vol 7, issue 3

A new look at innovation

26 March 2012
By Nick Smith
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Vscan ultrasound scanner

Developed in China but making its way into western markets, the Vscan ultrasound scanner

Reverse Innovation

We read it for you 'Reverse Innovation'

Vijay Govindarajan

‘Doing business in high-growth hotspots requires much more than ramping up sales, distribution and production...’

The further you move away from established 'home markets', the more potential for developing low-cost new products. Welcome to the idea of 'reverse innovation'.

Any fool knows it: the key to growth is investment in emerging markets. The BRIC countries have economies that are expanding at a rate that means they will outstrip safer, more traditional 'home' markets within perhaps as few as a couple of generations.

And any fool also knows that this investment lies either in opening manufacturing plant overseas to take advantage of cheaper material and labour, or pumping western products that are reaching maturity 'over here' into secondary markets. It's a sure way of making a few bucks at the end of the product's lifecycle 'over there'.

But according to Vijay Govindarajan, the second of these options is a strategy that's unlikely to have "much of an impact on poorer countries". Govindarajan's new book, 'Reverse Innovation', co-authored with Chris Trimble, explains why, and provides an alternative approach to relieving these markets of their wealth.

You can't do that by applying the normal rules. And the reason, Govindarajan says, is that "developing economies are different. They are not just a little bit different. They are night-and-day different. In the rich world, there are a few people who spend a lot; in the developing world there are a lot of people who each spend a little."

This leads to an unfamiliar business challenge. As Govindarajan says, one person with $10 has a completely different set of basic wants and needs from ten people each with only one dollar to spend. Trying to flog off end-of-the-line western products is "unrealistic. Doing business in high-growth hotspots requires much more than ramping up sales, distribution and production. It requires innovation. Reverse innovation".

To explain how reverse innovation works in practice it's useful to look at how GE's Vscan ultrasound image scanner originated in China, but worked its way upstream into established Western healthcare markets. Govindarajan, who spent two years at GE, serving as their first professor in residence and chief innovation consultant, takes up the story. "The next time you visit your physician for a routine check-up, don't be surprised if he sets aside the stethoscope."

That's because it's going the way of the typewriter. Hearing inside the body is powerful in diagnostic terms, but "to see inside is transformative. Medical imaging technology has now advanced to the point that every doctor can carry an ultrasound device in a coat pocket."

The background to the Vscan is what's important here. "GE planted the seed for the device in 2002, when it developed its first compact device in China", and is one of the best examples of how a transformative reverse innovation can migrate from filling emerging-market needs to finding a niche in a mature market.

As with many companies seeking new horizons, GE saw China as, quite literally, Shangri-La. As world leaders in the market for big, powerful, premium-priced ultrasound scanners for decades, the company naturally thought that all it needed to do was set up a sales and distribution centre locally. But after a decade in the East GE was making no headway, with sales of a mere $5m and with negligible growth.

All that changed in the first decade of the 21st century. In 2002 GE introduced its first portable smartphone-size scanner. By 2008 they'd cheese-pared the unit cost down to $15,000, roughly 15 per cent of the price of a bottom-of-the-range traditional scanner.

"Performance was not as good, of course," says Govindarajan, "but it was certainly much better than a 15 per cent solution, and performance has improved."

The lessons GE learned could be summed up with adjectives that routinely apply to hand-held instrumentation. They had developed something that was truly 'ultra low-cost', 'portable' and 'easy to use'. But they'd done it for a set of reasons that seemed to almost guarantee success, where they had previously failed.

Having realised that 90 per cent of Chinese hospitals are poorly funded there was no point in trying to sell budget-busting instrumentation. Transport is bad in rural areas where there are very few specialists. So you need to take your ultrasound machine into the field, and once it gets there it needs to be foolproof. The breakthrough in design terms came when GE shifted its emphasis from expensive custom hardware to relatively cheap software.

Today the Vscan is the growth engine for GE in China. It also caught on worldwide – "flowed uphill", to use Govindarajan's metaphor – and the global market rocketed from $4m to $278m with an annual compounded growth rate of more than 50 per cent.

There are seven similar case studies in 'Reverse Innovation' where the authors demonstrate how the process of innovating for emerging markets can "trickle up" to create financial success for companies casting their eyes on pastures new. But you can't do this overnight. And this book is careful to point out that there are certain critical phases that need to be addressed.

Critically, there are five phases or 'gaps' that need to be identified and evaluated: performance, infrastructure, sustainability, regulatory and preferences. Only by gaining a firm conceptual grasp on these will the counterintuitive reverse innovation process make sense.

It has an interesting societal benefit too. Which is that technology can be placed in the hands of the people who need it most at a fraction of the original cost. One of the side-effects Govindarajan notes is that in companies such as GE the people responsible for the project really bought into the idea that they were doing some good in the world and not just returning profit to a multinational corporation.

"All the leaders we've spoken with exhibit an extraordinary level of passion about their reverse innovation efforts. Much of this consuming passion is rooted in the potential to address so many unmet needs in emerging markets and, in so doing, to improve people's lives." 

'Reverse Innovation' by Vijay Govindarajan and Chris Trimble is published by Harvard Business Review Press, £19.99

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we read it for you: 'Reverse Innovation'

Vijay Govindarajan and Chris Trimble's new book challenges the assumption that the best climate for technology product innovation is the established hothouse of western or "home" markets. Under certain circumstances innovation can "flow uphill" and that its future lies in emerging markets. Today's poor countries are being tapped for breakthrough innovations that can unlock new markets in the developed world, and can even help solve societal problems such as the high cost of healthcare. 'Reverse Innovation' draws on eight case studies to illustrate the point, including how Logitech regained its market position in China as a developer of computer mouses and how Harman's new infotainment system has generated more than $3bn in new business.

The book goes on to explain that the biggest hurdles to reverse innovation are not scientific, technical or budgetary, but managerial and organisational. It also produces evidence to show that companies can earn the same or better margins and return on investment for a low-cost product developed in, say, China or India, than for a higher cost product developed at home.

Extract: What it is...

Quite simply, a reverse innovation is any innovation that is adopted first in the developing world. Surprisingly often, these innovations defy gravity and flow uphill.

Historically, reverse innovations have been rare. Indeed the reason most innovations flow downhill, not uphill, is intuitive. Rich customers in rich countries can afford – and indeed they demand – the latest and the greatest. Demand pushes technology forward. In due course, its benefits trickle down across the globe. You can do the innovation math: the United States and Germany have well over 300 Nobel Prize winners in science and technology. Meanwhile, India and China, with six times the combined population, have fewer than ten. Consequently, people ''especially in the West '' expect the future to be invented in Silicon Valley or Houston or Munich, but not in Bangladesh.

Thus, it is natural to suppose that the developing nations are engaged in a slow and evolutionary process of catching up with the rich world, both economically and technologically. They do not need innovation. They will simply import what they desire from the rich world, just as soon as they can afford it.

But the assumptions are misguided. What works in the rich world won't automatically achieve wide acceptance in emerging markets, where customer needs are starkly different. As a result, reverse innovation is rapidly gathering steam – and will only continue to do so.

Extracted from 'Reverse Innovation' by Vijay Govindarajan and Chris Trimble with permission

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