Reverse Innovation
Create Far From Home, Win Everywhere
by Vijay Govindarajan and Chris Trimble
Copyright 2012 Vijay Govindarajan and Chris Trimble Summarized by permission of Harvard Business Review Traditionally, innovation occurred primarily in developed economies.
Create Far From Home, Win Everywhere
by Vijay Govindarajan and Chris Trimble
Copyright 2012 Vijay Govindarajan and Chris Trimble Summarized by permission of Harvard Business Review Traditionally, innovation occurred primarily in developed economies.
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As the world economy shifts, the nature of innovation changes.
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“Reverse innovation” is the process by which firms create new products for and in
emerging economies that they then sell in developed markets.
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Reverse innovation requires you to see beyond your current “dominant” mind-set.
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Emerging and developed economies are divided by gaps in “performance, infrastructure,
sustainability, regulations” and consumers’ “preferences.”
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Less-developed nations have fewer regulations but tougher sustainability demands.
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Most outsiders who attempt to innovate for emerging economies fail to account for local
needs or realities.
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To innovate in a developing economy, you need a substantial physical presence there.
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Hire from within emerging economies and station staff there, including expats from
developed nations.
- Your teams in target economies need a clean start and the power to make growth- related decisions.
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Rating (10 is best)
Overall Applicability Innovation Style
9 8 10 9
9 8 10 9
Relevance
“Historically,
reverse innovations
have been rare.”
“The shift in
emphasis from
exporting to
emerging markets
to innovating for
emerging markets is
a significant culture
change.”
Summary
What You Will Learn
In this Abstract, you will learn:r1) How to define “reverse innovation,” 2) How it works and 3) Why it is so important.
Recommendation
This lovely, persuasive work couples the focused repetition of a good textbook with the lively style of an entertaining article. Academics and authors Vijay Govindarajan and Chris Trimble show how to harness “reverse innovation,” in which firms create products for and in emerging economies that lead to innovative goods for the developed world. The authors provide enticing data about the quick growth of developing economies compared to slower growth in developed economies. getAbstract recommends this accessible treatise to executives at companies with a global presence and to those interested in cultural differences, creativity and diversity.
The Time and Need for “Reverse Innovation”
Historically, most innovation occurred in developed countries because their populations could afford and demand progress and technological advancement. Businesspeople usually believe that emerging economies lag behind and don’t need to innovate to catch up because they can import what they require from the developed world. This reasoning fuels “glocalization,” which means that firms create products globally but sell “lightly modified versions” to less developed markets.
This worldview is no longer accurate. Emerging economies’ markets are fundamentally dissimilar to those of developed nations. Due to variations in culture and context, consumers need and want different things and possess a different kind of purchasing power. For example, when Walmart moved into South America, its “big box” formula did not work. Customers didn’t have enough money to “buy in bulk,” and – because most customers took the bus, rode a bike or walked – they could carry home only limited amounts. Walmart devised smaller stores to fit the marketplace. When these downsized facilities proved successful, Walmart opened “small-mart” stores in North America, creating a new market. This is reverse innovation – that is, an innovation that emerges from the developing world, which applies it first, and moves to the developed world.
Some 85% of the world’s population lives in “poor countries.” These nations’ economies are growing faster than developed countries’ economies, sometimes twice as fast. These emerging economies will provide “at least two-thirds of world GDP growth for decades to come.”
“The Five Paths to Reverse Innovation”
The developing world differs radically from the developed world, and each national culture possesses unique qualities. Despite these distinctions, reverse innovation follows five general patterns or paths. These paths navigate the “five needs gaps” that separate the developed and developing worlds. Successful reverse innovation recognizes and exploits these gaps as different cultures produce their own products and export them to the developed world:
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In this Abstract, you will learn:r1) How to define “reverse innovation,” 2) How it works and 3) Why it is so important.
