What Emerging Markets Can Teach Us about Innovation

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Kirk Kardashian

Hey, this is Kirk Kardashian, and you're tuned in to Knowledge in Practice, a podcast from the Tuck School of Business at Dartmouth. In this podcast, we talk with Tuck professors about their research and teaching and the story behind their curiosity. Today on the show, my guest is Vijay Govindarajan, the Cox Distinguished Professor of Management at Tuck. Vijay is here to discuss his new book, Global by Design: How to Create Innovations That Scale, Travel, and Transform, which will be published in August by Harvard Business Review Press.

In it, Vijay and his co-author, Amos Winter of MIT, give readers a practical framework for creating positive social change and business opportunities in emerging markets through designing high-performance, low-cost products that can succeed in resource-constrained communities. The book builds upon concepts Vijay introduced in his 2012 bestseller, Reverse Innovation, which guided multinational firms to innovate for emerging markets specifically rather than simply export products designed for developed countries.

Kirk Kardashian

Well, Vijay, welcome to Knowledge in Practice.

Vijay Govindarajan

Thank you very much for hosting me.

Kirk Kardashian

We're honored that you could make some time for this. So we're talking about your new book, Global by Design, which is about innovating for emerging markets. It's coming out in August, right, by Harvard Business Review Press? Tell me how this book came about and how it fits into your research and teaching.

Vijay Govindarajan

It's really a strange coincidence. I got an invitation from the MIT School of Engineering to come and give a keynote on reverse innovation. This happened about fifteen years ago. And I don't write for an engineering audience. The Thayer School is right next to Tuck. I didn't know any faculty at Thayer School. That's not my audience.

But when MIT invites you, you go. I went, and the person who sent the invitation was Amos Winter. So I gave the keynote on reverse innovation, and afterwards I met with Amos and asked him why he had even invited me. How did he manage to get hold of my name? And then he told me a story about how he used engineering principles to create a high-performance, ultra-low-cost wheelchair in Africa. And then somebody told him, 'Hey, there is a professor at Tuck who has got this notion of reverse innovation. You can actually bring that wheelchair to the U.S.' And therefore, he actually set up manufacturing in the U.S. and started selling that high-performance, high-value wheelchair in the U.S.

That's how he got my name. Then I said, he's coming at reverse innovation from engineering science; I came at it from business strategy. Why don't we join together and write a book about the engineering principles behind reverse innovation? That's how the book Global by Design happened.

Kirk Kardashian

Wow, that's interesting. And you mentioned that wheelchair that Amos Winter designed. It's in the book, right? It's the Leveraged Freedom Chair, right?

Vijay Govindarajan

Yeah, that's one of the many examples we use from Amos Winter's research lab.

Kirk Kardashian

In your book you say that emerging markets are forecast to increase their share of global market capital from 27 percent in 2023 to 55 percent in 2075. That's a huge increase. What's driving that trend, and how do you think businesses should be responding to it?

Vijay Govindarajan

I think the main reason for the trend is really driven by two emerging markets: India and China. Historically, in those markets, only the top 10 to 20 percent of the people were consumers because their per capita income was so low. And as these countries opened up and per capita income grew, more of the population in India and China became consumers. That is why you see phenomenal growth in emerging markets.

And to tap into that growth, multinationals have to change their strategy. They need to create high-performance products at ultra-low cost because per capita income, while it has grown, is still not at the same level as we see in the U.S. So that is why those markets are prime candidates for Global by Design.

Kirk Kardashian

So you begin your book with the story of Gillette trying and initially failing to design razors for India. Can you tell us that story a bit and explain how it encapsulates the main message of your book?

Vijay Govindarajan

In fact, that goes to the heart of what we were talking about: why Gillette initially missed the phenomenal growth in an emerging market like India. They took an older technology, a razor technology called Vector from the U.S., and then removed some features and sent it to India. And before they sent it to India, they actually did a pilot test to see whether Indians would like this Vector by recruiting students from MIT. Gillette is based in Boston, so they said, 'Test Indian students at MIT to see whether they will like Vector.' And it worked for those MIT Indian students. But when they took it to India, it completely bombed.

