Chapter 1: Introduction

The Great Silk Route, operational from the late 2nd century B.C to about 4th century A.D laid the foundation of the first truly global economy and the first multicultural society. The Silk route connected Northern China under the rule of Hun dynasty with Western Europe through the trading junctions of the Indian subcontinent and Persia. Silk, spices, horses, precious metals and even religion and technologies like textiles and metallurgy were traded in this first multilateral global trading consortium of kingdoms. The same reasons that led to the development of this route and flourishing trade about 2000 years ago are leading the way to a new revolution in today’s context. The quest to design and sell software to emerging economies of the world has many a parallel to the silk route in its fundamental economic origins. Entrepreneurs in mature markets are looking outside their core constituencies by catering to virgin markets. In the old times, the silk  market in China, the spices market in India and the horses market in Europe were all saturated but all the regions benefited by customizing their products and selling to new consumers.  Software companies in the developed economies are facing the same challenge today and an incredible opportunity awaits them in the form of a 4 + Bil people market representing the so called “Emerging economies”.

Several significant events over the last few years like the end of the cold war, opening up of east asian economies like India and china, explosion of the internet and mobile phones etc  have shifted the tectonic plates, and the after effects are still being felt in the world of trade and commerce. These changes will have a profound impact on how companies view their target market as it is very evident that the consumers in the lower slab of income are becoming attractive in every facet of business. As we map gaze into the crystal ball, empowerment of the poor and exploiting the economies of scale and volume in these markets will be key expansion strategies for the software industry. Yes, there is tremendous opportunity in the developed world for software but the sheer numbers of the emerging markets are too staggering to ignore. This emergence is not going to be automatic. We have to realize and design products that take into account the differences in culture, infrastructure and business practices. This book is about developing a methodology for doing just that.

What is globalization ? Why do we care about this ? How does this impact the world of software ? These are some of he tough questions that are being asked across the industry today. The software industry is no stranger to globalization and emerging economies. What is different now is that rather than just focusing on emerging economies as sources of great developers and sources of software development, software companies are  looking at designing and developing software applications that are targeted at the 4 Bil+ people that live in the non developed parts of the world. This is an area in which the software industry can learn from other predecessors like the consumer goods, retail and financial services industries that have a head start when it comes to customizing products for local economies. Traditional thinking is that globalization is all about leveraging economies of scale and just a matter of setting up delivery channels for delivering the products or services. From this perspective, the key strategic challenge is simply to determine how much to adapt the business model—how much to standardize from country to country versus how much to localize to respond to local differences. While this works in some industries it is really not that simple in most cases. Even fundamental products as Coke and Kellog’s cereal had tremendous challenges when it ventured into emerging economies. It Kellog’s case it was more of a cultural issue that in many target countries like India, cereal was not an accepted part of the breakfast routine. It had to reinvent its products to make inroads into one of the most promising consumer markets in the world.

Diffusion of Technology
Technology diffusion into the emerging markets will continue over the next several years but the rate will not be uniform and the depth of penetration will be varied across the different geographies.  Various socio economic factors will dictate the order of technology adoption and its rate of penetration. For example, due to poor land line infrastructure, cell phone adoption has exploded while the desktop PC adoption has been lukewarm.


Famous Economist Robert Solow observed in 1994 that Computers are everywhere except in productivity statistics. In an ironic twist to that “tongue-in-cheek” observation, software is ubiquitous except in 70% of the world ! To say that software has really not touched the 4 Bil+ people living in the so called “emerging” economies of the world would not be an exaggeration. As enterprise software companies run out of Fortune 500 companies to sell to and consumer software makers run out of households and teenagers in the developed markets, the emerging markets in the Bottom of the economic pyramid becomes a very attractive but a challenging target. This article examines why software has not really been able to penetrate this segment and ponders on the critical success factors that might influence the software design and the business models for successful forays into these markets.

The Lure of the Emerging Markets
Let’s look at some of the major factors that makes this market very attractive but at the same time extremely difficult to cater to due to the fundamental socio economic challenges:  

1. Size of the target market -70% of the world’s population has a per capita income of $15,000 per annum. Chances are that these people are probably not regular users of any kind of computing device currently. This makes them attractive target markets but they present an extreme challenge because of their social set up and affordability factors.


