Reflecting on our Innovation Practices

by Paul Hobcraft

http://innovationexcellence.com/blog/2018/03/13/reflecting-on-our-innovation-practices/

Very interesting article

Innovation has been rapidly changing and much of its basics have been swallowed up by some newly defining frameworks that have raced up to the top of the innovation agenda. They have driven much of our thinking and reacting. It is right that we all respond to these but we often forget much of the rest of what innovation needs to be built upon.

 Doesn’t the innovation needle keep shifting constantly?The basics of innovation still form around building the engagement, leadership, and involvement, in constructing a culture, the climate and environment needed, so as to allow innovation to evolve and thrive. Then there is that need for a constant investment in people, in our networks and relationships, that all need to come together. These are the foundation to build innovation capacities. 

Then, we have the investments in structures, systems, and governance, making sure these are flexible and robust enough to make what we work upon, as responsive, agile, adaptive, exploitative and exploratory. All coming together so we can end up with great new ideas, things and most importantly, in winning successful concepts that grow our business. The shifts taking place around innovation have been significant in their impact. The shifts taking place has been hugely shaped by how digital transformation continues to grow in its importance. how it is influencing much that is surrounding innovation, as it continues to disrupt in faster, demanding ways, where it deconstructs and then, it is forcing us to reconstruct our innovative thinking, so as to gain from all this transformation occurring all around us. The other real forces of innovation change in this relatively short period have come from a great explosion of Lean Management principles and practices and the incorporating of Design thinking  (embodied in MDG and our class at Kellogg) into our work. Both of these are being rapidly embraced by our organizations, large and small. How these are fully and successfully integrated remains a challenge for most to resolve today.

 

The raw power of knowledge needs harnessing and translating It is this ‘raw’ power of technology, pushing the flow of knowledge and exploiting the different social mediums that are swirling around us, with many suggested designs and frameworks that need deeper capture and translation, so as to extract new value.We all need to think through the value of the pivot, prototype, the constructing of minimal viable products and rapid experiment and design to increase in focus, so as to accelerate innovation discovery and delivery.We are learning faster, shutting down what does not work as we go, adapting faster than before with our innovative concepts, by being engaged and constantly informed by customer needs. 

Bit by Bit, Whole Foods Gets an Amazon Touch

By Nick Wingfield
March 1, 2018
https://www.nytimes.com/2018/03/01/technology/bit-by-bit-whole-foods-gets-an-amazon-touch.html



I thought this was a fascinating story of M&A integration feeding organic growth—building the capability platform. Keep in mind, some major thrusts at Amazon are:
• Entering the fresh food market via delivery of groceries
• Offering peripheral services that build interest in their Amazon Prime which offers free shipping to those members for an annual fee and bolster Amazon sales on their site
Suggest watching this very brief video on Amazon’s strategy:
  https://www.youtube.com/watch?v=BZQn98ko29o

Some signs are subtle, like the “Whole Foods + Amazon” one near the bananas. Others are more obvious, like the kiosk with Amazon devices for sale. 

It has been six months since Amazon took over Whole Foods, a $13.4 billion deal that made the internet retailer a major player in the world of brick-and-mortar retailing. For the most part, the 470 stores are still the same upscale, expensive healthy food emporiums that they have always been. 

Amazon has grander ambitions as well. The company’s executives are busy devising ways to connect its Prime membership program, which offers benefits like fast and free shipping and video streaming, with the stores. 

The company has said that Prime will eventually become the Whole Foods customer rewards program. It recently took a baby step in the direction of weaving together Prime and Whole Foods by giving Prime members 5 percent back on Whole Foods purchases made with an Amazon-branded Visa card. Whole Foods has signs about the offer all over its checkout stands. 

Some of the changes Amazon has made are experiments limited to a few locations. Others, like price cuts on grocery staples, are widespread and a sign of more to come, its executives say. 

“We’re determined to make healthy and organic food affordable for everyone,” Jeff Wilke, the chief executive of Amazon’s worldwide consumer business, has said.Here are a handful of notable changes Amazon has made to Whole Foods so far.(WATCH: Mr. Wilke, speaking at The New York Times’s New Work Summit, explains his strategic vision for the retailing giant and the critical role Whole Foods will play.)

Home DeliveryLast month, Amazon allowed people to buy thousands of different items from Whole Foods and have them delivered by Prime Now, a speedy Amazon delivery service that uses contractor drivers in their personal cars. The service, available only for Amazon Prime members, offers free two-hour delivery of orders and one-hour delivery for $7.99 on orders over $35. (Driver tips are optional.) 

Amazon introduced Prime Now delivery for Whole Foods stores in Austin, Tex.; Cincinnati; Dallas; and Virginia Beach. The company said it would expand the service to the rest of the country in 2018. Inside the Austin store, Prime Now orders in brown paper bags wait on shelves and in refrigerators for drivers to come pick them up and spirit them to customers’ homes. A banner at the entrance to the store promotes the delivery service. 

