The dawn of reverse innovation
2011 Ranking: #3
Winner: 2011 Breakthrough Idea Award
Vijay Govindarajan is the Earl C. Daum 1924 Professor of International Business at Dartmouth’s Tuck School of Business and Director of its Centre for Global Leadership. Recently, he took a leave and joined General Electric as Professor in Residence and Chief Innovation Consultant. He talks with Stuart Crainer about his 18-month experience at GE and about his concept of reverse innovation and its implications for multinational companies.
You just wrote an article for Harvard Business Review with Jeffrey Immelt, the CEO of General Electric (GE), and your associate, Chris Trimble. What was it about?
Historically, global companies innovated in their home markets, the developed world, and took those products into developing countries. We wrote about “reverse innovation”, which is just doing the opposite — innovating in emerging markets and then bringing those innovations back into developed countries. That’s the opposite of “glocalization” (a hybrid word formed by merging global with localization), the big idea in the 1990s, which has been defined as “thinking globally and acting locally”.
Did glocalization stop working?
The reason that glocalization worked historically is that American companies were taking their products into Europe and Japan (where the customers were similar to US customers). That approach does not work in emerging markets because the whole market structure and the customer problems are so fundamentally different. For example, just take the GDP per capita in two countries, the US and India; there is no product in the US, where the mass market per capita is $50,000, that can be adapted and sold in India, where the mass market per capita is $800.
Can you illustrate that point?
An interesting example is GE’s ultrasound machine. In the US, the ultrasound machine looks like an appliance. It’s huge, it’s bulky, it costs anywhere from $100,000 to $350,000, and it can do very complicated applications. But 60 per cent of India, for example, consists of poor rural areas where there are no hospitals. So, patients can’t go to the hospital; the hospital has to come to them. That means you can’t use those bulky machines; they must be portable. And again, customer affordability is different as well, so the charges people pay in the US for an ultrasound would be unthinkable in rural India.
And this led to reverse innovation?
In short, GE created a portable low-cost ultrasound machine, somewhere in the neighbourhood of $15,000, a fraction of the cost of the bulky US machines. And that has opened up a huge market in China and India. Now that same portable ultrasound machine is now coming into the US and creating new applications. This is a great example of reverse innovation.
Might this provide GE a chance to grow its business in India as well?
Most multinational companies, such as GE, have tried to sell their US products in poorer countries such as India and China; but, again, there was a serious mismatch in possible applications and pricing. That means they were capturing only one per cent of the opportunity in those countries. But, going forward, those countries are going to represent a huge growth opportunity. In fact, I believe that in the next 25 years the biggest growth opportunity for multinationals will be customers in poor countries. Which is why reverse innovation is important to GE and similar companies.
This represents a lot of big changes going forward. For example, where will companies be doing their research and development in the future?
The biggest change for American or European multinationals will be to shift the centre of gravity to where the innovation will take place. That means it is an organizational challenge. You have to put the resources where the opportunities are. That means you have to localize product development, you have to localize sourcing, you have to localize strategic marketing capability. This probably represents the biggest required shift in mindset for the leaders of multinationals.
How long has GE been practising reverse innovation?
It’s a relatively new concept. I would say it has caught on within the last five years. While India and China opened up their borders in the last 15 years, it’s really in the last five years that we have seen Western companies developing products based on what emerging markets need, want and can pay for.
I don’t sense that every major corporation is moving in this direction. What’s holding them back?
Probably the biggest problem of reverse innovation being adopted in large companies is the companies’ historical success. Glocalization, taking global products and selling them with some adaptation in local markets, requires a fundamentally different organizational architecture; and the more you succeed in (and dedicate most of your corporate resources to) glocalization, the more you are going to find it difficult to do a good job in reverse innovation. That’s probably the biggest bottleneck, historical success. Companies will move in this direction as more success stories evolve, such as the portable low-cost ultrasound machine.
Did GE encounter such bottlenecks in its own organizational culture?
Yes, without question. Here’s a case in point: five years ago, under GE’s glocalization model, the main responsibility of the head of GE Health in India was to distribute global products. If he had to come up with a new concept to solve Indian consumers’ health care problems, he had to do it on weekends, because he was busy selling global products during the week. But even if this health chief had written a proposal during the weekend, he had to then sell it to the global product head sitting in Milwaukee, who probably had never visited India nor understood the problems of its rural residents. And even if he could convince the global product head, there were a whole lot of others he also needed to convince. So, implementing reverse innovation represented a huge organizational challenge.
How did things get better at GE? What does it take to move a company toward reverse innovation?
As is so often the case, the key issue was the need for a cultural transformation, and it had to start at the top. To his credit, Jeff Immelt, Chairman and CEO of General Electric, regularly visits India and China and expects the CEOs of various businesses to visit them, as well. When Immelt sits with the Premier of China and talks to him about key national priorities, he gets firsthand knowledge about the possibilities in China. That kind of understanding developed by CEOs is the starting point for bringing about a cultural shift. It was Immelt who demonstrated the need for GE to adopt reverse innovation, and then he encouraged the organization to catch up to his vision on this.
Do American business leaders have Immelt’s vision? I’m told that only 25 per cent of Americans even have passports.
