Company Strategy

Creprahalad and hamel (part VII)

Dr. Neil Harvey

Twelve principles of innovation

Prahalad identifies twelve principles that constitute the basics of innovation philosophy for BOP markets:

1. Focus on price performance of product and services. Serving BOP markets is not just about lower prices. It centres around quantum leaps in price performance.
2. Innovation requires hybrid solutions. BOP consumer problems cannot be solved with old technologies. Advanced and emerging technologies must often be blended with the existing and rapidly evolving infrastructures.
3. As BOP markets are large, solutions that are developed must be scalable and transportable across countries, cultures, and languages.
4. The developed markets are accustomed to resource wastage. For example, if the BOP consumers started using as much packaging per capita as the typical American or Japanese consumer, the world could not sustain that level of resource use.
5. Product development must start from a deep understanding of functionality, not just of form. Marginal changes to products developed for rich customers in the United States, Europe, or Japan, will not do.
6. Process innovations are just as critical in BOP markets as product innovations. In developed markets, the logistics system for accessing potential consumers, selling to them, and servicing products, is well developed. In BOP markets, the presence of a logistics infrastructure cannot be assumed. Accessing and educating potential consumers can be daunting.
7. Deskilling work is critical. Most BOP markets are poor in skills. The design of products and services must take into account the skill levels, poor infrastructure, and difficulty of access for service in remote areas.
8. Education of customers on product usage is key. Innovations in educating a semiliterate group on the use of new products can pose interesting challenges.
9. Products must work in hostile environments. It is not just noise, dust, unsanitary conditions, and abuse that products must endure. Products must be developed to accommodate the low quality of the infrastructure, such as erratic electricity supplies and polluted water.
10. Research on interfaces is critical, given the nature of the consumer population. The heterogeneity of the consumer base in terms of language, culture, skill level, and prior familiarity with the function or feature, is a challenge to the innovation team.
11. Innovations must reach the consumer. Both the highly dispersed rural market and a highly dense urban market at the BOP represent an opportunity to innovate in methods of distribution. Low cost distribution is critical.
12. Paradoxically, the feature and function evolution in BOP markets can be very rapid. Product developers must focus on the broad architecture of the system – the platform – so that new features can easily be incorporated. BOP markets allow (and force) us to challenge existing paradigms.

Prahalad gives examples of cases such as the Jaipur Foot Hospital and the Aravind Eye Hospital challenging the assumptions of how healthcare can be delivered. By focusing on one disease and one major process, these institutions have pioneered a way of gaining scale, speed, extremely high quality, and unbelievably low cost. Several hospitals in India are specialising in cardiac care. The cost of a bypass operation in India is now as low as $4 000 compared to $50 000 in the United States. Certain eye lenses can be produced in India for $5, compared to retail prices of $200 for similar products in the United States.

global opportunity

Prahalad sees BOP as a global opportunity and identifies four different opportunities:

1. Some BOP markets are large and attractive as stand-alone entities.
2. Many local innovations can be leveraged across other BOP markets, creating a global opportunity for local innovations.
3. Some innovations from the BOP markets will find applications in developed markets.
4. Lessons gained from BOP markets can influence management practices of global firms.

ecosystems and reducing corruption

In Chapter Four, The Eco System for Wealth Creation, Prahalad covers a market-oriented ecosystem, ecosystems for a developing country, learning the sanctity of contracts, reducing inequities in contracts and building governance capabilities among the poor. Chapter Five examines reducing corruption and improving what he calls transaction governance capacity (TGC). ‘Fundamental to the evolution of capital markets and a vibrant private sector is the need for a transparent market for capital, land, labour, commodities, and knowledge. Transparency results from widely understood and clearly enforced rules. Transactions involving these rules must be clear and unambiguous. Ownership and the transfer of ownership must be enforced. Under such a system, assets can become capital. Investors will seek the best opportunities. TGC is the capacity of a society to guarantee transparency in the process of economic transactions and the ability to enforce commercial contracts. This is about reducing uncertainty as to ownership and transfer of ownership’ (Prahalad 2006:81).

development as social transformation

Prahalad concludes with the chapter Development as Social Transformation. He believes that when the poor at BOP are treated as consumers, they can reap the benefits of respect, choice, and self-esteem and have an opportunity to climb out of the poverty trap. As small and micro-enterprises, many of them informal, become partners to multinational corporations (MNCs), entrepreneurs at the BOP develop real access to global markets and capital and effective transaction governance, MNCs gain access to large new markets, developing innovative practices that can increase profitability in both BOP and mature markets.

