Many established global companies discount the need to innovate when competing in emerging markets. After all, innovation is expensive and risky. So, how can it make sense to spend heavily on an innovation for a market in which customers have so little money? Readers will find out just why it does make a lot of sense.
In March 2009, Logitech formed a special team with an urgent mission. The maker of computer peripherals, especially keyboards and mice, had been caught off-guard when consumers in China unexpectedly fell in love with a new mouse that was not Logitech’s. The company closely monitored its direct rivals, especially Microsoft, but this market insurgency was engineered by a Chinese company called Rapoo, at best a faint blip on Logitech’s radar screen.
When Logitech first noticed Rapoo’s mouse, the instinctive response was denial. Small companies had challenged Logitech before, and they usually went away. Within just a few months, however, the data were unambiguous. Logitech needed to respond. If it did not, it would find itself crippled in China, a lynchpin market in the company’s global growth strategy.
You may think that this storyline, in which a healthy multinational finds itself under siege from a developing world upstart, is unlikely or unusual. If so, think again. Thanks to the rising phenomenon of reverse innovation, we can expect that the scene that played out at Logitech will repeat itself in industry after industry.
Reverse innovation defined
A reverse innovation is any innovation that is adopted first in the developing world. To be clear: What makes an innovation a reverse innovation has nothing to do with where the innovators are, and it has nothing to do with where the companies are. It has only to do with where the customers are.
Historically, reverse innovation has been a rare phenomenon. In fact, the logic for innovations flowing downhill, from the rich world to the developing world, is natural and intuitive. After all, it is the richest customers in the richest countries that will always demand the newest technologies. In due time, the costs of new technologies come down, and incomes in the developing world rise. As a result, innovations trickle down. Right?
Be careful. The intuitive assumption that poor countries are engaged in a process of gradually catching up with the rich world has become toxic. It is a strategic blind spot that has the potential to sink an increasingly common aspiration: to generate high growth in the emerging economies. The assumption can even inflict long-term damage in home markets. That is because surprisingly often, reverse innovations defy gravity and flow uphill to the rich world. As a result, a defeat in a developing country half a world away can lead directly to a stinging blow in your own back yard.
To avoid this unsettling outcome, multinationals must shift gears. For decades, they have predominantly followed a simple global strategy. First, innovate for home markets. Then, export, with at most some minor modifications, to address local market needs.
This strategy worked well enough in the past, when the biggest export markets were other rich countries. It will not work well anymore. Global corporations must recognize that to win in emerging markets, they must innovate, not simply export. And, they must subsequently be prepared to migrate those innovations uphill, from the developing world to the rich world.
This is not a managerial challenge to be underestimated. It is at least loosely analogous to asking an automaker to move cars through the assembly line both forwards and backwards. Nonetheless, it is possible. That Logitech could be caught off-guard by Rapoo is a cautionary tale. The company’s quick recovery offers insight into what it takes for any company to make reverse innovation happen.
Why Chinese consumers wanted a different mouse
Somewhere along the way, the mouse lost its tail. Wireless mice are substantially more popular these days than the old tethered kind, and at the heart of the wireless mouse is the wireless chip. As it turns out, the chip technology determines some of the mouse’s most critical specifications. A mouse with a top-line wireless chip offers top-notch range, speed, and shielding. It can be used up to 300 feet from the computer, without any noticeable delay between mouse movement and movement on the screen, and with no risk of interference from other nearby wireless devices.
As of 2009, there were three wireless chip technologies commonly used in mice —27 MHz, 2.4 GHz, and Bluetooth. Around these technologies, Logitech had built a good, better, best product lineup. Consumers that chose the 27 MHz chip got a stripped-down mouse. But those that upgraded to 2.4 GHz or Bluetooth also stepped up on other mouse features. The better and best mice could work on more surfaces, were more programmable, had more ergonomic designs, and were easier to use. Logitech priced its good, better, and best mice at roughly $30, $50, and up to $150.
This product-line strategy worked well for Logitech. And, until Rapoo jolted Logitech into thinking twice, the company had interpreted its lackluster sales in China as nothing more than something to endure.
Logitech had a typical Western worldview. It believed that consumers were becoming more and more alike around the globe. If Chinese customers weren’t yet buying Logitech mice the way U.S. customers were, it could only be because of their higher price sensitivity. And that was something that could only be fixed in time, with cost reductions and with rising incomes.
