Innovation: the new masters of management

Developing countries are competing on creativity as well as cost. That will change business everywhere

Published on The Economist, April 15, 2010.

THIRTY years ago the bosses of America’s car industry were shocked to learn that Japan had overtaken America to become the world’s leading car producer. They were even more shocked when they visited Japan to find out what was going on. They found that the secret of Japan’s success did not lie in cheap labour or government subsidies (their preferred explanations) but in what was rapidly dubbed “lean manufacturing”. While Detroit slept, Japan had transformed itself from a low-wage economy into a hotbed of business innovation. Soon every factory around the world was lean – or a ruin. 

Management gurus are always glibly proclaiming revolutions. What happened in Japan qualified, as did the advent of mass production in America a century ago. Now something comparable is taking place in the developing world … //

… Hope versus fear:

All this is obviously good news for the billions of people who live in the BRICs (see article) and other developing countries. More consumers will have access to goods and services that were once confined to the elite. More than 90% of Indians and Chinese tell pollsters that they are optimistic about the future. Anand Mahindra, an Indian business leader, has described his dreams about the future as “not just colourful, but steroidal”.

What about the slow-growth rich world? Emerging firms are advancing on a greater number of fronts than the Japanese did 30 years ago and also advancing much faster, gobbling up Western rivals. Their charge will upset many established Western firms, which will face increasingly savage price competition, and also overturn many assumptions about the rich world’s competitive advantage. Many of globalisation’s most vocal supporters have justified the loss of manufacturing jobs in the West on the ground that the rich world will maintain an edge in innovation; the clever jobs will stay at home. Emerging economies are not merely challenging that lead in innovation. They are unleashing a wave of low-cost, disruptive innovations that will, as they spread to the rich world, shake many industries to their foundations. All sorts of chief executives will scream for protection.

Change will indeed be painful for incumbents, as disruptive innovation always is. But cheaper goods and services will be a blessing for Western consumers, who are likely to face years of slow income growth. It could also be good news for rich-world governments, which are plagued with deficits even before the baby-boomers begin to retire. Frugal innovation may well prevent America’s health-care system (which already consumes 17% of its GDP) from swamping the rest of the economy. Clever ways of applying economies of scale and scope in new ways could boost public-sector productivity.

Moreover, it is in the nature of innovation to feed upon itself. Innovation in the emerging world will encourage, rather than undermine, innovation in the rich world. Western carmakers learned the techniques of lean production from their Japanese rivals, just as the Japanese had earlier learned the techniques of mass production from the Americans. This great insurrection, like its predecessors, will make us all richer. (full text).

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