Historically multinational enterprises have geared there product offerings to the developed world. These same products were then often toned down in aspects of quality and or features and offered to emerging economies. However, often these products did not meet the needs, demands or wants of customers in emerging economies. Thus, to prevent a disruption of product offering and market control multinational enterprises need to look to new product ideas developed for emerging economies rather than handed down to these economies. Enter the ideals of reverse innovation and the ways in which multinationals can meet these needs. The paper will focus on the reverse innovation concept, identify “need” gaps within emerging economies and bringing together examples of multinationals and startups that have benefited from reverse innovation.
Keywords: Reverse Innovation, Multinational National Enterprise, Need Gaps
In the early part of 2009 Logitech, a leading manufacturer of wireless computer peripherals was at the top of its game. Offering a variety of wireless input devices ranging from the low-end models to high priced multifunctional models Logitechs’ marketing team assumed that it had its bases covered across the consumer market. However, Logitech had missed one key component of an effective global business-marketing plan; a complete understanding of how consumers in both the developed and emerging markets would use their products. In emerging markets such as China, the demand for wireless peripherals was focused on low cost and long range, the opposite of the peripherals that Logitech offered to the market. This lack of understanding pushed Logitech out the wireless peripheral market and allowed much smaller competitors, who understood the needs of customer, to take over the market share in China and other emerging markets.
As presented by Trimble (2012), “reverse innovation helps leaders and managers see what it means to develop in emerging markets first, instead of scaling down rich-world products, to unlock a world of opportunity” (para.2).To be truly effective and successful at reverse innovation companies must largely change the way that they think. Instead of inventing new products for developing countries, companies should look to the needs of the country and develop products that fit. Schachter, identifies five “needs” gaps that differentiate emerging markets from rich countries. These gaps include infrastructure gap, performance gap, sustainability gap, regulatory gap and the preference gap (Schachter, 2012).
This paper will focus on these five need gaps, establish how each can potentially benefit a company and how each add to a company’s ability to meet the need of its markets. Further each of the needs gap will be referenced to current industry leaders and new start-ups including firms such as John Deere, General Electric, Microsoft, PepsiCo and Diagnostics for All. In addition to the bridging of the needs gaps of emerging countries to major companies this paper will also look at the how companies can benefit from entering a marginalized market
General Electric and Infrastructure Gaps
In the developed world, global business often takes for granted the infrastructure that is in place. New products can be developed in the in rich countries with the assumption that a solid and reliable infrastructure is in place (Govindarajan, 2012). In emerging economies, businesses must not make such assumptions and plan new products to accommodate the different environments. General Electric has made several leaps and bounds in new product development in which they have taken in to consideration the infrastructure in emerging economies.
Two of the key products that General Electric has developed using the strategy of reverse innovation include hand-held electrocardiogram devices and PC-based ultrasound machines (Layne, 2009). Both products are geared towards emerging markets in which the current infrastructure is unable provide suitable alternatives. These products will further reach parts of rural emerging markets that traditional equipment would take many years to reach. Understanding the challenges of infrastructure needs in emerging markets has played out quite well GE.
From According to General Electric (GE) (2009), “GE’s revenues outside the United States soared from $4.8 billion, or 19% of total revenues, in 1980 to $97 billion, or more than half of the total, in 2008” (Para. 2). Professor Govindarajan, of Harvard School of Business, further relates that while this growth rate is increasing GE is only skimming the surface of potential emerging market growth (General Electric, 2009).
Microsoft Corporation and the Performance Gap
The speed at which technology grows continues to accelerate at an astounding rate. This growth is not limited the developed world, emerging economies are also growing and the need for software to accommodate this growing market is increasing. However, buyers in the developing world cannot demand the sky-high levels of performance that developed countries are accustomed (Govindarajan, 2012). It is for this reason that the Microsoft Corporation has developed “starter software” geared to a demographic that needs certain outcomes from their software but require a price point that is acceptable for the relative income.
To bridge the performance gap in emerging countries, a global business must revamp its attitude concerning product lineups. Rather than managing products with a good-better-best approach, reverse innovation points to the needs of the consumers and develops a product that meets consumer demands. According, to Govindarajan (2012), “it is impossible to design to that radical ratio if you begin with the existing offering. The only way to get to an entirely new price-performance curve is by starting from scratch (Para. 11). Thus, by starting from scratch Microsoft’s Starter Software created an offering that met the real needs at a realistic price.
