Adopting Open Innovation to Stimulate Frugal Innovation and Reverse Innovation
Mokter Hossain Researcher Institute of Strategy Department of Industrial Engineering and Management Aalto University, Espoo, Finland firstname.lastname@example.org
Electronic copy available at: http://ssrn.com/abstract=2197782
Abstract Frugal innovation and reverse innovation have very recently emerged as interesting concepts. Frugal innovation is based on cost constraints to serve low-income customers in developing countries. When frugal innovation comes to developed countries and become commercially successful it is considered as reverse innovation. Recently, many companies, such as GE, Siemens, Procter & Gamble, etc. have engaged heavily in frugal innovation and in reverse innovation. Open innovation, on the other hand, has not been considered in the context of lowincome customers in developing countries yet. We argue that using open innovation concept in developing countries may accelerate the pace of frugal innovation and reverse innovation. Consequently, quality product with low-income will be widely available not only in developing countries but also in developed countries. Hence, western companies need to change their long hold business strategies and reshape their business models. This study aims to illustrate why companies from rich countries need to be aware of and take step to become successful adopting frugal innovation and reverse innovation. Introduction Innovation paradigm has experienced a tremendous change in last one decade. Several new concepts related with innovation have emerged in recent times. One of those concepts is open innovation. Chesbrough (2003) coined this concept and defines it as “a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology”. Open innovation has received high interest from both industries and research institutes. Just recently, frugal innovation and reverse innovation have been used significantly in various industries such as medical instruments, electronics, information and communication technology, and agriculture, etc. to meet the needs of low-income customers. The fundamental edge of these two concepts is based on low-cost consideration. Frugal innovations are not only successful in low-income countries but also these innovations are arriving in high-income countries that are considered as reverse innovation. Open innovation, on the other hand, has so far been considered in the context of rich countries particularly in high-tech industries with a few exceptions of several highly growing countries (Hossain, 2013). Moreover, open innovation has shown a new way of dealing with technologies. Can this concept also be used to stimulate frugal innovation and finally to turn frugal innovation into reverse innovation? So far, despite being these concepts important to explore, to the best of the author’s knowledge, no study have been elucidated them together. This study is an attempt to explore this pressing question. Hence, it will provide insight for managers to establish their business models and business strategies.
Electronic copy available at: http://ssrn.com/abstract=2197782
To reduce costly research and development (R&D) projects and to conduct risky innovation research at low costs, open innovation can be used for low-cost product development in emerging markets. Open innovation has been cultivated through online platforms for many western companies to find ideas from innovative people in emerging markets. It brings innovation from new locations at a very low cost. To illustrate the importance of open innovation to drive frugal innovations and reverse innovations, each concept is briefly discussed in the following sections. It expounds how open innovation can be used more rigorously to stimulate frugal innovation and reverse innovation. Implication of this study is drawn in the final section. Movements of companies for frugal innovation Companies confront various challenges to serve the increasing number of low-income consumers who clamor for affordable solution that is sufficient enough to meet their needs. Frugal innovation is an innovation with low-cost, simple usability, efficient and aims at large lowincome customers (Soman et al., 2012). In Hindi, a word named Jugaad is also used to express frugal innovation (See, Radjou et al., 2012a). The traditional business culture is based on highly affordable customers and it neglects the idea to serve more with less. This culture is losing its lustre. Orientation towards frugal innovation has become an important agenda for many western companies. Frugal innovation is an innovation which is mainly based on extreme resource constraints to meet the needs of lowincome customers who otherwise remain un-served. Renault-Nissan led by Carlos Ghosn, for example, has taken very active steps for frugal innovation to innovate faster and cheaper aiming at unmet customers. In the same vein, large companies such as GE, Procter & Gamble, PepsiCo, and Siemens are also heavily involved with frugal innovation for their sustainable growth (Radjou et al., 2012b). These companies are changing their business strategies and restructuring their business models. For long-run success, companies need to develop affordable products with cost-constraints and achieve sustainable growth. German giant Siemens is heavily involving R&D teams of India and China for affordable solutions to meet low-income customers. Its SMART (simple, maintenance-friendly, affordable, reliable, and timely-to-market) product portfolio aims to innovate devices at a cost of 40-60% cheaper than the cost of usual available devices in the market. Siemens’ medical device named Fetal Heart Monitor (FHM) is developed with cheap microphone technology instead of costly ultrasound technology. FHM provides affordable health care initially in developing countries and subsequently in developed countries. Siemens SMART product portfolio claims to have over 160 products and product families for emerging markets (Siemens, 2011). Renault’s affordable vehicles are sold for about $10,000. It has low-price pickup and van in the market, too. These vehicles are sold under the Dacia brand. However, Renaults has not exposed its idea of low-cost vehicles to its customers. Rather, it has positioned these vehicles as more value at less cost with featuring as stylish, comfortable, dependable and affordable (Radjou et al., 2012b). Gérard
