Why Inclusive Innovation
Innovation today is widely recognized as a major source of competitiveness and economic growth for all countries – advanced and emerging economies alike. Its significant role in creating jobs, generating incomes and improving living standards is now well-understood.
However, instead of viewing innovation strictly in terms of competitiveness and as a strategy to support high value-added employment, it should also be conceived as a means of promoting `inclusive growth’. Inclusive growth embraces the have nots and brings them into the mainstream of the economic system as customers, employees, distributors and intermediaries. Inclusive growth will lead to resource poor people gaining access to essential necessities of life at affordable prices. Inclusive growth can be accelerated through inclusive innovation.
For achieving `truly’ inclusive innovation, we will have to cater to the needs of 4 billion people, whose income levels are less than $ 2 per day. For this, we need to make some paradigm shifts. For instance, getting more (performance) by using less (resources) for more (profit) is a well known strategy of industrial enterprises. However, when we achieve more (performance) by using less (resources) for more (people) then alone we can create ‘inclusive growth’. Let us call this “more from less for more people” paradigm as an MLM paradigm1.
The Challenge of MLM
The objective of MLM type of innovation would not be just to produce low performance, cheap knock-off versions of rich country technologies so that they can be marketed to poor people. Rather, the objective is to harness sophisticated science and technology know-how to invent, design, produce and distribute high performance technologies at prices that can be afforded by majority of people2,3.
If the MLM paradigm is made into a reality then the poor can potentially have the same ‘functional and emotional experience’ as the rich have for a fraction of the price. For example, a two wheeler scooter owner in India today can afford to buy world’s cheapest car, Tata Nano, costing $ 2,000. And this car is a proper car. It is comfortable, fuel efficient and environmental friendly. So this is an example of an innovation that is truly ‘inclusive’.
The challenge of serving these billions of people lies in moving from ‘low cost’ to ‘ultra low cost’ and from ‘incremental innovation’ to ‘disruptive innovation’, so that not just `affordable’ but `extremely affordable’ products and services can be created for these billions.
The Indian MLM Strength
Contextual factors have undoubtedly facilitated the growth of Indian MLM capacity. There are five factors that stand out.
First, the country’s political leaders experimented with socialism for more than four decades, which kept out foreign capital and technologies, but spurred local innovation. Indian engineers, backed by government funding, developed some of the lowest cost nuclear weapons, rockets, imaging techniques, supercomputers by depending only on their own ingenuity.
Second, the Indian economy didn’t start growing until the 1990s, so local companies were small. For example, in 2008, India’s then largest pharmaceutical company, Ranbaxy, made $800 million in revenues, which was 60 times less than the $48 billion that Pfizer made and nine times less than what the U.S. giant budgeted for research. Indian entrepreneurs, therefore, developed a penchant for undertaking small projects and using capital carefully. They’ve changed their approach to scale since 1991, but they maintain an unwavering focus on capital efficiency.
Third, local companies know that while India has both rich and poor people, catering only to the rich limits their market. Most target the aspiring middle class family, which lives on $5,000 a year. As a result, they were forced to develop value-for-money products and services by changing the price-performance equation.
And fourth, the most important driver happens to be India’s innovation mind-set. Some Indian leaders had the audacity to question the conventional wisdom. With increasing frequency, these leaders were rejecting established ways of doing business in favour of new practices. The mix of miniscule research budgets, small size, low prices, and big ambitions had created the need to think and manage differently. Indeed it is fair to say that the combination of extreme scarcity and extreme aspiration ignited the Indian innovation.
From `Low Cost’ to `Ultra Low Cost’
To how many of the following questions can we answer in ‘yes’?
• Can we make a Hepatitis-B vaccine priced at US$20 per dose available at a price that is 40 times less?
• Can we make an artificial foot priced at US$10,000 available at a price that is 300 times less?
• Can we make a high quality cataract eye surgery available, not at US$3,000, but at a price that is 100 times less?
• Can we make a mobile phone call at not 8 cents per minute but at a price that is 8 times lower.
Incredible as it may sound, all such MLM targets have been met in India. Let us explain as to how such impossible looking targets have been met by just citing a few representative examples.
