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After this month's midterm election results, which showed voters single-mindedly concerned about jobs and the economy, President Obama quickly rebranded his trip to India and other Asian countries as a trade mission. The goal of the trip, he said, was to stimulate overseas demand for American goods and services.
It's certainly true that, for many U.S. businesses, emerging nations present rich growth opportunities. In China, India, and elsewhere in the developing world, rising prosperity is expanding the market for consumer goods from high-tech razors to high-tech cars. But the traditional way of serving those markets suffers from flaws that eventually limit the growth potential.
Typically, multinational companies create stripped-down versions of products developed for Western consumers. They then offer these products in the developing world at a reduced price. To do this requires removing certain premium features or bells and whistles, and perhaps substituting lower-cost materials. Even so, the prices such products command are often unaffordable by all but a small percentage of people at the top of the local markets' income pyramid.
In this model, innovation flows in only one direction: downhill, from the headquarters of the multinational corporation out into the world. The same basic products made for the developed world are modified for poor-world consumption, mainly through de-featuring and substitution.
This strategy is called "glocalization." But while the word "local" is embedded in the name, in truth there is very little locally relevant insight reflected in the design of glocalized products. Thus, after an initial flurry of sales made largely on the cachet of the multinational's global brand, the approach fizzles. As one Indian executive told us: "Emerging nations used to aspire to have rich-world products. Now they want rich-world quality in their own products."
In the end, businesses that practice only glocalization will fail to exploit the full emerging-market opportunity—to the detriment of their bottom lines and the economy as a whole.
What works far better, we have learned, is reverse innovation. Instead of conducting innovation in one direction only, reverse innovation harnesses the inventive power of local insight—people who understand life at street level. How can you create successful products if you don't know how your customers live? That is why we believe products meant for emerging markets are best developed in local regions, by local people who have the surest grasp of market needs and customer behavior.
Moreover, emerging nations must deal with a variety of constraints. These include poverty, underdeveloped infrastructures, challenging geography, and a lack of natural resources. The silver lining in such constraints is that they produce a kind of resiliency and creative thinking that are relatively less needed in environments of greater abundance.
There are exciting examples of Western multinationals that have broadened their product development repertoire to include reverse innovation. GE's Jeffrey Immelt, one of the U.S. CEOs who traveled to India with President Obama, has learned the value of allowing innovation to occur anywhere and everywhere. A small team of GE Healthcare (GE) engineers in Bangalore, India, created a breakthrough in electrocardiogram (ECG) technology that offered enormous value to an underserved population of mostly poor patients in rural areas, places where health-care services are both scarce and ill-equipped.
Millions of Indians suffer from undiagnosed cardiovascular disease, so the ability to reach many more patients is a game-changing advance. The team designed an ECG machine that is lightweight and portable (so that it can go to where the patients are); battery-powered (because rural areas either lack or have unreliable sources of electricity); extremely easy to operate (so that no special training is needed to get results); and inexpensive ($500, vs. $2,000 for the traditional ECG unit sold in India).
GE Healthcare, which had previously offered sophisticated ECG products aimed at the top of the market, went on to develop an array of options suited to the varied settings and circumstances of emerging markets. It even discovered applications for its low-end units in the developed world, and was able to create new jobs in the U.S. When a product developed by a U.S. company in its Bangalore or Shanghai or Mexico City research center finds a market in this country, that is the ultimate fulfillment of reverse innovation.
There is nothing wrong with President Obama's goal of boosting foreign trade. But as vital as it is for U.S. firms to sell their products in emerging economies, we believe the greatest potential in those markets is to discover and empower the hidden knowledge and creativity of local talent. That is where the full opportunity of reverse innovation lies.