INNOVATION, CREATIVE OESTROGTION

ANO SUSTAINAOILITY
Look to the base of the pyramid for customers previously
ignoredthen look for new wavs to meet those needs.

Stuart L. Hart
OVERVIEW: Nearly 4'/: hillion people, all over the
world, earn less than three dollars a day. These are
largely rural, largely tinediieated hut nol stupid
individuals whom we do not understand and on whom
corporations have never seriously tried to focus. The
assumption has always been that this Is a market for governments or the not-for-profit sector to worry ahout, sort
of like an international division oflahor. However, this
base ofthe pyramid is where ihe higge.st business opportunities lie. As teelmologists. it is the early market that we
should be looking at.
KEY CONCEPTS: sustainabilify, innovation, creative
destruction, market di.srupters. glohal pvramid.
When you hear the terms "sustainabilily" or "su.stainabic
development." what eomes to mind? Very likely:
Renewable. Responsible. Environment. Soeiety. Clean.
Zero waste. Financial viability.
These terms have a lot ot" implied meaning, in conversations with others, one may quickly discover that although
the words "sustainabiiity" and "sustainable development" arc being used, the speakers are using them to
Stuart Han is the S, C. Johnson Chair of Swstainable
Glohal Enterprise and professor of management al
Cornell University's Johnson School of Management.
Ithaca. New York, His research interests are in strategv.
innovation and change, and he is a recognized authority
on the implications of sustainable development for
corporate and competitive strategy. The recipient of
numet-ous honors and awards, ffart has published over
50 papers and authored or edited five books. His latest
hook. Capitalism at the Crossroads, has hecn puhlished
by Wharton School Publishing. Philadelphia, Pennsvlvania. Hart has served as management educator for a
nundwr of organizations including Arthur D. Little.
Abbott Laboratories, BASF. Battelle. Baxter, and BP
Amoco. He earned a Ph.D. from the University of
Michigan in planning and .strategy. slh55^'cornell.cdu
SeptemberOctober 2005

mean different things. There are many buzzwords associated with the concept of sustainabiiity. and Figure 2. on
the next page, has a partial list.
Defining Sustainabiiity
I3y using a 2-by-2 matrix (Figure I). we can apply the
concept of sustainabiiity to the creation of shareholder
value. A company may look at decisions affecting shareholder value along two axes, the first being whether the
activity will pay off today or tomorrow, the seeond being
activities that are primarily internal to the Urm and activities that primarily concern external entities and thus have
a broader stakeholder context. Using an informal factor
analysis, our buzzwords ean be distributed among the
four quadrants to demonstrate the distinet constructs
(Figure 2). There is a common tendency, however, to mix
up these buzzwords when discussing sustainabiiity; this
has led to the many definitions used today.
Short-term and Long-term
The matrix in Figure 3 compares short-term initiatives a
company might undertake based on its definition of sustainabiiity. For example, initiatives on the left side ofthe
matrix foeus on short-tenn sustainabiiity. Internal initiatives illustrate the application of continuous improvement in quality management skills by making company
purchases more efficient in order to reduce waste. Most
companies have the expertise and programs to address
these initiatives. External, short-term initiatives focus
more on extending the reach ofthe firm. Companies
adopting these initiatives are concerned with the entire
product life cycle and how actions taken from the very
beginning ofthe life eycic affect the environment. This is
where a lot of eompanies, particularly in Europe, are
spending time.
If we examine this closely, we see a set of issues that
are primarily, not exclusively, geared toward today's
produets and processes. The initiatives are intended to
improve what we already do.

Today

Tomorrow

Internal

Cost &
Risk Reduction

Innovation
Repositioning

External

Reputation
Legitimacy

Growth Path
Trajectory

Figure I.Some activities may start today and pay off today white others may begin
todav and have a longer-term payoff. Activities that are primarily internal to the firm
involve its resources, technologies, capabilities, competencies, people: activities that
are primarily external, such as suppliers and customers, have a broader stakeholder
context in which the flrw is embedded.

