An Interview with Vijay Govindarajan
Vijay Govindarajan, known as VG, is the Earl C. Daum 1924 Professor of International Business at the Tuck School of Business and founding director of Tuck's Center for Global Leadership. He is also the faculty co-director for Global Leadership 2020, Tuck's executive education program that focuses on global management and is taught on three continents. He is also the chief innovation consultant to General Electric, and recently co-authored a seminal Harvard Business Review article titled "How GE is Disrupting Itself" - with Jeffrey Immelt and Chris Trimble - in which he introduces a key new management concept: reverse innovation.
VG, thanks for the interview. Let's begin by defining what you mean by "reverse innovation."
VG: Reverse Innovation, very simply, is any innovation likely to be adopted first in the developing world. Increasingly we see companies developing products in countries like China and India and then distribute them globally.
The fundamental 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.
What Jeffrey Immelt has been saying — and we wholeheartedly agree — is that 'success in developing countries is now a prerequisite for continued vitality in developed ones.'
Why is that?
For decades, US multinationals have focused their innovation efforts on the needs of rich countries and then exported their offerings around the globe. But today, they must be just as good at the reverse. They must innovate to solve the problems of the developing world -- and then bring the innovations home. Our article explains why reverse innovation is critical and how to make it happen.
Let's look at an example of how American auto manufacturers have not done an effective job at reverse innovation and why we say that the future may well depend on reverse innovation. Companies like Ford brought their global automobile platforms into India, thereby, becoming niche players in the premium segment. After all, only 5% of the Indian population can afford a Rs10 lakh ($20,000) car!
In 2009, Tata Motors launched the Tata Nano — the Rs1 lakh ($2,000) people's car. Multinational companies have to find a 10% solution to capture the full potential in urban India and a 1% solution to capture rural India. That is to say, if a product was to sell for $100 in US, a similar solution is needed for urban India at $10 and for rural India at $1. This is because of the income gap between US and India. The per capita income in India is about $1,000, whereas per capita income in US is about $50,000. That is why one needs the Tata Nano type of solution to unlock new markets in India. The Tata Nano is targeted at the non-consumers of automobiles in India today, namely the two-wheeler population. The two-wheelers are priced at $1,500. By introducing an automobile for $2,000, Tata Motors plans to migrate the two-wheeler population into four-wheeler users. Creating new consumption requires new business models.
Tata Motors plans to introduce Tata Nano not only in other emerging markets such as Africa but also plans to bring the car into Europe and the US eventually. The biggest threat to American automobile will come from emerging market competitors like Tata.
what should companies do to adopt reverse innovation? How does a company acquire this capability?
Let's start by saying that reverse innovation is not just a GE phenomenon. Companies like Procter & Gamble, Nokia, Unilever, IBM and Microsoft are all practicing reverse innovation in one form or another.
Second, reverse innovation is not a “nice to have” boost to revenue growth rates. We believe it will power the future — not just in poor countries, but everywhere. Many tremendous rich-world business opportunities will arise first in poor countries. To compete, global corporations must be just as nimble innovating abroad as they are at home.
Having said that, now let's look at how reverse innovation has evolved over the years. We've developed a simple four-phase approach which describes how reverse innovation becomes a key part of a global company's DNA. There's nothing complicated here; it's simply business evolution:
Phase 1 — Globalization — Multinationals build unprecedented economies of scale by selling products and services to markets all around the world. Innovation happened at home, and then the new offerings were distributed everywhere.
Phase 2 — Glocalization — In this phase, multinationals recognized that while Phase 1 had minimized costs, they weren’t as competitive in local markets as they needed to be. Therefore, they focused on winning market share by adapting global offerings to meet local needs. Innovation still originated with home-country needs, but products and services were later modified to win in each market. To meet the budgets of customers in poor countries, they sometimes de-featured existing products.
Phase 3 —Local Innovation — In this phase, the first half of the reverse innovation process, multinationals are focusing on developing products “in-country, for country.” They are taking a “market-back” perspective. That is, they are starting with a zero-based assessment of customer’s needs, rather than assuming that they will only make alterations to the products they already have. As teams develop products for the local market, the company enables them to remain connected to, and to benefit from, global resource base.
