Beyond Selling to the Poor: Building Business Intimacy through Embedded Innovation

Transcription

1 Beyond Selling to the Poor: Building Business Intimacy through Embedded Innovation Erik Simanis and Stuart Hart Cornell University April 9, 2008 Please do not distribute or cite without permission of the authors.

2 The year is An economics professor immerses himself in the daily life of a Bangladeshi village neighboring his university. Adopting a worm s eye view of the community, he joins residents in local farming projects, spends afternoons conversing at roadside tea stalls, and engages in late-evening dinners and debates. With time, the professor becomes attuned to a recurring obstacle faced by many villagers: access to credit. In response, he begins a micro-loan scheme that, over a period of years, evolves a successful banking model that obviates the need for collateral by issuing loans to groups of women. Flash forward to the late 1990s. Hindustan Lever (HLL) -- the Indian subsidiary of the Dutch multinational Unilever -- launches Project Shakti with $23 million in seed capital. Project Shakti aims to reach India s vast, geographically dispersed rural population through a decentralized distribution model. The model employs local women from thousands of women s self-help groups to operate as a door-to-door sales force for HLL s personal care products. To efficiently train Shakti women entrepreneurs, HLL partners with a local non-profit organization. Demand is boosted by utilizing community-based internet portals that advertise HLL s products and an additional village woman trained to conduct demonstrations about the health importance of personal hygiene practices. Today, Muhammad Yunus Grameen banking model is widely recognized as a disruptive innovation that brought affordable credit to the poor by turning conventional banking models on their head. Similarly, Project Shakti s reengineered distribution system is held up as an example of the systemic innovation needed to make corporations products and services accessible to the 4 billion people at the base of the economic pyramid (BoP). Both businesses, in other words, are exemplars of radical business model innovation for the BoP. 2 of 23

3 Yet while contemporary innovation frameworks train our sights on the structural similarities between these two businesses, they obscure a crucial dimension on which they differ. It is a dimension that elevates Grameen Bank to the level of a globally-respected, iconic brand, and enables a wide range of organic growth possibilities. Lacking this dimension, HLL s Shakti remains trapped in a resource-intensive, push-mode of expansion that, according to growing critics, conflates selling to the poor with the broader challenge of sustainable development. Indeed, what sets Grameen Bank apart from HLL Shakti is not a question of business model innovation, but one of business model intimacy. Business intimacy entails an interdependence and sense of shared identity wherein the company and community are committed to each other s long term well-being and success. Yet creating business model intimacy requires moving beyond the arms-length, datadriven planning processes that insulate managers from the communities they seek to serve. It requires moving beyond traditional public-private partnership models that invariably mediate the company s interaction with the community. The security blanket of hard market data, demand forecasts, and memorandums of understanding distract managers from the fundamental fact that forging a new business and value proposition for the BoP is, first and foremost, the forging of a new relationship. And relationships are built on personal trust and dialogue, not data and MOUs. For corporations to capture the so-called fortune at the bottom of the pyramid in a manner that addresses the 21 st century development challenge, a fundamentally new approach to strategy is called for. 1 A strategy based on humility and respect, deep dialogue and mutual learning. A strategy based on the fusion of the resources and capabilities possessed by both 1 For the first articulation of this idea, see C.K. Prahalad and Stuart Hart (2002) The Fortune at the Bottom of the Pyramid. Strategy+Business 26: of 23

4 corporations and income-poor communities. A strategy, ultimately, that brings corporations together in deep partnership with BoP communities to build a locally-embedded business. Disembedded Innovation In 1944, economic historian Karl Polanyi observed in his landmark book, The Great Transformation, that the birth of industrial capitalism was premised on a radical shift in how people perceived the relationship between the economy and society. 2 Prior to the 1850s, markets were seen as an important, but small, part of a diverse economic system that was embedded in the social fabric of a community. Post 1850s, Polanyi observed, the new concept of market economy undid this long-standing relationship: economic life became disembedded from society and viewed as a self-contained system whose greatest potential could be released through the unimpeded operation of impersonal, efficient markets. In the market economy, every person was either a Buyer or Seller; every relationship, a transaction. Everything, including people and the environment, a potential production input subject to the laws of supply and demand. Social welfare, in this new context, was maximized by getting more goods into the hands of more people. The idea of the mass market was born, and with it, the modern industrial corporation. In the ongoing effort to serve these mass markets, corporate growth and innovation strategies have continued to reflect this production-driven, disembedded quality. Communities are seen as target markets. Ecological systems are treated as natural resources that supply raw materials and waste sinks. People s aspirations for a better life register as potential market demand. Selling more products to more people is an internal, technical challenge tackled through data-driven methods of scientific management. Despite constant advances in innovation 4 of 23

