Chapter Six

Principle Five

Include the Margin

We need a system of inclusive capitalism that would have a twin mission: making profits and also improving lives for those who don't fully benefit from market forces.

—Bill Gates, chairman, Microsoft Corporation

In 2004, Dr. Rana Kapoor quit his job with a multinational company to start an inclusive bank: one that would sustainably serve the financial needs of the broadest possible swath of consumers. Dr. Kapoor felt strongly that banks should be servants of a country's economy rather than its arrogant masters. His vision of serving the needs of the Indian economy extended to the six hundred million Indians who had no access to a bank. To turn his vision into reality, he staffed his new venture—a “responsible bank” he named YES BANK—with some of the industry's most brilliant minds. He invited these recruits to apply their creativity to meeting the financial needs of average Indian families and businesses.¹

Over the years, YES BANK has pioneered many initiatives to make financial services accessible to the masses—either directly or through intermediaries. It uses sophisticated financial tools—so far available only to big businesses—to develop offerings for small and medium enterprises and nonprofit organizations. Specifically, it borrows cutting-edge products used in high-end investment banking and adapts them for development banking—by, for example, securitizing the microloans of microfinance institutions (MFIs) and selling them to institutional investors as convertible debentures. In doing so, these MFIs gain access to additional capital, which allows them to lend money to even more people.²

YES BANK—founded by a jugaad entrepreneur—is particularly keen to support the development of micro entrepreneurs who have so far been excluded from the traditional banking system. To that end, the bank has developed several simple but effective financial inclusion tools to streamline access to capital for micro entrepreneurs. For instance, YES BANK noticed that there was no viable solution in the market for credit appraisal of micro entrepreneurs who neither maintain formal business records nor file business details with authorities. To address this shortcoming, the bank developed the Credit Appraisal Toolkit (CAT): an Excel-based data analysis tool that compares details orally provided by a micro entrepreneur applying for a loan against those collected earlier from his or her peers for a better and quicker credit approval decision.³

More important, YES BANK's inclusive model—fueled by jugaad innovation—is profitable. Even though 46 percent of the bank's loans are extended to underserved segments of the Indian economy, it still earns 2 percent over its cost of lending, whereas most banks earn 1 to 1.5 percent less than what lending costs them. Riding on the back of his successful banking model, Dr. Rana Kapoor intends to grow YES BANK's revenues from $4.6 billion today to $30 billion by 2015. Dr. Kapoor points out: “At YES BANK, our primary focus is enabling social sustainability, which in turn helps drive our business sustainability. We serve the marginal segments of our society not as part of a CSR initiative, but as a core component of our inclusive business model. I don't see any contradiction between doing good for my society and doing well for my shareholders.”

Emerging markets are full of jugaad innovators who, like Dr. Rana Kapoor, are successfully including marginal segments of their society, both as consumers and as employees. These innovators are showing how including the margin not only enables greater social good but also makes great business sense: it is profitable and drives innovation. In this chapter we look in detail at how and why jugaad innovators include the margin.

Many Western companies, in contrast, often ignore marginal consumers and employees. They view these groups as unprofitable, too complex to serve, or not sufficiently valuable to include in their innovation processes. And this is despite growing diversity in the West—due to an aging workforce and expanding ethnic minorities—and the increasing number of economically marginalized even in the middle class. In this chapter, we also explore how Western companies can learn from jugaad innovators like Dr. Rana Kapoor to profitably include marginal groups.

Inclusion: A Moral Imperative That Makes Business Sense

To understand what drives jugaad innovators like Dr. Rana Kapoor to include marginal consumer segments in their for-profit business models, we need to first understand the environment in which jugaad innovators operate. As we've discussed in previous chapters, emerging markets possess three features—scarcity, diversity, and interconnectivity—that together constitute an imperative to include the margin.

First, as we pointed out in Chapter Three, emerging markets are characterized by pervasive scarcity on many fronts. Because of underdeveloped infrastructure, ineffective governments, and accelerated population growth, millions of people in Africa, India, and Latin America lack access to basic services like health care, education, and energy. In India alone, over six hundred million mostly rural citizens are excluded from the banking sector, and a nearly equal number live outside the reach of the electricity grid. There is an upside, however, to this widespread scarcity: millions of excluded citizens equals millions of potential customers. For entrepreneurs willing to rise to the challenge, the choice to include the margin promises many potentially lucrative opportunities to build entirely new businesses.

Second, many emerging economies are also characterized by mind-boggling diversity. The sheer social, economic, and cultural heterogeneity of these populations (India alone has 22 recognized languages and over 2,500 dialects) exacerbates the challenges posed by scarcity. Thus exclusion cannot be addressed with a one-size-fits-all approach—wherein, for example, a single product or service serves the majority of the population—an approach that is often favored by large corporations. Instead, inclusivity requires an approach to innovation that is sensitive to individual differences and local circumstances. The intellectual and creative challenge of serving the diverse needs of a large number of people in an economical way is a great spur to jugaad innovators.

Third, deepening interconnectivity in emerging markets both amplifies the sense of exclusion and offers interesting ways to reduce it. Even poor people in remote villages in Africa or India now have access to cable TV and can see what they are missing out on. This ability to see what the world has to offer drives them to aspire for better and more things. Pervasive cellphone ownership—India alone adds ten million cellphone subscribers a month, a majority of whom are in rural areas—creates many new opportunities for inclusion. For instance, even small entrepreneurs can now leverage mobile computing as a cost-effective platform to deliver education, health care, and financial services to the masses.

In sum, scarcity, diversity, and interconnectivity are together driving jugaad innovators like Dr. Rana Kapoor to build their businesses around the needs and aspirations of marginal consumers and employees. But how do these innovators successfully and profitably include such marginal groups and what underpins their ability to do so?

