I remember visiting Bill Gates’s house in 1998 when I was an intern at Microsoft. Next to priceless tapestries hanging in his hallway were plasma screen TVs displaying images from Corbis – the library of images that he owned. The TVs were about 25” across and priced at about $15,000 a piece – the best TVs that money could buy. Bill Gates is the classic early adopter – someone with a lot of money who is more than willing to pay for superb products. Gradually products are refined and prices come down, making these latest and greatest gadgets available to the rest of us. Obviously the first few items are costly to produce and therefore are only available to those with the most money. But what if that weren’t exactly true. What if products were created where the early adopters weren’t the richest people but someone else entirely?
This brings us to Sam Farber. In 1989 Sam’s wife Betty was struggling with horrible arthritis and found it difficult to use many common kitchen utensils. Farber started to look for easier to use tools but found none were on the market. So he decided to build his own. He hired Smart Design, a New York based design firm, to create a set of kitchen utensils that Betty could use. The designers watched people with arthritis use their kitchen utensils like scientists in a laboratory, noting the difficulties they had, making changes and measuring their effectiveness. Based on these findings, they created products that overcame those needs while also ensuring that the tools were attractive, affordable, and high quality. Since its founding OXO has become one of the most popular brands of kitchen utensils in the world. They are most famous for the OXO Good Grips handle that delivers maximum leverage and minimum force. Another product from OXO is their jar opener that allows anyone to open jar lids that are stuck. What Farber proved to the rest of the world was that it’s not just the arthritic that like easy to use kitchen utensils, it’s everyone.
By carefully examining the difficulties of arthritic people with their kitchen utensils, Farber was able to transform an industry. But let’s take it one step further – who is hurting the most in the world? Who is the exact opposite of the traditional early adopters that we visualize: The Third World poor.
Designing products for the world’s poor requires radical cost innovation to make them affordable. In traditional innovation we had products that started at high prices that gradually came down. In radical cost innovation, the idea is to create something that is extremely cheap and gradually increase the quality.
We generally think of cost being proportional to quality. Therefore something of very low cost would be very low quality. In reality, performance divided by price equals value and high value products are very much sought after. Take the example of Toyota – probably the brand that stands for value more than any other in the world. Today Toyota stands for a good car at a fair price that never breaks down. This level of quality wasn’t created by building a million dollar car and gradually stripping it down. It was created by relentlessly focusing on waste and cost until all excess costs were eliminated.
This idea of radical cost innovation is not new. The idea is based on Clayton Christenson’s “Disruptive Innovation” in the Innovators’ Dilemma where he discusses how mainframe computers (e.g., IBM) were gradually driven from the market by inferior but much less costly mini-computers (e.g., DEC) which were gradually driven from the market by the inferior but much less costly micro-computers (e.g., PCs and servers). When each of the attackers (e.g., micro-computers) were introduced, the incumbents (e.g., IBMs) of the world thought that these computers would never be able to compete because they weren’t powerful enough. However, over time, the power of micro-computers increased rapidly and the micro-computers were able to take over much of the “real” work at a much lower price. Christenson’s key point is that cheaper technologies get better faster than better technologies get cheaper.
Another take on the cost innovation idea is in the article Format Invasions from Strategy and Business Magazine. The authors point out that most companies are looking for the next “Killer App” that will totally transform their industry (e.g., Apple iPhone). However, industries are often transformed by radically lower costs. Think about how Southwest Airlines transformed the airline industry by introducing the concept of the discount airline to the American public. This is a trend across many industries: Dell in computers, Wal-Mart in retail, and Nucor in steel. In the words of the authors “massively lower cost is the killer app.”
Taking these ideas forward, if companies could create products that had radically lower costs for Third World customers, they would have a tremendous market advantage. While these products would be inferior at first, companies can increase product performance but keep a radically lower cost base. This would lead to products with a value higher than anything currently seen in the market.