Today

Tomorrow

Environmental Management
Systems
Greening
Pollution prevention (P2)
' Eco-efficiency
Risk management
Environmental management
ISO 14001
Waste reduction
Resource productivity

Sustainable development
Base of the pyramid
Urban reinvestment
Brownfield redevelopment
Inclusive capitalism
Community capitalism
Civic entrepreneurship
Radical transactiveness
Bto4B

Internal
Clean technology
< Eco-effectiveness
1
* Bio-mimicry
Leapfrog technology
1
Sustainable technology
Knowledge & service intensity
Cradle to cradle
Closed loops
Restorative technology
Systems thinking

External
< Corporate social responsibility
Industrial ecology
Stakeholder management
Life-cycle management
Design for environment (DfE)
* Green design
Corporate citizenship
Full-cost accounting
Take-back
Transparency
Corporate governance

Figure 2.In a "buzzword sort. " buzzwords are placed in four quadrants to
demonstrate the distinct constructs.
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In contrast, tiie right side of the matrix is where

companies become more innovative because, on the
long-tenn internal side, companies start to think about
capabilities and resources that can be used to address
clean technology and eeo-effectivcness. These new
eapabilities are the only way companies can achieve
long-term sustainabiiity. Eco-effectiveness, biomimicry, leapfrog technology, etc., all drive firms to
what the eeonomist Joseph Sehumpeter called "creative
destruction." To achieve these goals requires new skill
sets and new capabilities through activities such as
internal development, joint partnerships, and acquisitions. This is an increasingly important part ofthe entire
sustainabiiity agendaone that companies have not
focused on nearly enough.
When discussing sustainabiiity, then, it is important to
define the construct because each one (short-tenn and
long-temi, internal and external) will affect shareholder
value differently. It is easy to demonstrate the need to
reduce eost and risk in order to generate shareholder
value, but companies must also ensure that they maintain
corporate legitimacy and build positive reputations.

Eco-effectiveness,
bie-miinicry, etc. all
drive firms te wiiat
Sciiumpeter caiied
"creative
destructien."
especially after the recent events at such eompanies as
Enron and WorldCom.
However, while increasing shareholder value is important, innovation and re-positioning are also critical. Wall
Street nol only looks at how efficiently companies run

The Sustainabiiity Portfolio

Internal

Today

Tomorrow

Pollution Prevention
minimize process waste
enhance resource productivity

Clean Technology
develop new competencies
pursue disruptive innovation

IIHU

External

Product Stewardship

Sustainabiiity Vision

>lower product life cycle impact

increase transparency/
accountability

meet unmet needs

raise the bottom of the pyramid

Figure 3.This cluster of activities has to do primarily with using what we buy more efficiently .so as not to throw it
into the environment as waste: it is the application of continuous improvement in quality management skills.
However, huge opportunities exi.st at the bottom right realizing "the sustainabilitv visi<m. "
SeptemberOctober 2005