Cocreating Value with the Margin

Jugaad innovators like Dr. Rana Kapoor are uniquely attuned to respond to the external pressures and opportunities they face. They often live close to marginal segments, they perceive these segments' unmet needs first-hand, and they have an intuitive grasp of how to meet them. They also have a sense of fairness that drives them to make basic services like education, health care, and energy accessible to all. Finally, jugaad innovators believe in what Bill Gates calls “creative capitalism”—that is, they know how to employ for-profit business models to bring about social change.⁴ Jugaad innovators work with these traits to successfully reach the excluded in the following ways.

Approaching Marginal Groups as Whole New Markets

Jugaad innovators don't merely treat marginal groups as one more segment on which to dump their existing products. Instead, they approach marginal groups as whole new markets that need to be served with entirely new business models. For instance, large technology vendors boast about the accessibility features built into their existing products to enable the physically challenged to use them. But few of these companies come up with new products—let alone whole new business models—dedicated to serve, say, blind people.

A notable exception is Abhi Naha of the cellphone company Zone V. After two decades of executive-level experience in the tech sector, Naha founded Zone V with the express intention of developing cellphones for exclusive use by blind and partially sighted people worldwide.⁵ Globally, there are 284 million blind and partially sighted people, two-thirds of whom are women.⁶ Naha is particularly determined to empower blind women through mobile technology—especially in developing nations where such women are outcasts and are excluded from educational and economic opportunities.

In 2013 Zone V will introduce three models of cellphones. The first model will be a high-end smartphone with a simplified user interface targeted at elderly people in Europe (and later in the United States) with regular eye sight—but which can also be used by blind and partially sighted people. The second will be a mid-range smartphone primarily for blind and partially sighted people in urban areas of emerging markets. And the third will be a basic low-cost phone with valuable features for blind people who live at the bottom of the socioeconomic pyramid. All three models will be codeveloped and comarketed with a global network of design, manufacturing, and distribution partners.

Naha estimates the global cellphone market for blind and partially sighted people as well as regular-sighted senior citizens to be more than €1 billion (US$1.36 billion). Zone V will operate as a for-profit company and will initially target blind and partially sighted people in Western economies with easy to use yet beautifully designed cellphones. Some of the profits from the sales in Europe and the United States will help Zone V create ultra-low-cost phones that will be supplied to blind women in India and Africa on a not-for-profit basis. Abhi Naha is truly a visionary. What else can one say of someone who aspires to create a world in which the lack of sight does not mean a lack of vision?

Helping Everyone Climb Up Maslow's Hierarchy of Needs

Jugaad entrepreneurs recognize that even low-income consumers have high aspirations and are eager to climb up Maslow's hierarchy of needs. (According to the American psychologist Abraham Maslow, people face a hierarchy of needs: basic requirements such as food and safety come first, followed by higher level needs such as belonging, status, and esteem, with self actualization at the top.)

Jugaad innovators do not, therefore, short-change low-income consumers on quality: they know that although these consumer are low earners, they are high yearners. As such, jugaad innovators strive to offer marginal segments products of value that are nonetheless affordable. For example, as mentioned before, YES BANK has adapted high-end investment banking products for development banking—which in turn help microfinance institutions (MFIs) gain access to additional capital so they can offer micro loans to even more people.

Likewise, Zone V is infusing even its low-cost phones with high-end design to make them more desirable to blind women in developing nations. To that end, Naha has hired Frank Nuovo as Zone V's chief designer. Nuovo is the former chief of design of Nokia and the co-founder of Vertu—Nokia's offering for the luxury phone segment (which represents a $1 billion market)—where he remains principal designer. While continuing to design diamond-encrusted phones for the super-rich, Nuovo has joined Zone V determined to make luxury affordable and accessible to the masses. In particular, he is designing phones for Zone V that are cool yet inexpensive and that deliver a high-end experience to blind consumers at the bottom of the pyramid—giving them a phone they can be proud to own and that can help elevate their status within their community (see Chapter Three for more examples of how jugaad entrepreneurs deliver more value at a lower cost for more people).

Although people at the bottom of the pyramid do worry about meeting their basic needs, like food and shelter, they also have higher order needs such as being entertained or looking beautiful. Many companies, especially multinationals, fail to see this. Rama Bijapurkar, the Indian marketing guru and author of Winning in the Indian Market,⁷ says: “Every kid—poor or rich—has a right to be entertained. It is a basic right. Yet Western theme parks, with their steep entry fees, tend to exclude low-income people. Such an exclusive business model won't work in an emerging market like India where three hundred million people still earn $1 a day—and yet want to be entertained.”⁸

As if speaking directly to this point, Xavier López Ancona, a Mexican entrepreneur, founded KidZania in Mexico City in 1999 to make entertainment more inclusive—as well as increase its educational value. KidZania is a reasonably priced indoor theme park where four- to twelve-year-old kids play at being adults in a realistic, safe, and fun environment. At KidZania, kids perform “real world” jobs—as doctors, TV anchors, firefighters, police officers, pilots, or shopkeepers—and are paid in “kidZo” currency that they use to buy goods and services. In their role-play, kids get guidance and support from adult “Zupervisors.” Built to scale for kids, KidZania is complete with paved roads, cars, buildings, an active economy, and real-world establishments like hospitals, banks, fire stations, and supermarkets. The success of the Mexico City park—ten million children have visited it to date—encouraged Ancona to open more parks not only in emerging-market cities like Jakarta and Dubai but also in Tokyo, Seoul, and Lisbon. To date, twenty million people have visited KidZania parks worldwide. Walt Disney Parks and Resorts and Six Flags had better watch out: KidZania is planning its U.S. entry in the near future.⁹

Similarly, in the early 1990s, Heloísa Helena Assis—known as Zica—recognized the basic need of underprivileged women to look beautiful. A former hairdresser who grew up in a family of thirteen children in the favelas (urban slums) of Rio de Janeiro, Brazil, Zica was aware that these women couldn't afford to go to expensive beauty salons or spas in cities that charge a premium for services like hair care. She also noticed Brazilian women tended to go to hair salons to straighten their curly hair. Zica thought: “What if I could come up with a product—and a unique process for applying it—that can enhance Brazilian women's curly hair, rather than straighten it? That would help these women find beauty in their natural looks.” After several experiments on her own curly hair, she came up with the right formula—a cream that could hydrate and relax it and preserve its natural structure without straightening it.¹⁰ She patented her proprietary formula under the name Super-Relaxing. As a logical next step, in 1993 Zica opened a hair salon in Rio de Janeiro named Beleza Natural, where she could test her Super-Relaxing formula on real customers. The formula and the salon were a hit. Zica immediately expanded her business and opened more salons with three other partners.

