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 / Autumn 2006 / Issue 44(originally published by Booz & Company)


The Innovation Sandbox

To create an impossibly low-cost, high-quality new business model, start by cultivating constraints.

Illustration by Dan Page
In Bangalore, India, the cost of a Western-style hotel room is typically US$250 to $300 per night. But the indiOne hotel charges $20. The indiOne is modern; 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, which positions itself as the provider of “smart basics” for the intelligent traveler, 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. (IndiOne is a subsidiary of the Indian Hotels Company, owners of the famous Taj group of luxury hotels in India.)

Not far away, prototypes of a multiple-fuel stove for the rural poor are being tested by a large multinational corporation. The potential consumers of this stove typically use cow dung and biomass (sticks and grass) for cooking fuels. These fuels are inefficient, and the smoke from indoor fires can be harmful. With the “combination chula” (chula is the Hindi word for stove), a housewife can switch from biomass to natural gas instantly, depending on her budget and priorities (for example, whether she is cooking dinner for family or making tea for an unexpected guest). The cost of the combination chula is less than 1,000 rupees (about US$20). If it succeeds in India, it will be rolled out across multiple geographies, with potentially immense impact on the quality of life of people throughout the developing world.

Innovations like these are not just technological or market breakthroughs. They change people’s lives. The hotel, by facilitating travel for many more businesspeople, could greatly expand commerce in India. The stove could improve the lives of millions of people. 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. The seemingly impossible demand of a hitherto unserved customer base — a $20 hotel room in an environment of $250 to $300 hotels, or a cookstove for use by an impoverished villager — became, in this case, a specification for starting the innovation process.

This approach could be called an innovation “sandbox” because it 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. In India, several such breakthroughs are taking place now, in a global industry that is otherwise plagued by high costs, stultified traditions, a variety of regulators, a perennially dissatisfied customer base, and a reputation as an exceptionally difficult venue for business innovation. That industry is health care.

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  1. Gary Ahlquist, David Knott, and Philip Lathrop, “Prescription for Change,” s+b, Fall 2005: Constraints on health care in the U.S. could push a different kind of “sandbox,” known as consumer-driven health care. Click here.
  2. Joe Flower, “Five-Star Hospitals,” s+b, Spring 2006: Not every innovative health-care facility is in India. Click here.
  3. Tarun Khanna, V. Kasturi Rangan, and Merlina Manocaran, “Narayana Hrudayalaya Heart Hospital: Cardiac Care for the Poor,” Harvard Business Online case study #9-505-078: More in-depth study of the NH story. Click here.
  4. C.K. Prahalad, The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits (Wharton School Publishing, 2005): Strategic view of lowest-income consumers as a source of profitability for companies, and corporations as a source of dignity and choice; contains more detail on the JF and Aravind stories.
  5. Bertrand Shelton, Thomas Hansson, and Nicholas Hodson: “Format Invasions: Surviving Business’s Least Understood Competitive Upheavals,” s+b, Fall 2005: The sandbox equivalent in wealthier nations, its threat to incumbent companies, and a form of strategic response (including more on Zara). Click here.
  6. Narayana Hrudayalaya Web site: Comprehensive Web site describing the foundation, the associated institute, and the cardiac-focused hospital in Bangalore. Click here.
  7. For more business thought leadership, sign up for s+b’s RSS feeds. Click here.
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