Can Small Town Western Entrepreneurs Compete With Hungry Emerging Markets?

Post by Ashish Rajadhyaksha

Answer is “Yes We Can!” But with a big caveat. As the Indian Conglomerate Tata Group’s Chairman Mr. Ratan Tata recently described in an interview in London how “nobody is willing to go the extra mile” at Jaguar Land Rover or Corus, two British firms which he bought in 2008 and 2006, many managers and workers in the western world have developed a sense of complacency and also hopelessness caused by rounds of lay-offs and financial uncertainties.

As we all know back in the 1980’s, US automobile and other industries got whipped by the new Japanese system of making things efficiently through a process called “lean manufacturing” and using buzzwords like “Kaizen” or continuous improvement and techniques such as “Just In Time” inventory management system.  Since then western companies adapted the Japanese techniques and achieved Six Sigma efficiencies and ISO certifications, and achieved global dominance in sectors such as Aerospace (Boeing), Construction & Engineering (General Electric, Caterpillar), and of course Technology (Apple, Google, Intel, Microsoft, etc.).

Now in the new millennium, those surviving western companies and also the Japanese in turn face challenges from Brazilian, Chinese, Indian companies that are hungrier and now becoming engines of business innovation.  With new products and services that are dramatically cheaper than the western equivalents: $3,000 cars, $300 desktops, $35 i-pad equivalents, and $30 mobile phones that provide nationwide service for just 2 cents a minute, they are reinventing systems of production and distribution and creating new business models from supply-chain management to recruitment and retention.

In all the hype, we’ve to remember that many of these companies are government-subsidized or part of industrial conglomerates such as Tata Group of India, Samsung Group of South Korea, Orascom Conglomerate of Egypt, or Salim Group of Indonesia.  These groups have long operational histories and their share of failures and restructurings over the years, and so we shouldn’t get too afraid of their recent successes.  We need to first study their motivations and compulsions behind innovation, and then devise moves to counter that threat.  Always Remember the motto “Glocal:  Think Global, Act Local”!

Primary motivations behind this innovation surge in Emerging Markets:

Need-based:  Cost arbitrage lasts only for so long, so they need to move up the value chain to more value-added services and retain employees.  For e.g. Indian companies started as simple call centers, and then moved up to BPO, KPO, and now evolving into consulting services.

Historical Nostalgia:  For much of history, China, India, Egypt, Greece, Iraq and Iran controlled majority of the world’s GDP.  Whether its nuclear energy, trade, human rights issues, or social service benefits, citizens of these countries don’t respond well to threats of sanctions and criticism, and always carry a perpetual baggage of living up to its glorious past.  This sense of history drives them to try to achieve bigger things.

Fear: Compared to western world, leaders in emerging markets are always fearful of losing power or getting head cut off that may result in creating solutions to survive or get ahead such as alternative energy solutions due to frequent electricity cuts, horrible pollution, or making the world’s cheapest car, (Tata Nano) w/ the motive being creation of many jobs and safer alternative to a bike.

Demanding domestic market:  One of the key factors in Professor Michael Porter’s Diamond Model of the Competitive Advantage of Nations is Demand Conditions.  The more demanding the customers in an economy, the greater the pressure on companies to innovate and improve competitiveness. (Source:  Institute for Strategy and Competitiveness, Harvard Business School).

Globalization:  As the world gets inter-connected via frequent travel and online communication, people are exposed to better quality products, and they demand the same from their local corporations.  They’ll even smuggle these in if they have to, such as people taking iPad overseas and selling them for 2X or 3X the US prices.

Cocktail of challenges and opportunities translates into innovation:  Many consumers in these countries are poor, the infrastructure highly inadequate, and product piracy ubiquitous.  So selling in high volumes and constant innovation becomes more important than long-term value proposition and product differentiation strategy.  Bharti Telecom in India, Grameen Bank in Bangladesh, Grupo Elektra in Mexico, Haier in China, and East African Breweries in Kenya have all developed unique and innovative products or services to reach as many customers as quickly as possible.  (Source:  The Economist Special Report, “The World Turned Upside Down”, April 17th, 2010, pages 2-3).

How do western entrepreneurs compete with these game changing innovations?

Glocal:  Most of the world’s biggest multinationals are doing their R&D in emerging markets.  Instead of the top down research mentality of the past, research is more field-based by embracing “polycentric innovation” models, so the best practices are applied in all markets.  Companies such as GE, Cisco, Accenture, etc. have large workforce in emerging markets, serving both local markets as well as developing product and service intelligence for the home market.

Create Inverted Funnels:  Conventional wisdom suggests that benefits from products and services geared for the rich would slowly trickle down to the poor at the bottom of the pyramid as wealth slowly spreads around.   Now strategists are realizing that it isn’t enough to concentrate only on the rich.  They need to cater to the billions of people at the bottom of the pyramid too, and have started “reverse innovation”.  The innovation benefits could then funnel up by creating more efficiency, sparing use of raw materials, gentle on the environment, and simplicity of products and design.  For e.g. to stay relevant, Nokia needs to make a product equivalent to an iPad, but also a phone for $50 or below with long battery life that can be used as a flashlight during long periods of power outages.

Do incremental innovation:  Most western people think of innovation as technological break-throughs, innovations that take time and money.  But many of the innovations consist of incremental improvements to products and processes, thereby improving people’s lives and saving them money as well.  Examples of incremental innovations are: vacuum garment bags that save space and money, especially now when airlines are charging hefty fees for check-in luggage ; also rather than carry heavy water on their head or shoulders, women and children can now fill the drum by up to 50 liters of water and roll it along in the Q-Drum.

Be Hungry:  In this hyper-competitive world, those who are hungry for success and prepared to pounce on opportunities will get ahead. Indian, Chinese and Brazilian corporates are taking advantage of the weak market conditions, and are buying companies all around the world, and we need to do the same to get access to other markets.    

Be Frugal and Appreciative of Immigrants:  Western world is in a debt spiral and is staring at dramatically lower standard of living, unless we replicate frugal production and distribution strategy, not demonize hard-working immigrants to benefit from the new focus on austerity.

Take-Away:  Entrepreneurship & Innovation is continuous, complex and global.  Instead of ceding leadership, our local Chamber of Commerce members have to benchmark after some of the developing nations, understand their motivations for innovation, and see how we can adapt these techniques to become more efficient ourselves and out-run and out-innovate competition.