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Reverse Innovation Is Completely Different Marketing Essay

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Published: Mon, 5 Dec 2016

Large multinational companies traditionally considered deriving revenues in their home turf, and sought most of their growth opportunities within their home country. As markets saturated, they moved on to other rich countries targeting consumers from those market segments that they were able to secure in their home country. As competition from businesses both large and small increased, corporate strategy included expansion into emerging markets. Multinational companies have the capital to leverage their expansion into these emerging markets. This method allowed companies to obtain a foothold in these fast-growing economies, however, their current product offerings were too expensive to cater to the ‘bottom of the pyramid’ consumers, which is sometimes the bulk of the population. Western multinationals found themselves capturing a small segment of the market, due to the unavailability of cheap products so eagerly sought by these ‘bottom of the pyramid’ consumers. As done previously in rich foreign countries, the western multinational could cater to the rich in the developing country. Unfortunately the number of consumers fulfilling these criteria is quite small compared to the entire population. Traditional strategies of globalisation later included local innovation, which together was termed as ‘glocalisation’. These local innovations were fuelled by the need to address differences in the demand structure of the current consumers. Existing products of the multinational was slightly tweaked to appeal to the locals, through various ways (include from literature). This process carried out well until local competition from emerging countries, with their superior local market understanding started developing products aimed at meeting the needs of the bottom of the pyramid consumers. These products as identified by Vijay (XXX) share some unique characteristics (low price, etc.) and are much readily accessible by this consumer base. They products created for these consumers by local businesses were highly innovative, often performing the same functions as the western multinational’s product offerings, at a much lower price point. It fulfilled the need of these consumers of being of ‘good enough quality’ but at the same time being easy to use. Cheap products performing the same function attracted the attention of consumers in higher income segments in the emerging countries, and gained popularity through to neighbouring countries with low GDPs per capita.

Multinationals were seeing their markets slowly being taken over by these local innovators. To tackle this problem, western companies, not familiar with the demand needs of the locals created local innovation teams to create a clean slate approach towards innovation. Aside from altering current offerings, they also focused on creating completely new products sharing those factors such as low price, ease of use and good-enough quality. These products saw good responses from the local markets, bringing about increased learning of market needs to the Western multinational.

The step following this original local innovation was the export of products back to the developed world. This process was coined by Vijay as ‘Reverse Innovation’ in his book. The latest step for expansion of firms, this stage brings about a large number of research questions mentioned by Vijay and Trimble in their book. However, one aspect not considered was the target market in the developed country for these products. It is clear to recognize that there exists, even in the developed world, a number of consumers, especially in the bottom of the income groups, who prefer products sharing the features of low price, ease of use and good-enough quality. However, it is not clear who exactly these consumers are. With moderate success of the few successful examples of reversely innovated products in the western world, it creates the need to find out the perfect consumer profile for these products. This becomes more apparent during current recessionary periods, causing consumers to tighten their budgets. We analyse in this paper, from a consumer standpoint, behaviour towards these reversely innovated products. We ask whether the current economic climate will cause the purchase behaviour of those consumers, who would not necessarily have considered purchasing products sharing such features, to change or not.

Literature Review – Introduction

Guided by the research objectives, the literature review can be broken down into three major parts; 1. Reverse Innovation and related topics, 2. Consumer behaviour and its influence on market segmentation and 3. Consumer behaviour towards reversely innovated products in western societies. Within stated topics, the literature review, first, describes briefly respective theory, its composition and provides distinct definitions, vital key models and perspectives.

Thereby, research objectives of this dissertation and related theories can be clarified and explicitly distinguished from irrelevant literature available. This is specifically applicable to the topic of consumer behaviour and market segmentation with its vast amount of diverse scopes and research areas.

Second, it helps to define clear definitions of different innovation models, especially those generating from emerging countries, or the bottom of the pyramid (BOP), etc.

Defining Reverse Innovation….