The MLM challenge involves inclusive innovation centered around creating extremely affordable products as well as offering extremely affordable services through business process innovations, workflow innovations and so on. We must remember that innovation is all about doing things differently to make a big difference.
And here are some brilliant examples of such MLM innovations that have been successful in India.
MLM through Product Innovation: Tata Nano
The idea of Tata Nano was conceptualized by Ratan Tata himself. He gave a challenge of designing and developing a very low cost four wheeler to the young engineers in Tata Motors4. The tight price-performance envelope was such that the price of $ 2,000 was emphasized with all departments, namely design, development, production, materials, logistics and sales.
The Tata Nano team drew ideas from different sources, from helicopters to two wheelers. For example, the mechanism of helicopter seats was used to get a solution for the design of Tata Nano seats. Window winding mechanism was inspired by helicopter windows. The dashboard, fuel lines and lamps drew inspiration from two wheelers.
Tata Nano has contemporary styling, spacious interiors and high standards of performance. Tata Nano has a rear mounted 624 cc, 35 bhp engine, a maximum speed of 125 km/hr with a fuel consumption of 23 km/litre. It meets the Euro IV emission standards.
The low cost assembly line of Tata Nano, its innovative partnership with component manufacturing and the innovative business model for automobile dealerships have set new benchmarks for the global automobile industry.
MLM through Product Innovation: Chhotukool, a Nano Refrigerator
Tata Nano was produced by considering the constraints on costs that people with lean resources have. But India is full of other constraints too. India hosts the world’s largest population deprived of electricity. Some 92% of this population lives in rural India, 380 million people or 71.7 million households. The quality and quantity of power these people have access to, is very poor. The power situation in rural India cannot be fixed overnight. On the other hand, Effective refrigeration in rural areas can help people extend their access to not only food, but also essential drugs.
Godrej and Boyce took up this challenge5. They launched ChotuKool, world’s cheapest refrigerator with a $69 price tag in the spirit of Nano. The portable, top-opening unit weighs only 7.8 kg, uses high-end insulation to stay cool for hours without power and consumes half the energy used by regular refrigerators. This product had to cross several technological and social barriers.
To achieve its efficiency, the ChotuKool does not use a compressor; instead it runs on a cooling chip and a fan similar to that used in computers. Like computers, it can run on batteries. In a true MLM spirit, it has only 20 parts as opposed to more than 200 parts in a normal refrigerator.
The ChotuKool was co-designed with village women to ensure its acceptability. It is distributed by members of a micro-finance group. There are other business process innovations also coupled with product innovation. For instance, the villagers will act as marketers and will earn a commission of approximately US$3 per fridge sold. This fridge is targeted at households, who earn approximately US$5 a day, of whom there are almost 100 million in India. A true MLM story!
MLM through Product Innovation : Nano Laptop
Tata Nano and Chhotukool are examples of MLM innovations by private sector. What about the public sector? Well, there are many. Let us just cite the latest excitement.
On July 22, 2010, India unveiled a $30 laptop which is designed specifically for students. The laptop, designed in the spirit of Nano, is promised to be available for the students in 2011. The device has been designed by scientists from India’s premier science and technology institutions like Indian Institute of Technology and Indian Institute of Science6.
This Nano Laptop will be no bigger than a conventional laptop. It is a single unit system with a touch screen and a built in key board along with a 2 GB RAM memory, WiFi connectivity, USB port and powered by a 2-watt system to suit poor power supply areas. The low cost laptops are proposed to be distributed in millions in schools by the Government of India.
MLM through Business Process Innovation : Indian Telecom
The telecom industry revolution in India, specifically in wireless communication, is another example of MLM, with brilliant business process innovation. This industry now adds around 20 million subscribers per month. The cost of a minute of a cell phone time is less than one cent, the lowest in the world. A mobile handset is available for as little as US$20. The cost of one SMS text message has dropped down to as little as two by thousandth of a dollar!
This journey began with an audacious dream of a visionary leader Dhirubhai Ambani, who challenged his team to innovate and bring down the cost of a phone call to that of a post card in India7.
