In Search Of Sustainable Solutions

Amidst the noise and din of the Internet and social media where news and theories are built every day, management “gurus” are an endangered species. Clayton Christensen is undoubtedly one of the few survivors. His model of disruptive innovation was originally proposed based on studying mundane industries like steel and disc drives more than 25 years ago. His ideas got a lot more attention thanks to the progressive disruption of a whole range of industries in this digital era. Professor Christensen might argue that not all such disruptions meet his definition of “disruptive innovation,” but his name is inextricably linked with one of the defining challenges of contemporary business.

Christensen’s initial ideas were captured in the bestselling The Innovator’s Dilemma. Since then, he has written a series of books building on his original model. The Prosperity Paradox, co-authored with Efosa Ojomo and Karen Dillon is the latest. The sub-title of the book tells us what the book is about – How Innovation Can lift Nations out of Poverty. In this, Christensen emulates earlier gurus like Sumantra Ghoshal and C.K. Prahalad who shifted their attention to broader human concerns as they got older!

Christensen argues that three approaches that countries have followed to address the problem of poverty – creating institutions in the western model; addressing corruption; and investing in infrastructure haven’t worked. In his view, institutions have a cultural context and hence can’t be transplanted easily; corruption is not inherent to any region or people, and will reduce naturally when people don’t need corruption to sustain their lives; and costly infrastructure is difficult to sustain on its own.

So, what’s the solution then? Market-creating innovation is Christensen’s mantra to drive growth and prosperity in poor countries. In this, he emphasises differentiating market-creating innovation from sustaining innovation and efficiency-driven innovation.

Sustaining innovation focuses on the next better product with improved features – say, an iPhone X compared to an iPhone 8. No new market is created, volume growth is, at best, incremental, and it typically involves no new investment or growth in employment. Efficiency-driven innovation is the continuous improvement of processes that organisations do every day to reduce the consumption of materials, energy or human effort. This results in incremental improvements in profitability, but often reductions in employment.

What is market-creating innovation? This is innovation targeted at non-consumption – consumers who have needs but whose needs are currently not being addressed because of issues of affordability and accessibility. Typical examples are MPesa in Africa that allows simple banking transactions through mobile phone to those who can’t otherwise access or afford them and Aravind Eyecare in India that provides low-cost eyecare services (particularly cataract surgeries).

Why is this market-creating innovation critical to economic growth and prosperity? Christensen’s argument is that in poor countries such innovation has high growth potential because of the large number of people who are potential users of such products and services. It results in genuine growth in employment, which is important to raise living standards. Unlike employment created to serve export markets based on cost arbitrage which is inherently impermanent because the next favoured low-cost destination may come along soon, this employment is more stable and embedded in the economy.

What is the challenge of such market-creating innovation? Because it is targeting non-consumption, it is difficult to estimate demand as there is no data to go by. In short, its risky and involves careful problem formulation. But, when successful, it can have significant impact. Moreover it can also create the kind of demand that makes investment in infrastructure viable. It can improve the standard of living of poor people and make them more capable of contributing to and using modern institutions.

Reading this book gave me a sense of déjà vu. Fifteeen years ago, another management guru C.K. Prahalad wrote a book that made waves with a similar promise. We remember that book as The Fortune at the Bottom of the Pyramid but there was another part of the title that bears an uncanny resemblance to that of this book: Eradicating Poverty Through Profits. While Christensen does acknowledge Prahalad’s book in a footnote, the excitement around the BoP as Prahalad called it has waned over time.

Why did this happen? Many companies found the BoP too difficult to address. Margins were low, and substantially below the margins that could be earned in established markets through sustaining innovations. Sales, distribution and support were complex. Getting the value proposition right was far from easy. We saw several products targeting the BoP launched by large companies struggle to survive – Godrej Chhotukool, once a highly lauded initiative to provide compact, non compressor-based refrigerators to rural BoP customers struggled in the market; and PUR, a low-cost water purifier became a CSR project of Procter & Gamble rather than a commercial proposition. We still teach the same Aravind and Narayana healthcare case studies, and don’t have too many successful examples to offer.

In summary, The Prosperity Paradox is well-written and optimistic, but may not offer new insights if you are already familiar with the BoP story.