Reverse innovation is not just about improvisation or lowering the price. It is about shifting the price performance paradigm, says the co-author of a new book
Innovation that emerges from a developing economy and spreads across the world is not a one-off case of ingenuity any more. It is becoming a trend. Vijay Govindarajan first wrote about the phenomenon in October 2009 in a Harvard Business Review (HBR) article, “How GE is disrupting itself”, co-authored by Jeffrey R. Immelt, CEO, General Electric Co. (GE).
Now, in a well-timed book, titled Reverse Innovation: Create Far From Home, Win Everywhere, authors Govindarajan and Chris Trimble get into the details of this reversal, which means companies and thought leaders have to be in tune with the needs of, and opportunities in, emerging economies. With examples such as Procter and Gamble Co.’s (P&G’s) strategy for the unfamiliar customer in new markets to GE’s approach to healthcare in India, Govindarajan and Trimble throw light on changing management models and mindsets.
Govindarajan teaches international business at the Tuck School of Business at Dartmouth College, US. He has also been on the faculties of the Harvard Business School, Insead, Fontainebleau, France, and the Indian Institute of Management, Ahmedabad. Trimble, also a professor at Tuck, is a consultant who specializes in the execution of an innovation initiative. He wrote Ten Rules for Strategic Innovators—From Idea to Execution, in 2005.
In an email interview, Govindarajan tells us why this is the appropriate time to understand, adopt and benefit from this changing dynamic. Edited excerpts:
What is reverse innovation?
Historically, multinationals innovated in rich countries and sold those products in poor countries. Reverse innovation is doing exactly the opposite. It is about innovating in poor countries and selling those products in rich countries. For instance, Mahindra innovated a low horsepower tractor for India since farming land is highly fragmented. Mahindra used that tractor to create a vibrant hobby farming segment in the US. The hobby farmers use their tractors for enjoyment, not to earn a living. Mahindra also innovated beyond the product. The company enrolled close-knit families as dealers. Such dealers gave full attention to the needs of Mahindra. From 1999 onwards, Mahindra gained market share in the US. This is classic reverse innovation.
What recent changes have allowed this phenomenon?
There are two important trends which have made reverse innovation critical. First, growth is slowing down in developed economies and it is increasing in developing economies. Post the financial crisis, companies in rich countries are looking for growth and they have to go where the growth is—poor countries. Second, there are very smart local companies, such as Mahindra, that will force multinationals to engage in reverse innovation. About 10 years ago, there were fewer local companies that had global aspirations. Now, companies such as Mahindra and Tata from India and Haier and Lenovo from China are emerging giants. Thus if multinationals do not innovate in poor countries
, local companies will do so and use those innovations to disrupt multinationals in their home markets. This happened in the 1970s and 1980s when the Japanese auto makers disrupted the the big three auto companies in Detroit.
What kind of a ‘change in mindset’ is needed by leaders who are working, learning and innovating in emerging markets?
The most critical requirement is to understand customer problems among non-consumers. In a country such as India, a significant percentage of the population lacks basic needs such as housing, transportation, energy, and healthcare. Understanding customer problems is the starting point for innovation. Deere set out to understand local farming needs in India by setting up a local growth team. The team quickly understood that Indian farmers valued two things in their tractors—price and fuel efficiency. The result: Deere introduced a low horsepower tractor, Krish, in India with tremendous success.
‘Jugaad’ innovation or frugality seems to be a buzzword. How much of reverse innovation is to do with being low-cost?
Reverse innovation is not about jugaad (improvisation) and not about lowering the price. It is about shifting the price performance paradigm. For India to be a leader, we need to solve our problems with the latest technology. Take, for instance, the Narayana Hrudayalaya (NH) Hospital in Bangalore which performed open heart surgery for $2,000 (around Rs1.1 lakh; US prices for such a surgery will be $20,000). NH Hospital does not use jugaad. You cannot improvise heart surgery. Quite the contrary, NH Hospital uses the latest technology, the same ones we see in the US. That is the only way you can guarantee world-class quality. The hospital brings its costs down by mass-producing healthcare and not by jugaad.
Emerging markets want to have access to rich-world products, but with some local flavour. Do glocalization and reverse innovation go hand in hand?
Glocalization and reverse innovation go hand in hand. Multinationals will be able to sell global products in the top 20% of the economic pyramid in India. However, in order to create the market in the remaining 80%, they must practise reverse innovation. GE Healthcare, for instance, sells its premium imaging equipment such as X-rays, CT scanners, ultrasounds in the top 20% of the hospitals in India. However, it has created a new market by innovating portable and inexpensive EKG machines for rural India. For most multinationals, glocalization will work in the top 10% of the economic pyramid. Here, it is about market share. In the remaining 90%, it is market creation. Here, there is need for reverse innovation.