The Power of Market-Creating Innovation

By Clayton M. Christensen; Efosa Ojomo and Karen Dillon

Contrary to the conventional wisdom that a society must “fix” itself—its infrastructure, courts, legislatures, financial markets, and so on—before innovation and growth can take root, we believe that innovation is the process by which a society develops. Innovation funds our infrastructure, cultivates our institutions, and mitigates corruption. When a country’s prosperity stalls out despite a lot of activity within its borders, that country might not have a development problem. It might have an innovation problem.

Image result for Picture of a bulb shining

Market-creating innovations, in particular, provide a strong economic foundation. They share several characteristics. First, they offer many people access to a product or service that was previously unaffordable or otherwise unattainable—if it existed at all. That can have a profound impact on economic development for the region in question as well as on wealth generation for the innovator and entrepreneur.

Second, market-creating innovations leverage business models and value chains that focus on profitability before growth. They often do this by borrowing existing technology and inserting it into a different business model. When Kenneth Nnebue inadvertently launched Nollywood, he not only gave millions of Africans access to locally made video content but also inserted existing technology (VHS tapes and recorders) into a business model (straight to video) that many would have scoffed at. Nnebue understood that although straight to video might have been merely a face-saving tactic in Hollywood, it was the right strategy for Nigeria. If he had tried to copy Hollywood and build theaters, his efforts might well have floundered.

Third, market-creating innovations are generated by and for a local market—or at the very least, they are designed with a local market in mind. This means that innovators must do the arduous work of understanding the ins and outs of that market and making a product simple and affordable enough for it. They might make use of low wages in the region, but market-creating innovations are not fundamentally about taking advantage of low wages to make a profit. In fact, over time—as an innovation spreads throughout a market—wages increase. This is in contrast to the race-to-the-bottom phenomenon, wherein low wages are deliberately exploited, often for export.

The increase in wages brings us to the fourth characteristic: Market-creating innovations generate local jobs, which fuel the local economy. These jobs arise specifically to serve the local market; they cannot easily be outsourced to other countries. They might include, for example, positions in design, advertising, marketing, sales, and distribution. They often pay better than global jobs, such as low-wage manufacturing work and work sourcing raw materials, which are more readily moved from one region to another. Nigerians may not have manufactured VHS tapes or recorders, but recall that today Nollywood employs more than one million people in the country. And their jobs, unlike many created in Nigeria in decades past, are not at risk of leaving.

Finally, market-creating innovations can be scaled up. In fact, because they make a product simple and affordable, bringing it within many people’s reach, scaling up is a fundamental part of the process. As Nollywood spread across the continent and to Africans in the diaspora, it created more jobs, supported infrastructure development, and helped Nigeria develop its fledgling institutions. Thus the potential impact of market-creating innovations is enormous for companies and countries alike.

Let’s turn now to two more market-creating innovations, exploring how the various characteristics have played out in each.

Bringing Market-Creating Innovations to Life

How should companies think about creating new markets in frontier economies? We have identified five guiding principles.

1. Every nation has within it the potential for extraordinary growth.

Innovators must first understand that despite what traditional market analysis might tell them, significant opportunities exist in frontier markets. These do not (and should not) resemble opportunities in developed markets, which differ in their fundamental makeup. Richard Leftley saw that although Africa was home to 16% of the world’s population, it accounted for less than 2% of the global insurance market—and those lopsided figures signaled that a vast market could be opened precisely because of the continent’s nonconsumption of insurance.

2. Most existing products have the potential to create new growth markets if we make them more affordable.

Narayana Health is a chain of multispecialty hospitals in India, with seven world-class heart centers, 19 primary care facilities, and more than 6,000 beds. Devi Prasad Shetty, who once served as Mother Teresa’s personal physician, founded NH in 2000, when India was one of the very poorest countries in the world. He focused on improving the process by which care is delivered and as a result democratized access to highly complicated and expensive procedures.

In the United States, open heart surgery can run as much as $150,000—more than most Indians make in a lifetime. Given the cost, almost no one in India who needed heart surgery actually got it. Shetty saw an opportunity to create a new market for cardiac care. Today NH performs open heart surgeries for $1,000 to $2,000, with mortality and infection rates comparable with those in the United States. By increasing the utilization of its most expensive resources—personnel (especially surgeons) and medical equipment—it drastically reduced the cost of operations. It uses tiered pricing, whereby wealthier patients can pay more to get certain services, such as a private room. But the quality of care is standard across all patients.