John Deere and the Sustainability Gap
One of the major challenges of emerging economies is need to balance the product development and the environmental concerns associated with the products. As noted by Govindarajan (2012), “If the 5.8 billion of the world’s poor consume and produce goods in ways that are environmentally unsound, the results will be catastrophic for poor countries – and for the planet” (Para.20). The John Deere Corporation is a great example of how global business can influence the sustainability of emerging economies.
When entering the Indian market, John Deere looked at the current state of agriculture production in the country and decided to start from scratch on the new models for the country. Deere typically produced large tractor models, geared to handle large tracts of land, which burned large amounts of fuel. This concept was not sustainable in India, a country that typically farmed on smaller tracts of land and that did not have access to readily available fuel distribution that would be required for higher output (Balakrishnan, 2012). Thus Deere’s product offering called the Krish, a 35 horsepower low consumption model, has been a success and Deere now considers its Indian operations a center of excellence. Govindarajan (2012) states, “The only way poor countries can sustain economic growth is through “green” solutions” (Para. 19) Deere’s work in India truly represents this thinking.
PepsiCo and the Preferences Gap
As stated in previous sections one of the key parts of reverse innovation is the understanding of consumer needs. Every country in the world has its own sets of tastes, its own habit and its own rituals – successful reverse innovators such as PepsiCo understand this concept. As stated by Govindarajan (2012), “PepsiCo is developing new snack foods based not on corn (ubiquitous in the rich world), but on lentils – hardly a food most Americans grow up eating” (Para. 23). PepsiCo has been able to not only identify the product needs and wants of the emerging economy but it also was able to bring “trickle up” product promotion to other countries including Australia and New Zealand (Kaul, 2012).
By designing products that fit with the preferences of the society they are designed for, global business leaders, are able to open new doors for revenue. Further once these social trends are established they can help to close the preference gaps that exist between undeveloped and developing economies. Eventually these social norms will bridge the differences between the two economies and merging marketing styles that are acceptable to both consumer markets.
The Regulatory Gap and Diagnostics for All
Diagnostics for All is a small Boston startup that has developed a paper-based diagnostic tested for sweat, blood, urine, and saliva (Wright, 2012). This simple test has substantial impact on the ability to meet the needs of individuals in emerging economies, especially those consumers in rural areas. Diagnostics for All had multiple reasons for choosing to first release its products in emerging economies rather than typical developed markets. One of these reasons is largely referenced to the regulatory gap between developed and undeveloped economies. As noted by Wright (2012) “Despite the attractiveness of such a solution for the developed world, Diagnostics For All chose to commercialize in the developing world so as to sidestep the painstaking Food and Drug Administration (FDA) approval process” (Para. 4).
Diagnostics for All, usage of emerging economies regulatory gaps, should not be construed as way to cheat the system and get unsafe innovations fast tracked. Rather regulatory gaps when used as in the case of Diagnostics for All enjoy the advantages of lower friction and faster progress. Govindarajan (2012) notes, “in making this observation, we do not mean to suggest that low levels of regulation in an emerging market are either a good thing or a bad thing; it simply is what it is, and it may sometimes provide an advantageous medium for certain innovations” (Para. 18).
Reverse Innovation and Marginalized Markets
The five gaps noted above represent the challenges that global business must recognize when entering new and emerging markets throughout the world. These gaps are the reason that capturing opportunities in the poor world means starting from scratch, and reverse innovation is what can be call clean slate innovation (Govindarajan, 2012). However, some industry thinking presents the ideals that marginalized markets do not warrant enough potential to justify the investment. Yet when consideration is given to the actual size of the markets, this thinking has to be reconsidered.
One company that truly represents the ideology of reverse innovation in marginalized markets is Tata, manufacture of the Nano, the world’s most affordable car. The Nano was not a trimmed down version of another automobile made for another market. Rather the Nano was developed for the Indian market with Indian design requirements featuring clever designs to meet the needs of the market. As stated by Govindarajan 2012, “the Nano will make car ownership possible for 65 percent more Indians of the middle class, all of them eager for a safer alternative to motorbikes” (Para. 29).
There are many reasons that multinational enterprises should practice reverse innovation, but most importantly is the need to protect their investments. If MNE’s fail to practice reverse innovation, local companies will and the innovations that they create will eventually influence the financial well-being of the MNEs. Further MNE’s success rate for reverse innovation will be much higher if the five need gaps are met. By developing an attitude of ground up engineering and focus on the needs, wants, and interests of the host countries reverse innovation can become a win-win situation for all parties involved. As noted by (2012) “the new reality is that the future is far from home” (Para. 19). IF MNE’s do want remain competitive through the practice of reverse innovation, the must be just as interested about the problems of the emerging countries as they are about the problems of rich countries.
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