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Friday, May 11, 2012

Prof.Vijay Govindrajan on Reverse Innovation 05-12



© 2012 Harvard Business School Publishing. Created for Harvard Business Review by BullsEye Resources www.bullseyeresources.com.


Reverse Innovation

Create Far From Home, Win Everywhere

Vijay Govindarajan, Earl C. Daum Professor of International Business, Tuck School at Dartmouth
Angelia Herrin (Moderator), Editor for Research and Special Projects, Harvard Business Review

OVERVIEW

Traditionally, innovation has flowed in one direction:
Products and services designed for markets in the developed
world have been transplanted to emerging markets. “Reverse
innovation” is the exact opposite: Innovations designed for
poor-world consumers are rolled out to rich-world markets,
where (somewhat counterintuitively) they meet with huge
success.

Reverse innovation is a transformative trend that will impact
nearly every industry. It may present the single biggest
opportunity for multinationals over the next decade.

Corporations that understand reverse innovation will launch
products that disrupt established markets. Those that do not
understand it will find their market positioning threatened by
competitors that do. Unfortunately, reverse innovation has
been a tough concept for U.S. companies to wrap their minds
around.

CONTEXT

Professor Govindarajan explained reverse innovation and its
importance to U.S. multinationals, illustrating his points with
examples from his latest book. This book profiles companies
in industries being transformed by reverse innovation.

KEY LEARNINGS

Reverse innovation is a powerful trend that will present
opportunities and risks as it transforms multiple industries.
“Reverse innovation” refers to innovations designed as
solutions for emerging market consumers that find application
in the developed world, where they are often rolled out
to much success.

That is a somewhat counterintuitive concept. It is easy to see
why a poor man would want a rich man’s products—a nice
car, a cell phone. Why would a rich man want a poor man’s
products?

One reason is that reverse innovations offer remarkably high
value. Consider: In rural India, people earn $2 a day;
everything they buy must be affordable and durable. But richworld
consumers also want low-priced, high-quality
products.

 In this way, all consumers are alike. Rich or poor,
all choose products that meet their needs at the lowest cost.
Their needs may differ, so product functionality can differ,
and no one wants to buy products that will break, least of all
consumers who make just $2 a day.

There is another reason that reverse innovation works. Often,
innovative solutions for consumers in the poor world solve
different problems for those in the rich world.

In the health care industry, innovations designed for emerging
markets could trigger major change in U.S. markets.

America’s health care system is broken. It is the most
expensive in the world, yet quality is often far from world
class and access is far from universal.

 The nation has struggled with issues of cost, quality, and access for decades.
Much money has been wasted trying to fix the system via
traditional innovation models.

 Yet in poor countries,experimental models are providing health care at ultra-low
costs, with ultra-high quality and accessibility for all.

For example, General Electric makes an EKG machine that
costs $20,000 in the United States. The typical U.S. hospital’s
imaging center has millions of dollars of equipment, and
patients go to it when doctors tell them to. In India, such a
business model would work for only the richest 10% of the
population. The other 90%, which represents a tremendous
market, requires a different model. 

No Indian farmer making $2 a day would heed a doctor’s order to spend 50 days’ wages
on a $100 scan to see if he might have a heart problem.
Moreover, there are no hospitals in rural India, and even if an

EKG machine were brought in, it couldn’t be operated
without a reliable electricity source and an expensively
trained technician.

GE’s “90% solution” is a $500, battery-operated EKG
machine that is lighter than a Coke. No technician is needed
and it couldn’t be simpler to operate. Dramatically paredback
functionality allows it to be produced far less
expensively than the $20,000 model.

 A scan costs five cents.This device is a perfect example of reverse innovation. It was
developed for the Indian market and is now sold in global
markets, including the United States. It can be carried in
ambulances and used in places like accident sites and
crowded hospital operating rooms. The idea of a simple,
portable EKG machine is unlikely to have arisen from the rich
world, where the need is not obvious.

Two other examples of reverse innovation in health care:
— Bangalore, India’s Narayana Hrudayalaya cardiac
hospital offers $2,000 open heart surgeries, accessible
to all regardless of ability to pay. Only 40% of patients
actually do pay the $2,000, yet the hospital operates at a
35% profit margin without government subsidies or
charitable funding. Internally generated funds alone
allow it to build one new hospital every three years.
Quality is world class, with lower mortality rates than top
U.S. cardiac hospitals. 

How is this possible? 

