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Innovation boomerang: The role of emerging markets

Reverse Innovation

By Vijay Govindarajan and Chris Trimble

(Harvard Business Review Press, 229 pages, $30)

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*****

When GE Healthcare began to market its top-flight ultrasound machines beyond North America, an obvious opportunity seemed to be China, with its population of one billion. But after 10 years in that market, sales were only $5-million (U.S.) – a trifle by GE standards – because the machines were too expensive for that country's health facilities.

GE was following the classic strategy for multinationals known as glocalization: Take a product selling strongly in the home country, perhaps adjust it slightly to local tastes, and then reap more profit by expanding production to other countries. When that strategy failed, GE developed a portable ultrasound scanner for China that could be sold for $15,000, about 15 per cent of the cost of its lowest-end traditional ultrasound.

Performance was not as good as that low-end scanner, but it was good enough, and sales poured in. Today, with further developments to that product initially developed for the Chinese market, GE sells the Viscan, a hand-held ultrasound imaging device that Western doctors can carry in their pocket.

This is an example of reverse innovation. Instead of innovations occurring in rich countries and then being transferred to developing countries, they can sometimes originate in those developing countries and then move to wealthier states.

It's not a totally new phenomenon. For example, Gatorade is thought of as a 1960s breakthrough by the University of Florida football team, the Gators, to handle the brutal southern sun. It actually had its origins in developing countries such as Bangladesh, where cholera was being fought by giving carbohydrates and sugar in a solution with salt to rehydrate patients quickly.

But reverse innovation is increasing today, as globalized corporations realize they have to adjust their marketing in developing countries.

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"What works in the rich world won't automatically achieve wide acceptance in emerging markets, where customer needs are starkly different. As a result, reverse innovation is rapidly gathering steam – and will continue to do so," Dartmouth College business professor Vijay Govindarajan and consultant Chris Trimble observe in Reverse Innovation.

They argue that if rich countries and established multinationals are to thrive, they have to be just as curious about needs and opportunities in the developing world as in their own backyard. "Reverse innovation is not optional. It is oxygen," the authors declare.

They advise that reverse innovation begins not with inventing, but forgetting. You must let go of what you have learned and seen so you can open your eyes to needs in the developing world.

They cite five "needs" gaps that differentiate emerging markets from rich countries:

Performance gap

Typically, Western consumers have the choice of a "good" product that offers 80 per cent of the performance of the best product at 80 per cent of that product's price. But in developing countries, they look for a breakthrough product that might offer 50 per cent performance at 15 per cent the price of the best product. "It is impossible to design to that radical ratio if you begin with the existing offering." The only way to succeed is to start from scratch.

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Infrastructure gap

Rich countries have extensive infrastructure in place that the poor world lacks. New products have to be developed taking that into account – and, the authors note, those constraints may push designers to breakthroughs.

Sustainability gap

Environmental problems are much more intense in the developing world, because of large populations, which is why, for example, China is so excited about electric cars.

Regulatory gap

Regulatory systems in emerging economies are less developed and can present fewer delays when a company has an innovative solution. Massachusetts-based Diagnostics For All, which developed an inexpensive diagnostic testing system, chose to commercialize first in the developing world.

Preference gap

Consumers around the world have diverse tastes and habits. In India, for example, PepsiCo is developing a new snack food based on lentils rather than corn.

To understand and meet these gaps, the authors urge multinationals to set up local growth teams in countries where they want to sell. Those teams, living in the local market, can develop innovations designed specifically for those countries.

The book presents its ideas clearly, with about half devoted to the general concepts and the other half to case examples of companies such as GE, Procter & Gamble and PepsiCo, which are leading the way in reverse innovation. If your company can benefit from reverse innovation – or might suffer from it – the book is well worth reading.

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About the Author
Management columnist

Harvey Schachter is a Kingston, Ont.-based writer specializing in management issues. He writes Monday Morning Manager and management book reviews for the print edition of Report on Business and an online column, Power Points. More

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