HP- e-inclusion

Bridging the Digital Divide (A) HP’S E-INCLUSION

01/2004-5168

This case was written by Sara Foryt, Research Assistant, under the supervision of Daniel Traça, Assistant Professor of Economics at INSEAD. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The authors would like to thank the personnel of the Hewlett Packard Company. In particular, we wish to acknowledge the contributions of Shari Moore and Anand Tawker, and the help of Bernard Virondeau.

Copyright © 2004 INSEAD, Singapore.

N.B. PLEASE NOTE THAT DETAILS OF ORDERING INSEAD CASES ARE FOUND ON THE BACK COVER. COPIES MAY NOT BE MADE WITHOUT

PERMISSION.

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Introduction

As the dividing line between rich and poor in the community, Highway 101 in Palo Alto, California is more than just a transit route. Debra Dunn, Hewlett Packard’s Senior Vice President of Strategy and Corporate Affairs reflected on this while traveling down Highway 101 after attending the board meeting of a local not-for-profit organization in East Palo Alto. She knew that similar divisions existed in numerous cities and countries around the world. In her mind a key element of this division was access to and use of Information and Communication Technology (ICT), Hewlett Packard’s (HP) core business. Dunn’s thoughts trailed to HP’s groundbreaking efforts to address this problem both in East Palo Alto and communities internationally, and how these efforts were making a difference. Aimed at finding new markets for ICT among the underserved, HP’s work in East Palo Alto was part of a forward-looking strategy. The pressures on the company were huge and many believed that the strategy was risky. Among others these included: Wall Street’s expectations, challenges posed by competitors, and the need to find new profit opportunities in a saturated ICT industry.

The Digital Divide

“There are more telephones in New York City than in all of rural Asia; more Internet accounts in London than all of Africa. As much as 80% of the world’s population has never made a phone call.”

World Resources Institute

“One in two Americans is online, compared with only one in 250 Africans. In Bangladesh, a computer costs the equivalent of eight years average pay.”

The Economist, 10 November 2001

The digital divide refered to the wide gap between those who had real access to ICT and used it effectively, and those who did not. Many believed that ICT was linked to economic development, through enhanced productivity and improvements in living standards.1 For one, with the advent of computer technology, the Internet and cell phones, it became possible to

1 In addition to the divide in the use of ICT, there was also a divide in technology production. In 2003,

OECD countries accounted for more than 80% of global ICT production (US Internet Council) and 15% of the world’s population held 99% of all new patents - see Cornelius et al., “Trade in ICT Products: The Global Framework and Empirical Evidence” in World Economic Forum 2001-2002, Chapter 10. However, low-skill ICT service sectors like data entry and call centers were increasingly farmed out to places like the Caribbean, the Philippines and India (www.bridges.org). Although it was perhaps better for poor nations to invest in low-skill areas in which they had a comparative advantage, it is worth noting that in 1999, trade in IT products (in excess of US$800 billion) was larger than the combined value of world trade in agriculture and automobiles. Thus, the ICT industry held the possibility of helping developing nations to grow faster. Resnick (2001) argued that it was necessary to “think of computers like fingerpaint; not just as a tool to receive information, but as a creative opportunity,” which if missed could have economic ramifications. However, in countries, like India and Malaysia, where government efforts to invest in the production of technology were strong, the benefits accrued to only by a small, well-educated minority.

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obtain large quantities of information previously unavailable (e.g. how best to grow one’s crops, run a business or access health care). Furthermore, computer technology helped businesses and individuals do things more efficiently, and at a lower long-run cost. Given these advantages many feared that those lacking access to or proficiency in using ICT would suffer slower economic growth.

By an absolute measure, even the poorest had increased their access to and use of ICT. However, those with better access were increasing their use of technology at such an exponential rate that, in effect, the ‘digital gap’ was growing wider. Furthermore, ICT divisions tended to exacerbate existing income disparities. The poor were caught in a vicious cycle whereby poverty deprived them of ICT, which, in turn, hindered development and reinforced poverty. “The underlying trend is that privileged groups acquire and use technology more effectively, and because the technology benefits them, they become more privileged.”2

The divide existed within countries (e.g. among the middle class and the poor) and between countries (e.g. the US and Europe vs. sub-Saharan Africa). The latter was often referred to as the International Digital Divide (see Exhibits 1 to 4, for indicators of the digital divide).3

Why the Digital Divide Existed

Pricing and affordability, infrastructure, technical training and human capital (e.g. the capacity to use the technology) were all factors underlying the divide.

Poverty was undoubtedly the most important impediment both to accessing and using ICT effectively. In 2001, almost half the world’s 6 billion population survived on less than US$2 a day, and over 1 billion people lived on less than US$1 a day, making fulfiling the most basic needs, such as food and healthcare a struggle. In terms of accessing ICT, poverty created two types of constraint. First and most obviously, technology products were unaffordable. Even the cheapest computer on the market was beyond the reach of the world’s poorest. Second, the ability of the poor to access credit was hindered by lack of collateral. The poor were often barred from opening accounts with traditional telephone companies, for example, because it was assumed they would not be able to make their payments.

The fact that technology was often more expensive in developing countries complicated matters further. At Internet centers in most developing countries, the high absolute cost of Internet access put the service out of the reach of most (see Exhibit 5). For nine developing countries surveyed as part of the World Economic Forum’s Global IT Report 2001-2002, 20 hours of Internet use per month represented more than 20% of GDP per capita.4 Given too that the bandwidth in these countries was limited, the data retrieval speed of the Internet was 2 www.bridges.com. The digital divide was often also measured in terms of income, race, gender, age,

disability and location (e.g. urban vs. rural), which all tend to be differentiating factors in terms of ICT usage.

3 ‘Spanning the Digital Divide: Understanding and Tackling the Issues’ (www.bridges.org).

