Reverse Innovation

Creating Value to Customers and Companies

Research Paper Lokeshkumar M Singh 9/24/2011 PGDM- Marketing Roll No. 146

Title: Reverse Innovation creating value to the Customer and Companies. Introduction: GE Chairman Jeffery Immelt has rightly said, If GE doesn t master reverse innovation, the emerging in developing countries would destroy the company . The developing markets have become the hub for various low cost innovations in fields like wind power, FMCG, healthcare, telecom etc. The innovation exudes simplicity, common sense, innovative technology and ingenious use of local ideas and resources having significant impact in consumer s life not just in the third world but also in the developed west. For instance, Nestle learned that it could sell its low-cost, low-fat dried noodles originally created for rural India and position the same product as a healthy alternative in Australia and New Zealand. With growing rural purchasing power and three times larger population than urban, companies in various sectors are developing products specifically for these markets. Companies are moving away from Glocalization and minor modification strategy to reverse innovation, which involves bottom-up approach, community-embedded process of co-invention and business co-creation. Reverse innovation describes innovations originally developed and/or adopted in the developing world which later become prominent in mature world markets. It is based on the idea jugaad , which describes activity in India to adapt existing solutions using low cost technology. Increasingly we can see companies developing products for smaller town and rural market are getting wide acceptance in urban marketing thus prompting companies to distribute them nationally. For instance, Sachet packaging for fast moving consumer goods and micro-recharges for mobile designed to offer good value for money to rural market gaining huge acceptance in urban market. The process of reverse innovation begins by focusing on needs and requirements for low-cost products in countries like India and China. Once products are developed for these markets, they are then sold elsewhere - even in the West - at low prices, which creates new markets and uses for these innovations. Reverse innovation leads to products, which are created locally in developing countries, tested in local markets, and, if successful, then upgraded for sale and delivery in the developed world. Purpose To succeed in emerging economies, Global companies have to analyze customers need and uncover the problem area. Reverse innovation is one of the widely accepted tool to address this challenge. The purpose of this research paper is to provide overview of how reverse innovation can be used for new product development by FMCG companies in emerging economies. A structured strategic framework for reverse innovation would be developed by the authors which can be used by FMCG companies for their marketing strategies. Managerial Implication of Research: MNCs and Indian companies are joining the bandwagon to increase their footprints in the vast, untapped rural markets. It is beyond doubt that rural market is the place to be. Saturation of existing market and emergence of potential developing market has helped them understand importance reverse innovation. Managers have understood that reverse innovation can drive volumes by identifying new segments and developing R&D capabilities to serve this segments. Low cost products

created from this approach for rural markets can generate new demand in Urban Markets as well and hence on account of economies of scale, companies can churn huge profits. Limitation of Research: Primary research is done only for villages in an around Mumbai. This relatively small sample will act as representative for entire population this may lead to few errors creeping in the findings. Reverse innovation is relatively new subject so not much research has been done in this area. In addition, the authenticity of existing research is also not established. Key Findings: This research paper will try to find out acceptance of reverse innovation by the key stakeholders and how reverse innovation can be incorporated in corporate strategies companies. The framework thus obtained would help companies in formulating their reverse innovation strategy for emerging markets. Key Words: Reverse Innovation, Emerging market, BOP (Bottom of Pyramid), Frugal Engineering Literature Review: Ever since the BOP concept was introduced at the turn of century many companies have tried to transform their business models through single serve sachets, low cost production, extended mom and pop stores distribution and NGO partnership [Prodeep Kashyap et.al]. With growing rural purchasing power and three times larger population than urban, companies need to develop appropriate product for this market. The glocalization or minor modification will not work as rural customers are very different. The new approach would require incorporating bottom-up approach, community embedded process of co-creation and business co-creation. Such approach will bring the company into close business partnership with BOP communities. Ultimately creating enduring value for community and help in forging long term corporate growth and innovation. The success of new rural distribution and procurement models like ITC e-Choupal and Project Shakti shows that by creating business channels companies can create win-win situation for both business and communities. Many companies including MNCs and regional players started developing marketing strategies to lure the untapped market. In the past, western corporations had typically divided the world s 7 billion population in two. The 2 billion people who were rich enough to afford their products; and the 5 billion poor who were not. With the slowing of growth in developed economies and accelerating growth in emerging markets, the challenge is to bring the 5 billion poor into the consuming population. This requires innovation because the world s poor can t consume the products of business models designed to meet the needs of the 2 billion rich. This lead to development of concept called reverse innovation. By reverse-innovation process, innovations originally chartered for Rural Markets will be adapted and scaled up for urban markets. For companies it is the need of hour to focus on rural markets and be their solution providers. Reverse innovation isn't optional. It is oxygen [Govindrajan s interview to DNA].

