FOUR

Raising Expectations for Bonsai Consumers

UNREASONABLE ENTREPRENEURS find opportunity in the chasms that separate the fortunate from the not-so-fortunate. But to cross the great divides discussed in chapter 3, entrepreneurs must first understand—and then try to reshape—the thinking of those on the other side. Too often, the people who suffer most from deprivation have little reason to hope for a better future. If they are to rise out of a victim mind-set, they need to discover a sense of hope, a voice, and a will to act. To do so, they need a prospect of improving their living conditions.

Total equality will always be impossible, but inequity on the scale now seen around the world is likely to prove unsustainable in relatively short order and in a number of ways. That is why so many of the entrepreneurs in this book have set out to raise the expectations of the poorest of the poor.

These are the populations Muhammad Yunus described as “bonsai people” in his Nobel Prize acceptance speech: “To me poor people are like bonsai trees,” he said. “When you plant the best seed of the tallest tree in a flower-pot, you get a replica of the tallest tree, only inches tall. There is nothing wrong with the seed you planted, only the soil-base that is too inadequate. Poor people are bonsai people. There is nothing wrong in their seeds. Simply, society never gave them the base to grow on. All it needs to get the poor people out of poverty is for us to create an enabling environment for them. Once the poor can unleash their energy and creativity, poverty will disappear very quickly.”¹

The academic community uses language less poetic than Yunus’s, but an important body of research supports his message. Professors C. K. Prahalad and Stuart Hart, to name just two scholars, have written extensively about base-of-the-pyramid (BOP) markets and the power of partnering with the poor.² To get a sense of how social entrepreneurs are helping liberate the growing number of bonsai (or BOP) consumers from the constraints that rule their lives, we devote this chapter to three critical aspects of the challenge.

The first involves the issue of access, which we explore through the work of Victoria Hale and her Institute for OneWorld Health. Second, we investigate the prospect for radically cutting the price of products and services, spotlighting the work of such organizations as Aurolab and First Book. Finally, we turn to the question of quality, which we will examine through the lens offered by Nicholas Negroponte and One Laptop per Child, investigating organizations like Novatium and Recycla Chile along the way.

By addressing all three issues—access, price, and quality—together, these social and environmental entrepreneurs are seeding and growing significant new markets where none existed before. At best, their work creates a virtuous cycle of sustainability: access to better-quality products and services at prices affordable to a broader segment of the population generates consumer demand, which in turn increases volume and leads to further cost reductions.

Of course, none of these ventures is guaranteed success. Indeed, many will fail—but we must hope that they at least fail in interesting ways. In the process, they will broaden the thinking of new generations of innovators, entrepreneurs, businesspeople, investors, and governments (the last of which represents a crucial factor in ensuring that emerging solutions are broadly equitable and both economically and environmentally sustainable in the longer term). Just as important, such social ventures will help raise the expectations of those whose basic needs currently go unmet—and thus begin to seed the relevant markets of the future.

What’s the message for business and public sector leaders in this chapter? Social and environmental entrepreneurs may blaze the trail, experimenting with new solutions and enduring the early failures that deter major players, but in the end, mainstream businesses will have to do some serious heavy lifting to replicate and scale the successful solutions. In short, these entrepreneurial projects are not alternatives to public and private sector action but early indicators of the seismic market developments soon to come.

Access: Attacking Neglected Diseases

Access is a troubling issue for mainstream businesses, particularly those in the pharmaceutical sector. Think of the way that the human rights agenda has mutated in recent years, from an initial concern with torture and political abuse to a concern with wider social, economic, and environmental rights. There have been growing calls for universal access to essentials like clean water, affordable energy, and medicines for HIV/AIDS, tuberculosis, and malaria. That’s all well and good—unless your business model depends on long-term research, considerable investment, and early premium pricing, which are all wrapped around intellectual property rights.

One small spark of light for the pharmaceutical industry has been the work of Dr. Victoria Hale, recognized in 2002 as an outstanding social entrepreneur by the Schwab foundation. Since then, she has received multiple national and international awards, including the Social and Economic Innovation Award from The Economist, the Exec of the Year award from Esquire, and the Pharmaceutical Achievement Award. As if that were not enough, she and her organization, the Institute for OneWorld Health, were given one of the MacArthur Foundation’s coveted “genius grants” in 2006.