Beleza Natural currently operates twelve salons, located in Rio de Janeiro, Espírito Santo, and Bahia, primarily targeting low-income women. These salons are all operated by local community women. Each salon serves up to a thousand customers a day, treating up to forty clients at a time through a fast seven-step process. The salons now also sell a complete line of hair care products—developed by Beleza Natural's manufacturing unit, Cor Brasil, in partnership with leading researchers in top Brazilian universities.¹¹ Beleza Natural currently serves over seventy thousand customers, and the company's sales revenues are growing at 30 percent a year. Since 2005, Beleza Natural has increased its revenues by 918 percent and has expanded its workforce by 214 percent—today employing more than 1,400 people. “Above all, we sell self-esteem,” explains Assis. “I saw an opportunity to make all Brazilian women feel beautiful, [regardless of] their financial means.”¹²

Cocreating Value with Customers and Partners Throughout the Value Chain

Jugaad innovators don't view customers as merely passive users of their products and services. Recognizing the diversity of customer needs, they invent new solutions from the ground up by working closely with marginal groups to identify their unique needs. They then engage local communities and partners to set up a grassroots value chain to locally build, deliver, and support their solutions—making these solutions in turn affordable, accessible, and sustainable.

For instance, to effectively serve the six hundred million unbanked Indians, YES BANK is constantly experimenting with new technology-powered inclusive business models that tap a vast network of partners. The YES MONEY service is one such initiative. As part of this initiative, the bank has teamed up with various payment platform companies like Suvidhaa Infoserve and Oxigen Services which offer payment services through about two hundred thousand mom-and-pop retail stores in urban and rural areas. YES BANK has helped these companies to deploy a specialized “domestic remittance” module, allowing, for example, migrant workers in cities to send money to their families in far-flung villages through the National Electronic Fund Transfer (NEFT) system. Compared to money order remittance services (offered by India Post, a government undertaking), YES MONEY is about five times cheaper and five times faster. YES MONEY also offers a cost-effective alternative to Western Union. Moreover, the majority of the fees collected are passed back to the payment platform companies and the retailers—creating value for all partners in the YES MONEY ecosystem.¹³

Like YES BANK, Zone V is positioning its products as tools for economic empowerment rather than for passive consumption. Zone V's phones can therefore enable blind women in rural India to manage not only the finances of their households but also those of their neighbors and the village council. In this way, the individual phone becomes a vehicle for driving socioeconomic growth in an entire community. To make all this happen, Zone V will rely on a host of partners. It has outsourced its design and manufacturing to contract engineers and manufacturers and relies on nongovernment organizations (NGOs) like Sightsavers to distribute its phones in emerging markets like India—especially in rural areas. More important, Zone V will create a platform for third-party software developers to develop “inclusive apps” for its phones. These apps will be available at different price points depending on the customer segment and the phone being used. Naha believes that many mobile app developers will be motivated to create solutions that meet the basic needs of blind people worldwide.

In emerging markets, jugaad innovators often partner with state-level and local governments to make health care, education, and financial services more inclusive. For instance, GE Healthcare has signed a performance-based service contract with the government of the Northwestern Indian state of Gujarat. Under the terms of this public-private partnership agreement, GE-trained partners will operate and maintain all the medical equipment installed in government-run hospitals in the smaller cities of Gujarat. Rural hospitals, for their part, won't need to invest in expensive equipment or scramble to recruit qualified technicians. Nevertheless, they will be guaranteed higher equipment uptime and lower utilization costs—all of which will translate into cost-effective and high-quality care for rural patients.¹⁴

Scaling Up Personalized Solutions with Technology

Jugaad innovators cleverly employ technology—especially mobile computing—to reduce the cost of delivering services to marginal segments. They also leverage technology to customize their offerings on a large scale. A case in point is Reuters Market Light (RML), a mobile phone service developed by Thomson Reuters in India. RML delivers to farmers customized and localized weather forecasts, local crop prices, agricultural news, and other relevant information (namely relevant government aid schemes), in the form of three SMS messages sent daily to their mobile phones in the local language. Such customized and timely information enables farmers to better plan their activities such as irrigation, fertilizer use, and harvesting. As a result, farmers can better manage risks and improve their decisions regarding when and where to sell their produce to maximize profit. The service costs a mere 250 rupees (US$5) for a three-month subscription. As of 2011, some 250,000 Indian farmers from over fifteen thousand villages had subscribed to RML. Thomson Reuters estimates that over a million farmers across at least thirteen Indian states have benefitted from the RML service. Moreover, farmers have reaped substantial returns from their investment in RML. Some have realized up to 200,000 rupees (US$4,000) in additional profits, and savings of nearly 400,000 rupees (US$8,000) with an investment of only US$5 in subscription costs.¹⁵

