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Friday, December 31, 2004

Innovation blowback: Disruptive management practices from Asia -Part II

( Via MckinseyQuarterly). Well known consultants, John Hagel and John Seely Brown, write, Western companies think too narrowly about the emerging world. If they aren’t careful, they may end up as defenders, not attackers. In Part 1 we saw,emerging markets are generating a wave of disruptive product and process innovations that are helping established companies and a new generation of entrepreneurs to achieve new price-performance levels for a range of globally traded goods and service. In this second and concluding part,we shall see some examples and implied approach adn principles that are changing the nature of competition. Excerpts with heavy edits and my comments added:

The new models to follow:
- Chinese Motorcycle makers by embracing new production processes has made rapid gains in motorcycle export markets, especially in Africa and Southeast Asia, and now accounts for 50 percent of all global production of motorcycles. The average export price of Chinese models has dropped from $700 in the late 1990s (already several hundred dollars less than the cost of equivalent Japanese models) to under $200 in 2002. The impact on rivals has been brutal: Honda's share of Vietnam's motorcycle market, for instance, dropped from nearly 90 percent in 1997 to 30 percent in 2002. Japanese companies complain about the "stealing" of their designs, but the Chinese have redefined product architectures, in ways that go well beyond copying, by encouraging significant local innovation at the component and subsystem level.

-Cummins, the producer of diesel engines and power generators, recently did just that in India. By modularizing a product for the distinct needs of different kinds of customers and channel partners, the company cut the total cost of ownership and of sales in the channel. The result: higher demand for Cummins products. The new genset engines have been an unqualified success in India, where Cummins has won 40 percent of the market over the past three years. Genset sales now account for 25 percent of the company's total power generation sales there. Despite the much lower unit prices of the new range, its net profitability is comparable to that of the high end. Exports began in 2002 to other parts of Asia and were later extended to Africa, Latin America, and the Middle East. Innovation in emerging markets won't be limited to manufactured goods.

- The desire to reach vast low-income segments of Asia's population is also pushing service organizations to new levels of achievement. One vivid example comes from the Aravind Eye Care System, at Madurai, in the south Indian state of Tamil Nadu. The Aravind system—dedicated to eradicating "needless blindness by providing appropriate, compassionate, and high-quality eye care for all"—includes a chain of hospitals and a manufacturing center for sutures, synthetic lenses, and eye pharmaceuticals. Aravind hospitals perform 200,000 operations a year—nearly 45 percent of all such operations in Tamil Nadu and 5 percent of those throughout India. High volumes are dictated by the affliction's scale and by the need to make the network's nonprofit hospitals viable and to generate funds for expansion. Over the years, Aravind has carefully honed the flow of work through its outpatient departments and surgical wards—and both have reached impressive levels of efficiency.

The implications for Western companies - These models of innovation spell out a clear message for many companies in the developed world: if you're not participating in the mass-market segment of emerging economies, you're not developing the capabilities you will need to compete back home.

- First recommendation to Western companies is therefore to go offshore, not just to the affluent segments, and not just for wage cost differentials, but to serve the mass market. Only there will you be forced to innovate in the ways required to succeed in the future. The recommendations that follow build on this basic idea.

- A broader view of innovation that values the role of incremental change communicates the power of bootstrapping. Companies that start out with limited capabilities—such as those in many developing economies—can rapidly build them over time through a series of modest process and product innovations. Ultimately, individual innovations may matter less than the institutional capacity to sustain a rapid series of improvements and the pace at which they are developed and disseminated through the network. The principles and examples are very illuminative, but Asia( nay india) may need to do more to change the rules of game decisively across all shades of the spectrum. A recent article in the Economist magazine, says,In recent years, the Chinese industry—always seen as predator, never as a victim,has gone through wrenching changes that America’s textile lobby could scarcely contemplate. Its textiles sector has shed almost 2million workers since 1995 and employment in the clothing industry has levelled off as productivity has soared. China will have to wait for its fair share of the global market. It has already received more than its quota of rich-world protectionism.

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