4 Geoffrey Kirkman, Carlos Osorio and Jeffrey Sachs, “The Networked Readiness Index: Measuring the Preparedness of Nations for the Networked World” chapter 2 in World Economic Forum (2002) The Global Information Technology Report 2001-2002: Readiness for the Networked World p. 22.

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often significantly slower. Thus overall, those in developing countries received significantly less information and got less value for the price of Internet access than in developed nations. On the supply side, costs were also higher for technology companies in developing nations. For one, distribution costs were higher; often, a high portion of the population resided in rural villages, urban slums or shantytowns, which were difficult to reach. Distribution networks thus could be disjointed and disorganized.5 Also, given the low number of middle to high-income consumers, companies often could not sell enough of their products/service to achieve lower cost curves. University of Michigan professor, C.K. Prahalad, a long-time advocate of selling to the poor in developing nations, said:

“It’s true that some services simply cannot be offered at a low-enough cost to be profitable, at least not with traditional technologies or business models. Most mobile telecommunications providers, for example, cannot yet profitably operate their networks at affordable prices in the developing world.”6

The lack of basic infrastructure in developing countries was also a big challenge. Obviously, without electricity the use of electrical devices would be limited. Where it existed, frequent power outages were often a recurring problem. Poor infrastructure also meant that fewer paved roads, especially in rural areas, generated greater amounts of dust. This negatively impacted the functionality of traditionally-engineered technology products.

Moreover, simply having computers and connections was not enough. People also needed to understand the technology. Here, poor education levels were a prime factor in limiting ICT usage. Roughly 40% of adults living in the developing world were illiterate, with great disparities between men and women.7 Beyond that, many more had only a basic level of primary education. Furthermore, lacking training on how to use a technology or product, fundamental apprehension regarding anything modern and/or a distrust of difficult-to-understand foreign products prevailed. As one expert commented: “in the first few months, they view it [a technology product] more as an object of curiosity or as a machine for the educated and/or urban people.”8

Language barriers also existed. English dominated the Internet since it was first developed. While just over 50% of all Internet users were native English speakers, 78% of all websites in 2003 were in English, and 96% of e-commerce sites were in English.9 Seventy percent of all websites originated in the US, and the vast majority of these were in English. The dominance

5 C.K. Prahalad and Stuart Hart, “Strategies for the Bottom of the Pyramid: Creating Sustainable

Development.” mimeo, WRI's 4th Annual Sustainable Enterprise Summit (www.wri.org/meb/wrisummit).

6 C.K. Prahalad and Allen Hammond, (2002) “Serving the World’s Poor, Profitably,” Harvard Business Review, September.

7 UNDP Human Development Report 2002, p. 36.

8 Ved Prakash Sharma, head of information technology and computers and communications specialist in the National Agricultural Technology Projects of the National Institute of Agricultural Extension Management in Hyderabad. Source: “India Split by I-divide,” IDGNET 20 May 2002.

9 US Internet Council.

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of English and especially US content made the Internet less useful to other countries on a national or local level.10

What Could or Should Be Done

Much attention focused on the digital divide, and a wide variety of initiatives were underway to address it. These included efforts by governments, non-governmental organizations (NGOs) and corporations within the technology industry. These efforts were not uncontroversial and many argued that the basic needs of citizens took priority over closing the digital divide. These advocates instead, called for debt relief and greater levels of philanthropic action, especially in basic areas like food, clothing, shelter and healthcare. Once these basic needs were met, they believed that the poor’s access to technology would naturally increase with their wealth.

Perhaps the biggest skeptic of efforts to address the digital divide (especially the international divide) was Bill Gates, a leader in technology development (and leading sponsor of immunization efforts worldwide). He questioned: “what good is a cell phone to someone who is starving or dying from a disease?…I mean do people have a clear view of what it means to live on US$1 a day? There are things those people need at that level other than technology.”11 In fact, a UN study found that use of the Internet and e-commerce in the developing world would yield only a fraction of the gains to GDP of the developed world (GDP would be just 1.7% higher in Africa, 1.2% higher in Asia, and 1% higher in Latin America and Eastern Europe).12

On the other hand, there were many who viewed greater access to ICT as a key component of development. They argued that a large group of ‘have-nots’ could not participate in ICT jobs, e-government, ICT-improved healthcare and ICT-enhanced education, which were increasingly important ingredients to raising standards of living. Technology then, was a catalyst to improving the quality of life of many. Some initial, small-scale examples of ICT-enabled development existed: a project in Bolivia increased the poor’s access to credit and other financial transactions through smart cards;13 and a number of small e-commerce projects allowed small entrepreneurs in rural parts of the developing world to sell their products over the web, thus providing an added source of income.14 There were also

10 http://www.bridges.org/digitaldivide/index.html

11 Quotes amalgamated from: Bill Gates, Red Herring, 31 January 2001 and Sam Howe Verhovek, “Bill Gates Turns Sceptical on Digital Solution’s Scope,” The New York Times, 3 November 2000.

12 United Nations Conference on Trade and Development (UNCTAD) World Economic Forum 2001-2002, chapter 9, p. 94.

13 PRODEM, a micro-finance organization in Bolivia, used multilingual “smart-card” ATMs to reduce the marginal cost of using technology for each customer. The cards stored a customer’s personal details, account numbers, transaction records and a fingerprint, allowing cash dispensers to operate without permanent network connections, which was key in remote areas (Prahalad and Hammond, 2002).

14 http://www.bridges.org/digitaldivide/index.html, chapters 1.1, 3, and 2.

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instances in which improved access to information through ICT benefited the daily economic and social activities of the poor. 15

Actually, not enough was known about the quantitative link between technology and development, and to what degree technology would foster economic growth in developing nations if adapted for those conditions.16 Nevertheless, Prahalad and Hammond argued that: “ICT can grant access to otherwise isolated communities, provide marketing and distribution channels, bypass [traditional] intermediaries, drive down transaction costs and help aggregate demand and buying power.” And if ICT could promote economic development, then adapting technology for developing countries promised enormous potential for value creation…a share of which those providing the technology might capture…provided that other constraints working on the poor (like credit) were simultaneously addressed.