Definition

History

Theory (models, frameworks)

Critique in contrast with other theory

Analysis

= hypotheses (if required)

Innovation in general

Brief introduction to innovation in general (including history or necessity for business?)

Definition of innovation with some scholars explaining it and most popular frameworks (if available)

Explanation of reverse innovation

Brief introduction to reverse innovation (including origin and necessity)

Definition of the theory behind reverse innovation

In our paper, we focus solely on developed country multinationals, and this also sets the backdrop for the definition of reverse innovation. Indeed the term stands true only if innovations are brought back to the home (developed) country.

Introducing the model of reverse innovation (4 stages of RI) (by vijay)

Briefly describe all four stages

(maybe I can find another model that can be described as an alternative to vijay’s model – although probably not possible)

Explaining the four stages in detail:

Chris Trimble defines innovation as any project that is new to you and has an uncertain outcome (1,25).

US President, Obama, talks about the need for innovation by US scientists to outdo global competition. However, Vijay argues that this can only be done when scientists stop focusing on innovation in the USA and look elsewhere for dynamic ideas based on consumer needs. Innovation can occur anywhere and Mehmood Khan, chief scientific officer of PepsiCo found that Western doctors discovered in Bangladesh the use of century old local treatment for diarrhoea by cholera.

What is innovation?

Sustaining

Disruptive

Incremental

Radical

Reverse

Strategic

Architectural

Modular

Competence Enhancing

Competence Destroying

Globalisation:

Definition -43, 45

History

Theory (models, frameworks) – (ted levitt)

Critique in contrast with other theory – 51, 54

Analysis

hypotheses (if required)

transition to glocalisation – 48

unused – 33, 46, int…., ghamewat…

Phase 1 – Globalization -Multinationals built unprecedented economies of scale by selling products and services to markets all around the world. Innovation happened at home, and then the new offerings were distributed everywhere.

Globalisation theory was initially developed in 1817 by David Ricardo in his Principles of Political Economy and Taxation, where he suggests that nations should specialise in the production of those goods and services in which they are most adept. However, this would benefit both trading partners only if certain conditions stayed constant, namely:

There should be a balance of trade between the 2 nations so that one does not become indebted or dependant to the other in any way

Capital investment should take place in home country and not allowed to move from high wage to low wage country

In a sophisticatedly connected information network prevalent in today’s world, these conditions do not hold, invalidating Ricardo’s definition. It is not possible for countries to rely on themselves alone based on their competitive advantage. Global economics is dominated by export intensive countries, thus necessitating the need for increased exports to the rest of the world as the only method for expansion. Reverse innovation, however brings back the learning from foreign countries back to the home country to strengthen the foothold in current established markets of the MNC.

The bi-polar world economy dominated by USA and Europe (also Japan), has now become tri-polar with the inclusion of East & South East Asia. In terms of market size, USA, Japan, Germany, France, Italy and the UK still dominate, by 2020, China, India, Indonesia, South Korea, Thailand and Taiwan will move up to the top ten. It is easy to see their success already in a multitude of industries (Steel, Consumer electronics, Food, etc. ). This new tri polar world economy suggests the high importance companies must place to these emerging regions.

diagram (447886) can be included to underline the change in globalisation

Globalisation is one of the most popular buzzwords around not only in the world of business but a term to define the processes of international integration arising from increased human connectivity and interchange of ideas, products and other aspects of culture. Beerkens, 2006, summarises the different definitions and perspectives prevailing on the matter from Marx & Engels, 1848 to his own definition in 2004. He postulates that the process of globalisation causes acceleration, massification, flexibilisation, diffusion and expansion of transnational flows of people. It accelerates basic social arrangements (like power, culture, markets, politics, rights, values, norms, ideology, identity, citizenship and solidarity) to become disconnected from their spatial context (mainly the nation state) to create a worldwide interconnectedness between nation states.(beerkens, 2004). This also means that the development on one side of the globe will have consequences on the other. Som prominent examples of globalisation include Coca Cola’s presence in over 200 countries (1, 43) or the restructuring of the automotive industry to adjust to cost differences around the world through relocation of competitive advantage regarding manufacturing, assembling, etc., to the rise in prices of oil in the Western world due to shooting up of demand for it during 2004 and 2006 in India and China. Globalisation benefits XXXXXX. (1, 43) argue that the effects of globalisation are yet to see any slowing down.

