Reverse innovation: How GE is disrupting itself
Today, Harvard Business Review published “How GE is Disrupting Itself,” which dives into the radical way in which GE is using what the company calls “reverse innovation” to rapidly accelerate growth in global and emerging markets. Co-authored by GE Chairman and CEO Jeff Immelt; GE’s chief innovation consultant Vijay Govindarajan, who is Professor of International Business and director of the Center for Global Leadership at the Tuck School of Business at Dartmouth; and Chris Trimble, who is also on the faculty of Tuck and a consultant with GE; the in-depth analysis explains how GE is literally reversing its traditional business model. Rather than follow its historical path of developing high-end products and adapting them for emerging markets, GE is developing local technologies in these regions and then distributing them globally. To kick-off our three-part series, GE Reports presents the first of two podcasts by Vijay Govindarajan — as well as a full copy of the Harvard Business Review article, which is available via a free download in the middle of this page.
Coming home: GE Healthcare’s Mac 400 electrocardiogram machine, seen here being used in rural India, was developed for markets in that country and China. GE Healthcare made further improvements to the breakthrough technology and this year brought the new model, the Mac 800, pictured inset, into the U.S, where it is finding new applications, such as at accident sites.
Vijay Govindarajan
As Professor Govindarajan, or VG as he is widely known, makes clear in his podcast, for decades, GE and other large industrial players based in developed countries grew by making performance-rich products at home and then distributing them with some adaptations based on local conditions and needs. That process is what’s termed “glocalization” — a strategy, they note, that is “so dominant today because it has delivered.” They continue: “Largely because of glocalization, GE’s revenues outside the United States soared from $4.8 billion, or 19% of total revenues, in 1980 to $97 billion, or more than half of the total, in 2008.” However, as VG explains, despite past and current successes, companies such as GE are now doing an about-face since the strategy is only skimming the surface of potential emerging market growth.
The “disruption” that is at the center of their article can strain companies because reverse innovation requires a decentralized, local-market focus that fundamentally clashes with the centralized, product-focused structure that multinationals have evolved for glocalization. For example, GE’s new handheld electrocardiogram developed for India sells for around $1,000 and the portable, PC-based ultrasound that was designed for China sells for as little as $15,000. The authors note that with these kinds of products, companies like GE are “establishing lower price points, and even using the innovations to cannibalize higher-margin products in rich countries” — which is “antithetical to the glocalization model.”
When it came to ultrasound technology, GE found that “in wealthy countries, performance mattered the most, followed by features; in China, price mattered most, followed by portability and ease of use.” As a result, a new portable technology was developed for that market — and it’s now being marketed in the U.S. GE’s China team succeeded, in part, because it gave its local team unprecedented autonomy to develop the technology. GE has since set up more than a dozen similar operations in an effort to expand beyond the premium segments in developing countries and to preempt local companies from disrupting GE’s sales, in both developed and emerging markets.
As the authors explain, embarking on the new business model isn’t a choice. So-called emerging giants in local markets have the technical know-how, low-cost strategies, and a deep understanding of local needs that will also allow them to create market-specific technologies that they can then use “to disrupt GE in rich countries” if no action is taken.
Tomorrow, in Part 2 of VG’s podcast, he’ll explain why companies pursuing reverse innovation need a different organizational architecture if they are going to successfully shift power to where the growth is and build new products from the ground up.
* Read “GE’s Immelt Says ‘Reverse Innovation’ Needed for Global Growth” from Bloomberg
* Learn more about VG’s work at vg-tuck.com
* Read GE Reports’ recent story with VG, “Winning micro customers in mega markets”
* Read our follow-up story with VG, “Localized breakthroughs go global”
* Learn more about GE’s Mac 800 portable ultrasound
* Watch a humorous commercial from GE’s team in India advertising the Mac 400
Anyone interested in globalization and innovation — from business executives, to students, to general audiences — can sign up for VG’s newsletter, Vijay Govindarajan’s Innovation Quarterly, and read his blog at: vijaygovindarajan.com
GE Theater’s lost Zsa Zsa hit
The ‘Warbirds’ of Oshkosh
Excellent Article. It’s not enough to have a great idea. If your R&D dollars are going to pay off in profitable products and technologies, you need a strategy that not only makes markets but also beats the competition.Developing and Managing a Successful Technology and Product Strategy provides an innovative and powerful approach to developing technologies and products that people want to buy. Equally important, it explores ways to link those technologies and products with your company’s business strategy. Drawn from the MIT Sloan School’s top-ranked MBA curriculum, this groundbreaking program provides a framework for understanding how technologies and markets evolve, how they are linked, how technologies differ across markets, and how new technologies get accepted.
