Innovative approaches needed to capture profitable growth in emerging markets : Deloitte

Emerging markets are becoming the catalysts for new product and service innovation says a report by Deloitte Touche Tohmatsu. Titled Laboratories of Innovation: Leveraging Emerging Markets for Commercial Success, the report motes that long-term success, will take far more than simply making minor adjustments to existing products, lowering prices and developing new sales channels.

The research by Deloitte on innovation in emerging markets examines what is required for global manufacturers to realise the enormous market potential of the developing economies of Asia, Eastern Europe and Latin America. Key markets examined include: China, India, South Korea, Russia, Poland, Czech Republic, Argentina, Mexico and Brazil.

It includes a global online survey that has been completed so far by nearly 300 executives, in-depth case studies and the extensive experience of Deloitte member firms in advising major manufacturers operating in emerging markets. An executive summary report Laboratories of Innovation: Leveraging Emerging Markets for Commercial Success, highlights the preliminary findings of the research. In April 2006, Deloitte will release a full report with detailed findings

Outlining the key research findings global managing director, Gary Coleman, Deloitte's manufacturing industry practice, says, "Successful companies are looking beyond traditional strategies to meet the needs of markets with significantly lower per capita GDP.

"Companies will need to acquire a new set of competencies and organisational structures to generate a continuing stream of innovative products tailored to the needs of consumers and industrial buyers in emerging markets."

Coleman adds, "They will also need to take advantage of their parent company's governance, business processes, and management expertise to offer these products at dramatically lower prices that match the lower purchasing power of most buyers in emerging markets."

The new Deloitte report, Laboratories of Innovation: Leveraging Emerging Markets for Commercial Success, identifies five strategic initiatives that companies must deploy to grow profitably in emerging markets. Successful companies need to:

1. Develop tailored product offerings for the local market at cost structures, price points and business models that match GDP per capita economics.
2. Build local R&D capabilities in emerging markets and connect with local commercial managers.
3. Leverage global value chain competencies to maintain margins and effectively manage costs.
4. Acquire deeper customer knowledge and localise marketing strategies to reach customers and capture market share.
5. Win the war for talent by tailoring strategies that effectively deploy, develop and connect people.

Other key findings:

• Executives are bullish about the growth outlook in emerging markets. Nearly 60 percent of the executives surveyed expect their company's revenues in emerging markets to grow substantially over the next three years, compared to just over 20 per cent who were as optimistic about prospects in developed markets.
• Half or more of the executives surveyed said their products were very similar to those sold in their home market.
  
• For companies who did varying product offerings, they were more likely to vary pricing and discounts rather than offering fundamentally different product models or features.
  
• Among executives headquartered in developed markets, over 42 per cent had lower gross margins in emerging markets, 34 per nt had roughly equal margins and only 24 per cent enjoyed higher margins.
  
• Of the companies who did capture higher margins, nearly three-quarters provided product offerings (e.g., features, models and pricing) that were either very different or somewhat different than their home markets.
  
• Forty per cent of the companies selling new products in emerging markets said R&D was done locally, citing "need to understand local market," "lower R&D costs" and "faster time to market" as the top three reasons for investing in local R&D facilities.

"Emerging markets around the world offer significant growth potential, but the most successful and profitable companies will be those that really understand their customers and take a different approach," adds Coleman.