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HBR SPOTLIGHT

In the social sector, too much attention is devoted to Disruptive providing more of the same to narrow populations that are for Social Change already served. It’s time for a fundamentally different approach. by Clayton M. Christensen, Heiner Baumann, Rudy Ruggles, and Thomas M. Sadtler •

Reprint R0612E

In the social sector, too much attention is devoted to providing more of the same to narrow populations that are already served. It’s time for a fundamentally different approach.

HBR SPOTLIGHT for Social Change

by Clayton M. Christensen, Heiner Baumann, Rudy Ruggles, and Thomas M. Sadtler

The United States spends more money per livery models, and recipients. Many provide capita on health care than any other nation, relatively specific, sometimes sophisticated of- and it offers some of the most sophisticated ferings to a narrow range of people. While they care in the world. Yet it lags behind many less may do a good and important job serving those affluent countries on basic health indicators people, and while their services may steadily such as infant mortality and life expectancy improve, these organizations are unlikely ever rates. Similarly, the United States ranks second to reach the far broader populations that are in only to Norway among OECD countries in per- need—and that would be satisfied by simpler student spending on education, yet it comes in offerings if only they were available. 24th out of 29 on the OECD’s Programme for What’s required is expanded support for or- International Student Assessment mathemati- ganizations that are approaching social-sector cal literacy test. This pattern of aggressive problems in a fundamentally new way and cre- spending and disappointing returns in the so- ating scalable, sustainable, systems-changing cial sector isn’t limited to the United States, of solutions. Their method, which we call “cata- course. Throughout the world, affluent na- lytic innovation,” shares principal features with tions, institutions, and individuals generously ’s disruptive-innovation fund social services that fail to fully deliver on model. Like disruptive , which their promise. challenge industry incumbents by offering What accounts for this poor showing? It’s simpler, good-enough alternatives to an under- not a lack of solutions but rather misdirected served group of customers, catalytic innova- investment. Too much of the money available tions can surpass the status quo by providing to address social needs is used to maintain the good-enough solutions to inadequately ad- status quo, because it is given to organizations dressed social problems. Catalytic innovations that are wedded to their current solutions, de- are a subset of disruptive innovations, distin- OPYRIGHT © 2006 HARVARD BUSINESS SCHOOL CORPORATION. ALL RIGHTS RESERVED. BUSINESS SCHOOLOPYRIGHT © 2006 HARVARD PUBLISHING CORPORATION. C

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Disruptive Innovation for Social Change•••HBR SPOTLIGHT