VG-Very Well Written- You are the Best
Awesome Article…reflects today’s reality in Emerging Markets (which gets overlooked easily) with powerful examples. Having personally been a product of “Glocalization”, I am a convert now…totally subscribing to the fact that “Reverse Innovation” is the much needed oxygen for future growth.
VG-Its been an honour and great learning experience working with you.
Brilliant Article!Business operate to create value. Value for the world at large. So if a product innovation brings value for the larger audiance then how it could be “antithetical to the glocalization model.” It is actuall ethical to the glocalization model as it adds to GE’s glocal competitivness. The social value such product innovation creates is ethical way of sustainable busineses.
To me this is a touching article because the very last paragraphs says that VG’s mission of making multinationals see the merits of making deep commitments in developing markets is accomplished with GE setting the trend. One needs to see this beyond business and by tying it down with social commitments – not just health but employability too. A $ 10000 medical devise (I would imagine that the cost will keep dropping as volumes increase) is a risk free, reliable business model for self help groups across rural india. These groups (micro business enterprises) have access to credit through micro finance banks. They will take the product across rural India – providing affordable, high quality medical diagnosis and make decent living through their business model. The Banks will not have a problem extending credit because a GE product can by hypothecated by the SHG.
All that an SHG needs to do is do 2 to 3 diagnosis a day at 2 to 3 $ per diagnosis. This will help them (a) Repay the loan (c) Cover the cost (c) Make a fantastic profit. Given that India has an average population of 1/2 billion people in rural India SHG’s will not have a problem reaching their targets.
Great to see this happening and am sure many great things are to follow.
VG you are great..
What a great article and how well written – well done VG. It explains so perfectly both the barriers to radical developments and the appropriate organisational responses. I was a little surprised however that you did not give more credit to Clayton Christensen. The new products you describe are classic “low end disruptions” and the “keep the organisation separate model” you suggest is exactly what Clayton has been saying for 10 plus years. Also, you might have mentioned the “ambitextrous organisation” ideas of Michael Tushman since, I think you are describing exactly what he has been saying for 10 years.
What interests me are the border lines between new product in an existing business model, new product that needs a new business model but is addressing a similar market and using similar technologies (Zook’s adjacencies) and new growth platforms that are new product requiring new business models and often new technologies and new markets. The later two categories were part of my research published in “The Growth Gamble”. One of the findings was that as companies try developing “adjacencies” and then “new growth platforms” their ability to distinguish between good projects and bad ones decreases. It is quite low even for “new products”, but it can fall to below one in 50 for “new growth platforms” and one in 10 for “adjacencies”. Once the hit rate falls much below one in 10 the cost of development and early market tests begins to exceed the value of the few successes. Your article does not address this. It does not talk about the many failures and the cost of these failures. Nor does it describe a screening process for identifying which of the many emerging economy projects to support and which to turn down.
In The Growth Gamble, my co-authors and I developed a screening tools “The Traffic Lights” that might help with this issue. My guess is that GE success rate will be between one in 5 and one in 10 for these kinds of “adjacency” developments and, without a good screening process, the costs may exceed the value created.
Andrew
This article is a great contribution to the literature on contemporary innovation best practices as it reflects first rate thinking based on real-life corporate experiences. “Reverse innovation” makes a lot of sense to me as a way for many global organizations to achieve higher long-term growth rates. However, as you point out in your article “glocalization” is dominant today because it has worked well in the past. I suspect that for some organizations it probably still makes sense, depending on 1)considerations specific to the industry and, 2) to the degree a company is actually globalized or its divisions/brands/products are “easy” to globalize. The question is which companies/divisions/brands/products would benefit from adopting one model vs. the other? Perhaps one useful next step would be the establishment of criteria that a company can use to determine the innovation model(s) most appropriate for it to be organized against short-term vs. long-term.
