Reverse Innovation Issues - Example

Reverse Innovation Student’s Name Subject Professor University/Institution Location Date 1.0 Introduction Currently, emerging markets are seen to constitute a major growth opportunity in an evolving world economic order (Arnold & Quelch 2012). In that context, a unique but rare kind of innovation “reverse innovation” has been noted; where innovation that is adopted in emerging and poor economies ‘trickles up’ to already developed and rich countries (Govindarajan & Ramamurti 2011). In the face of such an unexpected incidence, a number of questions arise in regard to the factors that have and will in foreseeable future lead to reverse innovation. As reverse innovations move from emerging nations to developed nations and become more and more common, it poses a formidable challenge to multinational companies and other emerging national enterprises that concentrate on conventional affluent consumer segments. This report will critically deliberate ‘reverse innovation’ on one hand and a number of interrelated issues like; its impacts on sustainable economic growth, the kinds of innovation to emerge in emerging markets, present factors that facilitate the trend and the significance place of Emerging Markets National Enterprises and Developed Nations Multinational Enterprises on the other. Tata Nano car is a major case from India to consider though others emerging economies such as China and Brazil will be considered in this report. 2. 0 ‘Reverse innovation’ Issues 2.1 Sustainable economic growth; EMNEs and DMNEs. As Uribe, & Yue (2006) observes, innovations are in the verge of taking root and progress from emerging nations to developed nations. The point can be confirmed by the rapid rise of a number of Chinese firms, with some gaining a status of Multinational Corporations like Huawei, Hair and Lenovo. Countries grow differently and vary in the way they create their intellectual capital. Emerging nations are taking advantage of markets as they develop products and come up with innovation. The ‘reverse innovation’ phenomena have been brought about by the knowledge of domestic firms to design products and services for a defendable niche. Incremental and breakthrough thoughts occur through a higher understanding of local needs and information for strategies, management of management of their local talent pool. Products tailored to address consumers’ voice in a targeted segment and cost advantage through experimenting different ideas creates price competitiveness and intense price competition. Generally, emerging countries have a greater opportunity for future growth, financial stability and global trade, business and politics. Emerging economies have untapped potential and their determination to undertake domestic reforms that support sustainable and continuous growth (Nidumolu, Prahalad & Rangaswami 2009). Uribe, & Yue (2006) further points out that, most Chinese firms learn a lot from Multinational Corporation and foreign firms to develop a capacity for global competitiveness. The foreign firms in China are heterogeneous in regard to their country of origin which has allowed Chinese firms to learn faster and more. Diverse foreign firm’s increases the productivity of Chinese firms as they combine different skills get exposed to various technologies, marketing methods, management skills. Most foreign firms compete among themselves for export market and sometimes collaborate to leverage the domestic competition. Domestic firms achieve greater benefits since they tend to concentrate on domestic market more and understand certain aspects that are left out by foreign firms leading to unique products. According to Shaughnessy (2013), global challenges increase the need to be innovative and firms have increased their spending in research. For instance, 46% of Huawei’s employees are in research and development. Companies in China have been granted more U.S. patents than in developed countries. 2.2 Impact of ‘reverse innovation’ on sustainable economic growth Tata Nano was made and sold at low-cost and is one of the popular product in ‘reverse innovation’. Originally created for Indians who used motorcycles, it replaced was considered as the best alternative in the market with the lowest price. The car has met some important standards in India and its recent upgraded version called Tata Europa has also been in western nations markets. Emerging Nations Multinational Enterprises (EMNEs) and Developed Nations Multinational Enterprises (DMNEs) are faced with a demand to have an innovative perspective and incorporate systematic sustainability issues in their corporate strategy. According to Epstein (2008), the main focus of sustainable development is to impact positively on environment, employment and economy. The history of most poor countries has had a viscous cycle of exploitation, financial and social inequalities that is rampant between the social groups. That has progressively enlarged the gap and benefits of modernism and development between them and developed nations. It is this cycle that makes sustainable development significant in slowing it and turning it around and both EMNEs and DMNEs will need to work towards it. Both of these types of enterprises will focus on both the domestic market and export market and thus there are a number of issues that they will have to consider. First, they have to develop ability so as to tap the physical, financial and human resources from different t parts of the world. The resources can then be combined in commercially profitable and economically feasible activities. As Nidumolu, Prahalad & Rangaswami (2009) argues, the enterprises will need to prove their capacity in developing new skills and technology as well as managerial and productive