Efforts to Bridge the Digital Divide by 2003

Some of the most innovative efforts to address the divide had been undertaken by NGOs (examples are included in Exhibit 6). Many businesses also responded to the call, including OmniGlobal with its ‘OmniAccess programme’, AOL Peace Packs and AfricaONE. A number of major technology firms instituted philanthropic programs to address the divide, including Cisco’s “Networking Academies,” and Sun’s “Open Gateways Program.” Unfortunately, not all initiatives worked; sometimes donated computers sat unused, or call centers shut down for lack of funding, etc. In many cases, donations and philanthropic programs failed to produce sustainable, widely replicable models.

Governments also had a role to play in bridging the divide. While there appeared to be a correlation between the income level of a country and its level of “networked readiness” (defined as the degree to which a community is prepared to participate in the networked world),17 some countries nonetheless bucked the trend, proving that certain “enabling factors,” including government policy, could make a difference. For example, Estonia was comparable in networked readiness to the likes of Japan, France and Spain, while China, despite its impressive levels of economic growth, ranked fairly poorly (see Exhibit 4). Besides supporting information infrastructure projects, educating its citizens, and deregulating monopolies (such as telecommunications), governments could develop special policies to support ICT. These included building conducive business and economic environments, e- 15 The Women’s Information Resource Electronic Service (WIRES) in Uganda provided female entrepreneurs

with information on markets and prices, as well as credit and trade support services, packaged in local language formats. Another example was ITC, one of India’s largest companies. ITC’s agribusiness division set up 970 kiosks serving 600,000 farmers, disseminating the latest information on weather and best practices in farming and using an e-procurement system for supplies. Similar types of systems could provide farmers with access to higher-priced markets for their products (Prahalad and Hammond, 2002).

16 In a notable exception, a study showed that one of the most basic ICT devices – the telephone – could have a positive impact on economic development, in large part because of increased pricing transparency. Better access to current information tended to give villages with telephones lower prices for commodities and lower price variability. See Karen Eggleston, Robert Jensen and Richard Zeckhauser, “Information and Communication Technologies, Markets, and Economic Development” in World Economic Forum 2001-2002, chapter 7, pp. 66-69.

17 Geoffrey Kirkman, Carlos Osorio and Jeffrey Sachs, “The Networked Readiness Index: Measuring the Preparedness of Nations for the Networked World” chapter 2 in World Economic Forum 2001-2002.

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commerce, and e-government programs.18 Socio-cultural factors also came into play such as the local economic framework, political will, macro-economic framework, and trust in the ability to conduct business transactions (electronic signatures, consumer protection, etc).

The Hewlett-Packard Company

Background

HP was founded in 1939, by Stanford University classmates Bill Hewlett and Dave Packard. The company's first product, built in a Palo Alto garage, was an audio oscillator: an electronic test instrument used by sound engineers.

In 2003, still headquartered in Palo Alto, HP continued the tradition of technology and innovative leadership. With sales in 2002 of almost US$80 billion, HP ranked among the world’s largest multinationals. The company’s principal businesses included imaging and printing systems, computing systems and IT services.19 HP’s four core business groups are set out in Exhibit 7.

The Company in 2000

In 2000, with over 88,000 employees, HP was the market leader for printers and the second largest supplier of branded consumer desktop PCs worldwide. The company reported net revenue growth of 15% in 2000, following growth of 7% in 1999 (see Exhibit 8). Its international revenue in 2000 grew 16% overall to US$27.2 billion.20

Despite its growth, HP was under tremendous economic pressure. In 2000 the technology bubble burst and the worldwide economy began to slide; technology companies everywhere were beginning to suffer (see Exhibit 9, for the evolution of HP’s stock price).21

Also in 2000, HP was struggling to maintain its leadership position. Competitive pressures were immense; HP was not able to respond adequately to Dell’s model of direct selling. It looked with envy at rival IBM’s emergence as the leading IT services company. All the while, it was becoming harder to meet quarterly sales targets as the company continued to lose market share. HP also faced structural problems. In describing what went wrong, Debra Dunn reflected that: “I think that as the Internet became a critical and prominent feature of the information technology environment, HP lost its leadership position. One reason for this was our decentralized approach that didn’t help us drive an integrated strategy.”22 In July 1999, 18 World Economic Forum 2001-2002, chapter 2, p. 12 and p. 21.

19 www.hp.com

20 HP Annual Report 2000.

21 According to the company’s 2000 Annual Report: “Growth was partially offset by…softening demand in the business desktop PC and business printer markets, and unfavorable foreign currency effects. Dollar revenue and gross margin growth were also constrained by lower average selling prices and a shift to the low end in many product categories.”

22 “Technology Should Become Less Visible,” Business Today, 31 March 2002.

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Carly Fiorina, a stellar sales executive from AT&T/Lucent, was brought in as HP’s new Chief Executive Officer. Fiorina, with her strong sales background, set out to put more emphasis on the customer, making it easier to do business with HP.23

The Development of e-inclusion

HP’s History of Corporate Social Responsibility

From its start in 1939, Packard and Hewlett stressed their obligations to society in terms of corporate citizenship and philanthropy. Dave Packard first claimed that, “the Hewlett-Packard Company should be managed first and foremost to make a contribution to society.” Under pressure from external sources (including several fellow CEOs declaring that he was crazy and the company was doomed), Packard later qualified that profit was also essential as a means to enable the company’s social goals.24 In its first year, HP made a contribution to the Salvation Army.25 Later, Bill Hewlett championed and financed environmental protection efforts in the Lake Tahoe Basin, and Packard founded a substantial medical foundation and children’s hospital at Stanford University.26

As the company grew, HP encouraged employees to contribute to their communities through volunteering, paying US employees four hours per month to work in local schools or community non-profit organizations.27 In 1997, then CEO Lew Platt said, “doing right and doing well are not mutually exclusive. In fact…doing right may be the best way to make money.”