Such high visibility comes with a public health warning of its own. There are those who think that Hale and her work have been overexposed and overpraised by the media, a charge—it has to be said—that has been leveled at several other leading social entrepreneurs. But a few things are indisputable. Perhaps most important, OneWorld Health is considered to be the first nonprofit pharmaceutical company in the United States, and its mission and business model are highly unusual. Hale founded this model 1 company to develop new drugs for diseases that affect the world’s poorest people. The business model involves two key ingredients: the institute’s team of scientists uncovers promising drug candidates and ushers them through clinical trials and regulatory approval. Then, to ensure both affordability and sustainability, OneWorld Health contracts manufacturing and distribution to companies and organizations in the developing world—in the process, creating new paths to economic development.

With the specific goal of separating profitability from a drug’s potential to cure disease, OneWorld Health leverages promising industry research to create life-saving medicines for those patients most in need. It has been estimated that only 10 percent of global spending on health is devoted to diseases or conditions that account for 90 percent of the global disease burden. Strikingly, of the approximately fifteen hundred new drugs approved in the past twenty-five years, fewer than twenty were for so-called neglected infectious diseases that disproportionately affect the poor.

Most of these diseases are unheard of in industrialized countries. They include leishmaniasis, schistosomiasis, onchocerciasis, African sleeping sickness, lymphatic filariasis, and Chagas disease. Others, such as diarrheal disease, are ubiquitous, but their impact is severest in the developing world: 2 million children under age five die each year from diarrhea, and more than 1 million people die each year from malaria, most of them children as well. Meanwhile, numerous potential cures exist but remain undeveloped.

OneWorld Health aims to correct this unacceptable market failure. The institute’s business model offers pharmaceutical companies and universities an entity through which to share and/or donate intellectual property, lend professional experts, or make financial contributions. This enhances companies’ and universities’ role in promoting global health and allows them to receive credit for their support.

Hale explains the process as follows: “Many, many pharmaceutical professionals want to contribute to developing a new medicine, particularly a cure, for a deadly disease. We all are well aware that the poorest among us have the greatest needs for new medicines. There was simply no place for such professionals to gather to work together; there was no vehicle suitable to accept donated intellectual property. With a nonprofit company, the expertise, the technologies, and the funding are garnered and advanced to save lives of people who were forgotten.”³

This new paradigm for global health encourages collaboration and has the potential to shave years and millions of dollars off the traditional development path for new drugs. But what does this mean in practice? OneWorld Health’s first late-stage drug development program has involved an off-patent antibiotic that was no longer manufactured to treat visceral leishmaniasis, the second-deadliest parasitic disease after malaria, because it was not profitable. Yet this is a disease that in recent times has produced more than half a million new cases annually on three continents. One-World Health completed phase 3 clinical trial and subsequently obtained approval to use the medicine in India in 2006. In addition, it leads a malaria drug program and is building a portfolio of new drugs for diarrheal disease with a special focus on treatments for children.

If Hale is unwilling to pursue profits, where does she obtain her financing? Foundation and government funding is key. Significant funding for OneWorld Health has come from the Bill & Melinda Gates Foundation. The organization has also received royalty-free intellectual property donations from industry and academia and has benefited immensely from the intellectual contributions of hundreds of pharmaceutical scientists and business professionals who have rallied to support its mission.

If you ask Hale about the main challenges she faces in bringing OneWorld’s products to market, she replies, “The greatest challenge has been a bit of a surprise to us technologists: how to deliver new medicines to the people and [get them to] use the medicines correctly. Inevitably, it is the poorest people who often live very remotely that suffer and die from curable diseases. Though we are a pharmaceutical company, we do not have a sales and marketing force. Our patients are practically invisible to global enterprises. In this case, we rely on local entrepreneurs and rural health care providers. Many of these individuals are social entrepreneurs. We need to recognize that we are all just one link in a chain that is essential to have impact and change the world.”

Price: Slashing Costs by 90 Percent

Providing access to things people need is one thing, but ensuring that the price is right tends to be a different challenge. Some people are willing—and able—to pay almost any price for life-saving drugs, but for most people, cost is a crucial consideration in determining what products they can use, even if those products are easily accessible. So, whether or not social entrepreneurs articulate it this way, slashing the price of key western products and services by around 90 percent has become their ultimate goal.

