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© C.K. Prahalad1
Emerging Consumer andThe New Age of Innovation
C.K. PrahaladPaul and Ruth McCracken Distinguished University Professor
The Ross School of Business, The University of Michigan
© C.K. Prahalad2
Building Blocks of Strategy: Financial Services Firms
Life Stage Management ofFinancial Services (Scope of Services:Banking + Insurance)
Number ofConsumers(Scale of Operations)
Innovations inAccess to Consumers(Source of Value )
© C.K. Prahalad3
Agenda for the Session:
Demographic Dividend,Efficiency Dividend,Innovation Dividend
EmergingConsumers,
Reforms,Growth,
Convergence ofTechnologiesand Industry Boundaries,Connectivity
Cre
atin
g N
ew C
apab
ilitie
s:C
aptu
ring
Mex
ican
Opp
ortu
nity
Scale
Access to Consumers
EmergingOpportunity
© C.K. Prahalad4
Development of Strategy Concepts:Focus on Next Practices
1994 2004 2008 Competing forThe Future
*The Future ofCompetition*Fortune at the Bottom of thePyramid
The New Age ofInnovation
© C.K. Prahalad5
The Changing Roles of the Poor and the Rich:
Emerging Markets as a Source of Innovations?
© C.K. Prahalad6
Conception of Emerging Markets: India
$ 45,000 PPP + 1% ~ 4%
2006 2015
$ 10- 45,000 8% ~ 20%
Per Capita Income
4.5- 10,000 26% ~ 40%
< 4,500 65% ~ 36 %
Which is the Target Market ?
A
B
C
D
© C.K. Prahalad7
Approach to Understanding Market Opportunity
Per capita Income
Per family Income
Size of the Segment
Rate of Upward Mobility
Possible Revenue Pool
Possible Profit Pool
© C.K. Prahalad8
Conception of Emerging Markets: Mexico
~ $ 12,000 10%
$ 4,650 $ 4,000-5,300 20%
$ 2,600 $ 2,150-3,200 30%
$ 1,320 $ 775-1,830 40%
Which is the Target Market ?
A
B
C
D
Per capita Range % ofIncome (US$) Population
Source: INEGI
© C.K. Prahalad9
Conception of the Emerging Markets
Potential MarketFor Fin.
Services?
A
B
C
D
© C.K. Prahalad10
First Level Conclusions…
1. The Market is Significant2. This Market will Demand New Business Models3. The Market is Country/Sector specific4. Consumer Behavior/Expectations are varied5. We Need to Focus on Awareness, Access,
Affordability, Availability
We Need:Global Standards and
Locally Responsive Solutions
© C.K. Prahalad11
The Core Strategy Challenge
Life Stage Wellness Management
Number ofConsumers
New Channels andBusiness Models
TraditionalSegments
TOP
BOP
IntegratedAccess toConsumer
© C.K. Prahalad12
The Core Strategy Challenge
Life Stage Wellness Management
Number ofConsumers
New Channels andBusiness Models
TraditionalSegments
TOP
BOP
IntegratedAccess toConsumer
© C.K. Prahalad13
The Core Strategy Challenge
Life Stage Wellness Management
Number ofConsumers
New Channels andBusiness Models
TraditionalSegments
TOP
BOP
IntegratedAccess toConsumer
© C.K. Prahalad14
Accessing Emerging Markets:Challenge # 1:
Creating the Capacity to Consume
1. Easy Payments: Access to Credit2. Lower Costs: 20-50X improvement3. Single Serve4. Pay/use; Focus on Access5. “Last Mile” Distribution
© C.K. Prahalad15
Access to Emerging Consumers
They Live in:
Unorganized, InefficientSystems,
Local Monopolies,Information Asymmetry,Poverty Penalty, Poor Quality, Low Tech.
We Must Create:Organized Sector, National / Global
Competition,World Class Quality,
Affordable Prices,Access to info.
Advanced Tech.New Models
© C.K. Prahalad16
The Core “Mother Industries” forEconomic Development
Productivity =Poverty
Alleviation
Education,Health Care
MicroFinance
Connectivity
Energy
(Private Sector)
(NGOs,PrivateSector)
© C.K. Prahalad17
Is there Evidence that Emerging Consumer can be Source of Wealth
Creation?