Over the years, HP contributed millions of dollars, HP products and staff time to a vast array of worthy endeavors. In 2001, HP was ranked 14th in total worldwide giving,28 and second among US companies in percentage of total giving outside the US…and this was at a time when corporate philanthropy in general was declining.29 In 2001, overall charitable

23 Before Fiorina, HP had hundreds of autonomous divisions, organized along product lines. This was

beneficial in terms of fostering accountability and innovation in individual divisions, but it made sales efforts more complex. It was difficult, for example, for the company to bundle a PC and a printer. As one employee put it: “meetings with Intel were embarrassing; 30 HP people [from different divisions] would go.” After Fiorina, HP went from having 83 independent businesses to just 18 business categories selling in an integrated way.

24 http://www.amazon.com/exec/obidos/ASIN/0887308171/103-8825836-5382201

25 http://www.hp.com/hpinfo/newsroom/feature_stories/2001/digitalvillage01.html

26 Debra Dunn Speech, BSR Conference, 8 November 2001.

27 Ibid.

28 The Conference Board, from the HP Social and Environmental Responsibility Report 2001, http://www.hp.com/hpinfo/globalcitizenship/csr/csrreport02/

29 The Chronicle of Philanthropy, http://www.hp.com/hpinfo/globalcitizenship/csr/csrreport02/

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contributions by US companies fell 14.5% in real terms, and over the previous 15 years, as a percentage of profits, corporate giving dropped by 50%.30

HP’s dedication to corporate social responsibility was not limited to philanthropy, however. The company included in its core values a commitment to responsible business practices such as giving preference to suppliers that proactively addressed the environmental impact of their products, striving to create an inclusive work environment, and “creating fair value for our shareowners in ways that are transparent and ethical while conducting our business with uncompromising integrity.”31 In addition, the company strove to “honor our obligations to society by being an economic, intellectual and social asset to each nation and each community in which we operate.” See Exhibit 10 for HP’s core principles of global citizenship.

Perhaps as a direct result of these practices, while other large multinationals faced increasing pressure from the anti-globalization movement, HP remained solidly above the fray. In 2001, it was ranked fifth among top-rated companies for social responsibility.32 Traditionally part of Fortune Magazine’s list of the “Top 100 companies to Work For”, HP developed a reputation for empowering its employees and rewarding initiatives.33

Early Efforts: The Digital Divide

Prior to developing a formal program, grassroots initiatives within the firm emerged to address the digital divide. Those at the ground level working on these initiatives (like Barbara Waugh, a long-time advocate of CSR issues within the company) wondered if their efforts could be more sustainable than past philanthropic efforts, and if, in the long run, these could even be beneficial for HP itself.34 For Waugh in particular, the Grameen Bank’s success in Bangladesh in offering micro-loans to the poor while being both profitable and helping to end poverty was a source of inspiration. On learning about Grameen, she began asking whether HP could partner with an organization like Grameen (which it later did). At the same time, HP Labs engineer, Jim Sheats, began to experiment with technology projects and business models that were not only beneficial to users, but also environmentally and economically sustainable. These early efforts according to Waugh, were, “a combination of the formal and the informal, the hierarchy and the internal network.”35

By early 2000, a number of digital divide projects were already underway. HP experimented outside of the US with the MIT Media Lab and an organization led by the former president of Costa Rica, Jose Maria Figueres, on a small project that it hoped could potentially be used as a new business model. The LINCOS project (LIttle INtelligent COmmunitieS) was really an 30 Michael Porter and Mark Kramer, “The Competitive Advantage of Corporate Philanthropy,” Harvard

Business School Review, December 2002.

31 www.hp.com

32 Harris Interactive/Reputation Institute survey, http://www.hp.com/hpinfo/globalcitizenship/csr/csrreport02/

33 In 2002, HP missed Fortune Magazine’s ranking, due to the restructuring caused by the merger with Compaq.

34 Waugh, Soul in the Computer. At the time, Waugh was worldwide personnel manager for HP Labs.

35 Interview with Barbara Waugh, 26 November 2002.

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experiment with shipping containers fitted with PCs and a satellite dish that were turned into Internet access and education centers. While the impact of this project was not large, HP began looking at emerging markets for possible growth opportunities.

Changing Fortunes

As HP’s economic fortunes began to wane in 2000, there were questions as to whether these initial projects could be sustained. Waugh herself thought that early efforts would die out with cost-cutting measures.

However, when Fiorina learned about the projects, she wanted to know more.36 She shared her predecessors’ views that it was possible to “do well by doing good”, and thought these first projects might even be an impetus for the company’s future growth. Debra Dunn was Fiorina’s choice to expand the projects further.

HP began by undertaking a philantropic project called “Digital Villages”, the goal of which was to “harness technology to develop sustainable solutions that address social and economic needs of a few technologically underserved communities in the US.”37 These were chosen from proposals submitted by communities describing how HP funding and products could be used to generate sustainable improvements in terms of quality of life, employment, education, etc. A senior HP executive oversaw each part of the total US$5 million investment in low-income communities in East Baltimore, Maryland, East Palo Alto, California and with Indian Tribes in southern California. Among other activities, Digital Villages in the US extended connectivity, provided laptops to schools and assisted local firms to use the web to manage and market their businesses. While the project was not expected to be profitable, executives hoped to learn how to provide better long-term impact for communities through technology.

e-inclusion

The e-inclusion program was launched on 16 October 2000.38 Through it, HP would target both HP and partner products and services and sell, lease or donate them around the world, with the dual objectives of bridging the digital divide and helping the company economically over the long term.

Though the program had a philanthropic component, its goals extended well beyond the company’s traditional philanthropic practices. Projects would consider long-term sustainability in target communities. The program also embodied a new strategic commitment to underserved communities as a prospective growth market for HP products and services, while still retaining the company’s credentials of social responsibility. It was a new vision of ‘doing well by doing good’.

