgical procedures and othertreatments were often delayed because of a lackof sophisticated diagnostic equipment to performComputerised Tomography (CT) and MagneticResonance Imaging (MRI). Many patients

received the wrong diagnosis, sometimes withheartbreaking results.

In 2007, things started to change, thanks to anew regulation from the Medical Council of India(MCI). From that point on, all teaching hospitalsoffering postgraduate degrees in radiology,known as radio diagnosis in India, had to have CTand MRI equipment.

In response to the new regulation, Wipro, theBangalore-based IT services and consultingcompany, joined forces with GE Healthcare

in an initiative to build high-quality but low-cost imaging centres at the countrys teachinghospitals. The effort took the form of a Public-Private Partnership (PPP), with the rst centreplanned for the government-run medical collegehospital in Jabalpur.

Customer Insight

Wipro GE identied its key stakeholders as theconsumer, the government and its healthcareregulators, and the hospitals.

The partnership aimed at fullling the needs ofall three groups: for the consumer, providinghigh-quality, speedy care that was alsoinexpensive; for the government and regulators,access to large pools of investment capital andprivate-sector expertise; and for the hospitals,a steady supply of skilled labour and rst-ratemaintenance of cutting-edge equipment.

Innovative Strategies

Value Proposition

The Wipro GE partnership participated in thegovernment tender that grew out of the MCIregulation, offering the latest CT and MRIequipment. In addition to selling the machines,the goal of the partnership was to reduce the costof treatment by 30 to 50% for disadvantagedpatients. In the partnerships view, installing

the equipment was just part of the solution. Ifkey consumer needs werent also addressed, theutilisation rate for the new devices would be poor.

Business Model

Wipro GE partnered with government agenciesand clinical service providers, which helpedthem create a nancially viable ecosystem. WhileWipro GE became the technology provider,installing and maintaining the equipment andsteering the PPP project, it roped in clinical

service providers to create the infrastructure. Thegovernment provided rent-free land on whichto build the centre. The performance risk wasshouldered by Wipro GE; the service providersassumed the clinical risk.

What made the model protable was that theprivate sector augmented the patient ow fromthe medical college hospital. Local clinical serviceproviders sent referrals that accounted for about60% of the imaging centres volume.

Separate fee systems were devised for patients

referred by the medical college hospital andpatients from the outside. The governmentsubsidised 30 to 40% of the costs and it fullyreimbursed the service provider for certainpatients that were below the poverty line.

Shift in Mindset

Although most companies shy away from PPPprojects because of concerns about governmentlethargy and red tape, Wipro GE had implicit faithin this partnerships potential. They saw the PPPmodel as the vehicle for securing a sustainable

volume of patients, thus ensuring protability.

Business Benets

Spurred by the success of the pilot project atJabalpur in 2007, Wipro GE replicated the modelin other states. In May 2008, it sealed its secondPPP agreement, with the government of Gujarat, toupgrade the imaging facilities in ve government-run medical college hospitals, in Ahmedabad,Baroda, Bhavnagar, Jamnagar, and Rajkot.

In July 2010, Wipro GE entered into anagreement with the government of AndhraPradesh along with Chennai-based MedallHealthcare to provide similar imaging services infour more medical college hospitals, in Kakinada,Kurnool, Vizag, and Warangal.

In conjunction with upgrading the imagingfacilities, Wipro GE plans to develop at least 100cost-effective health-care products and pieces ofequipment by 2015.

Chapter 06


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26 PwC

Shift in Mindset

Organisations and consumers have becomeaccustomed to traditional paradigms associated

with serving the Emerging Middle market.Broadly speaking, affordability is at the top ofmind of both the consumer and the businessside. Any shift from that paradigm, toward othersources of value, is met with scepticism fromthe consumer over the actual value ultimatelyprovided and with cynicism from executives overthe sustainability of such an approach.

This cycle of distrust must be broken, however,if companies are to create a business model forthe sector that can remain protable. Shiftsin mindset are needed to understand both theunique ways in which this segment adapts to themarket and how organisations can respond withtheir own adaptations. Based on our research, wehave identied three key areas for change:

Trusted Endorsements (Managing the consumermindset) - Building trust through unconventionalproxies and partnerships is essential. Capitalising

on that trust, a company can then use itsmarketing channels, messaging, and packagingto convince the Emerging Middle consumerthat its products and services will cater to theconsumers special aspirations by delivering

value that goes beyond low cost.

Disruptive Thinking (Managing the innovationmindset) - Organisations must create disruptiveproducts, services, and business models tosucceed with the Emerging Middle consumer.The consumer is looking for affordability,

quality, service, and other sources of value thatexisting, cost-squeezed products are unableto provide. A company must, of course, have adisciplined investment process to meet theseneeds. But a companys leaders must also fosteran environment in which employees are affordedthe independence and structure to take r isksto create offerings that have the values theseconsumers want.

