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  • The Hidden Pitfalls of Inclusive Innovation

    November 26, 2014 Editor Comments Off on The Hidden Pitfalls of Inclusive Innovation

    By Raghav Narsalay, Leandro Pongeluppe, & David Light

    A few years ago, a large multinational corporation
    developed a new food product
    designed for low-income people in emerging
    markets. The product was highly nutritious
    and low-priced. To win the trust of people
    in remote rural communities, the company recruited a sales force
    of local women, who in turn developed recipes using the product
    and helped teach community members how to prepare those dishes.
    A yearlong trial confirmed the product’s potential: consumers
    found it easy to use and less expensive than common alternatives.
    Success seemed all but guaranteed.

    But company executives decided not to continue investing in
    the project after the trial period. They determined that the product
    wasn’t reaching new customers at a fast-enough pace—in other
    words, the business wasn’t scaling up. Product managers had tried
    to do all the right things, but it wasn’t enough.

    Other companies attempting to develop innovative products for
    the poor have faced similar challenges. For example, a large consumer
    products company developed an inexpensive water purifier. The
    company tried building a commercially viable venture targeting
    low-income customers, but it was unable to get enough people to
    make repeat purchases of the water purifier, and so was unable to
    grow the business. In the end, the company turned the venture into
    a nonprofit. Another company has developed an affordable refrigerator,
    but it too is finding it difficult to sell enough of them to make it
    a sustainable business.

    Such derailments of “inclusive innovations”—high-quality yet
    affordable goods and services designed for and sold to low-income
    people—are not uncommon. Companies often recognize the value
    of these projects but falter in the execution. In 2011, for example,
    98 percent of the Indian manufacturing executives we (at Accenture)
    surveyed said that inclusive innovation would be critical to
    their company’s future success, yet only 30 percent reported that
    developing inclusive products and services was an indispensable
    part of their business.

    To discover why some inclusive innovation projects fail—and
    why others, against the odds, succeed—we researched inclusive
    business initiatives (IBIs) in 17 multinational companies in five developing
    countries—Brazil, China, Ghana, India, and Nigeria—and a
    banking institution from Australia that targeted remote rural areas.
    The initiatives, each with annual sales of at least $100 million (with
    the exception of Esoko Networks Ltd.), were in eight industry sectors
    and included such companies as Nestlé, Haier, Siemens, Nokia
    Telecommunications, Hindustan Unilever, SAIC-General Motors-
    Wuling, and Tata Motors. (Because of confidentiality agreements we
    are not able to identify all the companies mentioned in this article.)

    Our study revealed that IBIs face many special hurdles as they
    begin to ramp up their operations. Some of these obstacles are well
    known, including inadequate physical infrastructure—such as utilities,
    IT networks, public transportation, and health care facilities—a
    lack of effective regulatory bodies, and useful market data. These
    obstacles are challenging, but visible and familiar, and many IBI
    leaders are prepared to overcome them.

    What often blindside IBI leaders, however, are pitfalls that are
    less obvious yet equally (or even more) dangerous. We identified five
    pitfalls that frequently knock IBIs off course before they can gain
    traction: lacking support from the top, focusing on the wrong performance
    metrics, failing to recruit talented executives, using old
    business models, and partnering with the wrong organizations. Our
    study of initiatives that successfully achieved scale also produced
    insights into how to avoid each of these hazards.

    Pitfall 1: Lacking Support from the Top

    CEOs and other top corporate executives often give verbal support
    to inclusive innovation and the economic and social benefits it offers.
    Doing so provides good public relations for the company and gets
    them invited to prestigious confabs such as Davos and the Clinton
    Global Initiative, where they can hobnob with business executives,
    political leaders, and NGO executives from around the world. But
    in practice, top managers can be extremely tough on IBIs, and their
    support is often lukewarm at best.

    Because of this tepid support from on top, ordinary problems
    that typically occur in the development of any new product or service
    can take on extraordinary importance and derail an IBI early
    in its journey. For example, while top managers in many companies
    do not blink an eye when allocating funds for product design and
    development aimed at middle-class customers, they develop cold
    feet as soon as they hear that the proposed spending is for products
    meant to be sold to low-income customers. And even if IBI teams
    succeed in clearing this barrier, they face another hurdle from
    the innovation lab heads, who are often not willing to spare their
    human and financial capital to work on what they see as highly risky
    ventures, unless they are prompted by top management or the board
    to behave otherwise.