Another jugaad innovator using technology to bring low-cost services to the masses is Dr. Liu Jiren, chairman and CEO of Neusoft, China's largest IT solution and service provider. Dr. Liu, a former professor of computer science, is worried that the Chinese, thanks to sustained double-digit economic growth, “have accumulated lots of wealth in the past two decades, but have also accumulated lots of diseases as they got richer.”¹⁶ It is estimated that ninety million Chinese suffer from diabetes and two hundred million may be suffering from cardiovascular diseases. The explosion of chronic diseases—which are particularly devastating for low-income Chinese in rural areas—is forcing the government to invest in a health care system that has so far been deficient or nonexistent in the rural areas, which lag behind urban areas in medical resources and health care infrastructure. But Dr. Liu warns: “If the Chinese government were to build a health care system to serve 1.3 billion Chinese modeled on the United States [where health care spending is projected to account for 20 percent of GDP by 2020] we will need a huge budget which will soon bankrupt our country. We need an alternative health care model that is smart, affordable, and inclusive. We need a model that focuses on—and enables—disease prevention rather than treatment.”¹⁷

For its part, Neusoft has developed several low-cost but high-tech solutions, such as affordable health monitoring devices and telemedicine solutions for rural hospitals to serve low-income Chinese patients. More impressively, Neusoft has developed a cutting-edge wristwatch for chronic disease patients to use as a mobile health monitor. On a regular basis, the watch collects bio indicators from sensors attached to the patient's body. This dynamic data is sent to Health Cloud, a cloud computing–based expert system. Health Cloud analyzes the data using a health care knowledge database and offers customized advice to the patient in terms of exercise plans and diet regimen, thus helping the patient make healthy lifestyle changes.¹⁸ For instance, if you are overweight, the system will suggest a three-month jogging plan, monitor and report back your progress daily, and even suggest improvements when needed.

Dr. Liu notes that in a rapidly aging China—where family ties are important and the over-sixty-five population is projected to increase from 130 million in 2010 to some 222 million by 2030—these wristwatches and home health monitors have become popular gifts from young Chinese to their parents.¹⁹ Through these gifts, young Chinese can remotely track their parents' health—through daily reports on their mobile phones—and proactively tend to their well-being. Dr. Liu believes that Neusoft's ability to serve marginal groups (such as the elderly and the rural poor) faster and cheaper by harnessing affordable technologies like cloud computing gives the company an advantage over Western multinationals. He says: “We don't have the resources of a large multinational corporation, but we identify opportunities in underserved markets early on and execute fast on them by harnessing the power of technology—especially cloud computing, which significantly lowers the cost of service delivery in sectors like health care.”

Jugaad innovators like Dr. Liu successfully include the margin by approaching marginal groups as whole new markets, helping everyone climb up Maslow's hierarchy of needs, cocreating value with customers and partners throughout the value chain, and making clever use of affordable technology to scale up their personalized solutions. As Western nations become increasingly diverse, however, there is a growing urgency for Western companies to pay close attention to the margin.

The Margin Is Becoming the Majority

In coming years, “marginal” segments in the West will no longer be marginal; they will become bigger, possibly much bigger. And the number of marginal consumers will increase across a number of dimensions: age, ethnicity, and income.

Take age. In the next fifteen to twenty years, the number of Americans over sixty-five will double. In the same period, the number of Americans over eighty-five will triple. This shift will be even more dramatic in Europe. The continent already has nineteen of the world's twenty demographically oldest nations. By 2030, nearly 25 percent of Europeans will be older than sixty-five, up from about 17 percent in 2005. As a result, the U.S. Census Bureau estimates that by 2030 the European Union will experience a 14-percent decrease in its workforce and a 7-percent decrease in its consumer populations.²⁰ All this means that American and European companies will need to tend to a rapidly aging workforce and learn to serve aging consumers—many of whom belong to the assertive baby boomer generation which is used to getting what it wants given the sheer strength of its numbers.

The good news is that this senior market is a highly lucrative one. In the UK, the over-fifties spent £276 billion (US$437 billion) in 2008, making up around 44 percent of total family spending in Britain.²¹ In the United States, the over-fifties' annual after-tax income is estimated to be $2.4 trillion, accounting for some 42 percent of all after-tax income.²² The bad news is that existing products and services are often not tailored to aging consumers' needs. Ian Hosking, senior research associate at the Engineering Design Centre at the University of Cambridge's Department of Engineering, points out: “Aging populations exhibit an increasing variation in functional capabilities such as vision, hearing, and dexterity. In general these abilities reduce with age. Even though it may seem obvious to design inclusive products, many products are targeted at young, able-bodied users. As a result, they are neither accessible nor desirable to older users. At the same time, the products that we use every day seem to grow ever more complex to operate.”²³ Western companies will miss out on a big market opportunity if they fail to adapt their offerings to the requirements of the rapidly aging consumer base in the United States and Europe.

Western populations are not only aging, they are also becoming more diverse and multicultural. For instance, the percentage of children in the United States with at least one foreign-born parent rose from 15 percent in 1994 to 23 percent in 2010. Similarly, more than half of the growth in the U.S. population between 2000 and 2010 came from the increase in the Hispanic population, which rose 43 percent to 50.5 million during that period; these Hispanic consumers are likely to form the majority in states like California within a generation. It is estimated that the Hispanic consumer group has a collective buying power of about $1 trillion.²⁴ The Census Bureau projects that the share of ethnic and racial minorities will reach 54 percent of the total U.S. population and surpass that of non-Hispanic whites by 2042—eight years sooner than expected.²⁵

The demographic makeup of Europe is also bound to change rapidly. Muslims, who currently account for 5 percent of the overall population of the European community (reaching 10 percent in France), are expected to account for 20 percent by 2050.²⁶ But long before that, countries such as Britain, France, Spain and the Netherlands will have surpassed that figure. As the working-age population rapidly decreases, European governments will have no choice but to liberalize their immigration policies if they wish to sustain their economic competitiveness. This growing ethnic and cultural diversity of Western populations will force corporations to innovate their products and services to meet the differing needs of minority consumers.

