Vijay Govindarajan: How Reverse Innovation Can Change the WorldPublished: March 29, 2012 in India Knowledge@Wharton
Vijay Govindarajan's two-year stint at General Electric led him to look at innovation in a new way and to become a pioneer of the concept of reverse innovation. Govindarajan, now a professor of international business at Dartmouth College and the first professor in residence and chief innovation consultant at General Electric, defines reverse innovation as "any innovation that is adopted first in the developing world." His latest book, Reverse Innovation: Create Far From Home, Win Everywhere, which was co-authored with Chris Trimble, an adjunct professor at Dartmouth, is due for release on April 10. In an interview with India Knowledge@Wharton, Govindarajan shares his insights on what is driving reverse innovation and how it can change the world. "I believe it will power the future -- not just in poor countries, but everywhere," he says.
An edited version of the interview follows.
India Knowledge@Wharton: If you were to spell out the central message of your new book, Reverse Innovation: Create Far From Home, Win Everywhere, in a nutshell, what would it be?
Vijay Govindarajan: Reverse innovation is any innovation that is adopted first in the developing world. In the past, reverse innovations have been the rare exception to the rule, but the phenomenon is becoming ever more common, and the implications for multinationals are profound.
In particular, thanks to the rise of reverse innovation: [One,] you must innovate, not simply export, if you want to capture the mammoth growth opportunities in the developing world. [Two,] the stakes in emerging economies are global, not local. Passing up an opportunity in the developing world today may invite formidable new competition in your home markets tomorrow. [And three,] legacy multinationals must rethink their dominant organizational logic if they are to win in an era of reverse innovation.
Surprisingly, such [reverse] innovations can defy gravity and flow uphill to the rich world. Increasingly we see companies developing products in countries like China and India and then distributing them globally.
India Knowledge@Wharton: When did you first start thinking about this concept?
Govindarajan: I first coined this term when I took a two-year leave from Dartmouth [from January 2008] and worked at General Electric [GE] as their first professor in residence and chief innovation consultant. GE's CEO Jeff Immelt asked me to study GE Healthcare in India. That is where the concept originated. I wrote a Harvard Business Review article with Jeff Immelt on "How GE Is Disrupting Itself" that introduced reverse innovation.
India Knowledge@Wharton: What do you consider some of the earliest examples of reverse innovation?
Govindarajan: Some of the early examples of reverse innovation would include Gatorade, the Godzilla of energy drinks, whose origins trace back to Bangladesh; chicken tikka masala, the number one food in U.K., whose origins trace back to India, and yoga, a popular craze in the U.S., which [also] originated in India.
India Knowledge@Wharton: What are some of the main characteristics of reverse innovation and how do these differ from "glocalization? Can the two co-exist within an organization?
Govindarajan: Reverse innovation is an innovation for the needs of customers in poor countries. Glocalization is innovation that is meant for [developed] world customers. Both types of innovations are critical. As such, multinationals must simultaneously excel at glocalization and reverse innovation.
India Knowledge@Wharton: What would you say are the key factors driving reverse innovation?
Govindarajan:The fundamental driver of reverse innovation is the income gap that exists between emerging markets and the developed countries. The per capita income of India, for instance, is about US$3,000, whereas it is about $50,000 in the U.S. There is no way to design a product for the American mass market and then simply adapt it and hope to capture middle India. You need to innovate for India, not simply export to India. 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 American corporations, reverse innovation is not a "nice to have" boost to revenue growth rates. I 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 future is far from home.
India Knowledge@Wharton: You mention this in your book -- that reverse innovation has the potential to not only transform companies, but the world, and also that it is not optional.Can you elaborate?
Govindarajan: Poor countries will become R&D labs for breakthrough innovations in diverse fields as housing, transportation, energy, health care, entertainment, telecommunications, financial services, clean water and many more.
Reverse innovation has the potential to transform wealth in the world. Growth in developed countries has slowed down. Much of the growth is now in developing countries. The 2008 financial crisis and the more recent debt crisis [in Europe] have only exacerbated this situation. As such, we are likely to see the center of gravity for innovation shifting from rich to poor countries.
If Western multinationals do not innovate for customers in poor countries, they not only stand to lose growth in poor countries, the implications are far worse. Emerging giants will do the innovation and bring those innovations into rich countries and disrupt multinationals. We are already seeing strong local players such as Tata, Mahindra, Haier, Lenovo, Goldwind, Suzlon, Cemex and Embraer. The list will increase, no doubt. The biggest competitors for multinationals are local companies from emerging markets.
For multinationals, reverse innovation is a nice growth opportunity in poor countries. But more importantly, it is a way to protect their competitive position in home markets.
India Knowledge@Wharton: What about the emerging economies? How will reverse innovation impact them?
Govindarajan: The customers are in emerging economies. Unfortunately, corporations have divided the world of seven billion people into two groups: three billion who are rich enough to buy the products they make and the four billion poor, we have left them to charity to take care of. This is an outmoded thinking. We have to bring the four billion poor into the consuming base. If we [are] to convert the poor into consumers, we can't give them the [same] products that the three billion rich are consuming. This will require innovation. Reverse innovation has the potential to transform emerging economies.
India Knowledge@Wharton: Are we likely to see more reverse innovation happening within local companies in emerging markets or at Western multinationals, which have R&D and marketing operations in the emerging countries?
Govindarajan: Local companies have deep understanding of local customer problems. But multinationals have deep global capabilities. Both have different strengths to excel at reverse innovation. Perhaps strategic alliances between local players and multinationals might hold the key.
India Knowledge@Wharton: What are the areas that organizations need to focus on and what are the challenges that they are likely to face as they embark on this track?
Govindarajan: Multinationals must develop a deeper understanding of local customer problems. Local companies must build global brands and global distribution capabilities. The biggest hurdle for reverse innovation is not technology or budgetary constraints. It is organizational and mindset-based. Success in reverse innovation does not depend as much on technology or financial resources as it depends on crafting the right organization and cultivating the right mindset.
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 [profit and loss] 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. Now more than ever, success in developing countries is a prerequisite for continued vitality in developed ones.
India Knowledge@Wharton: What is at stake for organizations that either ignore or are not committed to reverse innovation?
Govindarajan: If multinationals ignore reverse innovation, they are likely to get disrupted. We have seen this happen in the 1970s and 1980s when Japanese companies disrupted the Detroit automakers.
India Knowledge@Wharton: Your book is targeted primarily for leaders at multinationals in the developed markets. What is your advice to companies in the emerging markets?
Govindarajan: Companies in emerging markets can use the advice from the book to launch reverse innovation strategies of their own. After all, they are closest to the customers and they are nimble.