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Past Issue • Jan-Mar 2016

The Last Mile Conundrum: Pitfalls of Product Innovation Sans Market Strategies

The Last Mile Conundrum: Pitfalls of Product Innovation Sans Market Strategies

This paper strings together learnings from a series of case studies on innovations in emerging markets and provides insights into how firms need to pay attention to aspects like distribution networks, marketing innovations and local issues like patent regimes, if their product innovations are to be successful in tough competitive environment.

Innovation undoubtedly plays an increasingly important role in the economic activities of firms, industries and thus nations. An ever changing market and newer technologies create a shift towards innovation laden with positive value in a given market. Emerging markets have a preponderance of people at the bottom of the pyramid who live in rural markets. Innovations to cater to these customers are multifaceted. It requires innovations in technology, distribution and even in approaches to protection of Intellectual Property (IP). Contrary to the oft mistaken opinion that there is little, if insignificant, innovation happening in emerging markets, remarkable and disruptive innovations are actually happening in developing nations. However, it is the effort to bring these innovations to fruition that is the source of strife.

Given their market dynamics and situations peculiar to them, innovations in emerging markets throw up solutions that are often unanticipated. Product innovations are often accomplished with aplomb only to be relegated to storerooms due to a lack of concomitant market innovations that bring these products to the market. Clearly entrepreneurs face a mismatch between innovative ideas and products and the means to reach them to the final customer. In an effort to highlight some of the issues, this paper analyses a series of case studies dealing specially with innovation in emerging markets. These cases, set in India, clearly spell out varied hurdles in the innovation landscape faced by firms young and old. Further challenges in the diffusion of innovation have surfaced with a relentless regularity.

The Purest of Them All [Tata Swach: Pure Water for the Indian Household]

When TATA decided to launch a water purifier aimed at providing safe water for the masses in India, the initial product was developed within the research and development division or Tata Consultancy Services (TCS), and subsequently at Tata Chemicals Limited (TCL). Collaborative efforts between various TATA companies resulted in this low cost breakthrough. An affordable mobile water purifying unit to meet the needs of the large bottom of the pyramid population was designed with excellent engineering capabilities to give a product that was cheap, innovative, met its purpose and fulfilled a social necessity.

However designing the product was not enough.

The challenge in bringing this innovation, propelled by the need for sustainability and affordability, to the market however, lay in reaching the poorest households that needed this product the most. As social innovators it is cardinal for the technological breakthrough to reach its end user in spite of the uncertainties and risks. In order to reach rural areas, TATA Swach had to tweak its business plan and its marketing network to target the bottom of the pyramid (BOP).

The Magic Pill [Novartis In India: Innovation Versus Affordability]

A destructive innovation involving a revolutionary cancer drug in an emerging market ought to surmount complex managerial challenges. The case opens with a multinational pharmaceutical firm, Novartis International AG (Novartis) that is awaiting a major court decision on patent policy as it pertains to one of the firm’s products. A dependable, profit generating drug (global sales of US $3.9 billion in 2009) by the name Glivec was being introduced into Indian Markets facing significant resistance from key domestic players staking claim to the large pool of patients who could benefit from the drug. The cost of the drug was US $2,666 per patient per month. Compare this with the domestic versions selling between US $177and US $266 per month per patient. The changed institutional environment surrounding innovation and pharmaceutical patents coupled with the uncertainty of the legal standing on these matters brings into focus the need for firms to shore up their management of technology and/or management of innovation and global strategy.

Contrary to the oft mistaken opinion that there is little, if insignificant, innovation happening in emerging markets, remarkable and disruptive innovations are actually happening in developing nations. However, it’s the effort to bring these innovations to fruition that are the sources of strife.

Novartis introduced the drug into an emerging market at prices that were many times local drug prices and hence completely overlooked market dynamics. Further they chose to follow strategy that works in the West – litigating and taking their chances instead of perhaps talking to domestic players and understanding the untested legal ramifications of IP before pursuing their standard practices in the West. Firms can face hiccups when dealing with the intellectual property regime and its impact on business strategy. Firms need to reflect on the difficult policy trade-offs between incentivising innovation through strong IP laws and enhancing access and affordability through weak IP laws. This case demonstrates the need for global and domestic managers, particularly in knowledge-intensive sectors, to be sensitised to transitioning IPR regimes, particularly in emerging markets, and the resulting challenges.

