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Why bad things happen to good ideas

STR Team 

Is it possible that innovation in poor countries could be so monumentally difficult inside a strong global company? This excerpt from the book Reverse Innovation — Create far from home, win everywhere has some answers

Since organization follows strategy, it's hardly surprising that glocalization has molded the way the multinationals are structured and run. GE is a case in point. For thirty years, its organization evolved toward maximum effectiveness in glocalization. Power was concentrated in global business units that were headquartered in the rich world. The major business functions, including R&D, manufacturing, and marketing, were centralized at headquarters. Business leaders in developing countries were responsible for selling and distributing global products. (They also provided insights into local needs-insights that helped GE make minor adaptations to global products.) While many of the company’s R&D centers and manufacturing operations were relocated to the developing world, the objectives in doing so were to tap overseas talent and to reduce costs. Such units reported to global headquarters and remained focused on rich-world offerings.

This approach has enormous advantages. It is very efficient. Unfortunately, an organization with a single-minded glocalization focus will present formidable barriers for reverse innovation.

Take the case of V. Raja, head of GE Healthcare’s business in India in 2004. His primary task was to grow the market for GE Healthcare’s global products. And yet, as Raja surveyed GE’s customers in India, he saw a mismatch between their needs and the products he was able to offer them.

Consider, for example, a staple piece of X-ray imaging equipment, found in many basic surgical suites. It’s called a surgical C-arm, and it isn’t an especially complicated item: a rolling, C-shaped assembly, with an imaging unit at the top, which can be positioned wherever needed above a patient on an operating table. The technology dates back to before 1960.

At the turn of the new millennium, GE Healthcare offered to the Indian market a high-quality, high-priced surgical C-arm designed for the rich world. It was priced significantly higher than the local competition’s alternative. Not surprisingly, that made GE’s offering a tough sell for Indian hospitals and clinics. They would have been happier with a compromise product at a far lower price.

Raja saw a solution to the problem and made a proposal. He wanted the company to develop, manufacture, and sell a simpler, easier-to-use, and substantially cheaper product in India.

His proposal made good business sense, and yet it had little chance of approval. Here, in summary, is what Raja would have needed to do to overcome the dominant logic and to push his proposal forward:

* Take initiative far beyond the call of duty. Raja may have been the most senior executive in India, but his formal responsibilities included neither general nor product development. His role was primarily to sell and distribute GE’s global products in India. He was expected to grow revenues 15 to 20 percent per year while simultaneously boosting margins by holding expense growth down. This was a more-than-full-time job, for which he was accountable to deliver on plan. Simply finding time to pitch an India-specific product was a challenge in itself. But that is nothing compared with the challenge of the next step: selling the proposal internally.

* Generate senior-level interest. To do so, he would have to get the attention of the general manager at headquarters in the United States—not his immediate boss, but someone still higher in the global organization. India represented 1 percent of GE’s global revenues at the time, so Raja could expect to command roughly 1 percent of the bandwidth of such a manager with global responsibility.

* Make his case quickly. Should Raja be lucky enough to get a meeting, he would have limited time to present his idea. The law of elevator pitches applies: go for emotion and enthusiasm. Unfortunately, he would be making the pitch to someone more familiar with world-renowned American teaching hospitals than with rural clinics outside Bangalore. At that time, global leaders in the United States did not typically visit emerging markets to deepen their insight into local conditions. How could anyone be expected to understand health-care needs in rural India while sitting in headquarters in Milwaukee?

* Overcome bias against “small” opportunities. Raja envisioned a modest effort at first. He anticipated that only two full-time engineers would be needed to design the product and that manufacturing could be outsourced. He estimated a $5 million to $6 million business in a market sized at $30 million to $35 million. Those are small numbers for GE, but Raja believed that the Indian market would grow significantly in the future—particularly if offered the right kinds of products. Nonetheless, global managers are accustomed to placing big bets on projected billion-dollar businesses. In the glocalization context, a new surgical C-arm for the Indian market appeared to be an unjustifiable drain of attention and R&D ingenuity, and all for a mosquito-sized payoff.

* Build broader support. If Raja proved persuasive enough, he would be invited to share his proposal with functional leaders. Such conversations would be challenging. To the head of global manufacturing, simple, streamlined global products are more efficient than custom offerings. The head of marketing would fear a lower-priced product might weaken the GE brand and cannibalize existing global offerings. The head of finance would argue that lower-priced products would drag down overall margins. And the head of global R&D would want to know why engineers should be diverted from projects for GE’s most sophisticated customers—buyers who know exactly what they want and can pay top dollar.

* Deal with the capital budgeting system. Were Raja able somehow to gain the support of these executives, the formal capital budgeting system would require him to submit a proposal with cash-flow projections supported by market research and to show that the project could meet the company’s cost of capital and yield a positive net present value. Needless to say, it is nearly impossible to do market research or gather hard data when you are trying to create the market for a product that doesn’t yet exist—never mind calculate an accurate return on investment.