Another key factor contributing to the diversity of Western populations is the rise of Generation Y and Z workers, with their idiosyncratic values and expectations. Many studies show that Gen Y and Z employees consider themselves widely misunderstood in the workplace and feel alienated—primarily because the hierarchical structures and top-down communication styles of Western corporations are at odds with the collaborative spirit of Gen Y and Z workers. Unless Western companies find an innovation mechanism to keep their Gen Y and Z employees fully engaged, these young workers are likely to feel marginalized and leave for organizations that truly capitalize on their creative talents.

Finally, there has been a dramatic shift in income in the United States, where the lingering recession has pushed more people into poverty. In 2010, 15.1 percent of Americans (or 46.2 million people) were living below the official poverty line, the highest level since 1993 (in 2009, the percentage was 14.3 percent).²⁷ More worryingly, America's consuming middle class, which accounts for 70 percent of national spending and forms the bedrock of the U.S. economy, is shrinking. According to Pew Charitable Trusts, nearly a third of Americans who belonged to the middle class as teenagers in the 1970s have slipped below it as adults.²⁸ The study highlights the relative ease with which even Americans who started life with advantages can end up in low-income, low-opportunity circumstances.

And although it has become easier to be downshifted economically, it has become harder to climb back up the socioeconomic ladder. Median incomes in the United States have remained stagnant for the last thirty years. (In 2010, the median U.S. household income was $49,445, down slightly from $49,777 in 2009.) Adjusted for inflation, the middle-income family earned only 11 percent more in 2010 than it did in 1980, whereas the richest 5 percent in America have gained a 42-percent income boost. In sum, the bottom 60 percent of U.S. households experienced an income reduction in 2010, whereas households making $100,000 and above enjoyed an increase in income. As a result, the 5 percent of Americans with the highest incomes now account for 37 percent of all consumer purchases.²⁹

An economy rife with such inequality and downward mobility—the so-called “plutonomy”—is simply not sustainable.³⁰ In an op-ed entitled “The Limping Middle Class,” Robert Reich, former U.S. secretary of labor, warns: “When so much income goes to the top, the middle class doesn't have enough purchasing power to keep the economy going without sinking ever more deeply into debt—which, as we've seen, ends badly.”³¹ Fifty million Americans currently don't have medical insurance, and a whopping sixty million Americans are unbanked or underbanked—which means they are unable or unwilling to avail themselves of the full gamut of financial services offered by traditional banks. One can expect these numbers to go up significantly in coming years as economic conditions worsen. For a growing number of disenfranchised middle-class Americans, the American dream will remain just that: a dream.

What does all this mean for Western corporations? The marginal groups that have traditionally been perceived—and therefore ignored—as the “long tail” of the consumer economy (that is, as niche segments) are rapidly becoming the “fat tail” (that is, dominant consumer groups).³² These groups can no longer be ignored. Companies that actively embrace them, and form their businesses around their needs, are likely to find, just as jugaad innovators in emerging markets are finding, that doing so increasingly makes business sense. Indeed, it will increasingly be possible to include the margin (do good) and make a profit (do well) at the same time. But there are several factors holding back Western companies from including the margin in their business strategies. We explore these factors in the next section.

Why Western Companies View Marginal Groups as Unprofitable

Even though marginal segments are increasingly economically important, many Western businesses still shy away from serving them for three key reasons, each of which is related to either the unwillingness or the inability of Western companies to view marginal groups as profitable.

First, many Western companies view creating products and services for segments that are typically marginalized as a social mission rather than a core business opportunity. They tend to use their philanthropic arms to reach out to, say, low-income groups or ethnic minorities. But such exercises invariably become part of companies' corporate social responsibility (CSR) activities, while the for-profit business focuses on “mainstream” customers. For instance, many leading Western banks have set up foundations and CSR programs through which they partner with non-profit organizations like Operation Hope to serve the banking needs of the disenfranchised, yet in their core business these banks continue to serve middle-class and wealthy clients. Similarly, many companies have diversity programs that celebrate diversity in the workforce and customer base, but they rarely succeed in implementing employee engagement strategies specifically tailored to diverse groups.

Second, Western companies' current, often entrenched business models are not designed to meet marginal customers' diverse needs. To truly serve marginal customers and make a profit, companies would need to build entirely new business models specifically tailored to such groups. Unfortunately, most companies are reluctant to do this; they prefer to tweak their existing offerings and business models to serve the diverse needs of marginal customers. Such attempts, being halfhearted, are often doomed to fail. Thus companies fail to come up with a compelling and unique value proposition for marginal customers.

Third, a short-term outlook prevents Western companies' long-term investments in products and services that serve marginal groups. Companies that worry about quarterly performance aren't motivated to invest the time and resources needed to design business models that target marginal segments; the returns on such investments, they feel, are unlikely to materialize for a number of years. The financial services sector is a prime example. According to the FDIC, sixty million Americans are either unbanked or underbanked.³³ The big banks have yet to address the need of this large marginal group. Rob Levy, manager of innovation and research at the Center for Financial Services Innovation (CFSI), explains why: “Some large banks are aware of the market potential that over sixty million unbanked and underbanked American consumers represent. But to effectively serve those consumers, banks will need to design entirely new products, marketing strategies, and distribution channels to meet the needs of this consumer segment. While this kind of comprehensive approach to the underbanked market may realize positive returns and strong customer relationships in the long run, it may not yield gigantic profits in the first few years of operation. It can, therefore, be hard for banks to justify such long-term investments to shareholders.”³⁴

This reluctance of Western companies to include the margin is unfortunate. It means these companies are literally and figuratively leaving money on the table, and exposing themselves to competition from unexpected quarters on many fronts.