The most famous of these innovations is Tata Motors “Nano” that was released in early 2008. Historically multinational auto manufacturers have thought of the third world as an afterthought—waiting for incomes to rise so that they could buy developed world products. The Nano is a car built primarily for the Indian market where the average GDP per capita in India is about $3,300 per year vs. about $41,800 in the US. The base price of the car was 125,000 rupees (about $2,500). This is about half the price of the cheapest car in India and about five to six times cheaper than the entry level models just about anywhere else. Interestingly, Tata also owns the brands Jaguar and Land Rover. We obviously won’t be seeing at $2,000 Jaguar any time soon but don’t be surprised if we see some of the cost savings of the Nano delivered to some of the world’s top luxury brands.
CK Prahalad, the World’s foremost proponent of Third World Innovation, has been involved in a number of cost innovation projects for the world’s poor which he discusses in The Innovation Sandbox. In one case he helped Ginger Hotels to fundamentally rethink what it costs to run a hotel. Ginger Hotels (formerly Indiaone) has recently opened a hotel in Bangalore that provides rooms for about $20 a night vs. the $300 for other hotels in the area. Each room has an attached bathroom, wireless internet and an LCD TV. While most hotels make a 30-40% profit Ginger clocks in at 65%. One element of savings is in labor. In a 100 room hotel, Ginger has seven employees vs. 50 for a motel or 130 for a modern hotel. Everything else is outsourced.
But perhaps the most amazing Third World innovation is the Jaipur Foot, an amazing prosthetic that allows India’s poor amputees (many of whom were injured by land mines) to live normal lives. The device was a collaboration between master sculptor Ram Chandra and an orthopedic surgeon Dr. P.K. Sethi. The device is designed to be fabricated at a very low cost by relatively unskilled laborers. Even more impressive, the device is built to support the lifestyle of the working poor which includes walking barefoot and squatting. The device costs a mere $30, far less than the $8,000 to $10,000 similar devices cost in the US.
So how can large US firms respond? If large multinational firms do not attack the problem they will be at a tremendous cost disadvantage when foreign goods become good enough to enter US markets. However, there is a simple solution. Invest in making products for the world’s poor. This does not mean simply outsourcing to India to reduce the cost of products. I am talking about radically changing the price point of a product so that it can be afforded by the world’s most indigent people. This strategy has many advantages:
- Develop New Technologies
The main reason to do this is to increase the level of technology in the business. This technology could be used to make products more cheaply and increase profit margins, defend against competitors, or even block competitors in with patents in developed markets.
- Cheap to Develop
One of the great advantages to building products for the poor is that there is a relatively low cost to implement. In order to sell the products at a price that the customers can afford, manufacturing costs must be held extremely low compared to those in developed countries. This allows companies to do this research at a relatively small investment level.
- Doesn’t Affect the Core Brands
Companies would create an entirely new company to product these products. These firms would be making products under different brands. There is little chance that the main brands would be cannibalized. Eventually these products will provide competition when they are good enough to enter the developed world; however, this would happen whether or not the multinationals were invested in these technologies.
- Frequent Presence on the Supply Side Already — Outsourcing
A large number of global companies are already sourcing knowledge work from India and China. This workforce could be leveraged to make and sell products to the poor people in these areas. Sourcing this work from the same regions as the target customers would provide key insights and the ability to test easily.
- By Delivering Value to Those Most in Need, Companies Can Make a Real Difference in the World.
Simply put, this is one of the cases in business where companies can do a tremendous amount of good while making a tidy (if not huge) profit.
Bruce Sterling, the science fiction writer once said, “The future is here, it’s just not evenly distributed yet.” We are all waiting to buy the latest and greatest products that the rich and famous have today. Once they come down in price we will all have virtual reality headsets, Japanese super phones, automated homes and whatever else is dreamt up by the mad scientists in the back rooms of universities and corporations. At the same time, whether we realize it or not, we are also waiting for the next generation of radically lower prices from the Third World. These products are already being developed and it’s up to US companies to step up to the plate to maintain their competitive advantage or face being disintermediated by cheaper technologies.