Frugal and Reverse Innovations from Emerging Markets

This content relates to : EMERGING ECONOMY – INDIA

HIGHLIGHTS

Success in BOP markets requires the development of frugal innovations.

A “clean slate approach” is a useful starting point for developing frugal innovations.

Frugal innovations can lead to reverse innovation, i.e., the offering of such innovations in the developed world.

Anand Kumar Jaiswal

IIM Ahmedabad

Presented at the Special Session on Emerging Economy Innovation Research Opportunities: 2022 American Marketing Association Conference, August 9, 2022 1:15 PM CST

Panelists: Dr. Anand Jaiswal (Indian Institute of Management Ahmedabad), Mr. Munesh Makhija (Former CEO, GE India & China Technology Centers), and moderator Dr. Jagdish Sheth (Emory University) discuss various aspects of innovation in emerging economies from both academic and industry perspectives.

So I’m going to talk about, you know, we are discussing emerging market innovations and especially I’m going to discuss frugal and reverse innovations from emerging markets. And the framework which I’m going to present; that I developed along with my co-author, Federica Angeli from the UK. So let me — you know, I — most of you may be familiar with the term, given that we still have several other speakers, so let me take a minute to explain what is frugal innovation and what are reverse innovations using these three pictures. So, if you look at, on one side, we have this bulky machine. All these machines are ECG machines used for cardiac diagnostic, detecting cardiac, cardiac diseases, heart diseases. So, on the one side, you have MAC 5500 ECG machine, a machine or a product which is primarily developed for the developed world, rich countries; or the high-end hospital in the developing countries. Pretty expensive machine. This is one example.

After that, you would see a MAC 400, which is the machine developed exclusively for the developing country environment like India. Ultra-cost medical device, you can see. It costs; it was originally offered at a price of 1,000 US dollars, which is almost like 1/5th or 1/6th of the existing product in the market. So dramatically reduced price was offered and it’s a portable machine, small machine. So, this is MAC 400. And then eventually on the other side, you have MAC 800, where you can even pictorially see it has several additional features and it is — the MAC 400 was upgraded and eventually made available in the developed world. So, MAC 800 is now sold in all the major countries, developing — developed countries in the Europe, North America, and elsewhere. And it has created real big market for itself. So, you have an example — for example, so MAC 400 is an example of frugal innovation, developing ultra low-cost device or dramatically reducing the cost without compromising on performance or, in some cases, offering acceptable quality and acceptable performance to consumers.

So, MAC 400 is reverse; MAC 400 is frugal innovation example and when you take this innovation to the developed world, then this becomes reverse innovation. The reverse terminology here indicates traditionally they have seen innovations flowing from the developed world to developing countries. However, now, we are seeing a reversal of this phenomena, at least in some cases where innovations are developed — designed and developed and then eventually they are finding their places in the developed world. So, this is reverse innovation. And this is frugal innovation. So, this ECG, of course, machines, a MAC 400, and others, they are heavily discussed in the literature on emerging market of global innovation. Why they’re so important? You can see they’re not just low cost, but they offer functionalities which are needed in the developing countries like these are portable machines, you can easily take to the — take these machines to the rural areas, as you know, 70% of Indian population lives in rural areas. These machines are robust machines requiring very little service. They’re battery operated. So, in many rural areas, you can’t — you don’t have electricity, for example, or regular electricity. So, these are designed for rural environment and, therefore, very, very acceptable not just affordable, as you — as Professor Jagdish Sheth said affordability is very high, of course, and high acceptability.

So, this is one example, but beyond that, you have real high-tech, pretty complex device. So, this is a real high-tech machine, for example, used in the cancer diagnosis, oncology, a PET/CT scanner. So, if you, for example, intend to buy a PET/CT scanner, it may cost something about 200 million Indian rupees and using the similar approach, GE developed the Discovery IQ series of, you know, PET/CT scanner and in that process, they reduced the cost by 50%, which is a dramatic reduction in the cost, and I was told that this is — this machine is like entirely designed and developed in the Indian …, by the Indian team and in India. So probably the most complex healthcare device ever developed in the Indian context, in Indian environment, and then dramatically reduced cost. So, this is another example.

Now, how — so these two are from GE. GE not only developed these two, but series of products. 25 … last time I heard that they have developed 25 in series. So, it’s interesting context to understand the frugal innovation development. And that’s what we did. So, we primarily use data from GE and several other companies also to understand the process of frugal innovation development. However, as I said, it’s not just GE, you would find many other Indian companies and other MNCs operating in India, and also China and other developing world, developing the frugal innovation. So, again, two very well-known examples are shown here. So, you have Godrej, Indian conglomerate,for example, developing a 50 dollar portable refrigerator, ultra low-cost, portable, you can take it anywhere, very little number of, you know, spare parts. Very little service requirements. Designed for rural environment, again, where you don’t have electricity, for example, or no regular electricity.

