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Innovate by designing and selling products specifically to the very poor?

Recall the rather cynical statement that the Lord of the Universe loves the poor, because he made so many of them. Some 1.4 billion people on earth have daily income of less than one dollar, according to the World Bank. How can this possibly be seen as a promising market?

One of the world’s leading management thinkers, C.K. Prahalad (co-author, with Gary Hamel, of the most-read business article, The Core Competency of the Firm) wrote a book in 2005 making the extraordinary claim that the poor can best be helped by market forces. Let companies design and sell them products, he wrote (in Fortune at the Bottom of the Pyramid, Wharton Press), for profit. Do good..and do well. Market forces work far better, he wrote, than do-good institutions, NGO’s or governments. 

How to do this? Among his dozen key principles: 

* focus on quantum reductions in price and cost (e.g. Tata’s new $2,000 car – not exactly for the very poor, but certainly a quantum reduction).
* blend old and new technologies
* scale operations across countries
* redesign products from the outset (e.g. Hindustan Lever’s shampoo that works best in cold water), to work in hostile environments.

Examples? The global Grameen micro-credit bank; India’s e-Choupal project, creating networks of farmers that bypass rapacious middlemen; S.C. Johnson Co.’s partnership with Kenyan slum youth to provide home cleaning and waste disposal services.

Ever looked closely at a U.S. dollar bill? Notice the 13-layer pyramid? In 1932 President F.D. Roosevelt said on the radio, “these unhappy times [Depression] call for the building of plans that rest upon… the forgotten man at the bottom of the economic pyramid.” In 2008, times are perhaps not as unhappy – but are still miserable for the very poor. There are fortunes at the bottom of the pyramid. We just need entrepreneurs with sharp enough vision to see, and develop, them. 

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Think different, goes the Apple slogan. But how?

Well – instead of thinking new, how about thinking old? How about going back to the future?

BBC’s Business Day reports on a fine example. In San Francisco, Delhi, Dubai and elsewhere, a powerful trend is sweeping the world of cycling. Increasing numbers of people are buying “60’s bikes”, or fixed-gear bikes – bicycles that have only one gear, and no way of braking except slowing or dragging a foot. They are simple, tough, durable, and build fitness (imagine riding up a San Francisco hill in first gear!). This trend goes against the trend toward $2,000 18-gear bicycles along with colorful Tour de France fashion in skin-tights, helmets and matching water bottles.

Fixed-gear 60’s bikes are part of what is known as the ‘austerian’ movement – austere is good, less is more, and do with cheap and simple rather than expensive, showy and conspicuous. Austerianism, in turn, is part of the new pro-environment green movement.  

These bicycles are an example of how nostalgia can be a strong basis for innovation, given in particular the growing numbers of older people worldwide.  

 bicycle2.jpg
A fixed – gear bicycle: Ultimate simplicity.

Forty years ago, the Beatles released their album, Sergeant Pepper’s Lonely Hearts Club Band, on June 1, 1967. Apart from the wonderful songs (see the list below), this pathbreaking album contains at least seve lessons for innovators. Here they are:

1. Innovation is the key response, perhaps the only response, to waning popularity – in the face of the nearly irresistible tendency to do “more of the same”. In 1967 Beatlemania was waning. The Beatles had stopped touring and it seems that they were burned out. A Beatle statement that “we are bigger than Jesus” got them essentially expelled from Philippines.   The Beatles went into the recording studio, for five months – a remarkably long time, then, for one album – and emerged with Sergeant Pepper. It took huge risks – and was rocket fuel for renewal of their popularity.

2. Technology is a key source of innovation. There were several new technologies in Sergeant Pepper, including the new Dolby noise reduction, automatic double tracking (invented especially for the Beatles), varispeeding, and a novel method for pressing LP’s. The Beatles were not afraid to use every possible one.

3. …But the technology was driven by product and process innovation. The Beatles innovated in the music, instruments, arrangements and even words. They used a sitar (George Henderson), and a miniature trumpet player from a London symphony orchestra, and also a harpsichord, as well as producer George Martin’s harmonium. Martin was a key innovator – he had a background as a classical musician. 

4. Innovate everywhere: everything about Sergeant Pepper is novel – even the cover. The cover shows the word “Beatles” written in flowers, in a flower bed, and behind that the Beatles dressed as if they were a real Lonely Hearts Band, with a crowd of famous people behind them (Oscar Wilde, Marlene Dietrich, Karl Marx, Marlon Brando, etc.). The album was meant to be heard as a whole, not as individual songs, as one of the first ‘concept’ albums. The lyrics to a John Lennon song came nearly word for word from an old circus poster Lennon once bought. Like the DC-3, which was a portfolio of innovations, Sergeant Pepper combined many breakthrough ideas. 

