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05.10

By John R. Platt

Where will the next big, innovative idea come from? What will it be? Will it be a cell phone with gadgets galore, made in Japan and priced high for early adopters? Or will it be a functional yet inexpensive netbook, designed and built in India for all of the world to use?

According to Vijay Govindarajan, a professor at Dartmouth's Tuck School of Business, it's the latter circumstance that will truly bring innovation to the market. He calls it "reverse innovation," and it could be the next big growth area for multinational companies — if they don't let others beat them to the punch.

Reversing the Innovation Pattern

According to Govindarajan, reverse innovation happens when companies in poorer countries create innovative products, usually for their own markets, and then export them to developed countries. More simply, he defines it as "any innovation likely to be adopted first in the developing world." This is the reverse of how it normally happens, with innovations from rich countries being exported around the world.

These reverse innovations not only create new products at low prices — the $2,500 Tata Nano automobile, for example — they create solutions, something that engineers from American companies might not consider their first priority in product development.

"The reverse innovation idea is really about elevations that are based on the problems of poor countries like India and China," says Govindarajan. He cites examples such as a $70 portable refrigerator, or a $1,000 handheld electrocardiogram device developed by General Electric.

Speaking of GE, Govindarajan and co-authors Jeffrey Immelt (GE's Chairman) and Chris Trimble first coined the term "reverse innovation" last year in a Harvard Business Review article that looked at how the company was developing products for the developing world as a way to create new markets, and as a way to protect itself from competition. In the article, the trio described the GE EKG device as extraordinary because it was developed for the Chinese market, but then made its way to the United States.

The Barriers to Reverse Innovation ... and the Opportunities

But GE, says Govindarajan, is an exception, and most companies are not content to create new products for developing markets. He uses the Tata Nano as an example of a product that meets a need in India, but which American companies would not be likely to build. "Tata Motors created the world's cheapest car," says Govindarajan. "The lady who cleans my house in Hanover could buy a $2,500 car, too, but why is Ford not producing that car in the U.S.?"

The answer, he says, is the way American companies look at the market, the way innovation is funded, and other factors. "If I'm Ford," says Govindarajan, there are a vast number of customers for my product who are rich or super-rich. If I make a product for them, I make high margins. I would rather focus on the big and highly profitable segment."

The high cost of creating innovative products can also dictate the eventual market. "Innovation requires spending money, and I must spread the cost," says Govindarajan.

Finally, while developing markets may have large number of potential customers, they may also lack the infrastructure for which to deliver new products.

But the lack of infrastructure can sometimes create opportunities, says Govindarajan, who argues that an existing infrastructure can actually slow down innovation. "The reason there are so many cell phones in developing countries is there were no landlines. When you get cell phones, you create services, because there are no services to become obsolete. Because the infrastructure is so established in the United States, your innovations must be accomplished on top of what already exists. What would you do with all of the ATMs if you went to mobile banking? But in India, you can go directly to mobile banking, or to electric cars, because there are fewer gas stations already in place."

How to Get Started?

"What I would recommend for American engineers," says Govindarajan, "is to start not with technology but with a customer problem. The customer problem, the need that must be solved, must be the starting point for innovation."

But Govindarajan worries that American engineers might not be trained or prepared to think that way. "Many engineers have a tough time understanding the customer problem. Their focus is on the products they already have, and improving them." That does not solve anything, he says.

If you're really interested in finding out what potential customers need, Govindarajan suggests teaming up with your company's marketing department. "Get out into the field and really observe customers. Understand what their unarticulated needs are."

The Benefits of Reverse Innovation — And the Risk of Ignoring It

"Think about the so-called rich countries," says Govindarajan. "Their growth has slowed down. The growth now is in the emerging markets. If you concentrate on those markets, the growth will come back to you."

Meanwhile, if American companies don't start thinking about innovation for developing markets first, then companies in those markets are likely to beat them to it. "Because American companies focus on the highly profitable segment, I think reverse innovation will start in poor countries," says Govindarajan.

"But here's my advice," he says. "If you don't do it, your company's future is in peril."

Govindarajan believes that it's the engineers who have the best chance of getting reverse innovation off the ground in this country, by appealing directly to their managers. "If I were an American engineer, I would go to my boss and say the growth is in these countries, and it's a good thing to focus on good ways to help these people. What else better is there?"

For more on reverse innovation, visit Vijay Govindarajan's blog at www.vijaygovindarajan.com.

John R. Platt is a freelance journalist and marketing consultant from coastal Maine. He is a frequent contributor to Today's Engineer.

Comments may be submitted to todaysengineer@ieee.org.