Vector, to begin with, was priced at about two dollars, whereas in India there were blades for two cents. So the price was off. But more importantly, Indians shave very differently. They shave infrequently, therefore they have thicker hair to shave, and the Vector clogged.

So the point here is they didn't understand what Indians in India need. They need a high-performance razor and blade at ultra-low cost. You miss that when you take a U.S. product, remove some features, and send it to an emerging market like India.

Kirk Kardashian

Let's go back to that example of the Leveraged Freedom Chair, the all-terrain wheelchair that was designed for emerging markets. In your book you say that there are three stages of innovation for a Global by Design product like the Leveraged Freedom Chair. Can you walk us through those three stages and how they would apply to that product?

Vijay Govindarajan

You see, stage one is trying to understand what the consumer in a poor country like India, or on the continent of Africa, needs. In the example of the wheelchair, what someone in, say, rural Africa needs is this: suppose you are disabled.

In rural Africa, you don't have buses and cars, so you have to actually use a wheelchair for a long distance. And the roads are not paved; they are up and down. Therefore, the wheelchair has to be designed for people who use a push-rim wheelchair and don't have tremendous upper-body strength. So, in some ways, the wheelchair has to be designed so it doesn't roll off when you go on a steep incline. And people in Africa can only afford to pay $200. If the wheelchair breaks down, it should be easy to repair.

So that's what I mean by the requirements the customer wants. That means you need to design a wheelchair that can take people for long distances on uneven roads, and it should be easy to operate and easy to repair, and it should cost no more than $200.

The second phase is solving the problem. If those are the requirements, how do you solve the problem? By the way, we have solved the problem in the U.S. Suppose you are disabled and you want to climb Mount Washington, but you don't have the upper-body strength to push the wheels of your wheelchair going up the mountain. Or coming down the mountain, you have to hold on to the wheel.

Kirk Kardashian

Mm-hmm.

Vijay Govindarajan

Otherwise, you're going to come tumbling down. There are wheelchairs available in the U.S. for disabled people to go up Mount Washington, but they cost $7,500 because they have a gear system, similar to a mountain bike.

So the question becomes: How do you get the same performance of a $7,500 wheelchair at a $200 price point? This is the innovation challenge. And the way Dr. Amos Winter solved the problem is, instead of having a complicated gear system, he used the human body and created a crowbar. By just changing the position of the hand, you can either increase the speed or slow it down. Think of a crowbar: if you take a long crowbar, it increases the speed; a shorter crowbar slows it down. That's the technique he used to create a wheelchair for $200 that has the performance of a $7,500 wheelchair. That is solving the problem.

And third is, once you solve the problem in a poor country, how do you bring that solution to consumers in rich countries? So in the U.S., if you are disabled, you can get the $7,500 wheelchair, or get Dr. Winter's wheelchair by adding some additional features because, in the U.S., wheelchairs typically have to look a little nicer. And many times disabled people actually fold the wheelchair and put it in the trunk, drive the car, and then take it out. So it has to be easily foldable, easily disassembled.

So he added some features, and that wheelchair in the U.S. is selling for a lot less than $7,500. But it delivers the $7,500 performance. This is an example of the three stages: understand customer requirements, do breakthrough innovation to solve for those requirements, and once you solve them in a poor country, step three is to bring it back to a rich country.

Kirk Kardashian

That's great. What do you think are some of the biggest challenges for firms to offer high-performance, low-cost products for emerging markets?

Vijay Govindarajan

I think the biggest problem is a mindset, because most multinationals think they can simply take a product that they created in the U.S., strip some features, and lower the cost. That strategy never works because, first of all, even if you strip some features from a rich country's product, the price is still very high, as we saw in the Gillette example.

But the other problem is that when you strip the features, you make the product highly inferior and poor quality. Customers in poor countries don't want cheap products. They don't want inferior-quality products. They want high-quality products at ultra-low cost. So it is a mindset that is the biggest problem multinationals have to get over.

Kirk Kardashian

That's interesting. I think it's really cool that in your book you talk about how to go about assessing which global problem is worth trying to find a solution for. You say that identifying Global by Design opportunities begins with the Three Merits Test. What is that test, and can you give us an example of it?

Vijay Govindarajan

I think even before you embark on a Global by Design project, you must assess whether the problem that you're trying to solve, the opportunity you're trying to create, meets three tests: problem merit, innovation merit, and value merit.