Commenting on HP’s effort to seek new markets in underserved areas, Fiorina said:

36 Ibid.

37 http://www.hp.com/hpinfo/globalcitizenship/csr/csrreport02/

38 “Creating Digital Dividends” conference in Seattle.

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“I honestly believe that the winning companies of this century will be those who prove with their actions that they can be profitable and increase social value; companies that both do well and do good. In fact, business leaders will no longer view doing well and doing good as separate pursuits, but one unified pursuit. And increasingly, shareowners, customers, partners and employees are going to vote with their feet, rewarding those companies that fuel social change through business…This is simply the new reality of business, one that we should and must embrace.”39

Dunn's vision was that corporate social responsibility went beyond public relations. “Public relations is the wrong angle. It means that you're not really committed…[HP's efforts at citizenship] are within the DNA of the organization.” Large corporations like HP could lead in a broader way: “not just because it is the right thing to do, but also because it is essential for future business success.”40 This was a radical departure from the vision of social responsibility in most MNCs.

Most of these viewed CSR as a public relations exercise to manage both global image and the perceptions of stakeholders in home countries. e-inclusion shifted the emphasis to the local impact of socially-responsible business. Its key stakeholders were thus the local communities and governments. In fact, their acceptance of HP's actions and programs would ultimately determine the success of the company’s new vision of corporate responsibility.41 Hence, the public relations repercussions were only a side benefit of the program. Dunn argued that this new vision was necessary, pointing to September 11 and the war in Iraq and noting, “anti-US sentiment is running high around the world. Without a stable context [in local environments], our long term success is limited.” 42

The e-inclusion Mission

The new e-inclusion mission was thus to provide people access to greater social and economic opportunities by closing the gap between technology-empowered and technology-excluded communities, focusing on sustainability for both the communities and HP.

In the fall of 2001, Digital Villages went international, expanding into three underserved communities in Africa and Europe. At the same time, HP launched the Joko project in Senegal (joko means ‘link’ in the Wolof language) primarily to provide affordable Internet access and to foster money-transfer e-businesses.43 The Joko project was expected to yield a financial return for HP, and project success was measured both in terms of economic and social wealth creation. Finally, in conjunction with the restaurant chain McDonald’s,

39 Asia Pacific Economic Cooperation CEO Summit, Shanghai, China,

www.hp.com/hpinfo/globalcitizenship/csr/csrreport02/

40 Interview with Debra Dunn, 10 December 2002.

41 This new vision of the local impact of corporate responsibility was also distinct from the traditional focus on managing the political risk of investment projects.


43 http://www.hp.com/hpinfo/newsroom/press/25jan01a.htm

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“McInternet” was launched in Brazil to provide information via the Internet about jobs, health, and marketing and finance at over 50 McDonald’s restaurants.44

Research and Development for the Underserved

The i-communities

Following on these early experiments, HP began investigating developing new technology solutions to address the expressed needs and desires of the poor themselves, as well as developing business models that would be appropriate for developing countries and emerging markets.

At the time e-inclusion was created however, the idea of selling to the “Bottom of the Pyramid” was still in its infancy, finding inspiration in the academic work of C.K. Prahalad.45 Early experiences included Unilever’s Hindustan Lever, which made selling to the poor a key component of its business strategy.46 As one HP employee put it though, “there wasn’t a clear idea of how to serve the poor profitably with ICT.”47

According to Maureen Conway, Vice President of e-inclusion and Emerging Market Solutions: “HP wanted to do something to create jobs and improve peoples’ lives. Computers alone can’t do that.”48 Hence, much research would be needed to understand what would.

The concept of an “Inclusive Community,” or i-community, was born (see Exhibit 11). An i-community was: 1) a community in which ICT was strategically deployed for sustainable socio-economic development; and 2) an experimental platform for testing and developing emerging market solutions and business models. The key objectives for HP were to build brand value, business value and social value. The i-communities represented the zenith of HP’s doing good/doing well paradigm, i.e. developing new and appropriate solutions in underserved areas that could be replicated and sold on a broad scale.

“An HP i-community is a community where ICT infrastructure is strategically deployed to ensure the participation and inclusion of all appropriate parties in the

44 http://www.hp.com/e-inclusion/en/project/mcinternet1.html

45 C.K. Prahalad argued that selling affordable products to the extreme low-income consumer (e.g. the “Bottom of the Pyramid”) could translate into big business in developing countries. Although the margins of selling to the poor were likely to be smaller, the huge customer base would ensure profitability. Close to 3 billion people in the world in 2003 lived on less than US$2 per day (UNDP Human Development Report 2002). See: C.K. Prahalad and Stuart Hart, “Strategies for the Bottom of the Pyramid: Creating Sustainable Development.” mimeo, WRI's 4th Annual Sustainable Enterprise Summit (www.wri.org/meb/wrisummit).

46 Hindustan Lever was successful in India in selling smaller portions of soap products in affordable single-use packages. By 2002, the company had annual sales of these portions of 4.5 billion. See: “The Hunt for Globalization that Works: Can companies make money while bridging the digital divide?” Fortune, 28 October 2002.