5 practice, this core strategic logic has remained unchanged since its inception nearly 200 years ago. Recent corporate efforts to reach today s emerging mass market -- the four billion people at the BoP -- continue to rely on the same disembedded way of thinking. Three reinforcing attributes characterize disembedded innovation: a product-centric value proposition; a clinical orientation to stakeholders; and a discovery-based approach to opportunity. The primary goal is to get less expensive and better performing products into consumers hands, resulting in business solutions that are structural in nature. These structural business solutions focus on the physical or architectural dimensions of the business system and include changes to product/service design, improvements in production process, and reconfiguration of the value chain (see Figure 1 below). Figure 1 2 Karl Polanyi (1944) The Great Transformation: The Political and Economic Origins of Our Time, Farrar & Rinehart, New York and Toronto. 5 of 23

6 Product-Centric Value Proposition. The assumption that drives disembedded innovation is that end-products provide the primary source of value to customers, where value is calculated as the ratio of product quality (real or perceived) to price. Conventional strategic wisdom reinforces this perspective, with generic strategies falling into one of two main camps: cost-leadership (lowest price) or differentiation (highest perceived quality). Under a costleadership strategy, innovation efforts target new sources of production and operational efficiency; within a differentiation strategy, innovations look to improve and expand product functionality. It is no coincidence that the field of innovation is dominated by terms like incremental, radical, and disruptive -- all of which describe changes in product configuration and performance. Clinical Orientation to Stakeholders. Disembedded innovation relies on a clinical, transactional relationship with a firm s external stakeholder groups. Stakeholders are mapped according to their power and saliency and engaged insofar as they aid (or inhibit) the design, manufacture, or distribution of end products. Customers, much like patients to a doctor, are examined for insights into their needs. Focus groups and product testers are paid in exchange for information. When the risk/reward profile of internally developing a particular technology or new distribution channel is deemed unfavorable, partnerships and alliances are sought out with traditional (e.g., other firms) and non-traditional partners (e.g., NGOs). A memorandum of understanding details each partner s roles and responsibilities over a fixed period of time so that performance can be monitored and opportunism minimized. Discovery-Based Approach to Opportunity. Lastly, disembedded innovation maintains a discovery-based approach to new business development. Business opportunities are assumed to exist out there and are simply waiting to be discovered and assessed through 6 of 23

7 rigorous market research. 3 The cornerstone of the discovery-based mode is the business plan, which assesses the objective market potential and market risk through detailed calculations of price points, demand forecasts, and product specifications. Once the best business opportunity is identified, attention turns to efficiently executing the plan and rolling out a business model, in which scalability and growth trajectory have already been plotted and vetted. Should the new venture fail to live up to projected growth within a two-year window, patient capital is withdrawn and attention shifts to documenting lessons learned. Despite its pejorative connotation, disembedded innovation has fueled corporate growth and success in the industrialized markets. The fruits of this approach have also been enjoyed by broader society. Because of disembedded innovation s ruthless focus on giving more for less, corporations have created a level of material comfort in the industrialized world unimaginable at the turn of the nineteenth century. Homes are bigger, telephones and televisions ubiquitous, cars and trucks outnumber the number of drivers. Americans considered middle class in the early 1900s would fall below today s government s poverty threshold. It stands to reason that corporate efforts to extend disembedded innovation strategies to the four billion plus people at the BoP would yield a similar win-win. However, the informal economies at the BoP expose the limits of this innovation strategy. 3 For more information on the theory of discovery-based versus creation-based approaches to venturing, see the following two academic papers: Saras Sarasvathy (2001) Causation and Effectuation: Towards a Theoretical Shift from Economic Inevitability to Entrepreneurial Contingency, Academy of Management Review 26(2): ; and Sharon Alvarez & Jay Barney (2008) Discovery and creation: Alternative theories of entrepreneurial action, Strategic Entrepreneurship Journal 1(1): of 23

