Reverse innovation: create Far from Home, Win Everywhere

Citation

Amnaganti, S. and Raju, P.G. (2013), "Reverse innovation: create Far from Home, Win Everywhere", Competitiveness Review, Vol. 23 No. 3, pp. 299-302. https://doi.org/10.1108/10595421311319861

Li Peng once said, “People of all countries have the right to choose their own social system and road to development in the light of their national conditions and characteristics”. Many years after that, reverse innovation is making a seemingly big sound that innovation happens in emerging markets, poor men have similar needs as the rich ones, thus, to remain competitive, big multinationals should start innovating for the emerging markets which have a potential for global consumption. One and all are aware of innovation but wondering what reverse innovation is; very simply, any innovation likely to be adopted first in the developing world. Let us examine: it is logical why a poor man wants a rich man's product but why would a rich man want a poor man's product. Most product innovations that happen cater only to that elitist consumer segment in a rich country but what about that large less elitist to poor consumer segment in the poor countries. There are about 160 poor countries in this world. For instance, take the ECG equipment made by GE costing US$50,000 in the USA, weighing £300 this can be afforded by the richest of the rich countries, but when it comes to selling the same machine in India, it can be afforded only by those top 10 percent rich hospitals but what about the rest of the 90 percent; do not they need this life‐saving equipment or do not 90 percent get heart‐attacks in India. Why not an attempt be made to work and think about the common person on the street who can get benefited with innovation thus making his life safe, good, healthier and peaceful vis‐a‐vis affordable in terms of products, services, and systems. Then, GE came up with a light‐weight, portable, US$50 ECG equipment which operates on a battery which is appropriate for India's rural and semi‐urban areas which have either unavailable electricity or unreliable electricity and which can be handled by less trained doctors too. This product has brought about an explosive growth in sales in India (catering to that unexplored 90 percent) and later it also started attracting US markets for its value at a lesser price. This is an innovation made for the poor countries which has a potential for global utility. This is reverse innovation. It is not just value for money but value for many. Originally, we understood and experienced innovation as being done for rich and elite thinking class but the consequence is that, we are losing the mass at the bottom. It is asserted that innovations will no longer traverse the globe in only one direction, i.e. from developed nations to developing ones but they would flow in reverse. Now, it is time for all multinational companies of developed countries to seek explosive growth by beginning to innovate in emerging economies than depending on a time‐honored pillar of “rich‐world” economic verve given their long‐established track records. Thus, increasingly, one gets to see companies developing products in countries like China and India and then dispense them globally.

The basic driver of reverse innovation is the income gap that exists between emerging markets and the developed countries. There is no way to design a product for the American mass market and then simply adapt it for the Chinese or Indian mass market. Buyers in poor countries demand solutions on an entirely different price‐performance curve. They demand new, high‐tech solutions that deliver ultra‐low costs and “good enough” quality. Thus, Reverse Innovation is the solution that shows leaders and senior managers how to make innovation in emerging markets happen, and how such innovations can unlock opportunities throughout the world. Thus, to compete, global corporations must be just as dexterous enough innovating abroad as they are at home.

The above explanation does open the doors for a re‐direction in thinking but can a book be written on this phenomenal thought; and there emerged this book that highlights the agonies and ecstasies of some of the world's most important companies including Deere & Company, P&G, GE, and PepsiCo, demonstrating exactly what works and what does not. The new reality is that the future lies far from home. Whether you are a CEO, financier, strategist, marketer, scientist, engineer, national policymaker, or even a student forming your career aspirations, reverse innovation is a phenomenon you need to understand and digest.

This book has 12 chapters and is divided into two parts: Part 1 is about the reverse innovation challenge and Part 2 is about the reverse innovation action which includes a series of case studies demonstrating reverse innovation in action, also these examples are not documented widely. For instance, one can read about GE's electrocardiogram (ECG) machines made specifically for the resources of Indian customers, the story of Narayana Hrudayalaya hospital in Bangalore, in India, where the cost of open‐heart surgery has been brought down to about $2,000 while in the USA, the surgery costs ten times higher, yet, the hospital's net profit margin is slightly higher than the US average, the saga of Deere & Company developing a winning tractor in India, etc.

The book is supplemented with two appendices, namely, Appendix A which contains a reverse innovation tool kit which is a concise and a judicious manual offering new strategies for companies seeking to take advantage of the potential of emerging markets and Appendix B contains an agenda for researchers with respect to organization mechanisms and incentive structures that can facilitate the trickle‐up process vis‐à‐vis a rich repository of notes and a meticulous subject index.

