Monday, April 16, 2012

‘Reverse innovation is not optional. It is oxygen’

Published: Monday, Apr 16, 2012, 9:20 IST
By Vivek Kaul | Agency: DNA 
Vijay Govindarajan is the Earl C. Daum 1924 Professor of International Business and the founding director of Tuck’s Centre for Global Leadership. VG, as he is popularly known, is an expert on strategy and innovation.
He was the first professor-in-residence and chief innovation consultant at General Electric. He was ranked #3 on the Thinkers 50 list of the world’s most influential business thinkers. In this interview to Vivek Kaul, VG talks about the concept of ‘reverse innovation’ and his eponymous new book Reverse Innovation: Create Far From Home, Win Everywhere (co-authored with Chris Trimble and published by Harvard Business Review Press).
Q: What does the term reverse innovation mean? How did you end up coining the term?
Historically, multinationals innovated in rich countries and sold those products in poor countries. This makes sense. After all, the United States and Germany have well over three hundred Nobel Prize winners in science and technology. Meanwhile, India and China, with six times the combined population, have fewer than ten.
And consumers in rich countries can pay for innovative products. So, it is logical that innovation should flow from the rich world to the poor. Something strange is happening, of late. Innovations are flowing in the opposite direction. Innovations are flowing from the poor countries to the rich.
This is the essence of reverse innovation.It is about innovating in poor countries and bringing those products into rich countries. My co-author, Chris Trimble, coined the term.
Q: In the first chapter of your book, you talk about the American drink Gatorade as an example of reverse innovation. Can you talk the DNA readers through that example?
Gatorade is an example of reverse innovation. The inspiration for Gatorade, the Godzilla of sports drinks, came from an unlikely source: Bangladesh. There was an outbreak of cholera in Bangladesh in the 1960s (the country used to be called East Pakistan in those days). Cholera causes diarrhoea resulting in severe dehydration.
The Western doctors who went to help the victims were surprised that locals were giving a drink containing carbohydrates to treat diarrhoea. The concoction included ingredients such as coconut water, carrot juice, rice water, carob flour, and dehydrated bananas.
At the time, Western medical opinion held that putting carbohydrates in the stomachs of patients suffering from diarrhoea would cause cholera bacteria to multiply and the disease to worsen. Yet, the local treatment worked.
Q: Why did the treatment work?
As Dr Mehmood Khan, chief scientific officer of PepsiCo (which now owns Gatorade) puts it, “by giving carbohydrate and sugar in the solution with salt, uptake was quicker, and patients rehydrated faster”. The success of the treatment was covered in the British medical journal Lancet, and it made its way to a doctor at the University of Florida.The doctor saw a common problem in the need for rapid re-hydration. If such a treatment worked well for cholera patients, it would surely work for healthy football players.
Q: And what happened after that?
Around that time, the University of Florida athletics department was looking for ways to get their football players quickly rehydrated. The research labs of the University of Florida came up with a concoction of water, glucose, sodium, potassium, and flavorings. The tasty cocktail sped the replenishment of the electrolytes and carbohydrates (just as was the case with diarrhoea patients in Bangladesh) that players lost through sweat and exertion. Gatorade took its name from the Florida Gators, the football team of the University of Florida.
Q: And this was reverse innovation?
Yes. The Gatorade story was unusual for its era. It ran counter to the dominant innovation pattern. Innovations typically originated in rich countries and later flowed downhill to the developing world. Gatorade, by contrast, swam against the tide. It was a reverse innovation.
Q: What would be some of the earliest examples of reverse innovation?
I already gave you the story of Gatorade which was an example of reverse innovation that happened in the 1960s. Chicken tikka masala became the #1 favorite food in UK in the 1990s — an innovation from India. If you want to go much before in time, I would single out yoga. Yoga was an Indian innovation thousands of years ago. Americans embraced yoga in the early part of the 20th century as they were seeking ways to control stress. Yoga has created a slew of new businesses in the US: instruction classes, DVDs, books and even clothes. Lululemon Athletica, a Canada-based company, started to sell yoga gear about 15 years ago. The company has a market capitalisation of $10 billion today.
Q: Despite these early examples, you suggest that reverse innovations have been rare historically.
Yes, this is a relatively recent phenomenon. Why? First, as long as the rich countries were growing at healthy rates, multinationals were satisfied to focus on satisfying needs of rich-world customers. Post-2008 financial crisis, growth has significantly slowed in developed countries.
Multinationals are therefore forced to look for other avenues for sustained growth. Poor countries offer a significant opportunity. After all, over 5 billion live in poor countries — they represent a huge customer base. But to capture that opportunity, firms must innovate since middle-class consumers in emerging markets are fundamentally different from the middle-class in the rich-world.
Second and more importantly, only in the past decade, local firms from developing countries have started to become global rivals. Emerging giants from India (Infosys, Tata, Mahindra & Mahindra), China (Haier, Lenovo, Huawei), Brazil (Embraer) and Mexico (Cemex) have global aspirations. Therefore, ignoring emerging markets can cost multinationals more than a missed opportunity abroad. It can open the door for local firms from the developing world to inflict pain or even severe damage even in multinationals’ well-established home markets. This possibility inevitably draws multinationals into the reverse innovation game.
Q: Can you give us a few examples to show that the scene on reverse innovation is changing now?
