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.

Go to Source:
Reproduced via RSS from http://www.ssireview.org/articles/entry/the_hidden_pitfalls_of_inclusive_innovation

Categories: Feature Articles, Social Innovation

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