Reverse Innovation Continues to Garner Attention

Stephen DeAngelis

May 11, 2012

I have been discussing the topic of reverse innovation (i.e., innovation coming out of less developed countries into more developed countries) since 2009 (see Innovation, Development, and India). That’s when I first heard of an Indian innovation process called “jugaad,” an improvisational style of innovation that was developed primarily because Indian inventors wanted to address the pressing needs of those around them but had few resources upon which to draw. Jugaad basically means, “Somehow, get it done.” Some of the “good enough” innovations developed in places like India have indeed been good enough to make their way into the marketplace in developed countries. I broached the topic of reverse innovation again a few months later in a post entitled Innovation in (and from) BRIC Countries.

In an article in the Financial Times, Stefan Wagstyl wrote, “Not only do China, India, Brazil and other countries offer companies fast growth prospects; they also generate opportunities for developing new products, services, manufacturing techniques and business processes.” [“Innovation: Replicators no more,” 5 January 2011] He continued:

“These innovations do not yet involve transformational technological shifts – such inventions remain the preserve of the developed world with its long-established universities and commercial laboratories. But the emerging world is spawning product improvements with commercial implications that are game-changing. They do not win Nobel prizes but they do make money. Multinationals that dismiss such innovation as localisation do so at their peril. The advantages competitors gain in emerging markets will be deployed in the rich world too.”

Christoph Nettesheim of Boston Consulting Group, told Wagstyl, “The danger for many [multinationals] is that they don’t see the emerging market innovations coming because they are not yet coming direct into their home markets. But they will.” Wagstyl noted that “emerging market innovation is not new.” He reports that more than two decades ago “Hindustan Lever, the Indian consumer product affiliate of the Anglo-Dutch Unilever, pioneered mini-sachets as a way of taking its soaps to poorer consumers.” If that sounds oddly familiar, it’s probably because Procter & Gamble has put on a media blitz touting its new Tide Pods laundry detergent. “What is new,” wrote Wagstyl, “is the growing volume of such innovations” coming out of emerging market countries. He continued:

“Sceptics dismiss many emerging market innovations as incremental improvements. But for business, that is beside the point, when such improvements lead to better products, services and processes. Peter Williamson, international management professor at Cambridge university, says: ‘The innovations may be incremental. The effects are not.’ Leading multinationals agree. Engineers at Siemens’ Indian affiliate developed a low-cost x-ray scanner camera that is so good it will be used in developed-world equipment. … Scores of multinationals do the same. GE sells Indian-developed electrocardiograms and Chinese-devised ultrasound scanners around the world. Nokia uses Indian and Chinese software skills to develop smart handsets. Vodafone launched a mobile money transfer system called M-Pesa on Safaricom, its Kenyan affiliate. Similar schemes aimed at the unbanked have been introduced elsewhere in Africa and now India.”

Alan Murray calls this “Trickle-Up Development” in a review of Vijay Govindarajan and Chris Trimble’s book entitled Reverse Innovation. [Wall Street Journal, 11 April 2012] Murray writes that the book “offers provocative insights into the quickly changing dynamics of the global economy.” He continues:

“Messrs. Govindarajan and Trimble … say that, increasingly, business success is coming from companies that use their knowledge and resources to create innovative new products for developing countries and then adapt those products to satisfy demands in the developed world. The traditional flow of innovation—from rich to poor nations—is moving in reverse. The book is rich with examples of the phenomena. An early case dates from the 1960s, when Western doctors who went to Bangladesh to help address a cholera outbreak. The doctors discovered that the locals were using a drink made of carrot juice, rice water, bananas and carob flour—a mix of carbohydrates and sugar—to rehydrate those suffering severe diarrhea. A doctor at the University of Florida read about the traditional treatment and concluded that something similar might help dehydrated football players. The result: Gatorade.”

Murray also writes about the GE example mentioned earlier. He is aware, however, that skeptics could argue that a few anecdotes don’t make a business case. The authors of the book argue “that these anecdotes aren’t isolated examples but rather part of a trend that is gathering steam.” Murray continues:

“If growth is going to be driven by developing markets, they say, then innovation almost certainly will be, as well. For big companies, the obstacles that stand in the way of such ‘reverse innovation’ are the same that block disruptive innovations of all stripes. Companies are understandably wedded to the successful, high-margin products that they sell in the developed world. Executives are reluctant to devote resources to what seem like relatively small opportunities in the developing world, particularly when the effort risks cannibalizing lucrative existing products.”