NH has expanded over the years and now provides quality care in more than 30 additional specialties, including oncology, neurology, orthopedics, and gastroenterology. The organization is worth some $1 billion, serves nearly 2 million Indians a year, directly employs more than 14,000 people, and has trained thousands of workers who are now employed at other facilities in India and abroad. And while major hospitals in the United States struggle to make a profit, NH made more than $20 million in fiscal 2017–2018.

3. A market-creating innovation is more than just a product or a service.

It is a system that often generates new infrastructure, regulations, and jobs for people who make, distribute, market, sell, and service the offering. One of the clearest illustrations of this point is Mo Ibrahim’s Celtel (now part of Bharti Airtel), which democratized telecommunications in Africa and paved the way for an entirely new digital economy that now supports some 4 million jobs. Celtel did not simply create an inexpensive mobile phone; it built a whole system that includes cell towers, installed and maintained by engineers; scratch cards containing prepaid calling minutes, sold in informal shops; advertising, created by artists and graphic designers; contracts, drawn up by lawyers; new projects, financed by bankers; and customer support staff. By 2020 the industry is expected to support more than 4.5 million jobs, provide $20.5 billion in taxes, and add more than $214 billion to African economies.

4. Obstacles can be mitigated through innovation; innovation doesn’t have to wait for their elimination.

The essentials of development and prosperity can be pulled in by market-creating innovations, as we have seen. When such innovations take root, infrastructure improves, institutions strengthen, and corruption is tempered. And once a new market becomes profitable to the various stakeholders in the economy, including investors, entrepreneurs, customers, and the government, they are often incentivized to help maintain those resources. The process occurs over time; it is not a single event.

5. When innovations target nonconsumption, scaling them up becomes inexpensive.

Once an opportunity is identified and a business model is conceived to make a product or service available to a large population of nonconsumers, achieving scale is relatively cheap. The first step is recognizing an area of nonconsumption. If you try to exploit existing opportunities in frontier markets—many of which are already crowded—and hope to get scale up that way, you may find yourself chasing a mirage. Think about how easily Safaricom, the company behind the innovative mobile-money product M-PESA, grew its operations after creating a market for consumers who were unbanked. In less than a decade more than 20 million Kenyans adopted M-PESA. Contrast that with how much it might have cost Safaricom, and how much longer it would have taken, to exploit the conventional banking system—buildings, branches, accounts, staff, regulations, and so on—to achieve the same scale.

term strategy and readiness for an economy beyond oil. For a country as dependent on oil as Nigeria, it would be interesting to simulate a month without earnings from sales of crude oil, and play out the impact on running government at the federal, state and local government levels; as well as impact on the private sector. 

While there is an unending argument about oil being a blessing or a curse to Nigeria; we should perhaps focus on how to make oil the catalyst to fund the foundation we require for a future economy beyond oil and avoid the current behaviour of spending it all. 

The future will come, whether we are ready or not, better to be ready.

Conclusion

The key to cracking frontier economies lies not in exploiting existing markets, although that may lead to some success. It lies in creating new markets that serve the billions of nonconsumers unable to find a product or service to help them solve an important problem.

The process by which those markets are created, even in the least likely of circumstances, is what investors and entrepreneurs need to understand. Our research suggests that this is the critical missing link. Once we focus more effort on that, immense opportunity will ensue, and inclusive, sustainable development will follow. It is precisely through innovations that generate or connect to new markets that societies can create jobs, pay taxes, and build their infrastructure and institutions. The quality that sets market-creating innovators apart—the ability to identify possibilities where there seem to be no customers—is the reason their work represents such enormous opportunity.

“It’s difficult to run a ruler over things you can’t see,” Mic.

“It’s difficult to run a ruler over things you can’t see,” MicroEnsure’s Richard Leftley says. “But when you strip away the layers of conventional thinking about what’s not possible and start to reimagine what is, you can begin to create something really powerful. And that, in turn, has the potential to change the world.”

Photo Credit: Pexels

Clayton M. Christensen is the Kim B. Clark Professor of Business Administration at Harvard Business School and a coauthor of The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty (HarperCollins, 2019). 

Efosa Ojomo leads the global prosperity research at the Clayton Christensen Institute for Disruptive Innovation and is a coauthor of The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty (HarperCollins, 2019).

Karen Dillon is a former editor of Harvard Business Review and a coauthor of The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty (HarperCollins, 2019).