The End of Corporate Imperialism, by C.K. Prahalad and Kenneth Lieberthal, encapsulates the obvious elegantly and factually, and its thesis is far more true today than in 1998, when it was written: “Too often, companies try to impose Western models of commerce on developing countries. They’d do better—and learn more—if they tailored their operations to the unique conditions of emerging markets.” Western MNCs (multinational corporations) perceive the primitive state of consumption in emerging markets, and they too often develop a strategy in which they: 1) focus on the extreme minority of wealthy consumers and/or 2) address the order of magnitude larger middle tier of the market by offering their past-mature products with minor cosmetic changes.
This is another symptom of MNCs’ being stuck between industrial and knowledge economies. As I stated in my Transourcing Point of View, “Enterprises are ambivalent about innovation and product creation because they represent an inherent conflict: the drive to amortize past investments (including process-oriented constraints of marketing, distribution, service, etc.) conflicts with companies’ need to satisfy customers’ wishes for novelty. In practice, this too often leads to vapid product extensions.” The industrial-era enterprise derived its competitiveness largely through production and distribution efficiency, and it marketed to customers in a (relative to today) era of scarcity in which they were grateful for what they could get. Mastering efficiency in transforming heavy, constraint-laden raw materials into products imprinted on executives the impulse to develop products to satisfy their needs to extend past investments while satisfying customer wants as well. This impulse is dangerously out of synch in the knowledge economy, where leaders are differentiated through innovation and marketing excellence. MNCs must focus on innovation that puts customer wants first while retaining their competences in efficiency.
Value-added goods of all types are loaded with assumptions that simply do not hold true in emerging markets. Two common examples are mobile phones and laptops. Cellular infrastructure and usage patterns are different in China and India, so companies cannot address these markets my making current models more cheaply; they must design for the environment. In India, for example, most customers are accustomed to inconsistent infrastructure, and people take it in stride if they have to place three calls to complete a mobile phone conversation. This would be intolerable for a U.S. customer, and this has been built into phones and infrastructure, adding to the cost of the phone and putting it out of reach of many potential customers in India.
If you had asked any computer manufacturer five years ago whether it was possible to make a $100 laptop, s/he would have smiled kindly at your ignorance. Even today’s most advanced designs and supply chains can produce a price four to five times that amount. Yet 2006/2007 will probably see it done (see The $100 Laptop Moves Closer to Reality, The Wall Street Journal, 14 November 2005). To make it happen, however, designers had to go back to the drawing board and discard past assumptions. They had to design for the customer first.
This is the big lesson for emerging markets, which have “usage scenarios” vastly different from those of western countries. Admittedly, there is risk involved in investing in R&D for a market that differs significantly from traditional markets. There are two responses: 1) companies have lived in an era of long product life cycles, and innovation was a core competence for few. Therefore, few are good at it; they are inefficient and success rates are low. Approaching emerging markets through innovation will enable leaders to get better at innovation in general, which will benefit them many times over.
Secondly, the rapidly developing human capital market is waiting to be tapped. By partnering with design and engineering talent within the markets, MNCs will develop a competence that will serve them well: to design products specifically for these markets at a lower cost than they would pay at home. They can take the design lessons they learn and apply them to developed markets as well.
Innovation and tapping the global human capital market are ends in themselves. They are the core competencies of the knowledge economy. Put another way, those that don’t develop these competencies will become less relevant and fade into obscurity.