guished by their primary focus on social sible product or service could sabotage their change, often on a national scale. current offerings, it’s almost impossible for To understand this argument, it’s useful to them to disrupt themselves. Therefore, the review the disruptive-innovation model first catalytic innovations that will bring new bene- put forward in Christensen and Joseph L. fits to the most people are likely to come from Bower’s HBR article “Disruptive Technolo- outside the ranks of the established players. gies: Catching the Wave” (January–February It’s fairly easy to grasp the disruptive-innovation 1995). The authors divide innovations into model when it’s applied to commercial products two categories: sustaining and disruptive. Most and services. But how, exactly, does the model product and service innovations are sustaining. work in the social sector? Catalytic innovators They provide better quality or additional func- share five qualities: tionality for an organization’s most demand- 1. They create systemic social change through ing customers. Some sustaining innovations scaling and replication. are incremental improvements; others are 2. They meet a need that is either overserved breakthrough or leapfrog products or services. (because the existing solution is more complex By contrast, disruptive innovations don’t, than many people require) or not served at all. by traditional measures, meet existing custom- 3. They offer products and services that are ers’ needs as well as currently available prod- simpler and less costly than existing alterna- ucts or services. They may lack certain features tives and may be perceived as having a lower or capabilities of the established goods, for ex- level of performance, but users consider them ample. However, they are typically simpler, to be good enough. more convenient, and less expensive, so they 4. They generate resources, such as donations, appeal to new or less-demanding customers. grants, volunteer manpower, or intellectual Southwest Airlines’ low-cost, no-frills flights capital, in ways that are initially unattractive to were a disruptive service innovation that incumbent competitors. initially attracted leisure travelers whose alter- 5. They are often ignored, disparaged, or natives were to pay through the nose or not even encouraged by existing players for whom to fly at all. The company rapidly stole the business model is unprofitable or other- share from established carriers while also wise unattractive and who therefore avoid or bringing new customers to air travel. Personal retreat from the market segment. were a disruptive product inno- The following examples in health care, edu- Clayton M. Christensen (cchristensen@ vation because, while they were less power- cation, and economic development show the hbs.edu) is the Robert and Jane Cizik ful than mainframes, they quickly found a catalytic innovation strategy in action at both Professor of Business Administration at huge unserved market for their affordable, if nonprofit and for-profit organizations. People Harvard Business School in Boston. limited, capabilities. often equate an organization’s tax status with Heiner Baumann (heiner_baumann@ Disruptive innovations have had a major im- its ability to generate positive social change. newprofit.com) is the chief knowledge pact on industry structures, from travel to com- But, as we’ll show, organizations can create cat- officer and a partner at New Profit, a puter retailing to , and have alytic innovations regardless of their owner- Cambridge, Massachusetts–based often given rise to social change in the process. ship structure. venture philanthropy fund that pro- But the social changes caused by disruptive in- vides financial and strategic support novations are largely unintended; they are sim- Investing in Health Care for social entrepreneurs. Rudy Ruggles ply the by-products of pursuing a business op- In health care, investments in sustaining inno- ([email protected]) is the pres- portunity. With catalytic innovations, however, vations enable organizations to treat their ident of Weston, Massachusetts–based social change is the primary objective. challenging patients with the most advanced Collaborative Innovation Services, a and therapies. An investment in consulting firm that works with organi- Thinking Catalytically catalytic innovation, meanwhile, yields sim- zations to create solutions to social and The existing players in any sector have re- pler products and services that are affordable environmental challenges. Thomas M. sources, processes, partners, and business to a broader population. Sadtler ([email protected] models designed to support the status quo. Cutting-edge care. Several years ago, a major .edu) is the vice president of profession- This makes it difficult and unappealing for teaching hospital in Boston received a large al services at CA, a manage- them to challenge the prevailing way of doing donation to further its mission to provide the ment software company based in things. Organizations are set up to support highest-quality health care, serve regional pa- Islandia, New York, and a New Profit their existing business models. Because imple- tients, and pioneer practices for global dissem- thought partner. menting a simpler, less expensive, more acces- ination. Stakeholders submitted diverse pro- harvard business review • hbr.org • december 2006 page 2