Chapter 1 in the book opens with the popular American sports drink Gatorade designed to rehydrate athletes that was developed by a professor at the University of Florida. However, the less known side of this popular story is that in 1960s, when western doctors went to Bangladesh and other Southeast Asian countries to help fight the cholera outbreak, they discovered a local concoction that has ingredients such as coconut water, carrot juice, rice water, carob flour and dehydrated bananas; this is essentially a solution of carbohydrates, sugar and salt that is used to treat dehydration. The treatment was featured in a medical magazine that was read by a doctor at the University of Florida. Thus, the core innovation for Gatorade actually originated in an emerging market. This is an example of what Vijay Govindarajan and Chris Trimble, Professors at Dartmouth's Tuck School of Business, call “reverse innovation.” Instead of an innovation originating in an industrialized market and then “tweaked” to fit the needs of an emerging market, reverse innovation is developed in an emerging market based on the needs of that market. Eventually that innovation makes its way to developed markets, “reversing” the traditional path of innovation. Also, there is a mention of glocalization (explained in Chapter 3 as level three thinking) which means that most global companies recognise that emerging markets have become today's last source of growth. But all they do is modify and export products that they develop in their home country. “The authors say that glocalisation” as a strategy is bound to under‐deliver. To capitalise on the full potential of emerging markets, they must start in the opposite direction – by innovating specifically for and in developing countries to create breakthroughs that will be adopted next at home and around the globe.

Chapter 2 discusses five “need gaps” in emerging markets and is positioned at a level to be useful, and it offers examples that are not widely documented. The gaps identified are:

1. 1.

   The performance gap. Customers in emerging markets are prepared to make sacrifices in performance at the right price.

2. 2.

   The infrastructure gap. Emerging markets do not have the infrastructure that exists in developed countries.

3. 3.

   The sustainability gap. Developing countries face the most daunting environmental and sustainability challenges.

4. 4.

   The regulatory gap. Regulations are few and far between in developing countries.

5. 5.

   The preferences gap. Every country has different tastes and preferences.

Chapter 3 focuses on changing the mindset, i.e. leaders of global companies in general go through five levels of thinking when it comes to mulling over emerging markets. Level 1 leaders argue that the new market does not matter. Level 2 thinkers presuppose they can scan the elite from the market by targeting the wealthiest customers, and wait for it to develop and act more like their home markets. At Level 3, companies follow a “glocalization” strategy, in which they develop local versions of global products. Reverse innovation begins to happen at Level 4, as companies see that the unique needs of emerging markets require them to design new products from scratch. Finally, at Level 5, companies recognize the innate opportunity in reversing the flow of innovation by using products developed in an emerging economy to create organic growth in mature markets. Many organizations have woken up and began waking up to this truth. Robert McDonald, Chairman and CEO of Proctor and Gamble, confirms to in reverse innovation:

Our innovation strategy is not just diluting the top‐tier product for their lower‐end consumer. You have to discretely innovate for every one of the consumers on that economic curve, and if you don't do that, you'll fail (88 pp.)

The authors provide calculated courses of action on how to execute such innovation. Their thumb rule for piercing into these markets is to create products and services that provide a 50 percent solution for only 15 percent of the cost. That is the reason why corporations must abandon assumptions of globalization that is likely to produce an inadequate or inferior product. They should learn how to encourage reverse innovation along with local adaptation of current products, regardless of the conflicting strategies or probable tough cannibalization.

Chapter 4 insists on changing the management model wherein the authors urge companies to set up what they call “local growth teams” (LGTs). These LGTs must be built from the ground up and managed as separate new companies, preferably run by outsiders. LGTs must develop clean‐slate solutions based on clean‐slate needs assessments starting from scratch. Also, the need to create a custom scorecard to evaluate the LGT performance is suggested. For instance, PepsiCo drew upon local teams and global resources to develop Aliva, a new savoury cracker created by Indians to satisfy the Indian consumers, but with potential to appeal to a wider global palette.

Chapters 5‐12 is a journey into many cases of companies with respect to reverse innovation. Most of the details mentioned in each case are not widely documented.

After Chapter 12, there is a concluding chapter in which the authors say that reverse innovation has the potential not only to transform your company, but also to transform the world. Reverse innovation is not optional. It is oxygen. Also, in one of the interviews, the authors said that reverse innovation is different from disruptive innovation propounded by Clayton Christensen though there is an overlap between reverse innovation and disruptive innovation but it is not a one‐to‐one relationship. Some, but not all, illustrations of reverse innovation are also illustrations of disruptive innovation. A reverse innovation, very simply, is any innovation likely to be adopted first in the developing world while a disruptive innovation has a particular dynamic that endangers incumbents.

After reading this book, one shall surely agree with the essayist Francis Bacon that this book has to be read wholly with attention and diligence. The authors do not present their ideas as guaranteed pills for success but have offered a theory of gaps and trends that might explain why innovations can defy gravity and flow uphill. They said that their arguments and hypotheses need to be tested rigorously to determine the contingencies. The authors call for more research into “organization mechanisms and incentive structures that can facilitate the trickle‐up process.” But, all said and done, reverse innovation is a powerful way to capitalize on the unexplored consumer segments in the emerging markets and it preaches new dynamics, not about lowering cost, but about adjusting to a new price‐performance curve by creating more value.