8 Limits to Disembedded Growth To begin, it appears disembedded innovation is effective only when there is a welldefined, existing BoP market against which corporations can benchmark products and services. Hindustan Lever s (HLL) highly-publicized success in developing its Wheel detergent for poorer segments in India illustrates this point: HLL was responding to a competitive threat from a local producer (Nirma) which, having already established itself as the preferred brand at the low-end of the consumer market, was moving up-market and picking off HLL s wealthier, core customer base. With Wheel, HLL was innovating for an established consumer market and against an existing value proposition. Disembedded innovation works well when the target is crystal clear. More often than not, however, companies enter the BoP without established product markets against which to benchmark. It s worth noting that the Base of the Pyramid is a socioeconomic demographic -- it is not a market. The two are often conflated. And while alluring, World Bank poverty statistics are not a proxy for a market. The lives of the poor, just as those of the middle class and wealthy, are complex and do not fit neatly within Maslow s hierarchy. Even seemingly obvious needs -- such as clean water and electricity -- are deeply entangled with the local social structure such that they have no meaning or value on their own. For example, anthropologists have observed how women s daily collection of water from sources far from home -- a practice which may appear to be purely time-consuming drudgery -- provides a cherished opportunity to socialize beyond the gaze of men. Faulty assumptions about customer needs are reinforced by disembedded innovation practices that search out field-data to confirm pre-determined needs and business opportunities. The process typically involves a brief, ceremonious field visit into a village or slum coordinated 8 of 23

9 by a local NGO partner. Otherwise, managers remain cocooned in hired jeeps and internet-ready hotels as business plans are generated and vetted. It is no surprise that most MNC ventures at the Base of the Pyramid have either: failed to move beyond a market research phase for lack of clear market demand; crashed and burned shortly after launching a BoP product (e.g., Nike s World Shoe); or shifted into a social-marketing or philanthropic mode when demand falls short of expectation (e.g., P&G s Nutristar). Yet, even when companies get good data by going native in villages and slums, disembedded innovation leads to sub-optimal business models that leave the company exposed and without any viable means of sustaining their competitive positions. This happens because the transactional, impersonal nature of the innovation process is built into the business model itself and is reciprocated by partners and customers. Consider again Hindustan Lever s Shakti business in which rural women villagers are recruited for door-to-door sales. HLL currently supplies the Shakti ladies with its products packaged in single-use servings (i.e., sachets). It would make far more sense to provide bulk products that the Shakti women can re-package onsite. Doing so would carry multiple benefits, including: lowering the product cost to the customer; allowing the women to contribute more value to the final product and thereby command a greater share of the returns; and reducing the growing mountain of sachet packaging waste that has invaded the Indian sub-continent. Yet HLL has been unable to make this seemingly simple change to the business model out of concern that the Shakti ladies will adulterate the product and harm the firm s brand. But this concern exists only because there is an absence of shared commitment between HLL and the women partners. Trust extends only so far as the legal contract that defines their partnership. 9 of 23

10 This lack of trust and shared commitment has also made scaling-up an arduous, costly process. Turnover among the Shakti ladies was, at one point, over 50% within a few months of their recruitment into the program. As contractors, the Shakti ladies have no reason to invest their sweat equity into realizing a longer-term vision. As the saying goes, it s nothing personal, it s just business. The important point is that this rational approach is not an inherent trait of the Shakti women. Anthropologists have documented across societies the widespread presence of love and gift economies shaped by caring. Disembedded innovation has literally made the Shakti ladies into self-interested, short-term profit maximizing partners. HLL is simply getting back what it put in. Disembedded innovation causes the same dynamic at the customer level. By engaging customers as data points driven by a consumption-maximizing logic, customers end up embodying this very trait. When a less expensive knock-off surfaces, a company can only watch powerlessly as customers make the seemingly rational decision of switching to the other product. This poses an enormous challenge in BoP markets, as low-cost knockoffs and counterfeit products are a reality that cannot be ignored. Furthermore, the traditional set of legal tactics that companies employ to prevent counterfeiting and competitor entry in established markets (e.g., patents, lawsuits, lobbying) are impractical and essentially useless in most BoP contexts. Not only is legal recourse time-consuming and often ineffective, but the expense of monitoring hard-to-reach villages (of which there are 600,000 in India alone!) is prohibitive. In the BoP, disembedded innovation sows the seeds of its own destruction. Disembedded innovation, then, although familiar and comfortable, is a high-risk/low return strategy for the BoP. Going native may lead to structural innovations sufficient for accessing the few pre-existing BoP markets. But value will be limited to incremental revenue 10 of 23