Disruptive Innovation for Social Change•••HBR SPOTLIGHT

posals for the use of the funds, and two of patient has a complaint that’s not on the list of those ideas made it through the vetting pro- health issues the clinic treats or has symptoms cess to reach the board for final consideration. that indicate a serious problem, he or she is re- One proposal recommended that the hospital ferred to a doctor or an emergency room. Be- move beyond its current tertiary care status to cause MinuteClinics are less expensive for become a “quaternary” care provider, combin- many uninsured people than a visit to a doc- ing its tertiary care and capabilities to tor’s office and are often more convenient for extend the boundaries of its clinical excellence. the insured, the model has the potential to The other proposal recommended funding a bring basic health care to many whose access nursing fellowship and broadening treatment is otherwise limited. responsibilities for the best nurses. MinuteClinics may offer “lesser” health ser- The quaternary care proposal promised ser- vices than a doctor’s office would, but this re- vice innovation that would advance the elite duced scope amounts to a good-enough service hospital’s evolution by offering enhanced treat- that’s attractive to a large, underserved popula- ment capabilities for patients with compli- tion. (In fact, MinuteClinic’s surveys of more cated problems. The nursing fellowship would than 350,000 patients indicated a 99% satisfac- also promote service innovation, but in a dif- tion level.) MinuteClinics also provide services ferent way. It would train nurses to begin of- that many incumbent health providers resist fering care that doctors formerly had provided, offering because the services generate limited but at a lower cost. As disruptive-innovation profits and result in little professional satisfac- theory would predict, the hospital board de- tion. As a result, the growth of MinuteClinic cided not to disturb the status quo. It turned (which was recently acquired by CVS) and down the proposal to train nurses in provid- other health care–related catalytic innovators, ing more sophisticated care and used the do- such as RediClinics, Take Care Health Systems, nation to fuel the hospital’s current model: and Wal-Mart’s in-store clinics, will come at the pushing the envelope on providing cutting- expense of the full-service organizations that edge care to a relatively small population of allow them to thrive. the sickest patients. It chose sustaining over Affordable insurance. The nonprofit labor disruptive innovation. organization Freelancers Union is another cat- Walk-in clinics. By contrast, Minneapolis- alytic innovator in the health care field, pro- based MinuteClinic is a catalytic innovator. viding low-cost health insurance and other The for-profit company’s 87 clinics are located services to independently employed contrac- in ten states in CVS stores and other retail lo- tors, consultants, part-timers, temps, and cations and provide fast, affordable walk-in di- other workers in the New York area who agnosis and treatment for common health wouldn’t otherwise be able to afford insur- problems, as well as vaccinations. Minute- ance. By handling individual policyholders as Clinic employs nurse practitioners armed with if they belonged to a group working for a large software-based protocols and applies strict employer, Freelancers Union can offer compre- rules that help ensure consistent service. If a hensive health insurance at prices that are 30% to 40% lower than those charged by in- cumbent insurers for individual plans that provide comparable coverage. Freelancers The Five Qualities of Catalytic Innovators Union’s actuarial analysis of claims has shown 1. They create systemic social change 4. They generate resources, such as that the workers it covers are not a high-risk through scaling and replication. donations, grants, volunteer man- demographic, as many incumbents have as- 2. They meet a need that is either over- power, or intellectual capital, in ways sumed. With the growing scale of its coverage served (because the existing solution is that are initially unattractive to incum- and the detail of its analysis, Freelancers more complex than many people require) bent competitors. Union has gained bargaining power with its or not served at all. 5. They are often ignored, disparaged, insurance carrier, allowing the nonprofit to 3. They offer products and services or even encouraged by existing players continue to lower its insurance premiums. that are simpler and less costly than exist- for whom the business model is un- Because incumbent insurance companies ing alternatives and may be perceived as profitable or otherwise unattractive and have aligned their processes, cost structures, having a lower level of performance, but who therefore avoid or retreat from the and marketing to focus on corporate clients, users consider them to be good enough. market segment. they have little incentive to try to compete

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Disruptive Innovation for Social Change•••HBR SPOTLIGHT

