Reverse Innovation

Just after the dot com economic bubble burst at the turn of the century, surviving CEO’s boasted how well they had managed the ‘reinvention’ of their companies as well as the job descriptions of their employees. Being flexible meant a company was nimble and ready at a moment’s notice to pounce on the next upcoming opportunity, but about 8 years later and shortly after the 2009 economic crisis, everything changed.  ‘Reinvention’ was out, while the new term, ‘Innovation’, was in. What caused this change?  …and how can CEO’s inject this ‘new era of innovation’ into their company cultures?  

In a recent New York Times bestseller titled, “Reverse Innovation”, co-written by Vijay Govindarajan and Chris Trimble, the authors claim that most CEO’s truly do not understand how to leverage innovation in a connected world.  …and for those that do, their corporate culture would have great difficulty supporting innovative ideas that are not incremental to their existing operations.  Almost counterintuitive, the more efficient and successful a firm, the less of a chance it can fully leverage this ‘new era of innovation’.  Why?  The reason for the shortcoming has nothing to do with a firm’s ability to come up with new ideas.  Most of their technicians are smart and well prepared, and yet, herein lies the core of their problem.

Smart people like to become smarter by building upon a previous design or success.  They know how to continuously deliver improvements to a product or service, and as they continue down a preferred experience curve, they tend to innovate within their established comfort zones.  In addition the base of loyal customers that buy their products contingent upon incremental enhancements is dwindling, not growing.  At some point, like in the case of GM prior to its government bailout, either the Research & Development (R&D) team will run out of new ideas or the reduced number of loyal customers who demand more features will become financially unsustainable.

What then should a CEO do when their R&D department reaches a plateau and stops delivering on new and exciting ideas for the majority of their customers?

The CEO could replace the R&D team’s leader with another, but most likely, the new leader will come from a competitor and be just as narrowly focused on features as his predecessor.  There is also the enormous investment in lab and testing equipment that indirectly influences the direction of research and the scope to invent new ideas.  Many labs leverage their knowledge-base with other labs and together could create an even narrower preferred niche for innovation.  Aside from scrapping the department entirely and starting from scratch, a CEO might consider a hybrid solution as highlighted in Vijay’s book on ‘Reverse Innovation’.

In 2008 Vijay’s preliminary work on reverse innovation caught the attention of Jeff Immelt, the CEO of General Electric or GE.  Immelt knew that his super efficient operations at GE were potentially hurting his R&D efforts to innovate new products, company-wide. Over the years his company’s vision to innovate ‘out-of-the-box’ had become myopic in an environment where success was measured by cost reductions rather than sales to new markets. He also knew from his previous experiences in India and China that exporting his goods to emerging markets would have limited success, despite design adjustments to reduce price points.

Immelt felt that if he could somehow harness emerging market intel at a local level and pass it along to his formidable R&D teams located in developed countries, that he would win big.  Not only would he gain valuable insights to new ideas but also offer his R&D team with unprecedented access to ‘live’ laboratories of potential buyers for field testing new ideas and further tweaking of their existing designs. With this plan in mind, Immelt turned to Vijay and his team at Dartmouth to evaluate implementation strategies that could co-exist with GE’s behemoth, efficiency-driven operation. In so doing, Vijay coined the GE initiative the same as the title of his book, “Reverse Innovation”. …which refers to the direction of information flow from a disorganized emerging market to the confines of a sophisticated lab team in a developed country. (Traditionally, innovation begins within the confines of a lab team and their final results exported to emerging markets.)

Vijay’s recommended implementation strategy offered GE’s labs with a rich inventory of field-tested, innovative solutions that could potentially unleash a renewed culture of exciting possibilities, company-wide.  In his book Vijay covers 6 more similar case studies with other organizations and concludes with an open invitation for additional insights. To that end, I have chosen to add my two bits.

An Alternative Approach
Aside from improving an R&D team, a reverse innovation approach could also become a game-changer if applied at a company’s Human Resources level.  Hiring has virtually followed the same process for decades, where recruiters or hiring managers sift through thousands of resumes and are rewarded based on how well they can match candidates with a job description. However, if we apply some of what Immelt and Vijay have taught us so far, hiring just to match a job description may create the same incremental way of thinking that was shown to insulate a group from innovating new ideas.

Perhaps firms should view hiring as a strategic opportunity to inject outsider perspectives that would otherwise never surface among their current employees.  With online training easily accessible, companies should consider hiring based on one’s ability and willingness to expand their knowledge-base so they can participate in meaningful dialogue with multiple department heads.  Similar to the contributions from emerging markets that helped GE grow, these ‘field-tested’ innovations from new hires could trigger a renewed culture of exciting possibilities, company-wide.

What is your opinion?

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4 Responses to Reverse Innovation

  1. David Lloyd-Jones says:

    Tom,

    In rather the same vein I think people ought to take a look at th excellent Clayton Christensen’s stuff, e.g. his book “The Innovator’s Dilemma.”

