"It is best that we cannibalise ourselves than have someone else cannibalise us," is a powerful statement. Especially, when it comes from Sophie Vandebroek, Chief Technology Officer of Xerox Corp., who is referring to the delicate balance that global companies have to maintain while serving bipolar needs of developed and developing markets as wide ranging as the US and Uganda.
Vandebroek should know. She heads what is arguably the crucible of innovation in computing and personal electronics-Palo Alto Research Center. PARC, as it is called in short, gave the world laser printers, LCD (liquid crystal display) and optical disk technologies, and the graphical user interface in computers (to which Apple and Microsoft owe their fortunes in no small measure).
Xerox is betting that similar, big innovations in products and solutions will come from Chennai, some 14,000 km away from PARC's Silicon Valley home. Mid-March, it opened what it calls its innovation hub in Chennai, adding to the prowess of some 500 scientists at three other centres all located in the developed world: US, Canada and France.
The $22-billion printing and document management company is a late entrant into what business researchers and top global CEOs like Jeffrey Immelt of General Electric are calling "reverse innovation". There are variants to the theme bandied around in boardrooms and business schools- some call the trend "polycentric innovation", for instance-but in a nutshell, it is about innovating products and solutions primarily in emerging markets with an aim to serve both developing and developed nations.
Reverse innovation as a concept would have been fictive as recent as the beginning of this decade. Historically, the multinational innovated in cloistered research and development (R&D) centres typically located in the US, Europe or Japan and sent products-with minor tweaks-to markets as varied as India and Ethiopia. Such products, mostly, found takers among the middle class and rich or, in rare instances like personal care products, even the poor.
"R&D stayed at home as late as the end of the 20th century," says Jaideep Prabhu, Nehru Professor of Indian Business and Enterprise at the Judge School of Business, Cambridge University. "In the first phase (of innovation shifting away from the developed world), the driver was talent in countries such as India. Now, the driver is the local market."For multinational corporations chasing growth, India presents a sweet intersection of low-priced talent and a mass market-making for the new innovation destination in the world. Academic Vijay Govindarajan thinks the other change that has come about is the growing share- roughly half-of poor and developing countries in the global economy. "It is not possible anymore to satisfy the Indian mass market with a product developed for the American mass market considering their vastly different per capita income.
The only way MNCS can capture opportunities in India is to engage in breakthrough innovation," says Govindarajan, the Earl C. Daum 1924 Professor of International Business, Tuck School of Business at Dartmouth, US. Govindarajan, who was the first to write about reverse innovation along with Immelt and fellow Tuck School professor Chris Trimble last year, has an ominous prediction for those who don't see this writing on the wall: if MNCs fail to act, local Indian companies will innovate and disrupt their rich, home markets.
This almost happened to Deere & Company, the world's #1 maker of tractors (sold under the John Deere brand) by revenues. While its R&D facility in Pune had developed a nofrills tractor model for India, it never thought of selling it in the US, a market that predominantly buys tractors powered by engines upward of 80hp and those that come with air conditioned cabins, global positioning systems and other developed-market add-ons.
What India offers...
A low-priced electrocardiograph designed, developed and manufactured in India by GE Healthcare is finding takers not just in India and other emerging markets. The MAC 400, developed at one-third the cost of a comparable imported version, has buyers in kerbside medical assistance in the US. "The emergence of frugal mindset among consumers in developed markets and increasing demand for 'value for money' products is accelerating the drive for reverse innovation," points out Navi Radjou, Prabhu's colleague and Executive Director, Centre for India & Global Business at Judge Business School.
Carlos Ghosn, Chairman and CEO of the Renault-Nissan Alliance, recently related the story of his company's India experience on an engineering solution. A team each in France, Japan and India worked on identical specifications (for a problem Ghosn declined to detail) and produced solutions that were all on a par in quality. The difference, Ghosh told reporters in Chennai elaborating on India's "frugal engineering" DNA, was that the Indian solution cost one-fifth what the French and Japanese engineers came up with.
The trend extends into processes, brands, consumer insights and even business models, adds Radjou, who believes the results will be comparable to the impact the Internet had on businesses. Example: At Cisco, whose focus is on education with a solution that costs less than Rs 50 a month for each student, Chairman and CEO John Chambers says Sunil Mittal, Chairman, Bharti Airtel, told him about the need to "think differently for mass and volume".
Mittal's mobile phone services company is the leader in a market where tariffs, as low as 30 paise a minute, are the lowest in the world. "It has taken me a couple of years to understand the economic efficiency of that. Now, I have got the concept, now I have to learn how to reverse it and bring it to the US, Europe or Japan," Chambers told BT in April. Elsewhere, PepsiCo is transferring knowhow it got in India on reducing water consumption to other locations. It brought down water required to produce a litre of beverage from 7.3 litres in 2001 to just 2.4 litres in 2009 through process efficiencies.
India's diversity offers many lessons, too. Renault chose to set up a design studio in Mumbai not just to design cars for India but also tap into trends that are unique to the country. "Indians want to stand out in a crowd. That explains why there are so many different colours in the interior of a car," says Jean-Philippe Salar, Studio Chief Designer, Renault Design India. Over the last few years, the studio has gained such an expertise that it has been given the exclusive responsibility to do the colour and trim of Renault's global concept car that is to be unveiled in 2011.
What's in it all for Indian companies? Knowledge of the local market, economies of distribution and an obsessive bent of mind to pare costs make them the best positioned to ride the reverse innovation wave. Tata Motors' Nano is the most visible example of this. There are others, too. ICICI Bank has set up a global innovation team that transplants ideas from one region to other markets.
For instance, it introduced a biometric smart card in India taking a cue from a similar deployment in South Africa. It also worked with the Indian Institute of Technology, Madras to transform fingerprinting technology on to biometric-enabled ATMs for deployment in rural areas.
Tech services vendor Tata Consultancy Services, too, taps into R&D capabilities available in places such as Silicon Valley to incorporate into branded solutions for various clients. At Suzlon, while some engineering work is done out of its India factories, most of the high-end innovation including wind energy management solutions are carried out of its labs in Germany and The Netherlands.
Still, the big hurdle before the Indians will be the lack of scale to take advantage of reverse innovation and go global, says Radjou. His solution: polycentric innovation. "Indian companies should innovate through partnerships. That way, the limitations of scale can be overcome and companies can specialise around their areas of strength," he suggests, pointing to how Procter & Gamble already has more than half its products having R&D elements (the company calls it connect and develop, or C&D) from external sources and Nokia has partnered Reuters for data such as market prices and weather reports. Scale could be yet another challenge for Indian firms to crack through innovation.
- Additional reporting by Josey Puliyenthuruthel