Because surgeons have perfected the ability to work on beating
hearts rather than using expensive heart/lung machines
to still hearts. High volumes of surgeries allow surgeons
to become highly skilled and specialized. The hospital is
managed via “Manufacturing 101” principles of highvolume
production, quality improvement, and strict cost
control. 

A new hospital is being built in the Cayman
Islands to serve Americans.

— Thailand’s “Doctor J” has created a $30 artificial leg.

The leg is made from used plastic yogurt containers that
otherwise would have been discarded, so materials costs
are very low. Labor costs are low because unemployed
amputees are trained as technicians to fit legs on others.

Having the artificial leg themselves, they bring
experience, skill, and passion to their work. The leg is
comfortable and extremely durable. Videos showed of
amputees running, biking, and farming on the leg. The
product has great potential to disrupt the U.S. market,
where artificial legs cost $20,000 each.

Reverse innovation shifts the traditionally accepted price/
performance paradigms in ways that initially don’t seem
possible to developed-world mindsets.

“[Reverse innovation] is about shifting the
price/performance paradigm, offering ultra-high
value at an ultra-low price."
—Vijay Govindarajan

Few U.S. multinationals understand the power of reverse
innovation or are prepared to capitalize on it.

Reverse innovation will transform nearly every sector,
including transportation, energy, health care, housing, and
manufacturing. It may represent the biggest opportunity for
multinationals over the coming decade.

Multinationals that understand reverse innovation, such as
GE, will launch game-changing new products. Those that
don’t will face threats to their market position, which in many
cases will come from companies from emerging markets that
understand how to provide high value at low cost.

Unfortunately, reverse innovation is not an easy concept for
U.S.-based corporations to understand. The dominant logic
that brought them success in the developed world is what
holds them back from understanding consumers in emerging
markets. Instead of thinking about ways to exchange “value
for money,” companies need to start thinking about how to
provide “value for many.” 

Focusing on ways to expand access
to products and improve their value opens up new avenues of
innovation.

“The institutional paradigm needs to shift from
'value for money' to 'value for many.' Companies
need to spend a lot less and give lots more value
to lots more people. It's a fundamentally
different paradigm."

Kellogg’s is an example of a company that is struggling in
emerging markets. The company thought it was accommodating
the preferences of the Indian breakfast market with
banana- and mango-flavored Corn Flakes lines. But in India,
people like hot breakfast. Pour hot milk into Corn Flakes of
any flavor and the result is an unappealing mush.

Other Important Points
 A $300 house? That’s the open-source challenge that
Professor Govindarajan has posed to innovators everywhere:
http://www.300house.com.

 Compassion 101. Business schools have a role in
promoting reverse innovation: cultivating compassionate
leaders with the humility to learn about emerging
market customers.

Reverse Innovation: All About Mindset
Succeeding at reverse innovation requires a reverse
innovation mindset.

 Some pointers:
— Shift the focus from providing “value for money” to
providing “value for many.” 

This is not a foreign concept in American business. 

Henry Ford asked, “Why can’t many have cars?” 

Steve Jobs asked, “Why can’t many have computers?”

— Look at poor customers the same as rich ones. They
have the same aspirations, desires, and intelligence.

— Don’t assume you understand the problems of
customers in emerging markets. 

Lay aside preconceived notions. Approach these markets with
humility and curiosity, as if you’ve landed on Mars.

— Create reverse innovation teams. Teams should be a
mixture of locals who understand customers well and
employees who understand the company’s resources
and capabilities.

— The reverse innovation mindset is the critical
element. Once that is in place, resource-allocation
decisions become a lot easier.

— There has to be company-wide buy-in. In particular,
sales and marketing thinking has to change—from
selling premium-priced products at high margins to
low-cost products at high volumes and slim margins.

— Let the world be your teacher. Search the world for
practices and approaches that will improve the value,
lower the costs, and extend the access of your
products.


BIOGRAPHY

Vijay Govindarajan

Earl C. Daum Professor of International Business, Tuck School at Dartmouth

Vijay Govindarajan is the Earl C. Daum 1924 Professor of International Business at the Tuck School at Dartmouth. 

An expert on strategy and innovation, he was the first Professor in Residence and Chief Innovation Consultant at General Electric. 

He has been ranked #3 on the Thinkers 50 list of the world’s most influential business thinkers, and has been cited by BusinessWeek, The Economist, Forbes, and The Times (London) as the top thought leader in strategy.

Listen to Prof. Vijay Govindrajan speak on Reverse Innovation