Western Companies Will Face Increased Competition in Core Markets

As we've noted, with the ranks of those in the marginal segments growing, the “long tail” is increasingly becoming the “fat tail.” And as long as large corporations continue to view marginal segments as unprofitable, opportunities will open up for new players to step in and fill the vacuum created in this sizable and growing market. As a result, established Western companies will soon face competition, even in their core markets of middle-class and affluent consumers, from a range of players.

Frugal Innovators from Emerging Markets

Companies from emerging markets such as HTC and Haier are already giving Western consumer goods companies a run for their money by offering low-cost, high-value cellphones, fridges, and wine coolers to financially stretched Western consumers. Similarly, Western carmakers need to worry about the upcoming launch in the U.S. and European markets of Tata Motors' US$2,000 Nano, as the car is poised to capture the hearts (and wallets) of cost-conscious Western consumers clamoring for affordable, fuel-efficient transportation.

Goliaths from Unrelated Industries

Leading players across industries are facing competition from big players from other industries who are encroaching on their home turf by serving marginal segments. For instance, Wal-Mart, Inc. is challenging banks on their home turf by opening 1,500 Money Centers that serve many of the basic financial needs of low-income consumers—allowing them to transfer money, buy prepaid debit cards, pay bills, and cash checks (not to mention allowing them to use this cash, along with complimentary coupons, to shop within the same store). Walmart Money Centers are highly successful because they are accessible (they are located very close to where consumers live), intimate (consumers regularly visit the Walmart store for their grocery purchases and trust the brand), and affordable (Walmart charges only $3 for cashing checks up to $1,000 and only $3 for buying or reloading its prepaid card).³⁵

Encouraged by the success of its Money Centers, Wal-Mart is launching even smaller kiosks called Express Centers in more far-flung locations. As Rob Levy of CFSI notes: “While many are talking about financial inclusion, Wal-Mart is actually championing it using an innovative business model that eschews product complexity in favor of simplicity and convenience that enhance the user experience.”³⁶

Nimble Start-Ups

By exclusively focusing on mainstream markets, large companies ignore lucrative opportunities in marginal segments and expose themselves to competition by nimbler start-ups. Again, take the financial services sector: not only do incumbents have to contend with a giant retailer like Wal-Mart encroaching on their turf, but they also need to ward off rivalry from nimble start-ups like PayNearMe. PayNearMe helps the 24 percent of American households who have neither a debit nor a credit card to buy stuff on Amazon, purchase bus tickets on Greyhound's website, or pay by cash offline at a 7-Eleven outlet. Danny Shader, a serial entrepreneur who founded PayNearMe, observes that “the ‘underbanked’ is a giant underserved market. We're making it better, faster, and cheaper for them to transact.”³⁷ Visa and MasterCard are paying close attention to PayNearMe, given that $1.2 trillion worth of consumer purchases were conducted using cash in 2010.

Marc Andreessen, cofounder of Netscape and general partner of the venture capital firm Andreessen-Horowitz, believes that “asset-light” tech start-ups—such as PayNearMe, which conducts millions of dollars in financial transactions without owning a single bank branch—are in the process of invading and overturning established industry structures. Andreessen believes that we are in the midst of a radical and wide-ranging technological and economic shift in which software companies are about to take over large swathes of the economy. He notes: “Over the next ten years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not.”³⁸ Increasingly, these Silicon Valley entrepreneurs are targeting marginal segments that have long been ignored by brick-and-mortar companies in capital-intensive sectors such as health care, telecom, finance, education, and energy. It is this sharp focus on marginal segments that will lead to big revenue gains and growth for the companies who target them.

How to Make Big Margins by Including the Margin

Jugaad entrepreneurs offer many powerful strategies that Western companies can learn from in their attempts to include the margin profitably. Specifically, Western companies can adopt the following strategies.

Carry Out Social Inclusion with a Business Mindset

Non-profit CSR programs that serve marginal groups are redundant if your company is also striving to meet the needs of the same groups using a for-profit business model—just as jugaad innovators in emerging markets are doing. To avoid such corporate cultural schizophrenia, Western corporate leaders need to pull the plug on their CSR efforts and get serious about social inclusion by making it a strategic business imperative for all their departments and senior managers. These leaders could emulate Ramón Mendiola Sánchez, CEO of Florida Ice & Farm Co., a large food and beverage producer and distributor in Costa Rica. As explained in Chapter Three, Mendiola merged his business, social responsibility, and environmental strategies into a single integrated corporate strategy, which is carried out by employees at all levels in ways that bring benefits to all stakeholders.³⁹

Cater to the Expanding Low-Income Western Consumer Base

The economic downturn is set to keep the financial squeeze on middle-class Americans and Europeans for some years to come. This hollowing-out of the middle class means that Western companies that traditionally served this mainstream market will need to radically shift their innovation strategies—or lose out to low-cost rivals. Rather than spending R&D on premium products with high-end features, these companies will need to create value-for-money products that are accessible to the growing low-income consumer base in the United States and Europe. This is a wise strategy that companies such as the French carmaker Renault are currently following. These companies are stepping up their R&D and marketing efforts to launch a slew of products tailored for budget-conscious Western consumers. For instance, Renault is rapidly extending its low-cost Dacia brand—that includes the Logan, the highly successful sedan that sells for about $10,000—by adding the Logan van, the Logan pickup, and even the Dacia Duster SUV to the portfolio. Aimed at cost-conscious European car buyers, these no-frills Dacia vehicles—manufactured in Renault's factory in Romania—use fewer parts and boast a simplified design, yet are affordable and robust. Low-cost vehicles in the Dacia portfolio have rapidly become Renault's cash cow, contributing to over 25 percent of its sales revenues in 2010, up from 20 percent in 2008. That percentage could be higher in coming years, given that 59 percent of Europeans under thirty—and 54 percent of Europeans over fifty—claim to be ready to buy a low-cost car.⁴⁰ Renault envisions expanding its low-cost product portfolio even further in the future by adding more models that will be developed by the company's rapidly expanding R&D team in India—a country that, according to CEO Carlos Ghosn, boasts deep expertise in what he calls “frugal engineering.”⁴¹