A reverse innovation, very simply, is any innovation likely to be adopted first in the developing world [Govindrajan s blog]. Particularly in developing nations where divide between rich and poor is very high, Rural population s needs and desires are different, Affordability and Quality of product are two important decision variables of rural population s buying behaviour which companies cannot afford to ignore. They demand new, high-tech solutions that deliver ultra-low costs and good enough quality [Govindrajan s website]. But the interesting thing about reverse innovation is that it is not just about bringing the poor into the consuming population: it puts the multinationals that adopt it at the forefront of innovation. What they learn in the poor countries helps them transform the lives of people in the rich countries. When creating products for developing markets, companies need to start with design frugal design. If companies were working with plenty, very soon they would have a product that s expensive to manufacture, difficult to service and at a price point that s completely unviable. They have to start by finding out what the market needs so you can design a optimal platform. Companies will not necessarily make money on that platform: but make it when they upsell. Consumers who buy that platform soon need an upgrade and buy the next model at a higher price [Prof Govindarajan]. Reverse innovation is not just about products, said Mr Quigley. A.G. Lafley of Procter & Gamble defined innovation as a new idea that delivers value for the enterprise. In your business model you have to empower the team in the emerging markets if you want to succeed. The FMCG companies have realised that there is a big opportunity for them to enter the rural market {S John Mano Raj et. al]. The sector is excited about the rural population whose income levels are rising steadily and the lifestyles are changing. There are as many middle income households in the rural areas as there are in the urban areas. Thus the rural marketing has been growing steadily over the years and is now bigger than the urban market for FMCGs. Globally, the FMCG sector has been successful in selling products to the lower and middle income groups and the same is true in India. Over 70% of sales are made to middle class households today and over 50% of the middle class is in rural India. The sector is excited about the rural population whose income levels are rising and which is willing to spend on goods designed to improve lifestyle. Also with a near saturation and cut throat competition in urban India, many producers of FMCGs are driven to chalk out bold new strategies for targeting the rural consumers in a big way. And the rural penetration rates are low. This presents a tremendous opportunity for makers of branded products who can convert consumers to buy branded products. If a firm, wishing to operate in these markets must be receptive to the opportunities arising from the resource constraints typical of consumers in the markets and willing to develop the capabilities to meet the aggressive price/performance ratios required by consumers [Chang-Chieh Hang, Jin Chen, and Annapoornima M. Subramian]. The first challenge in reverse innovation is to create local products for the local markets, because customer affordability is fundamentally different. In addition, these innovations in turn have the potential to travel back to the richer countries. If companies do not take this approach, it is not only a lost opportunity for growth in poor countries, but potentially Western companies can get disrupted in their own country [Mc Kinsey Report, 2005] The factors critical to reverse innovation strategy success are R&D and managerial practices that are vital for creating new, affordable products or services for the unserved mass markets in developing countries [Jeffrey R. Immelt, Vijay Govindarajan, and Chris Trimble, HBR 2009]