This is indeed a very powerful and awakening article for many. It’s interesting that in the IT enabled services and other services in the IT space, Indian MNCs like Wipro & Infy has actually pushed large players in same space to adopt ” Reverse Innovation”.
Indeed a good thought articulated well.I endorse the concept of reverse innovation.Markets precedes products.Developing countires to contribute significantly for growth of organization which hitherto has seen good times in developed countries but are currently facing challenging times.Paradigm shift in the concept of Rest of the World.Ultimately market orientation and customer needs ,customer affordability, and basic functional needs of the product are critical for sustained growth.The operational budgets should reflect target/achievements in new market/new geographies/new customers/new products separately and the team achieving desired results should be recognised.
I fell reverse innovation has great potential and important to develop further.
There are I feel considerable obsticles and barriers to overcome and I wrote of these in the following link:
http://blogs.harvardbusiness.org/hbr/hbreditors/2009/09/hbr_issue_highlights_october_2.html
These raise issues relating to GE from the article written in the Harvard Business Review published “How GE is Disrupting Itself,” for further thoughts for the adoption of reverse innovation
Well done VG. This article explains the necessary steps multinationals must take; 3 Box Thinking for sure. Congrats and I sincerely hope that your work becomes the “tipping point” for other multinationals to see the upside of developing markets.
Excellent article VG. I am profoundly thrilled by the depth of academic research that went into this article. Indeed ‘reverse innovation’ holds vast promises for international firms operating in ‘red oceans’.
Seems to me that china and india will continue to be the rallying point for international firms in product innovation and strategy for coming years. I equally subscribe to your idea that Africa would be a potential honey pot for GE( energy) in the near future.
But I have doubts. The greatest casualty might be the GE health care brand itself. The organizational structure necessary for ‘reverse innovation’ in my view cannot operate as independent units because the products they spawn come back to cannibalize GE global markets. Its like having ‘resistance units’ in an army batallion. Making cheap products most likely will spark price wars in developing countries, making GE comparable with cheap(and maybe substandard) medical products from asian countries. would GE be able to win the price war? GE in my reckoning is known for innovation and quality and these are traits other health care companies cannot contend with.
Finally, reverse innovation might be the trend today but is it sustainable??
Apart, excellent article. Keep more coming.
Regards
This a very enlightening article about GE new strategy for innovation and how structure has been aligned to support the strategy of GE. The authors have explained very well how the need to change the strategy was felt and how changes have been implemented. This article is great contribution to academia and other corporate world. Dear Prof. your research papers have been great learning source.
Dear Prof. Govindarajan:
I am associated with Anand group, one of the largest groups manufacturing auto components in
India, like Gabriel shock absorbers, Behr airconditioning systems, Perfect Circle piston rings, Spicer axles and drive shafts, Victor gaskets, Emcon exhaust systems, Haldex brake
adjusters, Mahle filters, Mando brakes, Federal-
Mogul bearings, Valeo friction materials, Henkel
products, and many others, through joint ventures
with world leaders.
I am inspired by the work you are doing on Innovation and have been reading about it in various publications. The recent article in HBR
about GE is particularly inspiring.
We have decided to start a formal process in Anand
group for Innovation for which we seek your advice
and guidance and, if possible, participation.
I am an MIT Sloan graduate and look forward to
your response. I take the opportunity to wish you
and your family a happy new year.
With best regards, H. R. Prasad.
Well researched and brilliantly articulated;that the chalenge is more organizational than technological.May be this “commoditisation of innovation” made possible by India and China having attained a critical mass in resources and consumers will be the biggest disruptive event of this century.