With standardised national income, media and technology authors adopt the view that consumers would have similar needs and behaviours. For example, communications development (Bradley, 1991:384) and technology development (Ronkainen 1993:167) will bring convergence in consumer markets. McLuhan (1964) talks about a ‘Global Village’, where global media and increased travel will bring about convergence in consumer behaviour, values and lifestyles. This is supported by Ted Levitt (1983) who suggest that new technology will cause consumer needs to become consistent, based on his view of consumer rationality and price sensitivity or profit maximising intentions. However, this assumption of nationality is inherently flawed as it does not incorporate cultural contexts (Antonides 1998; McCracken 1989; Süerdem 1993). There is also small empirical evidence of consumer behaviour convergence based on universal ‘price-minded’ customers in the micro level (Usunier 1996). Macro level hypotheses is also disregarded by (Craig, Douglas and Grain 1992, Hollanders, Soete and Ter Weel 1999, Sarkar 1999).

As can be easily understood, the scope of this topic is huge, and we shall look at only from an international business point of view. CONVERGENCE – but in reality DIVERGENCE XXXXXX

Given the ease of controlling expansion possibilities, cost reduction, resources and logistics, MNEs can now strategically disperse activities, including innovation functions in different low cost geographic locations. The motivations for conducting international business include market motives, economic motives and strategic motives. Market motives can be offensive or defensive – offensive being the motive to seize market opportunities in overseas countries through trade investments, and defensive being the motive to protect the company’s market power or competitive position in contrast to the domestic rivalry or changes in government policies. Economic motives apply when firms capitalise on the inter-country differences in costs of labour, natural resources and capital and taxation, to achieve economies of scale and subsequent higher revenues. E.g. Motorola establishing production facilities in China’s special economic zones offering lower taxation rate than applicable in the US. Strategic motives lead firms to internationalise, capitalising on distinctive resources or capabilities developed at home (e.g. technologies and economies of scale). Firms can increase their cash flow by deploying these capabilities overseas. Firms may also wish to exploit first mover advantages, e.g. Volkswagen which was the second automaker in China, was the first to locate in Shanghai, gaining a monopoly in the market for years. Firms also gain advantage by integrating both vertically and/or horizontally involving different countries. (1, 43)

There are several papers suggesting the heterogeneity amongst different markets in the global sphere. Bakhtazmai (2011) postulates that there is a decentralised regulation of markets, and while cosmopolitan nations move towards globalisation, they also reach down to the social local organisations. According to J.H. Mittelman, globalisation is “a historical transformation in economy and cultural diversity”. Hofstede postulated different dimensions could be used to understand and tackle cultural differences. Differences in product usage and buying motives are correlated with these dimensions (De Mooij 1998, 2000, 2001). Since people’s attitudes related to consumption are based on their values,the differences become more stable and stronger over time. Conventionally international business interprets the term culture to mean national cultures exclusively, but Hofstede (1991:253) has warned against applying national culture dimensions to subnational levels. Bakhtazmai concludes that the pace, magnitude and direction of change caused by globalisation will continue to progress rapidly through technology transfer. Dynamic management (Dowbor, 2001) requires constant adaptation to different segments of social reproduction.

Benefits from globalisation may include design, purchasing, manufacturing operations, packaging, etc. making possible standardised facilities, methodologies and procedures across countries. Companies may only tweak a little bit in each area to achieve profits. The process of combining both global and local operations has become known as ‘glocalisation’. Yip and Coundouriotis (1991) argue that global strategy usage can possibly help achieve reduced costs, improved quality, enhanced customer preference and combined global resources.

