Disruptive Innovation in Chinese and Indian Businesses

The Strategic Implications for Local Entrepreneurs and Global Incumbents

Peter Ping Li

• Publisher: Routledge
• Year: 2013
• eBook ISBN: 9781136696121
• Edition: 1
• Topic: Economics
• Subtopic: Business General
• Index: Economics

With the rapid development of China and India as new economic powers in global competition, an obvious question is whether these emerging economies are great opportunities or threats. Whilst answers are bound to differ depending on one's perspective, it is increasingly clear that more local firms, especially local entrepreneurs, from these emerging economies will play a more critical role in global competition by becoming challengers to global incumbents. Indeed, the fact that the majority of their populations are at the bottom of the pyramid, and thus cannot afford products designed for the developed markets, has made these emerging economies fertile ground for developing and applying disruptive innovations.

A novel mix of key attributes distinctive from those of established technologies or business models, disruptive innovations are typically inferior, yet affordable and "good-enough" products or services, which originate in lower-end market segments, but later move up to compete with those provided by incumbent firms. This book sheds new light on disruptive innovations both from and for the bottom of the pyramid in China and India, from the point of view of local entrepreneurs and international firms seeking to operate their businesses there. It covers both the theoretical and practical implications of disruptive innovation using conceptual frameworks alongside detailed case studies, whilst also providing a comparison of conditions and strategic options in India and China. Further, unlike existing studies, this book focuses on the neglected perspective of local challengers as the primary players, and in doing so reveals the extent to which the future landscape of global competition may be shaped by disruptive innovation, as well as its capacity to make the world "flatter" and more sustainable.

This unique book will be valuable to both scholars and practitioners interested in disruptive innovation and those working in the fields of Asian studies, international business, economics and globalization.

1
Introduction: disruptive innovation from the bottom of the pyramid

The strategic implications for local challengers and global incumbents

Peter Ping Li

The new research on emerging-economy multinational enterprises (EMNEs) has grown rapidly (e.g., Li, 1994, 2003, 2007; Luo and Tung, 2007; Mathews, 2002, 2006). This emerging research has focused primarily on the potential of EMNEs as global latecomers to catch up with and leapfrog the established multinational enterprises from the developed economies (DMNEs) as the global incumbents, despite the doubts raised by the traditional multinational enterprise (MNE) theories, such as the Ownership–Location–Internalization (OLI) Model (Dunning, 1988, 1995, 2006) and the Internationalization Process (IP) Model (Johanson and Vahlne, 1977, 1990, 2009). Even though the unique potential of EMNEs has been recognized (e.g., Li, 2003, 2007; Mathews, 2002, 2006), we know very little about the underlying mechanisms for EMNEs to catch up with and leapfrog DMNEs, especially their sources of competitive advantage and the unique mechanisms of innovation that underlie the trajectory of accelerated learning via exploration and exploitation (see Li, 2010 for a review). The implicit assumption is that most EMNEs rely primarily on low-cost imitation as the basic source of their competitive advantage. Hence, there exists a major gap in the literature on EMNEs as emerging challengers. In order to understand the trajectory of accelerated learning by EMNEs and further develop the learning-based view of internationalization (Li, 2010), we must consider the unspecified drivers behind the trajectory of accelerated learning by EMNEs in sharp contrast to those of DMNEs (cf. Hobday, 1995, 2005; Li, 1994, 2003, 2007; Madhok and Keyhani, 2012).

Further, given the rapid emergence of China and India as the new economic powers in global competition, one has to wonder if the emerging economies present great opportunities or threats. The answer is bound to differ due to diverse perspectives. In a broad sense, however, it seems increasingly clear that EMNEs as latecomers will play a critical role in global competition by being the bottom-up disruptive challengers to the incumbent DMNEs. The rise of emerging economies, coupled with the fact that the majority of their populations reside at the bottom of the pyramid (BOP) as the lowest-end segment of the global market (Prahalad, 2009) and therefore cannot afford the products and/or services designed for the established markets, has made emerging markets the most fertile for disruptive innovation or DI (Ricart et al., 2004; Yu and Hang, 2010), which is also referred to as reverse innovation (Govindarajan and Ramamurti, 2011; Govindarajan and Trimble, 2012) or blowback innovation (Hagel and Brown, 2005). This is especially true for business model innovation at BOP (Eyring, Johnson and Nair, 2011; The Economist, 2010). In this sense, the previously separated streams of research into DI (Christensen, 1997; Christensen and Raynor, 2003; Christensen, Anthony and Roth, 2004) and BOP (Karnani, 2007; London and Hart, 2011; Prahalad, 2009) should benefit from cross-fertilization. In particular, DI in the emerging economies (where the majority of BOP resides) may serve as a core mechanism to drive the trajectory of accelerated learning by EMNEs. In other words, as a driver of accelerated learning, DI at BOP has the potential to explain why and how EMNEs can catch up with and leapfrog DMNEs. Hence, accelerated learning is particularly salient to EMNEs, as a special form of entrepreneurship (Li, 2010; Madhok and Keyhani, 2012).