5. Innovation is best when its implementation is at its best. Beatles hired only top-flight session musicians (musicians hired just for the recording), and the 5 months they invested reflects their perfectionism. (150 days for a dozen songs, or nearly two weeks per song). 

6. True innovations find commercial success – not always, but often. Sergeant Pepper was the #1 album in 1968 for 23 straight weeks. The CD, re-released in June 1987, was #3! and then again, in 1992, on its 25th anniversary, re-charted at #6. 
 
7. Finally, innovation is about teamwork. All the songs were written by John Lennon and Paul McCartney. While each has written great songs on their own, the songs they wrote together are unparalleled for their novelty, creativity and appeal. Lennon and McCartney were utterly different in personality, lifestyle and values. That diversity perhaps strengthened their powerful collaboration.

Sergeant Pepper Tracks
1 Sergeant Pepper’s Lonely Hearts Club Band
2 With A Little Help From My Friends
3 Lucy In The Sky With Diamonds
4 Getting Better
5 Fixing A Hole
6 She’s Leaving Home
7 Being For The Benefit Of Mr. Kite
8 Within You, Without You
9 When I’m Sixty Four
10 Lovely Rita
11 Good Morning
12 Sergeant Pepper’s Lonely Hearts Club Band (Reprise)
13 A Day In The Life

As a visiting professor at MIT, I quickly learned that Nick Negroponte was no ordinary professor. We academics are trained that science proceeds in incremental small steps. Nick always was a visionary. As a computer science professor, in 1977 he saw the future was in the convergence of computers, media, publishing and entertainment. He draw a simple diagram – converging circles – and went out to raise $10 m. to start a Center to explore the implications. No American company would fund it. The Japanese got it – and wrote him a $10 m. check, giving birth to the now world-famous MIT Media Center – a playground for ideas and creativity that has to be seen to be believed. 

Negroponte is now on a two-year leave from MIT. His vision: one laptop for every child. There are 55 m. children in Brazil, most of whom do not get proper schooling, or even any schooling. There are 200 m. children in China who need schooling.  Negroponte wants every child to have a laptop. To do this, the price of the laptop must fall to $100. Right now it is $179 – but economies of scale are driving the price down. What about American kids? Well – parents can buy one, but a condition is that they must be two, and give one to a needy child abroad.

Negroponte’s OLPC organization is not-for-profit, and he himself seeks no profit. His vision is simply to implement his vision for the world’s children.

But there are obstacles. Negroponte selected AMD as the chip supplier. Intel, whose chips were too costly, has fought back and launched its own $100 laptop, called Classmate, which it offers to Brazil and other countries; Intel Chair Craig Barrett himself spearheads the effort.

Negroponte’s laptop is designed by the world’s top ‘geeks’. Its battery life will one day reach 12 hours. Its screen is phenomenal – easily visible outdoors in full sunlight. A hand crank generates electricity, when the battery runs down. There are no ‘holes’ or connections, and the computer can be rained on or dropped or dumped in the sandbox… and survives. It has two green ‘ears’ that give it far better receptivity for WiFi than ordinary computers. It looks neat – it’s green and white color scheme make it friendly and attractive for kids. Most of all, it is simple. Negroponte designed it, so that one child can teach another, or children can simply learn to use it on their own, in three minutes – and they do!  

Lessons for innovators from OLPC? Perhaps a key one – said in the Bible centuries ago. The prophet Isaiah said: “Without vision a nation perishes.” (Isaiah 61, 11).  In Hebrew, it is even more emphatic – “perishes” translates truly as “falls apart, crumbles”. Without vision, innovation falls short. What drives Negroponte to ultimate success, I hope, is his sweeping vision. He has used vision in the past to attain outstanding innovative success, with his Media Lab. And I hope his world-embracing vision will succeed again. 

The only source of sustained competitive advantage, Peter Drucker once said (and is quoted in Innovation Management), is… the ability to learn faster than your competitors.

Do business schools and management educators learn at all – fast or slow?

Consider this. Michael Porter’s phenomenal 1980 book Competitive Strategy invented a new management discipline, known as competitive strategy. In its wake, companies built strategy encyclopedias. Business schools taught strategy core courses. I believe both initiatives were a failure for at least a decade.

But why? Because companies quickly learned the problem was not conceiving a strategy – but implementing it. The problem was not the noun, but the verb – action, implementation. Harvard Business School Professor Bob Kaplan has helped fill this gap – his Balanced Scorecard and Strategy Map tools help companies with crucial implementation. “What companies need is not a VP for strategy,” Kaplan says, “but a VP for Strategy Implementation.”

Now, consider innovation. There are hundreds of books on the subject. And many business schools have core courses on innovation. But history repeats itself. The problem is not innovation – dreaming up new products and services. The problem is implementing the innovations, managing them, organizing them, and wrapping clever creative business models around ideas to achieve marketplace success. In other words: Innovation management.