(Some) Price CutsA few days before Amazon completed its acquisition of Whole Foods, it announced a series of price cuts on grocery items, a move to change the perception of the chain as “Whole Paycheck.” It slashed the price of a dozen Organic Valley large brown eggs by 27 percent and cut the cost of a 16 ounce jar of 365 brand crunch almond butter by 13 percent. For Thanksgiving, it made turkeys cheaper, and for Valentine’s Day, it dropped the price on roses.Still, much of the selection in Whole Foods stores still carries premium price tags. Studies by analysts have shown that overall prices on typical Whole Foods shopping expeditions have decreased only slightly. Whole Foods said there was more to come. “We’ve done quite a bit,” Brooke Buchanan, a spokeswoman for the market, said. “There’s still so much more we have planned.” 

GadgetsThe most conspicuous sign of Amazon’s agenda inside Whole Foods is the kiosks containing Amazon electronics that now lurk near store aisles. Not far from the Honeycrisp apples and bulk bins of granola, shoppers can now pick up an Echo, a Fire TV or a Kindle. 

In a handful of Whole Foods stores, including in Denver and Chicago, Amazon has opened big electronics stands called pop-up shops, which are staffed by Amazon employees who can answer questions about the devices. The pop-up shops, which are at dozens of shopping malls around the country, give shoppers an opportunity to try the devices in person, something they cannot do when they browse online. 

Amazon Order PickupFor years, Amazon has been installing banks of lockers inside and around supermarkets and other buildings, giving people who order items on Amazon a secure place to pick up their packages. The lockers can also be used to return items ordered on Amazon.Since the Whole Foods deal closed, Amazon has put its lockers inside all of the chain’s stores. In some stores, the lockers are smaller and tucked among the wine and other goods. The Austin store has a huge bank of lockers near a set of escalators. 

Bolstering Private Label FoodsSo far, much of the changes have gone in one direction: injecting a little Amazon into Whole Foods. But a little Whole Foods is being added to Amazon, too.Amazon has sought to bolster Whole Foods by making the chain’s private label products available through its various online outlets. Whole Paws, the grocer’s pet food brand, and 365 Everyday Value, its line of foods for budget shoppers, can now be purchased through Amazon.com and AmazonFresh, an existing grocery delivery service run by the internet retailer. 

Amazon even dedicated an area of its automated convenience store in Seattle, Amazon Go, to Whole Foods private label goods.

The Big Shift in Strategy - Part 2

http://edgeperspectives.typepad.com/edge_perspectives/2015/01/the-big-shift-in-strategy-part-2.html

In the last posting, the author suggested that we’re going through a big shift in strategy from strategies of terrain to strategies of trajectory. This positing summarizes what the author thinks strategies of trajectory might look like. Again, I urge you go to the original source

Most strategies (strategies of terrain) tend to look from the present out to the future. Strategies of trajectory start with a view of the future and work back to the implications for action in the present. 

Here’s the paradox: strategies of trajectory become more and more essential in times of rapid change and uncertainty, while at the same time becoming more and more difficult.  But that’s exactly what makes strategies of trajectory so valuable… 

…So, what’s required to craft these strategies of trajectory? Five elements can help to make these strategies successful:
• Challenging
• Shaping
• Motivating
• Measuring
• Learning 

Challenging
In a world of accelerating change, one of our greatest imperatives is to "unlearn" - to challenge and ultimately abandon some of our most basic beliefs about how the world works and what is required for success 

Shaping
What about the opportunity to materially alter the probabilities regarding potential future outcomes?...In times of rapid change and growing uncertainty, we actually have far more degrees of freedom to restructure entire markets and industries than in more stable time…haping strategies are classic strategies of trajectory – they begin by defining a desired market or industry structure and then focus on mobilizing third parties to invest to support the shaping strategy 

Motivating
 Successful strategies of trajectory need to find ways to motivate people to overcome risk adverseness and to take bolder action 

Measuring
As the name suggests, strategies of trajectory are ultimately about measuring movement in a particular direction.  Any strategy of trajectory must therefore be explicit about the metrics that will indicate whether we’re on track to establishing the desired position in the future 

Learning
In a time of accelerating change, learning is essential to success=

The three Cs of customer satisfaction: Consistency, consistency, consistency
It may not seem sexy, but consistency is the secret ingredient to making customers happy. However, it’s difficult to get right and requires top-leadership attention.

March 2014 | byAlfonso Pulido, Dorian Stone, and John Strevel

http://www.mckinsey.com/insights/consumer_and_retail/the_three_cs_of_customer_satisfaction_consistency_consistency_consistency?cid=other-eml-cls-mip-mck-oth-1407

This article focuses on consumers (B to C) and I believe a lot of what is discussed is pertinent to B to B interactions and are inherent in the buying decision process of the business buyer.

Consistency may be one of the least inspirational topics for most managers. But it’s exceptionally powerful, especially at a time when retail channels are proliferating and consumer choice and empowerment are increasing. 

Getting consistency right also requires the attention of top leadership…..This customer journey can span all elements of a company and include everything from buying a product to actually using it, having issues with a product that require resolution, or simply making the decision to use a service or product for the first time…. 

