Reverse Innovation Is Completely Different Marketing Essay

Published Date: 23 Mar 2015

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...

<We can actually start off the literature review with the funnel, providing us with the background to include globalisation - glocalisation - local innovation - reverse innovation>

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. <insert example references>). 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 emerging markets have few product options thereby providing market openings for add-ons that update and extend the lives of existing merchandise.

The theory that has been widely recognised as to incorporate the main features necessary to meet emerging customer requirements is called frugal innovation. Frugal innovation includes… Definition of frugal innovation and description

The fundamental driver of reverse innovation is the income gap existing between emerging markets and developed countries. Products developed for the American mass market are targeted towards an income group that cannot be matched in countries like India or China. Buyers in these developing countries demand products that offer far more value for the same price. High tech products are demanded, but that at a very low price, and only with good enough quality.

considerably reduced product development costs - see design-to cost approach by Renault/ dacia

With aggregate GDP of $12.5 trillion, the 4 billion of the world's poorest people form the bottom of the pyramid (BOP). These people are consumers who have the same intention as others to spend, and that too on quality goods bearing brand names (1, 65). DeSoto (2003) confirms that the world's poorest countries have huge assets waiting to be unlocked through capitalism.

As postulated by Prahalad, (1, 59) and Moore (1, 65) the BOP markets are a source of radical innovation. He encourages managers to pay special attention to awareness, access, affordability and availability to create an innovative business model. He created the innovation sandbox, which is based on the following constraints:

Creating a product which is modern, simultaneously identifies with the need and aspirations of the poor

Build a product meeting global safety needs

All aspects of the business from supply to logistics must be scalable

Affordability of the product

These constraints all revolve around consumer immersion and insights. New business models must not disrupt local cultures and lifestyles. An effective combination of local and global knowledge is required. (1, 62). Prahalad also suggests that this 'Tier 4' market not only require basic consumables such as food, textiles, and housing but also high tech businesses such as financial services, cellular technologies and low end computers. Several examples exist of such innovation such as HP's solar powered camera, Ericsson's low cost cell phone and the 'One Laptop per Child' (OLPC) for children.

Of course this is a simplified view of the world, but in essence it holds true. Now, more than ever, success in developing countries is a prerequisite for continued vitality in developed ones.

GE Article

Companies must expand internationally Innovation centres are changing across the world.

One critique: clean slate approach involves high risk of failure…elaborate

Stage - reverse innovation

Some scholars (reference)think that this is just a natural step after local innovation. If there is enough capital left, prospects in the home country must be exploited with this new opportunity.

A reverse innovation is an innovation that has taken place in an emerging economy for the local customers. This innovation is then introduced in the Western world. (More detailed definition as described by vijay's book). Govindarajan's theory of reverse innovation is not completely new. Other scholars such as … have named it trickle-up innovation. Starting in reverse, this idea is developed from scratch in the emerging market and later trickled-up into the developed country. Phase 4 - Reverse Innovation - If Phase 3 is "in country, for country," Phase 4 is "in country, for the world." Multinationals complete the reverse innovation process by taking the innovations originally chartered for poor countries, adapting them slightly, and scaling them up for use in developed countries.

Besides the advantages mentioned before, one is most significant towards the utilisation of reverse innovation. EMNEs possess the local know how and can develop products perfectly suited for the local consumers in their respective domestic markets. However, these products do not just speak to local consumers that reside in emerging markets. Successful penetrations of developed countries by Chinese and Indian MNEs have shown that the domestic market becomes increasingly competitive. Local consumers from developed countries also start to demand products that consist of the attributes that make the product "frugal" or "good-enough". One of the reasons for this shift in preferences is potentially the on-going recession. Recession: <mention the different recessionary periods, and then..> The rich world accounts for almost 2/3rds of global merchandise exports and this remained the case during the 1960s. During 1990s world trade growth saw levels around 6.6%, followed by 6% at the beginning of the millennium, actually at a rate faster than world output, increasing global income by more than $500 billion, most of which ended up in the industrialised nations. World trade volumes decreased for the first time ever during the 2008-2009 crises. Reported by the World Trade Organization, European trade fell 16% in Q4 2008.

