May, 2012, Volume 10, Number 2
Phantom Markets: A Lesson from Kellogg's Mistaken Venture
By Robyn Bolton
Originally published at HBR.com
Here's a quick quiz for you. Is it easier to get
A: 1% of a huge, established market?
B: 100% of a completely new one?
If you work for Apple, you might have picked B. But too often when companies embark on innovation projects, they pick A: that is, they start by believing that nothing could be easier than to capture a small chunk of a very big, existing market.
But to unleash the power of innovation to capture big markets, what matters is not how big any existing market is but how many people are wrestling with some problem that no current offering really solves, what we here at Innosight call the "important and unsatisfied jobs" of consumers — and non-consumers. When sizing an innovation opportunity, what you should be looking for are jobs what are widely held and currently poorly served, not lots of people who haven't bought your own products yet.
To see what I mean, consider what happened to Kellogg when it first attempted to enter the Indian market in the early 1990s. The logic behind its decision appeared to be unassailable. With $3.8 billion in revenue and a whopping 40% share of the U.S. ready-to-eat cereal market, Kellogg was the market leader in its home base. And with sales in nearly 150 countries, it already had a formidable international presence. India was home to 950 million possible new consumers. If Indian consumers would eat as much cereal, on average, as Americans, then just 2% of the population would generate more revenue than the entire U.S. market. Surely, Kellogg could capture 2% of this vast group with a little bit of innovation.
Buoyed by this optimism, Kellogg invested $65 million in establishing an operational and marketing presence to launch Corn Flakes, Wheat Flakes, and its "innovation" — Basmati Rice Flakes — throughout the country. "Our only rivals," declared the managing director of Kellogg India, "are traditional Indian foods like idlis and vadas."
Unfortunately, these rivals turned out to be formidable. The company's significant investment failed to gain Kellogg much of a foothold in the Indian breakfast market and, 12 months later, by April 1995, it could claim to have less than 0.01% of those 950 million potential consumers. Over the years, Kellogg continued to invest in the market — repositioning products, launching new brands of ready-to-eat cereal, and marketing heavily. But by 2010, Kellogg had managed to capture considerably less than 1% of the population, generating revenues of only $70 million.
How is it possible that Kellogg could envision building a $3 billion business in India, invest $65 million in the first year alone, and end up, 16 years later, with only $70 million in annual revenues? And how can other business leaders avoid making similar mistakes?
Kellogg's mistake (admittedly easier to see in hindsight) was that it had taken a far too simplistic approach to identifying its "huge" market, merely looking for people who might want its products. What it (and similar companies) needed to do was to take a more sophisticated approach to identifying viable markets, a process that comprises three broad steps: gaining the right insights, counting the right people, and envisioning the right innovations to serve those people.
Gain the Right Insights
Where did Kellogg executives come up with that original 950 million figure? They assumed that everyone in India (950 million people) eats breakfast and that everyone who eats breakfast would potentially want to eat corn flakes. But was that so? To find out, they needed to ask a completely different set of questions:
1. What jobs were people trying to accomplish when they either bought the current offerings in the breakfast food market or made breakfast from scratch at home?
2. How (and how well) did those products actually accomplish those jobs?
3. What offering could Kellogg profitably devise that could fulfill those jobs better?
If Kellogg executives had asked those questions about the Indian breakfast market, they would have identified one absolutely critical difference between its cereals and its "only rivals." What Kellogg didn't know, as Homi Bhabha, director of Harvard's Faculty of Arts and Sciences' Humanities Center stated at the time, "was that Indians, rather like the Chinese, think that to start the day with something cold, like cold milk on your cereal, is a shock to the system. You start it with warm milk." In other words, Kellogg failed to provide a product that satisfied one of Indians' most fundamental and important breakfast jobs — "enjoy a warm breakfast that does not shock my system." Idlis, steaming hot lentil cakes, and vadas, hot potato chutney pancakes — did that job far, far better than corn flakes.
Count the Right People
Had Kellogg executives understood this important insight, they would have seen that the market for its ready-to-eat cereals was nowhere near the 950 million they had been salivating over. And had they completed the analysis correctly, they would have seen that the market was even smaller still.
There are, of course, two sides to every marketing equation: Are you selling what people want? And can you sell what they want at a price they can afford? Here Kellogg stumbled, too, as many multinationals do when first entering developed markets: The price it needed to charge to be profitable with its existing products was about 33% higher than its nearest competitor in India. And unlike in the U.S., where, as the market leader, Kellogg could regularly increase prices and be confident that competitors would follow quickly, Indian cereal manufacturers could not be assumed to behave in the same way. And they did not, more rationally maintaining their low prices. Thus a $3 billion market of nearly a billion possible consumers was really, even after 16 years of investment, only a $100 million market comprising a small fraction of the 250 million breakfast eaters in the middle class. It's unlikely that this smaller market would have dissuaded Kellogg from entering India, but a market of that size would necessarily entail a different market-entry strategy, pricing, resource allocation, and marketing budget.
And that's where the innovation process should have kicked in.
Envision the Right Innovation
To find a big market it could innovate its way into, Kellogg needed to find a job that many Indian breakfast eaters needed done that wasn't yet being fulfilled very well. One could imagine that, for instance, with the insights that Indians' breakfast jobs are best satisfied by a variety of warm, spicy foods that leave you feeling full and healthy, Kellogg might have focused its innovation efforts not on coming up with more ready-to-eat cereals, or different sized packages for its existing products, but on the implications of India's modernizing economy — on the fact that the time once allocated to preparing meals from scratch was now being spent on pursuing the expanding educational and economic opportunities created by a newly-opened market. With such an insight, Kellogg might have more fruitfully focused its innovation efforts on, say, easier-to-prepare versions of traditional favorites that could be delivered at the temperature, in the variety, and with the tastes familiar to Indians, but in a far more convenient way. Thus, by combining qualitative insights with quantitative information, the company would have had a far better shot at using its innovation capacities to create a truly innovative business that could generate significantly better results.