More than 3 billion people around the world lack reliable telecommunications service. A big part of the reason is the cost involved in extending wire-line infrastructure from urban to rural areas. In rural Bangladesh, average per capita income is $286 per year, a level that makes the existing business model for telephone service unfeasible. Only a disruptive model could change the situation.

Accordingly, Grameen Telecom has focused on bringing wireless service to the country’s poor. Initially, few gave the venture much hope since only the richest city dwellers in Bangladesh could afford their own mobile phones. But Grameen Telecom, following the bank’s microcredit model, came up with an innovative approach. It lent up to $175 to women in rural villages — independent entrepreneurs who became known as the “wireless women of Grameen.” The loan amount covered the cost of a mobile phone, a small solar recharger unit, and the training needed to use and service the equipment. Once equipped and trained, the entrepreneurs could then sell phone usage on a per-call basis at an affordable price to others in their villages.

The pilot project started with 950 villages, and the results were impressive.6 Village phone operators increased their income on average by about $300 per year. They spent much of this additional income on their children’s education and health care, another boost for Bangladesh’s future development. The women of Grameen also saw their status in the villages rise considerably as a result of their role in providing the new service.

Users of the service benefited greatly as well. They no longer had to endure time-consuming, expensive travel to secure information about, for example, crop prices; nor did they have to place orders with distributors through a slow, unreliable postal system. Each call saved the average user between $2.70 and $10, a figure representing up to 10% of household monthly income. Environmental advantages also became clear, in the forms of reduced vehicle usage for travel and the avoidance of construction associated with a wire-line infrastructure.

The business model also proved to be highly profitable for Grameen. In comparison with their urban counterparts, the rural phones booked three times the revenue per phone: $100 per month for a village phone versus about $30 per month in the city. If extended to all of rural Bangladesh, the business could generate revenues in excess of $100 million per year. (If a similar model were applied to rural India and China, tens of billions of dollars of revenue would be at stake.) Recently, Grameen Telecom began offering rural Internet access via kiosks. An emerging telecom company in India, n-Logue, has adopted a similar business model; it has developed new technology to dramatically lower connection costs in rural areas using “wireless local loop” technology that separates voice and data traffic. The revenue and profit potential for this business are enormous.7

Meanwhile, telecommunications giants in developed countries have spent billions on 3G technology and spectrum licenses, hoping to provide enough bandwidth so that current customers can use wireless devices to do things that they now do on the wire-line Internet. Those investments have crippled many companies and are unlikely ever to produce adequate returns. Far better to compete against nonconsumption at the base of the pyramid, and then to migrate from that profitable base toward successively more sophisticated customers and applications in global markets.

Power to the People

Beyond the mandate to sustain corporate growth lurks another challenge that increasingly will vex multinationals: the extent to which they contribute to, or detract from, sustainable development.8 Affluent countries account for more than 75% of the world’s energy and resource consumption and create the bulk of the industrial, toxic and consumer waste; if the developed world’s model of commerce and consumerism were to become the standard everywhere, it would require the equivalent of more than four Earths to supply the raw materials, fossil fuels and waste sinks that would be needed.9 Clearly, a different model is called for.

For most corporations, environmental management and clean technology efforts are driven by the demands of their established markets. They would do better to focus on developing countries, which constitute the best initial markets for environmentally friendly technologies. When environmental innovations are targeted at developed markets from the outset, they are pitted against wasteful but inexpensive and entrenched technologies and aimed at customers who are extremely unforgiving. Again, competing against nonconsumption is the better route.

Consider the problem of electric power generation and distribution. In rich countries, the existing power infrastructure is made up of large, centralized facilities and an extensive grid system for transmission and distribution. But there is also growing investment in disruptive innovations based on what is called the “distributed generation” of power; these include such technologies as solar photovoltaics, wind turbines, fuel cells and micro-turbines. In addition to taking advantage of renewable fuels, these technologies generate small quantities of electricity (under 1 megawatt) near the actual point of use, thereby avoiding the need for expensive distribution infrastructure. In 2000, global venture-capital investment in distributed generation surpassed $800 million (up from about $100 million in 1996).

In the developed world, the difficulty facing innovators is the existence of a well-developed, sunk-cost grid system, which (at least for now) wipes away any cost advantages associated with distributed generation. In these markets, cost-accounting systems and rate structures that are tailored to the centralized generation of power make it difficult for such technologies to gain a foothold.