for Freelancers Union’s niche business. The tion in the United States by expanding access to catalytic-innovation model, in which the orga- and redefining the goals for advanced study. nization acts as a marketer and broker while Community colleges offer a lower-cost alter- partnering with an established insurance - native to four-year universities and measure rier, is replicable, and Freelancers Union is now quality not by the selectiveness of admissions expanding to other states. or the earning power of graduates but rather by factors such as job placement rates and the Investing in Education convenience of access to classes. This has made Just as catalytic innovations in health care ex- community colleges an acceptable and even pand the reach of good-enough care, catalytic desirable choice for students’ first two years. In innovations in secondary schools can make a fact, these schools now enroll some 44% of all broader range of good, affordable courses undergraduates in the United States. They pro- available to people who otherwise would have vide a good-enough alternative for prospective limited or no access to certain types of course undergraduates who regard the traditional content or degree opportunities. four-year incumbents as overpriced for their Online classes. Online learning is an exam- initial needs, and they provide a viable option ple of one such innovation. Because of tight for the unserved: aspiring undergraduates for budgets, many public high schools have ceased whom traditional colleges, for a variety of rea- to offer classes that cater to small groups of sons, are out of reach. students—classes in certain languages, for in- Some state colleges and universities have stance, and advanced placement courses that helped create this shift by explicitly pointing count for college credit. Other small or poorer prospective students toward community col- schools have never had the budgets to offer leges for their first two years. Having freshmen While incumbent these types of courses. For-profit Apex Learn- and sophomores attend community colleges ing and nonprofits Virtual High School and eases housing shortages at four-year schools organizations may do a Florida Virtual School, among others, have and allows their faculties to teach fewer intro- good job serving a provided these specialized classes to thou- ductory courses, freeing instructors up to teach sands of students through their online learn- more intellectually challenging upper-level particular group, they ing curricula. They allow school systems to courses and seminars. True to the model of offer good-enough AP and other courses at a disruption, many community colleges are of- are unlikely ever to reach fraction of what a live course would cost the fering upper-division courses as well but with- the far broader school to provide and give students options out the significant cost burdens of research- that would otherwise be unavailable to them. oriented faculty. Community colleges serve as populations that would According to the U.S. Department of Educa- feeder schools for the four-year institutions, be satisfied by simpler tion, as of 2005, there were 40,000 to 50,000 which in turn have made transfer arrange- secondary school students in 37 states partici- ments more straightforward. offerings. pating in online courses, through approxi- mately 2,400 online charter schools and state Investing in Economic Development and district virtual schools. Historically, organizations such as the World Student attrition is higher in online courses Bank and the International Monetary Fund than in live ones, both because participation have promoted economic advancement by ap- can be technically challenging and because plying resources at a scale and scope unmatch- sticking with an online course requires strong able by developing economies. However, during self-motivation. However, in the absence of al- the past several decades, microfinance organi- ternatives, online courses remain an adequate zations have taken a different approach, mak- option for an underserved population. What’s ing small loans available to latent entrepre- more, they’re based on a profitable, disruptive neurs who otherwise would have little or no business model—affordable, widely accessible access to capital. learning—that the incumbent schools are not Microlending. Conventional banks are typi- structured to pursue. cally unwilling to lend to people without as- Community colleges. Though it may at first sets, forcing those customers to seek informal seem counterintuitive, the community college loans, often at interest rates of 300% to 3,000% model is a catalytic innovation—one that is dra- (if they can be obtained at all). Microfinance matically changing the shape of higher educa- organizations have stepped in by offering

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Disruptive Innovation for Social Change•••HBR SPOTLIGHT