The other example we all know, very well known, Tata. Yeah, again, the biggest conglomerate in India, developing 1,300 US dollar car, ultra low-cost car. So how these products — and there are many more, I have just given the example of four; but how they’re different, they’re different in some dimension. For example, historically, we have seen several frugal innovations in India and other developing countries, but mostly they were in consumer goods. For example, in Indian context, we often discuss this example of Nirma versus Unilever, David versus Goliath, the story we talked about. We talked about CavinKare, again, a Chennai-based company. Now, number one in haircare product in rural India in terms of market share. Nirma used to be number one player for a very long period of time. And they developed, again, dramatically affordable and acceptable product, consumer product, detergent for laundry.They democratized laundry, you know. Till about mid-’70s laundry used to be a product of only affluent urban consumers in India, but Nirma led the democratization of this category.

Similarly, you know, Chik, CavinKare’s brand – that democratized the haircare products among the rural low-income population. So, these were — there are other earlier also. We have also seen process innovation from the developed, developing countries. So, we keep talking about organizations such as Narayana Hrudayalaya or Aravind Eye Care Hospital. And I think many of you may be knowing about Aravind Eye Care Hospital. So, Aravind Eye Care Hospital serves two-third of its patients at zero cost. Two thirds of its patients are given cataract treatment or surgeries at no cost and the cost of cataract is 100, 100th of the cost of cataract operation in the US or is even more. And the clinical efficacy or, you know, the clinical quality of cataract they do is better than the hospitals, many hospitals in the developed world. So, the data suggests that the infection rate, for example, of Aravind is lower than the infection rate in the NHS of UK. So, they don’t compromise quality; better quality, superior quality, but at 100th of the cost, that’s a dramatic reduction in the cost. So, this is, of course — so these process innovations we heard from developing world, we heard about some innovation in the consumer products, but what we’re hearing now is innovations in pretty high-tech products, complex product, technological products, and that is an interesting context to understand the process of development of these innovations.

So based on the data from GE and looking at other examples of frugal innovations, we attempted to develop a conceptual framework. So, what we realized when we looked at the strategy of GE and many similar companies and also domestic organizations like Godrej, for example, we found that the strategy actually was evolved in four key distinct stages. And each stage is a set of factor contributed to this strategy or they were drivers, for example, or antecedent to that particular stage. So, we highlighted … So, let me use this diagram to present this model. So, what we identified — what we realized or what we found through data that there are four distinct stages in the process of evolution of frugal and the reverse-based innovation strategy. So typically, most companies, when they start off, they start off with a de-featuring-based approach or strategy. And then that is — they realized that the strategies were — so let me very briefly mention what is de-featuring. So when we say defeaturing; de-featuring is you have an established product which is primarily developed for the developed world, rich consumers. And you will — when you attempt to reduce cost, you realize or you, you attempt to bring down the features. So, reduce functionalities and feature gradually one by one. And in that process, you attempt to reduce the cost.

So, you assume that there’s a linear relationship between, for example, the number of features you can offer and the price you can charge for that product. So, typical approach you would find that, you know, when MNCs offer their; their existing products in the developed, developing countries to low-income consumer or even middle-income consumer, they replace metal with plastic, they replace automatic control with the manual control. Technology sometimes, you know, they use different alternatives like instead of, you know, LED, they may go for LCD or they may go for a smaller screen so they — anything which they think is not needed by a developing world consumer, they attempt to remove it. This is a de-featuring approach. And even GE, you know, as per our data, we realized that GE tried this when they were trying to reduce the cost of health care and develop affordable healthcare devices. In first few products, they used this or adopted this strategy. However, they realized that this strategy is not very productive because two reasons. First, you can only achieve limited price reduction with this approach. You can’t have dramatic price reduction, you know. So, for example, in the baby warmer, they could achieve the price reduction of 65% with this approach. But beyond that, even when you go for 65% price reduction, the products are still not affordable by the masses. You want real big price reduction. And secondly, when you reduce these features and functionality, invariably, the product is no more attractive to consumers, you know. So, consumer, even BOP consumer. And I remember Professor Sheth talked about this. They also have aspirational needs — they also aspire to … in this globalized world, even low income and lower-middle consumer, you know, they prefer to buy products which are made available to affluent consumer, rich consumers.