2. The number of PCs in use worldwide will reach almost 1.3 billion by the end of the decade — up from about 575 million today. With only about 150 million new PCs coming from mature PC markets in Europe, the US, and Asia, the rest will come from emerging markets like China, Russia, and India. With growing computing power comes the need for compelling software to boost productivity and to gain process efficiencies


3. Empowerment of the poor- The Rural markets of the emerging economies are more wired and accessible now than ever before. With this connectivity comes the opportunity to communicate and to access knowledge for day to day tasks. This opens up a consumer market of giant proportions as long as we are smart about tapping it


4. Global Supply Chains ( GSC )- GSCs are a result of off-shoring, out-sourcing and a renewed focus on exploiting the untapped emerging market consumers. Thomas Friedman in his latest book “The World is Flat” writes about how the playing field has been leveled and how supply chain for almost every business has become global. Global supply chains have impacted almost every vertical industry like Healthcare, Legal, Financial Services, Manufacturing etc making it important for software companies to customize and offer its products and services to parts of the globe that were afterthoughts until recently !

Busting the myths around emerging markets
There are plenty of myths surrounding the needs and wants of emerging economies. Some of them have sound reasoning behind them but most don’t. Here are some fundamental flaws in traditional thinking around selling software to the emerging economies

1. Waiting for the Emerging economies to be “ready” for software
One of the frequent quotes that one hears from software makers is that “the emerging markets are not ready for our products”. On the contrary, Globalization has affected almost every other perceivable industry like healthcare, retail, Financial Services etc. Companies in these industries are not only using services from emerging markets as “out sourced labor pools but are also aggressively pursuing these markets as the next big opportunity to sell their products and services. Manufacturing and Supply chain software companies are probably the ones that have had to develop software for the emerging markets keeping in line with the trends On the other hand, software industry that prides on being the leading light of leveraging the offshore development and delivery model has been surprisingly stoic to the fact that these markets present incredible opportunities themselves.

2. Extreme paranoia over software piracy
Sure software piracy is a major problem for software makers in emerging economies but it is not an unavoidable phenomenon especially in the enterprise market. Firms that are fixated over this are most likely the ones to be left out of the emerging wave of opportunity.

3. Assuming that poor markets can be served with “minimal” functionality
Another frequent mistake that software companies make is to offer “trimmed” version of the same software for developing countries and wonder why the adoption rates are rather appalling. A key characteristic of the emerging market whether we consider the enterprise or the consumer market is that they expect no less in terms of features and functionalities. In fact one might even go on to add that these consumers are savvy enough to demand the latest in computing, state of the art cell phones in rural India and China being cases in point.
4. Emerging economies are often laggards when it comes to consuming bleeding edge software
Here is another urban myth – no pun intended. Emerging economies might be laggards in terms of overall adoption rates but we should not mistake this for the market being a laggard in terms of its wants. On the contrary, emerging markets are notorious for their tendency to skip generations of technology, a luxury its developed counterparts don’t have. For example, India pretty much skipped the main frame wave of computing and directly hopped on to the current wave of desktop and PC based computing. Another example is the rapid and remarkably dense penetration of high speed internet lines in South Korea almost skipping the whole dial up generation.

Now that we have a good understanding of the market dynamics, lets turn our attention to factors that software makers have to consider while designing software for the emerging markets

• Focus on what’s working in the emerging markets


• Learn from the cell phone penetration in the emerging markets. India alone added about 2 Mil Cell phones every month. NTT DoCoMo’s famous i-mode mobile service had more than 3.5 million users in Japan in its first year in operation alone in 1999-2000. i-mode’s original target market were the 20 something upper middle class and above gen Xers


• Innovate new payment models


• In the example above, DoCoMo also pioneered a new payment model of a flat fee plus packet based charge for downloads. It also allowed for 3rd party companies to make content and other downloads such as games available through i-mode for a royalty fee. This was a brilliant concept and quickly a thriving ecosystem of content providers, billing consolidators and value added service providers sprung up.


• Focus on the right genre of software applications  


• Social computing: Most of societies in the emerging economies put a premium on social interactions making this a very compelling domain for software makers to focus on. Making blogs, podcasts and multi node networking sites available in devices in different form factors will be one such avenue. SMS is a stranger to most people in the US but is the lifeline of many an emerging economy. Stock quotes, weather, sport updates, instant messages, tele marketing campaigns etc are some of the innovative uses SMS has been put to in these countries. There are even companies that offer SAT and GRE learning services over SMS !