Oh sure. PepsiCo drew upon local teams and global resources to develop Aliva, a new savory cracker created by Indians to satisfy the Indian consumers, but with potential to appeal to a wider global palette. In China and India, Harman designed from scratch a completely new automobile infotainment system for emerging markets with functionality similar to their high-end products at half the price and one-third the cost. It has generated more than $5 billion from the new business around the globe.
Q: Any other examples?
GE innovated a portable ultrasound machine for rural China for $15,000 which has generated over $250 million of global sales.Indian farmers cultivate on small pieces of land. Deere developed a small 35 horsepower tractor customised for such lots. In India, tractors often do double duty, both working the farm and providing family transportation. Customers therefore value low price and fuel efficiency — two characteristics on which Deere’s new tractor excelled. Deere has now designated India as the global centre of excellence for small horsepower tractors.
Q: What is glocalisation? How does in help the process of reverse innovation?
Most global companies recognise that emerging markets have become today’s last source of growth. But all they do is modify and export products that they developed in their home country. This is “glocalisation” — a strategy bound to under-deliver. To capitalise on the full potential of emerging markets, they must head in the opposite direction — by innovating specifically for and in developing countries to create breakthroughs that will be adopted next at home and around the globe.
Q: Any examples?
When the giant big-box retailer Wal-Mart entered emerging markets in Central and South America, it discovered that it couldn’t simply export its existing retail formula. It needed to innovate. Specifically, its big box had to be radically scaled down. The company created a version of the Wal-Mart store similar to the more “cozy” retail outlets common in Mexico, Brazil or Argentina.
Smaller stores thrive in those places because shoppers typically lack the liquidity to buy in bulk and maintain a home “inventory.” Moreover, consumers not only don’t drive SUVs, they often ride bicycles, mopeds or buses — or else they walk — to do their shopping. There are limits to what they can carry home. Small Wal-Marts matched the needs of the local culture.
Q: But how is this a reverse innovation?
Today, Wal-Mart is doing something that would have been hard to imagine just a few years ago. It is bringing the “small-mart” concept back to the United States. For one thing, its big-box market is saturated. Many US consumers suffer from big-box fatigue.
Furthermore, dense urban environments, with constrained space and ultra-high rents, can more easily — and profitably — support numerous small stores distributed around town instead of one or two that are the size of a full city block. A variant of the same logic applies in very sparsely populated rural areas, where a big box simply couldn’t thrive. Wal-Mart will be a powerful rival to small-box competitors, in that it still enjoys vast economies of scale in purchasing and supply chain management even with a small store footprint.
Q: You talk about Narayana Hrudayalaya Hospital performing world-class open heart surgery for just $2,000. This price — 90% to even 99% below rich-world’s comparables prices — can this become a reverse innovation?
Narayana Hrudayalaya Hospital does open heart surgery at a fraction of the cost of what it takes in the US. This difference cannot be explained by differences in labour costs. It is pure and simple innovation. They have taken the manufacturing sector’s principles that have been around since Ford’s Model T —standardisation, specialisation of labour, economies of scale and assembly line production—and applied them to healthcare.
For instance, they buy the same world-class equipment you will see in Mayo Clinic (one of the best hospitals in the United States) but they use it 20 times more. That drives the cost per unit down. They are now building a 2,000-bed hospital in Cayman Islands (60-minute flight from Miami) to serve American patients. This is classic reverse innovation.
Q: Any other Indian companies doing reverse innovation?
In 1994, Mahindra and Mahindra (M&M) arrived on American shores. The company, founded as a steelmaker in 1945, had entered the agriculture market nearly 20 years later, partnering with International Harvester to manufacture a line of sturdy 35-horsepower tractors under the Mahindra name.
These tractors became very popular in India. They were affordably priced and fuel-efficient, two qualities highly valued by thrifty Indian farmers, and they were sized appropriately for small Indian farms. Mahindra figured its little red tractor would be perfect for hobby farmers, landscapers and building contractors.
The machine was sturdy, extremely reliable and priced to sell. With a few modifications for the US market — such as super-sized seats and brake pedals to comfortably accommodate larger American bodies — Mahindra was good to go.
Q: And this became a reverse innovation?
Yes. Mahindra had developed a high-quality, low-horsepower, low-cost tractor for the Indian market. They took that product and created the “hobby” farming segment in the US. This is a segment which uses the tractor not for earning a living but for enjoyment. This is reverse innovation par excellence.

Q: What do you mean when you say that “the new reality is that the future is far from home”?

It is simple. If multinationals have to remain competitive , they must be just curious about the problems of customers in poor countries as they are about the problems of customers in rich countries.
Q: What makes you say that “reverse innovation is not optional. It is oxygen”?
If multinationals do not practise reverse innovation, local companies will and use those innovations to disrupt multinationals in their home markets. This movie has played before. Japanese automakers disrupted the Detroit Big Three during the 1970s and 1980s. Reverse innovation is not optional. It is oxygen.
Q: What is the central message of your book that has just come out?
We have three important messages:
Capturing opportunities in emerging markets requires innovation.
Local companies in emerging markets are best positioned to do such innovations. After all, who understands local customers better— local companies or multinationals?
Local companies can use such innovations to launch global strategy.
Vivek Kaul is a writer and can be reached at

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