What I mean by that is, problem merit is that there are lots of problems in the world. In fact, every day when you watch TV or open a newspaper, there is a problem. We don't lack for problems. But problem merit says: If this problem is solved, will it create a lot of value for a large number of people? That means the problem has merit.

But it has to satisfy two other merits. Innovation merit says: Can breakthrough innovation solve this problem? There are some problems that, even though they may have merit, cannot be solved because we don't have the technology, or the price point at which the technology is available is not there. So innovation merit says: Can innovation actually solve the problem?

But then there is a third, which is value merit. If we solve the problem through innovation, will it create value for the consumer?

So find a problem which is worthy of solving, then find technologies that are available to solve the problem, which is the innovation merit, and make sure that when you solve the problem it creates value. So it is at the intersection of these three merits - problem merit, innovation merit, and value merit - that Global by Design opportunities lie.

Kirk Kardashian

Yeah. I think you mentioned in the book that emissions from, say, a volcano are a big problem, but you're never going to solve that with technology, so that wouldn't have the innovation merit, I suppose.

Vijay Govindarajan

Absolutely. There are lots of problems in the world today, but not all of those problems can be solved today. But if the problem has merit, then you keep watching the technologies and the price points of those technologies because the cost of technology does drop over time. So there may be a time in the future when the innovation merit will be met. Therefore, don't ignore those problems, but you can't solve them today.

Kirk Kardashian

Yeah. So this gets to, I think, more of a question about design, right? Designing products, which maybe your co-author Amos Winter was more of the expert on. But in the book you talk about primary design requirements versus secondary design requirements. Can you help us understand those a little bit?

Vijay Govindarajan

I think Tata Nano is a great example. In India, the Tata Group wanted to create a car for the poor. So they wanted to create a car for $2,000 at a time when automobiles that could seat five people cost $20,000. That is clearly a noble cause.

And they solved all the primary design requirements and actually created a five-seater car that could drive for a price of $2,000. So the primary requirements were met. Yet Tata Nano was a fiasco because they forgot the secondary requirements. Secondary requirements came when they had to build the business model to actually get that car to the consumer.

One aspect of the business model was how they communicated the value proposition of that car to the masses in India. They marketed it as a cheap car. And Indians didn't like that label because only cheap people will buy cheap products. Instead, the marketing had to embrace the secondary constraints, which relate to business-model issues. One aspect of the business model is marketing and communication, and they missed that, with the result that the product was a failure.

So designers have to think both about primary considerations and secondary considerations. And secondary considerations typically come a little later. Therefore, you cannot anticipate that upfront, but you need to be prepared.

Kirk Kardashian

In the conclusion of your book you say that innovation should be driven by value creation. What do you mean by that, and what are some other motivations for innovation that are less successful?

Vijay Govindarajan

Innovation has no purpose unless it creates value. There are people who get fascinated by innovation by just creating novel things. That is not innovation; that is simply novelty, because no one can benefit from it. I think value is the only way we can test whether it is true innovation or not. By value, we mean: Does it solve a problem for the end consumer? If it doesn't solve the end consumer's problem, it has no value. Therefore, it has no merit.

Kirk Kardashian

And you also say that value creation isn't enough, right? I mean, you say that innovations must also disrupt the economic equilibrium. Can you help unpack that, too?

Vijay Govindarajan

In fact, I would put it slightly differently. The way you create value is by disturbing the economic equilibrium. For instance, Innova School, which is a very innovative school in Peru, wanted to offer the same quality education that you get in a private school in Peru, and private schools charge $15,000 a year. They wanted to create the same high-quality education for $1,000 a year in tuition.

Now, how do you do this? You cannot do this by recruiting the same high-quality teachers that private schools attract. The reason they have high quality in private schools is because they have high-caliber teachers. But high-caliber teachers also mean high cost. They couldn't afford that. Therefore, that was the equilibrium: The private school's equilibrium was to hire high-quality professors, pay them well, and charge $15,000 a year in tuition for that quality.