Consumers become more protective and change priorities. Next to the recession, it is noticeable that a general shift in preferences is taken place. On one hand more and more consumers favour products that provide value for money with less additional functions. On the other hand they become less willing to spend additional money on features that are not necessary, reliable and easy to use. One example is the car industry … (include reference for shift in preferences for car buying _see Arthurdlittle report). In order to fight off this critical threat, western MNEs have to start reversely innovating their products for these valuable and huge consumer populations in the developed market. Thereby, western MNEs can protect their existing customer group that would otherwise change to the products of the EMMNE and might be able to increase their scope in order to capture new markets and target groups.

International firms from the western world, with their local innovation centres will understand these needs, and leveraged with more capital to fund improved research and development, they can also standardise new innovations to achieve economies of scale. This is part of the detailed organizational model as suggested by the author of the idea.

- one critique: theory only made for MNE's

- Reverse the innovation cycle (laggards turn into innovators and vice versa) (include the

definition of the "old" innovation cycle)

1, 71. - Disruptive innovation in reverse (cannibalisation) (or can glocal and RI strategy coexist?)

Emerging economies are gaining increasing importance in the global innovation system. Christensen, 1997 and Immelt et al, 2009 talk about innovations originating from emerging countries through disruptive and reverse innovation paradigms. Corsi, Minin, 2011 reinterpret the concept of reverse innovation as being a type of disruptive innovation, as suggested by Immelt et al 2009.

Some might say that reverse innovation has been happening for a long time now, with products being taken back to home countries. Given how new the theory is, little empirical research has been carried out in the field of reverse innovation as recognised by the authors of this idea.

Several authors have identified and discussed the process of innovation from emerging economies. There have been limited empirical research into the field, and scholars refer to the trend differently as disruptive innovation from emerging economies, innovation from the bottom of the pyramid, cost innovation and reverse innovation.

International business has seen a lot of studies emphasizing the role of BRIC countries in the current global setting. The lower cost of production and the spiralling size of the emerging economy push companies to consider these countries as areas of high investment. Cultural, institutional and environmental differences however require companies to respond by adapting their global products to meet local requirements in the emerging markets, which scholars term as glocalisation. In the last ten years however, this practice has been assumed to be ineffective in capturing the bulk of the market, only capturing those small number of people, whose incomes have risen, due to economic activity, to levels comparable to the majority of developed country customers. MNCs must now cater to the mass market of less wealthy customers not currently part of the MNC customer base. Based on subjective evidence, (Hart & Christensen, 2002; Prahalad, 2004; Immelt et al, 2009; Hang et al, 2010) identify new ways to pursue innovation in these countries. Their studies roughly build upon Christensen (1997) and Christensen & Raynor (2003), who first proposed a connection between disruptive innovation and innovations originating from developing countries (Hart & Christensen, 2002). Prahalad, 2004 talks about how profitability can be increased by innovating for the poorest people at the bottom of the pyramid, through adopting radical business models and dynamic product/service configurations. The practice produces value for both the consumers who would have otherwise not have been able to have access to such products and technology, and on the other hand expanding the customer base for the western multinational.

Regardless of the potential for a disruption in the market that the theory behind reverse innovation creates, it has not been thoroughly proven yet that the introduction of the locally innovated product in the developed market will be overall successful in the first place. Due to the topic's recency few examples of MNEs have shown success but potential downsides have been mostly neglected. Thus, Vijay suggests future research on this topic to specially focus on the identification of the products that are most likely to be migrated into the western world. In order to do so MNEs have to identify consumer segments that are in favour of buying a reversely innovated product over others in the developed market. Out of that reasons, the next part will review existing literature on the topic of consumer behaviour and related market segmentation.

