Over the next two decades, rising per capita wealth in rapid-growth markets will generate a significant growth opportunity for multinational companies. Understanding this market, and developing products and services that meet its needs, will become a strategic priority that cannot be ignored. http://www.ey.com/GL/en/Issues/Business-environment/Innovating-for-the-next-three-billion Our Growing Beyond program explores opportunities across expanding into new markets, finding new ways to innovate & implementing new approaches to talent. www.ey.com/growingbeyond

1. Innovating for the next 3 billion
The rise of the global middle class -
and how to capitalize on it
November 2011

2. Introduction

3. Introduction
Rapid-growth markets in Africa, Asia, Eastern Europe, Latin America and
the Middle East are:
► Playing an increasingly dominant role in the global economy
► Major hubs of entrepreneurship, innovation and trade, as well as
investment from multinationals from around the world
► Trending away from a dependence on exports toward a model of
increased private consumption
► An unprecedented opportunity for companies that can serve the huge
new middle class with relevant products and services
Page 3 Innovating for the next 3 billion

4. The next 3 billion ...
► The middle class in Asia alone = 525 million people (more than the
entire European Union).
► Between now and 2030, an additional 3 billion people globally will
enter this income bracket .
► We call this emerging demographic ―the next 3 billion.‖
► It represents a valuable opportunity to seize a giant new market by
thinking differently about innovation.
Page 4 Innovating for the next 3 billion

5. Responding to the opportunity
► Between 2009 and 2030, demand from the global middle class could
grow from US$21 trillion to US$56 trillion.
► Many companies will need to:
► Understand the unmet needs of new middle-income customers
► Create different pricing and distribution strategies for these markets
► Rethink their product and service offerings to meet these needs and the
new customers characteristics
► Create entirely new products and services tailored to these customers
Page 5 Innovating for the next 3 billion

6. Shares of global middle-class consumption
Page 6 Innovating for the next 3 billion

7. About Innovating for the next 3 billion
► Based on a survey of 547 executives from around the world
► In-depth interviews with some of the world‘s leading entrepreneurs,
senior executives and thinkers
► Explores: scale of the opportunity and approaches companies are
taking to develop affordable products to meet the needs of customers
on lower incomes
► Concludes: with a model that describes the necessary capabilities
for companies seeking to target the next 3 billion consumers
Page 7 Innovating for the next 3 billion

8. Respondent profile
Respondent location % Stakeholder %
India 15 CEO/President/Managing director 21
Mexico 15 SVP/VP/Director 19
Russia 14 Head of department 18
China 13 CFO/Treasurer/Comptroller 12
Brazil 13 Head of business unit 11
Turkey 12 Other C-level executive 9
Indonesia 10 Board member 5
South Korea 8 Head of M&A/Corporate development 3
CIO/Technology director 3
Revenue %
EBITDA growth in last year %
$20b or more 12
Over 20% increase 16
$10b – 19b 6
10% to 20% increase 29
$5b – 9b 8
5% to 10% increase 25
$1b – 4b 22
1% to 5% increase 16
$500m – 999m 15
No change 11
$250m – 499m 8
Decrease 4
$100m– 249m 13
Less than $100m 17
Page 8 Innovating for the next 3 billion

9. Key findings

10. Summary: key research findings
1. Innovating for the next 3 billion is a major opportunity, but
companies have to be realistic about the challenges.
2. Deep customer insight and organizational agility are key to meeting
the needs of the next 3 billion.
3. Companies must balance the need for local customization with
global scale.
4. Understand that in the current economy, low-cost innovations are
not just for rapid-growth markets.
5. Successful innovation in rapid-growth markets goes far beyond
R&D.
6. Local companies have the upper hand in serving lower-income
customers, but multinationals are gaining ground.
Page 10 Innovating for the next 3 billion

