1. Frugal innovation & emerging markets

2. Emerging markets Emerging markets as a source of product & service
innovation
& new business
models?
Economies characterised by rapid growth & industrialisation
Brazil; Russia; India; China (BRICs) largest by GDP
Mexico, Indonesia, Turkey

3. This session
What do we mean by “frugal innovation” & what are its main features?
What is the difference between frugal innovation & reverse innovation?
Does frugal innovation present an opportunity or threat for Western companies?
What do we mean by marketing to “the bottom of the pyramid”: is it an opportunity or mirage?

4. The Economist interview with Prof Vijay Govindarajan

5. Discussion 1. What is frugal innovation?
______________________________________________
2. Prof Govindarajan also talks about “reverse innovation”. What is it?
_______________________________________________
3. Do you think that they matter? Why? Who to?

6. What are the main features of frugal innovation?

7. Context: the growing interest in “frugal innovation”
Immelt, Govindarajan & Trimble (2009) “How GE is disrupting itself”
The Economist (17th April 2010) – special report on innovation in emerging markets
Wagstyl (2011) – Financial Times article on innovation in emerging markets
CK Prahalad – “bottom of the pyramid”
Aneel Karnani (and others) – BOP as a mirage

8. Defining reverse & frugal innovation
Ambiguity in the use of these terms in the literature. For clarity, these definitions will be used:
Frugal innovation will be used to describe innovations developed or adopted for the needs of emerging market economies
Reverse innovation describes innovations originally developed and/or adopted in emerging market economies which later become prominent in mature world markets
GE’s lower cost ECG machine is an often cited example of reverse innovation

9. Examples of frugal innovation from India
Process innovation: Narayana Hrudayalaya Group offers low cost, high volume, low margin heart surgery costing one-tenth of same procedure in the U.S.
Product innovation:
$50 Aakash tablet computer
Business model innovation: Bharti Airtel offers the cheapest mobile talk time in the world through low margin, high volume business model combined with cost cutting through extreme outsourcing strategy

10. Characteristic of frugal innovation
Distinctive in its means and ends
Taking the needs of “poor” consumers in emerging economies as a starting point & working backwards
Responding to limited resources, turning constraint into advantage
Designing products to meet those needs using low cost technology, minimising resources or leveraging them in different ways
Result in dramatically lower cost products and services; may outperform alternative
Rethinking production processes & value chain
Developing new business models
May also have a social mission to fulfil

11. A case study of frugal innovation? Tata Nano – the people’s car

12. Innovation is about more than technology: the “4 Ps” of innovation space (Tidd and Bessant, 2009)
PARADIGM
(mental model/ business model)
INNOVATION
PRODUCT/SERVICE
(manufacturing, back office, organisational)
PROCESS
Incremental – doing what we do better
new to the enterprise
Radical – new to the world
POSITION

13. Innovation in Position
Innovation in the target for the product or service offering & the story that the business tells about it
The Tata Nano has been targeted at the growing Indian middle class & positioned as a substitute for scooters & small motorbikes rather than competing with small cars

14. “Build innovative products for the masses”
“The aim is to create products
for that larger segment –
good & robust products
that we are able to produce
innovatively & get to the
marketplace at lower costs”
(Ratan Tata, Chairman, Tata Group)

15. Frugal innovation takes the needs of emerging economies as the starting point for product development

16. Target market Growing Indian middle class
Aim was to provide a substitute for scooters & small motorbikes rather than competing with small cars
Price of Rs. 100,000 (around $2000)

17. Designing products to meet those needs using low cost technology…..

18. Focus on extreme low cost led to rethinking production processes & supply chain
Supply chain: the various actors & processes that are involved in producing goods (and services), starting with raw materials and ending with the delivered product (also known as industry value chain)
Supply chain challenged to meet cost targets
Suppliers included Western component firms – e.g. Bosch

19. Discussion Q: What you think is innovative about the Tata Nano?
1. ____________________________________________
____________________________________________
2. ____________________________________________
3. ____________________________________________

20. “Being the cheapest doesn't necessarily make it the worst and for £1700 the Tata Nano is unbelievable value…. The Nano has been conceived to create a nation of drivers. In India, the transport of choice for the masses is the motorcycle, but Tata Motors think that 450,000 Nanos can be sold every year for around double the cost of a 100 or 150cc bike. The Nano makes it possible for four to travel together and in greater safety”.
“Cheap and undeniably cheerful. Unbelievable value, if only you could buy one in the UK”
“Creative cost-saving is evident throughout the Nano. Flat side glass, a single wiper and no tailgate, three wheelnuts instead of four and a single door lock all help to keep the price low. But although the entry-level model is spartan, the CX and LX models have air-con. Incredibly for such a cheap car, a huge range of accessories and customisation options are offered, from decal sets to bodykits and dashboard trims”.

