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Strategy & Innovation

May, 2012, Volume 10, Number 2

Reverse Innovation: Create Far From Home, Win Everywhere

reverseinnovationBy Vijay Govindarajan and Chris Trimble

Editor's Note: Innosight welcomes one of the world's leading innovation thinkers, Vijay Govindarajan of Dartmouth's Tuck School of Business, to our newly expanded Innosight Fellows program. His bestselling new book, Reverse Innovation, crystalizes a big idea in how to connect problems in emerging economies to innovation challenges we all face everyday. We hope you enjoy this excerpt.

Gatorade. It is as American as baseball and apple pie.

Its 1960s roots can be traced to the sun-scorched University of Florida and its football team — the Gators. Oppressive heat and humidity led the team's trainers to seek better ways than water alone to quickly re-hydrate players. They turned to the school's research labs, which came back with a concoction of water, glucose, sodium, potassium, and flavorings. The tasty cocktail sped the replenishment of the electrolytes and carbohydrates that players lost through sweat and exertion. Even before it became an actual brand, Gatorade got a nice marketing boost from the coach of Georgia Tech. Asked how his team had lost to Florida in the 1967 Orange Bowl, he lamented: "We didn't have Gatorade."

It is a great story, and it is wonderfully fitting for an American icon. But there is an interesting missing link, one that leads back to events far from Gainesville, Florida.

Earlier in the 1960s, there were epidemic outbreaks of cholera in Bangladesh and elsewhere in South Asia. The key to keeping cholera patients alive was simple: Keep them hydrated.

gatAccording to Dr. Mehmood Khan, Chief Scientific Officer of PepsiCo (which now owns Gatorade), Western doctors who went to help stem the epidemic were surprised to discover a centuries-old local treatment for the severe diarrhea caused by cholera. 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 diarrhea would cause cholera bacteria to multiply and the disease to worsen. "Yet for thousands of years, this was the normal treatment used in Ayurvedic medicine," says Khan. "By giving carbohydrate and sugar in the solution with salt, uptake was quicker, and patients re-hydrated 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.  

When innovation flows uphill

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. Quite simply, a reverse innovation is any innovation that is adopted first in the developing world. Surprisingly often, these innovations defy gravity and flow uphill.  

Historically, reverse innovations have been rare. Indeed, the logic for innovations flowing downhill, not uphill, is intuitive. Rich customers in rich countries can afford — and indeed they demand — the latest and the greatest. Demand pushes technology forward. In due course, its benefits trickle down across the globe. You can do the innovation math: 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. Consequently, people — especially in the West — expect the future to be invented in Silicon Valley or Houston or Munich, but not in Bangladesh.  

Thus, it is natural to suppose that developing nations are engaged in a slow and evolutionary process of catching up with the rich world, both economically and technologically. They do not need innovation. They will simply import what they desire from the rich world, just as soon as they can afford it.  

Under that set of assumptions, a strategy known as glocalization makes perfect sense. As practiced by multinational businesses, glocalization posits that the work of innovation has already occurred. Emerging markets can be tapped simply by exporting lightly modified versions of global products developed for rich-world customers – mainly de-featured lower-end models.  

But the assumptions are misguided. What works in the rich world won't achieve wide acceptance in emerging markets, where customer needs are starkly different. As a result, reverse innovation is rapidly gathering steam — and it will only continue to do so.  

On the surface, reverse innovation seems to be a counterintuitive phenomenon. It is easy, after all, to understand why a poor man would want a rich man's product. But why would a rich man ever want a poor man's product? The answer is that, under certain circumstances, it offers new, unexpected, or long-overlooked value. Consider two modern 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.  

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 U.S. 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. Soon enough, it seems, some Americans will be able to buy their South Asia-inspired Gatorade at a New York City Wal-Mart scaled to the dimensions of a village bodega.  

The future is far from home

Next, consider U.S. efforts to improve the cost-effectiveness of — and access to — healthcare. Reformers would do well to look to India for new thinking.

Narayana Hrudayalaya Hospital performs world-class open-heart surgery for just $2,000. This price — 90% to even 99% below rich-world comparables — can only partially be explained by India's lower costs of labor. The real magic is in process innovation. Narayana Hrudayalaya took the radical step of adapting for use in health care a number of well-understood industrial concepts that have been around since Ford's Model T: standardization, specialization of labor, economies of scale, and assembly line production.  

This may sound simple, but it runs counter to the dominant logic of rich-world health systems. Doctors focus on the most challenging patients, trying to push the envelope on medical science and technology. Cost is not the first consideration, but the last. As a result, Western medicine is organized based on the expensive, and debatable, assumption that every patient is unique.  

Innovations in India show that, in many instances, there is another way. In fact, Narayana Hrudayalaya is bringing its innovative business model to the rich world. It is building a cardiac hospital in Cayman Islands (an hour's flight from Miami) to treat Americans with heart disease at 40 percent below U.S. prices. 

These are just two of many examples that we will highlight in this book. The dynamics of global innovation are changing.  

In his January 2011 State of the Union address, President Obama said that the United States must "out-innovate, out-educate, and out-build the rest of the world." That's a fine ambition, but it won't happen if American innovators focus strictly on American problems.  

The new reality is that the future is far from home. If rich nations and established multinationals are to continue to thrive, the next generation of leaders and innovators must be just as curious about needs and opportunities in the developing world as they are about those in their own backyard.  

Whether you are a CEO, financier, strategist, marketer, scientist, engineer, national policymaker, or even a student forming a career aspiration, reverse innovation is a phenomenon you need to understand. Reverse innovation has the potential to redistribute power and wealth to countries and companies that understand it —and to diminish those that do not. Conceivably, it could accelerate the rise of poor countries and the decline of rich ones. But it doesn't have to turn out that way.  

Indeed, reverse innovation is an opportunity that is open to anyone, anywhere, with the ambition to go after it.  

The stakes are high. As we will explain, ignoring reverse innovation can cost many companies, especially today's world-class multinationals, much more than a missed opportunity abroad. It can open the door for the so called emerging giants, the rising generation of multinationals headquartered in the developing world, to inflict pain or even severe damage even in your well-established home markets. There are dozens of such companies now, with names like Tata, Mahindra, Reliance, Lenovo, and Haier. They are here to stay. (See "Invasive Species: Mahindra & Mahindra in the U.S. Heartland").  

Jeffrey Immelt, Chairman and CEO of General Electric, puts it this way: "If we don't come up with innovations in poor countries and take them global, new competitors from the developing world – like Mindray, Suzlon, and Goldwind – will. That's a bracing prospect. GE has long had tremendous respect for traditional rivals like Siemens, Philips, and Rolls-Royce. But we know how to compete with them. They will never destroy GE. The emerging giants, on theother hand, very well could." 

Reverse innovation is not optional. It is oxygen.

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