This, as explained in chapter 3, is something that Fabio Rosa has already done with electricity in Brazil. His widely replicated Palmares Project established the standard for low-cost electricity transmission in rural Brazil, reducing costs to consumers by more than 90 percent. Rosa, however, is not alone.

David Green and Aurolab

David Green established Aurolab, a model 2 manufacturing facility in South India in 1992. Green has developed an economic paradigm for making health care products and services available and affordable to the poor. His philosophy of “compassionate capitalism” uses excess production capacity and surplus revenue to serve all economic strata, rich and poor alike.

Aurolab has grown to be one of the largest manufacturers of intraocular lenses in the world, with over 5 million lenses sold in more than 109 countries. The lenses are surgically implanted in the eye to replace a cloudy, cataract-damaged lens. (Cataract disease is the main cause of blindness and visual disability in the world.) Aurolab sells for $2 to $4 lenses that are priced at $150 in the developed world, thereby helping countless patients who otherwise could never afford such treatment to preserve their sight and ability to work.

Mainstream intraocular lens companies selling approximately the same volume of lenses as Aurolab have a hundred times the revenue. Yet not only is Aurolab able to serve 10 percent of the global market; it has also achieved both product affordability for its customers and economic sustainability for itself by carefully tailoring its costs and margins.

This is what Green has to say about the main challenges he faces in bringing such products to market:

The first challenge is finding R&D people to work with who know about the technology in question and who are willing to share their knowledge. These are usually individuals and not companies, since companies are generally unwilling to share for all the obvious reasons. The second challenge is developing a product development process that does not infringe intellectual property or violate trade secrets but still results in state-of-theart [treatments] for the poor. The third challenge is getting the product into affordable manufacturing. The fourth and perhaps greatest challenge is marketing and distribution: developing unconventional distribution which minimizes margins and which enables [Aurolab to reach] the intended beneficiaries is quite challenging. The final challenge is being properly capitalized to enact all the steps, particularly for developing distribution.⁴

As he addresses all these challenges, Green stresses the importance of finding new ways to measure value when working with mainstream partners. Ventures like Aurolab, he notes, need “to work with a strong partner that has ethical fiber and perseverance for maximizing distribution over maximizing return on investment to shareholders.”

Green also helped develop India’s Aravind Eye Care System (profiled in chapter 1), which performs 250,000 surgeries per year, making it the largest eye care system in the world. Seventy percent of the care is provided free of charge or below cost, yet Aravind’s hospitals are able to generate substantial surplus revenue. Green has replicated this cost-recovery model in countries like Nepal, Malawi, Egypt, Guatemala, Tibet, Tanzania, and Kenya.

Another focus area for Aurolab is suture manufacturing. The company has cut the price of ophthalmic sutures from $200 per box to $30. Previously, only 10 percent of suture products were sold to developing countries, where 70 percent of the world’s population lives. As a serial entrepreneur, Green has also led Aurolab to manufacture a low-cost, digitally programmable analog hearing aid that uses solar power to charge batteries. An estimated 250 million people could benefit from hearing aids, yet only 6 million are sold each year, mostly in developed countries. The device, normally priced at $1,500, is now manufactured at a cost of $50 and is priced for poor customers on a sliding scale from free of charge to $200.

Ask Green what mainstream business and public sector leaders could learn from Aurolab’s example, and he suggests:

For every product development cycle, we start out with the assumption that things don’t really cost that much to make. We demystify cost structure and the technology and develop manufacturing where our cost structure is no different from major western companies. The truth is, the emperor really is not wearing any clothes—it doesn’t really cost that much to make ostensibly sophisticated medical devices. Most companies could have a manufacturing cost structure and sufficient production capacity to profitably serve the needs of lower-income countries, but they don’t. I believe there’s a way for these companies to price their products to be affordable for developing country markets in ways that don’t jeopardize profitability in higher-margin developed country markets. My life would be much easier if I could just convince these companies to seriously look at developing the higher-volume, lower-margin developing country markets with their present product lines. This would save me a lot of hassle in manufacturing and becoming their competitor.

