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How To Disrupt Using Reverse Innovation

Can emerging markets teach us how to innovate?

23Feb

Innovation is not the same for everyone and can come in many shapes and forms. Which model to choose is often a hard question, but testing and experimenting is a good practice to start with. Today, many companies tend to choose a disruptive model, where they jump in an existing gap at the bottom of the market and make their way up until they replace incumbents. But successful cases of this approach are a rarity rather than common place.

There is, however, a model which can provide high-end market incumbents with more room for experimentation at the bottom end, without much of a risk for their valuable assets; reverse innovation.

Initially coined by professors from Dartmouth Tuck School of Business Chris Trimble, Vijay Govindarajan, and GE's CEO Jeffrey Robert Immelt, reverse innovation means deployment of low-cost products and services across emerging markets first, with a further expansion of the same product to the developed world. GE has been practising the model with its healthcare unit for quite a while, but the path has not been easy.

General Electric, is one of the world's largest conglomerates who operate in multiple sectors, including power, natural resources, healthcare, transportation, and capital, acting as a provider of services which cater to the needs of multiple industries. For a long time, the company has been mainly operating in the developed world, where clients can afford high-end services and products, and this strategy has served as a good revenue generator. A short while ago, though, GE decided to make some changes to their approach and started to learn more about low-end goods which specifically target emerging markets, but can be deployed across wealthy nations too.

If a company that wants to practice reverse innovation model is, for example, a startup, the implementation of this innovation strategy could theoretically be more straightforward, if they would initially focus strategic efforts on the design of a low-cost innovation for a low-cost market before its delivery to a developed market. With large and mature companies, they need to go 'top-down-top', meaning that they will inevitably face clashes between their business strategies.

When companies first innovate in developed countries, the business strategy requires a centralized approach, in terms of resources and power, and with reverse innovation, it is, predictably all about decentralization. The approach requires learning about the local and low-end aspects, so innovation can fit the criteria of a particular customer base first, and then it can be adjusted to the conditions of the main market.

Why would a company want to use a model?

Emerging markets are developing fast, however, they are still not ready to adopt the full spectrum of innovation that is offered in the developed world. When it comes to countries like India and China, two of world's most populated areas, the purchasing power is still nowhere as big as, for example, the US's (in terms of the GDP per capita), but that's exactly what’s needed for reverse innovation.

In the rural area of China, for example, there are millions of people who don't have access to healthcare services in the form that may be available in more wealthy nations. However, those living in poor regions want to have this access, and preferably cheaply. And that's where large companies from developed markets can contribute to finding innovative solutions, but they need to do so with the low price per unit of innovation. In his interview for Harvard Business IdeaCast, Vijay Govindarajan, one of the creators of reverse innovation model, said: 'That is exactly the problem that is faced by the US consumer. Therefore, while it may appear that 'what can a $200 per capita consumer teach a $50,000 consumer?' The fact of the matter is, it is the same problem the US has to solve.'

One of the solutions for the developing world could be to introduce generic versions of advanced technologies, sacrificing some quality - which would undeniably improve the situation in a short-term but would also create new problems that would have to be fixed systematically, requiring more resources from the innovator. With reverse innovation, advanced technology and approaches are used to create brand new solutions which would allow for the creation of highly reliable, functional, and ultra-low-cost products. Once the product is successful in the emerging market, it could be then brought and implemented in the developed world.

In the end, the product successfully enters the global market, but foremost, it creates a completely new niche at the bottom end, meaning that the innovator can execute, disrupt, and enjoy dominance in a newly created market.

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