Why-and How-large corporations should invest in market-creating innovations

By:

Sep 28, 2021

This piece was co-authored by Christimara Garcia, a volunteer at the Christensen Institute and founder of Catalyze Innovations Initiative, a Brazilian market-creating innovation action tank. 

At the Christensen Institute, our research suggests that investing in market-creating innovations is a critical missing piece in the economic development puzzle for many growth economies like Brazil. These innovations are incredibly transformative because they are not just products or services, but entire systems that can provide a foundation for robust growth for organizations and regions. 

For example, when Dr. Devi Shetty built Narayana Health (NH), his goal was to make high quality–and high cost–tertiary medical care like heart surgeries affordable to the average Indian. In order to do this, NH had to make investments that many established hospitals or healthcare systems wouldn’t necessarily make. NH invested in education and found itself running 19 postgraduate programs for healthcare workers, from cardiothoracic surgery to medical laboratory technology. NH also developed an insurance product called Yeshasvini. For as little ast 11 cents a month, a member of a low-income household could get health insurance that would cover up to $2,200 in healthcare expenses. NH also invested in mobile cardiac diagnostics labs (large buses outfitted with medical equipment, cardiologists, and technicians) that traveled to poor communities. All these investments are the backbone of the system that enables NH to profitably offer surgeries and high-end healthcare services at affordable costs.

The system NH has built provides a strong foundation for robust economic activity in India. Today, the company hires more than 11,000 people and generates more than $440 million in annual revenue.

Large corporations–because of their wealth of resources–are well positioned to make the necessary investments in market-creating innovations like NH. But there often isn’t as strong an incentive for them to do so as their business models are targeted at those who can already afford existing products on the market. Unfortunately, this leaves many market-creating opportunities untapped. By creating an entirely new unit focused on identifying and developing market-creating innovations, large organizations can more confidently go after these opportunities that can generate not just competitive advantage but systemic impact. Consider how IBM did it on multiple occasions.

From Big Blue to Small PCs

IBM, sometimes referred to as Big Blue, has endured several corporate evolutions which have helped the company create multiple new markets in computing. For instance, IBM was the only leading mainframe computer maker that also became a leading maker of minicomputers. At the time, IBM sold mainframe computers for around $2 million per machine with gross margins of roughly 60%. Mini computers on the other hand, sold for around $200,000 and had gross margins of 45%. IBM was able to make the difficult transition to selling minicomputers by completely separating the two businesses. While the company made its mainframe computers in Poughkeepsie, New York, it made minicomputers in Rochester, Minnesota. There was enough distance between both business units that the minicomputer team had enough time to learn how to serve the new and entirely different market. The distance also helped IBM’s minicomputer team create new processes that aligned with the new business. When it came time to transition to personal computers, which IBM sold for around $2,000 with margins between 25% and 40%, the company repeated the process again and based the PC team in Boca Raton, Florida.

While IBM made mainframe computers by the hundreds annually and minicomputers by the tens of thousands, the company made personal computers by the millions. As a result, the company needed a vastly different system to serve this new market of personal computer enthusiasts. In order to do this, IBM, which had historically designed its software and hardware, made an equity investment in a company called Intel. Intel would go on to supply the millions of chips IBM needed for the PC. IBM also partnered with a small software startup called Microsoft for the operating system and worked with Seagate to supply the disk drives for the machines. At the time, because there was no major retailer that could profitably and competently sell the PCs, IBM had to create a network of retail stores. These investments enabled the company to successfully transition from mainframe computers to minicomputers to personal computers, a feat no other mainframe computer achieved. To illustrate how important these shifts were for IBM, consider this; few people can name an early mainframe (or mini) computer maker.

IBM was able to accomplish this because, each time the company created a different business unit that went after the new market creating opportunity. And then it isolated it. In IBM’s case, geographical isolation created enough distance from the core business to give the new business units enough time to grow. 

By investing in market-creating innovations, large corporations have a chance to create competitive advantage, as they reach out to people that didn’t have access to their product, opening a totally new segment of consumers. One of the ways companies can more effectively do this is by creating new and separate business units, with employees motivated to develop market-creating innovations for nonconsumers, large corporations can more successfully create new markets that have significant impact on their future growth prospects.

Efosa Ojomo is a senior research fellow at the Christensen Institute, and co-author of The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty. Efosa researches, writes, and speaks about ways in which innovation can transform organizations and create inclusive prosperity for many in emerging markets.