Company Values and Metrics (Managingthe organisational mindset) - The genesis

of organisational culture is frequently top-

down. But to protably serve the EmergingMiddle, company leaders need to inculcate adifferent cultural dynamic involving valuesthat disperse the decision making and metricsthat are customised to this sector. This shiftincludes a heavy emphasis on risk taking,customer orientation, and collaboration withexternal players as well as the development ofnew research methodologies and measures ofsuccess. Ironically, this change in culture needs

to be closely managed from the top down as itdevelops over time.

Trusted Endorsements Managing the

Consumer Mindset

CEOs from many of the pioneering businessesserving the Emerging Middle in India say that thekey to success is to establish trust between theconsumer and a brand, which involves a processthat is signicantly different from what works

with upper-income tiers.

Before going too far, a company has to answerthese questions: What promise is its brandmaking to the consumer? What choices doesthe company need to make to deliver on thatpromise? What counterintuitive consumerperceptions have to be managed? Does theproduct design suit this segment?

Building a Brand by Building Trust

Consumers in the Emerging Middle oftenrely on local opinion leaders and sourcesof information to form a judgement about aproduct. These opinion leaders essentially areproxies of trust. Organisations need to buildtrust through these leaders, and through otherproxies and partnerships, to highlight the qualityand affordability of their products. These trust-building arrangements are unconventional andrequire skills quite different from those neededto sell products to upper-income segments.Our research has revealed these promisingapproaches:

Shift in Mindset

Dont focus on product

innovation, instead focus on

aspirations and innovate in

marketing mechanisms such

as channel, differentiation

strategy to reach out to themass market. Channel and

nance innovation are critical

for reach and affordability.

CEO,Automotive Company

Trusted

EndorsementBrand is a crutch or an ally.

Managing Director,Telecom Handset Manufacturer


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Working with proxies of trust As noted,organisations could establish relationships withlocal proxies of trust such as ardityas (localmoney lenders),sarpanches (village heads), andother community leaders. For example, Bajaj

Auto, as mentioned earlier in the report, used300 sarpanches to market its Boxer motorcycle

Forming partnerships Liaising with non-government organisations (NGOs) also helpsto establish trust with this consumer. A majorIndian FMCG player,for instance, partnered

with a NGO to develop content for its rural salesinitiative. Co-branding with successful productsis another option for partnering.

Establishing emotional connections - The useof celebrities, sports personalities, and otherrole models creates an aspiration around abrand. Understanding regional differences andmarketing products accordingly gives a brand afavourable reputation. Tata Sky followed bothpaths: it used a leading lm star to market its

brand and introduced channel packages thatwere customised by region.

Managing Consumer Perceptions fromthe Bottom Up

Consumer perceptions in Emerging MiddleIndia are a challenge for companies to manage.Marketing requires a bottom-up approach,involving a combination of word of mouth,traditional media, and partnerships.

Providing extraordinary value can actually

backre, in terms of counterproductive consumerperceptions. The CEO of a hospital chain cateringto the Emerging Middle Indian market cites oneexample: A doctor who spends a long time withhis patient to understand the patients history

would be perceived as incompetent, as the localdoctor spends less time with the same patient.

Word of Mouth: Driving Awareness andSeeding Demand

Word-of-mouth marketing is a critical means ofbuilding trust for a brand in this segment andrequires a de-centralised approach. Generatingthe right buzz, via community leaders, can bea cost-effective way to create awareness andaccelerate demand.

Using mass media is another effective way to

build awareness, and to cater to the aspirations ofthis segment. But besides being expensive, thatchannel is not sufcient to drive adoption. Whatare also needed are local partnerships and ofineinterventions. Although these vehicles, too, areexpensive, not to mention time consuming, theyare both essential for accelerating demand.

Engaging the Consumer The Case forDesign

Besides marketing, the way a product is

presented is a key element in attracting customerawareness and winning acceptance in thissegment. The goal is to keep the local customerengaged on a number of levels, by providingsuperior and aspirational design, packaging, andtechnology.

Attracting attention with colourful packaging

Procter & Gamble launched its Tide detergentpowder aimed at Emerging Middle customers in bright packaging to attract attention.

HULs Sunsilk shampoo comes in colourful bottles

and disposable packages to stand out amongother brands.

Customising product design

Considering the space constraints in the housesof these customers, Godrej Industries launcheda small portable refrigerator, the GodrejChotukool, which was customised in accordance

with the living conditions and budgets -- of thisconsumer class.

Leveraging technologyIn 2008, Nokia launched Nokia Life Tools,

a package of agricultural, educational, and

entertainment services designed especially forconsumers in small towns and rural areas ofIndia. The package provided timely and relevantinformation customised to the users locationand personal preferences and sent directly to amobile device.

Disruptive Thinking Managing the

Innovational Mindset

Innovation is the hook that will connect acompany to the consumers in this segment. Whatthey want in a product quality, service, andother values in addition to affordability is oftennot available. Innovation is needed to come up

with the prize.

Businesses must assess their innovationcapabilities and identify gaps in their cultureand process. Is innovation a priority withinthe organisation? Does the company use acommercialisation model to test and scale new

disruptive ideas?

The AND Approach: Quality ANDAffordability

K. Srinivas, CEO of Bajaj Motors, made an astuteremark that sums up the AND approach. He said,If you are chasing product innovation only, youare chasing the wrong goalpost.