11. The opportunity

12. The opportunity
► In 2000, only 10% of spending by the global middle class took place
in Asia.
► By 2030, this could rise to 40%.
► In 2009, the middle class in Asia-Pacific spent just under US$5 trillion.
► By 2030, this could rise to almost US$33 trillion (according to the
OECD).
Page 12 Innovating for the next 3 billion

13. Finding opportunity in frugal innovation
60 Total Developed market companies with rapid growth market operations Rapid growth markets
40 41 40
40 37
36
34
22
20
20 18
6
4
2
0
A major opportunity and we are A major opportunity and we intend to A major opportunity for some Not something that we consider to be a
already taking advantage of it take advantage of it companies but not one that we see as major opportunity
a major priority
Q: Please complete the following sentence based on the statement that best describes your company‘s view on the opportunities for frugal
innovation in rapid-growth markets - Adopting frugal innovation to create products and services is ... Base: Total (547), Developed market
companies with rapid-growth market operations (240), Rapid-growth market companies (307)
Page 13 Innovating for the next 3 billion

14. The size of the opportunity
► Rapid-growth markets account for 80% of the global population and
50% of global GDP at purchasing power parity.
► But the average S&P 500 company earns just 10% of its revenues
from these economies.
► Many companies are missing a significant and increasingly important
opportunity.
► A fundamental rethinking of innovation and go-to-market strategy is
required.
Page 14 Innovating for the next 3 billion

15. Pricing approach in rapid-growth markets
100
Premium: Top end of market
90 Mid market
Value: Bottom end of market
80 40
46
54
70
60
50
40
51
30 46
40
20
10
8 6 9
0
Total Developed market companies Rapid growth market companies
with rapid growth market
operations
Q: How do you typically price your products or services in relation to competitors in your main rapid-growth markets?
Base: Total (547), Developed market companies with rapid-growth market operations (240), Rapid-growth market companies (307)
Page 15 Innovating for the next 3 billion

16. Implications for business

17. The innovation capabilities model
► Considering all these challenges, we have developed a model to help
you tackle each one of the areas where innovation capabilities need
to focus on.
► The model focuses in the four areas, and develops insights for each:
1. Customer insight
2. People and culture
3. Research and development
4. Operations and business model
Page 17 Innovating for the next 3 billion

18. The innovation capabilities model
There are four key capabilities to focus on:
1. Customer insight
2. People and culture
3. Research and
development
4. Operations and
business model
Page 18 Innovating for the next 3 billion

19. 1. Customer insight

20. 1. Customer insight
Understanding customer needs requires resources on the ground in local markets.
This is why companies should ...
At a local level: At a global level:
► Have resources available to observe ► Use analytics and technology to gather
potential customers and assess where information about specific markets and
their unmet needs lie turn this into actionable insight
► Develop the capability to conduct in- ► Conduct quantitative research and build
depth research, including extensive a rigorous understanding of market size
ethnographic research and qualitative and expected customer behavior
fieldwork
► Spot linkages across markets and derive
► Engage customers and treat them as economies of scale from reapplying
partners and collaborators in the knowledge about customer needs
innovation process
Page 20 Innovating for the next 3 billion

21. Understanding the new customers
► Understanding local customers is the most critical enabling factor for
innovation.
► Traditional analytical tools give basic information about customer
demographics and opportunity, but very limited in rapid-growth
markets because:
1. There is a shortage of good-quality data.
2. Target customers have no history of buying similar products.
3. Demand strength unknown until products and services are offered.
► Therefore: qualitative research is essential to gain genuine insights
from customers and understand what new products and services they
might need.
Page 21 Innovating for the next 3 billion