Detourbet, a senior executive of Renault was sent from Paris to India to lead the development of a global small car. Price of the Renault’s small car is expected to be around $5,200 and that will initially be commercialized in India and then in other developing countries, such as Brazil, Indonesia, South Africa, and Asia, etc. To stay in leading positions in emerging markets over the long run, Siemens decentralized decision-making locus and greater entrepreneurial authority towards emerging markets. Emerging markets is ideal ground for western companies for trial and error of frugal innovation activities. Countries such as India, China, and Bangladesh along with other Asian and African countries are good ground for frugal innovation practices and for its market. Designing affordable products is not enough rather it is just the beginning. How to sell these innovative products into the target markets is an important issue to consider. Salespeople can be specially engaged for frugal innovative products. Procter & Gamble, for example, has two separate sale groups for low-income and high-income segments. Unilever has launched a lofty plan to double its revenue by 2020 with significantly reducing environmental adverse impact. Much of this ambitious plan is based on frugal innovation. Movements of companies for reverse innovation Reverse innovation is an aftermath consequence of frugal innovation. Frugal innovation aims to serve low-income customers in developing countries while reverse innovation turns frugal innovations into reverse innovation bringing them into the developed countries sometime with modified offerings. The concept of reverse innovation came into academic radar in 2009 since the seminal work of Immelt et al. (2009) in Harvard Business Review. They believe that reverse innovation is not optional for western companies rather it is oxygen. Trimble (2012) puts reverse innovation as the following way: “A reverse innovation is any innovation that is adopted first in the developing world. To be clear: What makes an innovation a reverse innovation has nothing to do with where the innovators are, and it has nothing to do with where the companies are. It has only to do with where the customers are”. Govindarajan (2009) believes that taking innovations originally manned for low-income countries, scaling up them and bring them in high-income countries is a phenomenon considered as reverse innovation. Reverse innovation emphasis the low-price point innovation originating from developing countries and create new market demand for rich countries (Govindarajan and Trimble, 2012a). It requires major changes in organizational culture: discarding old organizational structure to create new one, reorientation of product development and innovation method, and arraying sales force with new settings, etc (Govindarajan, 2012). When frugal innovations turn to rich countries, sometime with modification of offerings, these are considered as reverse innovations. Only a few companies have become successful in reverse innovation as it is challenging for many companies to turn an innovation into uphill (Govindarajan, 2012). Avoiding reverse innovation, on the other hand, results in hefty cost for western companies (Govindarajan & Trimble, 2012b). Haier, a Chinese company, has
introduced washing machine called Mini Magical Child initially for local market as an alternative of large, expensive washing machines. The product becomes successful not only in developing countries but also in developed countries (Hang et al., 2010). Another Chinese company is making effort to design an iPad like device at a cost of $80 and that is around 20% of current cost of iPad (Hang et al., 2010). A small, low-cost, energy-efficient microwave of Galanz, becomes a commercial success globally and made Galanz as one of the largest microwave manufacturers in the world (Ge & Ding, 2008). The trend of reverse innovation is becoming more important in pharmaceutical industry as a cost of R&D is very high (Diller, 2012). Many pharmaceutical products from developing countries are increasingly becoming commercial success in developed countries. Surprisingly, microfinance enterprises from developing countries, such as Grameen Bank, Kiva, Samasource, etc are already proven to be successful in developed countries (The Guardian, 2012). Some companies are forced to embrace reverse innovation for defensive reasons. If GE, for example, does not come up with reverse innovation, competitors from developing countries, such as Haier, Mindray, Suzlon, etc. will take over market (Immelt et al. 2009). These examples show that reverse innovation is becoming an integral part of many western companies and western customers. Adopting open innovation to stimulate frugal innovation and turn it into reverse innovation To boost frugal innovation in emerging markets and bring them into rich countries as reverse innovation, open innovation may play a crucial role. Considering open innovation as radar to catch frugal innovation and subsequently bring it into western countries seems pivotal for western companies. It will benefit western countries to satisfy their customers with low-cost quality product. On the other hand, open innovation may bring partnership among various sources in developing countries so that new products with low-cost can be offered towards the customers who otherwise remain unserved. Customers in western countries will get more affordable products. More global competition to innovate will emerge, too. Openness of innovation provides easier flow of knowledge, risk sharing of R&D cost, more competition, cheaper products, etc. among many others. Open innovation can bring frugal innovation from a distant location to global presence. Adoption of open innovation in emerging markets especially in low-cost innovation is not prevalent. Recent years open innovation intermediaries such as InnoCentive, NineSigma, IdeaConnection, etc have started playing a pivotal role for low-cost innovation (Hossain, 2012). Open innovation in general and open innovation intermediaries in particular are limitedly adopted for products targeting low-income customers in developing countries (Hossain, 2013). Lilly, for instance, developed web-based open innovation platform called InnoCentive to find solution from across the world. Similarly, Procter & Gamble has established an initiative called Connect + Develop, where anyone is invited to submit ideas and business ideas and selected ideas are rewarded. Pfizer has recently launched a similar platform called ‘Pfizer Incubator’.