Create an Inclusive Work Culture

As their workforce becomes increasingly diverse and global, Western companies must ensure that no worker feels marginalized due to age, social background, or job title. Companies must strive to foster an open and inclusive culture anchored by a participative management style. This helps to foster a creative and motivated workforce, one that can tap into different domains of expertise in devising new products and services and that feels empowered and encouraged to do so. ThoughtWorks is one such company that has successfully cultivated a transparent and inclusive work culture. This software consultancy, headquartered in Chicago, has experienced revenue growth of 20 to 30 percent a year, by charging premium fees to its loyal blue-chip clients such as JetBlue, L.L.Bean, and DaimlerChrysler. The company's secret: a flat organizational structure that allows its one thousand global employees to have an equal say in all major corporate decisions. Roy Singham, founder and chairman, notes: “We want to be the flattest company in the world. The janitors in China should be the strategic equals of the CEO in Chicago. And how do intellectuals collaborate in the twenty-first century? Self-organizing in small teams, poly-skilled, decentralized, non-authoritative.”⁴² ThoughtWorks' “hypertolerance” of diversity begins with a stringent recruitment process that ensures, says Singham, that “no bigot, sexist, or homophobe gets in.” Singham observes, “In the twenty-first century, inclusivity won't happen through authority or some artificial ‘diversity’ program. Rather, the CEO must embody the spirit of inclusivity by nurturing an ‘obnoxiously’ transparent culture where every decision and strategy can be debated openly, without fear.”⁴³

Recognize That Marginal Segments Are Not Marginal Minds

By labeling marginal customers and employees “too poor” or “too old,” companies lose an opportunity to tap into the rich knowledge and wisdom these marginal groups might contribute to the organization. Take the baby boomers, for instance. On January 1, 2011, the very first baby boomers started to turn sixty-five, an age beyond which employees are deemed “unproductive” by most employers. Yet companies such as Boeing and Eli Lilly have recognized that although at sixty-five their employees' hair may be gray, their “gray matter” remains of considerable value. Recognizing this fact, in 2003 Procter & Gamble and Eli Lilly (along with Boeing) launched YourEncore.com, an innovation community that connects retired scientists and engineers with organizations seeking to leverage their expertise to solve challenging technical problems. Fifty companies—including many Fortune 500 companies—are now members of the YourEncore network, which provides a great platform for retired scientists to continue doing the work they love by matching them to short-term projects at member companies.⁴⁴

Use Technology to Lower the Cost of Inclusion

Just like jugaad innovators in emerging markets do, rather than invest in expensive brick-and-mortar delivery infrastructure, Western companies need to harness the power of social media, cloud computing, and mobile telephony to cost-effectively deliver their products and services to marginal consumers. For instance, health care insurers UnitedHealth Group and Blue Cross and Blue Shield—in partnership with technology vendors such as Cisco—are piloting cost-effective telemedicine programs that allow patients in Minnesota and Colorado to talk to health care professionals remotely as a low-cost alternative to expensive in-person visits from doctors to patients who live in rural and underserved areas. If successful, these virtual solutions could be deployed in several other states across the United States. According to a study by the Center for Information Technology Leadership, a non-profit research center in Boston, the widespread implementation of telemedicine solutions could save the U.S. health care system more than $4 billion annually just by reducing transfers of patients from one location, such as a nursing home, to provider offices or hospitals.⁴⁵ Affordable, accessible telemedicine solutions also significantly reduce hardship for financially stretched American patients and their families.

Partner with Non-Profit Organizations

Corporations rarely partner with non-profit entities outside their CSR initiatives (initiatives that, as we argued earlier, need to be integrated with the company's core business strategy). But a new generation of non-profit ventures is willing to work with businesses to cocreate for-profit business models that improve the lives of marginal citizens while also generating a profit. For instance, the Center for Financial Services Innovation, a policy research and advisory organization based in Chicago, advises large banks on how to design inclusive business models that can profitably serve the roughly sixty million Americans who are either unbanked or underbanked.

Secure C-Level Buy-In to Drive Systemic Business Model Changes

Given that inclusivity requires fundamental and systemic changes in how companies operate, top management's commitment is vital to enabling and sustaining such business model transformation within companies. For instance, GE's Healthymagination program—aimed at making health care services affordable and accessible for the masses—is overseen by CEO Jeff Immelt himself. Through his leadership, Immelt is personally driving a shift in GE's culture from that of an R&D-driven high-end product company to a community-focused inclusive solution provider (see Chapter Eight for more details on GE's Healthymagination initiative).

Adopt—and Adapt—Proven Best Practices from Emerging Markets

As we described earlier in this chapter, emerging markets—because of scarcity, diversity, and interconnectivity—are increasingly a breeding ground for solutions that include the margin. If you have learned how to financially include the six hundred million Indians who are unbanked or offer affordable medical treatment to the hundreds of millions of Indians who lack access to basic health care, you are likely to have gained valuable insights into how to serve the sixty million unbanked and underbanked Americans and the fifty million Americans who lack health insurance.