11 growth, and the company s competitive positions will be tenuous. As a result, applying disembedded innovation at the BoP will, out of strategic necessity, revert to a short-term value capture mode, where the objective becomes selling as much and as quickly as possible to the poor, before competitors (and counterfeiters) can eat the company s lunch. Re-Embedding Innovation Strategy When it comes to the BoP, corporations must resist the temptation to behave like the proverbial child with a hammer, to whom everything begins to look like a nail. As Muhammad Yunus has demonstrated, to open the company up to the wellspring of value at the Base of the Pyramid, companies must become native to the community. Becoming native requires thinking beyond selling to the poor. It requires re-embedding innovation strategies back into place in order to become a long-term, integral member of a community ecology. Embedded innovation reverses the thinking and business practices that typify traditional innovation strategy. As a B2C strategy, where C stands for Community rather than Consumer, locally-rooted relationships form the primary source of value -- not the products and their corresponding taglines. Engagement with income-poor communities takes place in a spirit of joint learning and mutual sharing that entails sustained, face-to-face interaction. New value propositions are co-evolved by the company and the community, and business models creatively marry the capabilities of both partners. Embedded innovation consists of three core attributes: a community-centric value proposition; a long-term partner orientation to stakeholders; and a creation-based approach to opportunity. The strategic intent is to establish a durable base of competitive advantage through business model intimacy (see Figure 2 below). 11 of 23

12 Figure 2 Community-Centric Value Proposition. Through an embedded innovation lens, the greatest source of value resides in the community of relationships that anchor an enterprise to a particular place. By becoming rooted within a community ecology, a company becomes part of residents very identity and self-image. The experience of value, therefore, extends far beyond the simple consumption of a company s products and marketing messages. It speaks volumes that, for example, Grameen s bank workers are often addressed as sister and brother in the communities they serve. Communities are created and sustained through a mutual recognition that each person has the right to participate in and shape a dialogue around a common set of important issues. For this reason, a company cannot unilaterally choose to become part of a community the way a market researcher can choose to collect data. Joining a community requires building personal 12 of 23

13 relationships and demonstrating commitment to the range of issues and concerns that, on the surface, may appear to lie outside of a company s immediate interests. Muhammad Yunus instinctively recognized this reality in choosing to live in Jobra village rather than commuting to Chittagong University from the main city of Dhaka (as did most other faculty). Living in Jobra afforded Yunus the opportunity to participate in daily life, including village farming projects and drought relief efforts, and to thereby contribute to the constitution of Jobra s community. Even today, Grameen Bank branch managers are required to spend the majority of their day out in the community office. Grameen even forbids managers to travel by car within communities -- an impersonal and distancing mode of transportation. Instead, Grameen employees walk and bike to meet with borrowers in their homes. Long-Term Partner Orientation to Stakeholders. In embedded innovation, BoP communities emerge as valuable and vital business partners to companies. By forging long-term partnerships, embedded innovation catalyzes a kind of disruptive thinking that allows both the company and the community to see the world and its interconnections in a new light. It fosters a collective imagination that leads to value propositions and business models that exceed what either partner could conceive of or entertain on its own. Importantly, believing that poor communities are rich in capabilities, resources, and imagination is a prerequisite for seeing and harnessing this capacity -- the opposite of the old adage seeing is believing. The mutual learning and inter-personal exchange necessary for merging partners capabilities and resources into a new business builds a sense of mutual commitment and joint responsibility for its success. Yunus openly states that the Grameen lending model and its supporting organizational structure were co-developed by Yunus and his students together with the villagers of Jobra. 13 of 23

