Sunday, September 23, 2012

Innovation Arbitrage In A Global Marketplace

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Imagine a country where your technologically outdated inventory would be regarded as "cutting edge" product. That is a no-frills illustration of the notion of Innovation Arbitrage.

As an exporter, you can sell some of your slower-moving inventory to countries whose level of economic and technological development would allow you welcome access into their respective marketplaces. Further, you could further develop that demand by the prudent use of social media and representation in that geographical locus. As an importer in a country with an emerging economy, you would look at the same strategy, except that you would have the logistical advantage of 'working it' locally.

Further to the idea of Innovation Arbitrage, smaller companies can commandeer foreign markets by being strategically savvy; the key here is not building a better mousetrap, so much as in building the first mousetrap. Focus, to the best of your enterprise's ability, on learning about and addressing the needs and solving the problems of less-developed countries.

As they say in Arkansas, USA, "It's all relative." 

The following article written by Kim S. Nash  and featured in CIO Magazine caught my eye. It lends a brilliant insight into what every manufacturer, service provider, importer, exporter or sales organization must start looking at and taking advantage of, although it refers to Innovation Arbitrage (The Internationalist Page Blog's preferred descriptive term) as "reverse innovation."

CIO — In his reverse innovation theory, Chris Trimble, an adjunct professor of business administration at Dartmouth College, asserts that companies should target customers in emerging economies to gain competitive advantage in the "rich world." Trimble is co-author, with Vijay Govindarajan, of Reverse Innovation: Create Far from Home, Win Everywhere.

What is reverse innovation?
Any innovation that is adopted first in the developing world. Today, almost all innovations are adopted first in the rich world and only later flow to emerging economies. At most, they make minor customizations for other countries. That worked well enough when two-thirds of the world's economic growth was not in the developing world. But it's not good enough anymore. The needs of customers in emerging markets are far different than those of customers in the rich world.

Why are the needs different?
One example: Although China has the number two economy in the world, most people in China are peasants. There's no way the same products will work in the United States and in China. Corporations have to learn a new trick.

What's the trick?
Getting your mind around how different the needs of customers in emerging markets are. If you fly to India tomorrow, you land with rich-world blinders on. You see what is familiar and overlook what is unfamiliar.

John Deere wanted to develop a tractor customized to the needs of farmers in India. They sent a team to India for two weeks to learn the market and then go back to Iowa to build. Two weeks! They didn't actually understand the market. The second time, they sent a team to do research for two years. They took their tractor apart, laid out all pieces on the table. They did the same with a local tractor that was doing better than theirs in the market. Then they built a new tractor from the ground up, based on what they learned Indian customers value.

Is innovating for the developing world a competitive advantage?
Not at first. At first, when you figure out a breakthrough way to produce a product or a service at drastically reduced cost, you're usually making major sacrifices in quality that the rich world won't buy. But you won't be stuck there forever. Technology improves over time. While that offering you develop in India for India may not be attractive to the rich world when it's launched, five years later, when quality is there, it's very compelling.
The stakes are really, really high because innovations targeted to the developing world can flow uphill.

How can IT help?
Heads of HR, finance and IT are all in a positions to accelerate reverse innovation if they are willing to break from traditional organizational practices. Normally, all these functions are under tremendous pressure to standardize everything to be efficient and save money. Unfortunately, efficiency and innovation are in conflict. Efficiency is toxic to being innovative.


Admittedly, the article's focus is a bit more faddish and requires more re-tooling (and possible redirecting) of your company's operations than The Internationalist Page's more simplified approach of viewing the opportunity as a matter of "one person's trash is another person's treasure."

I do not advocate shifting your organization's thrusters in the direction of Innovation Arbitrage, as some others do - I advocate reviewing what you've got and seeing where it may intersect with a less-developed countries needs. Put more academically, Innovation Arbitrage is an operation which should be complementary to your existing operations. It's purpose is to increase profitability without the requirement of your having to go too far afield of your company's current operations, i.e., a supplement and not a substitute.

Douglas E. Castle for Innovation Arbitrage.

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