By using emerging markets as a breeding ground for inclusive innovation, Western companies can not only grow their businesses in those markets but also learn lessons and develop products and services that they can adapt to serve marginal groups in the United States and Europe. Johnson & Johnson, for example, is currently sponsoring Text4baby, a text messaging service that provides pregnant women and new mothers in low-income families with valuable information about how to care for their health and give their babies the best possible start in life. Text4baby was inspired by successful mobile health initiatives undertaken in emerging markets such as Mexico and Kenya.⁴⁶ (In Mexico, VidaNET is a free service that sends text messages to HIV patients to remind them to take their medication on a regular basis.) Text4Baby is literally a lifesaver in the United States, where each year five hundred thousand babies are born prematurely and nearly twenty-eight thousand children die before their first birthday. (According to the World Health Organization, babies born in the United States have a greater probability of dying in their first month than babies in much of the developed world.⁴⁷) By late 2011, over two hundred sixty thousand women had signed up for Text4baby—a number expected to reach one million by the end of 2012.⁴⁸

Embrace Inclusive Design Principles

It is easier to factor in inclusivity up front, during the design phase of innovation, rather than to try and retrofit or reengineer existing products and services to appeal to marginalized segments of the market after the fact. To learn these new inclusive R&D skills, companies should consider joining academic initiatives like the Inclusive Design program at the University of Cambridge's Department of Engineering or recruiting graduates from Stanford University's Entrepreneurial Design for Extreme Affordability program and Santa Clara University's Frugal Innovation Labs. (We describe these programs in more detail in Chapter Nine.) In addition to helping Western companies gain access to the next generation of inclusive innovators, these programs can give Western companies early access to new technical solutions, results of pilot tests in the field, and knowledge of how to go about doing inclusive innovation more generally. For instance, the Engineering Design Centre at University of Cambridge's Department of Engineering is helping organizations such as the BBC, Bayer Healthcare, Roche, Nestlé, Royal Bank of Scotland, Bosch, Siemens, and Marks & Spencer design mainstream products and services that are accessible to, and usable by, as many people as reasonably possible (but especially the elderly) without the need for special adaptation or specialized design. There are already 130 million people over fifty in the European Union; by 2020, one in two European adults will be over fifty. Designing products and services that these consumers love to use is not only socially responsible but also makes great economic sense.

Western companies can no longer afford to ignore marginal segments, which are poised to grow in size and significance in the coming decades, as the workforce and the customer base in the West become increasingly diverse and the purchasing power of the U.S. middle class continues to shrink. Recognizing the commercial potential of these marginal groups, Western companies must start designing entirely new products and services that meet their particular requirements—just as Renault is doing. To effectively market and distribute these offerings to these segments, companies need to take advantage of technologies such as social media and mobile computing and to forge partnerships with non-profit organizations. More critically, to optimally serve marginal segments in the long run, Western companies need to enshrine inclusivity into their corporate culture and their business models, just as Wal-Mart is doing. As Johnson & Johnson did, Western companies can jump-start these inclusion initiatives by adopting proven solutions and business practices from emerging markets.

Western companies, however, need to move fast—or else they risk leaving opportunities open for nimble rivals from around the world to jump in. This threat is precisely why consumer goods giant Procter & Gamble is proactively reinventing its business model to serve marginal groups—especially low-income consumers.

How Procter & Gamble Includes the Margin Profitably

For decades, Procter & Gamble (P&G) has concentrated on developing household goods for the vast American middle class. But today the company is changing the way it does research, distribution, and marketing so that it can better serve the needs of cash-strapped Americans. Specifically, P&G wants to build a whole new business by tapping into what it calls “un-served and under-served consumers.” Thus, for the first time in thirty-eight years, in 2010 P&G launched a new dishwashing soap in the United States. The soap had the Gain name and scent, formerly reserved for laundry detergent, and was offered at a bargain price (compared to the company's slightly more expensive Dawn Hand Renewal dish soap). Since 2008, when the recession deepened, P&G's cheaper brands—such as bargain-priced Luvs diapers and Gain laundry detergent—have sold better and posted faster market-share gains than its premium-priced Pampers and Tide brands.⁴⁹

Seeing a clear trend, P&G is stepping up its research into the swelling ranks of low-income American households. In doing so, the company seeks to ward off growing competition from low-cost suppliers across its product lines. Between 2008, when the recession began, and 2011, P&G's fabric-softener sheets business (which includes the Bounce brand) lost 5 percent of its market share to Sun Products and private-label brands. Rivals such as Church & Dwight and Energizer Holdings, which supply the low-cost Arm & Hammer detergent and Schick shaving blades, respectively, are stealing market share from P&G's pricier brands such as Tide and Gillette.

With a sense of urgency, P&G's CEO Robert McDonald is accelerating the company's R&D efforts to come up with a rich pipeline of “value for money” products that cater to budget-conscious Americans—making this a strategic priority for P&G. “We're going to do this both by tiering our portfolio up in terms of value as well as tiering our portfolio down,” McDonald explains.⁵⁰

Although P&G has successfully served the bottom of the socioeconomic pyramid in emerging markets, its executives in the United States never imagined they would one day be selling to this segment in America. “This has been the most humbling aspect of our jobs,” says Phyllis Jackson, P&G's vice president of consumer market knowledge for North America. “The numbers of Middle America have been shrinking because people have been getting hurt so badly economically that they've been falling into lower income groups.”⁵¹

Conclusion

The growing diversity of the workforce and the customer base in Western societies, combined with the shrinking purchasing power of the middle class, are forcing Western companies to find innovative ways to serve marginal segments—segments that now carry more economic weight than ever before. But jugaad innovators don't include the margin on a mere whim or for philanthropic purposes. Rather, innovators like Dr. Rana Kapoor of YES BANK include the margin because it makes business sense for them to do so.

Perhaps of greater interest, jugaad innovators are driven to include the margin by passion, intuition, and empathy. Indeed, they pour their hearts into their inclusive innovation initiatives, as they are able to intuitively connect with marginal groups and empathize with their needs. This genuine empathy confers authenticity on their inclusion initiatives and makes these projects more sustainable. Like Bill Gates, jugaad innovators are passionate about creating a system of inclusive capitalism—one that can harmoniously reconcile the twin goals of making profits and improving people's lives. Empathy, intuition, and passion are at the core of the final principle that drives jugaad innovation: “Follow your heart.”