14 Indeed, working closely with Jobra s villagers was instrumental in helping Yunus unlearn the conventional economic wisdom in which he had been indoctrinated as a professor of economics. Seeing his own discipline from the vantage point of Jobra s villagers was an important step in Yunus ability to re-imagine a banking model geared towards the unique needs of the poor. Creation-Based Approach to Opportunity. Lastly, embedded innovation uses a creation-based approach to business development that nurtures a new market by progressively evolving an altogether new value proposition and business model through action-learning. A creation-based approach is not about forecasting and then tapping into latent demand; rather, it entails synchronizing the business development process with the pulse of the community so that the business s value proposition co-evolves with customer needs and the local ecology. Rather than segmenting problems into business categories such as food, energy, water, or IT, a creation-based approach dissolves artificial industry boundaries and links together seemingly separate domains of value to form a new, locally-responsive market pattern. By enmeshing the company within this emergent value network, it engenders an interdependence among the health of the new business, the community s residents, and the local ecology. Importantly, forging these new value networks requires setting aside preconceived notions as to what poor people need or what environmental problems exist and, by extension, what readymade solutions a company has to offer. It is important to recall, for example, that Muhammad Yunus and his students spent almost four years working with Jobra villagers on a number of farming experiments before the idea of credit provision emerged. It took another seven years until the business model was completely baked and ready to be broadly scaled. One of the most celebrated aspects of Grameen s solidarity lending model -- the use of group peer pressure in place of collateral to 14 of 23

15 help guarantee loan repayment -- was adopted because the villagers themselves had already decided to form groups to facilitate loan collection. Because of the creation approach, the resulting model is very un-bank like and has low material resource requirements: manual transactions and record-keeping instead of computers; trust and friendship rather than legal contracts; bicycles and walking sandals instead of cars; home visits instead of marbled offices and executive suites. Building Native Capability In 2003, having developed a deeper understanding of the business challenges posed by the BoP, we were struck by the sizable chasm between corporations current capability sets and those needed to execute an embedded innovation strategy. It became clear that embedded innovation required a distinct capability set, one we call native capability. 4 Native capability demands skills in facilitation and practicing humility; for building trust and close relationships across differences in status and background; and for co-evolving value propositions and business models through action learning. To help bridge this capability gap, we and colleagues have been involved in developing an embedded innovation approach. We call it the Base of the Pyramid Protocol (BoP Protocol). The BoP Protocol is a co-venturing process in which a company together with a BoP community conceives, launches, and evolves a new business that serves that very community. As one senior manager familiar with the BoP Protocol describes, it is a structured approach to a non-structured challenge. 5 The process builds on the capabilities and resources of both partners 4 For further development of the idea of native capability, see Stuart Hart (2007) Capitalism at the Crossroads: Aligning Business, Earth, and Humanity, Wharton School Publishing. 5 We thank Mr. U. Purnachand of The Solae Company for this description. 15 of 23

16 and creates a strong sense of shared commitment and deep interdependence between the two, thereby establishing a powerful base of competitive advantage and a formidable entry barrier for copy cats. The BoP Protocol consists of three phases that take approximately two years to complete depending on a company s base level of capability and established in-country relationships (see Figure 3 below). The three phases include: Phase I: Opening Up Phase I begins with a company immersion in the community (slum or rural village) using homestays to build rapport and a base of trust. The company s immersion team then recruits a community cohort, and together they learn about each other s capabilities/needs and explore mutually beneficial business opportunities. The output is an actionable, co-created business concept. Phase II: Building the Ecosystem In phase II, the partners formalize a Project Team and evolve an initial product/service offering and brand position based on the co-created business concept. Action learning is used to empower and build the community team s business skills, while creating buzz in the larger community. The output is a community-tested business prototype. Phase III: Enterprise Creation Phase III evolves the full business model through small-scale tests and action learning. Local market demand is catalyzed through engagement of the community in this process. The community team deepens its management skills, and the company creates a scale-out platform. The output is a locally-embedded business. 16 of 23