.. Our research identified three keys to consistency: 

1. Customer-journey consistency
It’s well understood that companies must continually work to provide customers with superior service, with each area of the business having clear policies, rules, and supporting mechanisms to ensure consistency during each interaction.
2. Emotional consistency
One of the most illuminating results of our survey was that positive customer-experience emotions—encompassed in a feeling of trust—were the biggest drivers of satisfaction and loyalty in a majority of industries surveyed.
3. Communication consistency
A company’s brand is driven by more than the combination of promises made and promises kept. What’s also critical is ensuring customers recognize the delivery of those promises, which requires proactively shaping communications and key messages that consistently highlight delivery as well as themes

Parsing the growth advantage of emerging-market companies
Surprisingly little of their edge is attributable to starting from a smaller revenue base. They also seem to invest more, allocate resources more fluidly, and spot fast-growing segments.
MAY 2012 • Yuval Atsmon, Michael Kloss, and Sven Smit

https://www.mckinseyquarterly.com/Strategy/Growth/Parsing_the_growth_advantage_of_emerging-market_companies_2969

Some real “food for thought”. Read the full article.

Leaders of multinational companies are by now well aware of the growth potential that emerging-market consumers represent, an opportunity that we estimate could exceed $20 trillion annually by the end of this decade… 

… One striking finding was that companies headquartered in emerging markets grew roughly twice as fast as those domiciled in developed economies—and two and a half times as fast when both were competing in emerging markets that represented “neutral” turf, where neither company was headquartered…. 

…. It is impossible to definitively disaggregate the sources of the remaining growth differential. However, the following three factors appear to be materially different for these two classes of companies: 

Higher reinvestment rates. Emerging-market companies paid dividends at a lower rate than developed-market companies, returning only 39 percent of earnings to shareholders, while developed-market companies returned close to 80 percent…. 

… Agile asset reallocation. Additionally, we found that on average, emerging-market companies have been reallocating capital toward new business opportunities more dynamically than those headquartered in developed economies… 

….. Growth-oriented business models. Emerging-market companies generally serve the needs of fast-growing emerging middle classes around the world with lower-cost products. Developed-economy companies tend to rely more on brand recognition while targeting higher-margin segments, which are relatively smaller and thus less likely to move the needle on the companies’ overall growth rates. 

Organizational health: The ultimate competitive advantage
To sustain high performance, organizations must build the capacity to learn and keep changing over time.
JUNE 2011 • Scott Keller and Colin Price
Source: Organization Practice

https://www.mckinseyquarterly.com/Organizational_health_The_ultimate_competitive_advantage_2820

A GREAT article!!!

....Our central message is that focusing on organizational health—the ability of your organization to align, execute, and renew itself faster than your competitors can—is just as important as focusing on the traditional drivers of business performance. Organizational health is about adapting to the present and shaping the future faster and better than the competition. Healthy organizations don’t merely learn to adjust themselves to their current context or to challenges that lie just ahead; they create a capacity to learn and keep changing over time. This, we believe, is where ultimate competitive advantage lies..

Remapping your strategic mind-set

Pankaj Ghemawat

McKinsey Quarterly, 2011 Number 3

This is an extremely interesting perspective on creating global strategies.

Executives can shake up their thinking, identify hidden opportunities, and spot lurking threats by looking at a novel type of map that depicts the world from the perspective of a particular country, industry, or company.Senior executives need better mental maps to navigate our unevenly globalized world. Although a wide variety of metrics show that just 10 to 25 percent of economic activity is truly global, executives disproportionately embrace visions of unbounded opportunities in a borderless world, where distances and differences no longer matter....
...I want to focus on the potential for a special kind of map—one I call a “rooted map”—to help leaders enhance their intuition about the opportunities and threats inherent in our semiglobalized world.Rooted maps correct a misperception reinforced by conventional ones: that the world looks the same regardless of the viewer’s vantage point or purpose. In the real world, though, geographic distance and differences in culture and policy matter. To better reflect this reality, rooted maps depict the world from a specific perspective and with a particular purpose in mind....
....depiction of the world as seen from New York City¹ is a humorous example, but more data-driven versions—particularly those drawn at the industry or company levels—have serious business applications.

Is your emerging-market strategy local enough?

The diversity and dynamism of China, India, and Brazil defy any one-size-fits-all approach. But by targeting city clusters within them, companies can seize growth opportunities.

APRIL 2011 • Yuval Atsmon, Ari Kertesz, and Ireena Vittal

Source: Strategy Practice

https://www.mckinseyquarterly.com/Strategy/Growth/Is_your_emerging_market_strategy_local_enough_2790

The article highlights the importance of thinking local in formulating a global strategy. Remember, markets are local but industries that supply them can be considered global. What I mean is the final offering to any locale must be dictated by local norms and tastes. However, the development and delivery mechanism –or appropriate portions of it—can and should be globalized for leverage and efficiencies as appropriate.