An Idea And An Impossible Problem [Oral Insulin-Managing Breakthrough Innovation at Biocon]

Medium-sized firms (under US $1 billion) in an emerging economy (India) face significant challenges of product development and commercialisation. Biocon started in 1979 as a small biotech garageoutfit and grew in a span of three decades to the number one biotech firm in India. Its global sales in more than 75 countries reached US $712 million. It had an impressive list of 36 key brands across four therapeutic divisions of diabetics, nephrology, oncology, and cardiology. Biocon’s oral insulin (IN- 105) drug in particular promised both strong financial returns as well as social impact. However this would be possible only if, and when, the drug reached its target population. Already having invested several years of research and development in putting the drug through Phase I and Phase II trials, Biocon has to put the drug through the vital Phase III trials before it can be cleared for launch. Surrounded by a lot of economic uncertainty, the firm should reach a decision if they should partner or go it alone in marketing the drug. Moving away from transitioning research [focused on “imitation” or generic drugs to high-risk drug discovery] while fine tuning strategies in emerging markets, poses many a challenge to today’s innovative firms. They, had a potential blockbuster on their hands but how would they enter new markets? Although its therapeutic effect would be unique compared to plain insulin, it was undoubtedly a risky investment.

The complexities of high-risk R&D management in emerging markets and the subsequent strategic challenges in developing a framework for the commercialisation of technology prove prime concerns for most firms. Translating Biocon’s capability portfolio to actual drugs that reach the marketplace is wont to risks and missteps.

A Tight Embrace [Embrace Infant Incubator]

When founders Jane Chen, Linus Liang, Rahul Panicker, and Razmig Hovaghimian developed an infant incubator based on a social need in a classroom at Stanford University little did they realise that to finally reach the infants, it would need years of learning and re-aligning business strategies. While high infant mortality rate in India are high, hospital grade incubators cost a whopping INR 75,000- 150,000 (high-end) to INR 200,000-INR 300,000 (mid-end). The Embrace infant warmer worked on a revolutionary gel that retained heat in a secure pouch placed inside a wrap that would provide the much needed heat sustenance for infants to survive their crucial first days. Developed in USA, the team tested these in rural India. Priced nominally at INR 4000, they geared up for a much awaited release.

But their product faced a major hurdle. To reach villages, they did not have the distribution capabilities and were limited to the Government network and a few rural hospitals. Further their model was easy to inculcate into already existing infant warmers in India. Innovators must be attuned to market conditions and challenges and incorporate suitable business model innovations in order to succeed.

A Cool Idea [Godrej Chotukool: A Refrigerator for the Masses]

When Godrej designed an unconventional cooling system they had the mass markets in mind. Prices for home refrigerators ranged from INR 7,000 to over INR 70,000 each. The Indian refrigerator market, considered massive, was valued at INR 40 billion (2010). It was mainly dominated by MNCs such as LG, Samsung, Whirlpool, Sanyo and a few local players. Given its domination over the consumer durables market, the penetration levels were not impressive. Thus was born ‘Chotukool’- priced at just INR 3,500 and running on 12 volt battery power. Its simplicity of design required only a small manufacturing unit. However when they launched the product in 2010, they hit roadblocks.

Product innovations are often accomplished with aplomb only to be relegated to storerooms due to a lack of concomitant market innovations that bring these products to the market. Clearly entrepreneurs face a mismatch between innovative ideas and products and the means to reach them to the final customer.

Since, they had called it a refrigerator, they had to deal with the mindset of refrigerators being considered ‘luxury items’ in rural India. They did not consider their competition, ironically named ‘Mitticool’ working along the same lines. A lack of regular distribution channels further clogged their reach and recovery. Godrej had failed to take into account these logistical issues before launching their affordable refrigerator mainly aimed at the bottom of the pyramid users and rural consumers. Their confusion on financing options for BOP customers further accentuated their lack of market penetration. Innovation in emerging markets encompasses not only R&D, but also value proposition, cost structure and market segmentation planning.

Notwithstanding their massive market and growth potential, the uncertainties and risks of emerging markets warrant that both established and young firms must have their innovative arm and distribution networks well organised.

Given this new era of global innovation where emerging markets play an essential role, the focus has further been trained on a market-oriented corporate culture. Business model innovations, broadening the innovation base, increasing resource efficiencies while reaching a larger customer base, have yielded cumulative results for firms in emerging markets. Notwithstanding their massive market and growth potential, the uncertainties and risks of emerging markets warrant that both established and young firms must have their innovative arm and distribution networks well organised. Stringing together the challenges and actions of firms that have already gone through the rigmarole serves, to highlight that while successful product innovations in emerging markets are commonplace, they need to focus on distribution and marketing business model innovations going forward. Why do firms enter? What makes them sustain profitably? Though these questions have been studied by researchers, on-the-ground reality can elucidate key issues of management in today’s tough competitive environment in emerging markets. The last mile that’s where they need to focus.

ABOUT THE AUTHORS

  • MridulaAnand

    Mridula Anand

    Independent innovation and IP consultant. She holds a graduate degree from Stanford University and has also completed her Law degree.
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