ability. Ultimately, they will have to translate resources into outstanding specific outputs. EMNEs may highly benefit emerging economies as their business strategy relates to nation’s development needs. However, MNCs have to work on reducing the potential conflict that exists due to divergent objectives between them and their host countries. They will also have to work toward reducing the cultural and social factors that lead to tensions. DMNEs will therefore have no choice but participate in decision making to ensure equitable division of benefits between them and the host countries. National policies are changing in order to ensure that the host countries reap the benefits of DMNEs such as the automobile MNC in Brazil in sustainable economic development. Both DMNEs and EMNEs will need to continuously initiate programs towards capacity building and training, develop and make use of alternative energy sources to supplement energy consumption needs, collaborate with government to ensure cost cutting measures, strategic alliances, diversification and deal with weather competitive challenges. 2.3 Future Innovation from emerging markets  Most DMNEs have seen sustainability as unnecessary cost on business and most incompatible in the core part of business development. However, sustainability has been embraced as a guide for EMNEs and is picking up a pace in different sectors. These innovations target to offer solutions to transform the industry, meet the growing consumers’ desire for sustainable products and services. Subsequently, these sustainable innovations have positive financial impact consumers’ bottom-line and on business at large. For instance, Azuri, the low-cost solar panel for rural areas in Africa has brought clean energy to markets and low price renewable energy (Sveen 2003). Apart from developing elegant products, emerging economies are concerned of low prices products which reflect a deeper understanding of its customers as well as similar others in different geographical areas. A good example is Xiaomi, Chinese consumer Electronics Company dubbed “Apple” of China for its low priced elegant products (Lesser 2013). As lesser (2013) observes, emerging economies have assigned extra budgets for R&D to come up with the right idea, launch them quickly and at the right time to push companies far ahead of its competitors. Most of surveyed CEOs rank innovation as a top priority so as to cope with world rapid change. Every company in emerging economies has their own reasons to why they invest in new ideas. However, there are a number of core reasons why innovation has been taken as a priority in these emerging markets. First, sustainability is one of the powerful catalysts for change. According to MIT Sloan Review, companies in developing markets have a higher likelihood to focus on sustainability-related innovation and business models. Sustainability has been the best way, sometimes, only way that has helped them deal with acute scarcity of resources as well as population growth challenges. Eventually, the companies do a lot more than just coping with constraints that faces other companies that do not embrace sustainability. Sustainability champions manage to generate consistently above-average growth and profit margins and increase their sustainability agendas. Secondly, companies in emerging markets for instance China and India are focusing on end of easy growth. Though most of economies in emerging markets are still growing, they are also downshifting and the cost advantages are shrinking. They focus more intensely in developing others sources to increase competitive advantages. From rapidly growing economies, a list of fast-growing and globalizing companies have tripled their annual spending on R &D. Thirdly; the mindset in emerging markets lends itself to innovation. Entrepreneurs and executives have a relentless pursuit for success offering extraordinary creativity, confidence in investing and actions towards growth. They forge through mistakes, use time and cost to innovation (Lesser 2013). India in particular has emerged as an outer hub for IT services and use of capital. 2.4 Why innovations ‘trickle up’ from poor to rich countries ‘Trickle up’ innovation is characterized by development and testing of products in emerging economies. That offers a greater acceptance in the local market which popularizes it around the globe. As seen earlier, these innovations are timely and target a certain consumer segment. As Immelt, Govindarajan & Trimble (2009) observes, General Electric (GE) health-care department developed a MAC 800, an electrocardiograph machine to be used in China and India in 2008 retailing for 80% markdown compared to products with equal capabilities. As a good example, it eventually becomes easier to market it abroad like in U.S. That provides a base for launching in developed markets. Application in 1st world then determines which markets in develop world are the most preferable for the product depending on consumer segments that might embrace the innovation. The innovative solution is unattractive in developed countries but with time performance rises to attractive points in rich world. There are three gaps that determine why innovation ‘trickles up’ from developing to developed economies including; income, infrastructure and sustainability gaps. Income gap significantly determine the rate in which innovation trickles up. At first, the innovation may appear unattractive in developed world. The existence of consumer segments that value the performance of the new innovation ultimately makes the innovation to be accepted by other segments. The increased demand for new infrastructure technologies is low in develop countries. However, the need to replace the existing infrastructure leads to acceptance