Creating a powerful emerging-market strategy has moved to the top of the growth agendas of many multinational companies, and for good reason: in 15 years’ time, 57 percent of the nearly one billion households with earnings greater than $20,000¹ a year will live in the developing world….
…To accelerate growth in China, India, Brazil, and other large emerging markets, it isn’t enough, as many multinationals do, to develop a country-level strategy. Opportunities in these markets are also rapidly moving beyond the largest cities, often the focus of many of these companies….... To accelerate growth in China, India, Brazil, and other large emerging markets, it isn’t enough, as many multinationals do, to develop a country-level strategy. Opportunities in these markets are also rapidly moving beyond the largest cities, often the focus of many of these companies. For sure, the top cities are important: by 2030, Mumbai’s economy, for example, is expected to be larger than Malaysia’s is today. Even so, Mumbai would in that year represent only 5 percent of India’s economy and the country’s 14 largest cities, 24 percent. China has roughly 150 cities with at least one million inhabitants. Their population and income characteristics are so different and changing so rapidly that our forecasts for their consumption of a given product category, over the next five to ten years, can range from a drop in sales to growth five times the national average…
 …As developing economies become increasingly diverse and competitive, multinationals will need strategic approaches to understand such variance within countries and to concentrate resources on the most promising submarkets—perhaps 20, 30, or 40 different ones within a country

Putting a value on training
Training programs generate greater value for organizations when the curricula reflect key business performance metrics. Testing real-world outcomes is crucial.
McKinsey Quarterly, July 2010 • Jenny Cermak and Monica McGurk
Source: Organization Practice
https://www.mckinseyquarterly.com/Putting_a_value_on_training_2634

This is a very important topic and an interesting case study of how to measure the impact of training in your organizations. In essence, you must understand how the training relates to specific business performance goals and then assess the impact.

"All organizations train their people, and most spend significant sums doing so. Yet they generally don’t have any idea whether they’re getting any business value from training. Beyond teaching new employees the specifics of their jobs, most companies train staff in areas such as leadership, communications, performance management, or lean operations. But they typically measure training’s impact by conducting surveys of attendees or counting how many employees complete courses rather than by assessing whether those employees learned anything that improved business performance.
This approach was, perhaps, acceptable when companies had money to spare. Now, most don’t. Yet more and more, organizations need highly capable employees—90 percent of the respondents to a recent McKinsey Quarterly survey1 said that building capabilities was a top-ten priority for their organizations. Only a quarter, though, said that their programs are effective at improving performance measurably, and only 8 percent track the programs’ return on investment.
The story of one social-sector group, the Boys & Girls Clubs of America (BGCA), illustrates how organizations can make the most of their outlays for training programs by doing a better job of understanding which of them create business value, and how. The answers are remarkably straightforward and have lessons for retailers, manufacturers, and a range of other organizations as well".

Does Globalization Threaten or Nurture Local Markets
By R. Frost

http://www.brandchannel.com/features_effect.asp?pf_id=319

A critical issue for all companies (this article talks about consumers but I think it is relevant to business to business situations because decision makers are impacted by similar dynamics that impact consumers from a local vs. global basis), this article delves into the emotive issues impacting decision making. An example of the type of topics covered is highlighted. This is definitely worth the read.

"What effect does globalization have on consumer behaviors and tastes? As we move easily across regions and cultures are we more adventurous or will we naturally navigate to the known?...

…But Mark Kennedy, chief strategy officer at Landor Associates, views the renewed interest in local traditions more as a complement to globalization than a substitute for it. “In all countries in the world there’s almost a reaction to [globalization] in some of the local products,” he says. “I wouldn’t call it a backlash, but it’s almost like a balancing effect on local products. They start to reassert themselves.” Kennedy notes that this growing interest in local brands is taking place even as the shops in all the world’s airports are becoming increasingly the same, with the same brand names in all of them "

At the Base of the Pyramid
When selling to poor consumers, companies need to begin by doing something basic: They need to create the market

By ERIK SIMANIS
WSJ, 10/26/09 http://online.wsj.com/article/SB10001424052970203946904574301802684947732.html

This article from the Wall Street Journal highlights not only the challenge of creating business opportunities at the bottom of the human pyramid, but also interesting insights of consumerism in developed markets:

"Around the world, four billion people live in poverty. And Western companies are struggling to turn them into customers.

For the past decade, business visionaries have argued that these people, dubbed the Base of the Pyramid, make up an enormous, untapped market. Some of the world's biggest, savviest corporations have aimed to address their basic needs—by selling them everything from clean water to electricity.

But, time and again, the initiatives have quietly fizzled out. Why?

Because these companies were looking at it all wrong.

Put most simply: The Base of the Pyramid is not actually a market. True, those billions of low-income people have a lot in common. But they don't have two of the vital characteristics you need to have a consumer market. They haven't been conditioned to think that the products being offered are something one would even buy. And they haven't adapted their behaviors and budgets to fit the products into their lives. A consumer market is nothing less than a lifestyle built around a product.

Think of an example close to home. In the 1970s, bottled water was a foreign idea to most Americans—it wasn't part of American consumers' lifestyle. It took decades for large numbers of consumers to accept the notion of buying something you could get free out of a faucet—and turn bottled water into a big business. For many poor consumers, paying for clean water or sanitation products seems just as outlandish.
The answer? Companies must create markets—new lifestyles—among poor consumers. They must make the idea of paying money for the products seem natural, and they must induce consumers to fit those goods into their long-held routines.

