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1081 MANAGEMENTReverse Innovation and the Role of aStrategistReverse innovation is not an isolated phenomenon but order of the day. Oxford dictionary defines innovation as ‘a newmethod, idea, product, etc’. For all practical purposes, business innovation means a new venture put to commercialuse. In the organisational context, innovation may be linked to performance and growth through improvements inefficiency, productivity, quality, competition and market share. Though the concept is not very new and was in practicesince early 2000, Harvard Business Review, in an article published in September 2009 popularised the phenomenonof Reverse Innovation. A reverse innovation is any innovation likely to be adopted first in the emerging marketsand then repositioned in the matured markets. It is so called because historically, nearly all innovations have beenadopted first in developed countries. Reverse innovation, also called trickle-up innovation, involves creating entry-level products for developing nations and then repackaging them for sale in developed nations. It solves many woesof multinationals including considerably reduced product development costs and substantially increased revenue bydiversifying globally. Read on to know more… Scope of Reverse Innovation Multinational companies need to change the very way they conduct business, suggests Dr. Vijay Govindarajan, noted expert on strategy and innovation. For decades the MNCs have focused innovation efforts based on the needs of developed countries and then exported products around the globe. But today, they must innovate to solve the problems of the developing world and then bring the innovations home, he emphasises. Following are three prime reasons leading to reverse innovation: 1. Income gap between emerging markets and matured markets. Because per-capita income is low in the developing countries, conditions are ripe for innovations that offer quality products and services at a very low price e.g. a 50% solution at a 5% price. Initially the 50% solution is unattractive in the matured markets, but eventually, performance rises to the level that it becomes attractive at an acceptable price. 2. Infrastructure gap - Most of the infrastructure (energy, transportation, telecom, etc.) in the CA. Debdatta Bandyopadhyay developing countries are still being built. As a (The author is a member of the Institute. He can be reached at result, demand for new infrastructure technologies email@example.com) is much higher in the developing countries than it THE CHARTERED ACCOUNTANT january 2012 97
MANAGEMENT 1082 is in the developed countries where demand for portability and small size serve critical advantages. The infrastructure is created primarily by the need to Obama healthcare reform is based on low cost, good replace existing infrastructure. quality and increased access. These are the same three3. Sustainability gap - Many developing nations pillars that will unlock the huge untapped healthcare are confronted with environmental constraints market in countries like India. far sooner in their path of economic prosperity ▪ The example of Tata Motors: than developed nations were e.g. desalination In 2009, Tata Motors launched the Tata Nano, the technologies are more likely to be adopted first in much talked about R1 lakh ($ 2,000) common man’s Africa and in the Mexican deserts. car and now relaunching the same car as Tata Pixel for the European markets. Through this car, Tata MotorsThe Indian Scenario has tried to unlock new markets in India. The Nano▪ The example of GE Healthcare: is targeted at the consumers outside the automobileGE had a very strong healthcare franchise in the US segment in India, mainly the two-wheeler users. Thewhere they researched and developed premium X-ray two-wheelers are typically priced in India at $ 1,200 tomachines and medical scanners. These expensive $ 1,500. By introducing an automobile for $ 2,000, Tataproducts were imported by top Indian hospitals which Motors plans to migrate the two-wheeler population intohave state-of-the-art medical imaging facility. However, four-wheeler segment. Tata is now attempting to createthe healthcare needs of rural India are completely new consumption by extending to newer markets withdifferent. More than 70% of Indians live in villages which modified products. Tata Motors plans to introduce Tataare a huge market, but it cannot afford feature-rich Nano not only in other emerging markets such as Africaexpensive products. In 2008, GE innovated an ECG but also plans to bring the car into Europe and the USmachine called MAC 400 to serve the rural market. It eventually, repackaged for matured markets.was developed keeping in mind the huge rural marketstarving for a basic product at an affordable price. The Framework of Reverse InnovationAn additional feature of this equipment was its Ishikawa diagram (also called fishbone diagrams orportability. This equipment costs about R50,000 cause-and-effect diagram) was first used in the 1960s($ 1,000), a fraction of the cost of the appliance-sized and is considered one of the important tools of TQMpremium machines sold in the US. In 2009, GE has (Total Quality Management). We will now attemptbrought an improved version of these portable low cost modifying the conventional fishbone diagram in anECG machine into the US, which is sold as MAC 800. attempt to develop a framework for reverse innovation.These machines have created new applications in the The below diagram is illustrative only and can be re-US in accidents sites and in emergency rooms where arranged to suit specific requirements Developin g Market Inpu ts PLC 6 P&L Projection CAPEX 5 D efeature Global Resource optimisation specifications Local Product R evised Design Function Product Marketing strategy Technical needs Process Developed Market Inputs 98 THE CHARTERED ACCOUNTANT january 2012