Kyle Zimmer and First Book

Such ventures are not confined to developing countries. Let’s turn to a case that powerfully underscores the fact that bonsai and BOP markets are everywhere, even in the most basic information technology: the book. Kyle Zimmer, founder of First Book, experienced her epiphany while working at a community-based center in downtown Washington, D.C., home to many African American and Latino families and starkly different from the surrounding wealthy neighborhoods and affluent suburbs. There she worked as a volunteer tutor to youngsters in early-childhood programs.

“It opened my eyes,” Zimmer recalls. “The program where I volunteered is a relatively well-funded institution as these kinds of institutions go. But as I browsed through the reading materials available to those children, I was appalled. They were really poor.”⁵She began “reading studies and nosing around,” as she puts it, trying to find out what was going on in Washington, D.C., and other cities. “What I found,” she says, “was a gigantic chasm.” Children had no books. When she dug deeper, she discovered that the majority of low-income families in the United States have no age-appropriate books for their children. In fact, the absurd truth, uncovered in a University of Michigan study, was that randomly selected middle-income households had approximately thirteen books per child and that low-income neighborhoods had one book for every three hundred children.⁶

An attorney by trade, Zimmer says she put her private sector head to work and thought of Henry Ford and the Model T: if you want to put a car in everyone’s driveway, or a book in every house, you need to price it right. Next, you need to have an assembly line in place that allows you to get as many books to as many low-income children as possible. So that is what she set out to do. With two other lawyers, Peter F. Gold and Elizabeth Arky, she founded First Book in 1992, as a hybrid nonprofit (model 2).

First Book’s early mission was simple: give children from low-income families the opportunity to read and own their first new books. It began in three communities and distributed twelve thousand books in the first year. By May 2007, the organization had celebrated the distribution of more than 48 million books through a network of over three thousand communities across the United States. First Book has also begun operations in Canada and taken early steps in India, where support is building with NGOs, foundations, and individuals, including senior members of the Indian government.

An evaluation by Louis Harris & Associates found that when First Book works with a local organization serving the most disadvantaged children, the number of children who previously had “low interest” in reading fell dramatically from 43 percent to 15 percent and those with a “high interest” in reading more than doubled, from 26 percent to 55 percent.⁷ Moreover, 92 percent of children stated that they “love” receiving books they can call their own and take home, and 80 percent noted that “it means a lot to receive something new and not used.” Most important, 69 percent of children reported a marked improvement in their interest in reading: 63 percent are “not unhappy to have to take time away from play to read,” and 80 percent “really like to read books on their own.”

If ever there was a BOP opportunity, it was here, and by the early 2000s, Zimmer and her partners began to think about setting up a model 3 for-profit outlet to complement First Book. By creating the First Book Marketplace (FBMP), they hoped to offer a broad selection of high-quality, relevant children’s books in unlimited quantities at a price far below what was then available to programs serving disadvantaged children. Moreover, FBMP would do this through a user-friendly online ordering process with no complex procedures. And First Book could use the revenues generated from FBMP to scale up the original operation so that more low-income children could get free books.

As a reality check on the plan’s feasibility, First Book began by conducting a survey of ten thousand programs focused on low-income children. Would they be willing and able to pay something for the books? Yes, it seemed they would: of the organizations surveyed, 68 percent had money to purchase low-cost new children’s books. Even better, the two hundred thousand to three hundred thousand programs serving children from low-income families in the United States have an annual estimated book-buying power of at least $86 million. So, in 2004, the group quietly launched a FBMP pilot, which in two years had generated sales of over $1 million for five hundred fifty-five thousand books to more than eight hundred programs.

Since then, the numbers have continued to climb. As of 2007, more than twenty thousand programs had signed up to become part of the First Book system—a fourfold increase in under two years—and sales revenues were on track to more than double those of the previous year.

FBMP’s social business works like this: First Book purchases selected inventory and customized reprints from publishers in carton quantities on a nonreturnable basis. Books available for purchase are then posted on the FBMP Web site. Inventory is stored using the donated warehouse space already provided to First Book. Customer programs register and order through a simple online system. The price per book averages $1.80, including shipping and handling, and generates a margin of $0.75 for FBMP. The icing on the cake, at least for the publishers, is that they are able to guarantee that they will have no return books, but the real impact is found in the minds of children.

Zimmer has this to say about what mainstream business and public sector leaders could learn from First Book’s story: “There is nothing new under the sun. We have been able to take the best practices regarding market aggregation from the private sector and leverage those models with the unique advantages of a social enterprise. These hybrid strategies certainly have broader applications.”