This market requires companies to think AND,not OR. Consumers in this segment are extremelyaspirational in their demands and therefore

require both quality and affordability. For acompany to deliver on that combination of needsrequires a shift in mindset. The company has tounderstand that serving the Emerging Middle isnot just about making a product bite-sized, whichis the typical approach, but also about making itbeyond and within their reach at the same time.Companies must indeed be innovative to bring allthat to market in a protable way.

In conducting our research, we spoke to severalother CEOs who added to this line of thought. As

V. Raja, Ex-president and CEO of GE HealthcareIndia, put it, You must focus on quality and


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affordability -- quality is the fulcrum. MartenPieters, CEO of Vodafone India, had a similar viewon affordability and service delivery. India needsto move beyond labour arbitrage and IT, he said.The next wave of growth will be from services.

The Disruptive Leapfrog Mindset

Leapfrogging, via disruptive changes, is anecessary partner to AND thinking. Companiesmust be prepared to offer leapfrog products

and services as this market often misses ageneration of technology and is ready for thenext generation.

Nokia Money used leapfrog technology inoffering its mobile nancial services to theEmerging Middle. The new services includedsending money to another person, makingproduct purchases, and paying bills, all takencare of via a voice call or SMS and available 24hours a day.

Nokia Money was disruptive because the

company used mobile devices to address anunmet global demand for access to nancialservices. Nokia provides that access to theunbanked and under-banked population,empowering people and their businessesthrough their mobile phones and eliminating theneed for intermediaries.

Nokia Money has built a dynamic newecosystem for mobile payments. It is designedto work in partnership with mobile networkoperators, nancial institutions, distributors,

and merchants to seamlessly provide the newservices.

The unbanked have most to gain Nokia Moneymight be this groups only access to nancialservices. The services are simple to use, secure,and available across different operator networksand on virtually any mobile phone.

A Mindset for Partnership

Partnerships between small and largeorganisations are necessary to deploy disruptive

technologies at scale. For large companies, the

hunt should be on to nd a small innovativepartner, one that has an efcient cost structureand can be the source of disruptive innovations.

A larger organisation brings with it theadvantages of a brand, an established network,access to capital, and a roster of already provenprocesses and technologies. For its part, asmaller organisation, in addition to serving as anincubator for breakthrough ideas, contributes itsagility and the trust it has won from consumers.

Company Values and Metrics

Managing the Organisational Mindset

Once companies understand the valuepropositions for the Emerging Middle, they willrealise how very different they are from thoseof other segments. Coupled with challengesrelating to delivery, market maturity, and theconstant pressure to achieve scale, the reality ofradically different value propositions requiresorganisations to re-evaluate how growth andsuccess is to be measured: Do these barometersneed to be treated differently in this cash-strapped segment?

The challenge is not only about learninghow to operationalise and track progress viaunconventional metrics, but also about how toadapt the organisations own values to the specialneeds of the sector. The changes required onthat front include a new emphasis on risk taking,customer orientation, and collaboration withexternal players. Although there is no one-size-

ts-all approach, we have synthesised a set ofstrategies that pioneers have used to succeed inthis market.

Limiting the Innovation Resource Pool

One very effective strategy that successfulbusinesses utilise repeatedly is limiting theresource pool available for developing innovativeproducts. This is a counterintuitive approach,since most businesses believe that providing ampleresources for innovation is the best strategy.

We found success stories in which signicantlimits were put on the innovation team onmultiple dimensions, including budget, marketresearch, product price (often less than threetimes the market price of competitive products),and company resources. The idea was succinctlyencapsulated during our interview with aleading innovation expert in India, Dr. RameshMashelkar, a board member at the NationalInnovation Council: Companies need to have

the mindset of More for Less for More. In otherwords, provide signicantly more value, forsignicantly less price, for a large consumer pool.

Shifting to Lateral Research (Need vs.Demand)

Although conventional market research mayshow that consumers need a certain categoryof products, it does not necessarily follow thatthey will pay for that need. Ultimately, the needcould be ignored, deemed by the consumer to befrivolous or purely aspirational. In rural India,for instance, a biogas fuel stove that was provento be a better option than the carcinogenic-linked alternative found very few buyers. Thesame set of consumers purchased cell phones,invested in gold, and indicated that they wouldprefer to purchase the latest durables endorsedby celebrities. Businesses must understand theconsumers situation at a nuanced level, andsolve a problem that was being poorly addressedbefore, thus ensuring that demand for theirproduct already exists.

To make sure that biases do not creep into theconsumer research process, several organisationsundertake lateral research, where they hire apartner organisation with expertise in a relatedeld to conduct research for them. For example,a leading healthcare devices manufacturerhired a local eye-care provider to help create therequirements for the healthcare companys nextline of products. The research process tends to bemore challenging. On the plus side, however, theinsights gained have very little bias toward theexisting product base.


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Counting on Unconventional Metrics

Businesses need to recognize that metricsthat have been traditionally used to measureperformance in the upper-income tiers might not

work as well in this market.

For instan

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