these clients small loans at relatively low inter- but they lack the formal education and licens- est rates and requiring little or no collateral. ing of physicians. The clinics offer essential In many countries, microlenders (combined) drugs, health products, and basic health care have had a far greater impact than the World and health education at affordable prices, and Bank, IMF, and conventional banks in rais- they provide the owners with enough income ing significant segments of the population to ensure the sustainability of the model. from poverty. Strict standards and regular inspections by the One of the best-known microfinance organi- HealthStore Foundation guarantee that the zations is Grameen Bank. At the end of 2005, it clinics offer uniform quality and prices. The had 5.6 million borrowers in nearly 60,000 combined buying power of the network is villages throughout Bangladesh. Since its in- used to obtain medicines at the lowest possible ception in 1976, it has lent more than $5.2 billion rate, which helps drive the access cost toward a with a recovery rate of more than 98%. Owned goal of 50 cents per person per visit, com- 93% by its borrowers, 5% by the Bangladeshi pared with roughly $3 per outpatient visit in government, and 2% by other private Bang- government-run hospitals. With their higher ladeshi banks, it has been profitable in every capital and personnel costs, government hospi- year but three since it was founded. Profits tals would have trouble competing on price. As from the bank are used to increase the loan with MinuteClinics in the United States, the fund. In 2005, the entire $15.21 million profit Kenyan clinics’ growth will probably come at was transferred to a disaster relief fund, called the expense of the full-service incumbent orga- the Rehabilitation Fund. Accion International, nizations that currently ignore, disparage, or another profitable microfinance organization, encourage them. reports that between 1996 and 2005, its affili- Capital equipment. KickStart is another The community college ated programs issued $9.4 billion in loans in business that creates catalytic innovations in varying amounts to 3.97 million people. More Africa. The nonprofit develops and sells low- model is a catalytic than 97% of those loans have been paid back. cost capital equipment to poor entrepreneurs innovation that is According to the Microcredit Summit Cam- in Kenya, Tanzania, and Mali; develops re- paign, which collects outreach information lated supply chains; creates initial markets dramatically changing from nearly 3,000 microfinance organizations, for the equipment; and adapts the equipment about 80 million people worldwide are receiv- according to market feedback. One of its inno- the shape of higher ing credit through this approach. vations is the MoneyMaker foot-operated irri- education. Rural clinics. While microfinance itself is a gation pump, which dramatically increases catalytic innovation, it is uniquely powerful in the productivity of farmland. The pumps cost its ability to enable other catalytic innovations between $38 and $90 and can increase an aver- to flourish as well. Consider the HealthStore age farmer’s annual income tenfold, from about Foundation, which has established what might $100 to more than $1,000, allowing families be thought of as the MinuteClinics of Kenya. to send their children to school and make The Kenyan health care system is hierarchical other investments in their futures. The farmer’s and has a complex administrative structure initial expense is sometimes advanced by a and an urban bias. Roughly 80% of Kenya’s microlender and can usually be paid back in doctors and dentists live in Nairobi and other three to six months. urban areas, while 70% of the population lives Like other catalytic innovations, KickStart’s in rural areas. A 1998 study indicated that products may seem to perform less well than more than half the population did not visit competing goods. Compared with motorized government-run health facilities because those pumps, for example, KickStart’s pumps are institutions lacked the needed drugs, were too labor-intensive and low capacity. But motor- far away, or were too expensive. ized pumps are more expensive and require With the help of microloans, the Health- electricity or fuel, and labor is a plentiful asset Store Foundation has begun to address these for Kenyan farmers. KickStart provides a good- problems by training local residents to pro- enough solution that has transformed the lives vide basic health care and helping them buy of thousands of farmers. Since 1993, KickStart and operate their own clinics. These residents has helped generate 41,000 profitable new turned clinic owners often have experience as businesses. Creating new businesses at the rate nurses or other types of health practitioners, of 800 per month, KickStart’s clients today

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Disruptive Innovation for Social Change•••HBR SPOTLIGHT

generate $47 million in annual profits and though MinuteClinic’s outlets were initially wages, which is equivalent to more than 0.5% located only in the Minneapolis–St. Paul area, of Kenya’s GDP and 0.2% of Tanzania’s GDP. the social and economic forces that gave rise to The success of the HealthStore Foundation, it were not location specific. The environmen- KickStart, and other such organizations de- tal factors that produced it in Minneapolis– pends on the availability of microlenders. In St. Paul created sectorwide opportunities for turn, microlending helps sustain borrowers inexpensive, good-enough care. who are paying back loans and creates an eco- Not all sectors are ripe for the rapid growth nomic environment that attracts other lenders of catalytic innovations. In the federal govern- looking to start new businesses. Economic de- ment, the judicial system, child welfare ser- velopment arises as a result of these organiza- vices, and other arenas that are heavily regu- tions’ catalytic innovation business models, not lated or are controlled by politics and other solely because of their resources. forces outside the market, the innovation pro- cess may be slowed down. Still, we have yet to Identifying Catalytic Innovations find a social sector that is impervious to disrup- Many mainstream organizations could use ad- tion by catalytic innovation. ditional resources to grow, refine, and revital- Identify specific catalytic innovations. ize their current valuable offerings, and in- When sector dynamics indicate that some sort vesting in sustaining innovations can certainly of innovation is starting to come about, do- advance social goals. However, when the ob- nors or social investors should evaluate it jective is to get a system unstuck and to create against the five qualities (is the innovation de- new change models, it is time to go in search signed to create systemic social change, does it of catalytic innovations. While there are many meet an overserved or unserved need, and so Many mainstream guides to smart investing and philanthropy on) to determine whether the development is that focus on identifying traditional sustaining in fact a catalytic innovation. organizations could use innovations to support, investors seeking cata- At the identification stage, note that the in- additional resources to lytic innovations have few sources to rely on. novations, not the organizations, are being Here are some guidelines they can use. considered. In the case of MinuteClinic, for revitalize their current Look for signs of disruption in processes. example, the innovation is low-cost, walk-in Once an investor or organization has chosen a clinics in high-traffic areas such as drug stores offerings. But when the particular social challenge to address, the first and shopping malls and not the MinuteClinic objective is to get a step is to look for preexisting catalytic innova- brand itself. It is easy to confuse the two, but a tors. Because of their nontraditional models search for catalytic innovations needs to focus system unstuck, it is time and technologies, these organizations may not on the solution first and then look at how it is, to go in search of show up in mainstream news articles, watch or could be, implemented. lists, or trade magazines. Instead, it is often Assess the business models. Just because an catalytic innovations. easiest to detect their presence by noting the organization has come up with a good idea for patterns of catalytic innovation activity that systemic social change doesn’t mean that it will arise in the sector overall. Dynamics to watch succeed in implementing that change. At this for include the following: third stage in the evaluation of a potential cata- •A relatively new entrant is providing a lytic innovation, assess whether the group’s lower-cost, less-functional alternative to a cus- business model can allow it not only to effec- tomer segment that is overserved or not served tively introduce the innovation but also to scale at all by the dominant provider. it up and sustain it. Organizations that have • The dominant provider is moving away aligned their resources, processes, and values from the new entrant’s offerings and toward a according to the five catalytic-innovation crite- more profitable segment of the market. ria to support their innovations are most likely • The new entrant is continuing to improve to succeed. That means investors or donors its offering, expanding its market reach as the should look for organizations whose work in dominant player retreats, while others copying one location is transferable to other locations its model are beginning to emerge. and that have produced the same results else- These sorts of ripples occurred after Minute- where, for example. It also means investors Clinic’s appearance in 2000 (as QuickMedx) should seek candidates that turn down funders and rapid expansion in the following years. Al- that would require them to alter their models