22. 2. Research and development

23. Reasons for conducting R&D in rapid-growth
markets
44
Proximity to key growth markets 43
45
42
Ability to access low-cost skills 42
43
Ability to gain a better understanding of 40
36
local customer needs 43
Ability to operate in a low-cost business 39
38
environment 39
Relevant expertise of local engineers and 36
42
scientists 31
25
Proximity to key inputs and resources 30
21
19 Total
Ability to transfer skills obtained to compete
21
in developed markets 17
Developed market companies with rapid-
16 growth market operations
Ability to partner with local organisations 12 Rapid-growth market companies
20
Q: What might be the main reasons for conducting R&D in rapid-growth markets?
Base: Total (547), Developed market companies with rapid-growth market operations (240), Rapid-growth market companies (307)
Page 23 Innovating for the next 3 billion

24. 2. Research and development
Meeting the needs of the next 3 billion will require companies to ...
At a local level: At a global level:
► Develop an increasing proportion of their ► Set up global innovation networks that
R&D close to where these customers link R&D centers across both developed
are located — in rapid-growth markets and rapid-growth markets to share
relevant intellectual property
► Develop ―reverse engineering,‖ where
affordability forms the baseline to ► Think about ―platform technologies‖ that
develop new products and services are globally relevant and that can be
combined with local components at the
► Make sure that local R&D centers have point of delivery
autonomy to make their own decisions
about which projects to pursue ► Make decisions about how to allocate
R&D resources around the globe — and
► Put in place mechanisms for new ideas move them from one location to another
to reach decision-makers, regardless of as the need arises
where in the organization they originate
Page 24 Innovating for the next 3 billion

25. Local R&D and global R&D
► Local R&D enables local insight into local customer needs, plus a
rapid response to local demand.
► But a purely local approach to innovation is both inefficient and
expensive.
► Companies must balance local relevance and global scale.
► Building a global network of R&D centers enables application of
innovations across multiple markets.
► Developed market companies are taking innovations from rapid-
growth economies and finding new markets for them in the developed
world.
► 81% agree that frugal innovation has as much relevance in
developed markets as it does in rapid-growth ones.
Page 25 Innovating for the next 3 billion

26. Location of innovation
Total
80 Developed market companies with rapid-growth market operations
Rapid-growth market companies operating internationally
Rapid-growth market companies operating domestically
64
60
51
45 45
40
30
27
24
20 17 17 18
16
14
9
5 5
3 3 3 3 2
0
Gobal network of R&D centres Network of R&D centres in Network of R&D centres in Single R&D centre in a Single R&D centre in a rapid-
across both developed and developed markets only rapid-growth markets only developed market growth market
rapid-growth markets
Q: Which of the following best describes where innovation generally takes place in your company?
Base: Total (547), Developed market companies with rapid-growth market operations (240), rapid-growth market companies operating
internationally (154), rapid-growth market companies operating domestically (153)
Page 26 Innovating for the next 3 billion

27. R&D opportunities
There are several R&D trends that companies can develop in a global
scale:
► Open innovation – companies combining both internal and external
partners from around the world to generate ideas and solutions
► Joint-venture partnerships between multinationals and entrepreneurs
in rapid-growth markets to move up the innovation value chain
► Acquisitions can be a way of gaining access to frugal innovation
capabilities and taking aboard new products, process or business
models
► Cross-fertilization of talent between different R&D centers
Page 27 Innovating for the next 3 billion

28. 3. People and culture

29. 3. People and culture
Managing talent and expertise are critical to successfully innovating for this market ...
At a local level: At a global level:
► Delegate decision-making responsibility ► Manage talent globally so that managers
to local teams in rapid-growth markets can be rotated among key markets and
gain experience across diverse business
► Ensure that local managers have the environments
ability to make recruitment decisions
► Work to build a culture and set of values
► Be able to develop new product or that are global in scope
service ideas to meet local needs
► Develop a global mindset and the ability
► Embed P&L responsibility to ensure that to tolerate ambiguity and integrate
managers have accountability multiple perspectives
► Set pay and reward structures for local ► Understand interdependencies among
teams that are appropriate for the pace different regions and how decisions
and growth rate of the market made in one region will affect another
Page 29 Innovating for the next 3 billion