Despite the strategic centrality of DI at BOP, it is surprising that the issue has not yet been explored in a systematic manner. The extant research on DI is largely confined to the context at the top of the pyramid (TOP) (e.g., Christensen, 1997; Christensen and Raynor, 2003; Christensen et al., 2004). Furthermore, limited attention has been devoted to the link between DI and EMNEs (e.g., Eyring et al., 2011; Hagel and Brown, 2005; Hart and Christensen, 2002; Immelt, Govindarajan and Trimble, 2009. See Govindarajan and Ramamurti, 2011, and Zeng and Williamson, 2007, for exceptions). Hence, DI by EMNEs has the rare potential to cross-fertilize the diverse research streams on entrepreneurship, innovation, dynamic capability, strategy, business model, and cognition in the salient context of globalization (Li, 2010). We posit that DI by EMNEs can serve as a shared “big question” in the domains of international business, strategy, and entrepreneurship, with the unique potential to challenge the prevailing paradigm and also to facilitate the imperative paradigm shift toward an interdisciplinary approach to any complex phenomenon as holistic and dynamic.

This topic also has the potential to settle the debates over the nature, rationale, criteria, and processes of DI by clarifying the extant conceptual ambiguities and confusions (see Yu and Hang, 2010, for a review) as well as the nature and impact of BOP (see Karnani, 2007, for a review). This is largely because DI tends to occur at BOP due to the indigenous need for novel value propositions to be embodied by initial sub-standard (low price as frugal innovation) and emerging future standard (unique value with disruptive potential) as two defining qualities of DI. Further, this new stream of research is imperative because we know relatively little about the complex link between globalization and innovation (Aharoni and Brock, 2010; Castellani and Zanfei, 2006; Loof, 2009; Nieto and Rodriguez, 2011), especially their interaction and the underlying mechanisms in the emerging economies (Asakawa and Som, 2008; Gassmann and Keupp, 2008; Gorodnichenko, Svejnar and Terrell, 2010). The globalization of innovation by DMNEs (Lewin and Couto, 2007) and EMNEs (Li, 2007) bears critical implications. In this chapter, I will focus on DI at BOP by local entrepreneurs (some of them will emerge as EMNEs) not only because it is novel and in need of research, but also because it directly challenges the prevailing paradigm in the domains of international business as well as innovation toward their needed paradigm shift (see Christensen et al., 2010; Govindarajan and Ramamurti, 2011; Li, 2007, 2010; Ricart et al., 2004; Sarkar, 2011). This focus is also relevant for global incumbents since the strategic implications for latecomers are the mirror image of those for incumbents.

The purpose of this introductory chapter is to integrate the research streams on DI and BOP toward a new model of the mechanisms for EMNEs to catch up with and leapfrog DMNEs. As the primary contribution of this chapter, the model of entrepreneurial leapfrogging further develops the learning-based view of internationalization by specifying the driving force behind the trajectory of accelerated learning (see Li, 2010 for a review of the learning-based view). First, I reframe the constructs of BOP and DI in order to settle the related debates. Second, I offer an integrative typology of global innovations to differentiate, and also to integrate, all major types of innovations in all types of markets so as to provide a conceptual core for a model of entrepreneurial leapfrogging with DI at BOP as the underlying mechanism to catch up with and leapfrog DMNEs. Finally, I discuss the major implications of the new model for research and practice.

Key constructs reframed

The reframed construct of BOP

If we follow the metaphor of the pyramid, we can divide the world population into five key segments: the top first and second segments are TOP, the third segment lies in the middle of the pyramid (MOP), while the fourth and fifth segments are BOP. This is the global pyramid, from which the notions of TOP, MOP, and BOP are derived. According to the World Resources Institute, those people with GDP per capita below $3,000 belong to BOP. According to this benchmark, the majority of the population in the emerging economies (e.g., 80% in China and 98% in India) are BOP. In this sense, Prahalad refers to BOP specifically as the “emerging consumer markets or just emerging markets” (Prahalad, 2009: 7). Others refer to BOP in term of “the base of the pyramid” (e.g., London and Hart, 2010). From this perspective, the primary differences between the emerging economies and the developed economies can be framed in terms of the global pyramid. Specifically, TOP resides primarily in the established economies, BOP resides largely in the emerging economies, while MOP resides in both the developed and emerging economies as the overlapped segment (i.e., the lowest market segment in the developed economies and the highest market segment in the emerging economies). To simplify our analysis, it is beneficial to evoke the notion of the mainstream market as the reference point. Hence, I can provide the following working definitions of BOP, TOP and MOP:

Within the global pyramid, BOP refers to the mainstream market and the segment lower than the mainstream market in the emerging economies, in contrast to the mainstream market and the segment higher than the mainstream market in the developed economies i.e. TOP. However, the segment lower than the mainstream market in the developed economies, as well as the segment higher than the mainstream market in the emerging economies, jointly constitute MOP as the overlapped segment in the global pyramid.

