September 2013 Editor's Choice: Innovation & Scale: Two Sides Of One Coin

Businesses know all too well that Price – Profit = Cost, and this age-old formula has been a guide to successful investments in innovation for many years.

Yet this month’s editor’s choice suggests that to innovate for inclusive business, the best approach is to flip this formula and look at it as Cost + Profit = Price. Sure, they mean the same thing? Perhaps, but they imply different strategies.

The second equation is a clue as to how you approach innovation, given a major constraint at the base of the pyramid, highlighted by C.K. Prahalad in his article, Bottom Of The Pyramid As A Source Of Breakthrough Innovations. A major constraint for the BoP is price - and relatedly affordability. The author suggests you fix price relative to what the BoP can afford, identify what profit/revenue mix you are after and then innovate to find solutions that provide an acceptable quality for the price point arrived at. A very practical case study is then used to illustrate how this was done with BP in India.

While our focus on the Practitioner Hub tends to be on how inclusive business works in practice, this month’s Editor’s Choice takes a more theoretical approach, but one that is essential to understanding how to design business models that build in both innovation and a vision towards scale. The Product Development & Management Association published the article in the Journal of Product Innovation & Management in 2011, so that “…by focusing managerial attention on creating awareness, access, affordability and availability (4As), managers can create an exciting environment for innovation.”

Academic but highly accessible, this paper shows very simply how to use external constraints such a minimum price the BoP can afford for a given product to set the framework within which new products and business models can be created. It also shows how getting the framework right produces the necessary demand to get to scale - the idea of scale is therefore incorporated into the innovation process right from the start.

A $2000 car (Tata Nano); a $50 cataract surgery (Aravind Eye-Care System); less than $0.01 per minute of cell phone time (Airtel); a modern, well appointed $20 hotel room (Ginger)... These are a few of the examples of great innovation cited by Prahalad in this article. “To operate profitably in these settings, we have to transcend technology and product perspectives of innovation and focus on total delivery of value. As a result, we are forced to rethink the very source, the focus, and the processes of innovation.”

The challenge according to the author is how to provide “world class quality (not luxury) at prices that are one fiftieth…” He suggests similar thinking is needed when seeking to convert the BOP into micro-consumers, micro-producers, micro-investors and innovators.

According to the article, there are pre-requisites to innovation at the BOP which create unique challenges:

1. Creating an awareness of the product and service such that the BOP consumers and producers know what is available and on offer, and how to use it;
2. Enabling access such that even consumers in remote locations are able to get access to the products/service;
3. Ensuring that the product or service is affordable. Most often, this is the most difficult problem for firms from the developed markets to come to terms with. We need to provide world-class quality (not luxury) at prices that are one fiftieth or better such as a $50 cataract surgery (with world-class quality); and
4. Focusing on availability. To build trust and a loyal base at the BOP, we have to ensure an uninterrupted supply of products and services.

These pre-requisites suggest a number of constraints to think about and thankfully the article asserts, “In the BOP, successful innovation is about working with constraints… to succeed we need to accept them as real and work with them.”

The trick I learnt from this article was that all constraints (including challenges such as getting price right or scalability) have to be properly identified upfront to guide innovation. Any innovative solution built to fit all the constraints is likely to produce innovation that works!

Prahalad uses the example of building a biomass stove for the very poor in rural India to illustrate the process of innovation for the BOP. One of the constraints in the process was that the innovative stove solution had to be scalable – it had to lead to a viable business not just a product. The key point is that all aspects of the business – manufacturing and logistics, distribution and fuel supply – had to scale. They planned to sell 1million units in the first 2-3 years with a further goal of serving 20million consumers in 10-12 years.

Their results were good: within the first two years of the project, 400,000 units had been sold, exceeding the scale and quality achieved by others. Data on energy efficiency gains, carbon reduction and indoor pollution is strong.

In Nigeria I have witnessed a parallel example, working with Oando, a leading energy company. The company has adapted every aspect of the design production, distribution, retail, financing and refilling of its liquid petroleum (LPG) stove, to develop the 3kg O-gas, a version tailored for the base of the pyramid. After considerable investment, sales to micro-finance clients are picking up. This model is high innovation and it only works if it goes to scale.

The example of Oando features strongly in a new Insider on Innovation, drawing on the BIF portfolio, and exploring how the themes of Prahalad and others can be seen to work in practice. Similarly the constraints to scale – important to identify from the start, as Prahalad argues – are explored in practice in another new Insider, ‘Scaling Inclusive Business’.

Further Information

C.K Prahalad's article, 'Bottom of the Pyramid as a Source of Breakthrough Innovation' (2012) can be found here

To explore how Prahalad's theory works in practice, see the Insider on Innovation. To find out why most inclusive businesses fail to scale, read Scaling Inclusive Business.

All previous Editor's Choice blogs can be found here.