47 Interview with Anand Tawker, October 2002.

48 Interview with Maureen Conway, December 2002.

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enhanced economic and social development of the community as measured by tangible improvements in relevant indices such as literacy, job creation, income generation, access to government services, education, healthcare, etc.”49 (See Exhibit 12)

According to Conway, “i-communities differ from other e-inclusion projects by introducing the business intent loud and clear.” While the Joko project helped the company understand how HP’s brand would have a business impact on developing country markets, i-communities were “more solution-oriented,” and more of a potential profit-maker. They also presented a new approach to determining those solutions that would allow HP to “understand a community and how technology can affect it, and ultimately experiment with a business model.”50

Janine Firpo, Director of Multi-Sector Initiatives at HP, argued that it was critical to have a solid understanding of the market. Because technology made for the West would not work in developing nations, it was thus necessary to “reinvent technology”.51 Debra Dunn concurred: “HP sees an opportunity, but the market is so far from [the company’s] reality, that there’s no way we can sit in Palo Alto and come up with appropriate solutions.”52 Spelling out the challenges, Barbara Waugh went even further: “we can’t begin to co-invent appropriate solutions for the [underserved] until we live with them, sleeping on the mud floor, walking 10 miles for water with our hostess who trudges along with a child on her back, a child in her belly, and a third child tugging at her leg.”53

Any solution developed for this market had to be simple and easy to use: “it is important that the technology becomes less visible, less onerous, less cumbersome.”54 Solutions also had to adjust to consumer needs and aspirations, which even in developing countries varied from region to region with culture, climate and geography…among other factors. Waugh was precise: “the products and services offered must be based on both advanced technology and local knowledge and practices. Also, low-cost, high-quality decentralized distribution systems must be devised.”55

HP Labs India: Developing Solutions for Emerging Markets

In conjunction with the i-communities, a key element of the company’s strategy to develop ICT solutions for the poor was its renowned HP Labs. With 7% of HP’s US$4 billion annual research budget, HP Labs conducted research internationally in projects not specifically

49 HP Presentation.

50 Interview with Maureen Conway, December 2002.

51 Conference call with Janine Firpo, 28 August 2002.


53 Waugh, Soul in the Computer, p. 172.

54 Debra Dunn “Technology Should Become Less Visible,” Business Today, 31 March 2002.

55 For additional information on HP’s initial efforts to develop solutions from the Kuppam i-community project, see Case B.

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earmarked for immediate business returns, but with the goal of fueling long-term growth through technological innovation. They were, according to Dr. Ramani, Research Director of HP Labs India, “ideas that create change”.56

In April 2001, Carly Fiorina announced that HP Labs India would develop applications for emerging markets thereby taking advantage of the local engineering talent and furthering the long-term research strategy of the Labs.57

The Lab in India, based in Bangalore, was charged with developing products exclusively for developing nations. Department Director Warren Greving believed that the India Lab’s local talent base gave it a distinct advantage. Local engineers would design for India, based on their experience there, and products could be leveraged in other countries where conditions were similar.

Results and Challenges by 2003

According to Dunn, ‘e-inclusion’ had already helped the company build its brand and grow its business both directly and indirectly. Indirectly, as the company engaged with communities, it created near-term business opportunities and improved the company’s image.

Thus, the true test of HP’s efforts was its positive image in such places as South Africa and Southern India where e-inclusion projects had been implemented. “The perception of HP [by locals] is different than the view of other companies [located there]. That is precisely the kind of publicity we like to have.” Furthermore, “country managers like e-inclusion; the leverage is tremendous. It accelerates the flow that we wouldn’t have otherwise…Other companies have to run ads to tell people about their performance [in terms of corporate social responsibility]. HP doesn’t have to do that.”58 This was clear in South Africa when President Mbeki chose to inaugurate HP’s e-inclusion project there.

Also, e-inclusion gave the company “a broader footprint in markets in which we are leading and where we are looking for growth.”59 This helped HP’s aspiration to be the “leading technology company in the world”. These early successes caused more internal resources to be devoted to e-inclusion:

“Philanthropy at HP is not allocated a lot of company assets. If it is a growth industry, however, it is thought of differently. For instance, using HP Labs [with

56 For example, the Labs were responsible for having invented pocket scientific calculators and the first

handheld scanner. Prior to 2001, HP Labs employed over 800 people in labs located in the US, the UK, France, Israel and Japan. For more information, see: www.hp.com.

57 The Hindu, “India: Hewlett Packard to Strengthen Presence,” 25 April 2001.


59 Ibid.

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e-inclusion]…would never happen in a purely philanthropic pursuit…we would never get the kinds of breakthroughs that smart engineers could come up with.”60

But, it was through the direct contributions to business growth over the long term that the company would develop new products and new solutions to be marketed in places like India.61 Then such products and solutions could be replicated in HP’s more traditional markets.

“I think as you expand the user base further, you start reaching more people who don’t care about the technology. They just want solutions that make their lives better. The solutions become visible and prominent to the user, and I think this is one reason why inventions targeting these markets [e.g. low-income consumer] can be used in all our markets.”62

Thus, “by aligning the business and citizenship objective, a company can engage in a more meaningful and deeper way, bringing assets to bear on complicated problems, hopefully achieving breakthroughs, and accelerating progress. That’s a lofty goal, but lofty goals help you get out of bed in the morning.” This had a direct effect on employee motivation: “passion can propel people to do things that are apparently impossible.”63

Going forward, would HP succeed in bringing the “doing well by doing good” paradigm to life with its i-communities, thereby making the poor a profitable business proposition for the ICT industry? One thing was certain: HP saw the i-communities as key to its sustainable competitive advantage. “By being inside of these markets, immersing ourselves in this work…we can marry the intimate knowledge of these markets with HP’s core competencies in technology and business model innovation. HP is the only player to develop this in this way.”64 Certainly, Debra Dunn was wildly optimistic that there were wins to be had.

Barbara Waugh encapsulated the long-term optimism within the company with a metaphor:

“There’s this Chinese bamboo: you plant the seed, you wait. Nothing seems to happen. You wait some more. Still nothing seems to happen. This goes on for four years. In the fifth year, the thing shoots up 80 feet! We have to believe that we are the bamboo under the ground, and we are going to shoot up 80 feet one day and the barren desert will become a bamboo forest.”65

…Or at least, it would become a vast market of low-income consumers using HP’s products and services and having a better life because of it.