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Disruptive Innovation for Social Change•••HBR SPOTLIGHT

in ways that are incompatible with catalytic- been developed with specific programs in innovation principles. mind, since that is usually how donors and phil- Keep in mind that tax classification—for anthropic investors want them presented. It is profit versus nonprofit—is not a useful crite- much easier for donors and investors to find re- rion for identifying catalytic innovators. quests for resources and process assistance than While the business models for the two types to find organizations—especially nonprofits— may differ, neither has an automatic advan- that tout their business models. It is also diffi- tage in addressing social challenges. EBay cult to compare strengths and weaknesses founder Pierre Omidyar recognized this fact across many different types of organizations when he and his wife, Pam, restructured their and to identify those that are most likely to be grant-making organization, the Omidyar Foun- effective catalysts. dation, as the Omidyar Network so that it If social investors are frustrated with current could make gifts in support of both for-profit solutions, they should seek out and support and nonprofit organizations that focus on catalytic innovations. Not only will this have social change. an immediate social impact, but it will also help establish the model and inspire more so- Catalyzing Business Models cial entrepreneurs to think catalytically. The screening approach described here can help investors identify groups that have a good Reprint R0612E chance of creating scalable, sustainable innova- Harvard Business Review OnPoint 1683 tions in social change. Using the method won’t To order, see the next page always be straightforward. Most reporting and or call 800-988-0886 or 617-783-7500 marketing materials and funding requests have or go to www.hbr.org

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Further Reading This article is also available in an enhanced Harvard Business Review OnPoint edition, (Product no. 1683), which includes a summary Harvard Business Review OnPoint of its key points and company examples to help articles enhance the full-text article you put the ideas to work. The OnPoint edition with a summary of its key points and also includes the following suggestions for a selection of its company examples further reading: to help you quickly absorb and apply the concepts. Harvard Business Will Disruptive Innovations Cure Health Review OnPoint collections include Care? three OnPoint articles and an Clayton M. Christensen, Richard Bohmer, overview comparing the various and John Kenagy perspectives on a specific topic. Harvard Business Review June 2004 Product no. 6972

From Spare Change to Real Change: The Social Sector as Beta Site for Business Innovation Rosabeth Moss Kanter Harvard Business Review May 1999 Product no. 99306

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