Innovation can no longer be the preserve of the traditional notion of science-and technology-based ‘invention’ or new knowledge creation. This model, dominant during the 20th century, is being replaced by the concept of innovation as bringing together existing knowledge and combing this to create something new. When innovation was framed on the Edison or Marconi model of product invention, there was an underlying assumption that improvement equated to technology advancement. But today, innovation is as much about new services, value propositions and business models. Pioneering medical services in India for example, have radically reduced the costs and improved the quality of cardiac and cataract surgery not through the introduction of breakthrough technologies, but by reorganising activity systems. And, although they may not be some of the world’s favorite airlines, the new business models adopted by low-cost carriers, has made them some of the world’s largest and most profitable.
At the same time, the notion that innovations that are still technology-based, have to be bleeding edge is no longer true. The most successful and widely adopted innovations aren’t always the ones pursuing ever greater functionality. Take one of the biggest success stories in mobile telecoms over the last decade. It wasn’t the much hyped (and extremely costly to providers) 3G platform which offered bleeding edge mobile internet services, but a very simple and crude data service called SMS, or text messaging that captured people’s imagination and had a radical impact on the way we communicate.
Lead Markets are Changing
Traditionally new products, solutions and business models have tended to be pioneered in a company’s home market, which was also assumed to be the lead market. These were then sold across other developed markets (with any practical, market-specific adaptations being made along the way). As a consumer class with sufficient purchasing power emerged in other markets, the innovations would then cascade down to these distant and different places. By the late 1980s, it was already clear that significant opportunities lay outside companies’ lead/home markets and that the transnational organisational model offered a solution to leverage different markets.
Christopher Bartlett and Sumantra Ghoshal described the transnational as a multi-business company, with multiple home countries each of which essentially provided home country comparative advantage. So for example, the telecoms equipment transnational Alcatel, ran its worldwide underwater cables business from Norway because with its many fjords, it was an early lead market for underwater cables. Ericsson ran its shipboard communications business from the Netherlands, as its long history of seafaring meant better market knowledge and skills were available there than in Sweden. These multiple home markets transferred or projected knowledge to other subsidiaries, which played an implementer role in other countries. With a few exceptions, such as Unilever in India and Heineken in Africa, at the time Bartlett and Ghoshal did their research the dominant innovation perspective was still essentially triadic. Innovative capability wasn’t expected outside of the US, Europe and Japan.
Now, however, the triad is losing its dominance and home markets are no longer necessarily lead markets. This means that the innovation activities of many western companies must break free of their geographical roots. Successful innovations can be born from addressing unmet consumer needs in very distant and different markets, and so there is a strong imperative to learn from tomorrow’s potential lead markets as well as current ones and combine that knowledge to create global innovations.
Innovating in New Markets: Reverse Innovation
The more recent argument for reverse innovation challenges the pre-eminence of the triadic developed markets by extending the transnational model to home bases in emerging countries. Here, low per capita incomes provide a stimulus to achieving cost reduction breakthroughs both in process and the resulting product or service. Products born from reverse engineering can sometimes find markets in developed economies either by appealing to less affluent consumers or by including features that make them attractive in different segments. More importantly, innovations from emerging markets may be competitively disruptive in developed economies, offering alternatives good enough to take market share away from incumbents. Witness the success of Korean cars in the US and more recently the Dacia range in Europe: The Dacia Logan, Renault’s low-cost, no frills €6,000 car launched in 2004, was designed for emerging markets with its simpler parts, minimal electronic functions and high suspension designed for potholes and rough roads. However, Renault found a strong market for this vehicle in Europe where cash strapped customers were attracted not only to the low purchase price but lower maintenance and repair costs. In 2010, only five years after its launch in Western Europe, Dacia accounted for 1.7 percent of new car sales in the region with annual sales of over 75,000 in France and 24,000 in Germany alone.
While the extended transnational logic of reverse innovation is compelling, it doesn’t address the challenges of global innovation. What it does do, is advocate a market-driven perspective in which firms widen their innovation activities to include demanding emerging markets, and then export the resulting innovations in order to pre-empt competition from competitors in those markets. But managing global innovation is an order of magnitude more complex than performing reverse, but essentially local, innovation. Global innovation is about accessing unique and differentiated skills and capabilities from all over the world and bringing these together in innovations. A good example of this can be seen in the global development of GE’s wind turbines: The design and integration work is carried out in Niskayuna, upstate New York. A lab in Shanghai designs the microprocessors that control the pitch of the blades, engineers in Bangalore build mathematical models to maximize the efficiency of materials in the turbine, and a team in Munich, in close collaboration with the Technical University of Munich have designed a system that calculates optimal wing pitch at any given time to produce maximum electricity. That is global innovation at its most effective!
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Reprinted by permission of Harvard Business Review Press. Excerpted from Managing Global Innovation: Frameworks for Integrating Capabilities Around the World. Copyright 2012 Yves Doz and Keeley Wilson. All rights reserved.
Yves Doz is the Solvay Chaired Professor of Technological Innovation at INSEAD. He is the co-author, with Jose Santos and Peter Williamson, of From Global to Metanational: How Companies Win in the Knowledge Economy. Keeley Wilson is a senior research fellow at INSEAD.
[Image: Flickr user Don]