This blog first appeared as Steve Wunker's piece for Forbes
By Steve Wunker
For a word that seems about as objectionable as motherhood and puppies, “innovation” is a term that wasn’t heard much in Brazilian boardrooms a decade ago. The same applies to executive suites in South Africa, Nigeria, India, and China. This is something of a puzzle. After all, if innovation springs up to tackle latent demand, emerging markets are packed full of unmet needs. Even in an advanced city like São Paulo, where I am writing this, inconveniences abound. Moreover, there are huge numbers of poor citizens inadequately addressed by businesses traditionally focused on a relatively thin strata of wealthier individuals. You would think that if we would see innovation flourish anywhere, it would be in environments like these.
To be sure, innovation has thrived in these settings, but it has been the sort of process improvement innovation that makes existing industries function better rather than the type that creates new markets, caters to new consumers, or pioneers new business models. Why is this? (Before the comments start pouring in, let’s be clear that any generalization about 5.6 billion people will have exceptions, and the press writes frequently about outstanding programs undertaken by CEMEX, Safaricom, Tata, and others. Yet these companies are unusual, and it is the very rare emerging markets executive who will contend that their country is remotely as innovative as the US, UK, or Japan, even outside of high technology, capital-intensive fields).
Simply put, it has been too easy to succeed without undertaking the sort of disruptive innovation that builds new market space. Banks have grown through building out their branch networks and product offerings. Retailers have planted big box stores. A host of companies enabling export-led economic strategies in the biggest emerging markets have been riding the updraft of fast growth, supplying goods and services to surging local firms and a mushrooming middle class.
In this environment, companies have prospered through executional excellence. They have not needed to generate new approaches to target initially small markets, because mainstream markets have been quite profitable. In many countries (India and China largely being exceptions), competition has been modest, and firms have not needed to best each other through coming out with boldly novel offerings.
Emerging markets have also lacked risk capital. Institutional venture capital is largely a North American and Northern European phenomenon, but wealthy individuals and conglomerates mobilize investment funds across the globe. In developing countries, these sources of finance have not targeted new markets because they have not needed to take those kinds of risks. When core businesses that you understand well are growing 10-15% a year, new markets can lack allure.
Yet the world is changing, fast. At least four factors are converging to create a rapidly-increasing demand for disruptive, market-creating innovation:
We are just starting to see the impact of these environmental shifts. Many of today’s breathless headlines about innovation in emerging markets are overblown. But not for long.