So what Innova did instead was recruit lower-cost, average-quality teachers, so they could pay them less. But then they upgraded the quality of those teachers by creating a centralized online teaching resource. And that centralized online teaching resource had about 20,000 lessons. When I say 20,000 lessons, each day what the teacher has to do in class was documented, including coming in and saying good morning to students. They essentially broke down every hour the teacher has to teach by really walking them through what they should do for that 60 minutes.

And these lessons were created by expert teachers. And therefore, this online teaching resource mentored them: They could take mediocre teachers and, within a matter of 18 months, they became very, very good. And then they assigned experienced teachers as mentors to watch how they taught in class and give them more help.

This is an example of disturbing the equilibrium by recruiting a low-cost resource, but then doing something else to upgrade that quality. That is the key by which you can create high-performance, low-cost solutions.

Kirk Kardashian

Yeah, and we should probably mention that Innova Schools were founded by a Tuck alum, Carlos Rodriguez-Pastor.

Vijay Govindarajan

He was very much a driver in that effort, but of course it is a team effort. It was his vision, his passion to bring education to the masses, to transform Peru through education. But a whole lot of people got involved in doing the three phases: identifying customer needs, solving the problem in Peru, and then, in stage three, taking that model outside of Peru into several other Latin American countries. This is a great example of Global by Design.

Kirk Kardashian

Yeah, it's a great story. It's really inspiring. So, Vijay, I know that designing products for emerging markets has been a real passion of yours for a long time. I remember a long time ago you were working on a project called the $300 House. And I just think it's interesting. Where do you think that passion comes from for you personally to design products for emerging markets?

Vijay Govindarajan

Really, my own upbringing, Kirk. You know, I grew up in India, and in my formative years what I saw was lots and lots of problems, and our family had few resources. If you have lots and lots of problems and very few resources, the only way you can solve your problem is through innovation. There is no other way. We can't throw money at the problem; we don't have money.

That is why I was very passionate about innovation. Then I came to the U.S., fortunate enough to get into Harvard Business School, where I got my MBA and doctorate. And for a long time I was working on innovation problems for the rich world. Then in 2008 and 2009, I went to work full-time for General Electric as their chief innovation consultant.

One of the first projects I got involved in was to create an ultra-low-cost, high-performance ECG machine in India. And that brought me full circle. My innovation passion started in India, and then I realized that passion when I went back to India in 2008 and saw how we could solve the problems of Indians by creating breakthrough solutions.

And guess what? Those solutions GE was able to take to 200 other countries, including the U.S. So that is where my passion for reverse innovation really comes from.

Kirk Kardashian

So when you look at the global market today, have you noticed any opportunities that can pass that Three Merits Test?

Vijay Govindarajan

I think there are three sectors where the Three Merits Test would be low-hanging fruit: education, health care, and energy. We have humongous gaps in all these three sectors, where we must create ultra-low-cost solutions that deliver high quality to the masses in health care, education, and energy.

And by the way, affordability is a central issue not just in poor countries, but it is also a central issue in the U.S., which is the richest country in the world. In fact, the coming midterm elections in the U.S., the number-one issue is affordability. We must, of course, have very rich people like Elon Musk, who has two trillion dollars or a trillion-dollar personal wealth. But a lot of Americans really suffer from an affordability crisis.

And it is in these three sectors - energy, education, and health - that Global by Design is a ripe and rich opportunity, not just in emerging markets, but here in the U.S., as these midterm election ideas really hinge on affordability.

Kirk Kardashian

Yeah, I think you're right. Do you have any words of advice for would-be innovators who want to serve emerging markets? Maybe someone who's studying engineering, someone who wants to start a business, or even people in larger companies that want to innovate for emerging markets?

Vijay Govindarajan

As we have been talking about, Global by Design might start from customers in emerging markets, but then it transforms the rich world as well. So to really have a Global by Design mindset, the one characteristic I would strongly recommend - whether you are an engineer, a business person, or someone in the liberal arts interested in Global by Design - is to be humble. I think it starts from humility. And when you are humble, you know what you don't know, and you begin to empathize with the problems of others.

And that, to me, is the starting point for being a successful Global by Design-er.

Kirk Kardashian

Well, that's a great place to end our conversation. Vijay Govindarajan, thank you very much for your time. It's been great to talk with you.

Vijay Govindarajan

Thanks very much, Kirk. Enjoyed it.