To understand the global consumer culture, (1,54) offers an categorization approach by integrating Rosch’s categorization theory into the discussion of whether consumer cultures globalize, glocalize or localize. The authors suggest that arguments for global consumer culture are made at the superordinate level. Levitt (1983) predicted the demise of local consumer culture, causing debates about viability of globally standardised marketing. Proponents of global consumer culture argue that cross border tourism, labour mobility (Holt et al. 2004) lead to standardisation of consumer demands (Alden et al 1999, Jain 1989). Advocates of local consumer culture argue that LCC remains resilient against such global forces (Jackson, 2004;Watts, 1996). However, meanings associated with the consumption factor are primarily functional or symbolic, causing the strength of the argument for a global consumer culture to vary between glocal and local consumer culture.

Ghamewat, P (XX) also argues that the world today is not as globalised as many strategists believe. ‘The world is not flat’, he says, his view significantly differing from Thomas Friedman (XX) [1] Companies must find ways to manage differences and similarities within and across regions.

Globalisation is relatively recent term, starting usage in 1960, however really starting to realise prominent existence since the 1990s. McLuhan, 1964 talks about a global village where people on earth live in a single social place. The local, however has to come to terms with the global. The mutual relationship also means that global is just plural versions of local. Hence, globalisation is always glocalisation (Robertson, 1995) – captured as being global, but acting local.

Glocalisation –

Phase 2 – Glocalization – In this phase, multinationals recognized that while Phases 1 had minimized costs, they weren’t as competitive in local markets as they needed to be. Therefore, they focused on winning market share by adapting global offerings to meet local needs. Innovation still originated with home-country needs, but products and services were later modified to win in each market. To meet the budgets of customers in poor countries, they sometimes de-featured existing products.

“Think Globally – Act Locally” (Glocal) is the at the core of international marketing departments and this defines the portmanteau word glocalisation. Early critics for global standardization talk about consumers’ needs and interests becoming homogenous, people willing to sacrifice product features, functions and designs, for high quality at low prices and huge economies of scale can be achieved through internationalisation. (1, 34) (1,37)

(1, 37) – glocalisation as a linear expansion of territorial scales – should we include or not? Can also be included in globalisation (motives for globalisation, but we do not mention glocalisation in that stage yet, so unsure) Standardisation versus Adaptation, Homogenisation versus Tailoring – these company activities are optimised when a company goes ‘glocal’. (1, 38)

The term originated from the Japanese word dochakuka meaning global localization (do – land, chaku – arrive at, ka – process of) (1,42) and came into existence with Japanese business practices as they brought their services in the 1980s to the USA (Japanese cars) (1,39; 1,40). The idea was applied to the marketing of products and affects all the “P’s” of the marketing mix. (1, 40) (1,36). The word ‘glocal’ was coined by sociologist Ronald Robertson (1995).

The erroneous assumption regarding homogeneity has led to firms to believe that their products will be accepted by international consumers. As studies show, their sales get saturated after a point, indicating the differences in consumer behaviour patterns. Company executives have started to innovate locally through learning of the intricacies of the foreign environment where they operate, understanding that this is the only way to leverage their global scale and reach (1, 43). Although most companies follow the notion ‘Think Global, Act Local’ Glocalisation is more complex (Medeni 2004). Glocalisation was developed as a more holistic solution to globalisation and localisation, which is more sociological. (1, 41) (also – glocalisation as a three – level system; 1,37)

In his paper, Vignali (2001) (1,36) differentiates between globalisation and internationalisation, defining the former as involving developing marketing strategies as if the world is a single entity, through full standardisation. He describes ‘internationalisation’ however as incorporating customisation of marketing strategies for different regions of the world based on cultural, regional and national differences. This is in line with Levit (1983) who suggest multinational companies and global companies engage in ‘internationalisation’ and ‘globalisation’ respectively. (1, 38)

Grune (1989) (1, 38) argues that multinationals pursue independent strategies in each foreign market and subsidiaries are essentially autonomous operations generating their own profits whilst finance and marketing efforts being coordinated by headquarters. Global companies operate as integrated systems with each subsidiary depending on the other for operations and strategy.