60 Ibid.

61 Ibid.

62 Debra Dunn “Technology Should Become Less Visible,” Business Today, 31 March 2002.


64 Interview with Anand Tawker, October 2002.

65 Waugh, Soul in the Computer, p. 187.

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Needless to say, skeptics were not lacking. Microsoft’s Bill Gates openly questioned HP’s ability to capitalize on the low-income market. “What percentage of HP’s growth in the future will come from customers who live on less than US$1 a day?”66 Even if it could overcome the incredible difficulties of developing the technology, the challenges that lay before HP were great.

Long-Term Commitment

Those within the company admitted that developing solutions for low-income, developing country markets would be a long, involved process, with a horizon of five to 10 years.67 It would be “a launch pad for a longer term business strategy.”68

But this long-term focus presented unique challenges. Funds would be needed, first to sustain development efforts, and then later on to turn the prototypes into real solutions and to promote and distribute the products and services. It was unclear whether the necessary funding would materialize. Under Wall Street’s short-term pressures, it is also unclear whether HP’s business units would be able to focus on the long-term goals sufficiently to lend them their expertise and to benefit from the solutions developed. These challenges existed against a background of a difficult market for technology products that meant tough measures like cutting staff. Dunn however, was confident that the short-term indirect payback provided by e-inclusion projects would help to sustain focus for a longer period.69

Bottom Line Implications

Could the company’s traditional focus on philanthropy in any way negatively impact its ability to be a successful business? As Fiorina said: “our commitment to bridging the digital divide is a key driver of our emerging markets and philanthropic activities and an extension of our long-standing commitment to making technology accessible to all.” But was the company’s desire to improve the world the best driver of its business model? It was this commitment, for example, that drove HP to target the extreme low-income consumer. Was the company foregoing higher margin opportunities in its preference for helping the needy? Would its “do good” philosophy help when it came to developing highly unusual solutions or convincing others of the business grounds for increased commitments? Or, would it be a hindrance?

Partnering

HP was in the business of information technology. Thus, to bring products to the underserved many other ancillary industries had to be involved. These included local and state governments, for example, who provided the upstream information included in e-government solutions, and all of the downstream aspects of distribution. Access to and knowledge of markets in which HP was not accustomed to operating were hence imperative. Partners were 66 Hiawatha Bray, “The Wiring of a Continent”, The Boston Globe, 22 July 2001.

67 Interview with Warren Greving, 22 October 2002.

68 Debra Dunn, “Technology Should Become Less Visible,” Business Today, 31 March 2002.


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needed! Technology, according to Fiorina, had to operate in conjunction with business, economic, political and social systems. With e-inclusion however, it also had to operate in unique geographic regions and types of environments, including rural areas.

HP had significant experience in partnerships. As Dunn said, “normally, when we look at bringing a solution, HP only brings part of the solution.” In the search for partners, none were lacking and the company had been approached by numerous candidates. These were also a source of investment. The company, jointly with its partners, planned to invest at least US$1 million per year (cash, equipment and expertise) for three years in the i-communities. For long-term sustainability though, additional partners would be needed.

Internal Challenges

While e-inclusion had strong internal support at the highest levels of HP, additional internal stakeholders were involved. Those making investment decisions would confront many competing business options and perhaps would be less familiar with the intended product markets. Indeed, the potential prototypes might be unlike anything the company had ever developed. Even Prahalad admited that: “the traditional workforce [of major corporations] is so rigidly conditioned to operate in higher-margin markets that, without formal training it is unlikely to see the vast potential of this market…unless business leaders confront their own preconceptions, companies are unlikely to master the challenges.”70

Moreover, HP had a longstanding tradition of standardizing its products for cost efficiencies, and a product was “localized” only if a particular business unit could prove that a bottom line justification for doing so existed. The only country in which localization occurred on a large scale (almost systematically) was Japan.71 It could therefore be difficult to gain acceptance of the idea of introducing a product for just one developing country. Along the same lines, HP was considering targeting its products to small entrepreneurs or “shopkeeper’s assistants.”72 This was not the traditional US consumer. Changing focus in both geographic region and product type was one thing, but changing the type of target consumer constituted a major reorientation.

70 Prahalad and Hammond, 2002.

71 Interview with Warren Geving, October 2002.

72 Interview with Warren Greving, October 2002.

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Exhibit 1 Internet Usage over Time and by Region

Middle East1%

Latin America

4%

Asia/Pacific

26%Canada & USA40%

Europe 28%

Africa 1%

Source: http://www.nua.com/surveys/how_many_online/index.html; “Spanning the Digital Divide: Understanding and Tackling the Issues”, www.bridges.com

Exhibit 2 Penetration of Different Types of Technology

Source: Digital Opportunity Task Force.

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Exhibit 3 Leading Internet Countries

Growth in Internet Users per 100 Inhabitants from 1996-2000

Source: World Economic Forum “The Global IT Report 2001-2002.

Exhibit 4

Indicators of ICT Readiness in 2000, Selected Countries

Source: World Economic Forum “The Global IT Report 2001-2002.

U.S 48 Korea (Rep, of) 38Sweden 47 New Zealand 31Iceland 45 Un.Arab Emirates 30Norway 43 Taiwan 25Denmark 41 Portugal 20

Estoria 22 Latvia 6Malaysia 15 Yugoslavia 4Chile 11 Romania 3Solvak. Rep 10 Bulgaria 3Uruguay 9 Suriname 3

