For decades, GE has sold modified Western products to emerging markets. Now, to preempt the emerging giants, it’s trying the reverse.
In May 2009, General Electric announced that over the next six years it would spend $3 billion to create at least 100 health-care innovations that would substantially lower costs, increase access, and improve quality. Two products it highlighted at the time—a $1,000 handheld electrocardiogram device and a portable, PC-based ultrasound machine that sells for as little as $15,000—are revolutionary, and not just because of their small size and low price. They’re also extraordinary because they originally were developed for markets in emerging economies (the ECG device for rural India and the ultrasound machine for rural China) and are now being sold in the United States, where they’re pioneering new uses for such machines.
We call the process used to develop the two machines and take them global reverse innovation, because it’s the opposite of the glocalization approach that many industrial-goods manufacturers based in rich countries have employed for decades. With glocalization, companies develop great products at home and then distribute them worldwide, with some adaptations to local conditions. It allows multinationals to make the optimal trade-off between the global scale so crucial to minimizing costs and the local customization required to maximize market share. Glocalization worked fine in an era when rich countries accounted for the vast majority of the market and other countries didn’t offer much opportunity. But those days are over—thanks to the rapid development of populous countries like China and India and the slowing growth of wealthy nations.
GE badly needs innovations like the low-cost ECG and ultrasound machines, not only to expand beyond high-end segments in places like China and India but also to preempt local companies in those countries—the emerging giants—from creating similar products and then using them to disrupt GE in rich countries. To put it bluntly: 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.
The problem is that there are deep conflicts between glocalization and reverse innovation. And the company can’t simply replace the first with the second, because glocalization will continue to dominate strategy for the foreseeable future. The two models need to do more than coexist; they need to cooperate. This is a heck of a lot easier said than done since the centralized, product-focused structures and practices that have made multinationals so successful at glocalization actually get in the way of reverse innovation, which requires a decentralized, local-market focus.
Almost all the people and resources dedicated to reverse innovation efforts must be based and managed in the local market. These local growth teams need to have P&L responsibility; the power to decide which products to develop for their markets and how to make, sell, and service them; and the right to draw from the company’s global resources. Once products have proven themselves in emerging markets, they must be taken global, which may involve pioneering radically new applications, establishing lower price points, and even using the innovations to cannibalize higher-margin products in rich countries. All of those approaches are antithetical to the glocalization model. This article aims to share what GE has learned in trying to overcome that conflict.
Why Reverse Innovation Is So Important
Glocalization is so dominant today because it has delivered. Largely because of glocalization, GE’s revenues outside the United States soared from $4.8 billion, or 19% of total revenues, in 1980, to $97 billion, or more than half of the total, in 2008.
The model came to prominence when opportunities in today’s emerging markets were pretty limited—when their economies had yet to take off and their middle or low-end customer segments didn’t exist. Therefore, it made sense for multinational manufacturers to simply offer them modifications of products for developed countries. Initially, GE, like other multinationals, was satisfied with the 15% to 20% growth rates its businesses enjoyed in developing countries, thanks to glocalization.
Then in September 2001 one of the coauthors of this piece, Jeff Immelt, who had just become GE’s CEO, set a goal: to greatly accelerate organic growth at the company and become less dependent on acquisitions. This made people question many things that had been taken for granted, including the glocalization strategy, which limited the company to skimming the top of emerging markets. A rigorous analysis of GE’s health-care, power-generation, and power-distribution businesses showed that if they took full advantage of opportunities that glocalization had ignored in heavily populated places like China and India, they could grow two to three times faster there. But to do that, they’d have to develop innovative new products that met the specific needs and budgets of customers in those markets. That realization, in turn, led GE executives to question two core tenets of glocalization:
Assumption 1: Emerging economies will largely evolve in the same way that wealthy economies did.
The reality is, developing countries aren’t following the same path and could actually jump ahead of developed countries because of their greater willingness to adopt breakthrough innovations. With far smaller per capita incomes, developing countries are more than happy with high-tech solutions that deliver decent performance at an ultralow cost—a 50% solution at a 15% price. And they lack many of the legacy infrastructures of the developed world, which were built when conditions were very different. They need communications, energy, and transportation products that address today’s challenges and opportunities, such as unpredictable oil prices and ubiquitous wireless technologies. Finally, because of their huge populations, sustainability problems are especially urgent for countries like China and India. Because of this, they’re likely to tackle many environmental issues years or even decades before the developed world.
All this isn’t theory. It’s already happening. Emerging markets are becoming centers of innovation in fields like low-cost health-care devices, carbon sequestration, solar and wind power, biofuels, distributed power generation, batteries, water desalination, microfinance, electric cars, and even ultra-low-cost homes.
Assumption 2: Products that address developing countries’ special needs can’t be sold in developed countries because they’re not good enough to compete there.