1083 MANAGEMENT W Another noted management expert C. K. Prahalad e have seen features of reversehas highlighted five ways that developing nations innovation even before theshould use for ‘trickle-up innovation’ strategy: global meltdown. Indian1. Affordable Products - Emerging nations cannot companies have been exporting afford goods priced for the US and Western Europe, goods and services suited to which pushes companies to find inexpensive the western world since decades. The global materials or manufacturing options. financial crisis has only made the cause for2. ‘Leapfrog’ Technologies - Developing countries reverse innovation much stronger. In years to lack 20th century infrastructure and so have fast- come there is likely to be slow growth in the forwarded to newer technologies such as mobile saturated markets and more robust growth in phones or solar energy. the emerging markets. The growth gap between3. Service ‘Ecosystems’ - Entrepreneurs in emerging the developed and the developing countries is markets often must rely on natural conditions and, gradually transforming into growth bridge. therefore, should aim at building more eco-friendly products and services. crisis has only made the cause for reverse innovation4. Robust Systems - Emerging markets require much stronger. In years to come there is likely to be products that work in rugged conditions. A gadget slow growth in the saturated markets and more robust sturdy enough to survive monsoons in India is growth in emerging markets. The growth gap between most likely to handle weather conditions in western the developed and developing counties is gradually countries also. transforming into growth bridge.5. Newer Applications - Customers in emerging Also, reverse innovation should not be confused markets have few product options thereby with export. China is eventually becoming the providing market openings for add-ons that update outsourced manufacturing hub to the western world. and extend the lives of existing merchandise. But, the Chinese goods, though they are price-efficient products, are often not quality efficient and mostly canOrganisational Essentials for Reverse Innovation be categorised as exports.In discussing some of the prerequisites in anorganisation which facilitate reverse innovation, like any More examplesother organisation, Production, Marketing, Finance, HR Some more recent examples of Reverse Innovationand Logistics are the key elements. Additionally to steer across various industries and geographies are asreverse innovation, it is important to have a LGT (Local follows:Growth Team) which, according to Vijay Govindarajan, - Nokia is testing new business models with newoperates with the following three important principles: features in its hand-held phones sold in US, based1. LGT needs to have a separate profit and loss on observations in Africa. statement. Additionally, the reporting system - Procter & Gamble found that a honey-based cold should focus on the areas of product development, remedy created for Mexico also had a profitable supply chain, manufacturing, marketing, sales and market in Europe and US. distribution. - Nestlé is selling its low-cost, low-fat dried noodles2. LGT needs to do a lot of experiments, learn and also originally developed for rural India as a healthy unlearn. As innovation involves uncertainty and the alternative in ANZ. key challenge, therefore, is to test assumptions to - HP intends to use its research lab to adapt Web- develop more knowledge about variables which interface applications for mobile phones in Asia are uncertain in different market conditions. and Africa to other developed markets3. Managements need to ensure that the LGT does - In February 2010, Godrej Group’s appliances not function in isolation. It should be able to division test-marketed a low-cost (dubbed the leverage the parent organisation’s enormous global world’s lowest-priced model at R3,250) refrigerator resources and technology capabilities. targeted mainly at rural areas in India. The product runs without a compressor on a battery and coolingIs ‘Reverse Innovation’ a Product of the chips. The company wants to use a community-ledRecession? distribution model (as an alternative channel ofWe have seen features of reverse innovation even distribution) to push for product growth in maturedbefore the global meltdown. Indian companies have markets.been exporting goods and services suited to the - Tata launched the water purifier ‘Swacch’ targetingwestern world since decades. The global financial the rural market in India which is the cheapest THE CHARTERED ACCOUNTANT january 2012 99
MANAGEMENT 1084 water purifier in the market. The product does not manufactured by utilising the Target Pricing or require running water, power or boiling and uses Target Costing methods exhaustively. Once the paddy husk ash as a filter. It can give purified water features and functions were finalised, target enough to provide a family of five drinking water costs were assigned to each and every system – for a year. The company feels it will open a whole transmission system, instruments, engine, body, new market. interiors and electrical systems. The sub-teams then designed the systems within the targetSome Relevant Costing Strategies to Leverage cost. They looked at every bolt and nut and keptReverse Innovation driving cost out of the system. Reducing inventoryFollowing are some costing methods which the reduced the working capital cost and also reducedaccountants and strategic planners have used in warehousing costs and obsolescence costs. Todeveloping successful products and services, through reduce inventory, demand fluctuation will have to belean innovation. The methods are briefly discussed reduced and reliability of inventory replenishmentalong with some prominent examples. Adoption of had to be