Recommendation
This lovely, persuasive work couples the focused repetition of a good textbook with the lively style of an entertaining article. Academics and authors Vijay Govindarajan and Chris Trimble show how to harness “reverse innovation,” in which firms create products for and in emerging economies that lead to innovative goods for the developed world. The authors provide enticing data about the quick growth of developing economies compared to slower growth in developed economies. getAbstract recommends this accessible treatise to executives at companies with a global presence and to those interested in cultural differences, creativity and diversity.
The Time and Need for “Reverse Innovation”
Historically, most innovation occurred in developed countries because their populations could afford and demand progress and technological advancement. Businesspeople usually believe that emerging economies lag behind and don’t need to innovate to catch up because they can import what they require from the developed world. This reasoning fuels “glocalization,” which means that firms create products globally but sell “lightly modified versions” to less developed markets.
This worldview is no longer accurate. Emerging economies’ markets are fundamentally dissimilar to those of developed nations. Due to variations in culture and context, consumers need and want different things and possess a different kind of purchasing power. For example, when Walmart moved into South America, its “big box” formula did not work. Customers didn’t have enough money to “buy in bulk,” and – because most customers took the bus, rode a bike or walked – they could carry home only limited amounts. Walmart devised smaller stores to fit the marketplace. When these downsized facilities proved successful, Walmart opened “small-mart” stores in North America, creating a new market. This is reverse innovation – that is, an innovation that emerges from the developing world, which applies it first, and moves to the developed world.
Some 85% of the world’s population lives in “poor countries.” These nations’ economies are growing faster than developed countries’ economies, sometimes twice as fast. These emerging economies will provide “at least two-thirds of world GDP growth for decades to come.”
“The Five Paths to Reverse Innovation”
The developing world differs radically from the developed world, and each national culture possesses unique qualities. Despite these distinctions, reverse innovation follows five general patterns or paths. These paths navigate the “five needs gaps” that separate the developed and developing worlds. Successful reverse innovation recognizes and exploits these gaps as different cultures produce their own products and export them to the developed world:
-
“The performance gap” – In established economies, producers offer moderately
differentiated versions of their products: one with top performance, one with 80% of
that performance at 80% of the price, and the like. Emerging economies need radically
cheaper products – say, 50% performance at 15% of the developed world price. But
there is a limit: Developing nations’ consumers will accept lower standards, but they
won’t pay for 15% performance. Firms must diligently track trends that close the
performance gap.
-
“The infrastructure gap” – Developing economies usually lack infrastructure, but
when they create new frameworks, they are likely to be state of the art because
demand is strong and development starts from scratch with no existing constraints.
A lack of infrastructure generates resourcefulness and leapfrogging adaptation. For
example, rural Morocco’s cellphone service is more advanced than rural Vermont’s.
The developing world is narrowing the infrastructure gap but not by reproducing
solutions from the developed world. For example, India generates more solar and wind
power proportionally than the US and provides power with many small natural gas
or bio-gas generators.
-
“The sustainability gap” – Developing nations face different environmental issues
than developed nations, and this variation drives innovation. For example, air
pollution in China fuels consumer interest in electric cars. Poor countries experience
environmental issues intensely and will develop new, local solutions.
-
“The regulatory gap” – Companies encounter less regulation in the developing
world, and that allows them to develop new products more quickly, though sometimes
without the developed world’s parameters, such as consumer safety provisions. As
economies develop, regulation will follow.
-
“The preference gap” – Developing world customers want locally appropriate
products – not necessarily the same products that are popular in the developed world.
For example, to satisfy the Indian market, PepsiCo created crackers made from lentils,
not corn.
Your firm’s success may endanger its reverse innovation progress. You achieved your success in a particular kind of market and culture. When one way of doing business works, it produces a “dominant logic” through which a company understands and interprets the world. But the world has changed. Now the former developing world offers a diverse spectrum of emerging economies. Your dominant logic can lead you astray as you enter those markets. You must be open-minded. Domineering corporate mind-sets break down into five distinct levels:
-
“Levelonethinking”–Thisapproachtreatsemergingeconomiesasiftheyarenot
worth attention, as if it is still 1970. Few companies feel that way anymore.
