Reverse Innovation : The Thin Line between Success and Failure
Innovation is a continuous need for an organization to remain competitive. As Michael E porter has explained Innovation is not only required to evolve an organization towards different landscape but most of time it is a compulsory requirement resulting from “Red Queen Effect”. Innovation is the only shield to protect companies from ever increasing competitive forces and changing business landscape. Innovation is the oxygen for company’s sustained success and growth. Innovation is not just about inventing or introducing a new product, method, technology or radically inventing a new form of wheel but is a balanced combination or synthesis of knowledge from existing and futuristic value generation activity. Innovation truly or ideally should be of both technical as well as social driven in nature, an innovation truly counts when it improves the value proposition of the existing or new product which are addressing “needs or want” of society (Market and consumer).
Historically companies have realized the need for innovation and have been continuously investing resources towards R&D to attain futuristic growth. From as early as start of 19th centuries most of the organization has been investing a quite substantial amount of their revenue to innovate and improve their offering in the market. But as above statement suggested the target for such innovation was the “Identified Market“, which are the existing customer segment or possibly the new identified customer segment but mostly within existing identified market. Since long as per Paretto rule or other studies, companies realized that only 20-30% of their total potential customers are only profitable and to gain profitability they must strive to serve these 20-30% populations in best way. Going by this logic all the innovations were subjected to serve these customers, who are rich customers and who lives in rich western countries. These products, which were originally developed for rich customers of west, were being offered to the affluent customer of emerging countries through “Glocalisation”. Typically through Glocalisation business model, companies started their globalization efforts by slightly adapting or Knocking out certain expensive and high tech product features from their established product. Then these scaled down product version (including localized feature) were sold to the customers in other geography including most affluent segments of society in developing countries. Glocalisation has been a successful strategy and it worked in a world where markets were broadly similar. For example an American consumer is more or less similar to consumer in Europe and Japan, so a slight localization or local adaptions in product made companies to expand their product reach to various markets across the globe. This provided a perfect sense of “scalability” in terms of company’s resources and a profitable approach. This strategy was fine with perspective of allowing multinationals to make profitable trade-off between global scalability and local customization to minimize the cost with maximize the gain in market share. This strategy was fine until the rich western markets (only) were accounted as existing market and emerging or poor countries did not offer many opportunities. So Glocalisation was only targeting customers belonging to Top of Pyramid segment in emerging or poor countries (Roughly 10% of these markets), apart from rich western countries customers.
With the changing business landscape and robust economic growth experienced by developing nations, the concept of Glocalisation has started losing its sheen and in coming days it might lose it competitiveness also. Today, the so called “Rich” countries and “Poor” countries account for roughly equal shares of the global economy. Emerging markets such as BRIC nation (Brazil, Russia, India and China) are the new mass markets of the world, generating almost half of global GDP and more than 45% of world exports. Apart from this, most of the rich countries are in a slow-growth recovery from a truly awful recent recession, whereas growth has been far more robust in developing countries. Looking at this growth gap, emerging economies are expected to account for as much as two-thirds of future growth in world GDP. But on social level, the customers in these new mass markets are fundamentally different from those in developed markets. These countries have customers whose per capita income is far lower than developing nations for example roughly per capita income in the U.S. ($44,000) vs. India ($1,000). But these markets constitute a mega consumer base (Large population) that is almost 60-70% of the global population making them “Mega-markets with Micro-customers“.
Owing to this radical shift in business landscape, the real potential for all companies lies in unlocking the Bottom of Pyramid (BOP) consumer base that accounts for at least 70-80% of global population. Localizing by earlier principle and offering adaptation of such global products which was originally created for the U.S. customers to Indian customer might not work in today’s scenario. Thus a complete paradigm shift was required for sustainable competitiveness by global companies. And consequently “Reverse Innovation” was coined to overcome such paradigm shift in the market
Reverse innovation is a term referring to an innovation seen first or likely to be used first, in the developing world before spreading to the industrialized world. The term was introduced by Dartmouth professors Vijay Govindarajan and Chris Trimble and GE’s Jeffrey R. Immelt. The process of reverse innovation is quite opposite to the approach of Glocalisation. Reverse Innovation focuses on developing products and services which addresses the needs and requirements of customers in poor / emerging economies like India and China. Once developed for these markets, they are then localized or ramped up to be sold elsewhere – even in the West – at low prices which creates new markets and uses for these innovations.
