Time for reverse innovation
In Vijay Govindarajan’s view, many of the major innovations of the future will originate in emerging markets. Global companies in the developed world will need to get in on the act if they are to compete, he says.
Gone are the days when the major mass markets were the US, Japan, and Europe. Today, emerging markets such as Brazil, China, India, and Russia represent half of the world’s GDP and over 40pc of its exports. They now represent the mass markets that need to be served, and not with products designed for traditional consumers.
With many forecasting that the developed world will see a prolonged period of the slow growth of 1 to 3pc as it emerges from recession, and the developing markets likely to see two to three times that rate of growth, it is time for a major shift in mindset among the multi-nationals in the so-called developed world who have traditionally targeted the top segment in these markets – the wealthiest 10pc. That is the view of Professor Vijay Govindarajan, director of the Center for Global Leadership at the Tuck School of Business at Dartmouth, who is currently completing a two-year stint as a chief innovation consultant with General Electric (GE), where he has worked closely with CEO Jeff Immelt.
“The real potential lies in unlocking the other 90pc of these markets,” he says. “Adapting global products created for Western customers in India simply will not work if they are to grasp the opportunity that is there. For multinationals, winning in emerging markets is not a ‘nice to do’. It is the very oxygen that will fuel future growth in their home markets.”
The key, says Govindarajan, is what he calls “reverse innovation”, a concept that has been implemented with some success across GE – he co-authored the cover story on the topic in the October issue of Harvard Business Review with his Tuck colleague Chris Trimble and Jeff Immelt, ‘How GE is disrupting itself’.
I ask Govindarajan to explain just how reverse innovation works. “Historically, multinationals innovated in the developed world and then adapted those products for the emerging economies. Reverse innovation is about doing just the opposite to that,” he says. “Now multinationals will have to innovate in emerging markets and then bring those innovations back to developed markets.”
This presents quite a challenge for large multinationals who have traditionally followed the ‘glocalization’ model, says Govindarajan – glocalization being the word coined for the practice of combining globalization and localization, popularised in the English language by UK sociologist Roland Robertson.
“The historical approach of multinationals has been this glocalization – and that approach implied that you developed products in the rich world and sent them to the poor world,” explains Govindarajan. “The fundamental tension between these two approaches is that glocalization requires centralization of power and of resources. Reverse innovation, on the other hand, requires decentralization of resources and of the decision-making power.”
Glocalization has proven a highly successful strategy in past decades, he concedes. “The US companies went global right after World War II when there was a need to rebuild the war-torn countries. They essentially brought their products to Europe and Japan. The strategy worked well in that era because the customer base in Japan and Europe was very similar to the customer base in the US. It was easy to take a product from the US and adapt it to those markets.”
He cites the recent example of McDonald’s, which introduced a lamb burger to its menu when it entered the Indian market, while otherwise retaining its core business model.
However, that has all changed in the past five years, says Govindarajan. “We have seen the rise of the middle class in India and China, and of course of their purchasing power.”
These markets present a far different challenge, however, than did the Japanese and European markets over the past 50 years. “They are fundamentally different as a customer base than those traditional customer bases. You only have to look at the income per capita. The average per capita income in India is $1,000 – just $200 in rural India, whereas it is $44,000 in the US. There is no product designed for the US that you can take and adapt to rural India where the mass market per capita income is $200.
“Instead, you need to reverse innovation, where you start by assessing customers’ needs in these emerging markets, rather than assuming that you only need to make alterations to existing products. Of course, as your local growth teams develop products for the local markets, they still remain connected to the global resources and technology of the global organization.”
Bringing innovation home
Govindarajan takes this reverse innovation concept one step further, suggesting that the innovations produced in emerging markets can subsequently be adapted and brought back to the home market with great success.
Take the US, for example. “The problems faced by emerging markets today will be the problems faced by the US in the future. The whole Obama Healthcare Reform plan is based on two principles: low cost and increased access. There are nearly 60 million Americans who are either underinsured or uninsured, and the cost of healthcare has been spiraling out of control in the US.