So, then product is no more attractive or preferred option to BOP consumers or low-income consumer if you go for de-featuring or functionality reduction. Therefore, GE realized that, you know, this is not the approach they can continue using and this will not lead or give them desired outcome. And therefore, they changed the approach and they used the second or they moved to the second stage, which is a clean slate approach. So, clean slate approach. You know, we say that when you, for example, forget all the existing alternatives which exist, you know, you have no baggage, you know. So, for example, the starting point there is what consumer actually needs, you know, you’re not looking at the existing solution, existing products, which are available by the organizations currently attempting to serve consumers. You are looking at consumer needs. And without any baggage, you attempt to develop newer solution. And invariably, you know, in that process, you think about out-of-the-box solutions and then developing some very lateral or newer approaches for new — for product development. So, they did that in the second stage.

And then after that, invariably, you’re in the emerging market or developing countries with a very large BOP population, and affordability becomes real big issue. So out of the 4A framework, affordability is number one. So, you — seemingly priority for most companies and consumers. So, dramatic reduction in cost is important and, therefore, you embark on this journey to develop frugal innovation, reduce costs, without compromising product performance or without reducing the quality in most cases. So, this is a third stage. And once you achieve very significant success and hence you develop an ecosystem like GE, for example, developed 25 launches, like 25 different products and the entire organizational DNA is changed or a new DNA, for example, possibly is created. And when while you have that, then you proceed to the last stage.

And here, what you attempt to do, the innovations which you have developed for the developing world, you attempt to take them to the developed world, and therefore, that’s the last stage, that’s the — and that is a reverse innovation-based strategy. Now, let me — in another — I have three more minutes. So let me very quickly identify the drivers, for example, of the strategy at each stage. So, when we looked at the data, we realized that why companies, typically, multinationals start with de-featuring, and we use this concept of institutional dualism. So, it’s about managerial mindset. For example, most multinational companies, managers, executive, they typically start looking at affluent consumer in the developing world. And their mindset is, therefore, you know, what rich consumer in Delhi and Mumbai needs, they attempt to develop that. And when they start looking at rural consumer, they’re conditioned with that learning or, you know, they’re driven by that learning. However, we know that rich urban consumer and the low-income rural consumer is different. So, this dualism, you know, you need different approach, you need different protocols for developing products. That is not so easy for these executives.

Similarly, big companies like even Unilever or P&G, or many others, they — the managers, they have this pressure from the global headquarters. They need to, you know, they need to stick to the standard protocols of the headquarters at the same time, they need to respond to the local environment. So, this brings in another dualism, you know. You are trying to operate and meet or satisfy the need of two very different constituencies, local environment and the parent or the global headquarter, for example. So that’s — that actually led to de-featuring based approach as a preferred strategy in the stage one.

So let me just quickly talk about what they did. So, in the second stage, for example, they created new P&L structure. The responsibility was completely shifted to the local operation; like local country head was given full responsibility for driving the innovation and the product development. India as a country for the first time, I was told GE started treating India as a …, India as a country, as a separate P&L, which was never before. So, you said in India, for India strategy, this is what they had embarked upon. And unlearning, this is very important because when you are clean slate means you forget the existing solution, you know, and you have flexibility to not to use anything from the parent, whatever you want, you can use from parents, to technological resources, but if you don’t want, you don’t — you’re free to do that. The third stage is when you are trying to develop this frugal innovation. Here, value discovery means the need recognition. You know, often in developed world, we say that consumers have need and then you fill it up or plug those need gaps. However, in developing world, we have seen — you need to create like Aravind Eye Hospital, for example, they struggled to acquire patients, even when they were giving free cataract surgeries. Because in rural India, there was — like nobody was willing to go for cataract, even surgery even when it is freely offered.

So, you need, so you create that need or need recognition needs to be there. The co-creation is very important. Developing the solution by involving community and cultural aspect, which Professor Sheth talked about, they’re also important. So, this is a partnership with the local organizations, like Aravind partners with, you know, the Lions Club, several other social sector, and they have all partnership with the Aurolab. So, the partnerships are very important. So, all these factors led to the frugal innovation. And the last stage is, of course, the reverse innovation, where we have seen that when MAC 400 was sold in the developed world they added several features because in those environments, you need those features, like wireless connectivity for keeping medical records or adding new or several other newer features. So, they did feature addition. At the same time, your global architect, product architect remain same, which gives you scale advantage. So, the big advantage here is that when you sell it out, you know, to the developed world you have, you know, additional revenue stream, which funds — which can fund several other frugal innovations eventually. So, with this, I would stop here. So, this is what we achieved through this framework. Our attempt was to understand how exactly these frugal innovations are developed, and how they are eventually made reverse innovation. Thanks. Thanks a lot to Professor Sheth and Dr. Raj, for inviting me to be part of this panel.

Thank you, Anand. Great, great presentation.

Thank you.

Author:

Anand Kumar Jaiswal

Professor of Marketing, IIM Ahmedabad

https://www.iima.ac.in/web/faculty/faculty-profiles/anand-kumar-jaiswal