Point taken. Increasingly, Western business leaders must recognize that they have a different role now inside their companies; they have to create a new global mindset inside their organizations. I think big companies whose leaders have global mindsets will be able to win in this new era in which the opportunity has shifted from developed markets to developing markets. You see, 15 years ago, when companies thought of global strategy, they thought in terms of Europe, the US, Japan and the rest of the world. Today and going forward, they have to think about their global strategy in terms of their strategy for BRIC countries (Brazil, Russia, India, China), the Middle East, Africa and the rest of the world. The “rest of the world” has become the US, Europe and Japan; that is the mindset shift that will enable all business leaders to think as GE now does.
And once they do?
You’ve identified what is probably going to be the most significant challenge for American multinationals. They have a lot of talent, but does that talent have a global mindset? So I say the biggest challenge for Americans and other multinational CEOs is to embed that mindset.
Jeff Immelt is still relatively new as GE’s CEO, but do you think this will become his legacy?
One of the remarkable things about General Electric is that it is a hundred-plus year old company, and the only way a company can survive that long is if it obsoletes itself in terms of products and solutions. This is the real hallmark of GE: that they are willing to change; they are willing to embrace new ways of competing. To that end, every effective CEO puts a new strategic frame on the company he or she leads — not because the old frame was irrelevant but because it’s a new environment, it’s a new world. The strategic frame that Immelt is putting in place (without losing the performance and discipline that Jack Welch put in place) is adding innovation to supply. Immelt’s legacy will be judged by how well he was able to incorporate innovation inside a company known for efficiency.
You have a unique role inside a modern corporation, professor in residence. How did that happen?
About 10 years ago, I gave the keynote address at a conference at which Susan Peters, the Chief Learning Officer of GE, was also a speaker. I really enjoyed her talk, so I congratulated her on it. She, in turn, asked me what kinds of things I work on, and I told her about my work on reverse innovation. About five years later, I met Immelt when he gave the commencement speech at Dartmouth College, where I have been on the faculty of its Tuck School of Business for some time. I had a half-hour meeting with him, during which I told him about my work in innovation. So, when Immelt and Peters were talking about bringing in an academic to push their thinking, my name came up. It was kind of a series of fortunate accidents, and I think very few academics get this kind of an opportunity.
What’s your job at GE?
My role consists of three things — to teach, guide and consult. I teach the top 600 officers of GE about the best thinking in innovation. The difference between the guiding and consulting parts is that I work more deeply on a few projects when I consult, whereas, when I guide, I am talking to a number of GE executives about issues on their plates. There is no typical day. That is the beauty of this work with GE. It’s been probably the most intellectually challenging growth opportunity I have had.
Did that surprise you?
What really surprised me is that I never thought that one person could have an impact, particularly on a large company such as GE with 300,000-plus employees. Amazingly, I found that, as an outsider, I have some strength that an insider does not have even though I don’t have a big title there, I don’t have a big budget and I don’t have a big business to run. I think I can make a difference at GE mainly because I am coming in as an academic; people know that my viewpoint is, thus, unbiased.
Might you be tempted to take on a fulltime GE role, if offered? Do the big titles and budget tempt you at all?
Actually, this role has only convinced me I don’t want those things. As the saying goes: those who can, do; and those who can’t, teach. I can’t, so that’s why I started teaching. In some sense, if you become an insider, I believe you lose your power base. As an outsider, you have no axe to grind, therefore people listen to you, whereas an insider does not have that luxury.
Sounds like you have stayed true to your roots.
Everybody’s formative years are important in guiding them and shaping them. My grandfather was a huge influence on me, and his biggest influence was to lift my ambition. He really made me believe that I could do anything that I dreamed of, so to speak. So he inculcated that ambition in me, and I think that is what probably has carried me all the way here, even to this GE opportunity. I could have been comfortable as a college professor, but just stepping into GE really lifted me to another level.
You have been named to each Thinkers 50 list since 2005, including the one just announced in October 2009. What are your thoughts about that achievement
It’s obviously a great honour, but also a very humbling experience, because whenever you are put on a list like that, people think you know a lot. In fact, one of the things I have found is that the only way you can be at the cutting edge as a thinker is if you are humble; and only humble people know how to learn, because they know they don’t know a lot. So, in some sense it’s an honour, but it’s also a feeling that I have a lot more to explore and learn.
And you probably explored and learned a lot writing your next book, Great Idea, What’s Next.
The big idea behind Great Idea, What’s Next is that most companies don’t lack for ideas. What happens is they mistake innovation for creativity. Innovation has little to do with how creative you are. Innovation is about commercializing creativity. As Thomas Edison, the great innovator, pointed out, innovation is one per cent inspiration and 99 per cent perspiration. Inspiration and creativity are what people get wrapped up in (and there are a lot of ideas in companies!), but the 99 per cent perspiration is what they forget. So this book is about that critical 99 per cent. How do you take an idea, an innovative idea, and then make it into a successful commercial business?
Great Idea, What’s Next, forthcoming 2010.
Vijay Govindarajan, Ten Rules for Strategic Innovators: From Idea to Execution, Harvard Business School Press, 2005.
Anil K. Gupta and Vijay Govindarajan, Global Strategy and the Organization, John Wiley and Sons, 2007.
Anil K. Gupta, Vijay Govindarajan and Haiyan Wang, The Quest for Global Dominance: Transforming Global Presence into Global Competitive Advantage, Jossey Bass, 2008.
Vijay Govindarajan’s Website: www.vijaygovindarajan.com