In the days of the rudimentary pistol, unlucky shooters were now and then hurt when unburned gunpowder escaped backward toward their faces. They came to describe this unpleasant experience as “blowback,” a term that has subsequently gained wider application in military affairs — to any event that turns on its maker.
Blowback is an apt term for the unexpected consequences of the investments that Western companies have made in emerging markets. Since first entering them several decades ago, and to a remarkable extent today, these companies have tended to view them in what Kenneth Lieberthal and C. K. Prahalad call “imperialistic” terms: as a beguiling mix of increasingly prosperous consumers and limitless pools of low-cost labor. (“The End of Corporate Imperialism,” Harvard Business Review, August 2003, Volume 81, Number 8, pp. 109–17.) Here, the thinking goes, companies can expect to harvest the fruits of the R&D and innovation skills painstakingly developed in their home countries.
That view is dangerously complacent. The very presence of Western intruders and the competition they create have inspired the emerging world’s companies to raise their game in response. Far from being easy targets for exploitation, emerging markets are generating a wave of disruptive product and process innovations that are helping established companies and a new generation of entrepreneurs to achieve new price-performance levels for a range of globally traded goods and services. Eventually, such companies may capture significant market share in Europe and the United States.
To be sure, these trends are in their early development, and most companies in emerging markets face formidable obstacles to competing effectively at home, let alone penetrating the developed world. Furthermore, most Western companies haven’t yet begun to serve the emerging world’s low-income segments, where crucial learning takes place. Even so, early indications suggest the “innovation blowback” from emerging markets could come soon:
- Wal-Mart Stores’ imports from China already account for 1 percent of its GDP. Along with other value-conscious retailers, the company stands ready to help a new breed of manufacturer target its wares at shoppers in the United States and Europe.
- Citigroup’s Chinese M&A unit reports that outbound deals make up the lion’s share of its pipeline — a sign that companies in China are moving abroad.
- Still more significant, mounting evidence suggests that farsighted vanguard Western companies are not only acquiring key capabilities by serving low-income customers in emerging markets but also preparing to use that experience to attack the growing value segments of developed markets. These companies, wielding advantages based not on factor cost differences but on superior management, show that blowback is as much an opportunity as a threat.
Most of the developed world’s companies must urgently reposition themselves to deal with this offshore challenge. The solution isn’t just to bring their products and business practices to the developing world, where they will invariably fail to penetrate beyond small segments of relatively affluent consumers and miss out on the vast purchasing power of less affluent ones. (Dell, which in the United States epitomizes innovative production processes, admitted as much when price competition from local companies forced it to retreat last August from its efforts to sell low-cost consumer PCs in China.) Nor can Western companies simply strip costs from existing products. They must instead redesign their products and processes from a “clean-sheet” perspective — one that amplifies their own distinctive capabilities and those of other companies — by participating in and orchestrating networks of highly specialized businesses. In fact, they can acquire the capabilities they will soon need at home only if they face the intense competitive pressures of serving the mass market in emerging economies.