Western multinationals — especially the most successful ones — consistently struggle to achieve their growth targets in emerging markets. Why? Because they try to repeat their past success formulas — the ones that work so well for them in developed markets.
This was the case at Harman, which had achieved extraordinary success in the high-end automotive infotainment systems for luxury cars. However, the company's initial steps to penetrate developing markets were unproductive. Harman created a scaled-down version of its high-end system which proved a dismal failure in poor countries.
For Harman and many others like them, institutionalized thinking — or what C.K. Prahalad first called the dominant logic — creates traps that can sabotage their efforts to capture the full set of opportunities in emerging markets. This is so because emerging market customers have vastly different needs as compared to rich-world customers. In the HBR article, "A Reverse Innovation Playbook" (April 2012) and our forthcoming book, Reverse Innovation, my co-author, Chris Trimble, and I elaborate on how western multinationals can overcome their dominant logic. But the starting point is to understand your company's current dominant logic. For a quick idea of what that might be in your organization, take the following quiz.
What is Your Company's Dominant Logic?
On a 1-5 scale (where 1=Strongly Agree; 2=Agree; 3=Neither Agree nor Disagree; 4=Disagree; and 5= Strongly Disagree), rate the thinking of your company's key decision-makers on the following statements, then add up the total of all 10 items.
1. Rich countries are the most technologically advanced. So innovation and learning will move from rich countries to poor countries.
2. Sales of our existing products and services will increase as emerging economies grow and consumer incomes rise. We need only to be patient.
3. The best approach to emerging markets is to export stripped-down versions of existing products and services, and sell them at lower prices.
4. The bulk of the customers in poor countries have low per-capita incomes, low sophistication, and low affordability. We should be able to meet their needs with cheap products based on older technology.
5. Poor countries today are where the rich countries were in their infancy. Poor countries will evolve in the same way that wealthy economies did. As they develop, poor countries will catch up with rich ones.
6. It is impossible to earn healthy profits in emerging markets.
7. The only competitors worth our attention are other multinationals.
8. Products that address poor countries' special needs can't be sold in rich countries because they're not good enough to compete.
9. We excel in product leadership and advanced technology — values inconsistent with the ultra-low-cost products poor countries require.
10. Because we stand for premium products and high quality, we will undermine our global brands if we compete in low-cost markets. Worse, we risk cannibalizing our premium offerings.
What is your company's score? If your total score is less than 30, you will underperform in emerging markets. Your business needs an antidote.
Recently, I administered this quiz to four world-class multinationals. Their scores ranged from 15 to 35 — very sobering indeed.
Overcoming Dominant Logic
Based on the experiences of a dozen companies including Procter &Gamble, Deere & Company, Harman, and Logitech, we advise a two-part approach, one that combines: 1. Gradual and accommodating change throughout the company from the top down, and 2. Immediate and radical change within small teams spearheading projects from the bottom up.
From the top down, CEOs should:
Rebrand the company's future: The CEO should use his position as a classic bully pulpit. At Harman, CEO Dinesh Paliwal repeatedly stressed that the company's traditional markets were saturated, and that future growth must be cultivated in markets that Harman had not hitherto served.
Increase R&D spending in emerging markets and focus it on local needs: Harman's core competency is engineering, and Paliwal shifted the engineering function's center of gravity from Germany and the United States to key emerging markets.
Bulk up on emerging market knowledge and expertise: Paliwal now transports his entire leadership team to China for a month every year. It's a dramatic action based on the simple idea that changes in scenary help bring about changes in thinking.
From the bottom up, Local Growth Teams (LGTs) should:
Establish radical goals: Harman built an LGT in India to design a new auto infotainment system to provide all the functionality at half the price and one-third the cost. Radical goals such as this one apply constraints to a project — and the constraints illuminate novel ways of thinking.
Leverage global resources: Paliwal recruited several of the more open-minded members of the legacy engineering culture to join the India LGT. The German engineers helped the LGT tap into Harman's extensive global resource base, including existing best practices and software codes.
Manage conflicts with the core business: Paliwal intervened when his chief technology officer — with roots in the German engineering group — attempted a coup against the LGT leader, Sachin Lawande. Paliwal not only thwarted the coup, he supported Lawande's leadership and even made him the new CTO. This is just the sort of highly visible personal action, on the part of a CEO, that can help change mind-set and culture.
The lesson is clear. When busineses see that the future lies elsewhere, they must challenge the dominant logic.
This blog first appeared on Harvard Business Review on 3/26/2010.
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