    Given your description of “Reverse Innovation,” I think there’s a good chance Christensen has rather more meat on his bones than this guy Govindarajan.

    BTW, Tom, it rather jumps out at one that you write above “Aside from scrapping the department entirely and starting from scratch, a CEO might consider a hybrid solution as highlighted in Vijay’s book on ‘Reverse Innovation’.

    In 2008 Vijay’s preliminary work on reverse innovation caught the attention of Jeff Immelt, the CEO of General Electric or GE. Immelt knew that …”

    “Vijay” is a personal name, while “Immelt” is a surname.

    -dlj.

    • Tom Kadala says:

      David –

      I’m not sure it’s fair to belittle one author’s view over another, especially when the topic is as broad as ‘innovation’.

      You said, ” I think there’s a good chance Christensen has rather more meat on his bones than this guy Govindarajan”

      Both books have their good and not so good points and to no surprise. The topic of ‘innovation’ is not one to be dominated by any one person or institution, since by definition innovation is about discovery without boundaries, parameters, or standards. Trying to claim the right to dictate what innovation is or isn’t is simply a misnomer and, in my opinion, a principle reason as to why multi-nationals tend to lose their competitive edge when disruptive technologies emerge.

      I guess it would be hard to sell books, if authors did not show a sense of authority and ownership, but in the case of “Reverse Innovation”, Vijay humbly recognizes his contribution as a conversation starter rather than dogma. I was impressed by his sincere humility and respect. At the end of his book he invites his readers to connect with him directly via email and even includes a comprehensive list for further academic research. It might behoove other authors to follow his example, since innovation is more about learning from others than dictating one’s sole opinion.

      On another note, I thank you for calling me out for referring to the author by his first name, Vijay, and for Immelt, the CEO of GE, by his surname. I’m assuming that you regarded this inconsistency as a matter of possible disrespect to Mr. Govindarajan. Perhaps in some cultures that would be the case and for those readers, I do sincerely apologize. It was not intentional. However, since my article is an op-ed and not a news report, I tend to favor a conversational writing style that is compelling, easy-to-read and follow. Somehow the comparison between both titans, Vijay and Immelt, rings better to me than Govindarajan and Immelt. It’s a matter of invoking a writing style with a twist.

  2. Hi, Tom.

    I completely agree with the notion (and problem) of incrementalism that affects corporate management today. And, in using HR leadership as a starting point to improve, or change these processes in companies. After all, companies need to find better ways to engage and build upon the power of its people and get beyond the domain and constraints of R&D labs.

    However, I also believe that there’s a lot that HR leadership needs to do at this level inside the company before it will be particularly effective or successful reaching outside the company (though, over time it needs to do both). The problem is that most HR (and Marketing) Leaders DON’T have a strategy for how to best use social media tools. Turning them loose on the outside will more often create confusion and havoc, more than insight (they simply won’t know how to capture the insights, and the havoc will be so pronounced).

    These tools need to be applied better internally so more people learn how to use them (with appropriate rewards and opportunities). For example, succession planning can become much more granular using these tools, addressing roles and opportunities well beyond the myopic focus on upper management leadership today, and greatly reduce the need (and cost) of hiring while also increasing retention and building goodwill among its people. Or, use collaboration technologies and reward cross-functional teams for working together on new innovations, insights and solutions. Then reach out to external communities…

    IBM and Intel are great examples where social networking is integral to the day-to-day operations of the business. And, they come up with innovations all the time. Raytheon has done some excellent work with Social Network Analysis (SNA) to foster new team building and reward those who are ‘strong connectors’ whether or not they are strong managers, etc. Yes, there is still so much to do internally.

    But, don’t get me wrong; I like all that you’re saying, and what Govindarajan, Trimble, and Christensen write about. Perhaps it’s an incremental side within me that suggests that organizations need to learn more about how to use these social networking tools so they can use them more effectively reaching outside the organization as well. And, perhaps the disruptive side of me goes along with some of the ‘game changing’ potential for external outreach — it needs to, and will happen.

    But, the real sense of urgency I feel is on HR Leadership and Marketing Leadership, as strategic leaders, to stop outsourcing a lot of these activities and get their hands dirtier making better use of them. Better brands, and companies will result.

  3. Tom Kadala says:

    Grant –
    Your comments focus on a company’s ability to integrate a social media periscope within their submarine-like confines. No doubt that social media outlets can help introduce new ideas to a stodgy team of developers, and herein lies the problem. Perhaps the focus should be less on improving an aging team and more on managing an HR process that aligns with product development at its various stages.

    In my world HR would become the most strategic department in a globally competitive company. But don’t get too excited if you are currently an HR director, my vision calls for a complete overhaul of how HR departments would operate. They would include management training segments that would help define the qualifications of team members needed on a per project basis. Projects would be aligned geographically to optimize communications among key departments and markets. I wrote an interesting article on this very topic several months ago titled: “Strategy in a Global World”. You can view it at: http://wp.me/p26dHY-21.

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