The model for creating new reverse is a brilliant one, the initiative start with the mother office (headquarters), then outsource the manufacture to the emerging markets, sell the new products and service to the emerging market, and sell the same product and service (with some adjustments) from the emerging market to technology develop markets. The idea on itself is not new, we can see this same process with a multinational organization as Shell, who develops new products, with his headquarter in the Netherlands. New about this idea is the fact that GE sees this reverse innovation as a future strategy. But for the near future, there is more to it than only reverse innovation strategy. This reverse innovation don’t have components of corporate strategy, but so it seems, put more emphasis on technology, production and marketing, with many restrictions from the management team, and this can be a constrain for GE, especially in the technology market. GE needs to develop corporate strategies, to stay in profitability and affectedness in the technology market. Mr. Vijay Govindarajan and his co-authors state correct that the economic influence of China and India has growth, but when it comes to being wealthy of other nations, my approach differs somewhat from that taken in much of the recent literature and that of Mr. Vijay Govindarajan when referring to slow growth of wealthy nations. In my vision slow growth of the wealthy nations suggests that there will be a fast growth soon but a wealthy nation (read U.S.A.) economic powerhouse will not experience exceptional economic growth anymore. I see clearly that U.S.A. economy has come to the end of its production life circle just as a production life circle of any product during the industrial age.
To break through GE management layers the colleagues need more than only educated in economic development, business analysts, financial systems, marketing and the traditional MBA education. It seems that GE history attracts many talent professionals that are able to drive the reverse innovation but as many traditional organizations, after bringing professionals in GE emerging workforce, GE headquarter seems to lose interest in these professionals with their creative ideas and energy. These communications constrain GE is wasting time, energy and money when it comes to developing the full capacity of the workforce and stationed in the emerging markets.
Organizations and societies are constant changing and in the emerging region the changes between organization and society create a gap when it comes to the quality of life. International and global companies don’t have a traditional in making policies concerning quality of life in the emerging markets. If there are no individuals with influence, human rights organizations, unions, global organizations like GE will not have design code of conduct or ethics as they have at the headquarter. If GE has code of conduct for their reverse innovation officers, is not clear that these are implemented and maintained. It is good for GE brand to talk about the quality of life. Possible that these health care machines and devices provide (is affordable) for some groups in the society, but is GE aware that these products are manufacture by those (at the end of the outsource chain) that are responsible for packing and transport, that in these chains cheap labor is involving. Like young children, sexual abuse and harassment of man and woman by their poor social economic status, less restricts health and safety regulations and labor conditions. These issues are less taken care of when GE goal is to double its revenue in the emerging market, the higher the profit the lower the conditions.
Is GE leader capable of design programs that influence the society and the way the individual in the emerging markets looks at GE and its stakeholders and does GE want to measure its influence on the society and individuals in that society? Where is GE headquarters future implications for her organization responsibility on the emerging market? Does GE see the demand for health care system driven by economic and technology changes in the emerging markets as the same as the consumer demanding for better quality of life? Is GE a reliable party to reach that goal and not merely money making machine, but the one organization that helps those that don’t have access to medical care that can improve the quality of life?
When it comes to organization design, the organization structure for the emerging market partners can be design as a depended entity. Such organization structure independent from the mother organization can identify the possibilities in the emerging markets and customers in the USA, EU and other countries. The structure of the organization in the emerging markets can create, and sustain competitive advantage when competition from China and India will become more intense, or when the health care market attracts more rivals that offer the same product and service as the GE partners but at the lower price and play a new ball game. Is the organization structure in the emerging market design from the macro economic perspective, to drive human potential in the quality of serving others, and prepare the organization to be flexible when recognizing is time to change gear, recognizing the economic and cultural of the emerging country where GE partner is residing?
GE headquarter must build a staff of visionaries that can identify growing health care industries, staff that wants to make a positive contribution in their communities, staff that put their energy to create a better quality of life and that are passionate about create vision and opportunities to suit those in needs that are excluded from the economic inner circle, health care and education.
I am a where that GE has to deal with corruption, misguided social, political, and economic policies, personal self enrichment, where the lower of the social class system then no-bodies of this world have to struggle for sufficient food as well the social and economic injustice, and the inhuman living conditions worse than slums. No one knows how much work their finger to the bone without honest pay. Everyday people, who are wrestling with the complexities of reality of life, without hope on a better life and are longing to taste social and economic freedom to take their life in their own hands, time will tell.
Hi there!
i’ve just joined here and wanted to say hi to all of you!I really hope to give something back to this board…
Cheers