increased. Inventory Record Accuracythese methods in appropriate cases would immensely was at six sigma levels and overall supply chainbenefit the members of the Institute. length was reduced. On a strategic level, Supply(A) Target Costing: Target costing is the process of Chain Network Design i.e. locating plants, contract determining the maximum allowable cost for a manufacturers, distribution centers and warehouses new product and then developing a prototype that were very important because 70% of the cost of a can be profitably made for that maximum target supply chain is fixed at the design stage. cost figure. Target costing is defined as a cost (B) Just In Time: Just-in-time (JIT) is a management management tool for reducing the overall cost of philosophy originally developed by Toyota in a product over its product life cycle. Management Japan, which focuses on executing tasks as and utilises this pricing technique to meet both the when required thereby eliminating the need of demands of its customers as well as company maintaining an inventory. The tasks could be profit goals. Target costing, in particular, emphasises anything, ranging from acquiring and supply of the reduction of costs during the planning and raw materials to processing and shipment. The design stage of the product life cycle since the basic concept involved is reduction of wastes majority of product cost is determined at this at every step. Reducing the inventory of such stage. In comparison to traditional product costing materials makes the system lean and exposes its methods, target costing allocates more of the total weaknesses, which can then be rectified. JIT lies in cost to the development stage, simultaneously the heart of lean manufacturing. It requires effective reducing costs during the production stage. measures at every step of the manufacturing A number of advanced cost-engineering techniques process; right from the ordering of supplies from are used in the cost reduction process. vendors to quality testing of the finished product. The Tata Nano illustration - Tata Nano car has been Alertness and agility are the key factors, which is T why an effective information backbone is required arget costing is the process to track the movement of items to and from the of determining the maximum shop floor. allowable cost for a new product JIT as a philosophy is good in most environments and then developing a prototype including India. Its core philosophy is identifying that can be profitably made for and eliminating waste and continuous improve-that maximum target cost figure. Target costing ment. This is important in a country like ours whereis defined as a cost management tool for resources are scarce. There are auto componentreducing the overall cost of a product over its companies in India that have excelled inproduct life cycle. Management utilises this implementing the JIT concept in the inbound (supplypricing technique to meet both, the demands side) part of the supply chain. However, JIT conceptof its customers as well as company profit does not work well when there is a high degreegoals. Target costing, in particular, emphasises of uncertainty in the system. Therefore, in certain industries such as fashion apparel, implementingthe reduction of costs during the planning and JIT might be difficult and challenging.design stage of the product life cycle since the The Oracle-TechMahindra illustration - The ITmajority of product cost is determined at this systems have been the key to consistent andstage. speedy healthcare delivery services through 100 THE CHARTERED ACCOUNTANT january 2012
1085 MANAGEMENT J 1-0-8 calls in Andhra Pradesh. TechMahindra ust-in-time (JIT) is a management provided the design and deployment of state-of- philosophy originally developed art emergency management solution. The IT team by Toyota in Japan, which focuses evaluated and selected Voice Over IP 7 capacity, on executing tasks as and when computer telephony integration; interactive voice required, thereby eliminating the response, geographic information systems and need of maintaining an inventory. The tasks global positioning systems as obvious technology could be anything ranging from acquiring choices given the need for distress communication and supplying raw materials to processing and management. Oracle Financials, Oracle and shipment. The basic concept involved is Human Capital Management, and Oracle Customer reduction of wastes at every step. Reducing the Relationship Management (CRM) were used inventory of such materials makes the system extensively to provide centralised background lean and exposes its weaknesses which can information for providing consistent delivery and then be rectified. detailed patient tracking. The CRM system is used to track patients as well as hospitals to store by providing a high-quality product, continuous information and uses industry best practices across improvement of the quality of the product and the delivery chain. The 108 helpline framework runs services becomes a culture for that company. akin to that of 191 helpline in US. We have already attempted using TQM fishbone(C) Total Quality Management: Total Quality is a diagram as an example in developing a framework description of the culture, attitude and organisation for reverse innovation. of a company that aims to provide its customers with (D) Benchmarking: Benchmarking is the process improved products and services that satisfy their of identifying "best practice" in relation to both needs. TQM means building quality into everything products and the processes by which those in every area – design, production, purchasing, products are created and delivered. The search for vendor relations, inspection and service after sales, best practice can take place both inside a particular market research, development, financial controls, industry and also