by Yann Cramer
Thanks to a number of spectacular successes obtained by blue-chip companies in recent years, Reverse Innovation is becoming a popular trend. Examples include GE’s portable ultra-sound equipment designed in China and sold worldwide, LG’s low cost air conditioner designed in India and sold worldwide, Renault’s Logan low-cost model designed for Eastern European markets and now selling on Western Europe, etc.
In an enlightening article, Vijay Govindarajan outlines a historical perspective from globalisation to reverse innovation, and highlights the key driver behind this evolution: the revenue gap between developed and emerging markets. But there are other drivers that may be less visible but no less powerful.
The road to reverse innovation
In his article What is Reverse Innovation, Vijay Govindarajan outlines the following historical phases:
- Globalization: companies designing and manufacturing in developed markets products that are “de-featured” for export to emerging markets that can’t afford the fully featured original product.
- Glocalization: companies still de-featuring products from developed markets but now localizing production in emerging markets to take advantage of lower labor costs.
- Local innovation: companies now designing in emerging markets products that are directly suited to the local needs. (Manufacturing continues to take place locally for costs reasons.)
- Reverse innovation: companies designing and manufacturing in emerging markets for local use AND export to the developed markets (with or without some level of scaling-up).
It is obvious that the evolution up to phase three is driven by the revenue gap between developed and emerging markets, hence the need to scale-down the product features and leverage lower labor costs in order to reach the emerging market affordability threshold. But something almost invisible, just below the waterline, happens during the shift from phase two to three: that is the realization that there is only so much you can achieved by scaling down.
Simplifying does not necessarily achieve Simple
When the beast is too complicated – some would rather present it more positively as ‘sophisticated’ – getting to something that is simple enough, may require to start from scratch rather than incrementally shave off features from the beast. This is an experience we all make every so often: the need to start afresh from a clean sheet of paper. When shifting to phase 3, companies realize that the incremental cost reductions achieved by scaling down products are reaching a plateau, and they take the radical step of starting from scratch and designing afresh in emerging markets for emerging markets.
“We do not need all this c**p”
The driver that leads from local innovation to reverse innovation is even less visible – almost taboo. It is the realization that customers in developed markets have been stuffed with increasingly complex product features that they actually do not need! The policy has enabled companies to maintain healthy unit margins in the face of intense competition, but an increasingly powerful undercurrent in developed markets pushes simplicity to emerge as something that is not just cheaper but also more reliable, more effective, more authentic, more beautiful, in short: desirable.
This trend is now making companies who have banked their success on high cost/high margin products vulnerable to potential new entrants that would disrupt the established cost structure paradigm. The success of low cost cars in developed markets – Renault’s Logan today and Tata’s Nano tomorrow – is there to demonstrate that radical simplicity appeals to a significant and likely growing market segment.