17 Figure 3 The initial BoP Protocol framework was developed in 2004 with the input of a diverse consortium that included: leading NGOs in the practice of participatory development; social entrepreneurs from organizations like Grameen Bank; and a dozen managers from the project s four corporate sponsors, DuPont, SC Johnson, Hewlett-Packard, and TetraPak. Since then, it has undergone extensive testing and refining through two ongoing business applications. In 2005, consumer products multinational SC Johnson launched the first BoP Protocol initiative in Kenya. In 2006, The Solae Company, a DuPont subsidiary in the food and nutrition industry, launched the second BoP Protocol initiative in India. 6 New BoP Protocol initiatives are slated for launch in Mexico, the Philippines, and the United States. 6 For a detailed explanation of the BoP Protocol process, along with examples from the DuPont and SC Johnson initiatives, please see Simanis et al (2008) The Base of the Pyramid Protocol: Toward Next Generation BoP Strategy (2 nd Edition). The document is available at: A BoP Protocol field guide with specific tools and techniques used in Kenya and India will be available in Fall of 23

18 SC Johnson o Launched in Kenya, 2005 o o o o BoP Protocol Projects Summary Project sites in Nairobi slums of Kibera, Mathare, and Mitumba and in the rural village of Nyota Township Community partners in Nairobi include over 25 members of self-help youth groups Co-created business provides home-based cleaning and insect-control services to slum residents Project in Phase III with the revenue model evolving; business spreading to adjacent slums The Solae Company, a DuPont Subsidiary o Launched in Andhra Pradesh, India, 2006 o Project sites in Rasul Pura slum cluster of Hyderabad and two rural villages in Parvathagiri Mandal o Community partners include approximately 45 women o Co-created businesses address issues of health and nutrition through the sale of fresh, prepared foods and cooking outreach teams trained in culinary arts and nutrition o Project in Phase III with both businesses generating revenue and approaching financial sustainability Toward Business Intimacy So what exactly is business intimacy and how does it create competitive advantage? Business intimacy is a unique relationship between a company and community characterized by a shared identity, a mutual commitment to a common vision, and an interdependence between each other s success and welfare. As with all relationships, business intimacy is dynamic. It requires patience and persistence to establish, and ongoing attention and personal investment to sustain. Shared Identity. A shared identity exists between a corporation and a community when each partner s sense of who they are cannot be separated from the other. It s much like a family, where each family member is an individual, but is also defined in part by his/her relationship and 18 of 23

19 shared experiences with the other members. The BoP Protocol s use of a co-creation methodology is the primary mechanism by which shared identity is forged. Consider the following: Approximately seven months after Solae s BoP Protocol project was launched in rural India, a senior executive traveled to Parvathagiri Mandal to see the business progress and to meet the 21 women community partners. When the Solae executive introduced himself to the women and mentioned that Solae was pleased to be working with them, the room fell quiet. After a pause, one of the women spoke up: We are pleased that you are able to join us, but...we are Solae! Clearly, the BoP Protocol had instilled a deep sense of shared identity. Mutual Commitment. Mutual commitment means that the company and the community view themselves as sharing equal responsibility for the success of the new business. Through the BoP Protocol, instilling an ethic of shared responsibility begins on day one. Company team members state and demonstrate that the corporation is there to combine its resources and talents with those of the community, rather than to solve the community s problems. As part of business prototyping in Kenya, for example, SC Johnson agreed to provide its consumer-packaged products to the Kibera youth group partners at a lower price to simulate bulk-packaged product costs. However, one of the Kibera youth group members had an appointment to provide an insect control test service to a Kibera resident before the test stock could be supplied to the youth partners. Rather than postpone or cancel the service, the youth member walked to a shopping center over a mile away to purchase, with his own funds, a can of SC Johnson s insect spray at full retail price. Mutual commitment is a two-way street. Deep Interdependence. The presence of deep interdependence means that both the community and the corporation derive meaningful value from the creation and operation of the 19 of 23