30. Cultural adaptation
When serving the next 3 billion customers, you have to consider:
► Cultural barriers can lead to product rejection and venture failure.
► Developed world products at developed world prices are not likely to
sell well in rapid-growth economies.
► For this reason, companies need to:
► Embed the product in the culture
► Adopt a mind-set where the product will be tailored to customer
needs
► Developed-market companies often think innovation means adding
sophistication and features, but innovation can also be making
products streamlined and affordable.
Page 30 Innovating for the next 3 billion

31. Tailoring new product development
Total Developed market companies with rapid-growth market operations rapid-growth market companies
60
55
52
50
42
38 39
40 37
35 36
28
26
24
20
0
We change the pricing structure or We create entirely new products with We simplify current premium products We re-package products and services
business model of existing products to lower-income customers in mind aimed at higher-income customers (eg,
make them more affordable in smaller sizes)
Q: Which of the following approaches do you currently take to developing products and services aimed at lower-income customers in rapid-
growth markets?
Base: Total (547), Developed market companies with rapid-growth market operations (240), Rapid-growth market companies (307)
Page 31 Innovating for the next 3 billion

32. Cannibalization
► Developed market companies often think:
―Will low-cost innovations made for rapid-growth markets
‗cannibalize‘ the sales of our premium products?‖
► Lower-cost innovation creates new consumption and demand.
► The added revenue from both the lower-priced and premium products
is far greater than the unadapted model (that fails to reach the next 3
billion).
► Even if there is some cannibalization, competitors will innovate in
these markets – a greater risk is to lose out on the giant growth
markets of the future.
Page 32 Innovating for the next 3 billion

33. Processes for driving innovation
Making the product and service development process more 65
64
efficient 66
55
A dedicated innovation team 60
50
42
Incentivizing employees for successful innovation 40
44
37
Formalized measurement of return on investment 41
34
36
Formalized testing, launch and review process 40
34
36
Direct oversight by local market management 30
40
31
Agreed process of financing for new product launches 35
28
29
A formalized ―go/no go‖ decision process 26
31
Relocating experts from developed markets to rapid growth 28
31 Total
market location 25
Partnerships with local entrepreneurs or organizations that 26 Developed market companies with
25
specialise in innovation 26 rapid growth market operations
Partnerships with non-governmental or academic 19 Rapid growth market companies
12
organizations 23
Q: Which of the following processes or approaches do you use for innovation in rapid-growth markets at your company?
Base: Total (547), Developed market companies with rapid-growth market operations (240), rapid-growth market companies (307)
Page 33 Innovating for the next 3 billion

34. 4. Operations and business model

35. 4. Operations and business model
To be successful in this segment, products need to be affordable and
accessible. Getting the business model right and ensuring that operations are
optimized across the value chain is therefore critical. Companies need to ...
At a local level: At a global level:
► Select local partners carefully across ► Have clear policies, including risk
every stage of the value chain management and compliance
frameworks
► Ensure operations are highly efficient to
lower cost and maintain margins ► Ensure accountability and ethical
behaviour across the value chain
► Understand the needs of local
customers and ensure that pricing and ► Use global supply chain and CRM
the business model are appropriate systems to optimize the value chain and
ensure that it is efficient and resilient
► Develop the agility to respond quickly to
new opportunities and risks ► Decide what to localize and to maintain
at a global level of the value chain
Page 35 Innovating for the next 3 billion

36. Implications: operations and business models
► Changes to the pricing structure or business model in development
products and services for lower-income customers.
► Companies with higher-than-average EBITDA growth are more likely
to create entirely new products and services for lower-income
customers.
► Involve options like reformatting products or adjusting pricing (e.g.,
single-use shampoo sachets for customers who are paid daily).
► Thinking about the underlying business model and ensuring that it is
tailored to the unique business environment.
Page 36 Innovating for the next 3 billion