The Reliance team said that it did not understand telecom but it did understand refining. So the team used an innovative “refining model of telecom.” Rather than following the traditional model of purchasing telecom equipment on a cost per subscriber basis, which meant paying a massive upfront cost per subscriber fee to vendors, Reliance paid them for the volume of traffic of voice that flowed through the equipment per unit time.
Reliance also pioneered some groundbreaking marketing strategies including free text messages, free phones, free incoming calls, and more. With Reliance’ entry, outgoing call rates dropped exponentially thus creating a revolution in the Indian telecom industry. Reliance’s deal with equipment suppliers set the benchmark for the lowest equipment prices in the world. And this initial movement of providing value for money plummeted the prices and costs to the ultra-low levels that we have achieved today by leading companies like Airtel.
Indeed, the remarkable success of Airtel is a testimony to the idea that it is not the product innovation alone but the business model innovation that counts3. At a superficial level, Airtel looks every bit like another telecom firm. But Airtel broke the telecom paradigm. It started with two major conceptual breakthroughs. It shifted the focus from Average Revenue Per User (ARPU) to contribution per minute and from vertical integration to outsourcing. Then it was creative in operationalizing these concepts in a systematic fashion. Its goal was to seek the best partners in the world such as IBM, LM Ericsson, and Nokia. With each vendor, it negotiated agreements that was a “win-win” and focused on growth. Further, capital expenditures (fixed costs) were converted into operating expenses (variable costs). It built rapidly an ecosystem of value added application developers and a large distribution channel piggy backing on existing small Indian retailers. It also built a system of contract governance that provided for flexibility, learning and change. Airtel has become one of the most benchmarked firms in the telecom industry and many telecom firms are now trying to imitate the Airtel innovation.
MLM through Work Flow Innovation: Aravind Eye Care
Aravind Eye Care system was started by G. Venkataswamy8. His mission was to eliminate ‘needless blindness’. The cost of a typical cataract surgery in the U.S. is around $3,000. Aravind has managed to bring down the cost to $30, performing around 300,000 surgeries per year. Aravind Eye Care has developed a cost-effective revenue model so that thousands of blind poor can be operated on for free or nearly free. Revenues were generated from a small percentage of paying patients6.
How did they achieve this MLM feat? Instead of increasing the number of surgeons Aravind decided to find ways to increase a surgeon’s productivity9. And it perfected an assembly line technique of surgery that increased this productivity by a factor of ten. The inspiration for this MLM innovation was drawn from McDonalds – delivery of the same quality of products in diverse regions through highly trained staff by an assembly line operation. The high cost of imported ophthalmic supplies was countered by setting up one’s own manufacturing unit. The costs of lenses were reduced from $100 to $2!
Manpower costs were dramatically reduced through innovative means. Aravind hired paramedical staff with lower educational qualifications than those in other institutes, hired them from rural and backward areas and yet gave them far more responsibility than the other institutions did. And the paramedical staff delivered.
But can such cheap eye surgery deliver quality results? A comparison of the data on some post-surgery parameters shows that Aravind Eye Care outperforms Royal College of Ophthalmic Surgeries in UK7. So, Aravind Eye Care innovation is not about getting `less from less’. It is about getting `more from less’. And that too for `more and more people’.
MLM by Involving Masses
Since MLM innovations are for masses, an interesting question is this. Can we get the masses involved in doing the MLM innovation? The answer is in the affirmative.
India’s National Innovation Foundation (NIF) set up in the year 2000, recognized that India just does not have one billion mouths to feed, it has one billion minds that can think! NIF started scouting, promoting and rewarding the grassroots innovations and innovators. Thousands of such innovations have been documented and encouraged10.
Let us cite just one typical example. NIF identified an innovation on a rural washing machine,that can work without electricity because it is pedal driven. A Kerala school girl, Remya, developed it because she had this incredible combination of constraints coupled with her aspirations. Her father was down with cancer. Her mother was perennially ill. She had to change three buses to go to the school. She had to come home, wash her clothes and do her studies. She created this washing machine, so that she could read, while the clothes were being washed, while she pedaled away.