20 new business on terms important to each partner. To create this kind of business mutualism, both the corporation and the community must play central roles in developing the business value proposition. The BoP Protocol ensures that the co-created business concepts respond to the unique needs of each partner by jointly developing a list of business success criteria. These criteria then serve as constant guides and reference points as the new business is created. The creation of the business in Hyderabad, India reflects such interdependence. Solae and the women community partners from the slum converged on the concept of a Culinary Park that linked Solae s core capability in food and protein nutrition to the community s expressed need for local green-space, fresh and affordable produce, and healthy, high quality food options. An important dimension of the business model is the seeding of a slum-based farmer network through publicly-accessible rooftop demonstration gardens that simultaneously promote healthy food options. And as the women partners have experimented with Solae s soy protein, they have developed preparation techniques that allow Solae s protein to be incorporated into staple Indian foods that Solae s own food scientists were unable to do! As these examples suggest, business model intimacy shifts the foundation on which competitive advantage is built. In the near term, it dissuades entry by counterfeiters and low-cost knockoffs by acting as a Neighborhood Watch that self-polices the community against hit and run companies interested in turning a quick profit. Over the long-term, business intimacy creates a locally responsive platform from which the business can be propagated in other communities. While the SC Johnson and DuPont businesses are still in start-up stage, this dynamic can be seen in the explosive growth of a Grameen Bank spin-off -- Grameen Phone. Grameen Phone operates a network of Phone Lady entrepreneurs in Bangladesh who sell mobile phone services in the villages. Piloted in 1997 in 950 villages, Grameen Phone has 20 of 23

21 revenues of nearly $1 billion and net profits approaching $200 million. Not surprisingly, most of the Phone Lady operators have been previous Grameen Bank borrowers, some with decades of experience with the Bank. The deep interdependence, mutual commitment, and shared identity that the Grameen Bank had forged with communities across Bangladesh were central in propelling the growth of Grameen Phone. Contrast this with the high turnover rate demonstrated by HLL s Shakti women entrepreneurs, which has compromised the program s financial viability. Business model intimacy, therefore, represents an entirely new dimension of value creation. While the time investment required to build this foundation is unquestionably greater than that needed to generate structural innovations, the long-term potential for growth, corporate renewal, and sustained competitive advantage rewards handsomely those corporations willing to make the investment. Leading the Next Great Transformation The initial vision of the Base of the Pyramid, which held out the promise of combining business growth with a sustainable development agenda, today is in danger of imploding. Corporations, relying on the traditional business tool kit, have slipped back into the business-asusual mode where the primary intent is to sell products to the poor. The few resulting corporate success stories seem to confirm that the only fortunes to be made in the BoP will come packaged in billions of single-serving packages. Small, in this case, is clearly not beautiful. Corporations, it would appear, are no better equipped to deal with the challenges of sustainable development than large, multilateral aid agencies. 21 of 23

22 We firmly believe, however, that there is a way forward that does not throw the proverbial baby out with the bathwater. Sustainably addressing global poverty, we contend, requires a new practice of development that enables jointly-defined agendas of change through partnership, not silver bullet solutions airlifted into communities, nor utopian models premised on the sanctity of indigenous knowledge and technologies. New technologies and Western knowledge are not inherently foreign -- they only become foreign when they are parachuted into a community and run roughshod over existing socio-cultural institutions. And providing for the needs of an additional four billion people without overwhelming the earth s ecological systems will require an order-of-magnitude reduction in environmental impact, a challenge best met by harnessing the breadth and depth of knowledge, technology, and capabilities across the globe. The issue, therefore, is not whether corporations can play a role in poverty alleviation, but how. The answer, we suggest, is through embedded innovation. Embedded innovation helps ensure that corporations clean technologies, valuable organizational competencies, and imagination build onto, not over, existing community assets and ecological webs. Embedded innovation ensures that jointly created solutions are responsive to local ecological systems and have the commitment of the wider community behind them. And perhaps most importantly, embedded innovation develops a deep base of entrepreneurial capacity in the community, a capacity that enables an ongoing stream of local innovation and positive change. It required a great transformation in thinking and behavior to realize the industrial revolution -- the period of capitalism that made possible an unprecedented level of prosperity and material comfort within the mass markets of the West. It will require an equally great transformation in corporate growth and innovation strategies to bring forth a new, more inclusive form of capitalism -- one that extends the benefits of enterprise to the entire planet, while at the 22 of 23

23 same time preserving the ecological foundation on which we all depend. But with every fundamental change comes tremendous opportunity. Seizing this opportunity will require a new corporate competence based on dialogue and intimacy, on openness to learning and experimentation, and on a constant exercise of humility. 23 of 23