Reverse Innovation is quite a cycle which is completely opposite to Glocalisation, here Initially companies focus on developing products for specific needs of local customers i.e. “in country, for country” in poor or emerging countries. The product is developed after detailed assessment of customer’s need in these emerging economies against just knocking down features from existing products. The developments of these products are augmented by benefits of company’s global resource and technology. Companies complete the reverse-innovation process by taking these innovations (originally chartered for poor emerging country’s customer) to rich western markets. They do so by localizing them, and scaling them up for rich world customers i.e. “in country, for the world.” Thus Reverse innovation broadly means Innovating a product which is created locally in developing countries, tested in local developing markets, and, if successful, then upgraded for sale and delivery in the developed world.
Reverse Innovation is the way ahead for all companies which desire to remain competitive. Apart from remaining more profitable, there were some critical revolutions which have occurred in business marketplace and which has rendered imperativeness towards such “reverse innovation”. These are
- Embracing of free market across large part of the globe.
- Enhancement in technologies such as telephony and communication.
- Local competitors gaining forefront of economic expansion
- The reducing gap between developing and developed economy.
- Higher growth rate of developing economies.
The perfect example which can be drawn about necessity for reverse innovation is from Pharma Industry. Statistically if you see, today almost 75% of all the medical discoveries benefit only 15% of the world’s population. That means the remaining 85% of the population are not being served or underserved by the existing pharma innovations. Most of these underserved populations reside in either developing countries like BRIC or in poor countries like many parts of Africa. Now if you analyze further, you will find that population in emerging markets has different diseases; much inferior healthcare infrastructure; lower customer affordability and differing regulatory systems.
This provide the perfect ground for reverse innovation, where the biggest opportunity for pharma companies is to focus on the vast segment of unserved and underserved customers in developing and poor countries. The pharma industry should focus on unique diseases in these customer bases and innovate with solutions that are not only specific and low-cost, but also provide extensive access to patients within existing infrastructure. Once these innovations hits off, then it will also find suitable applications in developed markets across the globe. The real business examples have been GE’s $1000 handheld ECG device and portable PC based ultrasound machines (At cost of $15000). These were not only remarkable due to their lower cost but because they were developed specific to the needs of local population of India and china and were later marketed to developed countries like USA.
Today most of the multinationals are turning toward this way of innovation. This is not only excellent way to increase your market share globally but also to pre-empt the competition. There are new generation of global corporations rising from the developing world, including Tata, Mahindra, Lenovo, Cemex and Haier. In the IT services industry firms like Infosys, Tata consulting services, and WIPRO have pioneered the concept of “global delivery model” challenging IBM and Accenture to redefine their business models. Brazil’s Embraer is giving Canada’s Bombardier a run for its money in regional jets. China’s Huawei is challenging global telecommunications companies like Siemens, Ericsson, Alcatel-Lucent, and Cisco. All these global corporations of developing world started as local companies in initial days, but all of these are providing stiff competition to multinationals—not just in emerging markets but also in developed markets.
These local companies realized that there is a huge customer base which due to lower affordability requires solution to their need with decent quality but at an ultralow price — that is, a 50% solution at a 5% price. At first, such solution maintaining only 50% quality was unattractive in the rich world, but eventually, performance of these products started rising to the point that it became attractive within the rich world also. Thus disrupting the business and increasing the competitive forces for the existing global multinationals. It is established now that if any company that does not have a presence or not innovating in emerging markets are dangerously putting itself and their competitiveness at risk even in their local market (Developed economy). If established global corporations do not innovate in poor countries, new competitor’s mostly local competitors will seize the opportunity. They will take the lead in such innovation not only helping them in this poor local market but throughout the world including developed market also. This not only increases the risk of developing some future formidable rivals, but allowing such local companies to continue making life miserable for developed country’s multinationals in their own developed market. Already, there are few examples of such reverse innovation followed by few global multinationals such as
- Nokia: ‘Nokia Life Tools’ originally meant for need of low income farmers in India and China and now finding market in developed economies. New features in its hand-held phones sold in the US, based on observations of how phones are shared in Ghana.
- Microsoft: creating new phone app services (Based on cloud computing platform) for “dumb” phones built for markets in India and South Africa, and ramping it for western markets.
- GE: ultra-portable PC based ECG machine in the U.S. at an 80% markdown for similar products. The machine was originally built by GE Healthcare for doctors in India and China.
- Tata Motors: Upgraded version of the Tata Nano in western markets; it’s called Tata Europa.
- Procter & Gamble: honey-based cold remedy created for Mexico also had a profitable market in Europe and the United States.
