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Learning new tricks from emerging markets

It's true that Western businesses can benefit from studying the world's smaller, scrappy new competitors. But the reverse is still very much the rule.

May 06, 2012|By James Crabtree

This year, India's Mahindra & Mahindra became the world's biggest tractor maker. It ran a television commercial in the U.S. to mark the moment.

The aim was partly to celebrate — its relatively affordable products, which suit the tastes and pockets of emerging-market customers, have begun to do well in the U.S. Dominant in India and growing fast in China, the conglomerate can be seen as an example of a business from India overtaking established businesses in the industrialized world.

But the ad was also designed to goad John Deere, its biggest Western competitor. The U.S. farm equipment maker and its Indian rival have had a testy relationship since the latter entered the American market in the mid-1990s. But John Deere was also sufficiently worried to try to learn from the upstart: In 2010, it launched a low-budget tractor in India.

In their new book from Harvard Business Review Press, "Reverse Innovation: Create Far From Home, Win Everywhere," authors Vijay Govindarajan and Chris Trimble, professors at the Tuck School of Business at Dartmouth College, argue that other Western businesses must similarly learn new tricks from their emerging markets.

It is an idea that the authors have been championing for years and which has become increasingly fashionable. Also known as frugal innovation, the argument is that companies can develop such products in and for developing economies at a much lower cost and then bring them back to their domestic markets.

The pair are seen as the originators of the idea, having penned a 2009 article for the Harvard Business Review with Jeff Immelt, chief executive of General Electric. In it, they described how the company had developed a low-cost handheld heart scanner for the Indian market, which ultimately also went on sale in the U.S.

Another example in the book is how Logitech, the computer peripherals maker, was undercut by Rapoo, a Chinese electronics outfit offering an ultra-low-cost mouse that was just about as good as Logitech's more expensive versions.

There is much to commend this approach. As the authors note, customers in emerging markets are different. They have less money to spend. They rely on infrastructure that is less developed, and on government rules that are less powerful.

Equally, many established businesses spend too much time dreaming up new ways to please their richest customers, ignoring the bottom of the market.

That said, there are problems with the thesis of this book. The authors pick some unfortunate case studies, such as Tata's Nano. The $2,000 car launched with much fanfare, but few sales, in 2009. In the long term, the Nano's frugal form may take off in India, and perhaps even in Europe and the U.S. But it shows few signs of doing so yet.

The authors also make heroic assumptions about progress in emerging markets. For instance, they paint a rosy picture of India's plans to build modern roads and plentiful renewable energy. This might be China's future. But in India, where infrastructure is crumbling and the government shows little signs of doing much about it, it sounds almost delusional.

A more important failing is one of balance. Yes, developed markets can learn much from new, scrappy competitors. But Indian and Chinese companies still need to import plenty of technology from the West.

They also face an uphill struggle if, like Mahindra & Mahindra, their aim is to beat Western organizations at home. Their advantage in frugal innovation is important, but it is unlikely to be enough on its own to meet their ultimate ambitions.

Crabtree is the Mumbai correspondent of the Financial Times of London, in which this review first appeared.

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