of innovation which promotes sustainability objectives. Many developing countries have for long been confronted with various environmental constraints in their progress to economic development compared to rich nations. Sustainable technologies are likely to be adopted in developing nations before they are adopted in remote places in developed nations like U.S. 2.5 EMNEs DMNEs compete in the diffusion of reverse innovations In one way, reverse innovation products endangers their counterparts in the market. In fact, they reduce the market by taking a large extent of consumer segment when their products are seen to have an added advantage. Most EMNEs and DMNEs products have dimensions that focus on the needs of mainstream customers. However, ‘reverse innovation’ offers two dimensions where one aspect can be quality while the other one might be price or speed. Mainstream customers do not embrace this innovation and tend to ignore the new products entrants and technology. However, the minority customer sees the lesser aspect that does not appeal to mainstream consumers more appealing. ‘Reverse innovation’ targets for segment with most people. Over the time, as technology improves and innovation become better, it meets the dimensions needed by the mainstream customers. In the face of such competition, DMNEs and EMNEs will have to work out a new strategy to thrive. One of the possible modes of survival for them can be through acquisition, where they take over an innovation and improve it to gain international acceptance depending on required standards. Another way to overcome competition will be to prioritize investment that interest minority customers. That means they have to overcome their initial resistance to sustainability ideas, refocus on customers’ needs to eventually take over in those markets where ‘reverse innovation’ products are taking over. They have to turn away from conventional premium-priced products that focus on the world’s affluent consumers. That will mean adopting a design for their products targeting poor people. By passing the past model, big companies like Microsoft, Procter & Gamble (PG) and Nokia (NOK) have discovered how to profit by targeting masses of consumers first. Over time, they can score again and sell their low-priced products to other consumers (Jana 2009). 3.0 Case Study Tata Nano is a classical example of what reverse innovation is. The car has been a great revolution recently in automobile industry. As a low budget car that was introduced in India where per-capita incomes are low. The innovation suits other developing world with so low per-capita incomes. The conditions in India were ripe to receive the innovation as it offered decent quality at ultralow price. Tata Nano has both the element of quality or performance and price that are considered highly in these developing countries. Tata Nano has been launched in European markets. Before it was launched, it was modified according to the taste of European consumers and preferences of the users. Its cost in Europe varies; actually higher than in India and fit in the new markets backing the leapfrog strategy. 4.0 Conclusion It is easy for firms to assume that innovation and product development happen in a similar manner in every place. However, countries grow and develop in different ways. Similarly, countries create intellectual capital in differently. When varying innovation models thrive in emerging markets, they have major impacts and ultimately become a lesson for multinational companies everywhere. “Reverse innovation” develop as innovators consider developing products for a defendable niche in relation to an understanding of the local needs. Usually, the firms in these countries have a high access to feedback between corporate and integrated local strategies. An innovation that tailor the true needs of consumer s of a targeted segment, unique local needs, price points, institutional voids and collaboration opportunities ends up taking over and becoming popular out of the speed by which the targeted market embrace it and its profits outcomes. It is certain now that numerous opportunities wait to explored and innovative ideas, product launching and new markets for emerging economies. References Arnold, D. J., & Quelch, J. A. (2012). New strategies in emerging markets.Sloan management. Epstein, M. J 2008, Making sustainability work: Best practices in managing and measuring corporate social, environmental, and economic impacts. Berrett-Koehler Store. Govindarajan, V., & Ramamurti, R. (2011). Reverse innovation, emerging markets, and global strategy. Global Strategy Journal, 1(3‐4), 191-205. Immelt, J. R., Govindarajan, V., & Trimble, C 2009, How GE is disrupting itself. Harvard Business Review, 87(10), 56-65. Jana, R. 11 March 2009, ‘Innovation Trickles in a New Direction’, Business Week.com: Available: http://www.businessweek.com/magazine/content/09_12/b4124038287365.htm [Accessed 8 February 2014]. Lesser, R. 11 September 2013, ‘Guest post: the innovation wave in emerging markets’, Ft.com: Available: http://blogs.ft.com/beyond-brics/2013/09/11/ [Accessed 8 February 2014]. Nidumolu, R., Prahalad, C. K., & Rangaswami, M. R 2009, Why sustainability is now the key driver of innovation. Harvard business review,87(9), 56-64. Shaughnessy, H. 17 January 2013, ‘Why Emerging Markets Are More Innovative Than America’, Forbes.com: Available: http://www.forbes.com/sites/haydnshaughnessy/2013/01/17/ [Accessed 8 February 2014] Sveen, C. 10 June 2003, ‘Emerging economies lead the way for sustainable innovation’, The Guardian: Available: http://www.theguardian.com/ [Accessed 8 February 2014]. Uribe, M., & Yue, V. Z 2006, Country spreads and emerging countries: Who drives whom?. Journal of international Economics, 69(1), 6-36. Read More