- Nestle: low-fat dried noodles originally created for rural India and later positioning it as health alternative food in western countries like Australia and New Zealand
- Pepsi & Co: product variant such as Kurkure, Aliva and Nimbooz initially developed as per local taste but now being sold at western markets.
Thus we can say that Reverse innovation is not only required by global multinationals to capture growth in emerging markets; it is the very oxygen that will fuel future growth of multinationals in their home markets also.
The fine Line of Reverse Innovation
Although Reverse Innovation is the way toward future and is going to be oxygen for the companies in coming future, but there is a fine line which separates the success and failure of a reverse innovation project. To delve deep into this statement we have to take a small example, Pepsi & Co. introduced some local variant of snacks and beverages in Indian market like “Nimbooz, Kurkure etc”. These variant are very much suited and developed for Indian taste, and subsequently were huge success in Indian market. Now based on Indian market success Pepsi & Co. planned to introduce it back in western market. Now the primary question arises will such innovation qualify as “Reverse Innovation” and if it qualifies then also will it be successful in the western market? Since western customer has different taste for snacks from Indian. In order to understand this fine line, we will try to see the relationship and impact of reverse innovation with other strategy and situations.
Reverse Innovation is the futuristic strategy but it does not imply that it will replace the Glocalisation strategy. If you analyze both the strategy model and distinctly identify their boundaries, then you will find that there is ample scope of both strategy models to co-exist in parallel. This state of co-existence is highly desirable also owing to high potential loss in case reverse innovation is completely knocking off the “Glocalisation Business model”. Since most of multinational have already invested heavily on later model, their co-existence can result in higher ROI and continuous profitability deriving from cumulative benefit of both the strategies. This brings us to an understanding that there should be a distinct but a fine line which should govern the “Reverse Innovation” business model and safeguard other business model as when applicable in coming days.
To understand the fine line between Reverse Innovation and Glocalisation, we have to study the situation that creates the possibility of Reverse Innovation. There are broadly two distinct situations that create the ground for Reverse Innovation. These situations ar
Situation 1: Affordability or Income Gap:
Looking at the world demography, there exist a significant gap between income or affordability between “Rich” nation’s customer and “Poor/Emerging” nation customer. As stated earlier roughly per capita income in the U.S. ($44,000) against India ($1,000) shows the gap of affordability between customers in these markets. Owing to large gap and lower per capita income, customer in “Poor/Emerging” countries will be inclined towards solutions which might be of inferior quality level but at much lower cost (affordability). Going by earlier stated need of “50% solution at 5% price” for poor nation’s customer, conditions arising from “Income Gap” are suitable for reverse innovation. This situation leads to reverse innovation project which will be to provide solutions primarily at very low cost with significant compromise on quality level. Although from other perspective such innovation looks more like a “Disruptive Innovation” but the clear definition of boundary can establish differentiation among these two strategies.
Although such situation based reverse innovation looks like a perfect strategy to gain new market, but if you look at the core of reverse innovation which is “Market back perspective” may find a major roadblock in futuristic scenario. The challenges which will come across reverse innovation are two fold
- Firstly with the improvement in affordability, will the same set of customer still continue with the same level of quality?
- Secondly, won’t a low cost model posing a serious threat towards possible cannibalization?
Improving affordability and Reverse Innovation
To understand the impact of these scenarios, let’s take an example from business. Tata Motors, one of large Indian MNC which enjoys market leadership in the HCV and MCV segment as well one of the leading players in Car manufacturing in India market. They identified the business opportunity leading to low affordability situation of reverse innovation, where they identified a huge market for affordable low cost car for poor people within India and abroad. As a result they decided to launch much-publicized “people’s car,” the Nano. It was a huge success in debut year with all possible public and media attention. Looking at the success of first year Tata decided to launch the same product with improved features and quality as Reverse Innovation in western market as Tata Europa. But the preceding year although the overall auto sales in India’s booming economy rose more than 22%, Tata sold only 509 Nanos in domestic market (November 2010). This was a very dismal show by the product which was considered as successful case of reverse innovation and was preparing for “market back” stage of the reverse innovation cycle.