Therefore – multinationals localise while globals globalise (!)

Globalisation and localisation may seem contradictory, however this mix of strategies are bound to coexist in the future. It takes into account the vast differences in practices, values, standards of living and taxation across the globe. At the core of the standardisation debate stands the argument – to what extent, if at all, is it applicable to design, market and deliver existing offerings across national market boundaries (1, 34). The arguments set forth in this paper for glocalisation suggest that a distribution infrastructure is available for realisation of potential economies of scale, through successful global strategies since global market segments exist, as does global economies of scale.

Tiplady (1, 35) adds that the situation is a bit complex and that globalisation does not only travel one way from the West to the Rest. The interconnected world allows ideas to transfer between nations and as they get to their new destination, they are adapted to fit the situation, meaning multinationals also learn within emerging country presence. It can be argued therefore, that reverse innovation is a type of glocalisation. Local realities shape these tweaks, for example Wal-Mart in China sells chicken feet and Chinese branded stewed pork ribs, also an indication of utilising local suppliers (tax breaks). (1, 35)

Under the set of assumptions that developing countries are engaged in a slow and evolutionary process of catching up with the rich world, both economically and technologically, and they will import what they desire from the rich world, a strategy of glocalisation makes perfect sense. Firms can tap emerging markets by simply exporting lightly modified versions of global products developed for rich world customers – mainly lower end models with fewer features.

Glocalisation is essentially a simulation of the process of hybridization – ” A process whereby cultural forms literally move through time and space where they interact with other cultural forms and settings, influence each other, produce new forms, and change the cultural settings.” (Lull, 2000. P.242). Businesses not engaging in the process can be rejected by host country consumers, as the process of growth within these countries is organic and must happen through integration with the host culture e.g. Wal-Mart in Germany tried to naively reinforce American culture onto Germans, which led to unfavourable results. (1, 40). (1, 41) points out the important role of cutting edge technologies in advanced products and especially consumer electronics in glocalisation. Good for our reverse innovation hypotheses.

When Wal-Mart tried entering Central and South America, it discovered it could not sustain by exporting only it’s existing formula – it had to innovate. In his paper, Immelt (2009) (1, 17) suggests that the business model of adapting global offerings to local needs will not be sufficient given the slowdown of growth in rich countries. He suggests companies start reverse innovating, i.e. involve themselves in local innovation and then distributing them globally. He recognises that multinationals can adopt both strategies, there are some conflicts which must be resolved, and otherwise, emerging country multinationals, with good local knowledge will destroy giants like GE.

Reverse Innovation

As lastly described, due to the increasing potential of the consumer market within the poor people of emerging markets, MNEs have to start focussing more on these groups of customers. However, because of the drastic divergence in preferences Vijay argues that adaptation will not be sufficient anymore to cover the resulting differences. He defines the following gaps as the main reason of differentiating preferences.

Performance Gap – Customers in emerging countries have lower incomes than their contemporaries in the developed world. This causes them to demand products that deliver a lower performance from products, however at a much lower price/performance ratio.

Infrastructure Gap – The developed world has superior infrastructure, e.g. power, water supply, logistical solutions, political institutions, etc. These are all still under construction in the developing world and require some time to reach (or even surpass) the levels in the developed world. This means that consumers in poor countries require products that do not rely on dependable infrastructure. The implication for improved innovation from this gap is that these poor countries will adopt technologies that have either been proved to be useful in the developed world, and also technologies that are better. For example, wireless technology in India is sometimes more sophisticated than developed countries’.

Sustainability Gap – Poor countries face stringent sustainability constraints, for example, India faces the threat of increased carbon emissions from its numerous industries. Problems such as these necessitate environmentally friendly products, which are often innovated locally, e.g. electrical cars in China, biodegradable energy (reference).