“Any solutions for the healthcare market in rural India or China needs to be based on those same two principles – low cost and increased access,” he says. “We need to find very innovative solutions in order to gain access to rural China and to rural India at a low-cost price point. One might think: what can a $200 per capita consumer teach a $44,000 per capita consumer, but it is the very same problem you are trying to solve.”
Govindarajan is quick to emphasize that a low price point does not mean inferior quality. “On the contrary, you have to employ world-class technologies if you are to come up with great, technologically-advanced solutions at low price points. And here too lies the opportunity in the home market.”
He illustrates the point with the PC-based ultrasound machine that GE developed for the rural Chinese market, which has now been adapted and is selling in the US for as little as $15,000 – a fraction of the bulkier premium products found in sophisticated hospital imaging departments.
“In rural China, you have to come up with an ultrasound machine that is portable because there are no hospitals, and it has to be at an extremely low price point. GE took the lead and came up with an ultra-low-cost battery-powered machine for rural India and China.
“What is more, it has unlocked new applications in the US. You can’t bring a bulky ultrasound machine onto the highway if there’s an accident – you need the portable machine. I believe that, in the future, the distinction between premium and value will be an artificial distinction.”
The organizational challenge
Not that Govindarajan believes glocalization has become obsolete. “It is still valid for rich countries and for rich consumers in poor countries such as China and India. Where it falls down is for the mass markets in China and India, which are fundamentally different. Glocalization will continue to dominate strategy for some time to come.
“There are deep conflicts between glocalization and reverse innovation,” says Govindarajan, “but they need to not only co-exist, but they also need to co-operate within the organization. This presents a major organizational challenge because those very centralized, product-focused practices that have made the multinationals so successful in glocalization will actually get in the way of reverse innovation, which needs a decentralized, local-market focus.
“There will inevitably be a tension that needs to be managed, and that is where the role of the CEO is vital. At GE, Jeff Immelt himself has seen the need for that change and that’s why he is taking the lead here.
“A multinational that wants to do reverse innovation has to come up with a new organizational structure that involves what we call ‘local-growth teams’, and these are anchored in some key principles:
- Local-growth teams must have local resources such as product development, manufacturing, marketing, selling, and distribution
- The local-growth team must have the right to draw from the company’s global technologies and resources. Take GE – the biggest advantage of GE is its world-class Global Technology Centre in Milwaukee. The ultrasound team in China was fully connected to the center
- The local-growth team has to take an experiment-and-learn approach because innovation endeavors are by nature uncertain. These teams have to learn quickly by testing assumptions, so you cannot apply the same metrics as for the established business
- Ensure your local-growth team reports to someone high up in the organization. They will need strong support from the top.”
Govindarajan is not suggesting that different local teams work in isolation, all solving similar product needs. “A healthcare product created for rural China may be able to solve a problem in rural India or rural Africa. So the local-growth team in China will be designated to develop that product, which can, with some adaptation, then go to other countries with similar product needs.”
So does this reverse innovation model apply only to large multinationals, like GE? “It is worth remembering that there are products in developed countries too that require innovative solutions, so the reverse innovation model is by no means exclusive to global companies.
“It may be a matter of looking at under-served or unserved markets in the home country. You can innovate in one customer segment, and then bring that innovation back to the top segment. Reverse innovation can be a powerful concept, even for a US company that only operates in the US.”
Again Govindarajan emphasizes that reverse innovation is not an easy model to introduce into a large established business, with its existing reporting structures and practices. “This is a cultural change. This is not simply a strategic change. It is vital that the CEO embraces the concept and places it at the center of the organization’s strategy.
“It is about shifting the culture and shifting the mindset and that is why it is so hard to do, but I don’t think multinationals in particular have any option,” says Govindarajan. “In my view, it is those companies that succeed and win in emerging markets that will remain vital and competitive in the developed ones.”