Reverse Innovation is a recent phenomenon

Qualitative clinical and longitudinal approach based on field studies

Best advanced by uncovering new concepts rather than by testing hypotheses - this is what we have done by considering the typical profile of the consumer in the developed market

Ray Vernon product cycle theory of international expansion based on the experience of American MNCs

Builds upon this theory and suggest that innovations can flow in a new direction ie from poor - rich

Only performance gap is a clear illustrator of disruptive innovation - similarity with RI

RI of not just products but also ideas

It leads to more product choices for both developed country and developing country

Limitation of 4 step - only talked about by Vijay. However they are connected

Important to make the distinction between local mnes and amercian mnes. Vijay defines it as for Americanised MNEs only

Reverse Innovation: Organizing Principles

- Reverse innovation requires a decentralized, local-market focus

- Most if not all the people and resources dedicated to reverse innovation efforts must be based and managed in the local market

- Local Growth Teams (LGTs) must have P&L responsibility (this is a key hurdle for American multinationals)

- LGTs must have the decision-making authority to choose which products to develop, how to make, sell, and service them

- LGTs must have the right (and support) to draw from the company's global resources

- Once tested and proven locally, products developed using reverse innovation must be taken global which may involve pioneering radically new applications, establishing lower price points, and even cannibalizing higher-margin products.

- Reverse innovations can be, but are not always, disruptive innovations

Consumer segmentation

As previously described it is necessary to review existing literature on consumer behaviour theory in order to identify most suitable frameworks for consumer profile identification and segmentation. Segmentation considers the grouping or cluster of customers with similar to equal preferences and needs. Other definition? Include new scholar. For the identification different variables and criteria is necessary. The more detailed and inter correlated, the better customer target groups can be distinguished. Consumer segmentation represents a crucial aspect of strategic marketing. The reason for its importance is clear. Companies have to identify which products or services they are going to provide into which markets. Thereby, they enable themselves to either concentrate on one market or diversify their marketing efforts and resources into different markets available (Drummond; Ensor, 2005). Cheverton (2004) identifies the following strategic options as a result of successful and distinct segmentation. The first one is undifferentiated marketing. This ignores the different segmentation and offers one single product that supposedly fulfils customer preferences as a whole. In this case companies have to trade-off between advantages such as lower cost and opportunities for economies of scale and disadvantages including the loss of customers due to unadapted product specifications. The second strategy, called undifferentiated marketing, spreads its offerings throughout segments, leaving the company vulnerable towards new customers (Cheverton, 2004). Although, if the company has enough resources at its disposal it can achieve sustained competitive advantage. Thirdly, within concentrated marketing, companies focus on one specific offering in form of products or services for one segment only. This strategy enables the firm to be more competitive in one market to find itself in a leading position eventually; however, increasing the impact of potential failure due to limited diversity (Doyle, 1994).

As we are looking into reverse innovation from a consumer point of view, we are neglecting firm's capabilities to find out which of three stated strategies are most suitable. Follow with an argument why reversely innovated products will be either/ or strategic marketing - which strategy should we choose in terms of RI? Question as hypothesis or something we answer in the LR already out of secondary data? - neglect undifferentiated marketing and focus on the last two strategies?

In order to distinctively identify said segments, it is vital to understand them with comprehensive knowledge. Consumer behaviour provides the foundation on which this knowledge is built on. Thus, identifying consumer backgrounds, preferences and behaviour is the backbone of any segmentation. The segmentation process consists of three processes that gradually follow each other: Segmentation, targeting and positioning (Drummond; Ensor, 2005). Due to our topic's recency and the literature gap in terms of the link between consumer behaviour and reversely innovated products, we focus entirely on the first process-step. This way an in-depth identification of typical consumers who would decide on a reversely innovated product over other products is possible.

The segmentation process

Effective segmentation processes need differentiation of segment groups that can be clearly kept apart. Adam, Armstrong, Brown and Kotler (2001) identify accessability, actionability, differentiability, measurability and substantiability as the main characteristics collected data has to contain. For example, data that is measurable has to be able to be quantified such as purchasing power determined by economic circumstances and income level of the consumer. Another example is the size of the segment and related profitability which both have to be substantial enough to justify companie's expenses (Kotler et al., 2001). Considering that reverse innovation requires a clean-slate approach with explicitly high investments and no definite success, the clear identification of potential profitability is especially critical. Other factors? Include new scholar theory. Providing that stated characteristics are met, the next major step involves the examination of comprehensive variables to be used for effective customer segmentation. Before a closer look is being taken into these variables, it is relevant to identify definitions of consumer behaviour and evaluate which ones to go by. Moreover approaches to the study of consumer behaviour have to be put in contrast and decided on.

