UPSIDE DOWN!

Making a case for sure-fire profits

BY Jayashantha Jayawardhana

A team of MIT engineers led by Prof. Amos Winter spent six years designing an off-road wheelchair for people in developing countries. Winter also co-authored an article with Prof. Vijay Govindarajan in the Harvard Business Review (HBR) on engineering reverse innovations.

The off-road wheelchair known as Leveraged Freedom Chair (LFC) is now manufactured in India. It’s 80 percent faster and 40 percent easier to propel than a conventional wheelchair, and sells for around US$ 250 – that’s on a par with other wheelchairs in the developing world.

And the Western version of the LFC, the GRIT Freedom Chair is made using the same technology and generates high power with a lower production cost but modified with consumer feedback. It sells in the US for 3,295 dollars, which is less than half the price of competing products.

So this is a perfect example of reverse innovation. It is the strategy of innovating, and distributing products and services in developing markets, and then offering those innovations with some modifications if necessary in developed markets. Multinational corporations (MNCs) particularly favour reverse engineering as a sure-fire strategy to make super profits.

According to Winter and Govindarajan however, regardless of its irresistible appeal and enormous potential, only a handful of MNCs have succeeded in developing products in emerging markets and selling them worldwide.

So why do the others fail to capitalise on reverse innovation?

The root cause is their failure to grasp the unique economic, social and technical contexts of developing markets.

Winter and Govindarajan also observe that “at most Western companies, product developers who spend a lifetime creating offerings for people similar to themselves lack a visceral understanding of emerging market consumers whose spending habits, use of technologies and perceptions of status are very different. Executives have trouble figuring out how to overcome the constraints of emerging markets or take advantage of the freedoms they offer.”

MNCs rely on a special playbook for offering products to developed markets. Typically, they offer three variations of a particular product – viz. a top of the line offering that delivers the highest performance at a premium price; a better version that delivers 80 percent of the performance at 80 percent of the price; and a good variant at 70 percent.

To penetrate developing markets where customers have smaller pockets but high expectations, they adopt a different design philosophy that reduces upfront risks. They value engineer a 70 percent ‘good’ product down to a 50 percent ‘fair’ variant.

This proves disadvantageous on two fronts because 50 percent of the price will typically be still too high for most consumers in developing markets and upmarket consumers will go for top of the line offerings. And thanks to economies of scale and globalisation of supply chains, local companies can now bring high value products relatively cheaper and faster to market.

Therefore, to court consumers in developing markets, companies have to meet or exceed performance, or the quality of existing products and services. Ideally, they must be able to provide 100 percent of the performance at 10 percent of the price. To play this right, Winter and Govindarajan prescribe several reverse innovation principles.

PROBLEMS As the saying goes, when all you have is a hammer, you tend to treat every problem like a nail. Focus on developing the most effective solutions to the real problems of consumers rather than foisting what you’ve already developed with minor tweaks.

SOLUTIONS Though developing markets are replete with constraints, they also offer intrinsic design freedoms. Zoom in on how to serve their real needs and wants; then design an optimal product offering using the low-cost resources and technologies at your command.

ANALYSIS In developing markets, social and economic requirements often drive technical requirements for products. If you design a tractor for low income farmers, you must be able to generate adequate traction and pulling force while making it lighter to drive down the cost of production. Since tractors are also used for transportation of people and goods, that too should be factored in.

SUCCESS Map all the stakeholders who will determine the product’s success. In addition to what end users really need and to build a scalable business model, stakeholders must figure out who will make the product, as well as distribute, sell, pay for, repair and dispose of it.

WINNERS Since the average disposable income of consumers, poor infrastructure, limited natural resources and low access to technology are challenging constraints, they compel you to think outside the box and create global winners.