What is Reverse Innovation?
A 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.
In our article How GE is Disrupting Itself, we argued that reverse innovation will become more and more common. We also showed that it presents a formidable organizational challenge for incumbent multinationals headquartered in the rich world, and we explained an organizational model for overcoming that challenge.
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.
For us, 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.
The Evolution of Reverse Innovation: A Historical Perspective
The globalization journey of American multinationals has followed an evolutionary process which can be seen in distinct phases.
Phase 1 — Globalization —Multinationals built 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 Phases 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.
Of course this is a simplified view of the world, but in essence it holds true. Now, more than ever, success in developing countries is a prerequisite for continued vitality in developed ones.
Reverse Innovation: Organizing Principles
In our view, the "first principles" of reverse innovation are as follows:
- 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
- Local Growth Teams (LGTs) must have P&L responsibility (this is a key hurdle for American multinationals)
- LGTs must have the decision-making authority to choose which products to develop, how to make, sell, and service them
- LGTs must have the right (and support) to draw from the companies global resources
- 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.
- Reverse innovations can be, but are not always, disruptive innovations
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