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?

Strategy in a Global World

In a tight labor market, staying employed can become a full time job.  One must constantly retrain, learn new skills, or even move to another country, just to avoid from getting fired.  But, what about corporations? What options do they have to avoid filing for bankruptcy?  How should they ‘reinvent’, reorganize, restructure, or expand to remain competitive? In short, what must CEO’s do to keep their jobs?

For years ‘going global’ or ‘globalizing’ meant expanding sales to other countries.  As companies ventured into emerging markets, they soon learned that by moving their production facilities to China, for example, they could produce their products for less. China offered cheap labor and a reliable capability to fill large orders on a consistent basis. As companies made the move, they created an eco-system of interconnected local suppliers that have essentially dominated the global supply chain for large orders.  How else could Apple have manufactured and sold millions of IPhones and IPads within such a short period of time without a massive cadre of capable Chinese workers, ready and able?  The firms that moved their global production to China helped to create a defacto low cost supplier for companies worldwide.

China’s dominance over the world’s supply chain has forced CEO’s to seek competitive advantages elsewhere.  Some CEO’s have turned to academic institutions for new ideas and approaches.  What they heard may sound surprising to you.  Leading business management professors claim that globalization is no longer just about selling and adapting to new markets but rather an opportunity/obligation to test a firm’s capabilities on the world stage. Unlike Pilates, a popular exercise class, globalization is not a fad or another reason to network.  It is a behavioral change that should become an integral part of every company’s corporate fabric.

At MIT Sloan’s Executive Education (executive.mit.edu), I attended a two-day workshop on this very subject, “Strategy in a Global World”.  There we evaluated trends, theories, and best practices from leading firms. One example that caught my attention involved an interview with the CEO of Haier, Zhang Ruimin.  Haier, which has no meaning in any language, is a top home appliance maker in China. During his interview Mr. Ruimin articulated a vision for globalization that treated the world as though it was his own personal university course catalog, where he could learn from proven competitors and work with top talent to design appealing products.  For a small spacer-saver refrigerator product, for example, Haier coordinated the efforts between an Italian-based designer and Japanese engineers.  Both were considered the best in their class.  To maintain close proximity between engineering and manufacturing, a key success factor, Haier moved one of their headquarters to Japan, not to dictate their terms but rather to learn from world class design engineers.  Haier’s ability to select premium vendors among top-notch eco-systems anywhere in the world ensured that their manufacturing capabilities, a core competency, would always rank at the top of the list of their closest competitors.

Haier’s success to be in multiple places at the same time, also a Harry Potter phenomenon, can explain the renewed focus on globalizing through integration. Using video conferencing, collaborative software, and a slew of similar affordable technological support systems, companies like Haier can decentralize and centralize the flow of information at will, hence, channeling ideas throughout the company (or to a network of partners) as though the “firm” were housed under one seamless roof.  New ideas that flow freely from a local market to multiple headquarters in real-time can be disseminated by management for competitive strategic analyses or rerouted for further field evaluation.  What evolves when ideas can naturally locate their best options within a firm is an organization that acts more like a living organism rather than a pile of stock certificates.

To fully appreciate the new role of global integration, CEO’s must be prepared to abandon traditional thinking where globalization had become just another scheme to increase profits quickly.  They should embrace globalization as a top company priority defined with clear goals and objectives including metrics and benchmarks to monitor progress.  As the Chairman of IBM, Samuel Palmisano recently stated, “ Global integration is no longer an option but an imperative.”

MIT’s Executive Education workshop demonstrated to me how global integration no longer has to be a game of chance but can follow a self-correcting, systematic approach that any company can adopt.  Executed as designed, the process can intuitively identify a company’s capabilities and gradually hone in on their most viable competitive advantages. What surprised me most was that what I learned in two days at MIT was not rocket science, nor does it need to be.  Instead it was pure common sense that could make the difference between a firm’s unsteady survival and its sustainable success.