That means working closely with local communities in developing products and businesses, to give consumers a stake in adopting the goods. What's more, companies must take a wide-ranging approach in their marketing, to give buyers as many reasons as possible to give the products a try."

Five Rules for Winning Emerging Market Consumers
By James A. Gingrich

http://www.strategy-business.com/press/16635507/16583

Multinationals need a disciplined approach to selling in emerging markets. They can't launch consumer products with a scattershot approach.

I would like to thank Jose-Luis Bretones from McDonald’s for alerting me to this article. I suggest going to the site and reading it in full. The following are excerpts that highlight the key learnings. The article is written in the context of consumer goods companies but I think the lessons learned are universal. My last two years at DuPont were spent deploying the Market Driven Growth (MDG) process in emerging markets. We found many of the same dynamics for industrial products –innovation across the full business design was critical!


THE IMPACT OF EMERGING MARKETS HAS AND WILL BE PROFOUND

Western Europe, Japan and the United States have been the engines powering the world's economy since World War II. That is no longer the case. Emerging and developing economies, on a purchasing parity basis, now total 44 percent of the world's economy, and in the last decade, emerging nations were responsible for two-thirds of the world's economic growth. The consumer base in these economies already measures in the hundreds of millions, is young and is growing three times as rapidly as in the developed world. As recent events have demonstrated, what happens in these economies affects us all.

Given these trends, multinational corporations face profound changes in the economic landscape. Over the next 10 to 15 years, most of the total world growth in consumption of consumer goods will likely be concentrated in the largest of the developing economies. In that time span, these strategic emerging markets will grow to be comparable in aggregate size to the Group of Seven leading industrial nations (the United States, Japan, Britain, France, Germany, Canada and Italy). The future scale and growth of global consumer businesses is dependent on their success in building strong positions in these new, challenging markets.

There are a handful of consumer goods companies that have already demonstrated the potential contained within the big, emerging markets. Companies such as Unilever, Coca- Cola, Gillette, Nestlé and Colgate- Palmolive all now capture one-third or more of their revenue from these markets, with profitability equal to, or higher than, what they achieve in developed economies. For example, the Coca-Cola Company now derives 37 percent of its revenue from Latin America, Africa and Asia, and these markets contribute a stunning 49 percent of its operating profits. Similarly, the Colgate-Palmolive Company receives 45 percent of its revenue from these same markets and nearly half of its operating income. …….

THE CHALLENGE IS LARGE – YOU CAN NOT EXPORT YOUR BUSINESS DESIGN FROM THE U.S. AND EUROPE

The success enjoyed by these pioneers, however, is not the norm. The largest group of multinationals has followed a flag-planting strategy: transplanting existing "first-world" products with minimal investment into a wide variety of new markets, without achieving significant market share in any of them. While multinationals are quick to cite the extent of their worldwide footprint, the global portfolio of most multinationals remains dominated by United States and Western European economies. The emerging markets combined in the portfolio of flag-planters are typically limited to less than 10 percent of their worldwide sales. Given their timid positions and weak understandings of these countries, the returns of those who have followed the "flag-planting" route are generally poor.

While there is a natural tendency for multinationals to build upon what made them successful in their core markets in Western Europe and the United States, it is this practice that routinely gets them into trouble. In reality, consumer goods companies cannot export their business models, products and marketing formulas wholesale from their core developed markets and expect them to work in places such as India, Turkey or Mexico. Emerging markets differ in their governmental policies, regulations and macroeconomic behaviors; in the structure of their consumer markets, distribution systems and competitive sets; in the needs and behaviors of their consumers……….

Late last year, Niall W.A. FitzGerald, chairman of Unilever P.L.C., summarized the challenge facing Western consumer businesses when he said, "The real action is increasingly going to be in the developing and emerging markets. Business should not be so mesmerized by the current economic difficulties in these markets that companies ignore the enormous long-term economic potential. However, realizing that potential will not be easy. It will not only require a greater emphasis on understanding what are the needs of the consumer, but a radically different way of approaching them."

THE LESSONS

1. Reach the masses: Manage affordability
When we discuss the consumer base in emerging markets, however, we need to recognize that it is still significantly poorer than the consumer base of the Group of Seven industrial nations. Middle class in the big, emerging countries is typically a family earning $3,000 to $10,000 a year when measured in equivalent purchasing power. There is an even larger mass of the population below this income level that is also prepared to spend, albeit selectively. Only a small fraction of the population of countries such as Turkey or India are well-to-do, middle class by American standards. For example, hypermarkets in Poland have captured only about 12 percent of the market there since they cater only to the portion of the population with cars. Most retailing in Poland is still done in local shops that people can reach on foot.
Reaching the masses frequently means that …. companies need to rethink their product lines with a sharp eye on the price/performance equation

2. Be ubiquitous: Invest in distribution
Finding cost-effective ways to build broad and deep sales and distribution coverage in the emerging markets is one of the most critical challenges facing consumer products companies. This can rarely be done on the cheap. Alliances with local producers that agree to provide distribution rarely work. Multinationals should also be cautious about relying too heavily on broad-line wholesalers/distributors in many of these countries.