© C.K. Prahalad18Source: Mr. Subrato Bhowmik
© C.K. Prahalad19
The Cell Phone Industry:1. Great growth Story in BOP markets around the world
Sub Saharan Africa, S. AfricaChina, IndiaThailand, Philippines, IndonesiaMexico, Latin America
3.0 billion connected around the world2. The industry has Cracked the BOP Code
3. India is one of the fastest growing Markets: 6 million/month4. Cost of service: Lowest in the world5. Market Cap of 4 firms in India: $ 75 billion
6. Cell phone is becoming the device of Choice not the PC
© C.K. Prahalad20
Participation In Emerging Markets
1. Converting consumers from Unorganized, inefficientmarkets to Organized and Efficient Private sector
2. It is a Market Development Task
3. BOP Markets will Force Breakthrough Innovations
4. We have to think differently;Price - Profit = CostCost + Profit = Price
© C.K. Prahalad21
Desire for EyesightTarget Price
Target Cost
Target Profit
© C.K. Prahalad22
Desire for ConnectivityTarget Price
Target Cost
Target Profit
© C.K. Prahalad23
Desire for a Car?
Target Price
Target Cost
Target Profit
© C.K. Prahalad24
The Desire for Connectivity
Target Price
Target Cost
Target Profit
© C.K. Prahalad25
Focus on Emerging Consumers Lead to Breakthrough Innovations
It can Create Global Opportunities
© C.K. Prahalad26
Making Products/Services Affordablee.g. Prosthetics for the Poor
Evidence: Jaipur Foot, India
Approach: Barefoot Walking,Squat on the FloorSitting Cross leggedWalking on Uneven GroundPaucity of DoctorsNeed for Custom Fitting in a day
Defaults As good as US ModelsSize and Scope Largest in the WorldViability Profitable
© C.K. Prahalad27
Basic Foot Movement is Complicated
© C.K. Prahalad28
The Functionality Requirements in India are Different from the West
Activity Functionality:1 Functionality:2
Squatting Need for Dorsiflexion
Sitting Cross Need for transverse Legged Rotation
Walking on Need for Inversion andUneven Ground Eversion
Barefoot Walking Need for Natural Look
Work Needs,Poverty,Lack ofTrained manpower,
Time forFitting
© C.K. Prahalad29
© C.K. Prahalad30
Comparison of Scale and Quality
Jaipur Foot 16,000/year As good as US
Aravind 280,000/year As good as UKEye care
NH 7,500/year Better than NY State
Scale Quality: Outcomes
© C.K. Prahalad31
The Health Care Revolution:
Jaipur Foot Prosthetics 200 x 16,000/year
Aravind EyeHospital Eye care 100 x 250,000/year
Escorts Cardiac care 15 x 7,000/year
Narayana Pediatric 30 x 7,500/yearHridayalaya cardiac care
Field of Group Specialization
Cost Adv.Over USA Size
© C.K. Prahalad32
Cost Comparisons
USA India Thailand
Typical Costs in US $
Coronary ArteryBypass Surgery 70-133,000 7,000 22,000
Heart valve Replacement 75-140,000 9,500 25,000
Hip Replacement 33- 57,000 10,200 12,700
Prostrate Surgery 10- 16,000 3,600 4,400
Source: US News and World Report, May 12, 2008
© C.K. Prahalad33
© C.K. Prahalad34
Do We Need a New Methodology for Innovation at Emerging
Markets?Creating Micro Consumers
Constrained Innovationor The Innovation Sandbox
© C.K. Prahalad35
Case Study # 2
© C.K. Prahalad36
Current Practice: Typical Cooking System
© C.K. Prahalad37
The “Innovation Sandbox” for Energy in India
Aspirational, Intelligent
Scalability
NewPrice-Perf.Levels
SafetyStandards,Eco.sensible
© C.K. Prahalad38
What is the Opportunity in India for BP?
1. Rural Poor is a Target Market2. Extreme Variety in Cooking Habits3. Choice of Fuels based on Cooking Habits,
Availability of Funds, and access to Biomass4. We need a very Flexible, Personalizable Solution5. There is a great Opportunity for Improving Energy
Efficiency and Health of Women and Children6. It must be affordable
© C.K. Prahalad39
The Combination Chula
BiomassPellets,Efficient,No Smoke
LPG,
© C.K. Prahalad40
Combination Stove used in Market Research
© C.K. Prahalad41
The Combination Chula
BiomassPellets,Efficient,No Smoke
LPG,
New Pelletizers,1 KG bags,Supply Chain
LPG Supply ChainDecentralizedStorage
Manufacturing and Logistics of the Chula
Creation of Village level Entrepreneurs: Jyoti AmmasPartnership with NGOs and IISc. as Co Creators
© C.K. Prahalad42
First Stoves
Stabilized Version
Current Version
© C.K. Prahalad43
Chinese StoveNext Version (India & Vietnam)
© C.K. Prahalad44
Where is the Experiment?