    Top managers are wary of IBIs for many reasons. Some are concerned
    that the project will lose money, others that it is a distraction
    from the core business, and still others that it requires the company
    to become involved in building support infrastructure (such as
    electricity and IT) that is beyond its expertise.

    But what underlies much of top management’s wariness is the
    fear of the unknown. Top executives will often be reluctant to pursue
    experiments that take the company beyond well-tested assumptions
    about its core customers. Others may be concerned that an
    IBI will unnecessarily drain resources from the core business and
    hamper the company’s ability to compete. So when an important
    supplier fails to maintain the quality of its goods, and the IBI has
    trouble locating a replacement source—to name one bump that can
    befall any new business—executives at the corporate headquarters
    might scuttle the project before the initiative’s leaders have had the
    chance to fully explore alternatives. If conventional ventures have
    three strikes before they’re out, IBIs are often allotted just one.

    To overcome this fear of the unknown—to turn up the heat on
    lukewarm support—IBI leaders have a number of approaches at their
    disposal. One is to turn the company’s board members into venture
    capitalists. At Unilever’s Indian subsidiary, Hindustan Unilever Ltd.
    (HUL), the company evaluated six IBIs by making board members
    responsible for allocating resources—in the form of people, money,
    and specialized internal expertise—to each of the six project managers.
    Every quarter, the IBI project managers would pitch their case
    for continued funding to the board, and all ventures were assessed
    against milestones pegged to growth of the business. Teams usually
    moved to the next round of funding only after they had achieved a
    scale that hit the milestone.

    This competitive, entrepreneurial environment kept all the board
    members heavily involved in the IBIs, even though they accounted
    for only a small part of the company’s overall business. Board members
    also provided guidance to project teams and used their contacts
    to open doors within and outside the company. Of the six original
    IBIs, two survived the three-year test period—a solid result, due in
    part to the support from the board.

    Fear of the unknown can also be overcome by launching an IBI as
    a corporate social responsibility (CSR) initiative rather than as a business
    initiative. Taking this approach lowers or eliminates the bar on
    growth and profitability, giving managers time to develop the initiative.

    Consider, for example, an IBI by Alibaba.com, China’s largest
    e-commerce company. In 2006, a few small-town furniture makers
    launched online storefronts on Alibaba’s platform, with the aim
    of accessing larger markets such as Beijing and Shanghai. Alibaba’s local managers deployed CSR funds to train local entrepreneurs build online storefronts.

    The CSR funds used for training local entrepreneurs helped support
    the rapid expansion in online storefronts based in the small
    town. By 2010, more than 2,000 shops were online, and the town now
    hosts more than 180 furniture factories and about 20 logistics firms.
    Perhaps most important, the town’s furniture has become a recognizable
    brand among high-income consumers in China’s urban markets.
    Although rural IBIs still have a limited impact on Alibaba’s bottom
    line, the scalability of these initiatives has convinced the company’s
    leadership of the long-term value of rural-to-urban e-commerce.

    Pitfall 2: Focusing on the Wrong Performance Metrics

    IBIs are often expected to mature as commercial businesses at the same
    rate of speed as other ventures, and so are often judged by performance
    metrics that emphasize revenue and profit growth. But company leaders
    seem to forget that a great deal of time and effort must be put into
    creating the necessary infrastructure, often under challenging circumstances,
    before an IBI can even begin to start doing business.

    For example, when Haier wanted to roll out 26,000 Goodaymart
    stores in rural China, it first had to invest an enormous amount of
    time and money to build the capacities of the local entrepreneurs
    who would operate the stores so that they could deliver a standard
    customer experience. And before ESOKO—a company that provides
    SMS alerts to farmers on prices, weather, and other information—was
    able to scale up its business in 10 African nations, it first had to create
    much of the content from scratch and then train the local entrepreneurs
    who would sell the mobile services on the basics of mobile
    telephony and the value of the SMS services they would offer. In both
    cases, the investments of time and money went well beyond what most
    business ventures targeting middle-class consumers would require.

    Instead of using the usual business metrics that measure success
    by how quickly a venture grows, companies need to devise different
    and often unique metrics for assessing the IBI’s performance. HUL
    has been a pioneer in this area, especially with Project Shakti. For
    more than a decade this venture has sold household goods, such as
    shampoo and detergent, in small villages in India that are difficult
    to reach. But the project’s success came about only through patience
    and the use of new ways of assessing progress.

