'Reverse innovation isn’t optional. It is oxygen'

Multinational companies need to change the very way they conduct business, suggests Vijay Govindarajan, noted expert on strategy & innovation and author of the international bestseller Ten Rules for Strategic Innovators. For decades, these companies have focused innovation efforts on the needs of rich countries and then exported products around the globe, but today, they must innovate to solve the problems of the developing world and then bring the innovations home, he tells Vivek Kaul of DNA Money in this email interview.

You wrote in a recent article that if GE’s businesses are to survive and prosper, they must become “as adept at reverse innovation as they are at glocalisation.” What is reverse innovation? Can we have an example?

Our article, “How GE is Disrupting Itself” (Harvard Business Review, October 2009), co-authored with Jeff Immelt, chairman and CEO of General Electric and Chris Trimble, my colleague at Tuck, introduces a new concept called ‘reverse innovation’. For decades, multinationals like GE have focused their innovation efforts on the needs of rich countries and then exported their offerings around the globe. But today, they must be just as good at the reverse. They must innovate to solve the problems of the developing world — and then bring the innovations home. The article explains why reverse innovation is critical and how to make it happen.

Let me give you an example of how American auto manufacturers have not done an effective job at reverse innovation. Companies like Ford brought their global automobile platforms into India, thereby, becoming niche players in the premium segment. After all, only 5% of the Indian population can afford a Rs10 lakh ($20,000) car!

In 2009, Tata Motors launched the Tata Nano — the Rs1 lakh ($2,000) people’s car. Multinational companies have to find a 10% solution to capture the full potential in urban India and a 1% solution to capture rural India. That is to say, if a product was to sell for $100 in US, a similar solution is needed for urban India at $10 and for rural India at $1. This is because of the income gap between US and India. The per capita income in India is about $1,000, whereas per capita income in US is about $50,000. That is why one needs the Tata Nano type of solutions to unlock new markets in India. The Tata Nano is targeted at the non-consumers of automobiles in India today, namely the two-wheeler population. The two-wheelers are priced at $1,500. By introducing an automobile for $2,000, Tata Motors plans to migrate the two-wheeler population into four-wheeler users. Creating new consumption requires new business models.

Tata Motors plans to introduce Tata Nano not only in other emerging markets such as Africa but also plans to bring the car into Europe and the US eventually. The biggest threat for American multinationals will come from emerging market competitors like Tata.
Reverse innovation is not optional. It is oxygen.

Which other companies are practising reverse innovation?

Other companies which have started reverse innovation include Procter & Gamble, Nokia, Unilever and IBM.

Would products for emerging markets be suitable for developed markets? Also, since you have worked as GE’s chief innovation consultant, can you tell us how GE has practised reverse innovation?

GE has a very strong healthcare franchise in the US where they develop and market premium-priced, feature-rich, bulky X-ray machines, CT scanners, MR scanners, ultrasounds, and ECG machines. GE’s global products have a market in the top Indian hospitals like Apollo and Manipal, which are world class and can afford to buy very expensive and state-of-the-art medical imaging equipment.

However, let us look at the healthcare needs of rural India. There are nearly 600,000 villages in India where 65% of the Indians live. This is a huge market, but it cannot be served by Western style products. Hospital infrastructure is either inadequate or absent in rural India. Therefore, rural patients cannot go to the hospital, the hospital has to come to the patient. So, portability is critical.

In 2008, GE innovated an ECG machine, MAC 400 to serve the rural market. This ECG is portable. Rural population cannot afford expensive healthcare. The MAC 400 costs about Rs50,000 ($1,000), a fraction of the cost of the appliance-sized premium machines sold in the US. In 2009, GE has brought an improved version of the portable ultra low cost ECG machine into the US, which is sold as MAC 800. This low-priced ECG machine has created new applications in the US in accidents sites and in emergency rooms where portability and small size are huge advantages.