National and local governments have an important role to play in the process. They have to create the enabling conditions for active private-sector involvement in creating this BOP market opportunity. TGC is a prerequisite. Governments now have new tools to create TGC in a short period of time. Further, new technologies and new approaches to reaching the BOP such as SHGs (self help groups) and direct distribution (creating millions of new entrepreneurs) can also create a respect for the rule of law and commercial contracts among the BOP consumers (for example as they access credit through the microfinance route) and local entrepreneurs.

BOP consumers have constantly surprised the elite with their resilience and ability to adapt:

1. They adapt to new technology without any difficulty and are willing to experiment and find new and ‘unforeseen’ (by the firms) applications for the technology. Nobody thought that farmers from the middle of India would check prices at the Chicago Board of Trade.
2. Technology is breaking down barriers to communication. Given that BOP consumers can increasingly enjoy the benefits of dialogue, access, risk benefit analysis and transparency (DART) and make informed choices, the chances of change in tradition will be improved.
3. BOP consumers now have a chance to upgrade and improve their lives.
4. By gaining access to a legal identity, they can participate more effectively in society and gain the benefits of the available opportunities. They do not have to remain marginalised.
5. Finally, the emancipation of women is an important part of building markets at the BOP. Empowered, organised, networked, and active women are changing the social fabric of society.

Prahalad sees the real test of the entire development process as poverty alleviation. The economic pyramid must, therefore, become a diamond. The economic pyramid is a measure of income inequality. If these inequalities are changing, then the pyramid must morph into a diamond. A diamond assumes that the bulk of the population is middle class.

‘Our best allies in fighting poverty are the poor themselves. Their resilience and perseverance must give us courage to move forward with entrepreneurial solutions to the problem. Given bold and responsible leadership from the private sector and civil society organisations, I have no doubt that the elimination of poverty and deprivation is possible by 2020. We can build a humane and just society’ (Prahalad 2006:112).

cases

Part Two of the book covers 12 success stories from the bottom of the pyramid. I accessed two of them through the Amazon.com review of the book. In Aravind Eye Care, surgeons with the assistance of paramedic assistants do an average of 2 000 operations a year versus 220 in other Indian hospitals. CEMEX, the largest cement manufacturer in Mexico, second-largest in the United States, and thirdlargest cement company in the world has, through innovation, found a profitable and empowering means of housing the poor for profit, instead of leaving that to governments or non-profit organisations. Saving money is not a standard practice of most low-income families; and when it occurs at all, it takes the form of tandas – a local neighbourhood, family, and network of friends who pool money if and when they have any money left to save. As a bold cultural innovation, CEMEX modified the existing tanda system within the Mexican communities, and revolutionised the idea of savings by changing the basic spending pattern of the poor in Mexico (called Patrimonio Hoy).

other views

I was very taken with the book. To test my views, I looked at the customer reviews of the book on Amazon.com. Peter Lorenz writes: ‘While teaching a man to fish is better than giving a man a fish, it is better still to teach a village how to raise fish (or capital, or critical mass, or some other key resource), and that is the fundamental if implicit message and philosophy here. Poor people don’t need charity; they need access to and information about the tools of capitalism, and governments and other non-profits are not likely to do this as such actions would put them out of business.’ Robert D Steele believes that Prahalad has presented the most common sense case for turning business upside down, and states that Prahalad merits the Nobel Peace Price. Robert J Crawford comments: ‘Finally, while I am sure that these stories helped a lot of people, nothing is put forward to argue that the cases are anything more than isolated incidents – is this really significant, I wondered? How will it diffuse in the overall economy? When? What else must be done? These macroquestions are wholly unanswered and yet, I feel, crucial for anyone who might want to get involved in the approach.’

conclusion

I believe this to be a truly remarkable book, and an outstanding contribution to the prevailing body of knowledge on economic development and the alleviation of poverty. It left me with the same question that I had after reading The Mystery of Capital. Why isn’t this being done worldwide (or at least where needed), on a large scale? Prahalad does have other important publications and I shall deal with them in a future issue.