1. Successful Piloting in India during 20062. Scaling in India during 2007-20103. Experiments in SA and piloting4. Opening up 8 New Geographies in next 3 years5. A New Category for BP- Emerging Consumer6. New Approach to participation in Non OECD markets
© C.K. Prahalad45
Emerging Consumers Creating a New Global Competitiveness Agenda for
MNCs?
Market Development
Distribution/Logistics,
Price-Performance
Hybridtechnology
DeskillingWork,
Remote Delivery
Scale
Creating the Capacity to Consume
Leanmanagement
Glo
bal
Com
peti
tive
nes
s
New Forms of Governance
© C.K. Prahalad46
Key Takeaways……
1. Emerging Markets a New Source of Efficiency and Breakthrough Innovations,
2. Awareness, Access, Affordability, Availability as Key building Blocks
3. The Innovation Sandbox – Embrace constraints
4. Collaboration with Civil Society, Public Sector andPrivate Sector
© C.K. Prahalad47
Critical Innovations1. Last Mile: Innovations in Distribution
Micro Finance FirmsNGOsTelecom FirmsRetailers (Casas Bahia, Elecktra)
2. Innovations in Payment MethodsCell Phones (Globe telecom)
3. Who is the Competition?Coke?
© C.K. Prahalad48
Rethinking Innovation andValue Creation
© C.K. Prahalad49
The New Age of Innovation:The Basic Thesis
Globalization Connectivity,Digitization,Convergence,Social Networks
A New ApproachTo Innovation &Value Creation
+ =
© C.K. Prahalad50
Price-Performance Envelopes are Changing Faster than anyone Expected
1. Transistors/chip 103 106 109
2. Decrease in size of micro-devices 10-1 10 -6
3. Computing power 1011 1015
4. Cost per MIPs($1000) 1 1M 5. DNA sequencing cost
($/BASE PAIR) 10 0.05 6. Magnetic data storage 104 1011
(bits/dollar)
1970 80 90 2006
Source: Ray Kurzwell
© C.K. Prahalad51
The New Age of Innovation:Core Drivers:
Connectivity, Convergence,Digitization, Social Networks
Shifting Balance of Power:C < F to C ≥ F
New FirmsN=1; R=G
Traditional FirmsMigrate toN=1; R=G
LooseCompetitive Advantage
Build New Capabilities:Social and Technical Architecture
Talent Matters IT Matters
No
No
© C.K. Prahalad52
Value Creation Process in:1. Google2. Tutor Vista3. Li & Fung4. Netflix5. Starbucks6. Amazon7. Aviva8. Nike9. ICICI- Prudential10. Automotive -OnStar11. Bridgestone12. Madras Cements13. Medtronics14. UPS
One Consumer atA time (N=1);
Multiple Vendors(R=G)
© C.K. Prahalad53
What Are the Building Blocks of a New Managerial Framework for
Innovation and Value Creation?
© C.K. Prahalad54
The New Game:
N = 1
R = G
( Co creation of Personalized Experiences)
(Multi-Institutional and Multi –Geographic Access to Resources)
© C.K. Prahalad55
The Transformation from a Product/Firm Centric View to N=1: R=G
1910
© C.K. Prahalad56
The Transformation from a Product/Firm Centric View to N=1: R=G
1910 2010
© C.K. Prahalad57
The Centrality of Personalized Experience
UndifferentiatedCustomers(Model T)
CustomerSegments
(e.g. Adolescents)Mass
Customization(e.g. Dell) Personalized
Co Creation(e.g. Diabetes,
EMRI)
N=1
© C.K. Prahalad58
The Need for Accessing Distributed Resources
VerticalIntegration(e.g. River Rouge)
Creation ofA Supply base
GlobalSupply Chains
Emergence ofNodal Firms andSupply Webs
R= G
© C.K. Prahalad59
Rethinking Innovation
Custom madeProducts
Mass ProductionOf Products
Services
Solutions
Unique,PersonalizedCo createdExperiences
© C.K. Prahalad60
Case Study # 3
Consider Type II Diabetes Next Practice Solutions?
© C.K. Prahalad61
The Spread of Diabetes
Type IIDiabetes
Kidney
Cardio-Vascular
Eye
Amputations
DiagnosisMedication
Compliance,Life Style
AffordableInsurance Delivery
Infrastructure
© C.K. Prahalad62
New Principles:1. Life Style Diseases Need Effective Management by Individuals.
Compliance to a Prescribed Personalized Routine is Key Focus on N=1 (Individual’s Behavior)
© C.K. Prahalad63
New Principles:1. Life Style Diseases Need Effective Management by Individuals.
