At a glance
• Multinational companies (MNCs) need to innovate in emerging markets to capture unique opportunities.
• Trying to innovate without a supportive, local ecosystem is a formidable task.
• Cisco India decided to take on the challenge of developing a new router from scratch.
• The product development journey, from idea to launch, offers insights into creating new markets.
Since 2000, the global R&D landscape has evolved to the point that emerging countries have advanced from being low-cost manufacturing bases to become R&D innovation hubs. Indeed, China and India now account for 20% of R&D spending worldwide. Given their global scope, MNCs are increasingly playing a dominant role in driving R&D activities in emerging countries.
Telecom equipment manufacturer Cisco Systems, Inc. is a case in point. Its R&D center in Bangalore, India was established in 1996 as an offshore unit and operated as an extended workbench supporting the activities of the US-based R&D headquarters (HQ). Over the years, it enhanced its internal capabilities through continuous learning via technology and knowledge transfer from the HQ. In a strategic move toward greater globalization, top management selected the Indian site to take on a bigger role as its Globalization Center East, making it the company’s second largest R&D center in the world (after the US). The center’s mandate was to develop products from concept to completion for India and similar emerging markets. The new product development team had to address three critical issues: How could it define the right product to address the specific needs of telecom network customers in the domestic market? How could it build the business case for approval in the absence of data? How could it compensate for the significant capability gaps in the Indian ecosystem?
The broader issue
The drive for global competitiveness forces firms to reconsider the configuration of their R&D networks, or the location of particular processes in their innovation value chain. With emerging markets increasingly moving to the core of MNCs’ global business strategy, the first question these companies tend to ask is, “Why should we innovate to enter or capture these markets? We have a proven product – all we need to do is find the correct market segment.”
The reasons for not embarking on local innovation are many: additional costs, uncertain outcomes, questionable returns and the possibility of losing intellectual property. However, this export-oriented business model brings limited growth, even as issues such as lack of product–market fit, price mismatch and low-cost local competition become evident. In response, MNCs typically embark on customization – stripping down existing products in terms of value and cost – in an effort to adapt to local needs. But they soon realize that this is not enough to achieve their wider objective of creating a new market. So it becomes essential to crack the code to local innovation.
For Cisco, the potential in the Indian telecom industry was huge. The market grew over 20 times in just 10 years, from 28.5 million subscribers in 2000 to over 621 million in 2010. It made sense to build telecom products in India because capital expenditure on telecom was increasing by 15% per year in the developing world, i.e. double the growth rate of the developed world. The India R&D team identified a backhaul router as the ideal product to meet the needs of the local market. If successful, the new router would become the first ever product developed end-to-end in the country; not only would it help Cisco win competitive advantage in India, but it could also be leveraged in other emerging markets.
Unique complexities in emerging markets
While regulatory systems, market research firms, credit rating systems, legal recourse, and the like facilitate the creation of markets, many of these crucial intermediaries are either underdeveloped or completely absent in emerging markets, resulting in significant “institutional voids.” These gaps have traditionally made it difficult for MNCs to succeed and, as a result, many companies have resisted investing in developing countries. Furthermore, the Indian ecosystem was not fully mature in terms of technology partners and the skills required. The Cisco India R&D team required local capabilities such as tier-1 chip vendors, senior engineering talent in specific areas, labs for testing and certifying telecom-grade equipment to global standards, manufacturing capabilities for complex hardware, and so on. Unfortunately, these were largely lacking.
Against this backdrop, the India team had to obtain buy-in from the San José HQ, which would have to take a leap of faith and allocate financial resources that could be better utilized elsewhere. It was clear that the return on investment would be negative in the short term. Another consideration was whether the product could be used in other markets. And, most importantly, if the innovation failed, this would deal a severe blow to Cisco’s R&D decentralization strategy. For the India team members, securing support from HQ and the new router’s success or failure had the potential to make or break their careers and credibility in the company. The stakes were high on both sides!