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Transcript of Reverse Innovation
detect future focal points of innovation
reengineer their processes and design new business models with the objective of boosting their competitiveness on mature as well as emerging markets. What We Do Think & Tell advises Executive Committees on the strategic and operational implications of Emerging Best Practices, develops executive education programs (such as Learning Expeditions in emerging markets), and operates transformation-enabling platforms (or so called "Extended Labs").
Think & Tell also handles large-scale organisation and business transformation projects with the support of Anthenor Partners' team of experienced business advisors and consultants (more on http://www.anthenorpartners.com)
Isabelle Raugel and Michel Zarka are cofounders of Think & Tell Enterprises. Michel is Anthenor Partners' CEO and Isabelle is a Senior Partner at Anthenor as well as Think & Tell Managing Partner. What it is Reverse innovations are innovations born in the developing world that tend to disrupt the competitive game in mature, industrialized markets. Context Reverse innovation is part of a bigger movement that we, at Think & Tell, call "reverse globalization" : for centuries, the West has dictated the way business is done and value creation is organized. There exists a deep-rooted belief that knowledge flow from West to East and from North to South—and not the other way around.
But the world has changed. It has become plural and interconnected. As a result, we are witnessing the rise of a powerful new “reverse innovation" trend:
Emerging countries are designing products and services offering previously unthinkable value (sometimes at one third or one fourth of the cost of the Western equivalent) and are starting to successfully sell them to increasingly cost-conscious consumers in mature, developed markets.
Western multinationals with powerful R&D centers located in Asia, as well as BRIC players with global reach, are stepping up efforts to produce such innovations. New ideas are also being hatched by local entrepreneurs who have ingeniously responded to the challenge of their harsh conditions by inventing new grassroots products, which they are now taking global. Our Belief Clearly, reverse innovation is opening up many business opportunities, first in other emerging markets, then all round the world, including in mature markets. But there is more to it than that.
It is challenging corporate cultures and organizations.
It is also redefining innovation itself.
While innovation is traditionally associated with product innovation, reverse innovation is all about processes: in other words, using breakthrough thinking to optimize the resource-to-output ratio.
We call these strategies SMART LOW COST®. In other words, how to do high performance at split costs.
In a world of diminishing resources, in which emerging middle classes in the emerging countries buy at a much cheaper price point, whereas the purchasing power of the western middle classes is receding, SMART LOW COST® may be a more promising equation than the high living standards = high value products = still more complex, higher costs products and services, which Western economies and corporations have long depended on. Where do we stand today ? Reverse Globalization is a nascent but growing trend as evidenced by : Emerging countries such as India becoming a major player in the health sector Following on the footsteps of GE HealthCare ECG,
the MAC 400 which costs around $800, compared with other hospital-class units that range from $2,000 to $10,000, The Mac 400 is now sold in over 70 countries worldwide.
India has now around 700 medical equipment companies that make affordable alternatives to equipment supplied by global giants (source: the Economic Times of India, February 2012).