-
“Leveltwothinking”–Atthispoint,firmsseekonlytosellexistingproductstothe
upper economic echelons of developing nations. This view assumes that emerging
economies are slowly creating a liquid upper class that will come to you, eager for
your products. But the developing world does not mirror the history of the developed
world. India’s GNP is rising, and its streets are crowded with motorbikes, not horses.
-
“Level three thinking” – This viewpoint, though limited, recognizes that different
markets face different realities. Yet, this rationale holds that “customization is
sufficient,” believing that firms can slightly alter existing products or approaches
to suit emerging markets. Level three marketing “treats rich and poor countries
equivalently” and ignores social, technological and economic realities, such as the
“Those who practice
reverse innovation
must sometimes
contend with potent
internal opposition
– frequently cloaked
in devotion to the
status quo.”
“Developing economies are different. They are not just a little bit different; they are night-and-day different.”
“It is impossible
to fully capture the growth opportunities in the developing world without developing new solutions from scratch. Reverse innovation is clean- slate innovation.”
“Developing economies are different. They are not just a little bit different; they are night-and-day different.”
“It is impossible
to fully capture the growth opportunities in the developing world without developing new solutions from scratch. Reverse innovation is clean- slate innovation.”
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fact that emerging economies have more customers, but less money. Picture selling
refrigerators in India: Rural India has unreliable electricity, so any design that depends
on constant power won’t work. The market demands a fridge that functions despite
power outages, even if the level of performance is inferior. Emerging economies need
products designed for their realities.
4. “Level four thinking” – These companies understand winning in emerging economies “requires innovation.” Such firms start with a clean slate and ask basic innovation questions: Who are the customers, what value can the company bring them and what’s the best way to deliver it? One possible pitfall of level four is that firms might generate inexpensive versions of existing technologies rather than cheap new technologies, assuming that low price is the only limiting factor. Chinese consumers don’t want technology that’s discounted because it is old; they want technology designed to work cheaply within China’s infrastructure.
5. “Levelfivethinking”–Thesefirmsknowthat“stakesareglobal”now.Atlevelfive, an organization knows how to escape dominant, developed-world logic and adopt a new perspective.
The leaders of companies at levels one through four often fear that margins in developing markets are too slender to produce profits, but countless examples prove them wrong. They fear that because their company’s strength is technological, they won’t be able to provide “ultralow-cost” alternatives. And they fear that manufacturing cheaper products for poorer countries will “cannibalize sales” of their higher priced products. That risk is present, but many companies thrive on offering products at a range of “price points.”
Level five requires thinking about the globe as your market. Decide if you should “shift the center of gravity of [your] organization to emerging markets?” Study a map of the world and mark where you think the greatest growth will occur in the near future. Then mark the locations where you have personnel. Usually, the marks will be in different places. Most companies face this severe disconnect between their future markets and the current locations of their staff and leaders.
At level five, your firm should move people who make essential decisions into growing economies’ home nations. Change your leadership structure to create positions responsible for guiding growth in developing countries. Then increase your research budget and encourage inexpensive experimentation. Let your employees know that you see growing economies as “incubation centers for global growth and innovation.”
You must build expertise in developing economies. Appoint directors and upper-level managers from these countries. Give rising workers within the company “multiyear expatriate assignments.” Provide brief “immersion experiences” for as many executives as possible. Build social connections between executives from developed economies and emerging economies. Hold conferences and educational seminars in developing countries. Your leaders should take “symbolic personal actions” to demonstrate the importance of emerging economies. While changing your company’s mind-set is essential, it is not sufficient. You must also change how you manage your company. Changes to company mind-sets are gradual and can take years to mature. By contrast, the organizational changes you should make will be sudden, even abrupt.
