Reverse innovation: What advantages do developing countries have in product innovation?
The conventional wisdom is that innovations originate in rich countries and the resulting products are sold horizontally in other developed countries and then sent downhill to developing countries. However, a reverse approach exists.
Reserve innovation
Reverse innovation broadly refers to the process whereby products originally developed for the markets of developing countries, also have significant potential in developed markets. E.g. GE Healthcare has successfully developed a low-cost electrocardiogram machine for the Chinese market, which has subsequently been marketed in the US with great success – and this without losing substantial revenue on their existing products in this category. Another widely known example, which to some extent can be described as reverse innovation, is how the microfinance institution Grameen Bank established a branch in the US – Grameen America – to serve poor people.
Innovations are born at the edge
The concept of reverse innovation was originally described in a McKinsey Quarterly. In essence, the authors emphasize that the periphery of today's global business environment is where innovation potential is the highest. “Edges define and describe the borders of companies, markets, industries, geographies, intellectual disciplines, and generations. They are the places where unmet customer needs find unexpected solutions…".
Another example of a company using the markets of developing countries to extent the periphery in how they create new products is Nestlé and Procter & Gamble. Both companies have successfully developed new fast moving consumer food goods that have been marketed widely in developed countries. “For companies, adopting this mindset in the perception of innovation can be very fruitful. I think it is very important to be aware that targeting the BOP markets is a very pragmatic and tangible approach in opening up the potentials for reverse innovation”, says Andreas Flensborg, Consultant at DIBD.
Linking back to BOP business development
The assumptions made by McKinsey are directly linked to thinking on BOP markets and how companies can use these markets for reverse innovation practices. C.K Prahalad points out five traits in this context:
- Affordable Products: Emerging nations cannot afford goods priced for the U.S. and Western Europe, which pushes companies to find inexpensive materials or manufacturing options.
- ‘Leapfrog’ Technologies: Developing countries lack 20th century infrastructure and so have fast-forwarded to newer technologies such as mobile phones or solar energy.
- Service ‘Ecosystems’: Entrepreneurs in poor nations often must rely on others for help, creating new partnerships like video-game cafés where gamers test offerings such as online identity verification.
- Robust Systems: Emerging markets require products that work in rugged conditions. A gadget sturdy enough to survive monsoons can handle spilled coffee in Boston or San Diego.
- New Applications: Customers in poor countries have few product choices, providing market openings for add-ons that update and extend the lives of existing merchandise.
Why is this relevant for my company?
At time, companies are keen to go into attractive new markets, because of those exact reasons. However, if the products of the company bear little resemblance with the needs of the consumers and the markets, the company can find a hard time in adapting and developing new products, trying to unlock and access the potential profits. Reverse innovation can become a key driver for your company in overcoming those barriers. It gives the companies a chance to reconsider their investments in new product development and whether the return on investment can be spread out and not only focused narrowly.
Investments without a clear scope are rarely welcomed, but many companies in the developed become apparent that the rapidly growing multinationals in developing countries have several advantages. Emerging market competitors could be the strongest advocate for reverse innovation. If established global corporations do not invest and innovate in poor countries, new competitors will seize the opportunity. They will take the lead in innovation — not just in the poor world, but throughout the world. They could develop into formidable rivals. Already, there is a new generation of global corporations rising from the developing world, including Tata, Mahindra, Lenovo, and Haier.