According to KPMG, The medical device industry in India is set to grow 23% to $6 billion by this year end,
Cost is not the only driver; gaps in medical treatment have led some Indians to come up with breakthrough innovations such as cheaper X-ray machines, imaging equipment, ECG scanners and even robots to cure cancer, blindness and heart diseases. Medical Equipment Clinical Services The Bangalore-based healthcare provider Narayana Hrudayalaya Hospitals (NH) Group, which currently has 14 hospitals with 6,000 beds doing cardiac surgery (with plans to add 30.000 beds in five years) will invest $50 million on setting up a super-specialty hospital in Cayman Islands, a British Overseas Territory in the western Caribbean Sea. NH is also in talks with five other global majors in the healthcare sector to establish five hospitals at an investment of $30-40 million each, Local R&D centers of multinationals doing local innovations with an eye on global markets GE India Technology Center has developed low-cost knee implants and reusable staplers; ... is developing low wind turbine for the Indian market (which is a low wind regime market). The expectation is that once it has been developed, the product will be sought after globally : 1- because the market is going to move into the lower wind speeds since the higher wind speeds are taken at this point of time, even globally. And 2 - because the low wind turbine designed in India are extremely cost effective. introduced a cardiovascular screening device for rural India Johnson & Johnson Roche Diagnostics Disruptive business models inspired by emerging best practices succesfully launched in western markets Between 2008 and 2012, 161 billion dollars have been invested by the emerging countries in the developed countries. The sheer volume of investments done by emerging enterprises in mature markets between 2008 & 2012 During the same period, the developed economies have invested "only" 151 billion dollars in the emerging countries. AmSurg, a US-based company, develops and operates ambulatory surgery centers, a practice initially born in the third world to provide care to populations which do not have access to a surgical center. Today, ambulatory surgery centers (ASCs) offer patients a comfortable environment where they can receive convenient, personal, high-quality treatment at a low cost. The ASCs are able to perform procedures at the same high level of care with the same specialized attention as hospitals but at a lower cost. Ambulatory Surgery Centers .... are expanding in the US & starting in Europe. ... Market cap for Armsurg After the launch in December 2011 of low cost mobile provider Free, the dynamics in the mobile communications market in France have been completely upset. Mobile communications consumption patterns are looking increasingly more like those in the emerging markets "Sim only" deals have exploded,
prepaid is expanding
the purchase of "naked" mobile phones (without subscriptions and time commitment) have increased
prices all-over have dropped (including on phone packages)
These new consumption patterns are promoted by the arrival on the market of low cost smartphones -such as the Chinese Ascend P1 by Huawei. There are 3 main types of
Smart Low Cost Strategies® Frugal Innovation Last Mile Economies SMART
LOW COST ORGANIZATIONAL CHALLENGES Frugal Innovation "Indians, they want a Ferrari at the cost of Tata Nano" Sanjoy Paul, VP Accenture Hybrid Value Chains Frugal innovation has its roots in frugal engineering.
Frugal engineering has been practiced in India for a long time and is a by-product of the spirit of "jugaad". Jugaad is a Hindi term roughly meaning a “work-around” designed to achieve a desired outcome or output with severe constraints and a shortage of resources. This typically results in goods and services produced at a fraction of the going cost.
In the last few years, jugaad-inspired frugal engineering has developed into a national movement, which many believe will become a major global trend of the 21st century. It has produced a steady flow of Smart Low Cost products in the automotive, health, industrial equipment, consumer durables and ICT fields. camera FM radio What's in a 30 euros phone ? flashlight (because there are power outages) dustproof non-slip grip multiple languages menu several contact books For ex: (because people don't read) (because there are so many idioms spoken) (because a phone has several users) (because the environment is hostile) Reverse innovation is one of the Next Practices that Think & Tell focuses on, both from a strategic and operational point of view. developed in emerging countries with the potential to impact business practices globally Contrary to common western belief, frugal engineering is not about pushing to market a low cost, basic, downgraded product. Rather it focuses on redesigning the product around the end-user essential needs, finding the right trade-off between needs and circumstances. As such,
it has many thought-provoking implications: Gopichand Katragadda,
Managing Director, GE India Technology Center So when I say higher value it doesn’t mean hundreds of features where 80% get used lets say 10% of the time.
When I say higher value I mean 20 features which get used by 90% of the population using that device.
So there is that shift in thinking. That is a huge shift in thinking actually. on the principles of effective design : on the very definition of value: There is a growing realization in the West that, beyond a given point, the marginal value of complexity decreases as complexity itself increases (to such an extent that it eventually ends up destroying value).
Simplexity represents an attempt to find alternative ways to design complex products and systems that offer reliable, fast, modular, affordable and easy-to-use solutions incorporating the user experience. Frugal engineering strangely resonates with the latest trends in design, in particular with the emerging theory - and associated practices - of Simplexity. Reality Check A quick survey (based on competencies and experiences declared on Linkedin) show that frugal innovation today is : Frugal innovation is also a new school of thought in the design field with experimentations in the US and the Scandinavian countries.