Body Copy: Initially due to the prohibitive cost of developing entirely new products for developing market and the low-income levels of the families in these countries major international companies adopted Glocalization strategies. This strategy involved companies developing great product at home and then distribute them worldwide with small adaptation to local condition. Glocalization worked fine in an era when rich countries accounted for the vast majority of the market and other countries did not offer much opportunity. But with the rising BRIC economies coupled with the fact that majority of population cannot afford foreign products designed for developed world lead to development of fertile ground for developing and testing products Which are not only affordable but also good enough meeting the basic needs at relatively low cost. This approach leads to development of reverse innovation; developing products especially for developing market but not de-featured or scaled down product for lower end as in the case of frugal engineering. The possibilities for reverse innovation creating disruptive products that are initially targeted to emerging markets but can be taken global over time, reversing the usual progress of innovation from developed nations to emerging markets are also attracting multinational corporations to emerging markets. Reverse Innovation in various sectors Sectors like telecom, automobile, FMCG, consumer durables, IT technology, education, healthcare, etc. provide an immense opportunity for companies to innovate products specially designed for emerging economies and then further take these products to developed markets with added features and other modifications. There are various examples of reverse innovation in Indian context.  Automobile sector E.g., Tata Nano was developed specifically for price conscious consumers of India. After its success in India, Tata has decided to take it to overseas markets like Europe and US.  Consumer Durables E.g., Godrej & Boyce Co. developed a low-cost refrigerator targeted mainly for rural consumers. The refrigerator runs without a compressor on a battery. Company uses innovative community distribution model to sell this product and has now plans to take it in African countries where the conditions are similar as rural India.  Telecom sector E.g., Bharti Airtel wants to replicate its low cost Indian business model in African sub-continent. The unique business model allows Airtel to lower the operating cost and generate better margins than its competitors.  FMCG sector E.g., Nestle developed low cost, low fat dried Maggi noodles for Asian market, but has now taken it to Australian and New Zealand market. E.g. PepsiCo developed a salted snack brand Kurkure especially for west Asian market. After its phenomonal success in India, it wants to take this Indian innovation to US market. Similarly, Pepsi is taking its baked crackers brand Aliva and lemon-favoured drink Nimbooz to global markets.

Opportunities of Reverse Innovation in FMCG sector Indian FMCG industry is valued at Rs 1300 billion (FY2010) and will continue to grow at a healthy rate of at least 12% in the next decade. According to CII FMCG Roadmap to 2020 report, the FMCG industry will be around Rs 4000 billion by 2020. The major growth factors are evolving lifestyle behaviour and emphasis on beauty, health and wellness, tailored products at highly affordable prices for Bottom of Pyramid (BOP) and rapid globalization. The markets in developed economies have now become saturated and markets in emerging economies like India and China have immense growth potential. Therefore, many Multinational companies have started calling India as an Innovation hub. They are establishing their laboratories and innovation centres in India. Major Indian players are also giving a tough competition to the MNC s and in order to defend/increase the market share, they are coming up with innovative products. Whether these products developed for emerging markets can be successful in developed and other markets? Yes, they can be successful because there are some consumer segments in mature markets which show similar traits and characteristics as present in emerging economies. For example, students, pensioners, migrants and unemployed adults of the mature markets will respond to the emerging market products very well. Similarly, the products developed for BOP in India will be hit in African, Middle East and other Asian countries like Bangladesh, Pakistan, Sri Lanka, etc. because the economic, geographical and cultural conditions are very similar in both the markets. They have similar purchasing power and consumption patterns. Areas where reverse innovation can be employed in FMCG industry  Product: The original product can be copied to developed markets with some modifications to suit the local taste and preferences. There are various product categories in FMCG like skincare, biscuits, food drinks, oils, toothpaste and shampoo in which innovative products designed only for India are available. They can be launched in overseas markets. For example, Garnier Men Powerlight range of skincare products was developed in Indian laboratory and is now being available in Singapore. L Oreal, owner of Garnier brand, wants to use the strategy of reverse innovation to increase the market share. It wants to develop the beauty products for emerging markets and then modify them for international markets.  Packaging: There are many packaging innovations in FMCG like Re 1, Rs 2 satchets for oil, cream, shampoo, etc. Rs 5 small packs for biscuits, soaps, soft drinks, tetrapacks for fruit juices and Rs 2 chocolate bars. These innovations came across because of low affordability and lower consumption pattern. The people in rural areas can t afford Rs 30 soap or Rs 50 shampoo, so these companies came up with micro packs. Also, tetrapacks was invented because there is no refrigeration facility available in rural hinterlands. These packaging innovations can be readily taken in overseas markets and it will help to evolve a new category or segment or might bring changes in the consumption pattern.  Supply chain: Because of the lack of basic infrastructure like roads, rail, power and banking systems FMCG majors were forced to innovate new distribution channels for the supply of goods, new money collection methods, new advertising channels and IT applications for the control of supply chain. For example, HUL s Shakti amma and ITC s e-choupal are highly successful models for distribution. These models can be copied in African and Middle East countries very easily. They can also be useful in countries like US and Europe where the

