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Thursday, September 07, 2006

Sandbox Innovation & The Zone Of Comfort Vs Zone Of Opportunity

C.K.Prahalad writes in detail with specific examples and a contextual framework on hoe the bottom-of-the-pyramid" model can foster the creation of what he calls "an impossibly low-cost, high-quality new business model." He thinks that working with and around constraints is the key towards success. CK refers to success stories in the hospitality & healthcare sectors in India and points to a few other companies operation on the innovation sandbox paradigm to success.

CK, well known for his repeated emphasis on the next practices instead of best practices showcases the Indiaone hotel as an example – the hotel charges $20, a fraction of what other western chains charge for customers in Bangalore with no compromise on the range of services. He sees that in the modern Indiaone hotels every room includes an attached bathroom, an LCD television, a wireless broadband connection, a small refrigerator, a coffeemaker, and a work area. The common areas include a pleasant cafeteria, an ATM, a business center, and a small gym. The hotel is very profitable. Its gross margins were 65 percent in 2005, compared with 30 to 40 percent for typical luxury hotels. And the business model is scalable. Ten such hotels are springing up this year in India, and another 25 are planned. His other examples like Aravind eye care system are indeed powerful ones.

The message from Prahalad is that all industries can try and achieve similar things but there are four conditions that must be present for similar types of breakthrough innovations to occur:
The process for designing both of these breakthrough innovations started with the identification of the following four conditions — all of which are difficult to realize, even when taken one at a time:
1. The innovation must result in a product or service of world-class quality.
2. The innovation must achieve a significant price reduction — at least 90 percent off the cost of a comparable product or service in the West.
3. The innovation must be scalable: It must be able to be produced, marketed, and used in many locales and circumstances.
4. The innovation must be affordable at the bottom of the economic pyramid, reaching people with the lowest levels of income in any given society.
In countries like India, with 700 million bottom-of-the-pyramid consumers at varying levels of income, the need for innovations that meet these criteria is now becoming obvious . He sees that the innovation “sandbox” involves fairly complex, free-form exploration and even playful experimentation (the sand, with its flowing, shifting boundaries) within extremely fixed specified constraints (the walls, straight and rigid, that box in the sand). The value of this approach is keenly felt at the bottom-of-the-pyramid market, but any industry, in any locale, can generate similar breakthroughs by creating a similar context for itself.

While the whole article is quite an insightful one and it makes interesting read – I particularly liked this one - The multinational corporations may find it hard to embrace these approaches, as the dominant logic of successful companies are so well entrenched: the business practices that have been successful in the past, the mind-set tied to those old practices, the internal evaluation systems that reinforce this mind-set, and the daunting problem of lack of experience in the new way of operating. CK, would know better than most others – he sits on the board of HLL , an unilever subsidiary – but for all practical purposes run as a separate local company and in the process creating a powerful identity for itself besides being hugely successful. The zone of comfort drives away the zone of opportunity. This is certainly true as offshoring majors are clearly demonstrating against the global service providers and am also hearing views about how the next wave of innovation may make a dent on the fast growing and well entrenched service majors. Asian Innovation, always had a different recipe and not many western enterprises understand them sufficiently to leverage better. Several months I came across this reasoning -"the presence many multinationals have established in Asia is more suited to prospering in yesterday's competitive environment rather than being well attuned to winning in the next round—especially against the new breed of Asian multinationals that seems likely to evolve as Asian companies rise to the challenge of inter-nationalization". Clearly, thinking global, acting local the article goes on to explain means that best practices and innovations generated in the course of adapting a global business formula to a local market remain imprisoned locally: They don't get propagated across Asia and the world. While this remains the case, Western multinationals in Asia won't be able to fully exploit the learning they are accumulating inside their Asian operations. The long-term consequence of this failure will be an inability to keep pace with their Asian cousins as they become increasingly capable of taking what they learn in one Asian country and deploying that learning elsewhere. In short, while Asia remains a recipient and implementer of best practice within Western multinationals rather than a strong contributor to global improvement and innovation, their competitive advantage will erode relative to Asian rivals capable of milking what they learn in Asia for all it is worth. I firmly beleive that colloboration in innovation would certainly help but a mindset change towards the asian microcosm may be the first step towards that..

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