Creating an innovation ecosystem for inclusive and sustainable business

Creating an innovation ecosystem for inclusive and sustainable business By Stuart L. Hart and Chiropriya Dasgupta The authors contributed to a chapter in the book – Base of the Pyramid 3.0: Sustainable Development through Innovation and Entrepreneurship. The book covers the state of the domain and acts as a sounding board for expert voices from the field. This excerpt from the authors’ chapter, articulates the systemic need for an innovation ecosystem. "To paraphrase Hillary Clinton, it “takes a village”—or an innovation ecosystem—to succeed with BoP enterprise." "Better to “think like a mountain” by envisioning the holistic character of natural systems and all their intricate interconnections." Introduction The BoP Global Network has come a long way since the groundwork lay 15 years ago. What started off as a Learning Lab at University of North Carolina, Chapel Hill in the year 2000, to animate the thought leadership articulated in The Fortune at the Bottom of the Pyramid (C.K. Prahalad, Stuart Hart), today is a strong network of twenty six Innovation Centers – all spawning/helping spawn new ventures that are economically competitive, environmentally sustainable, socially inclusive, and culturally embedded. However experience and experiments have shown that these ventures are sustainable and scalable only if they are embedded in a wider value proposition for all stakeholders and integrated into a larger innovation ecosystem. Book excerpt Over the past decade, most base-of-the-pyramid (BoP) ventures have either failed outright or dramatically under-performed against expectations. There are many and varied reasons for this less-than-stellar track record. Perhaps no cause for BoP failure, however, has been more ubiquitous than the mistaken belief that BoP ventures are no different from new ventures aimed at the developed markets at the top of the pyramid—the assumption that all that is required for venture success is an affordable product and an effective business model for production, marketing and distribution. Unfortunately, when it comes to the BoP, “no man is an island”: In the under-served, informal and opaque settings at the bottom of the income pyramid, ventures must be embedded in larger ecosystems rather than stand-alone initiatives. To paraphrase Hillary Clinton, it “takes a village”—or an innovation ecosystem—to succeed with BoP enterprise. The rise and fall of CleanStar Mozambique Nowhere can the importance of building base-of-the-pyramid (BoP) business eco-systems be seen more clearly than in the domain of clean cook stoves for the poor. Indeed, despite the best of intentions, the past decade has seen scores of failed clean cookstove ventures relegated to the scrapheap of history. One initiative in this space, however, stands out from the crowd: CleanStar Mozambique. From its inception, the founders of this venture understood that cookstoves must be embedded in a larger ecosystem to succeed. That is, until their original vision and business model was tragically reversed. Indeed, before clean cookstoves caught the attention of world leaders and became a global priority (the goal is to foster the adoption of clean cookstoves and fuels in 100 million households by 2020), a pair of young, visionary entrepreneurs, founders Greg Murray and Sagun Saxena, were thinking beyond the clean cook-stove silo: a vertically integrated business model that would address the challenges of charcoal-based deforestation and improve food security, health and income for smallholder farming communities living on subsistence agriculture. For CleanStar Mozambique, the actual cookstoves were a small part of a much larger ecosystem of value, which included the upstream production of smallholder-farmer-based biofuel from cassava, along with an integrated agro-forestry model that generated additional income—and food—for the subsistence farmers who previously subsisted on cassava and made charcoal to sell for cooking in the urban areas, accelerating the problems of deforestation of climate change. Within five years of launch, more than 1,000 farmers adopted the integrated agro-forestry model, and a 2 million-liter/year ethanol-based cooking fuel production facility was built near Beira, Mozambique, to replace charcoal. Over $21 million was raised from strategic corporate and institutional partners and investors such as Danish biotech powerhouse Novozymes, biofuel plant builder ICM, and financiers Bank of America Merrill Lynch, the Soros Economic Development Fund and IFU, Investment Fund for Developing Countries, to grow and scale operations not just in Mozambique but across Africa. These partners also contributed technology, project management skills, connections, credibility and financial savvy to the venture. Here, it seemed, was a true triple-bottom-line BoP ecosystem that created sustainable value for all the stakeholders involved. However by late 2013, the story took a dramatic turn. Driven, by a fresh round of investment capital, the decision was made to “focus” the business by suspending its agro-forestry and ethanol production. The company also got a new name NewFire Africa, and was now focused on just the sale of clean cook stoves and fuel. Unfortunately, this move produced limited success and, by June 2014, a decision was made to voluntarily liquidate NewFire Africa to put an end to the continuing losses. “The company was not able to achieve the scale and retail penetration required to make this venture viable” (Novozymes 2014). Nearly a decade of research, business model innovation and funding, among other things, had gone into making a business case for clean technology at the base of the pyramid a reality. What went wrong? Was the business case for this venture flawed? Were there too many moving parts? Was greater focus indeed required? Could the execution have been different? Was patient capital really patient? Thinking like a mountain In his 1949 classic book, A Sand County Almanac, Aldo Leopold coined a phrase that would reverberate through history: “thinking like a mountain” (Flader 1974). He was the first to observe that the extermination of wolves, while solving problems for ranchers, led to explosions in deer populations—and trouble for the eco-system as a whole. Focusing only on individual species in isolation, he observed, led to bad outcomes when it came to the natural environment. Better to “think like a mountain” by envisioning the holistic character of natural systems and all their intricate interconnections. Little did he know at the time that his observations about the natural world would one day provide a key insight in the development of sustainable ventures and economies at the base of the world income pyramid in the 21st century. Like Leopold’s single-minded wolf hunters, too many BoP ventures and initiatives have been “rifle shots”—business strategies premised on the design and sale of low-cost products to targeted low-income end-users. The landscape is littered with the remains of failed BoP ventures focused on the sale of such things as low-cost water filters, solar lights, clean cookstoves and myriad other household goods. The reasons for failure: product misfire, low sales penetration, high selling and distribution costs, and inability to scale (Simanis 2012). As Khanna and Palepu at Harvard Business School observed many years ago in “Why Focused Strategies May Be Wrong for Emerging Markets” (1997), such an approach can work well in developed markets where infrastructure and institutions are well established. But in the developing world, such a “rifle shot” approach is a death sentence. That is why most successful corporations from the developing world are highly diversified “business houses”—they can supply the infrastructure and institutions (e.g. power, transport, distribution, education, healthcare) that are missing in the society itself. In short, they think (and act) like a mountain. It is now becoming increasingly clear that the same logic applies to individual BoP ventures and initiatives—success demands that BoP enterprises create wide and compelling value propositions.

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