Compliance to a Prescribed Personalized Routine is Key Focus on N=1 (Individual’s Behavior)
2. Economic Incentives are a Source of Feedback to IndividualsPricing Based on Behavior can Improve Compliance
Focus on Variable Pricing Based on Compliance
© C.K. Prahalad64
Variable Pricing Strategy
Base Premium
Strong Compliance;Reduced RiskReduced Premiums
Poor ComplianceIncreased RiskIncrease Premiums
Ran
ge =
100
%
© C.K. Prahalad65
New Principles:1. Life Style Diseases Need Effective Management by Individuals.
Compliance to a Prescribed Personalized Routine is Key Focus on N=1 (Individual’s Behavior)
2. Economic Incentives are a Source of Feedback to IndividualsPricing Based on Behavior can Improve Compliance
Focus on Variable Pricing Based on Compliance
3. No Single Firm can Create the Eco System for ComplianceNeed to Build a Multi-Vendor Ecosystem with a Nodal Firm
Focus on R=Global for Serving N=1
© C.K. Prahalad66
The Diabetics Management Ecosystem
ICICI-Prudential
WockhartBiocon
NicholasJ&J
Metropolis,Well Spring
Gyms &HealthClubs
RuralAccess?
PharmaMonitoring
Diagnostics
HospitalNetworks?
Channels ConsumersHealthMgt.
© C.K. Prahalad67
What are the New PrinciplesInsurance Perspective Health Perspective
A Class of customers and One customer at a time; N=1Actuarial data Real time Behavioral data
Pricing based on segment Pricing based on compliance ofan individualEconomic Incentive to stayHealthy
Protect from Catastrophic Help customers improve theirIllness, death Life Style, contain disease,
Protect from Catastrophic illness and death
Customers are on their own Customers get help; Feedback andCertified Periodic Testing
© C.K. Prahalad68
The Basic Transformation
Suppliers The Firm Channel
SCM ERP CRM
NodalFirm
© C.K. Prahalad69
N=1, R=G Changes the Innovation Dynamic
BusinessUnits
Corp. as aPortfolio Of
Competencies
ExtendedSupply
Network
Enhanced Network of suppliers,Partners,
Consumers
The Sources of Competence is Changing
Pre 1990 1990 - 1995- 2001 -
© C.K. Prahalad70
The Meaning of Innovation is Changing
Product Innovations
Customer Specific
Solutions
Customer Experiences:Co Creation
Pre 1995 1995 - 2001-
© C.K. Prahalad71
We can Identify an Innovation Continuum
Locus ofCompetence
Locus of Innovation
Build & Sell Build Co CreateProducts Solutions Experiences
Corp.As a Source
ExtendedSupplierNetwork
Enhanced Network:Customers
© C.K. Prahalad72
InnovationCollaborativeCapacity
Common, SharedStandards, Platforms
Global TalentLeverage
New Business Models
InvestmentCapacity
The New Age of Innovation
© C.K. Prahalad73
What are the Enablers?
N=1, R=G Increase in the Numberof Activities, and Players:Orchestrating an eco system
Value Creation Understanding and ManagingTensions and Frictions
Innovation in anN=1, R=GEnvironment
Managerial Mindset, Systems,Measurements, and Talent
© C.K. Prahalad74
What are the Impediments toBuilding New Capabilities ?
Social InfrastructureOf the Firm:Legacy MindsetsDominant LogicSkills, Attitudes and
BehaviorsDecision ProcessesIncentives
Tech. InfrastructureOf the Firm:Legacy Systems
DatabasesICT ArchitectureApplications
BusinessProcessesAnalytics
Access toTalent
© C.K. Prahalad75
The New House of Innovation
The Technical Architecture of the Firm:(Information and Communication Technology –ICT-
Backbone of the Firm)
The Social Architecture of the Firm:
(Values, Skills, Attitudes, Decision Processes,
Performance Metrics in the firm)
Flexible and ResilientBusiness Processes andFocused Analytics
Per
sona
lized
Co
Cre
ated
E
xper
ienc
es:
N=1
Glo
bal A
cces
s to
R
esou
rces
and
Ta
lent
:R
=G
© C.K. Prahalad76
Strategy for Financial Services
Life Stage Management ofFinancial Services (Scope of Services)
Number ofConsumers(Scale of Operations)
Innovations inAccess to Consumers(Source of Value )
© C.K. Prahalad77
Transformation Requires:
ImaginationPassionCourageHumanityHumilityIntellectLuck !