Phase 4 — Reverse Innovation — If Phase 3 is “in country, for country,” Phase 4 is “in country, for the world.” Multinationals complete the reverse innovation process by taking the innovations originally chartered for poor countries, adapting them, and scaling them up for worldwide use.
VG, can you give us some examples of products developed using this process of reverse innovation?
One example is the GE MAC 800. In 2008, GE innovated an ECG machine, MAC 400 to serve the rural market. This ECG is portable. Rural population cannot afford expensive healthcare. The MAC 400 costs about Rs50,000 ($1,000), a fraction of the cost of the appliance-sized premium machines sold in the US. In 2009, GE has brought an improved version of the portable ultra low cost ECG machine into the US, which is sold as MAC 800. This low-priced ECG machine has created new applications in the US in accidents sites and in emergency rooms where portability and small size are huge advantages.
France's Groupe Danone learned about reverse innovation in Bangladesh, where they set up local microplants that produced a tiny fraction of the yogurt of a standard facility, partly because of the the lack of refrigerated storage. The lessons learned from Bangladesh helped Danone launch Ecopack, which is a low-cost yogurt sub-brand, in France.
Then there's Nokia which is doing some very innovative things in Africa and India. They learn how people use and share phones and then use that learning to create new features for their western customers. One of their newer phones has speakers that can play music and online videos so kids can share them with friends. This was something Nokia learned in Africa.
One can argue that the entire "netbook" movement which has taken the computer world by storm was inspired by the XO laptop which was built for kids in the developing world.
The list goes on and on, and is not limited to just techology driven products.
P&G's research lab in Caracas created a honey-based cough product for Mexico initially, but then found it had a market in to Western Europe and the US. People like natural honey!
And Nestlé took its dried noodles—a popular, low-fat, low cost meal created for rural Pakistan and India and "reverse innovated" its way to a budget health food in Australia and New Zealand.
VG, I'm concerned that most US companies simply aren't structured to succeed with reverse innovation. What are some of the more important principles that a company must adopt to create a culture in which reverse innovation flourishes?
It is extremely difficult for reverse innovation to happen because today's decision-making power rests largely with executives in the developed world. For example, global product leaders might have difficulty understanding customer problems in rural India and their priorities would be more focused on meeting the needs of the customers they are familiar with: the "rich-world" customers.
Reverse innovation requires a decentralized, local-market focus. Most if not all the people and resources dedicated to reverse innovation efforts must be based and managed in the local market.
The responsibility must be local as well. Local Growth Teams (LGTs) must have P&L responsibility (this, by the way, is a key hurdle for American multinationals). The LGTs must have the decision-making authority to choose which products to develop, how to make, sell, and service them. They must also have the right (and support) to draw from the companies global resources.
Finally, once tested and proven locally, products developed using reverse innovation must be taken global which may involve pioneering radically new applications, establishing lower price points, and even cannibalizing higher-margin products.
No one said this is easy. But then, survival today, requires a new mindset. Part of that mindset, an important part, will be reverse innovation.
Finally, and this is a question you probably hear a lot today, how does the recession impact reverse innovation?
Reverse innovation was important even before the global meltdown. The global financial crisis has only made the case for reverse innovation that much stronger. There is likely to be slow growth in the developed world and more robust growth in emerging markets. The growth gap between the rich and poor countries has now become more like a growth chasm.
Ten years ago, multinationals talked about their global strategy in terms of their strategy for the US, Europe, Japan, and the rest of the world. Going forward, multinationals must talk about their global strategy in terms of their strategy for the BRIC countries, Middle East, Africa, and the rest of the world. The "rest of the world" will include the US, Europe, and Japan!
Thanks, VG, and good luck with your research. I hope the multinationals pay close attention to you, for their own sake!
Visit VG's blog on strategy and innovation: www.vijaygovindarajan.com
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