existing distribution model is very costly to operate. These models can help in reducing cost and minimizing resources. Challenges: Reverse innovation in FMCG space is rather challenging task when compared to applying this concept in technology space. Reason being behavioural traits such as taste and preferences are far more localized and are difficult to standardize.

Strategic Framework for Reverse innovation:

Strategic framework for Reverse innovation for developing market is proposed above. The Reverse innovation flow has been explained below: Step1: Understand the importance of Reverse Innovation The stakes are enormous. Today, rich countries and poor countries account for roughly equal shares of the global economy. But for years, growth has been far more robust in poor countries. Now that most rich countries are in a slow-growth recovery, following a truly awful recession, the growth gap looks more like a growth chasm. Emerging economies are expected to account for as much as two-thirds of future growth in world GDP. The opportunity today lies in the developing markets which have to be understood and acted upon by the marketers today. Reverse Innovation s importance need to be understood by the companies. The products from developed markets cannot be simply dumped into the developing markets today. The needs, aspirations and affordability of the consumer of developing countries need to be taken into account while developing products and services them. Companies like HUL, Philips and ITC are some of the best examples who have recognised this need much ahead of their competitors and have successfully capitalised on this. If established global corporations do not innovate in poor countries, new competitors will seize the opportunity. They will take the lead in innovation not just in the poor world, but throughout the world. They will develop into formidable rivals. Already, there is a new generation of global corporations rising from the developing world, including Tata, Mahindra, Lenovo, and Haier. The emerging giants can make life miserable for Western multinationals. In the IT services industry, for instance, Indian firms (Infosys, Tata consulting services, and WIPRO) have pioneered the concept of "global delivery model" serve clients in the developed world from distant India, where talented software engineers earn substantially lower wages thereby challenging IBM and Accenture to rethink their business models. Brazil's Embraer is giving Canada's Bombardier a run for its money in regional jets. Mexico's Cemex has innovated in the cement industry to humble Holcium of Switzerland and LaFarge of France. China's Huawei is challenging global telecommunications companies like Siemens, Ericsson, Alcatel-Lucent, and Cisco. Step 2: Study needs and wants of the customers of developing world The needs and wants of the developing world consumer are different from that of the customers from developed world. Companies, earlier, hadn t recognized this fact. They used to simply dump the products and services which they had produced for the developed markets into the developing markets. Thus the actual needs of the developing world consumers weren t being met efficiently and thus these companies would fail in the rural markets. For example: electricity is a big issue in the Indian villages. Many villages in India don t have electricity even today, and the ones which have electricity, power cuts are frequent. So, electrical devices wouldn t be much successful and popular in the rural areas. If a company introduces devices which run on solar power, it would be immensely popular in the rural areas, provided the right pricing and distribution is in place. Philips solar stoves

