Ethan Arpi

’Globalization Comes Full Circle’ – Business Week

newIn this week’s cover story, Emerging Giants, Business Week explores the phenomenon of ?innovation blowback.? For those of you not familiar with the term?like me only 15 minutes ago?innovation blowback refers to businesses from the developing world that expand into overseas markets and go head-to-head with established multi-national corporations. From what I can tell, the term was coined this year by John Seeley Brown and John Hagel in The McKinsey Quarterly. (To see Nextbillion’s review of their article, Innovation Blowback: Disruptive management practices from Asia, click here.)

So how is it possible that companies from the developing world out compete multi-nationals that have long dominated the market? The answer, it seems, is that companies that succeed in places where it is trickier to do business are more adaptable and, consequently, more likely to thrive in the hyper competitive global marketplace. ?Hardscrabble origins,? Business Week writes, ?can be a vital source of strength. These companies have learned to make money by developing reliable, easy-to-use goods and services at very low prices.?In countries like Brazil, China, Egypt, India, and Mexico, where millions of citizens live on $2 a day, eking out a profit is not an easy proposition. In the cellular phone business, for example, providers have to charge just pennies for their services. And yet even in such a harsh business climate, the cellular industry is booming. As Business Week reports, ?Egyptian cellular operator Orascom boasts margins of 49%; Mahindra’s [India] pretax profit rose 81% last year.? The world’s largest cellular provider is no longer in the developed world; it’s Mexico’s America Mov?l, which enjoys more than 100 million subscribers.

In its quarterly report, which first used the expression ?innovation blowback,? McKinsey warns corporations in the developed world that complacency can quickly translate into obscurity. In fact, the consulting firm goes so far as to argue that western businesses will only survive by going on the offensive and taking their products to the developing world. ?They can acquire the capabilities they will soon need at home only if they face the intense competitive pressures of serving the mass market in emerging economies,? the authors note.

This is good advice for businesses looking to hold onto the reigns of power?after all, McKinsey is a consulting firm. But I?m also inclined to think that if businesses follow McKinsey’s advice, we might actually see substantial benefits flow to the BOP. Here’s why: As corporations begin focusing their attention on the mass markets in emerging economies, low-income consumers, who have long been ignored by the business community, will finally have a chance to buy products tailored specifically to their needs. Increased competition in emerging economies will also drive down prices and improve the quality of goods and services.

I suspect that once businesses discover the potential in emerging economies, they will lose interest in the high end niche markets of developed economies. Samsung, the Korean electronics manufacturer, has suffered a considerable set back because it turned its back on low-income consumers in the developing world. As Business Week reports, ?Samsung is missing-in-action in critical emerging markets such as India for the fast growing market in low-end handsets. Since the late ’90s, Samsung has tried to establish itself as a high-end player and ultra-cool brand by focusing on stylish, feature-packed products. The plan worked, but the company seems to have missed the big market shift to less expensive phones in recent years.?

It seems increasingly obvious to corporations that there is a fortune to be made at the bottom of the pyramid. But as Business Week suggests, many of these corporations are not from the developed world.