21. Chairman Tata Seeks to Salvage World’s Cheapest Nano Car (Bloomberg News, 22nd August 2012)
“First introduced in 2009, demand fell to a record low of 509 units in November 2010 after the cars caught fire. Sales have since lagged behind pricier models even after the company said the fires were isolated incidents”.
“Tata Motors sold 5,485 Nanos in July (2012), an increase of 68 percent over the same period a year earlier though still a fraction of the 20,000 units a month the dedicated factory at Sanand in the western Indian state of Gujarat is capable of making”.
“Tata will have to refresh the Nano with new features as competitors such as Maruti and Hyundai are also stepping up their efforts” (Industry analyst)
“Tata said that the company is working on the vehicle’s upgrades to undo the “stigma” attached to the hatchback. The company wasn’t “adequately ready” with advertising campaigns and a dealer network when it started sales of the car in 2009, he told reporters then”.

22. Discussion
What problems has the Tata Nano faced? Why? ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

23. Tata reveals European version of its super-cheap city car (2010)
                                                                                                                                                
Tata has revealed a European version of its Nano city car at the Geneva motor show. The car, to be called the Tata Nano Europa, is coming to Europe in 2011 in both left-hand drive and right-hand drive, with a target price of €5000 (£4500).
The Tata Nano Europa has been significantly modified for its introduction to the European market. Externally, the Tata Nano Europa gets bigger bumpers front and rear to comply with European crash regulations, plus LED foglamps and visibly smarter trim (including colour-coded door handles and chrome-effect strips), although there is still no direct access to the car's boot. Luggage has to be loaded via the rear doors. Inside there is leather trim, and high-gloss plastic on the dash.
The Tata Nano Europa gets wider tracks front and rear, and ditches the Indian-market two-cylinder motor in favour of a Euro5-compliant three-cylinder engine, expected to produce just 98g/km of CO2 and return 67mpg.
Tata reveals European version of its super-cheap city car (2010)

24. Discussion
Was Tata right to develop a Nano Euro for the European market? Why? ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

25. Discussion
Do you think that Western firms should treat frugal innovation as a threat or an opportunity? Why? ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

26. Does frugal innovation pose a threat to Western firms & economies?
Tata announces aims to launch Nano Euro in 2013
Increased cost of “Europeanising” the Nano with improved crash test safety & added features it is likely to cost from £ £5000 in the UK
“There’s one certainty: it will change the way car prices are viewed when it hits British showrooms – for substantially less than a Hyundai i10 and around half the price of a Smart” (Autocar)
October 2012: Tata announces plan to launch the Nano in the United States
Tata presents “Pixel” at
2011 Geneva motor show

27. What can the West learn from emerging markets?
A number of factors align to create the conditions for high–impact frugal innovation in India:
A culture of ‘jugaad,’ or creative improvisation, means the unusual skillset and mindset required for frugal innovation are abundant.
2. A huge market with a growing, aspirational middle class creates the perfect conditions for frugal innovation.
3. Not only is the Indian consumer base growing, but it is also extremely price–sensitive & willing to experiment, sustaining demand for frugal innovation.
4. Extreme conditions & major gaps in service provision stimulate demand for low-cost solutions in health, education and energy.

28. Reverse innovation

29. Defining reverse & frugal innovation
Ambiguity in the use of these terms in the literature. For clarity, these definitions will be used:
Frugal innovation used to describe innovations developed or adopted for the needs of emerging market economies
Reverse innovation describes innovations originally developed and/or adopted in emerging market economies which later become prominent in mature world markets
GE’s lower cost ECG machine is an often cited example of reverse innovation

30. Reverse innovation as an opportunity for Western MNCs (Immelt et al, 2009)
Immelt et al (2009) describe the reverse innovation approach being adopted by GE
Develop products in India & China targeting the needs of “poor” consumers and distribute them globally
Unlock opportunities in emerging markets
Target new market segments in Western economies (overshot customers & non consumers)