and lanterns are good examples of how companies need to assess the needs and wants of the rural consumers before developing products and services for the rural consumers. Step 3: Reverse Innovation Strategies Product Driven Modularity: Product driven modularity is also called as localized modularization; it is a loosely controlled, supplier driven approach that speeds up company s time to market, cut its cost and enhances quality of its product. The core of this strategy is a series of process networks mobilizing specialized companies across many level of an extended business process. The Chinese motor cycle assemblers like Longxin, CixiZongshen motorcycle orchestrated the networks. Initially these companies started competing against state owned assemblers who partnered with Japanese auto majors like Honda, Yahama and Suzuki motors. The private assemblers refined the Japanese companies integrated product architecture to modular and more flexible model. The Chinese system makes it possible for assemblers to modularize production in parallel by outsourcing the components and sub assemblies to independent suppliers. In contrast to more traditional, top down approaches, the assembler succeed not by preparing the detailed design but by defining only a product s key module in rough design blueprints and specifying broad performance parameters, such as size and weight. The supplier take collective responsibility for the detailed design of components and sub systems. Since they are free to improvise within the broad limits, they have rapidly cut their cost and improve quality of the product. Locating major suppliers and assemblers in the same city helps to mobilize the appropriate specializations. Informal social network, developed in crowded teahouse and restaurants, supplement more formal efforts to coordinate suppliers and assemblers. Throughout India and China, such emerging local business ecosystems play a major role in speeding up product and process innovation. Thanks to these innovations, China has made rapid gains in motorcycle export markets, especially in Africa and Southeast Asia. China now accounts for 50% of all global production of motorcycle. Customer Driven Modularity: Over the years, consumer packaged-goods companies have reduced their products unit size in emerging markets to unlock demand among consumers who cannot afford bigger portions. Coca-Cola, for example, began selling 200-milliliter bottles of Coke in India in 2003; Britannia launched Tiger Biscuits in 20-gram packages in 1999. Cummins, the producer of diesel engines and power generators, recently did just that in India. By modularizing a product for the distinct needs of different kinds of customers and channel partners, the company cut the total cost of ownership and of sales in the channel. The result: higher demand for Cummins products.

There are four ways in which consumer driven model works:  Designing product/services as per consumers demand: Product should be designed in such a manner that it should serve as an answer to customers unmet needs. The marketers need to get into customers mindset and think like him to come up with any product innovation  Design the pricing strategies: There are different target segment so marketers should have to clearly identify their target market and decide the pricing points. Customers wants products which are not too heavy on their pockets so company can adopt a strategy of penetration pricing to attract consumer loyalty.  Design/Re-design the distribution channels: Speed to market is key to any company s success therefore companies need to alter their distribution network for these markets as they have poor infrastructure. Moreover Supply chain management is very critical here as it is longer for this markets and it involves larger number of partners compared to Urban Markets. To ensure reach ability to interiors, Marketers need to use those channels which are accessible to rural consumers. Distribution network can be strengthened if it contributes in augmenting the income of rural population. HUL was able to penetrate more in rural markets through its Project Shakti. Process Driven Services: Innovation in emerging markets won t be limited to manufactured goods. The desire to reach vast low-income segments of Asia s population is also pushing service organizations to new levels of achievement. One vivid example comes from the Aravind Eye Care System, at Madurai, in the south Indian state of Tamil Nadu. The Aravind system dedicated to eradicating needless blindness by providing appropriate, compassionate, and high- quality eye care for all includes a chain of hospitals and a manufacturing center for sutures, synthetic lenses, and eye pharmaceuticals. Aravind, which occupies a highly specialized health care niche, developed efficient processes by treating huge numbers of extremely poor patients in a country where 12 million people are totally blind and an additional 8 million are blind in one eye. Its hospitals perform 200,000 operations a year nearly 45 percent of all such operations in Tamil Nadu and 5 percent of those throughout India. High volumes are dictated by the af iction s scale and by the need to make the network s nonpro t hospitals viable and to generate funds for expansion. Over the years, Aravind has carefully honed the ow of work through its outpatient departments and surgical wards and both have reached impressive levels of efficiency. Cataract operations in Madurai, for example, are performed on four operating tables, side by side. Two doctors operate, each on two adjacent tables. When the rst operation is over, the second patient is already in place. The intense throughput doesn t seem to compromise quality. Indeed, major complication rates are highly satisfactory: in virtually all event categories such as iris trauma or prolapse Madurai s 2002 gures were better than those of the United Kingdom (national survey by the Royal College of