When we approached publishers in the U.S. with our manuscript, the response was: how many core courses are there in Innovation Management? Well, we said, very few, partly because there are so few well-organized textbooks. Uh-huh, they said. Come back in 10 years. Sage (India), in contrast, understood the need at once.

A few days ago, a colleague drew to my attention a new initiative in Innovation Management – not at Stanford, Harvard or Wharton, but at North Carolina State University, where a Center for Innovation Management has been established, along with a School of Innovation Management, featuring unique new executive programs. As is often the case with innovation, the breakthroughs come not from existing market leaders but from upstarts quick to learn and seeking to gain competitive advantage.

So – is innovation a noun? Or a verb? In grammar, it is a noun. But in business, it is a verb – an action plan for implementing great ideas. In the term “innovation management”, it is the noun, not the adjective, that is the key success factor – provided the noun is treated as if it is a verb. That is the message we seek to convey in our book Innovation Management.

One thing leads to another… in strange and exotic ways.

For instance – Dutch researcher Marco Mostert, of Utrecht University, told  the International Medieval Congress in Leeds, England, on July 11, that the following teleology occurred:

• After 1200, in England and on the Continent, people began moving into towns.
• The migrants quickly learned that townspeople frowned on their wearing nothing under their smocks and gowns; as peasants became tradesmen, and dealt with the opposite sex, it became de rigeur to wear underwear.
• As underwear became popular, so did the supply of rags.
• This in turn increased the production of rag-based paper, and lowered its price; previously parchment (the skin of sheep) was used instead.
• This in turn led to William Caxton’s first printing press, in 1476, whose business model was built on cheap paper.  
• Caxton’s invention of printing, in turn, led to the writing and printing and sale of books. Books, in turn, led to innovation – the creation of new ideas, new findings, new thinking. 

The next time you watch an ad for underwear on TV, instead of scantily-clad models, see instead the march of progress and innovation. And the next time you discard your old underwear, think about how in the past they might have become War and Peace or Leaves of Grass. 

Source: Martin Wainwright, The London Guardian, “how discarded pants helped to boost literacy”, July 12, 2007.

The most powerful innovations occur in the way managers and entrepreneurs think about how they do business. Strategy guru Gary Hamel has argued this powerfully for years. 

Take for instance, Bill Gates. Microsoft has been trying to make money in China for 15 years. They began by sending sales managers to China from Taiwan. According to an article in the recent European edition of Fortune, “How Microsoft Conquered China”, Microsoft already had a near-100% market share for Windows. Only the copies were pirated. Microsoft made no revenue.  

Solution? Fight bitterly to protect intellectual property. Hire lawyers. Litigate. Prosecute. Right?

Wrong. Microsoft had five China country managers in five years, and none made any headway at all. When Microsoft executives in China tried to explain why this policy was futile and wrongheaded, the geniuses in Redmond, WA. Would not listen. And Chinese officials began to use Linux.

Then led by Craig Mundie, Microsoft executive who now leads the China strategy, a new approach – an ‘innovation in thinking’ occurred. Microsoft began to work with China’s leaders and governments to help build a Chinese software industry – a top priority for them. Microsoft offered China the right to look at parts of Window’s source code. A Microsoft R&D facility was set up in Beijing. And Bill Gates himself said in 2001 that while it was terrible China pirated software, if they were going to pirate anybody’s, he’d prefer it was Windows. 

Today Windows is used on 90% of China’s PC’s. When China’s leaders visit America, they stop first at Bill Gates’ home – then go on to see another Bill (Clinton) or George (Bush). Microsoft’s China revenues total no more than $7 per PC ($100 or $200 in rich countries), but – the old notion that if you sell a toothbrush to each of  a billion Chinese, you’re a billionaire is working out well. You succeed on volume. 

The old cliché says, Think global, act local. No way. It should read: Be global, but think local, act local. ALWAYS think local. That is how Microsoft finally succeeded in China.

Stew Leonard’s Dairy, a supermarket in Seattle, WA., was founded in 1921, by Stew’s father. It began as a dairy. Today, a supermarket, it has weekly turnover of more than $1.5 m., or $80 m. yearly! (The average supermarket turns over $200,000 weekly, about a tenth!). How does Stew boost business by an order of magnitude? By ‘listening to the voice of the customer’ and innovating accordingly.

Most supermarkets have a bewildering array of 16,000 items. Stew has only 750. But his secret? “Nobody comes into this store saying, what can I do today for Stew Leonard! They say, what can Stew Leonard do for me?  And if I don’t…they won’t come back. And they’re right”. Stew is on the floor constantly, every day. His work is his passion. He works his customers like a politician, asking them what they like, what they don’t like, what should be changed. 

