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"Reverse innovation" can create rich opportunities, a new book argues.
CFO Staff, CFO Magazine
May 15, 2012
The usual direction of innovation is from rich countries to emerging markets: design a product for the former, then export it (often a cheaper, no-frills version) to the latter. But authors Vijay Govindarajan and Chris Trimble of Dartmouth College's Tuck School of Business argue that multinational companies must also engage in "reverse innovation," by considering the needs of customers in developing countries first.
Govindarajan elaborates: You start by focusing on the consumers in poor countries and trying to understand what their problems are, then innovating for that. The consumers are very different. Whereas in a rich country you may have one individual with $1,000 to spend, in a poor country there are 1,000 individuals, each with a dollar to spend. You have to offer fundamentally different products and solutions.
General Electric has a good example of reverse innovation in its health-care business. The company makes an electrocardiogram machine in the U.S. that costs anywhere from $3,000 to $10,000. That's too expensive for India, so GE came up with a $500 ECG machine. It's portable, operates on a battery, and is very simple to operate. That has opened up a whole new market in India. And guess what? That machine is now sold in 90 countries, including the U.S. and Germany.
For American multinationals, reverse innovation is important for two reasons. First, they have to go where the growth is, and the growth is in poor countries. Second, if they don't do it, some local company in the poor countries will do the innovation, and then it will bring that innovation to the U.S. That happened in the 1970s and 1980s when the Japanese automakers disrupted the Big Three.
Can small companies do reverse innovation? Absolutely. The cost of innovation is much lower in a country like India compared with the United States; you don't need a lot of resources. I would suggest they partner with local players there.
For more, see Govindarajan and Trimble's Reverse Innovation: Create Far from Home, Win Everywhere (Harvard Business Review Press, April, $30).