    At the core of Project Shakti are local women, known as Shakti
    Ammas, who sell HUL products. (Shakti means power and Amma
    means mother.) HUL offers Shakti Ammas free courses on hygiene
    to help them market the products and also to teach them how to
    stave off disease in the villages. Shakti Ammas are paid a commission
    based on their sales, generally two to three times the amount
    that they would have earned before joining HUL.

    HUL assesses the performance of Project Shakti by measuring
    the performance of Shakti Ammas using the following metrics:

    • Whether a Shakti Amma is consistently earning more income
      by selling HUL products than she would have made in other
      local jobs.
    • The number of stores or storefronts opened by a Shakti Amma.
    • How often a Shakti Amma picks up stocks from her
      distributors
    • The number of villages reached by a Shakti Amma that could
      not have been reached through normal sales channels.

    HUL also tracks the average income of Shakti Ammas; their
    ability to access credit from alternative sources, such as self-help
    groups, to fund their businesses; and the potential of each Shakti
    Amma to generate additional revenue besides her HUL business.

    Because HUL concentrated on a variety of metrics and not just
    on the financial performance of the project, and because the executives
    were patient about results, Project Shakti was allowed to blossom
    and eventually flourish. The initiative started in 2000 with 13
    Shakti Ammas and has now grown to about 65,000 Shakti Ammas
    selling HUL products to more than 4 million households in more
    than 160,000 villages in 15 Indian states. HUL is committed to increasing
    the number of Shakti Ammas to 75,000 by 2015.

    Pitfall 3: Failing to Recruit Talented Executives

    IBIs are extremely challenging to manage and need talented executives
    to lead them. Yet attracting talent to an IBI is often difficult.
    IBIs are typically portrayed within companies as risky ventures
    with a high probability of failure. And even when an IBI succeeds,
    it is unlikely to have a material impact on the company’s financial
    performance. So under most circumstances, it’s a rare person who
    is willing to risk her career on such a gamble.

    To counteract such challenges, top management must treat IBIs
    as they would any other strategic project for the firm. YES BANK,
    in Mumbai, India, has consistently taken this approach, and so has
    been able to assemble top-notch teams to develop its IBI initiatives.

    Take, for example, the development of a new service aimed at
    low-income workers called YES MONEY. One day while walking
    to the office, the chief financial inclusion officer of YES BANK saw
    long lines of people standing in front of a state-run bank branch.
    When he spoke to some of the people standing in line, he learned
    that they were migrant laborers who were waiting to remit their
    earnings back to their families living in rural villages. After further
    investigation, YES BANK found that the long lines often caused
    migrants to lose an entire day’s wage.

    Seeing a new market opportunity, YES BANK designed a secure
    and convenient product for these workers called YES MONEY. Instead
    of waiting in line at the bank, the worker is able to deposit money
    with a business agent of the bank (generally located near local railway
    stations in small cities) who is available late into the evening, well
    beyond the hours banks are open. The agents then use terminals
    connected to YES BANK’s national electronic fund transfer (NEFT)
    system to deposit the remittance in destination accounts within 24
    hours. More recently, YES BANK has connected agents’ terminals to
    a new network, the interbank mobile payment switch, allowing remittances
    to be transmitted to their destination in seconds.

    YES MONEY has been a success. At the end of March 2014, YES
    MONEY had more than 15,400 agents serving more than 1.8 million
    customers. The service reported 10,360,000 transactions with
    a volume of more than $700 million.1

    The level of technological and managerial innovation required
    to launch this project would not have been possible without top
    talent working on the project from the beginning. The YES BANK
    leadership recognized this need at the outset and identified high-potential
    employees as candidates. Once discussion of the project
    began informally in cafeterias and coffee shops, many others volunteered
    to participate even before they could be officially asked.

    Once the initiative was under way, the YES BANK leadership
    was careful not to destabilize the team by pulling people out of
    the initiative to work on other projects. In fact, the board and top
    management were actively involved in identifying the additional
    talent the IBI would need to get off the ground as quickly as possible.

