Strategic innovation for serving the low-income segment

Abstract

The literature on serving the ‘bottom of pyramid’ (BOP) argues that large firms can profit from serving consumer segments, traditionally considered uneconomical. This would call for ‘strategic innovation’, as it would involve a redefinition of industry norms. Here, a distinction is drawn between BOP and Low Income Segment (LIS), to avoid the controversy on whether BOP represents the societal bottom or not. LIS is essentially a segment with lower endowments than required for availing products/services in an existing industry structure, but have at least some discretionary income. The focus of this study is large firms, with established businesses, venturing into the LIS. In this context, there are two key gaps in the existing literature, which my study seeks to address. 1. Prahalad (2004) had asserted that serving the BOP/ LIS would involve “challenging existing paradigms”. Yet, there are no studies to highlight why this would be required, and how engaging the BOP/ LIS would differ from a mere low-cost innovation. 2. From the organizational perspective, undertaking successful strategic innovation involves two important aspects: venture specific knowledge and capabilities need to be developed (at the venture level), and the venture needs to be transformed into a source of strategic advantage for the undertaking firm (at the corporate level). Discussions, in the existing literature, are largely restricted to the tasks that need to be accomplished during the course of venturing such as forming alliances and focusing on product affordability. The functional capabilities that enable undertaking of the tasks and the role of dynamic capabilities in developing the needed new functional capabilities, shedding of old capabilities that are not relevant, and recombining them to transform the venture into a source of strategic advantage for the firm do not appear to have been mentioned. Since the study pertains to an unexplored area, case methodology is adopted. Three ventures were selected for study: Shakti (Hindustan Unilever Limited), Microfinance (ICICI Bank), and Tata Kisan Sansar (Tata Chemicals Limited). Shakti was aimed at enhancing the direct penetration of Hindustan Unilever Limited products to villages with population with less than 5,000; Microfinance sought find a profitable way to fulfill a regulatory obligation of lending to poor sections of Indian society; and Tata Kisan Sansar was formed to take high-end agricultural products and services to small and semi-medium farmers. Though different in terms of the product offering, the ventures are examples of large firms engaging the LIS, with varying degrees of success.