The Business Phenomenon of Reverse Innovation

By Tim Dhoul Updated Aug 29, 2014

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Introduction
Consumers in developing economies have different needs
The challenge confronted by the Western world
Tata Motors offers an insight into market awareness
Repercussions for innovation management
Concept tackled on Dartmouth Tuck MBA electives
Emerging markets to continue effecting change in innovation thinking

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Is it possible that emerging markets and developing economies hold the key to creating the future’s most important strides in innovation?

That’s the question which forms the basis of the phenomenon known as reverse innovation, popularized by two Dartmouth Tuck professors in their book of the same name.

Simply put, reverse innovation isn’t about making things backwards. Instead, it lies in a reversal of the traditional process by which new products are developed and adopted in the Western world and later exported to emerging economies. Indeed, the necessities of lessened resources or geographical isolation in the less-urbanized developing world can be key drivers of innovation.

An example comes from GE Healthcare, who built a low-cost and ultra-portable electrocardiograph machine for doctors in India and China, before then making it available to the US, and at a fraction of the price held by similar products in the North American market.

Consumers in developing economies have different needs

At the heart of reverse innovation is a desire to help explain the changing landscape of the business world brought on by the continued growth of developing economies. It is also a recognition that consumer needs in these countries have largely been inadequately addressed in the past. Indeed, innovation of this kind has been labeled as ‘disruptive’ because of the way in which unexpected solutions arise from unmet customer needs.

Chris Trimble, one of the Dartmouth Tuck co-authors of Reverse Innovation, reflects that, “Now the economic growth is somewhere different, it’s in the emerging middles class in the developing economies and those are consumers who have very different needs. You can’t take a rich-world product, tinker with it a little bit and meet their needs. This is somebody with typically one tenth of the income of what we’re accustomed to and that’s just the tip of the iceberg.”

The challenge confronted by the Western world

The scale of this challenge for companies in the Western world is laid out by Trimble. “Reverse innovation is a new phenomenon for big global corporations. What do they really know about the needs of the consumers in the developing world?”

His Dartmouth Tuck colleague and Reverse Innovation co-author, Vijay Govindarajan, was recently ranked fifth in the global management ranking, Thinkers50. In 2009 he wrote that, “Emerging markets are a paradox: They are mega-markets with micro-customers. ‘Glocalization’ (the process of tinkering with a global product for a local market) means that multinationals target only the top of the pyramid in these markets, the wealthiest 10%. But the real potential lies in unlocking the other 90%.”

Are locally-based companies at an advantage when it comes to understanding and unlocking consumers’ needs? “That is exactly the thought that should be waking up CEOs of established multinationals in the middle of the night in a cold sweat,” says Trimble.

Tata Motors offers an insight into market awareness

Tata Motors provides a well-documented example of the process. The Indian conglomerate made a great deal of headlines with its launch of the world’s most affordable car, the Nano, in 2009. Trimble describes it as a “really watered-down car” to Western eyes, but states that Tata Motors’ Nano is, “exactly the type of innovation that the book predicts and if you’re trading up from a two-wheeler it’s a big advance. This is an area where it’s just so clear that the needs of the emerging world have not been well-served by rich-world auto-makers.”

It hasn’t all been plain sailing for Tata Motors – for one, its initial headline-making price of just one lakh (c. US$1,600) has subsequently risen to US$2,500-$4,000, (depending on the model) and sales have been disappointing. However, Trimble says Tata Motors has clearly been reading the market opportunity correctly and is interested to see how far it goes - there has been much talk of an upgraded model being unleashed into the Western world for instance, under the name of Tata Europa. According to a press release for Tata Motors, it will still have affordability at its core, with UK media estimates placing its expected price at roughly US$6-10,000.

Repercussions for innovation management

Competing with a locally-based company such as Tata Motors shouldn’t be impossible for multinationals with large resources, but may require a deeper level of thinking about innovation management.

“All innovation begins not with technology or creativity but with an understanding of the problem that you’re trying to resolve”, notes Trimble.

He says that multinationals commonly have two types of people already placed in emerging markets – technologists and marketers – but they do not interact, and may not be based at the same location or even report to the same people at headquarters. Changing an innovation management structure to allow for interaction would help and indeed, the ‘local growth team’ (purpose-built for a particular market) is something Reverse Innovation looks at; this, however, leads to the bigger question of how a company manages this process.

The question of how to manage an innovation initiative inside an established organization is at the crux of Trimble and Govindarajan’s research.

“It’s still an area where even the best companies in the world struggle. Even if you look at an Apple or a Google, you’ll find they’ve got some success stories that they’re proud of, but nobody in the world is doing this consistently well”, Trimble explains.

Concept tackled on Dartmouth Tuck MBA electives

Therein lies the potential opportunity for the emerging generation of MBA graduates. Both professors discuss the concept on their second-year MBA elective courses at Dartmouth Tuck with Govindarajan focusing on strategy and Trimble on the execution of innovation initiatives. And it seems interest in the topic is rising.

“This year I’ve had a handful of students that have sought me out in particular to talk about Tuck because they have learned about or are interested in reverse innovation”, admits Trimble. His message to his own students is that, “If they want to be involved in innovation in the future, they have to learn something about the lives of the middle class in the emerging economies.”

Right now, both professors are looking at the implications the concept holds for innovation management in the healthcare sector, with particular emphasis on the US and service delivery in India. A list of 2013’s key health trends in Maclean’s underlines the potential it holds in this area with Grand Challenges Canada’s CEO, Dr. Peter Singer, arguing that health innovation must focus on the ‘cost’ part of the equation.

Emerging markets to continue effecting change in innovation thinking

Reverse innovation appears to have touched a chord according to Trimble – not just among those aware of the increasing importance of emerging markets, but also at a time when economic insecurity has been an overriding concern across the globe.

“There’s a lot of uncertainty and I think reverse innovation was at least one window into what that new world was going to be about”, reasons Trimble.

The concept’s very emergence has stemmed from a fundamental misassumption that developing economies and their consumers strive only to gradually catch up with the Western world. Trimble suggests it is likely that the phenomenon will spread across the next generation or two.

“Eventually there’ll just be innovation moving from one corner of the world to another.” He adds that this situation will arise quickest in the fast-moving electronics industry, but will take much longer for a sector such as energy, where well-established infrastructure makes it much harder to implement innovation in the Western world than it would in developing economies. But, in the meantime, multinationals may have to reassess their approach to innovation management so as not to miss out on the opportunity a greater understanding of reverse innovation could yield.

Written by

Tim Dhoul

Tim is a writer with a background in consumer journalism and charity communications. He trained as a journalist in the UK and holds degrees in history (BA) and Latin American studies (MA).