3. Create desirability: Build strong brands (in our MDG work in emerging markets, we found it advantageous to first build a strong brand position in the top tier of the human pyramid and then take it down realizing that the offering had to be changed to meet the different price/value tradeoffs)

Interestingly, despite the limited financial means of the emerging market consumer, branding could well be more important in these markets than it is in markets such as the United States or Western Europe. In part, this is due to the aspirational attraction that strong brands have for lower-income consumers, particularly in "badge" categories. For instance, the number of lower-income consumers on the streets of Sao Paulo or Shanghai wearing $100 jeans, a price that represents a month's wages, is striking. ……….

A fact of life in almost all emerging markets is that multinationals will face competition from local entrepreneurs whose informal operating practices, such as tax evasion or selective attention to labor laws, secures them a large cost advantage. Brand equity becomes an essential weapon in defending market position in the face of this type of competition…….

Because the investment required to build and support a brand in these markets is high compared with the small size of many categories, companies should carefully weigh using umbrella brands in emerging markets as a means to create scale, particularly when exploring new categories.

4. Play to win: Pick your fights well
Multinationals must play to win in the emerging markets. Too many companies fool around in the high end of these markets and remain timid about investment. Rather than shielding these companies from losses, this flag-planting strategy only exacerbates them.

Emerging markets are no different in this respect from the United States or Western Europe. Consumer goods multinationals must build leading or strong No. 2 positions in their target categories to be profitable over the long haul. Further, getting to critical mass is vital, given the sizable minimum investments necessary in brand-building and sales, distribution and production infrastructure. Scale and the demonstration of long-term commitment also create an environment that is attractive to scarce local management talent. Dabblers in these markets should either get serious or get out.

5. Be local: Foster emerging-market entrepreneurs
The extreme volatility and unconventional business methods in emerging markets require different management skills than are needed in mature, Western markets. For emerging market managers, raging inflation, currency swings, new taxes, continually changing business regulations and interest-rate instability are all part of the normal macroeconomic environment……….

For managers who are unaccustomed to such an environment, the ride can be pretty wild. It can also be expensive for their parent companies. This is why the most experienced emerging market multinationals generally have strong country managers who generate significant value through their entrepreneurial spirit and intimate understanding of the local environment. They are provided with the right global support and the freedom to make decisions quickly. This ability to be more agile in the turbulent emerging-market environment is a significant competitive advantage.

P&G's Global Target:
Shelves of Tiny Stores
It Woos Poor Women
Buying Single Portions;
Mexico's 'Hot Zones'
By ELLEN BYRON
July 16, 2007; Page A1

One of the greatest sources for organic growth is in developing markets. The key is business design innovation not just product or service. This is a great article describing how one of the giants tackled the many challenges . One of the many critical learnings is: "To ensure satisfactory profit margins, P&G uses what it calls "reverse engineering." Rather than create an item, and then assign a price to it -- as in most developed markets -- the company first considers what consumers can afford. From there, it adjusts the features and manufacturing processes to meet various pricing targets."

LEÓN, Mexico -- Every day, Martina Pérez Díaz spends about five hours sewing 70 pairs of black loafers by hand for a wage of 120 pesos, or about $11. When she wants to wash her hair, she walks to her local tiendita, or "small store," to buy a 0.34 ounce, single-use packet of Procter & Gamble Co.'s Head & Shoulders shampoo. The price: two pesos, or about 19 cents. "That I usually can afford," she says.

Shoppers like Ms. Díaz factor heavily into P&G's plan to conquer more of the globe. The consumer-products giant has a goal of increasing total sales by 5% to 7% annually over the next three years. As part of that mission, it is looking to tap roughly one billion additional consumers -- most of them very poor women who live in developing countries.

Reaching these customers isn't easy. In emerging markets, P&G estimates that 80% of people buy their wares from mom-and-pop stores no bigger than a closet. Crammed with food and a hodgepodge of household items, these retailers serve as the pantries of the world's poorest consumers for whom both money and space are tight.

Rather than stock up on full-size goods, which cost more per item, they buy small portions of soap, laundry detergent, and single diapers as they need them -- even though the smaller sizes are usually sold at a premium (this learning is the driving force for Business Design innovation -- you must understand the context of your target customers). In Mexico City, for instance, a full-size bottle of Head & Shoulders that lasts roughly 70 shampoos costs half as much, per ounce, as a single-use sachet.

P&G calls such locally owned bodegas, stalls and kiosks "high-frequency stores," because of the multiple times shoppers visit them during a single day or week. Though most are rudimentary, usually operating out of the owner's home, these shops are a vital route into developing markets, executives believe. But while P&G estimates there to be about 20 million high-frequency stores world-wide, so far just 2.5 million carry their products.

Over the past six years, P&G has been deploying its armies of researchers, product developers and merchandising wizards to better understand both high-frequency-store shoppers, owners and the haphazard distributor networks that stock them.

