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?
A:
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?
A:
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?
A:
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?
A:
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?
A:
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?
A:
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.
A:
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?
A:
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?
A:
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?
A:
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?
A:
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?
A:
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?
A:
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?
A:
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?
A:
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”?
A:
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”?
A:
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?
A:
We have three important messages:
1
Capturing opportunities in emerging markets requires
innovation.
2
Local companies in emerging markets are best positioned
to do such innovations. After all, who understands local customers better—
local companies or multinationals?
3
Local companies can use such innovations to launch
global strategy.
Vivek Kaul is a writer and can be reached at vivek.kaul@gmail.com
|
|
|
