Emerging Market Disruptive Innovations
Companies located in developing countries are currently serving billions of local consumers with innovative and inexpensive products. What happens when more of those companies make the leap into more developed markets?
Disruptive innovation has been credited as the strategy that led to Japan’s dramatic economic development after World War II. Japanese companies such as Nippon Steel, Toyota, Sony and Canon started out by offering inexpensive products that were initially inferior in quality to those of their Western competitors. This allowed the Japanese manufacturers to capture the low-end segment of the market. Over time they continuously improved the performance of their products and began to move upmarket, into segments that allowed them more profitability. Eventually, the Japanese companies captured most of these segments and in the process pushed their Western competitors to the very top of the market or completely out of it.
The disruption process that catapulted Japanese companies to industry prominence 40 years ago is about to play out again with companies from markets like China and India at the forefront.
A number of scholars have argued that a similar disruption process is brewing in today’s emerging markets, especially in China and India. Numerous and less-well-known companies and entrepreneurs located in emerging markets are currently serving billions of local consumers with low-cost products without significant competition from global corporations that find these markets unprofitable. But once the local entrepreneurs establish themselves in their home markets, they should also make the leap into more developed countries. There, they will probably start with the low-end segments and gradually make their way upmarket. The fear among companies in more developed economies, therefore, is that history is about to repeat itself: The disruption process that catapulted Japanese companies to industry prominence 40 years ago is about to play out again with companies from markets like China and India at the forefront.
But how inevitable is this threat? Just because a product is very inexpensive or targets non-consumers of existing technologies does not mean it is disruptive. To be disruptive, a product has to meet two conditions: First, it must start out as inferior in terms of the performance that existing customers expect, but superior in price. As a result, existing customers will initially ignore it, but other customers (usually non-consumers of the incumbent products) will be attracted by its low price. Then, for a product to truly become disruptive, it must over time evolve to become “good enough” in performance (and so attract mainstream customers from the earlier generation of incumbent products) while at the same time remaining superior in price. In other words, it must become “good enough” in performance and superior in price.
For disruptors to have a chance of winning against incumbents, they must invest in improving the performance of their products while maintaining their significant cost and price advantages over the incumbents’ products. Whether they will succeed in maintaining this advantage depends on the source of their cost advantage and how sustainable it is. If the source of the cost advantage is low labor costs or a reengineered product that requires fewer or cheaper components, incumbents can find a way of neutralizing these advantages. For example, if the source of the cost advantage is low labor costs, incumbents from higher-wage countries could transfer their manufacturing processes to India or China and so enjoy the same low labor costs.
A cost advantage is difficult to sustain over time, especially if incumbents cut their costs in an aggressive and committed way. However, there is one source of cost advantage that is more sustainable than others. This is the business model of the disruptors. Specifically, a cost advantage that comes on the back of a business model that is not only different from but also conflicts with the business model of the established companies is more sustainable than other cost advantages. This explains the success of low-cost airlines over traditional airlines as well as the enormous inroads that mini-mills have achieved against integrated steel mills.
Business models are difficult to imitate. What makes the task even more difficult for incumbents is the fact that the disruptors’ business models often conflict with the incumbents’ business model.
When there are inherent conflicts between their traditional business model and the disruptor’s business model, incumbents will think twice before attempting to imitate the disrupting business model. And even when they do adopt it — in a separate subsidiary, as often advised by academics – - they are likely to fail. It is possible for incumbents to respond successfully to disruptors that base their attacks on a different business model. But the task is very difficult, and most incumbents do not do a good job at it. This suggests that a cost advantage that’s based on a different and conflicting business model is the disruptor’s best chance to make inroads against incumbents.
By Constantinos C. Markides
About the author
Constantinos C. Markides is a Robert P. Bauman Professor of Strategic Leadership at London Business School, since 1990. A native of Cyprus, he received a BA and MA in Economics from Boston University, MBA and DBA from the Harvard Business School.
This article is adapted from How Disruptive Will Innovations from Emerging Markets Be? by Constantinos C. Markides, which appeared in the Fall 2012 issue of MIT Sloan Management Review.