It is a topic of interest to the non-profit sector (as is the case in France - which has not yet picked up on the industrial and value creation dimensions of this emerging practice - probaly due to what we call the "lowcost" myopia which assimilates anything low cost with discounted products and poor quality). An emerging topic in Management Consulting and Global Business Services delivery processes which is concerned with state-of-the-art process innovations as well as business and value chain transformation.
For example, P&G has created a Frugal Innovation Program headquartered in the US in the Global Business Services Division). Concrete applications are to be found mostly in:
Information Technology, Energy, Health (pharmaceuticals and medical devices), and Automotive
with the most active companies/operations located in Asia: mostly India where frugal innovation is a topic both at Indian companies such as Infosys or at Indian BUs of multinationals such as SAP or Accenture). And where dedicated Frugal Innovation centers are starting to be built.
or at regional centers such as Singapore REVERSE INNOVATION the issue emerging countries have a strong incentive to move away from centralized systems ... and decentralized systems FROM: TO: les pays émergents connaissent une informationalisation forte sous condition d'industrialisation faible TO: Last Mile Economies and Networked distribution / procurement Ecosystems Because the physical infrastructure is generally deficient - and reaches out only to a portion of the population - .... towards distributed, "many2many" systems Ad-hoc decision making at the point of action "Smart" networked production, procurement or distribution systems environmental footprint economical footprint social footprint reengineering value chains to lower structural costs and invest in value creation operations "do more with less"
= low resource intensity schemes client empowerment
& stakeholders engagement Hybrid Value Chains maximize value creation as well positive externalities generated by the organization at large profits efficiency engagement Hybrid Value Chains - enable: - are: connectivity-based, ICT intensive (mobile & smart technologies, cloud-supported) Every node in the (distribution/procurement) ecosystem has an equal status, receives and gives out critical information Resource-driven: local resources empowerment Coordination in real time *The "true" middle class and low middle class by emerging countries' standards represent roughly 60% of the population, have an average of 4.000-16.000 USD annual income and concentrate 40% to 60% of the nation's purchasing power. 1 2 Redefining the Corporation's Innovation Engine Governance Extended Labs 3 The 4 phases of the global / local story Globalization Phase 1 the focus is "in country, for the world." Innovations developed for developing markets are scaled up and/or distributed in other developing as well as mature markets. attempting to realize massive economies of scale by selling the same product everywhere in the world. Innovation happens at home and new offerings are distributed everywhere Phase 2 Glocalization adapting global offerings to meet local needs. Phase 3 the focus is on developing products "in country, for country." As local teams develop products for the local market, they remain connected to, and benefit from, a global resource base. Local Innovation Phase 4 Reverse Innovation Innovation happens where the market (scale) is - increasingly in emerging markets. Innovation is centrally defined ; objectives & commands are cascaded throughout the organization product &
techno-push driven Innovation is centrally defined but uses local resources through a decentralized network of labs Emerging markets are used as experimental labs to develop and test breakthrough process and ecosystem innovations - which have a global impact on the corporation's top level processes will profoundly change the innovation paradigm What stage of the globalization story are you in ? process & ecosystem driven TECHNO /
PROCESS USER discovery techno tested techno proven & deployed latent (unexpressed) consumer needs user needs addressed user needs expressed unknown mature 9 Total Breakthrough Tactical Improvements discovery techno tested techno proven & deployed latent (unexpressed) user needs user needs addressed user needs expressed unknown mature 1 9 discovery techno tested techno proven & deployed latent (unexpressed) user needs user needs addressed user needs expressed unknown mature 1 9 Performance Boost discovery techno tested techno proven & deployed latent (unexpressed) user needs bankable consumer market user needs expressed unknown mature 1 9 PiggyBacking ECOSYSTEM innovations readiness level readiness level Breakthrough technology / process unearth completely new & unknown user needs Existing technologies or proven processes are repurposed to address identified user needs Novel technologies or processes are used to create breakthrough performance in cost/quality on identified user needs innovation graal as we usually understand it: incremental innovation
brand extension deep process reengineering
design2cost innovations Proven technology, process or infrastructure is used to address a latent user need for which it was not originally designed. infrastructure (soft & hard) - based innovations STAKEHOLDERS BENEFICIARIES unrelated partners (no linkages) partners identified
(synergies) unadressed user need user demand supported user needs consolidated discovery mature 1 9 readiness level readiness level Game Changers New, previously unconnected, partners, are networked to support and address an unmet user need industry level transformation
hybrid partnerships partners networked (reengineering the cost structure in novel ways to offer customers adequate quality and similar or higher value for less cost) STAKEHOLDERS BENEFICIARIES unrelated partners partners identified unadressed
user need user demand supported user needs consolidated discovery mature 1 9 readiness level readiness level Ecosystem Redesign New partners are brought on board to address an identified user need new business models
open innovation schemes partners networked TECHNO /
PROCESS USER readiness level readiness level TECHNO /
PROCESS CUSTOMERS readiness level readiness level TECHNO /
PROCESS USER readiness level readiness level PRODUCT & PROCESS innovations product innovations backed by disruptive technologies such as the full CFRP Aircraft (B787 or A 350XWB) or the iphone / ipad. About this report 1- The Reverse Innovation opportunity : how we see it.