the current assets, but at how well they re-position,

acquire new capabilities for the future, and tell their
story of growth. Many well-managed eompanies do a
great job pursuing short-term and long-term internal
sustainability-ereating aetivitics. but the stock priee
remains flat beeause they do not have a eompelling
growth story.
Greening and Beyond
Short-term activities ean be described as "greening." In
the current industry structure, many large firms are
inereasing their hold on their industries by pursuing
greening initiatives. For example, in the 1980s large
ehemical fimis followed a Responsible Care initiative
after being threatened with losing operating licenses.
Responsible Care meant self-regulation via a set of eodcs
of conduct that are primarily about pollution prevention
and product stewardship. A eompany must subscribe to
these codes in order to be a member of the Chemical
Manufacturers Association. Looking baek at which firms
gained differential advantage from the Responsible Care
eodes. one wil! see that it was the large incumbent firms
at the time. These firms wrote the codes, but did so in a
way thai .simply codified current practices.
Typically, greening initiatives involve rationalization in
terms ofthe impact on the industry structure. But contrast
that wilh the long-term piece ofthe model: "beyond
greening." whieh relates to emerging technologies, new
markets, new partners., new customers not served before,
and entirely new stakeholders. The competitive logic is
completely different. In fact, 10 years of good researeh
on the Responsible Care program shows that the
companies or the facilities that joined Responsible Care
did not make the biggest improvement from the standpoint of environmental perfonnance. The biggest leaps
in performance came from those eompanies and facilities
outside Responsible Care because they decided ihey
would play a different game.
Beyond greening lies diseontinuity. Here is where the
idea of creative destruetion relates to restrueturing the
industry, making the idea of sustainabiiity dynamic. For
example, the ehemical industry looks nothing like it did
10-15 years ago. it is being re-invented in front of our
eyes. Companies like DuPont have shifted their underlying portfolio away from what used to be its eore competencies and moved toward a whole new set of skills and
capabilities that have the potential of being inherently
clean and sustainablea completely new game.
Where Are We Now?
In any industry, both of these dynamics are playing out.
The question is. "Which one gels emphasized?" The
typical portfolio so far in most companies has been in
greening.

The stock prices el

linns remain flat
becanse tiiey de net
grewtii steries.
The problem is that we are in a period of dramatic
change. Schumpeler had a fundamental belief about what
makes capitalism great: "those periods of time when
things are in flux." He coined the term creative destruction prior to World War II, and the economy's rate of
change has been aceelerating since; today, eompanies
change form every 15 years or so. A few years from now,
that time might decrease even further. By 2020, more
than three-quarters ofthe S&P 500 will likely eonsist of
companies that are not even heard of today, which is why
innovation needs to be today's priority for companies. In
terms of the sustainabiiity agenda, companies should
be paying much more attention to the revolutionary
processes and routines that are going to be necessai^ to
remain viable.
Market Definition and Expansion
The market for new sustainabiiity products is found on
the external side. It is one thing to create all this breakthrough teehnology, but another to be successful with it
in the marketplace.
The bottom-right box in Figure 3 relates to sustainable
development and to a number of topics including
"Business to 4 Billion." or "B to 4B," which is about
population and where the new markets will be. The
challenge here relates to the explosive growth in population that has occun-ed over the last 50 years. Never before
has a single species exploded so, especially with this kind
of impact, not to mention the globalization that has
occurred over the 10-15 years. However, suslainability
products have only been marketed to a small portion of
that population (appro.ximately SOO million individuals).
The other 4-4'/:; billion people have largely been
by-passed. Ifwe are going to think about sustainabiiity.
we have to include the entire human community of
6.5 billion, not just the upper 800 million in business and
markets. Moreover, they have to be included without
destroying the planet. That is the primary challenge and a
huge innovation opportunity beeause there is no way to
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Global Pyramid

Purchasing Power
Parity in U.S. Dollars

Population in Millions

$1,500-15,000 /Emerging^

^ -500

<$1,500

4,000

Markets
(Base of the Pyramid|
:U.UJJ.J.iJ.I.U.lJ.i.U

Figure 4..4t the bottom of the global pyramid are low-income markets in the undeveloped world, where some
4 billion people earn tess than $3 per day (/).

achieve that solely through continuous, incremental

improvement.
To visualize this untapped market segment, it is useful to
think in terms of a global pyramid, where at the top live
800 million to a billion people who are similar to the
majority of individuals in the developed world (/). This
group of eoiisumers has been the focus of large corporations' strategies for a long time, and in many cases the
exclusive focus because that is where the money is and it
is what is known. Many believe that this is the only
available market to serve. Over the past 10-15 years,
however, an entirely new class of people has emerged.
People arc leaving rural villages, looking for wage jobs,
and where they fmd them, income is going up. We have
a growing class of people (maybe a billion and a half or
so) who arc being attracted to this industriali-^ing
economy, all over the world, and are making SI,500 to
SI5,000 a year purchasing power parity. Companies
have tended to focus on thai market, and that constitutes
their emerging market strategy.
However, that still leaves 4^'/? billion people who earn
less than three dollars a day. These arc largely rural,
uneducated people whom we do not understand.
Companies have nevei" seriously tried to develop any
kind of focus on this market. The assumption has always
been that this is for the government or the not-for-profit
SeptemberOctober 2005