Definition of consumer behaviour

This and the next part are slightly based on the work of Bray (2008) (Bray, 2008). Owing to the vast amount of theories regarding consumer behaviour, it is defined differently depending on respective point of views and contexts of scholars. First of all, a consumer is defined as the individual who purchases a product or service for personal consumption (reference). Yadin (2002) briefly defines it as "The observation of the decision-making, purchasing patterns and habits of the general public." (Yadin, 2002). Emphasising on behavioural factors as part of the buying decision process, he neglects psychological, social and personal characteristics that influence the consumer's behaviour considerably. Therefore, rather comprehensive definitions that are similar in their essence are provided by Hawkins (2007), Solomon et al. (2006) as well as Schiffman and Kanuk (2007). They predicate consumer behaviour to incorporate internal and external factors that influence and shape customers on an individual, group or organisational level. Additionally, they argue that it involves processes necessary to choose, utilise, evaluate and dispose of products and services closely connected with perceptions, experiences, attitudes and needs that affect the buying decision process before and after purchase (Hawkins, 2007); (Solomon et al., 2006); (Schiffman & Kanuk 2007). As there is no definite literature about consumer behaviour towards reversely innovated products, one of this project's main goals is to receive a first broad overview to determine the typical consumer profile for reversely innovated products. Thus, the latter definition is chosen as it includes all factors required. Other definition that talks about different factors?

Theoretical approaches to consumer behaviour

This chapter will investigate existing approaches to consumer behaviour and simultaneously provide a brief history of its study. As a result the most appropriate model for this project can be determined. The theory originates around the decision making process of a consumer. Five approaches can be identified that have been emerging over the time of consumer behaviour study. They all incorporate different perspectives and, in turn, different criteria that needs to be considered. They are called economic man, psychodynamic, behaviourist, cognitive and humanistic (Foxall, 1990).

First, economic man is considered to be one of the oldest attempts to categorise and link consumer behaviour as it started almost 300 years ago (Richarme, 2007); however being utilised properly around 1940 when first concrete research on this topic was conducted (Persky, 1995). The theory is based on the assumption that consumers highly rationally decide on a product out of selfish reasons. Individuals are only concerned about maximising utility and the impact the decision has on others in society is ignored (Chapra, Umer, 2000). Furthermore, this approach postulates complete awareness of all existing product options and additional purchasing information by the consumer. It includes consummate evaluation of alternatives and decision on the perfect offering for consumption. This theory has been considered to be long outdated because realistically nobody finds the time and can examine all information sources available equally. Secondly, it has been proven that rational factors matter little compared to emotional and subconscious influences like values, culture and relationships. The influence of relationships also negate the assumption that individuals purchase offerings on a purely self-interest basis. Lastly, "economic man" has been criticised by Herbert Simon's Satisficing Theory due to false belief of maximising utility because consumers, in reality, tend to purchase rather out of satisfactory reasons (Simon, 1997).

Secondly, Sigmund Freud is the main scholar responsible for the theory of psychodynamic consumer behaviour, presuming that decision making is based on biological drives such as hunger or sex and not on cognition and subconscious values (Stewart, 1994). Critiques of his theory have been notable, for one, arguing that he focused mainly on the sexual development of human and based his findings on personal experiences instead of scientific, objective procedures (Erikson, E.H. (1968). Identity: Youth and Crisis. New York: Norton). In addition, he has been criticised to show specific interest in male psychology, neglecting the female side and ultimately biasing his results (Masson, 1989).

Consumer behaviour models

In order to examine available variables to determine consumer profiles, different frameworks have to be compared. Throughout literature there exists a vast amount of frameworks and models that categorise consumer behaviour criteria and shows their correlation to each other.

Consumer segmentation criteria

Defining the market (http://www.goodfellowpublishers.com/free_files/Chapter%203-613f05c5881db99bee40447d737c410e.pdf)

Compare ranked frugal innovation criteria to segmentation criteria

Which of them are more important over others

e.g. for price: most significantly income, but low influence of age..(negative implication as low price = low quality)

brand perception

for ease of use: not really anything as it is balanced

recession factors and influence

innovation cycle (innovators/ laggards)

price, brand, value for money,

impact on perception towards green and environmental friendliness