Does she worry about competition entering First Book’s markets? She replies, “We feel very confident of our ability to compete in the marketplace, but First Book is fundamentally a mission-focused organization. If the result of increased competition is that books become more accessible to children in need, then we have accomplished our goal.”

Quality: Targeting the $100 Laptop

If a book is a window into a different world, how much more so is a laptop connected to the Internet? But to open such a window for BOP markets, entrepreneurs need to consider the relationship between cost and quality—the third key element of the success equation. Many western products—among them, computers—are overengineered for their actual purpose, which drives up costs and puts much-needed products even further out of reach of poor people, wherever they live. E. F. Schumacher, in his seminal 1973 book Small Is Beautiful: Economics as if People Mattered, argued instead for what he called “appropriate technology” suited to real needs in developing countries and emerging economies.⁸

Nicholas Negroponte and One Laptop per Child

One striking example of rethinking product design to achieve radical cost reductions places the spotlight on Nicholas Negroponte, chairman of One Laptop per Child (OLPC) and author of books like Being Digital.⁹ His quest? To produce a laptop computer that would be affordable for much larger numbers of people world-wide, particularly young people, and that would be designed from the bottom up (as opposed to being just a cost-down version of other laptops). The target price? An almost-inconceivable $100. By 2007, Negroponte had achieved a $170 prototype, but he was determined to hit his $100 target by the end of 2009.

After a few early iterations, the prototype design looked great by early 2007. At that year’s World Economic Forum summit in Switzerland, there were queues of people waiting to use the dozen or so machines on display. Designed to be run on Linux (but able to run Windows as well), the laptop has both a full-color mode and a black-and-white, sunlight-readable display option. Although the laptop will have a 800 MHz processor and 256 MB of DRAM, with 1 GB of Flash memory, it will not have a hard drive.

“The laptops will have wireless broadband that, among other things, allows them to work as a mesh network,” Negroponte explains. “Each laptop is able to talk to its nearest neighbors, creating an ad hoc, local area network. The laptops will use innovative power sources and be able to do most everything except store huge amounts of data.”¹⁰ And, he adds, “It also happens to be the greenest laptop ever built, by as much as an order of magnitude.”¹¹ Push him, though, and he accepts that this was a side effect of the design, rather than an intended outcome.

Laptops, Negroponte continues, “are both a window and a tool: a window into the world and a tool . . . with which to think. They are a wonderful way for all children to learn learning through independent interaction and exploration.” But why not use a desktop computer—or, even better, the sort of recycled computer that social entrepreneurs like Rodrigo Baggio of Committee for Democracy in Information Technology are collecting, refurbishing, and offering? “Desktops are cheaper,” Negroponte agrees, “but mobility is important, especially with regard to taking the computer home at night. Kids in the developing world need the newest technology, especially really rugged hardware and innovative software.”

Recent work with schools in Maine, he says, has shown the huge value of using a laptop across all of a child’s studies, as well as for play. “Bringing the laptop home engages the family,” he notes. “In one Cambodian village where we have been working, there is no electricity, thus the laptop is, among other things, the brightest light source in the home. Finally,” he adds, “regarding recycled machines: if we estimate 100 million available used desktops, and each one requires only one hour of human attention to refurbish, reload, and handle, that is forty-five thousand work years. Thus, while we definitely encourage the recycling of used computers, it is not the solution for One Laptop per Child.”

So how have Negroponte and his team cut costs so radically, and what is hindering their ultimate target of the $100 computer? Negroponte is happy to explain how they plan to crack the challenges:

First, by dramatically lowering the cost of the display. The first-generation machine will have a novel, dual-mode display that represents a major industry innovation that is certain to find itself in other products. These displays can be used in high-resolution black and white in bright sunlight—all at a cost of approximately $40. Second, we will get the fat out of the systems. Today’s laptops have become obese. Two-thirds of their software is used to manage the other third, which mostly does the same functions nine different ways. Third, we will market the laptops in very large numbers (millions), directly to ministries of education, which can distribute them like textbooks.

