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How: Repackage products, developed as inexpensive versions to meet the needs of developing nations, as low-cost innovative goods for industrialized-world countries.
Why: As products have already proven viable at a lower margin in other markets, they often work great as simple and cheap discount alternatives in more developed markets.
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Learning from “Good Enough”
Reverse Innovation is a business model where goods are initially produced for the developing world, before being repackaged and resold at low cost to industrialized countries.
Examples of such goods include battery-operated medical instruments or vehicles that were originally designed for the developing world. The underlying logic behind this model is that many products developed for emerging economies or lower-income countries must meet stringent requirements in order to be affordable to customers.
Doing business in such a tricky environment often gives rise to entirely new solutions to problems, which can be highly valuable for customers in more developed markets. In the past, new products were generally developed in western laboratories and brought to emerging economies or lower-income countries later on.
Reverse Innovation, however, turns this concept on its head. New products are developed at locations in emerging economies or lower-income countries and then commercialized globally in developed markets. This runs counter to certain economic principles such as Vernon’s product life-cycle theory of the 1960s, which states that products should be developed in knowledge- and capital-intensive higher-income countries and produced in low-wage countries.
Where did the Reverse Innovation business model pattern originate from?
The origins of Reverse Innovation can be traced back to the 1990s, when a number of former low-income countries, such as India and China, began to emerge as attractive markets. In recent years, various multinational corporations have established research and development departments in these countries in order to bring innovative products to local consumers. To the surprise of many multinational companies, these innovations sold well not only in the developing markets, but in developed markets as well, giving rise to the concept of Reverse Innovation.
One of the most notable pioneers of Reverse Innovation is the American multinational conglomerate General Electric. In 2007, the company developed a portable electrocardiography (ECG) device specifically for the Indian and Chinese markets. This device, which could be connected to a standard laptop computer, cost only one-tenth the price of a conventional ultrasound machine. A few years after its launch in these developing markets, General Electric brought this low-cost alternative to developed markets such as France, Germany, and the United States, where it was met with great success.
Vijay Govindarajan, Professor of International Business at the Tuck School of Business, coined the term Reverse Innovation.
Applying the Reverse Innovation business model
Reverse Innovation is a comparatively new strategy that can be of interest to businesses with substantial R&D or innovation capabilities that are located in emerging countries such as China or India. Additionally, companies based in higher-income economies that have come under significant pressure to reduce costs may also find Reverse Innovation to be beneficial.
In order to translate a product designed for the Chinese market to developed markets, companies often have to perform market segment innovation. For example, technical medical products developed in China for the Chinese market frequently have simpler and slimmer specifications. Products that fulfill only basic functions are known as frugal products.
So far, the medical technology industry has been at the forefront of Reverse Innovation and it is likely that other industries will follow suit. Reverse Innovation offers a valuable tool for companies to reduce costs and increase efficiency while still maintaining the quality of their products.
Cultural challenges in decision-making
It is a formidable challenge for companies to successfully employ the strategy of Reverse Innovation, as the decision-making power within most organizations is held by executives in developed nations. This can lead to a lack of understanding of the needs and priorities of customers in developing markets, and an inclination to prioritize the demands of more familiar, affluent customers.
To overcome this obstacle, companies must adopt a decentralized, locally-focused approach to Reverse Innovation. This necessitates that the majority of resources and personnel dedicated to this endeavor are based and managed within the target market, rather than at the corporate headquarters.
Establishing Local Growth Teams
Companies must empower their Local Growth Teams (LGTs) with the autonomy to make decisions regarding product development, manufacturing, sales, and service within the target market. These teams must also have the ability to tap into the company’s global resources as needed. Additionally, LGTs must have profit and loss responsibility, which can be a significant hurdle for American multinationals.
Once the products developed through Reverse Innovation have been proven successful in the local market, they must be taken global. This may involve introducing new applications, establishing lower price points, and even cannibalizing higher-margin products.
It is important to note that the process of Reverse Innovation is not without its challenges, but embracing it is imperative for companies to thrive in today’s business environment.
- How can you provide complete decentralized autonomy and local-market focus in developing markets to fuel innovation?
- What would your intended product or service look like, if you stripped away the convenience of modern infrastructure?
- Are our research and development and innovation capabilities in emerging markets adequate?
- How can we effectively safeguard our intellectual property?
- How can we prevent unintended transfer of knowledge to local competitors in countries like China or India?
- Are we capable of successfully marketing our cost-effective products in higher-income economies?
- Have we taken into account the "not-invented-here" mentality commonly found in Western markets and the belief that "a product designed in China will never sell in Europe"?
- Have we considered the various differences and new market segments that we will inevitably encounter when bringing our product to a higher-income economy?
Nestlé’s dried noodles
Its popular low-fat and low-cost meal was originally created for rural Pakistan and India; it has since become popular worldwide.
Its ultra-portable, battery-powered, and low-cost electrocardiogram (ECG) developed for India sold even more worldwide.
The Reverse Innovation strategy was used to develop the Nokia 1100 mobile phone in 2003. Designed specifically for the rigours of India’s hinterland, the low-cost phone was a hit in India and went on to become very popular in industrialized countries, selling over 250 million units worldwide.
French car maker Renault designed and produced this low-cost vehicle priced at €5,000 and aimed at low-income customers in Eastern European markets, particularly Romania. After success in Romania, the Dacia Logan was introduced in developed markets and Renault generated two-thirds of the vehicle’s total revenue from these countries, selling over 200,000 units since its launch in 2006.
Haier used the Reverse Innovation model to produce a small washing machine that was originally sold exclusively in rural China. The Mini Magical Child, a low-priced alternative to large and expensive washing machines, was a hit in China and sold over two million units in more than 68 countries.
Philips developed a low-cost, energy-efficient light bulb for the Indian market, which was later introduced in developed markets such as the United States and Europe.
General Electric’s healthcare division developed a low-cost portable electrocardiogram (ECG) machine for use in rural India. The product, called the MAC 400, was later introduced in developed countries as a cost-effective option for smaller hospitals and clinics.
Wal-Mart learned a valuable lesson in Mexico. Mexican shoppers prefer smaller stores compared to the large format stores Wal-Mart had in the U.S. By 2012, Wal-Mart had 1,250 small stores (Bodegas Aurrera stores) out of 2,138 stores in Mexico. Wal-Mart then opened similar small-format stores in the U.S. and Latin America.
Tata introduced the world’s cheapest water purifier, the Tata Swacch, targeting the rural market in India. The product does not require running water, power, or boiling and uses paddy husk ash as a filter. It also uses silver nanotechnology and can provide purified water for a family of five for a year. The company believes it will open a whole new market.
- Business Model Navigator by Karolin Frankenberger and Oliver Gassmann
- Reverse Innovation by Wikipedia
- Reverse Innovation - Definition and Examples - Business & Management Case Studies by Case_User
- 'Reverse Innovation': GE Makes India a Lab for Global Markets by Knowledge at Wharton
- Reverse Innovation: An Interview with Vijay Govindarajan by Christian Sarkar
- Product life-cycle theory by Wikipedia