For P&G the stakes are high. Sales of P&G products in developing markets currently total $20 billion, up from $8 billion five years ago. In recent years, emerging markets have contributed about 40% of the company's "organic" sales growth, which excludes gains from acquisitions. The company still lags other consumer-product rivals. Last year P&G derived 26% of sales in these regions -- a far cry from Unilever and Colgate-Palmolive Co., which manage to snag about 40% of their business in developing markets (the potential is huge)

Many industry observers initially believed that these independently owned shops would die out as major retailers such as Wal-Mart Stores Inc. and United Kingdom-based Tesco PLC expanded their reach into developing markets. Instead, P&G saw the opposite happen. Today, high-frequency stores, considered in aggregate, are P&G's largest customer, with Wal-Mart coming in second (incredible)

As these countries' economies have grown, more tiny stores have popped up to serve their customers' rising fortunes. The buy-in-bulk mentality which had made mass-merchants roll over smaller stores in the U.S. simply didn't apply. "That was a paradigm shift for us," says P&G Chief Operating Officer Robert McDonald. "We'll be in those big-box stores, but we've also got to be in the small ones."

Though Mexico is one of Wal-Mart's most successful markets, high-frequency stores are still regularly visited by 70% of the population, P&G estimates. By the company's count, Mexico has 620,000 high-frequency stores. In most villages and cities there is one approximately every one-and-a-half blocks. Though the average shopper spends just 23 pesos, or $2.14, a day in high-frequency stores, annual sales total about $16 billion.

Selling products through these stores requires a special set of skills (business design innovation often drives the need for a new skill base)

Product visibility, for instance, is one of the biggest challenges to selling in high-frequency stores. Shops tend to be poorly lit and in Latin America average just 250 square feet in size, P&G found. To store owners, displaying P&G staples like household cleaners, bath soaps and shampoos isn't a priority. Those types of products typically represent just 10% of their sales, while food brings in 35%, and soda brings in 25%. To maximize space, shopkeepers often store laundry detergent, toilet-paper rolls and shampoo packets beneath the counter, handing them to shoppers only upon request (the challenge)

So P&G began lobbying for better shelf space, one tiny store at a time, by offering them special perks that rivals do not. P&G-employed merchandisers visit the stores about every two weeks to tidy the shelves of their products, post signs with the items' prices and hand out promotional items, including posters. Also, sales representatives deliver inventory to stores themselves, often sparing owners a trip to the local distributor.

P&G touts other advantages, too: Household cleaners and beauty products bring a higher profit margin than food, candy and soda. And when products are arranged as P&G suggests, sales of those items increases 29%, the company claims to owners.

Five years ago, it launched a "golden store" program to encourage owners to display P&G products more prominently. As part of the initiative, representatives visit the stores to spruce up the shelves and display marketing materials -- small touches store owners say they like. To be considered a golden store in Mexico, retailers must agree to carry 40 or so P&G products -- displayed together rather than next to competing brands. So far, about 220,000 have the designation.

To prompt even more sales of its products, P&G began distributing a magazine called "Tu Negocio," or "Your Business." Reserved for golden store owners, the publication explains the benefits of the company's products. It also offers basic business-management tips, including how to calculate profit margins on the items the stores sell.

Recently, José Ramón Riestra, P&G's director of high-frequency stores in Latin America, dropped by a golden store in León. Immediately, he noticed that several P&G products, including Pampers diapers and Camay soap, were placed along a side wall -- on shelves below waist-level inside a glass case. Since most shoppers tend to linger for less than 60 seconds, they likely wouldn't notice the goods.

Smiling as he introduced himself to Rocío Vazquez, a shy 19-year-old at the counter, Mr. Riestra complimented her on her family's store. Ms. Vazquez estimates about 90 people from the neighborhood shop there every day, often two or three times. After inquiring generally about sales, Mr. Riestra got to the real business at hand. "Why are our products so far away, over there?" he asked, pointing to a side wall. "Why not put them behind you?"

P&G calls space nearest the cashier the "hot zone," and considers it the most valuable real estate in these small stores. Since more than 60% of customers already know what they're going to buy, P&G figures, little time is spent browsing. But P&G researchers found that shoppers tend to gaze at the cashier's area for a precious five seconds as they wait for the owner to hand them a product or get their change -- a prime opportunity to influence future purchases.

Despite Mr. Riestra's request for better placement, Ms. Vazquez didn't budge. "We're known locally as a food store," she says, pointing to the potato chips, candy and a bowl of Hershey's Kisses, priced two for a peso, or about nine cents, that occupied the space that Mr. Riestra wanted.

Next, Mr. Riestra and a P&G sales representative tried to persuade Ms. Vazquez to carry an additional version of Ace detergent, called Ace Natural. Containing aloe, the detergent promises to make washing clothes by hand gentler on skin. Usually high-frequency stores carry just one or two brands of detergent, so persuading shopkeepers to take on an additional version of a brand they already sell is difficult.

"Tell your customers this will be better for their hands," Mr. Riestra says, pointing to the Ace bag's illustration of an aloe plant. He also noted that the price, 4.50 pesos, or 42 cents, is a peso less than the regular version of Ace she already carries.
On this score he had better luck. Ms. Vazquez agreed to carry a few packages of the new detergent.