in other industries. The objective personnel rewards, training and education. A of benchmarking is to understand and evaluate the company must first improve quality and only then current position of a business or organisation in should it look into cost, volume and productivity. relation to best practice and to identify areas and The improvement in price, performance and means of performance improvement. services follow automatically. Once it is recognised Benchmarking involves looking outward (outside that customer satisfaction can only be obtained a particular business, organisation, industry, region or country) to examine how others achieve their performance levels and to understand the processes they use. In this way benchmarking helps explain the processes behind excellent performance. When the lessons learnt from a benchmarking exercise are applied appropriately they facilitate improved performance in critical functions within an organisation or in key areas of the business environment. Benchmarking is key tool to facilitate designing cost structure for products adopted for reverse innovation. This involves four key steps: (1) Understand in detail existing business processes (2) Analyse the business processes of others (3) Compare own business performance with that of others analysed (4) Implement the steps necessary to close the performance gap Benchmarking should not be considered a one-off exercise. To be effective, it must become an ongoing, integral part of an ongoing improvement process with THE CHARTERED ACCOUNTANT january 2012 101
MANAGEMENT 1086the goal of keeping abreast of ever-improving best more time and effort in training and empowering allpractices. management levels to always practice motivation – not movement (except under extraordinaryA Call Centre illustration- circumstances) and to work toward harmony withinIndian Call Centres are typically cost centres and the organisation.suffers from the perils of subjective management. ▪ Meeting management objectives – by educating andThe expectations from these centres are elementary managing management’s expectations. Managingservices at fractional cost. Quality is low down in the up has never been so important than it is today.priority list in managing most call centres. ▪ Management of quality rather than quantity. Below is an illustration based on a study on The priority should be on putting the benchmarksbenchmarking cost and profit centre measures where our business drivers are. To be successful withconducted by ACA research group, a renowned customers into this new globalisation era we musteducator on benchmarking. This study depicts the redirect our efforts in line with dynamics of changingshift of quality when a cost centre processes are demand and supply.benchamarked with that of profit centre. P Typically, measurement criteria in both cost and robably it is time to revise theprofit centres are: phrase ‘reverse innovation’▪ Calls completed per hour. to ‘lean innovation’. It gives▪ Calls received per hour. tremendous opportunity for▪ Average duration of a call. India to embrace experiments▪ Staff hours available per day. in traditional sectors like auto, banking, etc.▪ Supporting staff ratios. as well in sunrise industries like telecom and The key differences between cost and profit insurance. The diversified nature of the vastcentre measures in a BPO/Call Centre is that the latter domestic market in India offers ample scopefocuses more on staff behaviour than on cost cutting. of developing advanced products and servicesThe approach taken is divided between attitudes andactivities that lead eventually to staff and consumer suited for the export markets.behaviour. ConclusionCost Centres Profit Centres Reverse innovation is not an isolated phenomenonAttitudes Attitudes but an order of the day. Probably it is time to revise- Compliance driven - Customer Focused the phrase ‘reverse innovation’ to ‘lean innovation’.- Divisively competitive - Innovative It gives tremendous opportunity to India to embrace or sometimes non - Healthy Competition experiments in traditional sectors like auto, banking, competitive etc. as well in sunrise industries like telecom andActivities Activities insurance. The diversified nature of the vast domestic- Containing Cost and - Active staff turnover market in India offers ample scope of developing headcount control advanced products and services suited for the export- Budget based on call - Budget based on markets. The model of emerging market innovation volume sales growth that most people have in mind is a multinational- No outside or - Value added services corporation that pioneers a novel product or service in additional costs their sophisticated home market, drops some features factored and cuts the price, and then exports the stripped-down innovation into emerging markets. Companies must From the attitudes and activities, the staff and continue to develop a product that appeals to thecustomers react to those attitudes and activities with emerging market consumers who combine discerningbehaviours that affect whether or not our benchmarks tastes with low disposable income and then managersare met. For a cost centre to measure and benchmark quickly recognise that these products would appealto become a successful profit centre; the focus must to some segments within mature markets as well.be on: However, for sustainable growth it would become▪ Management of costs – not simply containment or indispensable for Indian companies to develop easily cutting. adaptable, but robust cost methods to propel ‘lean▪ Pursuit of beneficial productivity – effectiveness products and services’. It is the steam forward for our rather than efficiency. Indian companies to make significant inroads into the▪ Motivation of staff and management – the need for much awaited global markets. n102 THE CHARTERED ACCOUNTANT january 2012