    Because the bank treated this initiative as it did other strategic
    initiatives, the people leading the initiative knew that that the IBI’s
    success would open opportunities to climb the corporate ladder. To
    further lessen the risks of participation, the YES BANK top management
    made it clear that failure to achieve profitability in the short
    term would not hurt team members’ promotion prospects.

    Pitfall 4: Using Old Business Models

    In rural and remote areas where many low-income people live, the
    up-front investment required to launch a new business and the risk
    of substantial losses from testing new approaches are both high. To
    reduce costs and mitigate risk, many companies make the mistake
    of trying to transfer their usual business models to IBIs, sometimes
    even trying to sell stripped-down versions of their existing products.
    But this approach usually does not work. Instead of using old
    business models, innovative companies are now working with local
    communities to co-create new IBI business models.

    In the 1990s in Australia, rural regions got caught up in a spiral
    of poor economic conditions, shrinking populations, rising unemployment,
    and reduced incomes. Local banks started cutting back
    their operations, and many communities were left without local
    banking services or even ATMs. More than 2,000 bank branches
    shut down between 1993 and 2000, a 30 percent reduction in the
    number of branches.

    For Bendigo and Adelaide Bank (Bendigo), which was then much
    smaller than its peers, this presented an opportunity to grow rapidly
    by appealing to underserved customers. But using the old business
    model—building and operating traditional bank branches—was
    likely to be prohibitively expensive. So in late 1997 Bendigo’s leaders
    decided to try a new approach—an innovative franchise model,
    in which each of the bank branches would be owned by hundreds of
    local people within each community.

    To implement this new business model, Bendigo created a small,
    dedicated, internal team to design and grow the business. The team
    developed Community Bank as a franchise model, with the community
    owning the rights to operate a Bendigo bank branch. Bendigo supplies
    all banking and back-office services, and the community-owned company
    operates the branch. The bank shares the revenue with the branch,
    enabling communities to earn revenue from their own banking and
    channel this revenue back into community enterprise and development.

    In a traditional franchise model, one or two major investors
    own the branch. With Bendigo’s model, a mix of residents, local
    business proprietors, educators, local government representatives,
    and farmers pool their resources to fund new branches. The core
    concept of this business model is straightforward—if individuals
    have part ownership in a local community enterprise, and they see
    that it can create benefits for the community, they will be more
    inclined to support that business.

    The Community Bank has grown significantly over its 17-year existence.
    As of June 2014, there were 305 Community Bank branches
    holding 1,005,597 accounts, being served by 1,532 staff and 1,911
    Community Bank branch directors. More important, more than
    $125 million (Australian) in Community Bank branch profits has
    been returned to community projects, and almost $37 million has
    been paid in dividends to more than 73,000 local shareholders.2

    Pitfall 5: Partnering with the Wrong Organizations

    To succeed, all new business efforts must earn the trust of customers
    and investors, but in remote, rural areas, trust is likely to be in
    short supply when a large corporation comes knocking. To overcome
    skepticism, IBIs often partner with large and influential NGOs and
    government organizations to help them better understand the local
    population and gain their trust. In many instances, however, these
    organizations are a mismatch for the IBI’s needs. The corporation
    often ends up being one of the many partners the NGO or government
    organization is working with in the same or similar areas.
    Instead of being treated as collaborators, the corporations become
    rent generators for the NGOs and government organizations. In
    some cases, the large NGOs and government organizations are
    themselves perceived to be authoritarian and dominating players
    and are detested by locals.

    That’s why the best partners for large corporations are often
    small, local NGOs and entrepreneurs who are deeply embedded in
    the community and have earned their trust. In Brazil, major paper
    producers, including Votorantim, Klabin, and Suzano, are engaging
    communities through local NGOs and using these relationships to
    advance sustainability practices at a grass-roots level. For example,
    Klabin’s Forestry Incentive Program, first introduced in 1987, aims
    to increase the incomes of rural residents by developing sustainable
    forests that Klabin can harvest for timber.

    Klabin initially partnered with government organizations to
    provide funding and technical assistance to local producers with an
    eye toward improving forest sustainability. The initiative provided
    farmers with resources and know-how useful for building sustainable
    forests, but Klabin found that many local producers still chose
    to use older and less sustainable methods. To bring these farmers
    on board, Klabin needed to inspire a change in behavior. It did
    so in 2005 by partnering with a local NGO named APREMAVI
    (Association for the Preservation of the Environment and Life).
    APREMAVI had built and maintained long-term relationships with
    local producers and thus was able to convince them that sustainable
    forests and Klabin’s initiative would help secure their industry’s
    long-term success.