To avoid getting bogged down in your existing corporate structure, start “special organizational units” specifically for reverse innovation. These “local growth teams” (LGTs) start from scratch with a fresh structure but remain connected to their parent company so they can strategically exploit its resource base. Starting from scratch Reverse Innovation getAbstract © 2012 4 of 5
4. “Level four thinking” – These companies understand winning in emerging economies “requires innovation.” Such firms start with a clean slate and ask basic innovation questions: Who are the customers, what value can the company bring them and what’s the best way to deliver it? One possible pitfall of level four is that firms might generate inexpensive versions of existing technologies rather than cheap new technologies, assuming that low price is the only limiting factor. Chinese consumers don’t want technology that’s discounted because it is old; they want technology designed to work cheaply within China’s infrastructure.
5. “Levelfivethinking”–Thesefirmsknowthat“stakesareglobal”now.Atlevelfive, an organization knows how to escape dominant, developed-world logic and adopt a new perspective.
The leaders of companies at levels one through four often fear that margins in developing markets are too slender to produce profits, but countless examples prove them wrong. They fear that because their company’s strength is technological, they won’t be able to provide “ultralow-cost” alternatives. And they fear that manufacturing cheaper products for poorer countries will “cannibalize sales” of their higher priced products. That risk is present, but many companies thrive on offering products at a range of “price points.”
Level five requires thinking about the globe as your market. Decide if you should “shift the center of gravity of [your] organization to emerging markets?” Study a map of the world and mark where you think the greatest growth will occur in the near future. Then mark the locations where you have personnel. Usually, the marks will be in different places. Most companies face this severe disconnect between their future markets and the current locations of their staff and leaders.
At level five, your firm should move people who make essential decisions into growing economies’ home nations. Change your leadership structure to create positions responsible for guiding growth in developing countries. Then increase your research budget and encourage inexpensive experimentation. Let your employees know that you see growing economies as “incubation centers for global growth and innovation.”
You must build expertise in developing economies. Appoint directors and upper-level managers from these countries. Give rising workers within the company “multiyear expatriate assignments.” Provide brief “immersion experiences” for as many executives as possible. Build social connections between executives from developed economies and emerging economies. Hold conferences and educational seminars in developing countries. Your leaders should take “symbolic personal actions” to demonstrate the importance of emerging economies. While changing your company’s mind-set is essential, it is not sufficient. You must also change how you manage your company. Changes to company mind-sets are gradual and can take years to mature. By contrast, the organizational changes you should make will be sudden, even abrupt.
To avoid getting bogged down in your existing corporate structure, start “special organizational units” specifically for reverse innovation. These “local growth teams” (LGTs) start from scratch with a fresh structure but remain connected to their parent company so they can strategically exploit its resource base. Starting from scratch Reverse Innovation getAbstract © 2012 4 of 5
“Fundamentally,
all innovation,
including reverse
innovation, is about
assessing needs
and developing
solutions.”
“Manage reverse innovation initiatives as disciplined experiments,
with a focus on resolving critical unknowns quickly and inexpensively.”
“As the world economy grows, the clashes between economic activity and environmental concerns will only become more severe.”
“Situate innovators in emerging markets and empower these innovators to take initiative to solve local customer problems.”
“Manage reverse innovation initiatives as disciplined experiments,
with a focus on resolving critical unknowns quickly and inexpensively.”
“As the world economy grows, the clashes between economic activity and environmental concerns will only become more severe.”
“Situate innovators in emerging markets and empower these innovators to take initiative to solve local customer problems.”
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frees them from the organization’s dominant logic, while having global resources helps
these specialized start-ups challenge local companies. LGTs engage in “disciplined
experimentation” focused on “resolving critical unknowns” about their endeavors.
Evaluate LGTs with special performance metrics adapted to local conditions and crafted to
track and reward innovation. Judge them by what they learn. LGTs must revise their plans
often, unlike established firms that can use “the past...as a reliable guide to the future.”