Interestingly, such MLM innovations meant for constrained conditions are taking place not only in a village in Kerala, but also in an institution like MIT in USA. MIT D-Lab too has created a portable pedal powered washing machine11. With an estimated prototype price of US$127 MIT hopes that this innovation promises to vastly increase the productivity of wash women, and bring some of the benefits of an appliance often taken for granted elsewhere in the world at low-cost and without reliance on electricity. Interestingly, both Remya and the MIT team did the same MLM innovation, but their drivers were fundamentally different.
Does MLM Make Business Sense?
MLM products and services will no longer be motivated by the concerns on fulfilling the obligation of corporate social responsibility by the enterprises. To the contrary, MLM products and services are emerging as perhaps the biggest business opportunity of the coming decade.
Most of the growth in consumer spending is expected to come from people in emerging markets, who have a much lower spending capacity than traditional middle-class consumers in developed countries. The fastest-growing consumer class in the emerging markets of Asia consists of people spending US$2 to US$4 a day, according to a recent report from the Asian Development Bank11. This market can be served only by MLM products and services.
Indian companies are particularly well positioned to take advantage of this opportunity. They have direct access to the world’s second-largest emerging market, one in which a huge low-income group is poised to enter the middle class. By 2030, the share of the total population in the emerging middle class, those earning $4 to $20 a day, will triple, to 49 percent, or 725 million people – exceeding for the first time the number of those earning under $4 a day. An explosion of consumer demand, spread across a range of low- and middle-income segments, will allow Indian businesses to experiment with different scaling strategies, making the cost of pursuing MLM business models much lower for firms in India than for many competitors in other emerging markets.
If MLM business innovation models have to thrive, and in turn drive accelerated inclusive growth what kind of leadership qualities will be required? Prahalad and Mashelkar3 have identified at least five.
First, MLM CEOs must develop a deep commitment to inclusive growth, which will force them to think of unserved customers, be they rural poor, who don’t have access to telephones or urban poor, who don’t get emergency medical services. Companies often start by asking: “Given our cost structure, which segments can we serve?”They should ask: “Given that we need to cater to the unserved, what should our cost structure be?
Second, MLM CEOs must have clear vision with a human dimension: for example, helping poor Indians travel safely and affordably with their families; using connectivity to improve people’s work and lives; and enabling patients to buy cheap medicines.
Third, MLM CEOs must establish ambitious goals and clear time frames for achieving them. Companies should ask: “What is our on-the-moon project?” Or, as they do in India’s boardrooms: “What is our Nano project?”
Fourth, MLM leaders must force project teams to work within self-imposed boundaries that stem from a deep understanding of consumers. That will result in a novel, outside-in view of innovation. The language inside their organizations should be about consumers as people, suppliers as partners, and employees as innovators.
And finally, MLM CEO’s must continuously ask “What if we change the way we operate to reduce costs and focus on return on capital employed, not just on operating margins? If we reduce prices enough and make our products available to the poor, won’t there be explosive growth as they quickly find uses for and buy our offerings?”
MLM Getting Universal Attention
The concept of MLM was first proposed by me in April 2008 in my `Prestige Innovation Lecture’ in Canberra at the meeting of Australian Academy of Technological Sciences and Engineering1. Along the way, it got enriched to an extent that the legendary C.K. Prahalad and I wrote a paper `Innovation’s Holy Grail’ in the July-August issue of Harvard Business Review3. It is getting further traction now with the World Economic Forum meeting in New Delhi in November 2010 having a full session on MLM.
It must be emphasized that inclusive innovation through the MLM strategy forces us to measure opportunity by the ends of innovation—what people actually get to enjoy—as opposed to just an increase in their means. In important ways, this rationale invokes a return to the traditional case for innovation—its ability to produce break-through improvements in the quality of life—alongside the usual objective of competitiveness.
We have shown as to how the combination of constraints and aspiration can provide an explosive trigger for extreme and disruptive innovation. It is clear that the MLM way of innovation, anchored on the solid foundation of affordability and sustainability, will help us design a sustainable future for the mankind. Finally, `doing well’ while `doing good’ will be the mantra that the corporate world can benefit from, since then it will be able to provide not only `value for money’ but `value for many’.