If the vast majority of economic analysts are correct and emerging markets represent the best opportunities for growth, then companies are going to have to deep six old strategies and learn how to operate in this new environment. Murray reports that “the book advocates the creation of ‘local growth teams’ — small, cross-functional, entrepreneurial groups located in the emerging markets with both the authority and resources to create products and services for those markets. The key is to create a hybrid organization that can maintain the approach and mind-set of local entrepreneurs while also calling on the technology, production and marketing resources of the multinational firm.” He continues:

“Refreshingly for a business book, Messrs. Govindarajan and Trimble do not present their ideas as sure-fire elixirs. ‘We have offered a theory of gaps and trends that might explain why innovations can defy gravity and flow uphill,’ they write. ‘Our arguments and hypotheses need to be tested rigorously to determine the contingencies. Are they industry-specific? Product-specific?’ The authors call for more research into ‘organization mechanisms and incentive structures that can facilitate the trickle-up process.’ One of the book’s most interesting themes is how the trickle-up process could help the developed world address some of its most intractable problems. Consider the high cost of health care: The authors relate the story of Narayana Hrudayalaya hospital in India, where the cost of open-heart surgery has been brought down to about $2,000—in the U.S., the surgery costs 10 times as much—yet ‘the NH hospital’s net profit margin is slightly higher than the U.S. average,’ the authors write. The key has been process innovation of the sort used in manufacturing to help ensure heavier use of costly equipment and more frequent operations by each surgeon. If that sounds like a prescription for broken-down equipment being used by exhausted doctors, consider this: ‘The mortality rate within thirty days of bypass surgery is 1.4 percent at NH hospital,’ compared with ‘the U.S. average of 1.9 percent.’ Such solutions to rising health-care costs, originating on the front lines instead of in a bureaucrat’s office, make reverse innovation sound like a step in the right direction.”

James Crabtree also wrote a review of the book for the Financial Times. He notes that reverse innovation is an idea that book’s authors “have been championing for years and which has become increasingly fashionable.” [“The new markets for profitable ideas,” 11 April 2012] He continues:

“Also known as frugal innovation, the argument is that companies can develop such products in and for developing economies at a much lower cost and then bring them back to their domestic markets. The pair are seen as the originators of the idea, having penned a 2009 article for the Harvard Business Review with Jeff Immelt, chief executive of General Electric. In it, they described how the company had developed a low-cost handheld heart scanner for the Indian market, which ultimately also went on sale in the US. Another example in the book is how Logitech, the computer peripherals maker, was undercut by Rapoo, a Chinese electronics outfit offering an ultra-low-cost mouse that was just about as good as Logitech’s more expensive versions.”

Crabtree concludes, “There is much to commend this approach.” But he also believes “there are problems with the thesis of this book.” He explains:

“The authors pick some unfortunate case studies, such as Tata’s Nano. The $2,000 car launched with much fanfare, but few sales, in 2009. In the long term, the Nano’s frugal form may take off in India, and perhaps even in Europe and the US. But it shows few signs of doing so yet. The authors also make heroic assumptions about progress in emerging markets. For instance, they paint a rosy picture of India’s plans to build modern roads and plentiful renewable energy. This might be China’s future. But in India, where infrastructure is crumbling and the government shows little signs of doing much about it, it sounds almost delusional. A more important failing is one of balance. Yes, developed markets can learn much from new, scrappy competitors. But Indian and Chinese companies still need to import plenty of technology from the west. … Their advantage in frugal innovation is important, but it is unlikely to be enough on its own to meet their ultimate ambitions.”

Another review of the book was published in The Economist along with a review of book entitled Jugaad Innovation by Navi Radjou, Jaideep Prabhu and Simone Ahuja. [“Asian innovation,” 24 March 2012] The review states:

“The books show that frugal innovation is flourishing across the emerging world, despite the gurus’ failure to agree on a term to describe it. They also argue convincingly that it will change rich countries, too. Multinationals are beginning to take ideas developed in (and for) the emerging world and deploy them in the West. … This trend will surely accelerate. The West is doomed to a long period of austerity, as the middle class is squeezed and governments curb spending. Some 50m Americans lack medical insurance; 60m lack regular bank accounts. Such people are crying out for new ways to save money.”

The article argues that “globalisation is forcing Western firms to provide more value for money.” It explains:

“Logitech, an American firm, had to create a top-class wireless mouse for bottom-of-the-range prices when it took on Rapoo, a Chinese company, in China. John Deere had to do the same with its small tractors when it took on Mahindra in India. At the same time, globalisation gives Western firms more tools. Some are building innovation centres in the emerging world. PepsiCo, for example, established one in India in 2010. Some Western firms routinely fish in a global brain pool. Renault-Nissan asked its engineers in France, India and Japan to compete to come up with ideas for cutting costs. The Indians won. The Tata Nano may not have changed the world, but frugal innovation will.”

Consumers should be happy with that conclusion. With wages in the U.S. having remained stagnant for decades, squeezing value out of every dollar is important. There is an old adage that states, “Better is the enemy of good enough.” There is every possibility that we are entering an age of good enough.