Take, for instance, a small example – strawberries. Nearly all supermarkets sell strawberries in small baskets. Stew breaks the rules – the first principle of innovation. His strawberries are loose, in a big pile, and customers choose their own.  They end up buying a lot more that way, Stew says, fillings bags full, but mostly – that’s what they want. And we did what they want. 

This simple principle of business has brought Stew to make 24 additions to the original dairy store. 

He has Disney-like figures, in cow costumes, romping on the floor, entertaining children and adults alike. Who says supermarkets can’t be fun? Stew asks. 

“We want to make every customer feel special,” he says. He assembles focus groups weekly, to listen to what they say.  Members of the panels give their time, because they are, like Stew, passionate about the store.   

Stew offers low prices, because he buys direct from growers and producers. He offers low prices because he limits the range of what he sells. And he offers clear simple displays, to make shopping easy and fast.  

Great innovators are always focused on their customers. You can find great innovation everywhere – even in a supermarket. 

* based on the video “In Pursuit of Excellence”

Suppose you are CEO of America’s largest company, heading the Fortune 500 list in five of the past six years, with $351 b. annual sales (2006), up 11% over 2005, and $11.3 b. in net income, up nearly 1% over 2005, along with some one million employees. 

Where in the world do you find growth, after driving many of America’s smaller shops out of business?

Here is an ultra-simple innovation strategy. If you find it hard to sell “same to more” (the same goods and services to more and more customers), how about trying “more to same” (sell more, and different, goods and services to the same customers). How about, for instance, selling financial services?

On March 16 Wal-Mart withdrew its plan to create its own bank. But on June 20, it announced it will offer a range of financial services to its customers, through Wal-Mart Money Centers, including check cashing, bill payments and international money transfers. (Many of Wal-Mart’s customers are foreign-born workers, who send money home to their families). Wal-Mart may take business away from Moneygram International, US Postal Service and Western Union. 

Wal-Mart has been struggling. It has gotten bad press over discriminating against women. Its same-store sales were down 3.5 % in April, the biggest fall since 1979. And its strategy to move upscale, according to Business Week, has failed. 

Apparently, Wal-Mart’s business-model innovation, directed to financial services, is cohort-based – hoping to attract the financial business of younger people, who at times pay high rates of interest to moneylenders and look to save money in banking, just as they do in buying their clothes and food at Wal-mart.

Wal-Mart has a large, though low-to-middle income, customer base. By expanding the scope of its offerings, it hopes to restore its once-strong growth. We will watch the results closely, as a case study in innovation in America’s –and indeed, the world’s – largest business. 

In Innovation Management, we describe the American retailing giant Wal-Mart’s business model in detail. (See, for instance, our discussion of Wal-Mart founder Sam Walton’s business values, pp. 129-30, and Wal-Mart’s competitive model, p. 266). 

Wal-Mart’s “everyday low prices” were built on leveraging economies of scale, low-price Chinese suppliers, advanced satellite-based IT systems for inventory and shelf management, and ‘float’ – paying suppliers in 90 days, while selling their goods within 7. The latter ‘float’ is a three-month interest-free loan, which on Wal-Mart’s annual  $351 b. annual sales (now second to Exxon-Mobil in revenues), is worth about $4 b.

But in 2006, Wal-Mart’s earnings per share barely rose, its market value at end June is roughly the same as a year ago, and its share price, under $50, is far below its 2000 peak of $68. “Is the world’s biggest retailer in trouble?” asks The Economist, in its Feb. 15th issue. 

The answer is, No! Having innovated on the supply side (cost and efficiency management) Wal-Mart is now innovating on the demand side – on the products it sells. On June 20, Wal-Mart announced that having abandoned plans to start its own bank, it will instead offer a series of financial services to its customers, through Wal-Mart Money Centers (check cashing, bill payments, int. money transfers). Also, Wal-Mart will issue a Wal-Mart MoneyCard, a prepaid Visa card, which will cost $8.95, for buying gas, and for shopping online. Financial services is a new growth area for Wal-Mart. Faced with a decline in same-store sales in April, and a failure of its effort to sell more upscale (higher-priced) items, Wal-Mart grappled with a traditional strategic dilemma: Sell more (goods and services) to same (customers), or – Sell same (goods and services) to more (customers). The choice: More to same. According to Business Week (June 20, 2007), the new younger generation,  Gen Y, is more open to handling its financial transactions with companies that are not real banks. “In a decade Gen Y might think that Wal-Mart is as much a bank as Bank of America,” notes Business Week.   

“More to same” strategies require strong innovation management skills. Observers will  watch Wal-Mart closely to see if its core competency in innovation is as high as its core competency in operations management. 

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
March 2008
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