2- Smart Low Cost strategies, the engine that fuels Reverse Innovations.
3- Organizational impact of the above. In high-growth, constraints-based environments, entire market segments are underserved. This is particularly true of middle class and low-middle class households (by emerging countries' standards*) for anything from financial services to health, energy, housing and transportation needs. As a result, product and service providers (such as real-estate developpers, automotive makers, energy suppliers, health providers...etc...) must promote new market dynamics through the development of ecosystems that bring together economic actors
(such as corporations, CSOs - citizen sector organizations - NGOs, trade associations and microentrepreneur networks)
which previously never worked together.
This happened in the microfinance industry, and it is currently happening in the health, energy and housing sector.
This hints at the development of extremely competitive, though complex to manage, new value-creation organizational schemes that every corporation should carefully look into. What type of innovation do you do ? product, process, ecosystem ?
total breakthrough and tactical improvements ?
what about performance boost and piggybacking innovations as well as game changing ecosystem innovations ? where are the innovation hubs located and who are they (Labs and others ???)
how do they relate to each other ?
what is the role of the Chief Innovation Officer ? What are the effects - if any - of reverse innovations on the governance framework both from a corporate and operational perspective ? Schematically, the resulting matrix scans the dimensions of : Innovation Engine We often observe a disconnect between the value created in emerging countries and its institutional "weight".
For that reason, we are launching a research project focused on "Effective Plural Governance". The objective is to create a model that enables the top management to assess how well the corporate structure is leveraging on resources, competencies and value created in the emerging markets throughout the organization. Governance dynamics Knowledge transfers is there an optimal fit between the corporate presence in the various countries and the local ecosystem (resources, opportunities, potential to act as a catalyst of innovation worldwide). how well local competencies are utilized (turnover, career development, internal mobility, rewards & incentives, cross-fertilization... etc..) People utilization Local Context Relevance: how well does the organization capitalize on knowledge developed at the local level in emerging countries Alignment of the global governance framework with the above.
Ability to make the optimal trade-off between today's and tomorrow's best case scenario. Is the value created in emerging countries by local labs and BUs institutionally recognized ? We believe there is a need for an organizational vehicle to manage and take responsibility for out-of-the-box innovation projects :
focused on Next Practices
with the potential for transformational impact (on the corporate organization, on business models)
Think & Tell provides such a vehicle through the development, staffing, and management of externalized enterprise platforms that we call Extended Labs. are transformation-enabling platforms working on pilot projects or exploratory applied research
that the corporate structure cannot "host" at this point (corporate processes are not adapted to finance & manage such a project,
or/and the worth of the pilot project is yet to be proven) staffed with both :
internal people from the organization (who may come from different entities and who may not have any previous functional relations within the corporate organization)
and external experts and contributors, that we at Think & Tell, are in a position to identify and mobilize have their own budget / financing
identified deliverables and timelines
and are managed by Think & Tell who takes responsibility on the above, as well as on proper measurement of success and knowledge transfer to diffuse the learnings of the project throughout the corporation. Our view on the Reverse Innovation issue and Implications