Market creating innovations and business model

Anand Laishram *

In the previous weeks, we have looked at:
- Push vs Pull strategies
- What Market Creating Innovations mean?
- How Market Creating Innovations help ignite economic development?
This week, we will look at what Market Creating Innovations entail. We will focus especially on business model innovations.

Let’s refresh our memories first before we proceed.

Market Creating Innovations make products & services affordable & accessible to large sections of the population (also called non-consumers) who were earlier excluded from those products & services because of various barriers.

Those barriers are:
- Affordability
- Accessibility
- Expertise
- Time

In simpler terms, it means that for the non-consumers, the solutions they need to make progress in their lives may be too expensive or not available easily or too time consuming to use or too difficult to use.

Even though the solutions exist in the market, they are consumed only by a small section of the population (the wealthy and technically adept minority). Most businesses target them because they want to capitalize on their spending power.

Market Creating Innovations help break down the barriers for the non-consumers, thus allowing them to consume those solutions. In this process of meeting the needs of the newly unlocked market, various developmental resources and infrastructure are pulled into the economy. Jobs are also created, especially local jobs. This creates prosperity that is more sustainable.

We have looked at examples of the Ford Model T in the USA, Alpargatas in Brazil and Galanz in China. Market Creating Innovations may or may not involve technological innovation. But in most cases, it involves an innovation in the business model, i.e., the way a business creates and delivers value.

Enabling technologies may play a vital role, but may not be sufficient, unless they are packaged together with a business model that specifically targets the non-consumers, with the goal of breaking down the aforementioned barriers.

The components of a business model are:
- Customer Value Proposition
- Profit Formula (Revenue Model, Cost Structure, Margin Model & Resource Velocity)
- Key Resources
- Key Processes

Changes in a business model, in order to serve non-consumers, therefore, would include changes in the value proposition, cost structure, the key resources utilized, the key processes employed etc. We saw this when we studied the example of Galanz in China.

Galanz, unlike other Chinese microwave oven manufacturers (which targeted the export markets), instead targeted the domestic Chinese market.

They made microwave ovens affordable, accessible & easier to use for large sections of the Chinese population, who needed a better solution for cooking food in their cramped apartments, but were unaccustomed to using microwave ovens.

This involved the following innovations in their business model:

- Advertising in newspapers, instead of on television, which reduced advertising costs
- Knowledge marketing, which involved educating prospective Chinese consumers on how to use microwave ovens
- Selling microwave ovens through showrooms, which involved developing a national sales network
- Running their manufacturing plants 24/7, to achieve a 100 percent capacity utilization rate, to bring down costs
- Developing local customer support infrastructure

They also adopted other efficient management & purchase practices, in order to bring down. Galanz did also invest in technological innovation, in order to reduce costs of important microwave components such as the magnetron. But the business model innovations were crucial to achieve the goal of successfully serving the domestic market.

Similarly, the Havaianas range of slippers that Alpargatas introduced to serve the Brazilian people who couldn’t afford footwear, involved very little technological innovation. The slippers were very simply constructed using two pieces of rubber, which allowed large scale manufacturing and assembling at lower costs.

The other changes they introduced, such as, selling the slippers through vans that went to the places located far away from markets and urban centres, were very important. In the case of Clinicas del Azucar, a chain of clinics specialized in treating diabetes patients in Mexico, business model innovations were key.

Diabetes is a big issue in Mexico and is the leading cause of deaths and amputations in that country. Patients have the options of either getting treatment in the exorbitantly priced private hospitals or the heavily congested public hospitals.

Moreover, patients have to visit different specialists, working in different hospitals at different locations, in order to get properly treated. Thus, there were enormous affordability and time barriers which caused many patients to simply choose to live with the disease rather than seek the necessary medical services.

Clinicas del Azucar (simply translated as sugar clinics in English) created a one-stop solution for diabetes patients.

They made the following changes in their business model (as compared to traditional hospitals):
- They focus exclusively on diabetes.
- Patients have to pay a flat membership fee, which is much lower (and simpler) than the private hospital charges.
- Each location consists of multiple stations. Each station is manned by a specialist & the support staff and is equipped with all the machines and medicines. A patient moves from station to station and goes through the whole treatment procedure at a single location.

Clinicas del Azucar has been very successful in helping the Mexican public combat diabetes. 65% of the patients who got treated at Clinicas del Azucar were able to control their diabetes within 6 months, as opposed to just 19% for public hospitals.

They have optimized their operations to focus on making diabetes treatment more affordable, simpler & less time consuming for patients. Thus, we have looked at what Market Creating Innovations entail, especially business model innovations. Successfully targeting non-consumption requires optimizing the business model for that purpose. Technological innovation can be a crucial component but is usually not enough.

Next week we will look at how Market Creating Innovations helped bring about economic change in countries such as the USA, Japan, South Korea etc.