New Delhi: In 1995, a Harvard Business School professor named Clayton Christensen first wrote about what he termed disruptive innovation: “A process by which a product or service takes root initially in simple applications at the bottom of a market and relentlessly moves up the market, eventually displacing established competitors.”
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The quest by manufacturing companies to reach out to poor customers by persistently dropping prices is a well-known story. It is now the turn of service companies to walk down the same path. Over the past five years, a clutch of entrepreneurial companies has emerged in India to challenge existing business assumptions and offer quality services at low prices—delivering healthy newborn babies in hygienic hospitals; employing deaf adults to deliver packages; washing, drying and ironing clothes and linen; transporting the sick and injured to private or government hospitals in ambulances.

Village Laundry Services’ Chamak, the wash-dry-iron-deliver start-up, is Innosight Ventures’ first incubation in India with an investment of $1.5 million in 2007
In order to win over consumers to such services offered by such enterprises, setting the price platform becomes the most important task. “If price is to be the basis of competition—as it so frequently is in emerging markets—first establish the competitive price and create a rough cost structure. Then work backwards to determine what processes and resources are needed to meet the price requirement. Careful observation of customer needs will allow you to offer unique value tailored to the local market, even at low prices,” wrote Matthew J. Eyring, president of Innosight, a consulting firm started by Christensen, in a Financial Times blog in January.

This is what was done at LifeSpring Hospitals Pvt. Ltd, which tries to bridge the yawning gap between the substandard maternity services offered by underfunded public hospitals on the one hand and expensive ones available in private hospitals on the other.
Anant Kumar, chief executive officer of the Hyderabad-headquartered company, was working at Hindustan Latex Family Planning and Promotion Trust, selling condoms and pills to stop unplanned pregnancies, when he came face to face with “the crumbling government infrastructure” where the supposedly free maternity services could be accessed only after paying “bribes to security guards and nurses”.

Kumar had the business model of low-cost airlines in mind when he sought help from audit and consulting firm KPMG to offer low-cost and high-quality maternity services. The nine LifeSpring Hospitals in Andhra Pradesh charge Rs4,000 for a normal delivery, compared with the Rs6,000 charged by small nursing homes and Rs30,000 by large corporate hospital chains, he says.
Acumen Fund, which invests in businesses that focus on their social impact, has invested $1.9 million (around Rs8 crore today) for a 50% stake in LifeSpring Hospitals. Funding from Acumen and 50% ownership by HLL Lifecare Ltd (formerly Hindustan Latex) has helped the firm grow from its opening in 2005 to nine hospitals today.

There are other more independent ventures such as Dhruv Lakra’s Mirakle Couriers, which he quit Merrill Lynch to start and run in Mumbai in late 2008. Lakra employs 63 deaf adults and two able-bodied professionals (the reverse ratio for such employees is prevalent in a typical Indian company). Lakra says he has steered clear of investors because he did not want the fact of having to give commercial returns make him lose sight of his main objective, which was to help the six million deaf people in India.

Lakra is managing a cash break-even, self-funded venture, started with Rs10,000, which is still to turn profitable. Christensen has ascribed this problem of “too much capital” in an interview he gave to Newsweek on 18 August 2010, saying: “The more capital, the longer a company can go without testing its fundamental assumptions.”
Dedicated funds such as Acumen Fund do accept a lower return over a longer period of investment. Robert Katz, portfolio associate at Acumen Fund, says: “They (LifeSpring Hospitals) showed they could apply tools of business to high quality, low-cost maternal care for which there is a huge need. It is true that we push out the projections from time to time, but that is to ensure we have the desired unit economics such as revenues from each hospital in place before replicating the model.”

In the meantime, LifeSpring’s first hospital at Moula-ali in the Malkajgiri locality of Hyderabad has captured 48% of the baby delivery market in FY10 or 1,300 deliveries, according to Kumar.
Innosight Ventures, which funds firms venturing into disruptive innovation, was here in India when the Tata Nano—undoubtedly a disruptive innovation—was being showcased, and was amazed at the potential that such companies had in India and also the rest of Asia.

Speaking on disruptive innovation, Scott D. Anthony, managing director of Innosight Ventures and a student of Christensen, says that services companies are “more likely to develop compelling offerings as they have no choice, but to innovate the business model”. He compares this with the “trap that product-based companies often encounter, assuming that winning in emerging markets is all about trying to meet lower price points without asking whether the target consumer will consider the resulting product any good”.

Village Laundry Service Pvt. Ltd (VLS), the full-service wash-dry-iron-deliver start-up that is much cheaper than boutique laundry services and more hygienic than the roadside dhobi services, is Innosight Ventures’ first incubation in India, done in 2007 with an initial investment of $1.5 million.

While VLS’ Chamak, Mirakle Couriers and Pronto Franchising Pvt. Ltd, or Mr Pronto, (a Chennai-based shoe repair chain) do not explicitly target the working poor, they all employ workers from this population who, in turn, can act as spokespersons to the community they represent. In India, a common problem for firms targeting the working poor is the suspicion of the target consumer. Kumar of LifeSpring Hospitals says that his patients although exploited by the government hospitals are suspicious of the LifeSpring Hospitals offering because simply put they think it is “too good to be true”.

In the case of 1298, an ambulance service founded in 2005 and funded by Acumen Fund, it was simply raising awareness that “calling for an ambulance with medical equipment and paramedic support is better than rushing unaided to the hospital”.

These problems, though, are not a deal-breaker. Applying disruptive innovation seems to be a no-brainer in an emerging market such as India, where its enormous middle class and working poor population deserve an improved quality in and access to basic amenities. Innosight Ventures’ Anthony points out that even large organizations are adopting the disruptive innovation model such as Procter and Gamble Co., whose low-cost razor Guard has launched in India this past October as a substitute for “hundreds of millions of Indians who use double-edged razors”. Disruptive innovation is going to influence companies large and small, global and local, and going by his comments sitting on haunches is not an option.

“Many of the most powerful Indian companies grew by disrupting higher-cost Western competitors—Infosys is a great example of this. Western companies are fighting back on those companies’ home turf. Consider General Electric’s well publicized ‘reverse innovation’ efforts, where it develops new medical devices that are attuned to the needs of lower-income customers in emerging markets. Wouldn’t it be a twist if the emerging giants lost the battle on their own turf? If they don’t frame their domestic markets in the right way, they just might,” he adds.

This post was originally published on Livemint