And how is the production side being handled? The machines are to be made by Quanta Computer Inc. of Taiwan, the world’s largest manufacturer of laptop PCs. Equally encouraging are the names that are backing the OLPC venture. In addition to several faculty members from the MIT Media Lab, the list of founding members includes such corporations as AMD, Brightstar, Chi Mei, Citigroup, eBay, Google, Marvell, News Corp., Nortel, Red Hat, and SES Astra. Negroponte underscores one key strength of the OLPC model: “Sales, marketing, distribution, and profit represent over 50 percent of the cost of any laptop. OLPC has none of those.”¹²

Some of these partner companies view OLPC as a highly leveraged form of corporate philanthropy, but others see the venture as the thin end of a wedge into tomorrow’s markets. Certainly, Negroponte’s ambitions are breathtaking. If things go according to plan, OLPC will be shipping at least 50 million machines a year by the end of 2009, more than all the laptops sold worldwide in 2005. The initial price will be closer to $150 but is projected to drop to $100 as economies of scale take effect. Perhaps the key point here is that such ultra-low-cost projects have the potential not only to meet the needs of some of the world’s poorest but also to leapfrog back into rich-world markets as a complete new category of disruptive products.

There may be, however, a number of flies in the ointment. One issue raised by teachers and government officials in countries like India is whether children would be better serviced learning together rather than disappearing into their own worlds, courtesy of their laptops. In the United States, some communities have been dropping their free laptop programs, concerned that young people have been using their machines for games and surfing rather than more educational pursuits. But this doesn’t have to be an either-or discussion. Children can learn together and use computers to continue the process on their own, as long as their cultural environment promotes learning and has the means to check how these extraordinary tools are being used.

Another risk to the project is that someone else may come along with a different—even cheaper—idea. For example, Rajesh Jain’s Novatium intends to exploit the fact that many Indian homes have TVs to create PC-lite systems, able to access the Internet for as little as $70.¹³ Negroponte says he is unfazed by the risk of competition. “We no more compete with vendors than the Red Cross competes with Johnson & Johnson,” he says. “The more options, the better. Can OLPC stop making its laptop? No. If we do, the prices will go back up. Ours will keep going down.”¹⁴ But here is an uncomfortable paradox: sometimes, entrepreneurs will open up market opportunity spaces that others will be better equipped to move into.

Fernando Nilo and Recycla Chile

Then there is the nagging question of what to do with all the resulting electronic waste, or “e-waste,” from these laptops. Although computers—as well as televisions, mobile phones, fax machines, and scanners—are indispensable modern technologies, when they outlive their usefulness and need to be disposed of, they can be highly toxic for the environment unless discarded properly. The ability to address the end of the product life cycle in ways that achieve economic efficiency, social practicality, and environmental quality will be key—and possibly the origin of other as-yet-unimagined markets.

One social entrepreneur who is addressing the e-waste challenge is Chile’s Fernando Nilo, founder of Recycla Chile. Until recently, Recycla Chile was the only company in Latin America that recycled e-waste. Nilo recognized the e-waste problem as a major business opportunity, though at the forefront of his concern was social and environmental transformation. To achieve the former, he established a system whereby the personnel at Recycla Chile who dismantle the electronic appliances and consolidate the parts for export are former prison inmates who want to reintegrate into the workplace and society. To achieve the latter, perhaps a more difficult task, Nilo has embarked on a massive campaign to raise awareness, both in his country and beyond, of the urgent need to recycle e-waste—a process that will also require changes in public policy. To date, for example, there is no Chilean legislation that makes recycling mandatory.

Despite these challenges, Recycla Chile, which is a social business, has begun to make a profit. From modest origins in 2003, its annual budget reached $3 million by 2007. Revenues have continued to grow almost exponentially as enlightened companies hire Recycla Chile to collect and dismantle their e-waste. Recycla Chile then exports the raw material to European companies that specialize in e-waste reprocessing or disposal. Recycla Chile also receives and dismantles computers for other social organizations at no cost.

Access, price, and quality are all likely to be critical determinants of whether particular solutions targeted to BOP markets will take flight. The work of ventures like Aurolab, OLPC, OneWorld Health, and Recycla Chile are just some of the social and environmental enterprises now working to create the technological solutions of a more equitable and sustainable future. Their efforts to bridge the great divides we face are so ambitious and yet so necessary—from today’s perspective, so powerfully unreasonable—that we’ll spend the next chapter digging deeper into the relevant risks and opportunities.