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Whether it’s at the country, corporate or individual level, this blog considers how to gauge and measure impact.

Monday, March 10, 2014

NexThought Monday - The Dark Side of Reverse Engineering

By Stuart Hart

Flickr credit: Jesper Rønn-Jensen

It has now been more than a decade since C.K. Prahalad and I first published the article "The Fortune at the Bottom of the Pyramid" which launched the "BoP" business movement.  Over the past decade, there have been fits and starts: many BoP ventures have failed; others have been converted to philanthropic programs; but only a few have taken root and gathered significant commercial momentum.

This has led some to conclude that the whole concept of enterprise-based solutions to poverty was flawed in the first place. This has lead some to pronounce variously BoP business as the latest form of corporate imperialism – focused merely on profiting from the poor; or a quixotic quest for the impossible – a misallocation of valuable investment capital.  

In reality, however, rumors of BoP's demise have been greatly exaggerated (to paraphrase Mark Twain).  Indeed, much has been learned over the past ten years and I believe that we are on the verge of taking the BoP business movement to the next level in the coming decade – a BoP 2.0 revolution.

One area of important learning has been the potential for incubating disruptive innovations and business models starting in the underserved space at the base of the pyramid and later having some of these innovations move up-market.  

Clay Christensen and I wrote about this more than a decade ago (2002) in an article entitled "The Great Leap: Driving Innovation from the Base of the Pyramid."  The idea has caught on.  Over the past decade, a whole slew of new terms and buzzwords have arisen to describe this phenomenon, including trickle-up innovation, frugal innovation, and the latest incarnation: reverse innovation. Vijay Govindarajan and his colleagues have led the way in developing the strategic logic for reverse innovation and documented a growing number of cases illustrating this approach from the corporate sector, beginning with General Electric’s development of a low-cost, hand-held ultrasound device in rural India and China.

A key difference between reverse innovation and the earlier work on base of the pyramid strategy is the promise –even expectation – of large and profitable up-market migration for the innovations incubated in the underserved space. GE's hand-held ultrasound device, for example, has "trickled up" to the U.S. and other developed markets and now constitutes one of the fastest growing and profitable businesses for GE's Healthcare business.  

There is some good news and some bad news regarding this trend. First the good news: Reverse innovation provides an attractive internal logic for undertaking such innovation initiatives within large corporations. Rather than simply focusing on the possibility of opening up new markets among the world's poor and underserved, reverse innovation offers the potential for having your cake and eating it too by incubating innovations in the underserved space that can migrate up-market bringing new, disruptive, affordable, and (potentially) more environmentally sustainable products and services. Witness the growing "trickle-up" success in point-of-care medical devices, mobile telephony, and distributed energy technologies, for example.  Exciting stuff, to say the least.

But now for the bad news (there is a potential dark side as well): The risk that corporations gradually come to view the world's slums and rural villages primarily as laboratories for incubating innovations for the rich. The poor, in other words, come to be seen more as guinea pigs than as underserved people and communities with special needs and requirements – a place for corporations to force cost constraints on their innovation process enabling even higher returns in the eventual (ultimate) market at the top of the pyramid.

Should this scenario come to pass, it would represent a double tragedy.  Not only would this damage corporations' reputation and continuing right to operate, but the evidence is also mounting that few innovations incubated in the base of the pyramid space can easily travel up-market without significant modification, threat of imitation, or competitive reaction: Frugal designs must be upgraded to appeal to the wealthy; low-cost innovations can often be easily imitated, and competitors with lower cost structures can enter as fast seconds after the pioneers have incurred all the development costs.  

Allow this to serve as a cautionary tale to all those large, incumbent corporations thinking reverse innovation is the magic bullet: Focus on first things first, that is, better serving and lifting those underserved at the base of the income pyramid.  Should some of these disruptive, lower cost, or environmentally sustainable innovations eventually lend themselves to application in the up-market, that is great news for the corporations and the world.

But let us not look back in another ten years and view reverse innovation as yet another classic example of the Law of Unintended Consequences.

Stuart Hart is the Samuel C. Johnson Chair Emeritus in Sustainable Global Enterprise and Professor Emeritus of Management at Cornell University’s Johnson School of Management. 

 

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