Reverse Innovation in Action
Logitech’s entry into the Chinese computer mouse market demonstrates how companies can both stumble and triumph when dealing with reverse innovation. Logitech saw the demand for information technology exploding worldwide and mistakenly thought that users everywhere had the same needs. Logitech executives assumed that their expertise would let them successfully market their computer mouse in China. Instead, a Chinese competitor undercut their price: Rapoo offered a $15 mouse that was equivalent to Logitech’s $50 model. More crucial, Logitech failed to see that its product didn’t meet the unique needs of Chinese consumers. China’s high population density means that apartments are crammed together and that a mouse needs more shielding to fight jamming signals from neighbors. Chinese mouse users also require greater range, since they use the same device to operate their televisions. After stumbling badly, Logitech eventually started an LGT, which redesigned its mouse to satisfy Chinese market realities. This meant changing both the technology and the price, which Logitech did successfully.
The world’s poorer nations desperately need better health care, but many of the developed world’s health care solutions don’t fit developing economies. Paul Farmer, Harvard- trained in both medicine and anthropology, witnessed this in Haiti. When trying to deal with a local tuberculosis outbreak, Farmer found that access to proper medication was only part of the solution. He developed a system of “community health workers” who became “partners in health” with their patients and helped them address multiple factors that contributed to disease, from poor nutrition to illiteracy. Farmer helped people far more cheaply than “rich world” medicine could. His treatments cost $150 to $200, compared with at least $15,000 in the US. Other doctors have since transplanted this approach to Peru and to poor neighborhoods in the US, where it disrupted existing medical systems.
Reverse Innovation in Action
Logitech’s entry into the Chinese computer mouse market demonstrates how companies can both stumble and triumph when dealing with reverse innovation. Logitech saw the demand for information technology exploding worldwide and mistakenly thought that users everywhere had the same needs. Logitech executives assumed that their expertise would let them successfully market their computer mouse in China. Instead, a Chinese competitor undercut their price: Rapoo offered a $15 mouse that was equivalent to Logitech’s $50 model. More crucial, Logitech failed to see that its product didn’t meet the unique needs of Chinese consumers. China’s high population density means that apartments are crammed together and that a mouse needs more shielding to fight jamming signals from neighbors. Chinese mouse users also require greater range, since they use the same device to operate their televisions. After stumbling badly, Logitech eventually started an LGT, which redesigned its mouse to satisfy Chinese market realities. This meant changing both the technology and the price, which Logitech did successfully.
The world’s poorer nations desperately need better health care, but many of the developed world’s health care solutions don’t fit developing economies. Paul Farmer, Harvard- trained in both medicine and anthropology, witnessed this in Haiti. When trying to deal with a local tuberculosis outbreak, Farmer found that access to proper medication was only part of the solution. He developed a system of “community health workers” who became “partners in health” with their patients and helped them address multiple factors that contributed to disease, from poor nutrition to illiteracy. Farmer helped people far more cheaply than “rich world” medicine could. His treatments cost $150 to $200, compared with at least $15,000 in the US. Other doctors have since transplanted this approach to Peru and to poor neighborhoods in the US, where it disrupted existing medical systems.
PepsiCo’s experiences in India provide a model of the crucial principles of reverse
innovation. PepsiCo’s CEO Indra Nooyi is Indian, which gives the company expertise
in the nation’s economy. PepsiCo also models a conscious commitment to reach out to
emerging economies and to learn from them. When PepsiCo’s chief scientific officer,
Mehmood Khan, developed healthier snacks, he drew on the corporation’s experience
with its baked (not fried) Aliva cracker, which is designed to incorporate local dietary
practices. Its recipe blends lentils, wheat and rice bran oil (not palm oil) because rice is
common in India; rice bran oil is also cheaper and healthier, so it helps combat India’s high
rate of heart disease. Aliva used novel packaging to protect the cracker and draw the eye.
Throughout the product development process, PepsiCo employed local talent supported
by global resources. The firm gave local teams “freedom within a frame”: If they aligned
the product with “global brand standards,” they could develop it as they saw fit.
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