Viewpoint: January 19, 2005
All right, I have been really slacking off. The last time you heard from me on this web site was last April. I’m sorry I have kept you waiting this long.
My only excuse is that I have been scrambling to finish a new book, The Only Sustainable Edge: Why Business Strategy Depends on Productive Friction and Dynamic Specialization. I co-authored this one with my good friend and collaborator, John Seely Brown. The book is now completed and will be published by Harvard Business School Press this May.
The book makes the case that offshoring and outsourcing are representative of broader trends in the global economy forcing decision-makers to re-think business strategy and public policy at a fundamental level. In terms of business strategy, we maintain that companies will need to develop new sources of strategic advantage, harness new operating and organizational mechanisms to build this strategic advantage and even adopt different approaches to defining and implementing business strategies.
The book is already attracting attention and interest. Harvard Business Review will excerpt a portion of our book dealing with the concept of “productive friction” in their February 2005 issue. The McKinsey Quarterly will have another excerpt of the book focusing on the notion of “innovation blowback” in their Q1 issue due out later this month. They have actually beat HBR to the punch, however, by putting the article, “Innovation Blowback: Disruptive Management Practices from Asia” up on their web site ahead of its publication in their print magazine.
The concept of innovation blowback warns that executives may misunderstand the role of large emerging markets like China and India and that this misunderstanding may come back to bite them in unexpected ways down the road. Most executives acknowledge that these emerging markets are strategically very important as growth markets to compensate for the low growth of more developed markets. But this is a “good news” story that can lead to complacency by these executives. All they need to do is take their existing products, invest in some modest localization, sign up new distribution channels and sit back and reap the rewards.
There’s another way to view large emerging markets like China and India – one that is less reassuring to large, established players. Emerging markets like these are characterized by large (relative to developed economies) and rapidly growing middle classes with a strong tilt towards younger generations of consumers. These emerging middle classes are very demanding in terms of the price/performance that they require from their products and services, they are not very brand loyal and they are often eager early adopters, anxious to try the latest product or service (witness the growing role of China as a leading edge market for cell phones).
In other words, these large emerging markets are becoming cauldrons for innovation, both in terms of product design and the business processes required to deliver these products to market.
We’re not talking about modest localization; we’re talking about re-conceiving products and services from the bottom up. And we’re not just talking about consumer products and services – these innovations are rippling back through intermediate stages of product and service delivery as all participants in the value chain wrestle with the challenges of meeting demanding price/performance targets. C. K. Prahalad in his new book, The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits, writes eloquently about examples of impressive product and process innovations designed to better serve consumers in these emerging markets. But C.K. focuses primarily on the role of product and process innovations in accelerating the economic development of these countries while at the same time delivering profits to the innovators.
We take these developments one step further in our “Innovation Blowback” article. What if the product and process innovations being spawned in these emerging markets do not remain there? What if these innovations provide the basis for attacker strategies by companies seeking to penetrate and establish leadership positions in more developed economies? Now we get to the essence of the blowback phenomenon. Companies from developed markets that go to emerging markets in the quest for growth may in fact find themselves under attack in their home markets by companies who are more aggressive in realizing the potential for innovation in emerging markets. Unless executives explicitly view emerging markets as platforms for product and process innovations and ultimately as platforms for attacker strategies back in more developed economies, they are likely to be blindsided by companies that are more alert to the opportunities created by these emerging markets.
Now, this in itself is an important insight. But the real value comes at the next level: understanding the patterns of innovation that are surfacing in markets like China and India. Our article explores three broad patterns of innovation that are already visible in these emerging markets. We explore the implications for companies that want to harness these innovations to strengthen their own positions. Of course, you’ll have to read the article (and then the book) to get the full story regarding the innovations that will drive the next wave of value creation on a global scale.
For now, let me just give you a hint: product and process innovations should not be viewed as separate phenomena – the real opportunity will be to combine product and process innovations in ways that play off and reinforce each other.
OK, I can’t resist another hint: don’t get overly consumed by breakthrough innovations depending on new generations of technology – a lot of the opportunity comes from rapid iterations of enhancements to products and processes that individually may not make a big difference but cumulatively enable breakthroughs in price/performance levels. In this context, it is dangerous to think of innovation as a one time event. It is much more productive to view innovation as a process playing out over time. This is the key to the bootstrapping that is occurring in a broad array of product and service categories, ranging from digital still cameras to motorcycles to health care services.
So, what should you do about all this?
The first step is to figure out how vulnerable you might be to innovation blowback. Not all product and service businesses are equally vulnerable and it makes sense to begin to get a sense of vulnerability today and what early indicators to watch in order to monitor vulnerability over time. These emerging markets are highly dynamic environments. A scan done today may produce very different results if the scan is re-done six months from now. I am developing a diagnostic and monitoring tool that will help executives to assess changing vulnerability over time. If your senior management team does not have a clear and shared understanding of the nature and extent of vulnerability, you risk being blindsided by aggressive competitors.
This vulnerability assessment will shape the nature and timing of the actions your company will need to take. From my experience working with clients, I will tell you that most companies are tackling these issues much too narrowly. The challenges and opportunities created by emerging markets are not just marketing and sales issues; they touch every aspect of a company’s operations. Unless a cross-functional approach is adopted, the company will under-perform relative to more aggressive competitors. On a similar note, companies also generally fail to access and mobilize appropriate business partners to creatively identify and commercialize the kinds of innovations required to succeed in these markets. Very few companies, if any, will be able to meet these challenges and opportunities on their own. They will need to reach out to more specialized players (whether it is component suppliers to channel partners) that can challenge them to question basic assumptions about product and process design.
Now, I have framed this discussion in terms of threats to the business because my sense is that most executive are too complacent about the role of emerging markets in their business strategy. Of course, the flip side is that there is enormous opportunity for alert executives who clearly understand the potential role of emerging markets as catalysts for business innovation and who move aggressively to exploit these opportunities. These emerging markets in fact can become powerful platforms for attacker strategies on a global scale. Nevertheless, as I often remind my clients, today’s opportunity quickly becomes tomorrow’s threat. JSB and I wrote our new book to help executives to exploit the opportunities while protecting themselves against the threat.
In wrapping up, I apologize again for the lengthy wait since my last posting. I assure you I am back again and will post more regularly now that the book is behind me – there certainly is no shortage of topics that we should be discussing.
In fact, JSB and I are beginning to map out our next book even before our current one is out. We see patterns emerging that are connecting a wide range of phenomena in ways that have profound implications for business executives (and policy-makers). The working title for our new project is “Catalyzing Creativity: Bootstrapping and Mobilizing Global Knowledge.” We’re planning to do this one very differently from the way we have done our previous books in the spirit of practicing what we preach.
But more on that later . . .