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Reverse innovation, you have said, is any innovation likely to be adopted first in the developing world before being distributed globally. When importing those innovations, what should a company keep in mind? What are the steps?
I will distinguish between two types of markets for doing that. The first one is another emerging market. So it could be Pakistan, Bangladesh, or countries in Africa, the customer base in which will have a lot of similarities with India. Of course, there will be some local differences that need to be kept in mind.
The second is to take the reverse innovation to a developed economy like the US and those in Western Europe. These markets will have a different kind of customer base. There the companies would have to invest some more to improve the quality.
Why is the investment necessary?
In the US, there are three segments of markets. There is the 100 per cent price-100 per cent performance segment; then there is the 90 per cent price-90 per cent performance segment; finally, there is the 80 per cent price-80 per cent performance segment. When American companies come to India, they take their 80 per cent product-and-price combination and try to lower performance and price through a combination of 70 per cent price-and-per cent performance model. The problem is India, beyond the metros, and the other markets dont want this combination. They want 50 per cent of the performance at 10 per cent of the price.
In the US, you will have to provide at least 80 per cent performance (functionality) for it to be accepted. Therefore, companies will need to invest further. This will lead to the rise in incremental cost. If the quality of the low-cost product from emerging India has to be brought up from 50 per cent functionality to 80 per cent performance, the accompanying cost would go up from 10 per cent to 40 per cent. All of a sudden, in such developed markets, there would now be products that offer 80 per cent performance at 40 per cent of the existing market cost, opening up a new market!
Is the idea of reverse innovation easy to sell to venture capitalists?
We can divide India into three categories. The first has 10 per cent of its population. The second has about 6,000 small towns with around 20 per cent of the population, while the third has around 650,000 villages, comprising nearly 70 per cent of the population. So far, it has been easy to focus on the first India because we can see its purchasing power, we know how to solve its problems, making it easier to latch on. But it is now saturated, and is much contested for. Coming up with meaningful projects in this India is more difficult. A focus on the second and the third Indias would reveal virgin territories and VCs would be interested in listening.
Are companies from emerging markets the biggest threat for the MNCs? For example, did John Deere fail to re-import the small tractors it had created for India while Mahindra continues to compete with it in the US?
Mahindra created the hobby tractor segment in the late 90s. At that time, John Deere sent only its global tractors to India. It had the capability of making a low horsepower tractor but never really got into it because they were not in demand in the agricultural sector in the US with large tracts of land. It was only after it saw Mahindra in the US, that it began to take India very seriously. Now it has Krish which is a small horsepower tractor. So it is Mahindra which has to ramp up innovation to counter competition and also move up the chain.
Many emerging economies have leapfrogged to later stages, thanks to innovation under extreme conditions such the lack of infrastructure. Is there a flipside that one should be aware of?
The lack of infrastructure in India actually could be an advantage to innovation. There is no existing infrastructure to think through, so we can think free and get to the latest on offer. That has happened in telecom, it is happening in hospitals. But we cannot simply avoid infrastructure investments forever. We have to put it in place; but remember when we put it in place, we cannot replicate the Western models. Products will be innovated because of the lack of infrastructure; but when we work on the infrastructure for these, it will also result in a groundwork different from developed countries.
Where have you seen this being applied in India?
It is evident in telecommunications. We leapfrogged to mobile, and as a result, to mobile platforms such as e-banking. In the case of hospitals, we dont have the kind of hospital infrastructure that is available in the US; we also lack the availability of doctors and nurses. With so few doctors, how else will you take care of such a large population? There is a lot of de-skilling in hospitals in India than countries such as the US.
In the US, a surgeon may do 80 per cent of the work for a patient, even writing out notes, but in India she may do just 20 per cent of the work. That is because the rest of the 80 per cent of work can be passed on to other staff such as paramedics and nurses. Surgeons are then left to do the highly specialised but repetitive tasks. Out of necessity we have created a system, where we ask, where is the highest level of skill required. This kind of de-skilling is also a kind of innovation.
How have you seen reverse innovation changing since the time you had first spoke about it?
Innovation takes a long time to come to fruition. MNCs are embracing this because if they want to win in emerging markets, they have got to think differently. But it is not an easy switch in the mindset because all of a sudden they have to put resources in emerging markets, which they are not used to. They have to give decision-making power to the local teams and also have low-cost business models in companies that are used to premium business models. These are all mindset problems that continue to plague them.
You just mentioned that you are seeing some of them change now...
But not as fast as it should have. The key is going to be with the people they put in these countries. Companies usually take their US executives and give them exposure to these emerging markets. Even a one-week stint will open their minds. I had been with a group of American executives in Chennai for two weeks. Sitting in the US, only the headaches of India were visible to them. The opportunities were dwarfed by the headaches. But when they came to India, they felt that the opportunities were big enough to tolerate the headaches. The improvisations come to the fore, the energy in this country became evident. Companies which will succeed in changing their mindsets are those that would have put together local teams.
Should such teams be populated by expats or local talent?
It has got to be a mix. Expats are needed because ultimately these MNCs will have to bring global capabilties to India. Historically, a posting to India, was a sign of incompetence. Now they are sending over their best people because they realise that they can unlock these markets. For example, John Flannery of GE India, who is top-notch.
Vijay Govindarajan, the Earl C Daum 1924 Professor of International Business at the Tuck School of Business at Dartmouth, was the first professor in residence and chief innovation consultant at General Electric in 2008, on a two-year leave of absence from Tuck
With insights from his work in GE Healthcare in India, he co-wrote the article How GE is Disrupting Itself (2009) in the Harvard Business Review, with Jeff Immelt, GEs CEO, and long-term collaborator Chris Trimble. Rated as one of the ten big ideas of the decade by HBR, it first expounded 'reverse innovation'. He eventually co-wrote Reverse Innovation: Create Far From Home, Win Everywhere, with Trimble in 2012
Govindarajan has been awarded for excellence in research and been featured as an outstanding faculty and an executive coach by publications such as Business Week and Forbes. He is in the Academy of Management Journals Hall of Fame and ranked by the Management International Review as one of the Top 20 North American Superstars for research in strategy and organisation
As a management thinker, Govindarajan has worked with top management in Global Fortune 500 firms and a keynote speaker at various CEO fora
He has been a guest professor at management institutes across the world and penned nine books and over 70 articles in journals such as the MIT Sloan Management Review and the HBR