The Obama healthcare reform is based on low cost, good quality and increased access. These are the same three pillars that will unlock the huge untapped healthcare market in countries like China and India. By taking a leadership role in reverse innovation, GE is not only positioned well in China and India, but will also play a critical role in rebuilding America.

Some companies create skunk works with very little funding to see if an idea will work and scale up when an idea looks like a winner. Do you see reverse innovation progressing this way? As a part of GE’s reverse innovation strategy, it is creating a separate profit and loss (P&L) account for its Indian business. Why?

The key to making reverse innovation work is to reinvent the organisational architecture. GE’s innovation of the portable ultrasound in China is a case in point. The Chinese engineers opened up a new market in rural China with a breakthrough new business model where they were able to write sophisticated ultrasound software on everyday laptop computers. This is in sharp contrast to the premium, performance-rich, bulky ultrasounds sold in the US. The portable ultrasound has already created growth opportunities for GE in the US and other developed countries. This is a good example of reverse innovation. This was possible because GE created a local growth team (LGT) in China.

The LGT operated with 3 important principles. First, LGT is a separate profit and loss with localised resources in the areas of product development, supply chain, manufacturing, marketing, sales and distribution.

Second, LGT operated with an “experiment and learn” approach. Innovation involves uncertainty. The key challenge therefore is to test assumptions to develop more knowledge about variables which are uncertain. GE scaled up the portable ultrasound business after conducting many low-cost experiments and learning from them.

Third, the LGT is independent but is not isolated. LGT was able to leverage GE’s enormous global resources and global technology capabilities.

Reverse innovation appears to go against the current global strategy of glocalisation, where products developed in a company’s main market are introduced across the world. What problems do you see glocal companies facing when they go the reverse innovation way?

To succeed in glocalisation, multinationals must organise around global product P&Ls where power and resources are managed at the centre. While such a structure has tremendous advantages, that structure does not promote reverse innovation. Take the case of V Raja, the head of GE healthcare in India. In 2005, under glocalisation, Raja’s role was to distribute global products in India. Put yourself in the shoes of Raja who is a representative of any head of a business in India in any multinational company which is organised to excel at glocalisation. It would be extremely difficult for reverse innovation to happen because the decision-making power rests with executives in the developed world. Global product leaders would have difficulty in understanding customer problems in rural India and their priorities would be targeted at meeting the needs of the rich-world customers.

For reverse innovation to happen, local growth teams are required. Resources located in emerging markets should match the opportunity gap in those markets. GE has reorganised its healthcare business where Raja now reports to John Dineen, the CEO of GE Healthcare. India now has a seat at the corporate table!

Do you see the worldwide recession playing a key role in making or breaking the reverse innovation strategy?

Reverse innovation was important even before the global meltdown. The global financial crisis has only made the case for reverse innovation that much stronger. There is likely to be slow growth in the developed world and more robust growth in emerging markets. The growth gap between the rich and poor countries has now become more like a growth chasm. Ten years ago, multinationals talked about their global strategy in terms of their strategy for the US, Europe, Japan, and the rest of the world. Going forward, multinationals must talk about their global strategy in terms of their strategy for the BRIC countries, Middle East, Africa, and the rest of the world. The “rest of the world” will include the US, Europe, and Japan!

It’s said that as organisations become bigger, they become less innovative. Would you agree with this? 

Having studied a large number of companies, I have come to the conclusion that companies suffer from three traps that prevent them from commercialising the next big idea. The first is the “physical trap” where companies are unwilling to obsolete investments in their current physical infrastructure. Blockbuster found it difficult to respond to Netflix precisely because of their existing infrastructure. The second is the “psychological trap,” which is all about leadership mindset. Kodak came up with the digital camera concept in the early 80s.

However, the mindset of managers running the three-inch film business prevented them from seeing and seizing the enormous opportunity in the digital space. The third is the “strategic trap’, which is myopic thinking. Railroads are a case in point. They only thought of other railroad companies as their competitors. And the rest is history, as they say! Reverse innovation will require multinationals to overcome these three traps. GE has taken the lead in showing the way.