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The Case for 'Reverse Innovation' Now
Monday, 26 October 2009 00:00

A sophisticated emerging-market strategy is not optional for companies that want to survive and thrive in the 21st century. Is it possible that the most important innovations of the future will be adopted first in the developing world? In a recent Harvard Business Review article General Electric (GE) CEO Jeff Immelt and I argued that this phenomenon, "reverse innovation," will be increasingly common. Since then, the most common question we've been asked is "why now?"

We can answer this question by analyzing how American companies became global and why a new approach is needed going forward.

There have been three distinct phases in the history of globalization so far.

Phase One: Globalizing Market Presence (1950s and 1960s)
American corporations didn't "think global" for a long time because their biggest strength happens to be their biggest liability: the huge and robust domestic market. An American company could produce in Milwaukee, sell in Chicago, and still continue to grow very aggressively. Therefore, American companies never really felt the need or the pressure to cross the borders to achieve growth. However, in the 1950s, a new opportunity presented itself. As a result of the two World Wars, the rest of the world was destroyed and had to be built back up economically. American corporations took advantage of this opportunity to go global by selling products and services originally created for the American consumer to markets all around the world. For instance, Xerox Corp. (XRX) developed big, bulky, expensive copiers for U.S. consumers; it then sold them in Europe through its subsidiary Rank Xerox and sold them in Asia through its subsidiary Fuji Xerox.

Phase Two: Globalizing the Resource Base (1970s and 1980s)
To maximize efficiency, American corporations moved many operations overseas, including manufacturing and back office processing, seeking the lowest cost locations worldwide. American companies also established R&D centers around the world. Still, innovation endeavors were chartered overwhelmingly for the needs of the rich world. Globalizing resources was driven by two forces; ideological revolution and technological revolution. By ideological revolution we mean almost every country embraced free-market ideology and opened up its borders to global competition, reducing political risks in terms of locating mission-critical activities such as R&D in parts of the world other than developed countries. Technological revolution, meanwhile, reduced coordination costs, allowing companies to connect dispersed resources. For instance, Microsoft (MSFT) has development centers in the U.S., India, and China.

Phase Three: Glocalization (1990-2005)
In this phase, U.S. companies recognized that while the first two phases had minimized costs, they were not as competitive in local markets as they needed to be. Therefore, companies focused on winning market share by adapting global offerings to meet local needs. Innovation still originated at home, but products and services were later modified to win in each market. For instance, McDonalds (MCD) changed its menu in India to include a lamb burger while still maintaining its core global product platform.

 

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