John Paul

Innovation Blowback

In his 1997 book, The Innovator’s Dilemma, Harvard Business School professor Clayton M. Christensen showed that an upstart with an innovation that disrupts existing business models can beat out the big guys nearly every time. What’s more, he said, venerable companies seal their doom by doing just what they’re supposed to do: pleasing their most valuable customers.

Nearly a decade later, this threat for established companies is larger than ever, but is coming from a direction most aren?t even looking towards: the base of the pyramid. That’s the focus of a new McKinsey report, Innovation blowback: Disruptive management practices from Asia, which posits that Western companies think too narrowly about the emerging world, and that they do so at their own peril.

Blowback, as defined in the report, describes the unexpected consequences of the investments that Western companies have made in emerging markets. For instance, the presence of foreign businesses and the competition they bring often forces local businesses to take their game up a level. In doing so, they become more competitive on a global scale, threatening the foreign companies’ home markets.

More to the point, the report states that companies can gain key capabilities by serving low-income customers. In a market characterized by a lack of infrastructure, low education, and little disposable income, businesses must innovate to survive. These cost and management innovations become strong competitive advantages for a company, regardless of what market they are serving.

The take-away: multinationals that ignore the base of the pyramid are in trouble. Emerging markets can either be a threat or an opportunity to a global company, but one way or another, their business will be affected by them. If a company chooses not to focus on low-income markets, their competitors may, and subsequently gain competitive advantages in top-tier markets. Even if all multinationals ignored emerging markets (which they aren?t), local businesses will address the needs of the BOP, and in turn, will use those competitive advantages to compete in the global marketplace. One way or another, companies will begin to focus on the two-thirds of the world’s population that has predominantly been ignored by mainstream markets, and the innovations that result from this engagement will impact markets everywhere.

To turn this looming threat into an opportunity, McKinsey asserts that ?most of the developed world’s companies must urgently reposition themselves to deal with this offshore challenge. The solution isn?t just to bring their products and business practices to the developing world, where they will invariably fail to penetrate beyond small segments of relatively affluent consumers and miss out on the vast purchasing power of less affluent ones. Nor can Western companies simply strip costs from existing products. They must instead redesign their products and processes from a ?clean-sheet? perspective–one that amplifies their own distinctive capabilities and those of other companies–by participating and orchestrating networks of highly specialized businesses. In fact, 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 paper continues to explore these concepts, primarily by looking to India and China for examples of innovations that are already happening, some of which we list in our Activity Database. By the end of the report, the message to companies is clear: ?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.?