sector to worry about, much like an international division

of labor.
If one thinks in terms of purchasing power parity, S500 a
year does not seem like very much. But those numbers belie a much bigger, more dynamic story under
the surface, to use an iceberg analogy (Figure 5). What
is above the surface are the official numbers that
eompanies tend to focus on. What is below the surface
is the real dynamism of a huge informal economy
small enterprises that are not incorporated and are off
the books in the underground economy that far exceeds
the size of the formal economy. In The Mystery of
Capital. Hemando de Soto estimates that if companies
were to take just the real-estate assets of these people,
the market value of these structures would be S9.3 trillion (2).
Imagine what would happen if teehnologists and
business people were to inject this productively into the
world economy$9.3 trillion is many times more than
all the development assistance and aid that has been
given since the end of World War II! This is something
that could turbo-charge the whole concept of development and sustainable development.
Accessing the Market
So how do companies energize the base ofthe pyramid
throuuh business? To do that, they have to expand their

thinking, because so far most emerging market strategies by eompanies have been incremental extensions.
Current products and processes are changed a little bit,
trying to reduee the cost and eustomize them to a degree. However, the real opportunity is al the base of
the pyramid, which is relatively unserved territory.
Where it is served, it is poorly served, or those serving
it may be corrupt and consciously exploiting people.
This is where eompanies are going to fmd the most
exciting growth markets ofthe future and where they are
going to incubate the sustainable technologies of
tomorrow.

Tlie peal eopeptunity

lies at the base of the
pyramiil, which is
peiatively. unsepved
teppitopy.

Disrupters
Clay Christensen's work on disruptive innovation
initially made the case that in any market there is an
upward sloping performance curve, and customers
expeet improvement (2). There exists a range of
customershigh, middle and lowin any industry or
established market. A set of competitors (incumbent
firnis) serves that market, usually organized by some
teehnology standard. Christensen calls that sustaining
technology, which is not to be eonfused with sustainabiiity. He calls the improvements to the existing technology
sustaining innovation. And, as he has shown, almost
always in a competitive situation, those firms over-serve
the mainstream market. This opens an opportunity tor
new players to slip in underneath the existing competitive arena. These new companies are the disrupters;
they have discovered new ways of solving old problems

that are usually simpler, cheaper, easier to use, and

require less centralized expertise. Disruptive innovations have those characteristics. Initially, such innovations do not look very appealing to the mainstream
market.
A classic example is in the computer industry, where the
established market was mainframes and minicomputers
made by eompanies like DF.C (3), When PCs came in,
the DECs of the world asked their customers whether
they were interested. The answer came back loudly and
emphatically, "No!" DEC listened to its customers while
PCs found early eustomers not in the mainstream market,
but in down markets and off markets. These eonsumers
found real value with the package of functionality that
PCs brought at thai time and paid good money for them.

Purchasing Power
Parity (PPP)
Informal Economy
(Small enterprises,
bartering, sustainable
livelihood activities,
subsistence agriculture)

Size as % of GNP
Nigeria: 70%
Mexico: 40%
Brazil:
30%
Germany: 20%
Japan:
10%
USA:
10%