But Rapoo understood something that Logitech did not: that Chinese customers “moused” differently. Critically, for millions of Chinese consumers, satellite or cable television was too pricey. As such, people hungry for evening video entertainment connected their PCs to their televisions and surfed Internet video sites. In such a setting, a mouse is not just a mouse, but also a remote control. When used this way, a mouse needs at least the “better” 2.4GHz chip. It needs the longer range, and, because so many Chinese live in cramped urban apartment buildings, it needs better shielding.
Rapoo also saw that as much as Chinese consumers needed a better chip, they did not like Logitech’s $50 price point. To get the price down, Rapoo designed a mouse that had the 2.4 GHz chip but none of the other functionality that Logitech had bundled with it. Consumers loved it.
The mouse may be a humble device, but the lesson from this mouse tale is profound. Developing world customers cannot simply be differentiated from rich world customers because they have less money. They also have unique needs. To win in emerging markets, you have to understand those needs, and innovate to meet them.
Five substantial needs gaps
In fact, the needs and opportunities in the developing world are so different from those in the rich world that the very first requirements for reverse innovation success are humility and curiosity. You must let go of what you’ve learned, what you’ve seen, and what has brought you the greatest successes. In fact, it is best to assume that you have just landed on Mars.
Yes, buyers in the developing world have less money — but that is only the obvious beginning. The differences run much deeper. In fact, there are at least five enormous gaps that separate needs in the rich world from those in the developing world: the performance gap, the infrastructure gap, the sustainability gap, the regulatory gap, and the preferences gap.
Simply put, with fewer dollars in hand, buyers in the developing world are willing to accept lower performance. This sounds simple enough, but it is not as straightforward as it at first appears.
Consider a typical “good-better-best” rich-world product line. When global corporations headquartered in the rich world export to the developing world, the tendency is to focus just on the “good” offering, or perhaps even to water down the “good” offering a little bit further, from “good” to “fair,” to achieve the lowest possible price point.
This seems sensible enough on the surface. The problem is that a modest price cut — say, 10 percent — is not nearly enough to make a difference to mainstream customers in the developing world, who may have only one-tenth the income of buyers in the rich world.
Such low incomes, however, do not mean that developing world customers do not need innovative products. Indeed, what they need is radically reinvented designs that deliver at least decent performance at an ultra-low price. But there is no way to deliver 50 percent performance at a 15 percent price by diluting existing offerings. The only way to get there is to start from scratch, considering entirely new technologies.
In the rich world, most every citizen has access to modern transportation, communication, and energy systems, plus schools, hospitals, banks, courts, and more. In the developing world, most infrastructure is mostly still under construction.
This does not mean, however, that developing nations can only gradually catch up. Precisely because they are building from scratch, they can invest in the most modern technologies. Meanwhile, the rich world will only invest as existing infrastructure reaches replacement age, and, even then, will be constrained by the necessity to make any new systems compatible with what already exists. As a result, developing nations are hot, new construction markets, while rich nations are tepid maintain, repair, and replace markets.
The infrastructure gap, however, affects much more than infrastructure products and services. It affects any offering that relies on infrastructure — anything that plugs in, connects to a network, or moves from place to place, and more.
Rich world offerings are designed with the implicit assumption that they will be consumed by those with access to rich-world infrastructure. Logitech’s mouse was designed for use in the office, not in the living room, because people in the rich world still largely “consume” video entertainment via cable or satellite, with no mouse in sight.
Such offerings do not export well, so an innovation strategy is a must. New offerings must be designed with the developing world infrastructure in mind. In major cities, this may mean an enviable, next-generation infrastructure. In rural areas, it may mean no infrastructure at all. When GE designed an ultra-low-cost portable EKG machine for rural India, for example, one of the top considerations was long battery life.
Worldwide, as the economy grows, the conflicts between economic vitality and environmental sustainability are likely to become more severe. That said, the pressures will not rise uniformly. In many cases, the intensity of sustainability issues are highest in the developing world.
Winning in emerging markets requires recognition of these differences. In certain cities in China, for example, air pollution problems are extreme. As such, it is hardly a surprise that China is poised to take the lead in electric cars.
When regulations function appropriately, they eliminate business behavior that is at odds with societal good. They keep consumers safe and markets fair. That said, when regulations become too complex, captured by vested interests, or technologically out-of-date, they can become needless barriers to innovation.
Regulatory systems in the rich world are the result of decades of development while those in the developing world may be incomplete. Whether this is good or bad from a societal perspective is well beyond the scope of this paper, but the difference can make the developing world a more favorable environment for innovation in certain cases. Products and services designed around rich world regulations may become needlessly complex or expensive for developing world markets.