Connecting the global pyramid with the distinctive global strategies of EMNEs and DMNEs, it is reasonable to expect TOP to be well-served (and often over-served), primarily by DMNEs; in contrast, BOP tends to be ill-served (and often non-served), by DMNEs, and so it requires EMNEs and non-MNE local firms; finally, MOP tends to be under-served by both DMNEs and EMNEs as an open global battle ground. Despite the strategic imperative of moving down or up within the global pyramid, we know little about how DMNEs are moving from TOP to BOP if they can, or how EMNEs are moving up from BOP to TOP if they can; we also know little about how DMNEs and EMNEs compete at MOP. In this sense, this moving up and down within the global pyramid is a major part of the business model for both DMNEs and EMNEs, and has signifi-cant implications for their innovation means and ends. In order to recognize the overlaps between TOP, MOP and BOP, I accept that none of these notions is absolute or has any sharp and fixed boundaries; thus, they are relative in accordance with the Chinese frame of Yin-Yang Balance (Li, 1998, 2008, 2012a). I also maintain that there will be a dynamic process with a gradual shrinking of BOP and a gradual expansion of both MOP and TOP over time. The dynamic process is the general trajectory of poverty alleviation through the mechanism of DI at BOP.

The reframed construct of DI

As the most recent literature review pointed out, “the scattered and conflicting nature of the literature on disruptive innovation in the last decade may pose a state of ambiguity for future research” (Yu and Hang, 2010: 435). I posit that the debates over the nature and processes of DI are rooted in prolonged conceptual confusions and ambiguities in several areas (cf. Christensen and Raynor, 2003; Danneels, 2004; Govindarajan and Kopalle, 2006a; Markides, 2006; Schmidt and Druehl, 2008; Tellis, 2006). We can solve problems such as this by reframing DI as a new form of entrepreneurship for bottom-up leapfrogging, i.e., leapfrogging innovation.

The first major cause of the current conceptual confusion is the inclusion of both the low-end segment of the mainstream market and the non-consumption “new-market” segment below the mainstream as being initially served by DI. I take issue with this approach. The mixing of the low-end segment of the mainstream market with the marginal market for DI creates serious ambiguity and confusion as to whether DI is solely for the marginal customers in the non-mainstream market, or for both the marginal customers and the typical customers in the low-end mainstream segment. If the latter is the case, we should differentiate the low-end mainstream segment for DI from both the high-end and mid-end mainstream segments for sustaining innovation or SI (cf. Christensen and Raynor, 2003). There is no compelling reason to make such a distinction (Schmidt and Druehl, 2008). It would be much clearer if we were to leave all three segments of the mainstream market out of the notion of DI in order to focus on the marginal customers below the mainstream market. In other words, DI is reserved only for the non-mainstream market. The primary criterion is the non-consumption of mainstream products and services provided by DMNEs as the global incumbents (cf. Schmidt and Druehl, 2008). Applying this criterion to the global pyramid, I argue that the non-mainstream market in the global pyramid consists of the “mainstream market” in the emerging economies as the primary non-mainstream market at BOP, and the non-mainstream market in the developed economies as the secondary non-mainstream market at MOP, both of which are distinctive from the mainstream market in the developed economies at TOP. Hence, global non-mainstream consumers are in serious need of any novel value proposition with a high value/price ratio, as in the case of DI. The above reframing has removed the conceptual confusion over which market segment DI should start to serve: it is clear now that DI starts at the non-mainstream market and then moves up to the mainstream market in a bottom-up trajectory. This reframing of DI connects it directly with BOP as its primary target (and MOP as the secondary target).

The second major cause of the current conceptual confusion is the notion of high-end DI in terms of radically new quality and higher prices (e.g., Carr, 2005; Govindarajan and Kopalle, 2006a; Markides, 2006; Utterback and Acee, 2005). This view equates DI with radical innovation (RI) by explicitly assuming RI to have both superior quality and higher prices. I take issue with the notion of high-end DI, as well as the conflation of RI with both superior quality and higher price, for several reasons. First, the notion of high-end DI is incompatible with the original concept of DI as having inferior quality and lower prices (Christensen, 1997; Christensen and Raynor, 2003; Christensen et al., 2004). Although Christensen sometimes cites questionable or incorrect examples of DI (e.g., higher-priced Bell telephone and mobile phone), he has been largely consistent with the theoretical argument that DI tends to have a lower price in order to disrupt incumbents via a bottom-up process (Schmidt and Druehl, 2008). Even those who argue for high-end DI admit that Christensen’s notion of DI is a low-end, bottom-up type (e.g., Carr, 2005; Utterback and Acee, 2005). Second, it is the lower price and the resultant lower profit margin which cause the general neglect of DI by most incumbents. In other words, an innovation will become disruptive when it emerges from the low-end market in a bottom-up process, rather than high-end RI in a top-down process. Govindarajan and Kopalle...

Table of contents

• Cover Page
• Half Title page
• Title Page
• Dedication
• Contents
• Illustrations
• Contributors
• Preface
• Introduction: disruptive innovation from the bottom of the pyramid The strategic implications for local challengers and global incumbents
• The contexts for DI from China and India
• The strategies of DI for local challengers
• The strategies of DI for global incumbents
• Index