Ophthalmologists).In this case, too, the need to serve low-income customers in challenging conditions spurred innovation. People in rural areas, for example, suffer from refractive blindness resulting from the prohibitive time, travel, and other incidental costs of getting a pair of glasses. Aravind studied data on the needs of patients, prepared lenses in advance, and set up mobile optical shops in remote villages so that patients could be examined near where they live and, if necessary, supplied with glasses on the spot. Other Indian health care entrepreneurs, using processes developed in similar conditions, are already encouraging patients in more developed countries to get better value for money by traveling to Indian facilities for specialized services. Institutions such as the Narayana Hrudayalaya Foundation (acardiac care facility in Bangalore) and Escorts Heart Institute and Research Centre, in New Delhi, are proving that services, though intangible, can be delivered in a surprisingly exible way. Step 4: Implement the Reverse Innovation After the deciding the reverse innovation strategies: Product Driven Modularization, Customer Driven modularization and Process Driven modularization for the developing markets, the product/service should be launched. The company should first try the product/service in a test market. After getting proper feedback from the various stakeholders (departments, distributors, salespeople etc.) and the test market consumers, it must relook at its strategies and refine them further. If the strategies work as expected, the product/service can be launched in a full-fledged manner in various other markets. Possibility of positioning the product/service in urban markets: After getting feedback from the markets about the extent of success of the product/service introduced, the company should assess if the same product/services can be introduced in the developed (urban) markets. The demand for the product/service in these markets, the distribution channels, sales force availability and the company s commitment are necessary to introduce the product/service effectively for the urban consumers. If any obstacles are identified, they need to be overcome to successfully introduce the product/service in the urban markets as well. Step 5: Adds incremental value to the company and consumers Success of companies in developing Markets can serve as testing ground for the company because company s success/failure on this small landscape does lot of value additions to company. It lets companies to innovate their processes and products which can be further replicated for developed ) urban) environment. Also It is a win-win situation for consumers as they also get value added product and services at an affordable prices so consumerism can rise at a massive scale on account of Reverse Innovation.

Step 6: Launch the product/service in Developed (urban) markets If the product/service introduced in the emerging markets turns out to be a winner, the same can be introduced in the developed (urban) markets as well. The urban and semiurban markets can be used to expand the company s sales and also to build a bigger brand value of the company. This exactly is the concept of Reverse Innovation. To apply innovations in the developing markets, and to take them to developed markets if the innovations are successful in the develpoing markets. The concepts need to be scalable and sustainable. Scope for Future Research: Reverse Innovation is relatively a new concept in rural marketing. Companies are understanding that products specifically designed for rural markets are succeeding more, than dumping the urban brands into rural. Not much study has been undertaken in this phenomenon. Rural marketers, academicians and scholars should contribute more knowledge and skills in implementing Reverse Innovation successfully. Conclusion: Reverse innovation model spells out a clear message for many companies for many companies in the world; if you are not participating in the mass-market segment of emerging economies, you are not developing capabilities you will need to compete back home. Thus it is imperative for companies to target , not just to the af uent segments, and not just for wage cost differentials, but to serve the mass market. Only there will you be forced to innovate in the ways required to succeed in the future. By targeting instead the speci c and demanding needs of lower-income consumers, companies can address a far bigger emerging-market opportunity and create the ability to take innovative products and services from the emerging world and use them in new categories at home.

References:

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Authors Profile: Lokeshkumar M Singh 2nd Year Marketing student in K.J. Somaiya Institute of Management Studies and Research, Mumbai. Email id: lokesh.singh1267@gmail.com