    Klabin is also working with APREMAVI to convince local producers
    of the value of having their forests certified by the Forest
    Stewardship Council. The goal is to get all local producers certified
    so Klabin can become the only large paper company in Brazil that
    processes 100 percent certified timber. More than 17,000 farmers
    now receive sustainability-related incentives in the states of Paraná
    and Santa Catarina. The collaborative program covers 124,000
    hectares of cultivated forests, and 198 million seedlings have been
    distributed to farmers since the program began.3

    Partnering with small local NGOS, however, is not easy. They
    frequently don’t have the expertise or the capabilities necessary
    to participate in a for-profit business venture. In fact, concerns
    about profitability are typically foreign to the DNA of their organizational
    cultures.

    To create mutual trust with small NGOs and local entrepreneurs,
    companies must rethink how they partner. NGOs and local
    suppliers want to feel they are being taken seriously—not just being
    used to make inroads for a large corporation. One of the most effective
    ways for an IBI to reassure them is to set up an internal group
    to help transfer important expertise and best practices—in both
    directions—with their external partners.

    NATURA, one of Brazil’s largest manufacturers of beauty, skincare,
    and cosmetic products, created this kind of trust by establishing
    an Eco-Relations Management department. With employees
    in the field and a back-office staff , the department is responsible
    for managing partnerships with NGOs and local entrepreneurs
    and for training them to improve their operational efficiency. The
    department’s leader reports to the company’s supply chain director
    and sustainability director.

    NATURA’s team remains in constant communication with
    NGO partners and local suppliers to ensure that the aspirations
    of NATURA, the NGOs, and the local communities are always in
    alignment. The company even asks NGO staff members to accompany
    its teams of agricultural scientists, environmental engineers,
    anthropologists, and biologists on visits to local communities. As
    one senior executive noted, “the company does not send a buyer
    to interact with the community, but someone who understands
    the social logic.” This approach has helped the company gain local
    communities’ trust and develop purchasing channels that dovetail
    with the communities’ social structure and cultural expectations.

    By 2011, NATURA had established relationships with 32 rural
    low-income communities comprising more than 3,000 households.
    These communities supply NATURA with raw materials and knowledge
    about the medicinal or cosmetic properties of local plants in
    exchange for direct payment and investment in local infrastructure,
    such as roads, schools, and hospitals. Adopting this approach helped
    NATURA launch a new line of cosmetics, NATURA Ekos, by drawing
    on local knowledge.

    A Necessary Development

    Overcoming the hidden pitfalls facing IBIs is hardly a trivial matter.
    And yet the stakes for doing so could not be higher. Over the
    next few decades, billions of people who are now low-income will,
    because of economic growth, move into the middle class. According
    to estimates from the Organization for Economic Cooperation and
    Development, the global middle class will surge from 1.8 billion people
    in 2011 to 4.9 billion by 2030, with Asia accounting for 85 percent of
    that growth. And the purchasing power of that group is expected to
    rise from $21 trillion to $56 trillion during that same period.

    In the meantime, those aspiring consumers need products that
    people in the rest of the world take for granted: the means to access
    clean water, as provided by HUL’s Pureit water filter; the ability to
    save or transfer money and obtain loans, thanks to the efforts of
    financial firms like YES BANK; and the opportunity to obtain inexpensive,
    reliable, and functional transportation such as that provided
    by the joint venture of GM-SAIC-Wuling in China.

    Companies that figure out how to meet the needs of people moving
    out of poverty toward the middle class will be well positioned
    to serve those same customers decades into the future. Indeed, in
    our survey of Indian manufacturers, more than two-thirds of the
    executives surveyed said they believed that those businesses that
    embrace inclusion will ultimately outperform those that do not.

    The ability to overcome the hidden pitfalls of inclusive business
    initiatives is more than a CSR effort or a nice-to-have organizational
    skill. For companies that recognize the opportunity to provide the
    poor with goods and services that are both affordable and high quality,
    it’s rapidly becoming a necessary core competence.

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    Categories: Feature Articles, Social Innovation

    Tags: Business model, communities, ghana, Hindustan Unilever Ltd., local communities, Shakti Amma, Shakti Ammas, YES BANK

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