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Billions of poor people aspire to join the world's economy. Disruptive innovation can pave the way, helping companies combine sustainable corporate growth with social responsibility.
Global companies today are struggling with a Catch-22. On one side is the legacy of the 1990s, when investors became accustomed to double-digit annual growth. While investors are no doubt revising their expectations now that the bubble has burst, they are not ready to give up on demands for rapid, steady growth in the companies they fund. This need to find new markets or products is in itself a huge challenge.
Add to that the second part of the dilemma: Antiglobalization demonstrations have made it apparent that if corporate expansion is seen to come at the expense of the poor and the environment, it will encounter vigorous resistance. This is not just an issue for a few thousand protesters. As multinationals unrelentingly seek new growth to satisfy shareholders, they increasingly hear concerns from many quarters about environmental degradation, labor exploitation, cultural hegemony and local autonomy. What is to be done? Must corporations' thirst for growth and profits serve only to exacerbate the antiglobalization movement?
On the contrary, a solution to this dilemma does exist. Companies can generate growth and satisfy social and environmental stakeholders through a "great leap" to the base of the economic pyramid, where 4 billion people aspire to join the market economy for the first time. (1) This is not a question simply of doing the right thing in order to lift people out of poverty -- although that will surely be a result of the leap we have in mind. From a senior executive's point of view, it's a matter of finding the most exciting growth markets of the future, an especially important task for major corporations considering that 69% of the S&P 500 had below-average growth in 1999 and that turnover in the S&P 500 has increased over the years to 10% annually. The majority of large companies seem to be mired in saturated markets that have few significant growth opportunities. (2) The base of the pyramid is, so to speak, completely unsaturated.
It is also where the technologies that are needed to address the social and environmental challenges associated with economic growth can best be developed. So far, technological advances in the developing world have been under the radar of executives in the industrialized economies. We've learned, however, that companies are profitably disrupting traditional approaches to business problems in such industries as telecommunications, consumer electronics and energy production, to name just a few. These and many other opportunities are ready to explode in the coming years.
Economist Joseph Schumpeter's term "creative destruction" has become justifiably well known in recent years, but it tells only half the story. Before the destruction of industry leaders occurs as a result of disruptive innovation, a long period of "creative creation" typically can be discerned.
Keep in mind the fundamental conditions that lead to the success of a disruptive innovation. (3) The product or service must be one that initially isn't as good as those being used by customers in mainstream markets; as a result, it can take root only in new or less demanding applications among nontraditional customers. Because well-managed companies are under pressure to pursue innovations in markets that can sustain corporate growth rates and enhance overall profit margins, they conclude that investing in disruptive innovations is irrational. Potential disrupters are thus able to incubate their businesses in the safety of markets that resource-rich competitors are motivated to ignore; upstarts will then seek to grow upmarket by successively attacking market tiers that are the least attractive of the investment options facing the industry leaders.
Disruptive innovations allow many more people to begin doing things for themselves that could only be done either with the help of skilled intermediaries or by the wealthy before the disruptions (examples include the tabletop copier and online trading). The social good is …