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Friday, December 31, 2004

Innovation blowback: Disruptive management practices from Asia -Part I

( 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. Excerpts with heavy edits and my comments added:

In the days of the rudimentary pistol, unlucky shooters were now and then hurt when unburned gunpowder escaped backward toward their faces. They came to describe this unpleasant experience as "blowback," a term that has subsequently gained wider application in military affairs—to any event that turns on its maker. Blowback is an apt term for the unexpected consequences of the investments that Western companies have made in emerging markets. Here, the thinking goes, companies can expect to harvest the fruits of the R&D and innovation skills painstakingly developed in their home countries. That view is dangerously complacent. The very presence of Western intruders and the competition they create have inspired the emerging world's companies to raise their game in response. Far from being easy targets for exploitation, 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 services. Eventually, such companies may capture significant market share in Europe and the United States. Farsighted vanguard Western companies are not only acquiring key capabilities by serving low-income customers in emerging markets but also preparing to use that experience to attack the growing value segments of developed markets.
Two powerful factors are converging to transform them into catalysts of this kind. One is the low incomes of consumers in China and India—a total of 457 million households in 2002, with an average annual income of less than $6,000 a year. The other is the spending behavior of this immense group of consumers, who, by Western standards, are unusually youthful, demanding, open-minded, and adventurous. These demographics and consumer traits set a stern precedent. To penetrate this vast market, companies must charge prices that the majority of its consumers can afford. Mobile technology demonstrates both the opportunity and the challenge. China and India, thanks to their army of early adopters, have become two of the world's largest markets for mobile phones. But these markets differ from Western ones in important ways. Experts say, the cost of equipment for mobile-telephone networks must fall by a factor of five for it to succeed in the Indian market. Pricing for mobile-network operators must also be restructured, with smaller up-front license fees and more emphasis on performance-based payments. Established technology vendors such as Nokia or Sony Ericsson must decide whether products designed for more developed countries will succeed if merely adapted for Asia's emerging markets or a radical new approach to product and process design is required. A growing number of such companies now acknowledge that going back to the drawing board is the only choice in Asia.
Part II shall follow shortly.

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