« How GE is Disrupting Itself | Main | Pandit Ravi Shankar at Spaulding Auditorium, Dartmouth »

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.

reverseinnovation.gif

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

For more on reverse innovation, sign up for VG's Innovation Quarterly >>

TrackBack

Listed below are links to weblogs that reference What is Reverse Innovation?:

» Now that's a Da Vinci! from ChristianSarkar.com
Poor Leonardo. After losing out to Michelangelo di Lodovico Buonarroti Simoni during his lifetime, he still doesn't get the credit or recognition his work deserves. Finally, someone trusted their intuition, and bought a sketch which looked to him like... [Read More]

» The Pending Price Point Nightmare from Bloomport U
Imagine back 18 months ago, imagine you were the Brand Manager of the wildly popular “i-Widget” that had been enjoying differentiated success in the marketplace, it flew off the shelf, and any marketing effort was really just to sustain the buzz. ... [Read More]

» Opening up Reverse Innovation from Phil Townsend's Idealog
In an important Harvard Business Review article - How GE is Disrupting Itself, by GE's Jeff Immelt and Dartmouth professors Vijay Govindarajan and Chris Trimble, we are introduced to the idea of reverse innovation - an innovation likely to be crea... [Read More]

» Wild Phil Townsend: Where is GE's Open Reverse Innovation? from ChristianSarkar.com
Phil Townsend wonders why GE hasn't opened up it's Reverse Innovation model in his post: Opening up Reverse Innovation >>Townsend makes a good point:So why can't a company like GE follow down this path with "open reverse innovation" - inviting... [Read More]

» Back to School from Vijay Govindarajan's Blog
I am returning to the Tuck School after a two year assignment with General Electric as their first Professor in Residence and Chief Innovation Consultant. It has been a transformative experience indeed! First, I got a front row seat... [Read More]

» The Sustainable Advantage: Shifting Mindsets and Business Models from Innovation to Customer Intimacy from DeanMcMann.com
What's wrong with driving your business using the historic S-curve (innovation) model?  The innovation model has virtually dominated all literature, organization design, sales training, and investment strategies since the world economic boom follo... [Read More]

» The $300 House-for-the-Poor from ChristianSarkar.com
Ever since the Haiti earthquake, I've been thinking about why we don't have a quick-build house made of sustainable materials at a price point that the poor can afford (with micro-credit if needed). The $300 House-for-the-Poor is an extension of... [Read More]

Comments

great insight, I am sure it will take some time for the conservative minded companies to accept and adopt what you indicate. I can say that since typically the cash cow is the US market ( 70 % in revenue)and so this model throws current mode of operation out.... just curious .. do you see this across all sectors and industries ?

Spot on… I could not agree with you more!

It was late eighties… the IT boom was just beginning to happen and the Professionals from the top Indian schools were migrating to US in en-masse. I remember us doing a comical play in one of our college cultural events! It was about a 2020 vision of professionals from the west coming to India in en-masse on project assignments and we humorously depicted them adjusting to Indian cultures etc.

In a way you are kind of alluding to the same thing in a business innovation terminology - developing countries such as India and China sending “good enough” quality products & know-how (quality, speed & value) to the west at a fraction of cost, which in my opinion, might eventually make the professionals from the west to flock India & China for learning those techniques as we had humorously depicted in our comical play!

With all the pun aside, coming back to the point – an observation on your HBR article. Don’t you think that the reverse innovation also includes business model innovation apart from the product innovation? In my opinion product innovation primarily addresses the income gap and I would argue that the business model innovation by and large addresses the infrastructure and sustainability gaps, as pointed by you, as the top three primary drivers of reverse innovation. I would also say that those “good enough” business model innovations from the developing nations will also eventually find its place in the rich nations as part of your larger reverse innovation umbrella.

Any thoughts?

Regards,
Charles

PS: Your HBR article is simply great - the way you have explained the differences between disruptive and reverse innovation is truly outstanding!

Dear Prof. Govindarajan

Thanks for bringing in the new dimension of Reverse Innovation in management literature.

I feel that the main reason why reverse innovation succeeds is because products and services are ideated and produced under almost strangulating constraints but at the same time to match with exacting world class requirements in developing countries.

It gets back to the saying Necessity is the mother of Invention. Most people involved in the innovation ecosystem in developing and underdeveloped countries have constraints ingrained in their nature as they have lived through it. Thus if all the possible business challenges are taken head on in hostile conditions, the developed country context necessitates probably only minor adaptation.

It would be interesting to get a response to this view.

Regards

Sivakumar
Professor Marketing T.A.Pai Management Institute Manipal Karnataka State India. presently working as a Postdoctoral Researcher at Technology University Delft Netherlands

Post a comment

(If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)