The world’s great diversity of tastes, preferences, rituals, and habits adds spice to international travel. It also sometimes makes it nearly impossible to achieve full potential in the emerging economies through a simple strategy of exporting existing offerings. PepsiCo, for example, is developing new snack foods, starting with a new base ingredient. Corn is not nearly so ubiquitous in India as lentils, so Pepsi is commercializing lentil-based chips.
Because of these five of enormous needs gaps, the commonplace strategy of trying to win in the emerging economies by making light adaptations of successful rich world offerings is inadequate. Reverse innovation is the antidote, and reverse innovation is clean-slate innovation. It starts with reassessing customer needs from scratch.
From clean slate needs assessments to success
Accurate diagnosis of customer needs, however, is only a beginning. It must be followed by two equally challenging tasks: clean-slate product design and clean-slate organizational design.
Established global corporations bring enormous assets to the innovation game. This is both their biggest advantage and their biggest liability. The temptation is to try to innovate on the cheap by leveraging too much of what already exists.
When Deere & Company set out to develop a tractor for the Indian market, it started with extensive market research to fully understand how tractors were used differently than they were in Deere’s home market, the United States. Without such a clean-slate needs assessment, the Deere team may have missed critical needs gaps, such as the reality that in India tractors often do double duty, both working the farm and providing family transportation.
From a clean-slate needs assessment, Deere moved on to designing a new tractor from the ground up. The company had designed so many tractors that the temptation to assemble a machine based on existing components from other Deere products must surely have been tremendous. But the Deere team did not fall into this trap.
The company started by gathering dozens of engineers for a design kick-off meeting. For every component, the engineers considered well-documented customer needs and proceeded with no assumptions. Was the best design an existing Deere design? Something close to what a local competitor had produced? (Deere had disassembled several locally designed tractors and put all of the components on display for the meeting.) Or, was there a need to design something new from scratch? And, should Deere design and make the component itself or partner with another company?
This is what zero-based product design looks like. Through its careful clean-slate design process, the Deere team identified opportunities to differentiate itself in the Indian market through innovative clutch, steering, and braking designs.
That said, even the best work in assessing customer needs and designing solutions can fall short if it’s not coupled with zero-based organizational design. Teams responsible for developing and commercializing innovations in the rich world may excel when the task is innovating for home markets. But it is highly unlikely that the same teams can simultaneously deliver innovations for the developing world.
Instead, reverse innovation efforts require Local Growth Teams, which are purpose-built, from scratch, for the task at hand. When Logitech recognized that it was in danger of losing a critical market to Rapoo, its response was quick and effective. The company had a competing product on the market in just six months.
This could not have happened if Logitech relied on its existing product- development teams. Though these teams were effective at home, Logitech saw that these teams had biases and work processes that made them uniquely unqualified for the special challenge of innovating for China. So, the company instead commissioned a special team focused solely on the challenge of designing a mouse for the Chinese market. It tapped an experienced engineer to lead a team composed primarily of technologists from Taiwan or China who had a more intuitive understanding of the way Chinese customers used technology.
When reverse innovations travel full circle
The emerging economies have the world’s highest projected economic growth rates by a wide margin. The possibility of missing out on such growth should be more than enough to compel many of today’s multinationals to tackle the challenge of reverse innovation. And, again, the full implications of standing aside while others tackle the reverse innovation challenge are even more consequential. Failure abroad can lead to failure at home.
Innovations migrate uphill whenever there is a trend that closes a needs gaps. It is not hard to see how this can happen. The performance gap closes when new technologies designed for the developing world improve. A 50 percent solution at a 15 percent price may not attract much interest in the rich world when launched. Over time, however, a 50 percent solution improves to 60 percent solution, and then a 70 percent solution, and at some point the rich world becomes very interested. In cases in which the developing world has leapfrogged ahead, the infrastructure gap closes as rich world infrastructure reaches replacement age and is modernized. The sustainability gap closes as the intensity of sustainability challenges rises worldwide. The regulatory gap can close when rich world regulations are revised to accommodate new technologies. And, social trends can close preferences gaps. Consider that Chicken Tikka Masala is now the number one fast food in the United Kingdom!
Innovation is expensive and risky. As such, it is hardly surprising that many established global companies discount the need to innovate when competing in emerging markets. How can it make sense to spend heavily on an innovation for a market in which customers have so little money?
Because in an ever lengthening list of industries, it is the only way to win.