ASSIGNMENT 2 : Examples of Trickle-Up Innovation

QUESTION

Conventional thinking in product development has been that innovation starts in advanced developed countries like the US and Japan. Product marketed in countries where the average income is much lower often are older model of US product or used but still serviceable equipment. Several US multinational companies have established R&D labs in China and India. Originally it was to take advantage of the large number of well-educated engineers who could be employed at salaries much lower than the going US rate, but soon it was found that this engineer was adept at developing products for sale to the mass markets in these local countries. Typically these are product with somewhat reduced functionality, but they still are useful quality products. Now these US companies are beginning to market these products in the US as a low-cost product line that is attractive to a new low-end market segment.

Search the business literature for example of this new approach to trickle-up product innovation. Discuss advantages of this new approach to product development and discuss possible risks.

ANSWER

  Trickle-up innovation or reverse Innovation is the strategy of innovating in emerging (or developing) markets and then distributing/marketing these innovations in developed markets. The process of reverse innovation begins by focusing on needs and requirements for low-cost products in countries like India and China. Once products are developed for these markets, they are then sold elsewhere - even in the West - at low prices which create new markets and uses for these innovations.

   Levi's Denizen brand is one example of reverse innovation, with the company first launching the brand in Asia, targeting Indian and Chinese consumers. It sought to make inroads in those valuable markets but also to learn how to best produce an affordable product, taking into account the features and fit details most important to consumers. Denizen jeans will retail for one-third to one-half the cost of a pair of Levi's when they roll out in the U.S. this summer.

   "Launching in India and China, which are two very different cultures with consumers who have different body types, style and customs, gave us a chance to learn about how to make a brand relevant for the market," said Lance Diaresco, VP-marketing for Denizen. "We learned about fit and how to work with our franchise and wholesale customers to help them select the fits most relevant for their consumers."

   Another example; Coca-Cola's 14th billion-dollar brand was developed in the Atlanta-based company's Shanghai R&D center, for example. The beverage giant moved to plug a gap it saw in the Chinese market with the 2005 launch of Minute Maid Pulpy, a juice drink that easily transitions beyond the breakfast table. It's now the company's first billion-dollar brand to be developed and launched in an emerging market.

   Pulpy, first tested in a region of China, can now be found in 19 countries across Asia, Africa and South America. Most recently it launched in Turkey and there are plans to launch in six more countries before the end of the year. The success has encouraged further investment in the company's R&D centers around the world, said Venkatesh Kini, VP-marketing of the global juice center.

   "Because of the rapid growth in demand and scale in many of these emerging markets, like Brazil, China and India, the opportunity to create local, customized solutions is much more [pronounced]," Mr. Kini said. "Earlier it made more economic sense to create central innovations and scale them. Today, developing countries have critical mass and the capabilities to launch local, customized products across a range of categories."

   One last example that can be observed is in 2004; Renault designed a low-cost model of its brand Logan for Eastern European markets. It is a small family car produced jointly with its Romanian subsidiary Dacia. The Logan was designed from the outset as an affordable car, and has many simplified features to keep costs down.

   It was officially launched in June 2004, and began marketing in September 2004. Renault originally had no plans to sell the Logan in Western Europe, but in June 2005, began importing a more expensive version of the car. It was an unexpected success with people wanting an inexpensive, no-frills car they could repair themselves.

   The Logan was launched in India in April 2007, as collaboration with Mahindra, who helped Renault cut costs by 15%. India was the first right-hand drive market for the Logan. It was almost an instant success with impressive sales in the first few months. Since then Mahindra and Renault have parted ways, but the Logan continues to be sold by Mahindra, with technical support from Renault. Its awkward styling has resulted in lower than expected sales. The company has later introduced the name Verito to the car, which since then only had Mahindra badges.

Advantages of trickle-up product innovation to product development:

• Companies investing higher amounts in building the sustainable technological infrastructure that would facilitate advanced engineering. It would thus further stimulate industrialization.
• Better products for consumers and a variety of options to choose from at reasonable prices.
• Improvement in product’s design.
• Increase product’s quality.

Possible risks of trickle-up innovation:

• Very hard to conquer developing countries.
• Uncertain products’ quality.
• Technical and market risks.
• Less-expensive products may cannibalize sales of higher-priced goods with bigger markups.