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The article co-written by CEO of GE Jeffrey Immelt and two academics, mainly focuses on the transition from "glocalization" to "reverse innovation" and the organizational transformation companies must undergo to position themselves to capitalize on this trend. The need for "reverse innovation" arrived from globalization and the rapid rise of emerging economies like China, Brazil, and India which are turning upside down how business is done, and specifically how companies approach innovation.
In May 2009, GE announced that it would spend $3 billion to create 100 innovations in health-care over the next six years. The main aim was to lower costs, improve public access and raise quality. What was of noteworthy interest was that GE plans to focus on rural India and China. The authors call their process "reverse innovation," the opposite of what they refer to as the traditional "glocalization" approach used for decades by multinational companies. In short, reverse innovation involves how emerging economies take their new products which were meant for them globally and which may also include new, radical approaches to solving problems.
Local design, made in EM for EM
Local design, made in EM for the world
DM product design, made in EM for EM
DM product design, made in DM for EM
For GE, "glocalization" means how Western companies created products for their domestic markets and then later adapted them for foreign markets. Glocalization has been adapted by a variety of multinationals to refer to how to adapt their corporate strategies to local environments.
Glocalization worked fine when the vast majority of market comprised of rich countries and other countries didn't offer much opportunities. But, as emerging competitors became major players in the global economy, If GE's businesses are to survive and prosper in the next decade, they must become as adept at reverse innovation as they are at glocalization. Success in developing countries is a prerequisite for continued vitality in developed ones.
There are however conflicts between glocalization and reverse innovation. Also, the company can't switch to reverse innovation because still Glocalization is being seen as the dominate strategy for the foreseeable future. But in reality the two approaches, or models, need to work together in a complementary way instead of competing.
The authors explain that glocalization has been the dominant approach since it has "delivered". GE's revenues outside US soared by more than 31% because of glocalization from 1980 to 2008. However, that model came into picture when emerging economies were at the early stages and they had very limited middles classes from which to spur to consumer spending. But that was a lot more different
Situation then now. However, GE like many other multinationals, was satisfied with the 15% to 20% growth rates its businesses enjoyed in developing countries, thanks to glocalization. But when CEO Jeff Immelt set a goal to accelerate organic growth. It led reasons to doubt the glocalization strategy which limited the company's presence in the emerging economies to only the top segment. However, after GE analysed its several offerings in health-care, power-generation, and power-distribution, it showed that it could gain much more market share in emerging countries like India and China which led to development of revolutionary products like a $1,000 handheld electrocardiogram device and a portable, PC-based ultrasound machine that sells for as little as $15,000. These products are now being sold in the United States, where they're pioneering new uses for such machines.
Reverse Innovation questions two major tenets of glocalization which assumed that the emerging economies will follow the same growth path as developed economies and the products that were developed for emerging countries' special needs can't be sold in developed countries because of their non-competitiveness. However, both of these proved to be false as the emerging economies are growing at a much faster rate than expected because of their willingness to adopt breakthrough innovation. Emerging economies are becoming centres of innovation in fields like low-cost health-care devices, carbon sequestration, solar and wind power, bio-fuels, distributed power generation, batteries, water desalination, microfinance, electric cars, and even ultra-low-cost homes. Also, products like the portable ultrasound and handheld electrocardiogram proved that the emerging economies can also produce competitive products.
In the 1990s, General Electric manufactured ultrasound devices in the U.S. and Japan for the Chinese market. An ultrasound typically cost over $100,000 (2002 dollars, US), and it was the imaging centres in more advanced hospitals who were the customers. The uses included cardiology and obstetrics. However, these expensive machines had poor sales. In 2002, people in China developed an inexpensive, portable ultrasound that used a laptop computer which had cost a mere $30,000-40,000. The ultrasound machines were used in rural clinics in China, and in the U.S. they were deployed on ambulances. By 2007 the cost of an ultrasound had plummeted to $15,000. Jump ahead just one year and these portable devices had global revenues of $278 million, up from $4 million in 2002. In 2009, portable ultrasounds cost between $15,000 and $100,000, in contrast to conventional machines which cost between $100,000 and $350,000.
Although, the glocalization model of GE in which some R&D centres and manufacturing operations were moved abroad to tap overseas talent and reduce costs allowed made "Reverse Innovation" impossible because it was not an easy task as it was not part of the strategy and it required a lot of convincing to the various departments. This was the reason that successful efforts to develop radically new products for poor countries were extremely rare.
The article talks about the critical role that a CEO plays in serving as a catalyst for change, and to ensure that those in the organization see the big picture. When it comes to reverse innovation, executive leaders must work to advance their organization to new organization structures that will enable product innovation.
Also, the concept of "reverse innovation" led to the development of the local growth team (LGT) model which is based on five principles.
These include shifting power to LGTs in emerging businesses and being recognized as independent bodies wherein they can formulate their strategies and take decisions without becoming pawns to the global business.
Also, the products that LGT's should be working on should be built from scratch. This is required because the scenario is highly different in emerging countries as compared to rich countries.
Also, for building products from scratch requires a team that was built as a new company. Thus, zero-based organizational design which include hiring practices, reporting structures, titles, job descriptions, norms for working relationships, and power balances between functions all evolved to support glocalization needs to be rewritten for reverse innovation.
Also, as the LGT's will face different circumstances, challenges and will compete in a completely different environment as compared to their global counterparts, they need to be even customized for performance evaluation by setting up metrics which are realistic and thus lead to achievable objectives and targets.
As it was observed in the case of Venkatraman Raja, the head of GE Health-care's business in India, he faced many problems in convincing his idea of to various departments in the organization at various levels. Thus, the LGT's cannot thrive without support from the top. The executive overseeing the LGT has three critical roles: mediating conflicts between the team and the global business, connecting the team to resources such as global R&D centres, and helping take the innovations that the team develops into rich countries. Only a senior executive in the global business unit, or even its leader, can accomplish all of that.
Although, GE has started taking initiatives by setting up LGT's in India and China, there major efforts are focussed on developing products for the developed economies. Thus, there is still a long way to go for GE.
Also, the concept of reverse innovation focuses on bottom-up approach as compared to the top-down approach that doesn't respect geographic, cultural and market uniqueness which will implode upon itself. When multinationals operate in disparate cultures spanning the globe, the concept and practice of distributed leadership becomes a cornerstone to an organization's eventual success.
The article presents a paradigm shift in how to identify, secure and serve new markets. This is perhaps the most important and contemporary role of executive leaders in this era of globalization.