Innovation Blowback
McKinsey Quarterly reports on where global companies should be focusing their offshoring efforts in order to compete in the future. The article can be summarized as follows:
In other words, western companies in developed markets have traditionally viewed emerging markets in "imperialistic" terms, exploiting their cheap labour for price gains. However, they have also been instructive and inspiring to the emerging world's companies. These companies are rapidly responding with "disruptive product and process innovations" that threatens to eventually gain significant market share in developed markets. How so? The emerging world's businesses have been a hotbed of innovation in manufacturing. They have developed and mastered manufacturing driven by "localized modularization", where a product is developed in modules, with the production of modules farmed out to loosely controlled suppliers that have achieved great levels of efficiency, quality, process and cost advantage due to their specialization. In turn, the emerging world's businesses that benefit from these local business ecosystems have optimized price, service and processes, to service a local market that is price conscious and bear allegiances to no brands. Western businesses should be wary, as the emerging world's business will eventually move to service the developed markets as well.
What should western businesses in the developed markets do? McKinsey suggests that they should not just offshore production, but they should offshore their business -- they should enter emerging markets to serve consumers there. Cutting their teeth in the trenches of the emerging world be very instructive for western businesses and prepare them for a new wave of competition coming from the emerging world's businesses. The argument is very compelling. There is already evidence that western businesses need to adapt. It was only a few years ago that the likes of Samsung and LG were developing products for western brands. Today Samsung and LG own entire markets. There are numerous other examples, and numerous emerging world businesses that want to be next Samsung or LG. For those giants sleeping in the west that haven't woken up, it may already be too late.
For related reading, check out the following links:
| Inevitable | Traditional Offshoring | Innovative Offshoring |
| Emerging market business | Big business from developed markets | Big business from developed markets |
 | | |
| Competes locally | Innovate | Enters to emerging markets to serve |
| | |
| Learns to innovate | Leverages emerging markets for cheap labour | Learns and innovates |
| | |
| Eventually enters developed markets | Serves developed markets, including value segments | Leverages emerging market businesses to innovate |
| | |
| First competes in value segments |  | Competes in emerging markets and in value segments of developed markets |
| Transformation needed | |
| Competes with business already in developed markets |
In other words, western companies in developed markets have traditionally viewed emerging markets in "imperialistic" terms, exploiting their cheap labour for price gains. However, they have also been instructive and inspiring to the emerging world's companies. These companies are rapidly responding with "disruptive product and process innovations" that threatens to eventually gain significant market share in developed markets. How so? The emerging world's businesses have been a hotbed of innovation in manufacturing. They have developed and mastered manufacturing driven by "localized modularization", where a product is developed in modules, with the production of modules farmed out to loosely controlled suppliers that have achieved great levels of efficiency, quality, process and cost advantage due to their specialization. In turn, the emerging world's businesses that benefit from these local business ecosystems have optimized price, service and processes, to service a local market that is price conscious and bear allegiances to no brands. Western businesses should be wary, as the emerging world's business will eventually move to service the developed markets as well.
What should western businesses in the developed markets do? McKinsey suggests that they should not just offshore production, but they should offshore their business -- they should enter emerging markets to serve consumers there. Cutting their teeth in the trenches of the emerging world be very instructive for western businesses and prepare them for a new wave of competition coming from the emerging world's businesses. The argument is very compelling. There is already evidence that western businesses need to adapt. It was only a few years ago that the likes of Samsung and LG were developing products for western brands. Today Samsung and LG own entire markets. There are numerous other examples, and numerous emerging world businesses that want to be next Samsung or LG. For those giants sleeping in the west that haven't woken up, it may already be too late.
For related reading, check out the following links:
The Architectural Attributes of Components and The Transaction Patterns of Detailed Design Drawings -- A Case Study on China's Motorcycle Industry [PDF] Innovation blowback: Disruptive management practices from Asia -- the McKinsey report is also reprinted at CFO.com
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