Monday, April 16, 2012

Reverse Innovation: P&G Innovates on Razor-Thin Margins

If you shaved today, either in the U.S. or in India, you probably used a Gillette razor. Gillette (now a brand of P&G), reportedly has had a U.S. market share of more than 80%, with Schick a distant second. Even more remarkably, they achieved this without resorting to price competition. The blade cartridges for its latest-and-greatest razor, the top-selling Fusion ProGlide, retail for around $4 each, leaving Gillette with what must be incredibly lucrative gross margins.
But that is not the story in developing markets, where these top-of-the-line products don't fare nearly as well. So how is it that Gillette has over 50% market share in India — the world's largest shaving blade market by volume? And with a product that costs less than 3% of the Fusion ProGlide? This is an excellent story of reverse innovation in action...but the story has only just begun.
It starts as most such stories do — with a Western-based company trying to sell their cheapest products in emerging markets. In India, Gillette historically focused on selling their lower- and mid-tier American razors such as the Mach 3 in new packaging. But the vast majority of men below the pinnacle of the social pyramid, an estimated 400 million, still shaved with double-edge razors, a century-old technology that tends to cause far more cuts and bleeding. The fact that Gillette's global products failed to address billions of emerging markets' low-income consumers wasn't seen as a major problem at Gillette, so long as growth in its core markets was robust. But dominant market share creates its own growth challenges.
Recently, P&G has completely reversed the innovation approach at Gillette. First, it sent a team (PDF) to India to do ethnographic research — to observe customers, and do shop-alongs and home visits. This clean-slate needs assessment yielded keen insights about how the Indian male shaver differed from his American counterpart. He was typically far more price-sensitive, to be sure, but also shaved himself in a completely different way — likely seated on the floor, with perhaps a small amount of still water, balancing a hand-held mirror in low light, and experiencing frequent nicks and cuts from his double-edged razor.
Second, P&G leveraged these insights — and its world-class design capabilities — to develop, from a blank sheet, a new shaving tool to meet the specific needs of this consumer. The result was the Gillette Guard, perhaps the most significant departure from its traditional product development in Gillette's history. The Guard uses 80% fewer parts, a plastic housing, and a single blade to minimize cost while preserving "good-enough" shaving performance. It also has a large safety comb to reduce nicks and cuts, easy-rinse cartridges for better cleaning without running water, and several other key features designed specifically for the Indian shaver.
Third, P&G didn't stop at an India-tailored product, but built an India-tailored business model. All manufacturing is done locally to further control production and supply chain costs, resulting in razors and blade cartridges selling for 15 and 5 rupees, respectively (or about $0.30 and $0.10) — less than 3% of the Fusion ProGlide's prices. To distribute the product, rather than forming strong relationships with a handful of powerful retailers as in the U.S. or Europe, P&G had to strengthen its network of millions of Indian kiranas, or local shops. Finally, unlike developed markets where the focus is increasingly on digital marketing, P&G invested instead in traditional ads featuring Bollywood actors.
The result has been transformative for P&G's Gillette business in India. Only about six months after launching in October 2010, the Guard crossed 50% of razor market share by volume. Clearly, P&G has successfully transitioned its razor business to the third phase of global strategy: from U.S.-centric "glocalization" to India-centric local innovation.
However, it has not yet completed the reverse innovation cycle. To do that, P&G must first use the clean-slate Guard as a platform from which to adapt low-cost razors for other emerging markets, such as China and Africa. The potential market opportunity is dwarfed only by the social benefits of providing affordable, useful consumer goods for billions of the world's consumers. Following this, it could even eventually be introduced to developed markets like the United States, disrupting the existing razor business and completing the reverse innovation process.
This may sound unlikely — why would P&G cannibalize Gillette's core business? The stomach to do so requires accepting a hard truth: that Gillette will someday be disrupted — and there's a good chance that the disruptor will be an off-the-radar competitor from an emerging market, playing by completely different rules. Only by pre-empting those eventual rivals and reversing its own innovation process can P&G's Gillette hope to secure another century of market leadership.

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