Business Lessons From A Baby Elephant
Monday, April 9, 2012
Vijay Govindarajan is the co-author, with Chris Trimble, of Reverse Innovation: Create Far From Home, Win Everywhere, which hits bookshelves on April 10. A professor at the Tuck School of Business at Dartmouth University, Govindarajan chatted with Fast Company about $2,000 heart surgery, elephant prostheses, and the need for American businesses to, in essence, study abroad.
What’s “reverse innovation”?
Historically, multinationals innovated in rich countries like the U.S. and sold products in poor countries like India. Reverse innovation is doing the exact opposite, about innovating in a poor country like India, and bringing products to the U.S. It’s completely counterintuitive, because it’s logical to see why a poor man would want a rich man’s product, but it’s not that logical to see why a rich man would want a poor man’s product.
Why would a rich man want a poor man’s product?
There are two components here. First, why do we need to innovate in India at all? Why not simply send products to India? Second, why would those innovations defy gravity and flow uphill? The answer to the first question is that customer requirements in poor countries are fundamentally different than in rich countries. The per capita income in India is $1,000 nominal dollars; in the U.S., it’s $50,000. No business model created for the American consumer can go and capture Middle India. You have to innovate. That’s the first part. The second part: Why do these products flow uphill? Here’s an example: There’s a hospital in India called called the Narayana Hrudayalaya Hospital, or N.H. Hospital, in Bangalore. This hospital does open-heart surgery for $2,000. In the U.S., open-heart surgery costs at least $20,000. Because they offer open-heart surgery for $2,000 does not mean the quality is bad; the quality is on par with U.S. quality.
Now I know where to go for bargain-basement heart surgery.
How is it possible, to have good quality heart surgery for, as you call it, bargain-basement prices? The N.H. hospital uses the same equipment that you’ll see in Mass General. However, they use the equipment 500 times more. If you use equipment 500 times more, the cost per patient comes down. Here in Hanover, we have a great hospital. It has MRI machines, CAT scanning devices, but they’re only used 15% of the time. 85% of the time, they’re idle. Because somehow in the U.S., we have a belief that we have a birthright to have that MRI machine when we need it, these expensive machines are lying idle 85% of the time. My question to you is, would Ford Motor run their company like that?
But when you mass-produce health care, quality doesn’t suffer?
Actually when you stop to think about it, the quality improves. At the Narayana Hrudayalaya Hospital, the surgeons do so much surgery, they know more about it, and the quality improves. Assume for the moment there are 10 different types of heart surgery. Because of the high volume, at the N.H. Hospital, surgeons can specialize. Specialization leads not only to economies of scale and low cost, it leads also to high quality. Whereas at the Mayo Clinic, they don’t do enough volume to specialize, and they become generalists.