* Keep fighting the good fight even after the proposal is approved. A simple initial approval would hardly have been enough. Raja’s project would still have an uncertain payoff, and year after year, it would have to compete for additional capital with other, more profitable, shorter-term bets. Not only that, but Raja would still have had to sustain excellence in the operations he already supervised, while somehow executing a low-cost C-arm product within an organizational structure built for glocalization. So good luck with all of that!

Is it possible that innovation in poor countries could be so monumentally difficult inside a strong global company? Absolutely. The predicament that Raja faced is commonplace, and not just within GE but within all legacy global corporations. Each counterargument to a proposal like Raja’s makes perfect sense, at least as seen from the perspective of those running the global business. After receiving an early cool reception to his idea for a new surgical C-arm tailored to the needs of the Indian market, Raja turned his attention back to the pressures and practical realities of his day job. (But as we will see in this and subsequent chapters, GE has made several changes to its organizational structure to catalyze reverse innovation, and the surgical C-arm project has since moved forward.)

The moral of Raja’s real-life story? A strict and disciplined focus on glocalization creates insurmountable barriers for reverse innovation. Furthermore, the biggest hurdles to reverse innovation are not scientific, technical, or budgetary. They are managerial and organizational.

INVASIVE SPECIES: MAHINDRA & MAHINDRA IN THE U.S. HEARTLAND

In 1994, when Mahindra & Mahindra (M&M) arrived on American shores, it was already a powerhouse in its native India. The company, founded as a steelmaker in 1945, had entered the agriculture market nearly twenty years later, partnering with International Harvester to manufacture a line of sturdy thirty-five-horsepower tractors under the Mahindra name.

These tractors became very popular in India. They were affordably priced and fuel efficient, two qualities highly valued by thrifty Indian farmers, and the machines were sized appropriately for small Indian farms. Over the years, M&M continued to innovate to perfect its offerings, and its tractors proliferated throughout India’s vast agricultural regions. The Mahindra brand became well established and respected. By the mid-1990s, the company was one of India’s top tractor manufacturers—and it was ready for new challenges. The lucrative U.S. market beckoned.

When Mahindra USA (MUSA) opened for business, Deere & Company was the dominant brand. Deere’s bread and butter was enormous machines ranging as high as six hundred horsepower for industrial-scale agribusiness. Rather than trying to develop a product that could compete head-on with Deere, M&M aimed for a smaller agricultural niche, one in which it could grow and make the most of its strengths.

Mahindra figured its little red tractor would be perfect for hobby farmers, landscapers, and building contractors. The machine was sturdy, extremely reliable, and priced to sell. With a few modifications for the U.S. market-such as supersized seats and larger brake pedals to comfortably accommodate larger American bodies—Mahindra was good to go.

But the company was far from home and hardly a household name. The few Americans who had heard of the brand thought of it variously as “red,” “foreign,” or “cheap.” Even domestic competitors were barely aware of the newcomer. Deere gave more of its attention to Case and New Holland than to Mahindra. Flying below the radar, MUSA decided to make its mark through personalized service.

It built close relationships with small dealerships, particularly family-run operations. Rather than saddle dealers with expensive inventory, MUSA allowed them to run on a just-in-time basis, offering to deliver a tractor within twenty-four to forty-eight hours of receiving the order. MUSA also facilitated financing. In return, Mahindra benefited from the trust the dealers enjoyed in their communities.

MUSA also built close relationships with customers. Some 10 to 15 percent of M&M tractor buyers got phone calls from the company’s president, who asked whether they were pleased with the buying experience and their new tractors. The company also offered special incentives—horticultural scholarships, for example—to neglected market segments such as female hobby farmers.

This high-touch strategy paid off handsomely. MUSA’s U.S. sales growth averaged 40 percent per year, from 1999 to 2006. This prompted David C. Everitt, president of Deere’s agricultural division, to remark that Mahindra “could someday pass Deere in global unit sales.”

Deere responded with short-lived—and seemingly desperate—cash incentives to induce Mahindra buyers to trade for a Deere. This had the unintended effect of promoting M&M’s brand (“And we didn’t even pay for it,” says Anjou Choudhari, CEO of M&M’s farm equipment sector from 2005 to 2010). Mahindra fired back with an ad featuring the headline “Deere John, I have found someone new.”

As Mahindra enjoyed growing success in America, Deere struggled to gain a foothold in India. Unlike Mahindra, which had innovated both its product and its processes for the U.S. market, Deere tried to tempt Indian farmers with the same product that had underwritten its success at home. The strategy didn’t work, and Deere was forced to reengineer its thinking as well as its product.

“We gave a wake-up call to John Deere,” notes Choudhari. “Our global threat [was] one of the motivations for Deere to design a low-horsepower tractor—in India, and for India.”

In the meantime, M&M has become the number-one tractor maker worldwide, as measured by units sold.


 

Reprinted by permission of Harvard Business Review Press. Excerpted from Reverse Innovation. Copyright 2012.
All rights reserved.

REVERSE INNOVATION
AUTHOR: Vijay Govindarajan, Chris Trimble
PUBLISHER: Harvard Business Review Press
PRICE: Rs 750

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First Published: Mon, May 14 2012. 00:42 IST
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