Regulatory Gap – Regulatory structures in developed countries are more sophisticated and require companies to go through a lot of bureaucracy before they may establish new innovations. Thus, emerging countries see regulatory hurdles quickly being passed through. This may also be due to the fact that emerging country governments want more solutions to solve their problems of high population, low education, poor healthcare, etc.

Preferences Gap – Tastes and preferences are different based on values and culture. Companies must be innovative to address these needs, and this requires a clean state assessment of the customers’ needs.

Vijay argues that it becomes almost impossible to fill these vast gaps with the strategy of adaptation and essentially glocalisation. Thus, MNEs have to start from scratch utilising a clean slate approach for innovation, which is essentially part of the stage “local innovation”. The first out of two stages within the reverse innovation process.

Mentioned gaps inhere the differences in views, traditions, cultures and experiences between the western rich world and the developing world with lower average income (Gobble, 2012).

A good example of failing in an emerging market due to a glocal strategy, provided by several scholars (reference), is the failure of General Electric in the medical equipment sector. Describe book example_international business_page 28.

Local innovation, as described by Vijay, functions as a bridge to overcome these differences. Immelt (2009) suggests companies to start the process with a multinationals focus on developing countries, innovating products in the country, for the country. They take a zero-based (or a clean slate) assessment of customer needs, as opposed to the notion that consumers will adopt the company’s products which have been slightly altered for them. In this stage, the company can pool together its resources from around the world to innovate the most appropriate product for the local customer.

This approach is into contrast to the existing glocal strategy where products are being globally standardized and designed from home and only marginally adapted to the local customer’s needs afterwards.

Local innovation requires changes in the organisational structure, to include board of directors with individuals with superior understanding of emerging market needs. Leaders must understand that

Stage 1: Local innovation

Starting to realise that their glocal strategy was not suitable for the Chinese market anymore, GE created a low cost, portable ultrasound machine called the GE MAC 400. GE’s conventional ultra sound machines were sophisticated, but very bulky and quite expensive, affordable by a select few in the emerging world. In 2002 GE launched this product in China combining a regular laptop with sophisticated software, selling for $30000. In 2008, this product was re-engineered and the new model sold for $15000.This new product is less than 15% of GE’s contemporary offerings, and it was highly successful in emerging economies. This caused the mental map of GE to shift from the Triad (USA, Europe & Japan) to the ‘rest of the world’ [2] , and also initialised the idea of reverse innovation (taking learning back to the developed world)-

Although local innovation might indicate an ultimate strategy to capture the entire potential customer population from BRIC countries like China and India, it does fulfil its role only partially. Vijay defines his theory being applicable to the middle- and especially low-end segment in the emerging markets. In the past, they have been neglected by western MNEs due to their focus on the high-end customer segments in emerging markets when utilising glocalisation. The low-end segment is providing an increasing opportunity for MNEs as it consists out of 4 billion people world-wide. Prahalad (2007) defines them as the bottom-of the pyramid with a purchasing power parity of approxamitely 5$ trillion dollars. Bottom-of the pyramid articles

To meet the differences in customer preferences, different authors have identified similar theories about the product specifications needed. One theory is….(different theories such as inclusive innovation, catalytic,…) explain inclusive, catalytic, grass roots innovation, below the radar innovation, appropriate technology, inclusive business, jugaad/ frugal innovation (focus on the last for our first major hypothesis)

Factors identified by Prahalad:

Affordable Products – Emerging nations cannot afford goods priced for the US and Western Europe,

which pushes companies to find inexpensive materials or manufacturing options.

2. ‘Leapfrog’ Technologies – Developing countries lack 20th century infrastructure and so have fast-

forwarded to newer technologies such as mobile phones or solar energy.

3. Service ‘Ecosystems’ – Entrepreneurs in emerging markets often must rely on natural conditions and, therefore, should aim at building more eco-friendly products and services.

4. Robust Systems – Emerging markets require products that work in rugged conditions. A gadget sturdy enough to survive monsoons in India is most likely to handle weather conditions in western

countries also. 5. Newer Applications – Customers in eme


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