Initially, P&G had its own exclusive sales force in Mexico to supply store owners with its products. Then, two years ago, the company decided that it lacked the scale and resources to maximize distribution -- especially in far-flung regions. P&G began offering basic sales training to independent agents and encouraged them to build their own teams. Today, the company is experimenting with allowing agents and their workers to earn commissions from markups on products sold to stores.(business design innovation often requires new routes to market)

By relying on local agents, P&G is also able to strengthen its ties to store owners. This is especially important, since owners can be very influential in the brands their customers choose. Though the agents' jobs can be lucrative, the barriers to entry are high. Each must buy his or her own inventory up front, paying in cash. To purchase his first supply of P&G products last year, Luis Mosqueda says he sold nearly all of his family's furniture, his car, his children's toys and his mother's gold jewelry. Now, he says he earns about $24,000 a year -- an income that makes him relatively affluent. Twelve sales representatives work for him, including two of his brothers.

In marketing goods to low-income shoppers, P&G tries to keep in mind their budget constraints and even the coins they carry. Because they are often paid a daily wage, Mexican customers generally carry five- and 10-peso coins. "If you want to sell to low-income consumers, you have to know what's in their pockets," Mr. Riestra says. "It doesn't make sense to have something cost 11 or 12 pesos."

To ensure satisfactory profit margins, P&G uses what it calls "reverse engineering." Rather than create an item, and then assign a price to it -- as in most developed markets -- the company first considers what consumers can afford. From there, it adjusts the features and manufacturing processes to meet various pricing targets. To hold down the cost of its Ace Natural detergent, used to hand-wash clothes, P&G reduced the amount of enzymes in the product. The result: a product that costs a peso less than regular Ace and is gentler on skin.
P&G says that reverse engineering helps to keep the company's after-tax margins "comparable" to those in wealthier, developed countries.

Internally, P&G emphasizes to its employees that products developed for emerging markets must "delight, not dilute." Quality, executives say, is still critical. "You cannot trick a low-income consumer, because they can't afford to buy products that don't work," says Mr. Riestra. If a product doesn't perform, "they won't ever buy you again, and they'll tell everyone they know about it, too."

The company has addressed this point in several ways. Running water, for example, is in short supply for many low-income Mexican consumers. In response, P&G developed a fabric softener, Downy Single Rinse. It can be added to a load of laundry along with detergent to eliminate an entire rinse cycle in the semiautomatic machines typically used here (you must really understand the context!!!!!)

Other observations of the crowded quarters in which many poor Mexican people reside have led to lucrative insights about feminine-hygiene products. With women usually lacking the money and privacy to change their pads frequently, P&G developed Naturella, a low-priced, extra-absorbent cotton pad scented with chamomile, which has soothing and feminine connotations in Latin America.

Driven by strong sales in high-frequency stores, Naturella propelled P&G to take the lead in feminine care in Mexico, and is now sold in other developing markets, including Russia, Poland and the Balkans.

This September, P&G plans to bring to Latin America a merchandising technique common in the tiny shops of Asia: hanging products from the ceiling. Finding that dangling items can catch shoppers' attention more than products sitting on shelves, Mariano Martin, P&G's global customer business development officer, issued a directive to his team: "Own the air."
"The ceiling is still a very virgin location," says Christiane Rizk, a research specialist for high-frequency stores. "We have to get there before someone else does."

The Central Challenge of Global Strategy: Managing Differences With the globalization of production as well as markets, you need to evaluate your international strategy. Here’s a framework to help you think through your options. (HBR March, 2007)
by Pankaj Ghemawat

Reprint: R0703C

This is a facinating article on global strategies. I highly recommend reading it or ordering the reprint from HBR.....

The main goal of any international strategy should be to manage the large differences that arise at the borders of markets. Yet executives often fail to exploit market and production discrepancies, focusing instead on the tensions between standardization and localization.
In this article, Pankaj Ghemawat presents a new framework that encompasses all three effective responses to the challenges of globalization.

He calls it the AAA Triangle. The A’s stand for the three distinct types of international strategy. Through adaptation (often characterized by companies that heavily advertise to create the local demand), companies seek to boost revenues and market share by maximizing their local relevance. Through aggregation (often characterized by companies with large fixed costs like R&D to leverage them as broadly as possible), they attempt to deliver economies of scale by creating regional, or sometimes global, operations. And through arbitrage, they exploit disparities between national or regional markets, often by locating different parts of the supply chain in different places—for instance, call centers in India, factories in China, and retail shops in Western Europe (often characterized by companies with relatively high labor costs).

Ghemawat draws on several examples that illustrate how organizations use and balance these strategies and describes the trade-offs they make as they do so.Because most enterprises should draw from all three A’s to some extent, the framework can be used to develop a summary scorecard indicating how well the company is globalizing. However, given the tensions among the strategies, it’s not enough simply to tick off the corresponding boxes. Strategic choice requires some degree of prioritization—and the framework can help with that as well. While it is possible to make progress on all three strategies, companies usually must focus on one or two when trying to build competitive advantage.

To spark your interest, here is a very interesting chart from the article: