In today’s Finshots, we explain the concept of reverse innovation based on the back of GE Healthcare’s endeavours in India.
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The Story
On 26th March, GE Healthcare announced it would invest a whopping ₹8,000 crores in India over the next 5 years.
Okay, we should be saying Wipro GE Healthcare is investing that money actually since the two entities formed a joint venture in the 1990s.
But what caught our eye in their statement was about making “In India for the World”.
Now here’s the thing. If you think that the statement is about yet another manufacturing company relying on India’s low-cost labour and talented pool of people to make their products for cheap, it’s not entirely true.
What GE Healthcare wants to do instead could be termed reverse innovation.
What’s that, you ask?
See, when GE Healthcare first set up shop in India, their focus was to simply sell their expensive medical equipment such as CT, MRI, and ultrasound machines to hospitals and physicians in the country. The idea was to innovate the products in the rich countries and sell them in lower-income places. After all, who wouldn’t want products being made in these developed markets, right? There’s a certain allure to that.
But soon, GE realised that this imported stuff might be a little too pricey to achieve the desired scale.
So the American management team decided the best way to go about it would be to simply cut back on features. This way, they could reduce the cost of the equipment and make it more palatable to Indian consumers.
But even that didn’t move the needle by much in the country.
That’s when GE decided they needed to do something radically different. If they wanted to sell products en masse in a country like India, they first needed to make products for a country like India. It couldn’t be just about cutting back features to reduce costs. They needed to innovate and sell what customers in India needed. Not what GE wanted to make for them. So that meant the engineering and research team had to be in India and understand the country to figure out what to build.
And to ensure that the India plan was a success, they needed to overhaul their organizational structure too. Earlier, the India business was subsumed under Asia, which was further under Europe, which then reported to the head office in the US. It was a long chain of command. So India became a new organizational unit with its head directly reporting to the top brass in the US. This unit would have the power to decide which products to develop for their markets and how to make and sell them too.
India was becoming a key cog in the GE machine.
And by the late 2000s, GE had its first big success — it created an electrocardiogram (ECG) machine that catered to India’s needs. Since power outages were frequent, they decided it would be battery-operated. Since healthcare professionals wanted it to be portable, they made it lightweight. And since servicing headaches could crop up in rural areas, GE decided to use commercially available parts instead of the proprietary ones.
The end result?
The ECG machine was available at a mere ₹35,000. In comparison, GE’s other flagship devices were sold at upwards of ₹2 lakhs.
But that’s when GE realized that this innovative device needn’t be constrained to India alone. Even developed markets could use it. And pretty soon, it began to be used by first responders in the American and European markets too.
That’s reverse innovation. Or at least, that’s the term that Jeffrey Immelt, Vijay Govindarajan, and Chris Trimble coined for an article in the Harvard Business Review in 2009.
Simply put, it’s when a multinational company decides to create new products in developing markets and then exports them across the world.
But while it sounds easy, reverse innovation is anything but. And that’s because once these low-cost products are exported to other countries, management often fears it could end up cannibalising sales of higher-margin products there.
Take for example Harman, the audio company.
In 2007, the firm got a new CEO, Dinesh Paliwal. When he looked at the company’s luxury car infotainment division, he realised that even though it contributed to 70% of the company’s $3 billion revenues, the growth had saturated.
So he decided to flip the script. He wanted the focus to be on emerging markets such as India.
But Harman had tried making products for Indian cars before by cutting features on their premium products to make them more attractive. And it didn’t work.
So this time, Paliwal decided to innovate in India for India. He set up a software team in India and a hardware team in China to focus on emerging markets. They called the project Saras (which means ‘adaptable’ in Sanskrit). And the goal was a product that would be as functional as the high-end product at one-third the cost.
You can imagine that not everyone was a fan of this new initiative. The salespeople felt that they would earn lower commissions on sales. And the Chief Technology Officer even attempted to scuttle the project and overthrow Saras’ project leader. The general feeling was that creating low-cost products with modular components would dilute the Harman brand.
It took time, effort, and cajoling from the CEO to change the culture at Harman and support this reverse innovation.
And it was probably only when Japanese carmakers decided that they liked the new Harman products for their mid-priced cars, that everyone at Harman believed in it truly too. And by 2012, these product innovations contributed to 40% of the division’s $10.9 billion in new business.
That was how Harman took an infotainment system from India to the world too.
And now there’s only one thing left to do. Change the name of this phenomenon.
Yup, the problem with ‘reverse’ innovation is that it assumes the natural direction of innovation is from the rich countries. This then trickles down in the form of cheaper, modified devices or products to lower-income countries. But maybe that was true a few decades ago. We know that’s not the case today. Countries like India are innovating for the world now. So it’s time we did away with the ‘reverse’ aspect of innovation. No?
Until then…
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