There were many reasons identified for the Nano’s poor showing: production delays, fires, and other quality issue. But one of the interesting reasons being found that was the stigma attached to buying a “cheap” car. This stigma clearly indicated that there was enough affordability present among potential customers of Nano to at least buy a Maruti’s cheaper range (Maruti Alto) and customer were ready to shell out little extra more for better quality (at Least perceived) than was offered by Nano. Maruti’s sales continues rising but Nano although being cheaper than Maruti is still struggling, indicating that whole strategy of reverse innovation has somewhat failed in this case. Now going by same logic it is a challenge for Tata to sell higher improved version of Nano in western countries, because the question arises Is there any identified market for such product (Low cost but significant inferior quality 4-wheeler) in western world?.The question arises why a car or rather a poor people’s car that poor people are even not buying? The original target market being identified for Nano was motorscooter riding population, who are actually not upgrading themselves to Nano?
The reason probably can be failure to devise a targeted value proposition. This example points that entering a reverse innovation project without taking the time to clearly understand the buyer need as well identifying optimum price-performance configurations will result in failure. To summarize, with the improvement in affordability the whole starting point of Reverse innovation (that is buyer identification) may go awry. In order to optimize and obtain higher profitability, every reverse innovation should take care of “Identification of Buyer and their need”, “optimum price-performance configuration” of the solution and “flexibility” within the product development.
Cannibalization and Reverse Innovation
Secondly, Lower Affordability or Income Gap situation based reverse innovation might lead to radical product innovations. Such innovation sometime might not be very favorable for company’s existing business. Reverse innovation can lead to three scenarios which are a) New Market share, b) Destabilization of potential competitors and c) Cannibalization. Among these three, Cannibalization is the scenario which might not be favorable for company’s existing business. Cannibalization not only eat away sales of company’s existing offerings as well can lead to reduction in critical investment towards company’s existing products. For example as a reverse innovation, company introduced a lower cost product with much lower quality. But if the same lower-quality products are serving the required need at acceptable quality, then it might lead to shift of existing high end product’s customer towards these lower-quality products. This will be classic case of cannibalizing the company’s existing higher quality product from the lower cost-quality product launched as result of reverse innovation.
This type of problem is generally faced in a market where company faces two different customer segments because of affordability or income gap as well where demand is stationary and known. This type of situation can completely reverse the outcome of the reverse innovation and company might end up losing the existing market and profitability. This type of situation has to be pre-empted and a thorough analysis of market and demand is to be done. Here we find again a fine line between reverse innovation and cannibalization and company has to be very careful not to land on undesirable side.
Status branding and Reverse Innovation
Another problem which may arise, and is associated primarily with companies which are providing “Status brand” or “aspiration brand” to their customers. Status brands are those brands that, through association, inherently increase their owner’s popularity in a certain community. One of the rough examples is Mercedes-Benz, which enjoys the reputation of making premium automobiles at premium prices. Mercedes-Benz identified an affordability gap in country like India and found a perfect ground for reverse innovation. As a result they are planning to launch cars such as “A-class” and the “B-class”, both tiny, compared to their next largest, the “C-class”. But this raised a serious question about Mercedes-Benz loosing perception of status brand? Are such innovations going to hit “Price premium” commanded or market share as status premium brand for Mercedes-Benz? This was an important concern and eventually Mercedes-Benz has decided not to launch such vehicles in their existing western market including US. This type of concerns has to be diligently tackled ahead of getting into any such reverse innovation. “Differentiation of product as per market“, “different brand names” etc. are some of the possible solutions to overcome such problem against reverse innovation. For example BMW’s advent in such reverse innovation was hedged by smart strategy to buy / introduce a separate brand name only for such low cost cars as “Mini Cooper” which kept their aspiration value high for their premium car range.
Situation 2: Lack or differing infrastructure:
We understand that at a broader level all human being have certain common requirement like health, food, comfort and safety. But how they value these things and in what details they expect these requirement to be fulfilled depends mainly on affordability as well as infrastructure existing there. It is known that there exists significant infrastructure gap between rich countries and poor/developing ones and in most of developing countries such infrastructure is missing or being built up. Since a gap exist, so to address the customer need within existing infrastructure system will lead to innovation which is again reverse innovation.
For example GE’s innovation of ultra cheap ECG machine and portable ultrasound machine for rural market of India and China is a perfect example of reverse innovation owing to identification of infrastructure gap situation. GE healthcare found that healthcare infrastructure was very immature and scare in rural areas of India and china, but still customer wanted decent healthcare. Thus it was a required need at these places to address healthcare concern at lower cost and with higher level of mobility resulting in GE’s Innovation of low cost and portable healthcare equipments. These innovations exemplifies successful case of reverse innovation, where apart from serving these infrastructure starved markets it can be deployed in rich western market for different uses and for remote areas (Emergency purpose). But such situation based reverse innovation can also run into redundancy with improvement in infrastructure and affordability.