Hidden Assets
$9.3 trillion in assets
worldwide without legal title

Figure 5.There is mueh more to the "eountty " at the base ofthe pyramid than meets the eve. Like an
icebergonly the tip shows in official government statistics-there is an enormous mass below the surface outside
the reach of goveniment statistics (2).
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But eventually the technology improved, and the product

became good enough for the low end of Ihe mainstream
market. Initially, DEC responded by focusing on the
high-margin produets. But as time went on. more and
more applications were added, with more and more
customers buying. Eventually DEC ceased to exist.
That is the ultimate disruption process, and Christensen
has described it very well as the innovator's dilemma.
Initially for an incumbent firm, disruptive innovations do
not look very attractive. They do not have the kind of
growth potential that would justify an investment.
If this idea were put into the context of the global
pyramid, Christensen's argument would be that disrupters dropped to the bottom ofthe top ofthe pyramid.
found these niche markets, and then moved upward to
the mainstream market, ereating entirely new industries in the process and ultimately driving out old
technologies.
Becoming Disrupters
What happens if companies today think about taking a
great leap all the way to the base ofthe pyramid and
vetting technologies and business models there? If they
are able to ereate a cost structure and focus technology
development on the needs of those in the base of the
pyramidnot trying to force pre-existing technologies
and products on them, but to understand what their real
needs arethen there is much more space to move up
market over time.
A current example of opportunities for disrupters exists
in distributed power generation, which includes
renewable energy, solar, fuel cells, micro-turbines,
and so forth. Most renewable energy eompanies tried
to enter the market at the top of the pyramid. For the
past 30 years, this approach has been unproHtable, due
to the incumbency factor in the industry. The incumbent firms have been designed around a eurrent eentralizcd power production system with subsidies built
into it.
But what about the people al the base ofthe pyramid?
Those people have no access to eleetrieity; instead, they
pay for candles, kerosene lanterns, and other primitive
sourees of energy. With these energy sources eomc
dangers sueh as breathing fumes and being burned from
accidentally kieking lanterns over. There exists an
immediate opportunity if companies ean wrap their
minds around developing a business model to serve
that market and to optimize technology development to
fit it.
Furthermore, there is an opportunity to take technologies
that have been separate and combine them in a new
system vision that can dramatically lower eost. A number

SeptemberOctober 2005

of non-governmental organizations have already demonstrated that sueh a combination is viable, as well as
profitablecompanies like the Solar Eleetrie Eight
Company in Bangalore, India. These companies have
built a system to take solar electricity to eustomers
typically found at the base of the pyramid. Nongovernmental organizations sueh as Eight Up The World
had the brilliant idea of combining solar pliotovoltaies
with white EED technology and selling il to customers at
the base of the pyramid. Both these non-government
entities are finding that they can sell their electrieal
systems to customers at the base of the pyramid by
offering miero-credits (3-5 year loans) for the teehnology. The eustomer receives not only the light bulbs, but
storage technology, wiring and controls for a complete
rural lighting system.
These types of teehnology are not currently commercialized at the top ofthe pyramid in the United States. For
top-of-the-pyramid consumers, marketing such technology will require reeducating the consumer population
and modifying the existing infrastrueture.
The Prodigious Opportunity
If eompanies are going to drive competitive imagination,
they have to get past the idea of focusing on just a stakeholder point of view relating only to those players who
are already proximal to our current business. When
companies consider stakeholder engagement, they need
to consider not only customers, suppliers and regulators,
but also non-governmental organizations. acti\'ist groups
and other non-traditional stakeholder entities. These
stakeholders are ail players that are powerful, salient and
can directly affect business by eampaigning for
companies or against eompanies.
In addition to driving sustainabiiity through ereative
destruction and innovation, companies have to add a
layer of capability. This capability must take the form of
learning the needs of customers previously unconsidered
and looking for ways to meet those needs. Companies
must be careful not to go about meeting needs by convincing this section of the market of what already has
been done and how good it is for them, but through innovations.
The aspiring poor present a prodigious opportunity for
the world's wealthiest companies, but it will require a
radieal new approach to business strategy.
Reft're nets
1. C. K, PraliaUid and Siuart L. Hart. 2002. The fortune at the bottom
of the pyramid. Strait'gy ^ l^i'sines.s 26: pp. 54-67.
2. [ Icrnando dc Soto. 2000. Tlie .Mystery ofCapiUit. New York: Biisic
Books.
3. Clayton Christensen. 1997. The Innovator's Dilemma. Boston;
Harvard Business School Press.