37. Companies finding opportunity
in frugal innovation
60 High performers Low performers
44
40 37 38
30
27
20
15
4 5
0
A major opportunity and we are A major opportunity and we intend to A major opportunity for some Not something that we consider to be a
already taking advantage of it take advantage of it companies but not one that we see as major opportunity
a major priority
Q: Please complete the following sentence based on the statement that best describes your company‘s view on the opportunities for frugal
innovation in rapid-growth markets - Adopting frugal innovation to create products and services is ...
Base: EBITDA growth high performers (241), low performers (167)
Page 37 Innovating for the next 3 billion

38. Low-margin mind-set
Changing the way you perceive return and profit is key to developing
products for this new markets:
► Profitability is the most important challenge and requires rethinking
the business and process to understand how to tackle it.
► Companies in developed markets are used to high margins on
premium products.
► Rapid-growth markets have smaller margins, but large volumes.
► Companies need to shift to a ―low-margin mind-set‖:
► Process efficiency is essential.
► Find the right local partners across procurement, distribution and sales.
► Ensure a lean approach to distribution and the supply chain.
Page 38 Innovating for the next 3 billion

39. Barriers of products for low-income customers
54
Profitability of products and services 56
52
43
Existing or future competition 50
37
35
Distribution of products and services 40
31
26
Poor infrastructure in target markets 26
26
24
The market is currently too small and fragmented 24
25
23
Lack of education and awareness among customers 18
27
12 Total
Concerns that products and services aimed at lower-
11 Developed market companies with rapid-growth market operations
income customers will cannibalise premium offerings
13 Rapid-growth market companies
Q: What do you consider to be the main barriers for your company to developing products and services that meet the needs of lower-income
customers in rapid-growth markets? Shown top seven responses.
Base: Total (547), Developed market companies with rapid-growth market operations (240), rapid-growth market companies (307)
Page 39 Innovating for the next 3 billion

40. Closing remarks
Page 40 Innovating for the next 3 billion

41. Closing remarks
► Understanding and developing products and services for rapid-growth
markets is a strategic priority that cannot be ignored.
► Innovating for the next 3 billion means formulating a rapid-growth
market strategy while keeping a global perspective.
► Efficiency and adaptation are key – companies should aim to
recognize cross-pollination opportunities, identify key similarities and
adapt to increasingly integrated market forces.
► Product development and strategy execution needs to be localized,
but can draw on global resources and re-apply ideas across wider
markets.
Page 41 Innovating for the next 3 billion

42. Thank you
Page 42 Innovating for the next 3 billion

43. Ernst & Young
Assurance | Tax | Transactions | Advisory
About Ernst & Young
Ernst & Young is a global leader in assurance, tax,
transaction and advisory services. Worldwide, our
152,000 people are united by our shared values and Growing Beyond
an unwavering commitment to quality. We make a Global growth is the business issue of today.
difference by helping our people, our clients and our
wider communities achieve their potential.
In Growing Beyond, we‘re exploring how
companies can grow faster — by expanding
Ernst & Young refers to the global organization of into new markets, finding new ways to
member firms of Ernst & Young Global Limited, each of innovate and taking new approaches to
which is a separate legal entity. Ernst & Young Global
Limited, a UK company limited by guarantee, does not
talent. It‘s an ongoing program to help you
provide services to clients. For more information about grow beyond your expectations. Join the
our organization, please visit www.ey.com. discussion at www.ey.com/growingbeyond.
© 2011 EYGM Limited.
All Rights Reserved.
EYG No. EX0052
This publication contains information in summary form and is
therefore intended for general guidance only. It is not intended to be a
substitute for detailed research or the exercise of professional
judgment. Neither EYGM Limited nor any other member of the global
Ernst & Young organization can accept any responsibility for loss
occasioned to any person acting or refraining from action as a result
of any material in this publication. On any specific matter, reference
should be made to the appropriate advisor.
Page 43 Innovating for the next 3 billion