Infrastructure advancement and Reverse Innovation
An example to put this point across is Nokia, one of the leading manufacturers of mobile handset. They introduced range of so called “dumb” phones having only basic features to cater to Indian rural and poor customer’s need for telephony. These range started from a very low cost, basic feature phone, providing basic communication services like “call and sms” to rural and poor mass within available limited infrastructure (Lack of 2G, 3G etc) of the country. This way Nokia managed to gain No.1 position with almost 80-90% market share (Within India) at some point of time during early 2000’s.But with gradual development and awareness of technology and infrastructure, customer started moving toward smart phone. In present scenario high end mobile handset manufacturer like Apple, as well as High end mobile phone sets from Samsung, HTC and Sony has started eating away market share of Nokia. Now the whole objective of “marketing back” this reverse innovation is posing a big challenge for Nokia not only in western market but even for Indian market. As we can find that although Nokia still manages 40-50% of market share in developing countries but it is struggling to manage any significant market share in US (About 10% only at present).
This example points to a serious question about successful completion of reverse innovation cycle for products, which has been innovated due to infrastructure gap and is unable to attract high end or high tech customers. Since infrastructure is continuously improving in most of developing countries, thus to invest your R&D and plan reverse innovation only based on infrastructure gap may turn out to be futile for its optimal success. This type of problem should be countered by continuous innovations complementing the earlier reverse innovation projects like Microsoft’s new phone application services for “dumb” phones which allow users with existing, non-smart phone devices to access Web sites such as Twitter, Face book. This type of additional reverse innovation complementing earlier reverse innovation products can lead the way to strive in parallel with improving infrastructure and improving aspiration of customer. Apart from this “accurate demand identification” and “flexibility” is the key.
Way towards Successful Reverse Innovation
Based on above discussion, it can be deduced that during reverse innovation certain amount of diligence and assessment of certain business factors should be carefully addressed like “Identification of correct customer need and buyer segment”. “Infrastructure gap analysis with a futuristic delta co-efficient” that is “flexibility” in product development may be another good area to start with especially for products which is going to address infrastructure based problems. Customer culture, market behavior and consumer behavior of the developing / poor country should be paramount to learn as a starting step. A thorough market research including cultural survey must be deployed during planning stage only.
A thorough “price-performance configuration” needs to be derived depending upon customer need in subjected market. Pricing the product at lower range by discarding features which may be still desirable to customer of developing nation might not attract customer. As stated earlier Nano was an example where “price” might not have been the most problematic area. Another example will be defense based procurement, even developing or poor countries will not compromise on quality for cost in such deals, indicating need for optimum “price-performance configuration” determination. Here again market surveys can be a valuable tool in order to provide valuable information as to consumer demands and your own knowledge about manufacturing and operational cost will help significantly in devising a value proposition.
Leveraging on knowledge and expertise from their earlier or existing market offering and R&D is must to be profitable for such innovations. First of all customer in developing nation are aware of technological and feature advancement in rich western countries and they expect these features at least in lower version and secondly leveraging such knowledge will cut on extra R&D cost and help in developing proven product. For example in service industry service provider or consultants are enjoying success due to reverse innovation by offering their services using the same methodology across rich and poor countries but by cutting activities such as fancy presentations, Multi level reporting, or other up-sell services. This way they are able to offer their specialized knowledge, analytical skills, and business experience at affordable rates even in western countries.
Finally Localizing of resource and decision making with full support from headquarters is crucial for any reverse innovation to succeed. Decision making power should be allocated to such local units in developing nation in order to enjoy unidirectional focus to innovate. LGT team of GE healthcare in India and China and the organizational structure of these LGT provide one of the perfect examples for the same.
This bring us to a conclusion that Reverse Innovation is the “Oxygen” for the future for every multinational but the fine line of reverse innovation should be identified and adhered to dynamically and diligently. Reverse innovation is like innovating on the edge of present market, product and intellectual capital of the company leading to innovation which address unmet customer needs, develop unexpected solutions. It redefines the core competency of the company and is significant to cope up with unexpected shift of business landscape with breathtaking speed
Reverse Innovation is the way to tackle future competition, but wrong assessment and lack of futuristic approach can lead such innovation into classic trap of cannibalization and brand equity loss. If planned successfully and executed optimally with a flexible view Reverse Innovation will not only maximize the profit or increase the new market share but will define altogether the new core of the business landscape providing first mover advantage to company involved. At last, due diligence and careful assessment is essential for reverse innovation benefits to be maximized.