But distributed generation has much more promise in the developing world. Consider that more than 2 billion people in the world have no access to dependable electric power. For people in distant rural areas, no grid system exists, and the massive capital investments needed to build such systems mean that it could be decades before they are built. As a consequence, the rural poor now spend much of their income on candles, kerosene and diesel in order to have periodic electrical service and lighting at night. If offered a viable substitute, these people might abandon dangerous and polluting fuels in favor of clean and efficient electric power. The potential market is huge and made up of people who would welcome innovations that cannot now compete in developed markets. Yet few producers of distributed-generation technologies have targeted the rural poor at the base of the pyramid as their initial market.

The crucial breakthrough for sustainable energy technologies will not take place in a laboratory. Instead, such technologies must be incubated and refined where they can be profitably deployed through disruptive strategies, in markets where they do not compete against established systems. Pioneering companies will have to optimize a new technology for use in poor rural areas and develop production, sales, service and microfinancing packages that enable nonconsumers to gain access.

Rolltronics, a start-up in Menlo Park, California, may be just such a pioneer.10 The company has devised a method of producing semiconductor circuits on a flexible substrate such as plastic or foil, using a continuous roll-to-roll production process, similar to that used in printing on paper. The technology has important implications for power consumption at the base of the pyramid.

The roll-to-roll process is a classic disruptive technology: It can produce certain low-end types of semiconductor circuits at markedly lower costs. Compared with the current approach, in which chips are produced in billion-dollar fabrication facilities using millions of gallons of water and toxic chemicals, roll-to-roll processing is modular and clean. Low capital costs (as low as $10 million per facility) make it possible to locate smaller production facilities closer to end markets.

Another pioneer in this area, Iowa Thin Film Technologies of Ames, Iowa, is already making roll-to-roll solar photovoltaic cells that could be used for the rural, off-grid market in the developing world. These solar cells don’t generate a lot of power, but the homes of potential customers aren’t filled with power-hungry appliances. And while photovoltaics can’t be relied upon at night or on cloudy days, the technology still promises a substantial improvement to those who would otherwise have no electric power at all.

To make this disruptive innovation competitive in developed markets and even more useful in poor countries, local production and low-cost power storage will be needed. Rolltronics is piloting roll-to-roll technology capable of producing the solar cells and low-cost, thin-film batteries that will make such storage feasible. Eventually, both the cells and the batteries could be made in small, relatively inexpensive factories located directly in the countries they would serve, helping to foster a fully integrated, indigenous, distributed solar industry. Other companies have begun to recognize the magnitude of the opportunity: Shell, through a joint venture with Akzo Nobel, has made investments in the development of roll-to-roll solar capability.

Sustainable energy pioneers who focus on the base of the pyramid could set the stage for one of the biggest bonanzas in the history of commerce, since extensive adoption and experience in developing markets would almost certainly lead to dramatic improvements in cost and quality. If companies such as Rolltronics create a business model that can be profitable in those markets, solar energy has a chance. But that is the only strategy that can possibly succeed in this area — absent massive and perpetual government subsidies.

A Leap Beyond Faith

The theory of disruptive innovation suggests that existing mainstream markets are the wrong place to look for major new waves of growth. Forcing a potentially disruptive innovation into a sustaining business model — thereby putting it on a collision course with incumbents — will only ensure its early demise. Our thinking about the potential rewards resulting from a great leap to the base of the pyramid extends this concept as a framework not just for corporate growth but also for more balanced macroeconomic development. Indeed, the great leap holds the potential to address the root causes of antiglobalization sentiments.

If history is any guide, most of the growth opportunities in this vast, untapped market will be seized by entrepreneurs (like Grameen and Galanz) in developing countries — just as the opportunities in impoverished postwar Japan were captured by innovators such as Sony, Honda and Toyota. Global corporations, however, shouldn’t assume that such an outcome is inevitable; they, too, can seize growth opportunities before they become threats. To do so, they will have to build new business models that include governance and organizational structures better suited to conditions at the base of the pyramid. And, as is always the case in pursuing disruptive innovation, companies will need to manage the opportunities independently from the processes and values of their mainstream global businesses.

Our research on such ventures stresses the importance of focusing technology and product-development resources directly on the needs of the poor; it also points to the need to build long-term relationships with such partners as local communities, local companies and nongovernmental organizations.11 Global companies that follow the principles of disruptive innovation and set their sights on the developing world will not simply be taking a leap of faith. By taking a great leap to the base of the pyramid, they will be giving themselves a chance for sustained corporate growth while also helping to lift the poor out of poverty and opening the way to sustainable growth for the global economy.

(Reprint #:4415)

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