Corporations – the incumbent dilemma to scaling up social innovations
Adapted from the book “Scaling Up Business Solutions to Social Problems”, Olivier Kayser and Valeria Budinich, 2015. The book has recently been published in English and is available here.
Multinational corporations (MNCs) have a key role to play in accelerating the scaling up of social innovations, by leveraging their networks, brands and capabilities. They can also benefit by tapping into growth opportunities, stimulate their innovation and provide meaning to their employees and customers.
However, large corporations tend to be inflexible. Some are so focused on their traditional ways that they are simply unaware of new opportunities; others are unable to overcome internal organizational resistance, or are unwilling to do so by fear of jeopardizing their core business.
Some pioneering companies have resolved this dilemma. We believe it is the vision and determination of their leadership that has helped them succeed.
Multinationals: unaware, unable or unwilling?
Western manufacturers of solar home systems (SHS), and foundations engaged in multimillion-dollar rural electrification programs in Africa, were convinced that the cheapest SHS “needed” cost $1000 and could not possibly be sold on a fully commercial basis to the poorest. This thinking ignores the fact that social entrepreneurs such as SELCO and Grameen Shakti have sold over one million SHSs to poor families in India and Bangladesh by redesigning traditional products and business models to sell them at $300, with a profit.
Innovations like this challenge common business wisdom, which explains why they are usually generated by social entrepreneurs or local businesses. For the incumbents, they seem based on counterintuitive customer insights.
Even when corporations see the opportunity, they face implementation challenges to do with the unusual nature of the goals and the modus operandi of these social businesses.
For example, it took many years of trial and error for cement manufacturer Cemex to design their now celebrated Patrimonio Hoy program on housing. What made Cemex successful was their leadership’s determination to find a solution after the first pilots failed. Most corporations aren’t set up to do this.
Large corporations, as opposed to innovative entrepreneurs, have much to lose and are often unwilling to take risks.
Most are active in mature industries where market growth is slow and technology innovation minimal. As technologies mature, products become “engineered commodities”, which consumers buy primarily based on prices. Anyone familiar with these industries knows how much effort and creativity is put into avoiding the feared “commoditization” of products.
The outcomes of these strategies are high-priced, over-engineered products with very high gross margins but also with very costly selling, general and administrative expenses. Capturing a large BoP market with a radically simpler, lower-cost solution might be tempting but the fear of cannibalizing one’s core business is paralyzing.
Six lessons learned from pioneers
The obstacles mentioned above should not serve as an excuse. Indeed, some pioneers have been able to overcome them. Our experience shows that they share six consistent features.
1. Focusing on a specific problem
Compare two corporate mission statements:
- “Defeat diabetes by finding better methods of diabetes prevention, detection and treatment” (Novonordisk).
- “Lead in the invention, development and manufacture of the industry’s most advanced information technologies” (IBM).
The first is focused on problems to be solved and is implicitly opened to others joining in the effort, while the second is self-centered and competitive, seeming to pay more attention to their competitors than to their customer.
2. Recognizing ignorance
Corporations don’t know the BoP, even in their home countries.
After the 1994 Tequila crisis, Cemex decided to investigate how to grow its presence in the BoP market segment that it had never focused on. In 1998, it launched a “garden project,” with managers living within the BoP in order to understand the market of slums. In 1999, Patrimonio Hoy was launched in Guadalajara. After a year of experimentation there were few results to show, but the CEO nevertheless reiterated his commitment to the learning process. It was only in 2002 that Patrimonio Hoy was first featured in the press, four years after inception.
3. Acting as entrepreneurs
For many corporations, the first step after a strategic opportunity is identified is to prepare a business plan for approval by the executive committee. This often takes 6- to 12-months and is resources intensive. Respecting such corporate rituals is often necessary, but always frustrating as most business plans do not stand up to the test of reality.
One of the most successful projects tackling the issue of toxic cooking fumes is First Energy (originally BP Oorja). After months of testing and trying to understand the consumers’ needs, the team came out with a two-burner prototype, one powered by LPG and the other by biomass. They gave it for trial to several households from rural areas and had put all its expectations in the LPG one. Yet after the trial period, all the households said: ‘This biomass stove is terrific. But we don’t understand why you put a gas burner next to it, it is completely useless.’ Understanding cultural habits and customer preferences is critical in BoP markets
4. Nurturing the right intrapreneurs
Regardless of how insightful the strategy is and how committed the corporate leaders are, progress will eventually be limited by the number of people in corporations who are able to bridge the gap between public- and citizen- sector partners: what has been coined “social intrapreneurs.”
5. Creating an internal space in the organization
Corporate leaders need to create dedicated entities (BoP business unit, foundation, investment fund, technical assistance programs) within the organization that reinforce each other and all contribute to solving the problem selected. The challenge is to create a space where this initiative can be protected from business-as-usual rules.
6. Transforming the culture of the entire organization
These initiatives are taken to heart by people in organizations. We have seen financial experts volunteer their help on projects that did not involve their units in any remote way. Conversely, we also saw senior managers passionately arguing that it was immoral to “make money on the back of the poor.”
While BoP experiments need to be protected from the rest of the organization, a strong effort needs to be made to avoid their becoming marginalized.
This blog is part of the November 2016 series on Scaling and replicating inclusive business models, in partnership with DFID and SEED. Explore with us the key ingredients of a pathway to scale, debates and new ideas on replication, and look at what small companies, large companies and ecosystem actors can do.