Upper high income Lower high income

Emerging Countries Developing Countries

Main Telephone Lines per 100

inhabitants rank

Personal Computers per 100 inhabitants ra

nk

Estimated Internet users per 100

inhabitants rank

Through telecenters, libraries, post offices, etc; 1 – limited; 7 pervasive ra

nk

United States 59.97 1 58.52 1 59.75 1 5.4 4 Sweden 58.20 3 50.67 2 56.30 2 5.9 2 Singapore 48.44 6 48.81 3 46.05 3 5.7 3 Finland 54.59 5 39.61 4 37.23 4 6.3 1 Japan 58.47 2 31.52 5 30.44 6 4.1 7 France 58.01 4 30.48 6 14.46 9 3.9 10 Italy 47.38 7 13.94 7 33.42 5 3.4 14 Estonia 36.32 9 13.55 8 25.47 7 5.3 5 Czech Republic 37.79 8 12.20 9 9.75 11 4.0 8 Malaysia 19.93 14 10.31 10 15.90 8 3.4 15 Chile 22.12 13 9.55 11 11.55 10 3.4 16 South Africa 11.35 17 6.18 12 5.49 14 3.1 20 Argentina 31.31 11 5.13 13 6.75 12 4.9 6 Brazil 18.17 15 4.41 14 5.78 13 3.1 19 Turkey 27.99 12 3.81 15 3.04 15 3.9 11 Colombia 16.91 16 3.31 16 2.07 17 3.6 13 Bulgaria 35.03 10 2.67 17 2.83 16 3.7 12 Egypt 6.63 19 2.21 18 0.71 19 3.2 18 China 11.11 18 1.59 19 1.74 18 2.8 21 Indonesia 3.14 23 0.99 20 0.58 20 3.4 17 Honduras 4.50 20 0.93 21 0.52 21 2.3 23 Vietnam 3.18 22 0.88 22 0.13 23 2.6 22 India 3.20 21 0.45 23 0.49 22 4.0 9 Bangladesh 0.34 24 0.09 24 0.04 24 1.9 24

Public Internet AccessTeledensityCountries

PC Penetration Internet Penetration

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Exhibit 5 The Exorbitant Cost of Internet Access as a

Widespread Obstacle to Network Use

Annual ISP Cost for 20 Hours of Monthly Use and Internet Users per 100 Inhabitants (log), controlling for GDP (log).

Various countries (abbreviated names) and regression line

Source: World Economic Forum “The Global IT Report 2001-2002).

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Exhibit 6 NGO Digital Divide Projects

• TARAhaat: a business enterprise of a development NGO based in the US that used a franchise-based business model to bring computer and Internet technology to rural regions in India. It and its franchisees planned on becoming financially self-sustaining. TARAhaat aspired to provide a "gateway" that larger corporations could use to access rural customers.73

• ViaSebrae: an e-commerce platform in Brazil developed through a joint venture between a for-profit software company and a non-profit organization.74

• Infocentros Association: a non-profit organization run like a business that had a chain of 100 telecenters in El Salvador, and was working to create useful and educational Internet programming in Spanish.75

• Development Space: a business dedicated to developing a web platform accessible worldwide. See www.developmentspace.com.

• www.drishtee.com: an e-governance project in India working to create a commercially viable IT enterprise delivering economic development services to rural India.

• www.isapindia.org: an organization aimed at using IT to enhance rural farm incomes in India through setting up an agri-knowledge network and agri-clinics (in other words, to better connect technical assistance to those who need it)

• www.sitaa.org: an organization creating a model "e-cooperative" designed to expand computer-based learning/earning opportunities for women, children and seniors citizens.

Exhibit 7 Four Core Business Groups of the New HP

Enterprise Systems Group (ESG)

ESG focused on providing the key technology components of enterprise IT infrastructure to enhance business agility, including enterprise storage, servers, management software and a variety of solutions.

Imaging and Printing Group (IPG)

HP was the leading provider of printing and imaging solutions for both business and consumer use. IPG included printer hardware, all-in-ones, digital imaging devices such as cameras and scanners, and associated supplies and accessories. It was also expanding into the commercial printing market.

HP Services (HPS)

HP Services was a premier global IT services team. It offered guidance, know-how and a comprehensive portfolio of services to help customers realize measurable business value from their IT investments.

Personal Systems Group (PSG)

PSG focused on supplying simple, reliable and affordable personal-computing solutions and devices for home and business use, including desktop PCs, notebooks, workstations, thin clients, smart handhelds and personal devices

Source: http://www.hp.com

73 http://www.digitaldividend.org/action_agenda/action_agenda_01_tarahaat.htm

74 http://www.digitaldividend.org/action_agenda/action_agenda_01_viasebrae.htm

75 http://www.digitaldividend.org/action_agenda/action_agenda_01_infocentros.htm

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Exhibit 8 HP Financial Highlights

Source: Hewlett Packard Annual Report 2001.

Exhibit 9

HP Stock Price Over Time

2001 2000 1999Net Revenue (millions US$) 45,226$ 48,870$ 42,371$

Imaging and Printing Systems 42.4% 41.1% 42.6%Computing Systems 38.8% 41.4% 40.0%IT Services 16.6% 14.3% 14.5%Other 2.2% 3.1% 2.9%

Financial Indicators (% of Net Revenue)Gross Margin 26.0 23.3 29.5 Research and Development 5.9 5.4 5.8 Selling General and Administrative 16.1 14.5 14.7 Restructuring Charges 0.8 0.2 n.a.Earnings from Operations 3.2 8.2 9.0

FINANCIAL YEAR (end Oct. 31)

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Exhibit 10 Corporate Responsibility at HP

Global Citizenship: Good citizenship is good business. We live up to our responsibility to society by being an economic, intellectual and social asset to each country and community in which we do business.

Underlying beliefs supporting this objective:

• The highest standards of honesty and integrity are critical to developing customer and stakeholder loyalty.

• The betterment of our society is not a job to be left to a few; it is a responsibility to be shared by all.

• This objective is essential to delivering on the brand promise.

Source: http://www.hp.com.

Exhibit 11 The Evolution of e-inclusion

evolution of communities

eInclusion

time

digital villages

• philanthropic

• hp develops governance structures

• hp is primary driver for progress

hp dependent

iCommunities

• partnerships

• shared accountability

• brand value, business value, social value

build capacityfor sustainability

we are here

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Exhibit 12 An i-community Defined

iCommunitydefined

iCommunity is a targeted location (platform) that supports development of relationships between government, business and HP to:

• enable ICT infrastructure development

• build capacity within the community

• create new job and income opportunities

• provide access to new markets

focus on self-sustainability,scaleability and replicability

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