We imagine innovation as a trickle-down process. Companies in places such as the United States, Europe, and Japan deploy sophisticated technology to produce premium products for developed markets. Then they strip out some features, maybe substitute cheaper materials and eliminate most options, and ship their diminished creations to presumably less-demanding customers in Africa, Asia, and South America.
But the days of rich countries' hegemony over innovation may be numbered. In their new book, Reverse Innovation: Create Far From Home, Win Everywhere (Harvard Business Review Press), Vijay Govindarajan and Chris Trimble describe the developing world as a fertile research and development lab for companies in any market. The authors, both professors at Dartmouth's Tuck School of Business, argue that increasingly, breakthrough ideas will sprout in poor countries and be replanted here. Govindarajan spoke with Inc. editor-at-large Leigh Buchanan about how U.S. entrepreneurs can take advantage of this bidirectional model.
What are some products or business models that moved from the developing to the developed world?
A well-known one is microfinance, which originated in Bangladesh in 1983. It is now operating in more than 100 countries, including the richest country in the world, the United States, where it is transforming people's lives. An earlier example also started in Bangladesh, where Western doctors had gone to treat a cholera epidemic. They found the local people there giving patients carbohydrates and sugar to keep them hydrated. The doctors found that very surprising, because medical opinion at the time said that if you put carbohydrates and sugar into someone suffering from diarrhea, the diarrhea will get worse. But the local people had been using this treatment for hundreds of years, and when the doctors saw how effective it was, they published a paper about it in a British medical journal. That was picked up by doctors at the University of Florida, who were trying to concoct a drink to rehydrate their football players fast. Their team was the Gators, so they called the drink Gatorade.
Do companies here sometimes innovate for developing markets and then reimport those innovations?
Walmart is a good example of that. The main concept in the United States is the big box. But when Walmart went into South America, what it found was that the dynamics of shopping are different. Consumers there are poor. They can't buy large quantities of a product and store it at home, because they don't have the money and they don't have the room. They also don't have huge SUVs to load up. Walmart decided to innovate a small-store format in these countries. The beauty is that, even in a small store, Walmart's products will be cheaper, because they have economies of scale at the back end. This was a very big success in South America, and now Walmart is bringing the small-store format into the United States. It will open them in cities that are too crowded and expensive and in rural areas that are too sparsely populated to support a big box.
The companies practicing reverse innovation in your book are all global corporations. Are there opportunities for smaller businesses as well?
The kinds of innovations you see in poor countries are ideally suited for start-ups, both homegrown and from the developed world. That's because they don't require a lot of resources. And start-ups, of course, are starved for resources. They do, however, require creative thinking, which entrepreneurs are good at, also. In these circumstances, entrepreneurs should flourish.
Do you have any sense that entrepreneurs in poor countries are imagining products for their home markets but also eyeing rich ones?
I think they're focused on their own markets. Their passion is to create business opportunities in those countries. Entrepreneurs here should have a venture fund or something to monitor these innovations. Then, when they see an opportunity in a poor country, they should partner. There are lots of people in developing countries looking for alliances of this sort.
Another example from health care: I was in India two weeks ago, and there was an entrepreneur who had started a business making hospital beds. Currently, hospital beds in India are supplied by a large American manufacturer. They cost $10,000. This entrepreneur's beds cost the same, but they take up 40 percent less space, which means you can fit in more patients. Of course, you can't shrink a hospital bed, so instead, this guy had incorporated all the things that take up room around it. He built an IV pole into the bed and the hand-soap dispenser and a space for patient records. He built a cupboard underneath the bed for the patient's clothes and personal effects. He has just started production and already has a backlog of orders. This is a very smart guy, but his aspiration is just to be in India. I can imagine an entrepreneur here striking a deal with him to bring this hospital bed into other emerging markets, or even the United States, where hospitals have problems with space.
How do you recognize mainstream developed-world demand for developing-world innovations?
If you're an entrepreneur considering bringing an innovation to a developed country, you need to take three steps. First, don't bring it to the rich world right away. Think about poor countries instead. And, by the way, when I use the words poor and rich, I'm not making any value judgment. It's the World Bank definition. You take the GDP per capita and find the average for the world. A country above the average is rich. Any country below the average is poor. According to that definition, there are 164 poor countries, with a total GDP of $30 trillion. Thirty trillion dollars! And those countries are growing faster than the rich countries, at 5 percent. That's $1.5 trillion of incremental growth every year. So if you're a U.S. entrepreneur looking for a market for an innovation from India, look to the developing world first.
Step Two is, come into the rich world, but don't go straight to the mainstream. There are always poor people in rich countries, just like there are rich people in poor countries. So target that group first. Step Three is, think of the mainstream.
What are the marketing challenges for products imported from the developing world?
You have to convince people low cost does not mean poor quality. That takes some convincing.
What are the greatest obstacles to developed-world business leaders' recognizing and capitalizing on the potential of developing-world innovations?
The biggest obstacle is the mindset. In the developed world, we have been so successful for so long catering to a very sophisticated customer, supplying premium products with high margins. That dominant logic does not work in poor countries. It is a fundamentally different customer set with fundamentally different problems. Sometimes, countries can become insular when they are so successful. For American entrepreneurs to tap into this opportunity, they have to be curious about the problems of people in poor countries. This curiosity—if you can acquire it, then you can succeed.