31. Reverse innovation often defined in contrast to the “glocalisation” approach used by many MNCs
Develop products for Western markets
Adapt those products for local variations in consumer preferences in global markets
Focus on “skimming the top” of emerging markets

32. A case study of reverse innovation: GE’s portable ultrasound machine
(based on Immelt, Govindarajan & Trimble (2009) “How GE is disrupting itself”)

33. GE Corporation
GE: amongst the largest U.S. companies ($143.7 bn revenues in 2011)
Diversified industrial companies with products ranging from aircraft engines to domestic appliances
GE Healthcare: $18.1 bn revenues from medical imaging & information technologies, medical diagnostics, patient monitoring systems

34. Ultrasound
An ultrasound scan is a test that involves taking pictures of the body using sound waves
Ultrasound can be used to look at all soft tissue structures and blood vessels
The scan is carried out by a radiologist or ultrasonographer and the images are recorded and interpreted in order to make a diagnosis
Ultrasound is used in the diagnosis of many different conditions (cardiology; obstetrics; general radiology)

35. 1990s: GE served Chinese market with ultrasound machines developed in the U.S. & Japan
2002: Conventional ultrasound machine cost $100,000+
Typical customers: sophisticated hospital imaging centres
Typical uses: cardiology; obstetrics; general radiology
Expensive bulky devices sold poorly in China

36. Innovation for the emerging Chinese market
2002: the new ultrasound launched at a price of $30,000-$40,000
Typical customers:
China: rural clinics
U.S.: ambulance squads & hospital emergency rooms
Typical uses
China: identifying enlarged livers & gallstones
U.S.: identifying ectopic pregnancies; imaging of accident victims; imaging during operations
2002: local team in GE China leveraged GE’s global resources to develop a cheap, portable ultrasound machine

37. A new global market
2007: a dramatically cheaper model launched priced at $15,000 (a $5,000 model is now available) - sales in China increase sharply
Dramatic increase in GE global revenues from portable ultrasound devices
2002 = $4m
2008 = $278m
2009 prices of ultrasound devices
Portable device = $15,000-$100,000
Conventional ultrasound = $100,000-$350,000
Low cost ultrasound devices available to previous non-consumers in China & U.S.

38. Organisational challenges of reverse innovation
Under glocalisation model, responsibility of a director of a GE operation in an emerging market focused on sale, distribution & service of GE’s global products…. not new product development
Organisational barriers to reverse innovation:
Getting attention from GE corporate headquarters
Overcoming fears of weakening GE brand & cannibalising sales of existing (higher priced) products
Addressing scepticism about diverting R&D resource away from the needs of most sophisticated customers in favour of simple, cheaper products
GE has established Local Growth Teams(LGTs)
Shift responsibility for strategy development to emerging markets
Give LGTs responsibility for identifying new product opportunities
Customise objectives, targets & metrics for emerging markets
Importance of top management support to organisational change

39. Marketing to “the bottom of the pyramid”: opportunity or mirage?

40. Marketing to “the bottom of the pyramid” (BOP) (Prahalad & Hammond, 2002)
There is much untapped purchasing power at the bottom of the pyramid (“BOP”) & private companies can make significant profits by selling to the poor
By selling to the poor, private companies can bring prosperity to the poor & help eradicate poverty
Multinational companies (MNCs) should play the leading role in this process of selling to the poor
“BOP markets are hot-beds of commercial and technological experimentation” (p.53)

41. The “mirage” of marketing to the bottom of the pyramid (Karnani, 2007)
BOP proposition is flawed & inconsistent with the evidence
Profit opportunities of marketing to the truly poor are modest
Best opportunities exist where firms reduce price by changing the price-quality trade-off in a manner acceptable to the poor
Best way firms can help alleviate poverty is by upgrading the skills & productivity of the poor & create more employment opportunities

42. Discussion
1. Can you think of examples of frugal or reverse innovations from other emerging economies? ___________________________________________________________________________________________________________________________________________________________________________________ 2. Do you think it’s simply a matter of time before Brazil/ Russia also experience frugal/reverse innovation? _______________________________________________________________________________________________________________________________________

43. Summary
Introduced the notion of “frugal innovation” directed at the needs of emerging economies
Discussed the difference between frugal innovation & reverse innovation
Highlighted how GE is seeking to develop the reverse innovation as a way of accessing emerging markets & create new market segments in established (Western) markets
(Briefly) introduced the (related) debate about marketing to “the bottom of the pyramid”