• Entertainment software


• You never know what will entertain people in different parts of the world. Exclusive Ringtone downloads alone were about a $3.5 Bil market growing at more than 40% worldwide last year of which more than 20% of the market was in India alone. Surprising but true is the fact that this market is strongly influenced by the local Indian movie releases as ring tones of the latest film music is a fashionable thing ! Other entertainment software include, peer to peer gaming, interactive TV , mobile games, quizzes and puzzles etc.


• Collaborative software


• Tailoring solutions based on locale


• Many basic elements required for buying and using software that we take for granted in the developed world are not so in the emerging world. For instance, most poor people cannot to buy software and would rather rent or lease it for on a per use basis. Usage patterns of technologies are also quite different in these parts of the world. In most developing countries, internet access is predominantly dial up based and fees are charged based on the number of minutes one is online and that charge includes ISP and telephone fees. This has led to people pre typing all their email in notepad prior to logging on to the internet for the absolute minimum time to just paste and send their emails ! This should be a case for creators of CRM product vendors as sales reps are more likely to be offline for the majority of the day and would probably do a quick sync up every 2-3 days. Software should be tailored to the local economies to facilitate these behaviors instead of expecting the consumers to change their patterns.


• Invest on consumer education


• Another aspect of catering to the emerging markets is to ensure that the target consumers fully understand the benefits of the software product they are offered. ITC, a large Indian Corporation offered direct access to the Chicago Board of Trade for rural farmers in interior India by setting up e-Choupals that are essentially internet kiosks that give the farmers up to date information about the commodity prices worldwide. In a place where pure drinking water and paved roads were luxuries, e-Choupals caught on like wild fires but not before ITC trained the locals on its usage and potential benefits.

In addition to taking into account the specific factors we discussed above, it is also important to consider some fundamental aspects that govern software for the emerging economies.

Rethinking the business model

Traditional Client access based licensing models might not be the best ones in Emerging markets that are known to be notoriously cost conscious. Despite having similar user characteristics, the enterprises in the merging economies often work with tighter budgets and even thinner budgets for IT. Manpower on the other hand might be in abundance making productivity arguments for ROI in IT systems rather ineffective. The value of IT as a critical competitive advantage is something that has not sunk in completely in the mid markets of the emerging economies. IT spending is seen mostly as a necessary evil and hence strategies must be crafted to clearly articulate the value proposition of the software above and beyond just productivity. Penetrating the market with a low upfront but annualized payment model might be a better approach in these markets.
In chapter XXX we will develop a framework based on a model I call “Lateral Design” to help us uncover these challenges.  This framework will help in designing software for emerging economies by taking into account factors like affordability, infrastructural limitations, deployment imperatives etc.


Rethinking the vertical markets
Let’s look at some of the leading vertical markets and explore how the socio economic factors in these industries impact the way software has to be designed to address those macro factors. Most of the business applications intended for the enterprise market evolved from the business practices of the developed countries. For example, the financial services segment largely grew out of the GAAP and SEC regulations in the US and the Sarbanes Oxley regulation is shaping the software features around compliance and auditing. In many emerging markets, there are many instances of fundamental differences in the way business is carried out and the software has to be specifically modified to accommodate those differences. Micro Credit lending is a large scale program run in many emerging economies at grass roots level.  This might be an opportunity to design a software to manage this process around micro credit schemes.
Most emerging markets don’t have state sponsored healthcare hence the regulatory and healthcare related insurance markets for software makers is low but the market for in-patient hospital management software is ripe. Another area of potential growth is in Life Sciences software as there is an increasing amount of grass roots research and drug trials. With the recent enforcement of GATT and WTO regulations that provides IP protection for generic drugs, the pharmaceutical manufacturing industry is bound to take off in the next 2-4 years. Manufacturing software that specifically address this need might be another possible solution in the healthcare segment.
In the retail industry, most emerging markets don’t have large retail chains like WalMart or JC Penny but this is changing very rapidly. For example, in China the 10 largest retail chains combined to sell more than $15 Bil a year in 2004 and is growing at more than 50% a year. This means that there is a lot of potential for Point of Sale as well as backend store management, distribution software, warehousing solutions etc.  

Robert Solow might have been right in 1994 but we are battle tested and too smart to let it happen again. Software companies will eventually figure out how to serve the poor and the underprivileged and make successful business models out of it but the real challenge is in getting there first. Lets the games begin !