Wednesday, June 13, 2012

The Embedded Innovation Paradigm

The Embedded Innovation Paradigm
The embedded innovation paradigm takes a new approach to how an organization develops geared at creating sustainability. This new approach focuses on the concept mentioned in my last post regarding business intimacy. The whole purpose of this model is to integrate the organization within the community being targeted.

By integrating into the community the organization adds a significant competitive advantage in the sense that it builds consumer trust and a long term relationship.

The Structural Innovation Paradigm
So what exactly is the embedded innovation process and how does an organization implement the model? To understand the this we must first look at the more traditional model of innovation called the Structural Innovation Paradigm. Then we can determine where the models differ and also where this traditional model breaks down.

As you can see from the image the Structural model is driven by latent need. It is focused on developing products that answer the needs of the consumers and is very market driven. Now this system works well for developed markets where consumption is the driving factor. Where the structural model breaks down is in traditional markets or in the BoP (Base of the Pyramid).

Given that the BoP in emerging markets make up roughly four billion people it is a huge untapped market. The problem is that these are the most impoverished people in the world. This leads to not only the challenge of how do you target these markets but also the ethical aspect of targeting these markets. If you follow the  structural innovation paradigm you just produce products they need and get them to consume those products. As you can see when a person makes the roughly two dollars per day to be considered a member of the BoP this method creates challenges of image and the ethical nature of your business. Beyond the ethical nature there is also the challenge of understanding your market. How many people can honestly say that they understand the needs of lets say a village in Uganda and has the market data required by the SIP.

First let me say that people living in the BoP do have needs and those needs also need to be fulfilled. Now, one might think that charity is the best way to assist people in the BoP; based on this organizations should donate products that are needed in the BoP. This was one of the questions I had and the argument I received  against this was very compelling. Many organizations have gone the route of just donating products to the BoP but due to peoples pride and the lack of a sense of ownership the products actually end up not being maintained. This leads these products to being discarded and not necessarily in an eco-friendly manner.

One solution to the challenges face with providing consumers at the BoP the products the need is the embedded innovation model. SIP is based on the fact that there are latent needs that must be fulfilled. In EIP this becomes a focus on latent potential. This is the believe that there is potential in today's diverse economies. Since these markets do have a latent potential you need to find a way to address that potential.

the next concept is based around building local relationships. By generating these relationships an organization can build trust and generate a sense of belonging in the community. This is a very important part of the process especially if you want your product to be successful and if you want them to receive a quality product that fulfills their needs. If you go the traditional route you will find that they will learn the concept of lower price consumption relatively quickly. This does come with serious drawbacks that I have seen in a developing country and that is the concept of low quality often illegal knock offs at cheap prices. This low quality leads people to buying a product that is inferior which often doesn't last long. In the end this doesn't solve the problem. By building this trust you also build their loyalty and at the same time protect them from problems associated with inferior products.

The next phase is all about maintaining a positive relationship with the community. You see to use the embedded model correctly you create a give and take relationship with the community. You offer your solution to local entrepreneurs. In turn other enterprises arise around the the solution that you have provided. In the end what your organization ends up doing is building a local economy. This adds even more value to the lives of the people in the community and in turn builds a local sense of responsibility and an awareness by the communities that you support the part your organization had in this development. In turn leading to more brand loyalty.

This model seems to be quite idealistic but in one of my upcoming posts I will describe how this can be done and also if I can acquire the permission provide a real world example.

source:
MIT Sloan Management Review 2009
Innovation from the Inside Out
Erik Simanis and Stuart Hart

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