Reverse Innovation

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Last week I wrote in a post that the cost advantages of engineering in China had dissipated to the point that the only remaining rationale was developing products in China for the local market. Local designers are much more likely to create innovative products tailored for the market with radically different value propositions than those found in the developed world. This is superior to the strategy of stripping down products that were developed for a more mature economy.

The problem with the dilution strategy is that products often fail to address the real and different needs of consumers in the developing world. The design-to-value approach is based on value perceptions of the end consumer and the mix of attributes required to enhance this perception is different market to market. It is not just about hitting a price point, it’s about getting the price - value equation right. When it comes to developing products in China, getting this balance right is best left to the locals.

The ancillary benefit of this approach is that you can occasionally stumble upon an innovation that has mass appeal across multiple markets, both developed and developing. These “reverse innovations” that result from importing product designs back to developed economies have the potential to upset existing offerings based on much different price – value propositions.

There are still some cost advantages to engineering in China, but the real opportunities lie in developing for the local market. The advice from my colleagues at Kalypso is to focus your engineering and development resources on understanding what Chinese customers want and learn to rapidly prototype multiple solutions. You can read a short paper on the subject here. Using the trade-off analyses inherent in a design-to-value approach may lead to breakthroughs that have implications far beyond Asia.