This is how large western companies find innovation from emerging market from unknown individuals of distant locations without physical presence of their innovation activities. Open innovation intermediary platforms give people of developing countries to contribute in innovation. It decreases R&D costs through sharing risk with externals partners. However, these platform not yet known to many people especially in emerging markets, who have ideas, talents and can solve many pressing challenges. Product developed in low-income countries can be as high quality as products developed in developing countries with significant lower cost. In a R&D initiative Renault-Nissan, a task was given to three teams in Japan, France, and India. Each team came up with a solution of equal quality but cost of solution from Indian team was one-fifth of the cost of other two (Radjou et al., 2012). There is a growing evidence of developing countries for innovation with low-cost. Products developed in that process in developing countries may then meet the quality requirements of at least some customers in developed countries, and when introduced into markets in developed countries (a practice considered as reverse innovation) they may thus disrupt these markets (e.g., GE’s $800 portable ECG machine). Implications Challenges are increasingly alarming and failure in foreign land results in failure in home country of western companies (Trimble, 2012). However, companies from developing countries are still not so successful to develop products that may appeal to the western world. One of the fundamental reasons for this is that they do not have adequate wherewithal. Moreover, in large markets such as China, India, Indonesia, Bangladesh, companies battle locally and have limited intention to focus on global market. However, scenario is changing - some are visible and others may not catch our attention. The companies from developing countries steadily accrue innovation capabilities that are sufficient enough to surpass the west companies in many extents (Sarkar, 2011). Talents are sprang up everywhere of the world. Those talents usually lack proper academic knowledge but have tendency to learn something quickly once they are motivated. Opportunities to test products and service developed with low cost can help companies to gain experience to deal with emerging markets and to groom for future challenges. Western companies need to manage frugal innovation to meet the increasing demand in developing countries and consequently adopt strategies for reverse innovation so that western market can be satisfied with low-cost and adequate level of quality products. Firms need to keep in mind that success may not come immediately as Teece (2010) rightly says that in almost all cases, a new business model undergoes trial and error before it becomes a success or a futile. Companies do not ponder much on business model of an innovation as much as they do for innovation. Frugal innovation misses above both from companies - innovation itself which is largely ignored until now and business model to generate a profitable revenue stream from it. Companies need to have new and unique product with new distribution systems and that result in new business strategies with fresh business models.
It is necessary to consider open innovation in low income countries to turn frugal innovation into reverse innovation. Chaudhuri et al (2009) emphasizes that reluctance of western companies to focus on developing countries may turn out to be an insurmountable barrier for future entrants as early movers have advantages. Companies can learn from other companies by observing various strategies they have taken to become successful in frugal innovation. Radjou et al. (2012) raise three fundamental factors for companies to consider: (1) difficulty of R&D teams to create good enough solution, (2) separate brands for less expensive offerings, (3) incentive to salespeople to sell frugal products. Western managers are reluctant to consider frugal innovation as part of their business strategies and top management also not well aware of this growing phenomenon. Academics may, with extensive study, find necessary models and theory to understand frugal innovations and right paths to bring those innovations into rich countries as reverse innovation. So far only a few studies are conducted on frugal innovation and reverse innovation separately. These two concepts remain separate from each other in the academic literature. Future studies should consider both these phenomena simultaneously to see how one affects another. Studies in academic education on frugal and reverse innovation are still limited within a few institutes. To groom future managers, business schools need to consider developing countries and innovation culture therein. Western companies need to make internal team to explore innovation arena in low-income countries or innovation that can meet the needs of low-income customers. Employees of field level especially who are dealing with products for low-income customers must be heard by top management. Western companies may consider reducing their product features to reduce the cost of products significantly down so that these become affordable for low-income countries with meeting their basic needs. Future research may focus on why firms fail to transform frugal innovation into reverse innovation and how to escape enthronements especially by companies of developing countries. Western companies need to observe more closely the internal movement of business in developing countries, too. A complete analysis of frugal innovation that are happening worldwide needs to be conducted to see the overall picture of this phenomenon. Moreover, how open innovation can stimulate frugal innovation and reverse innovation is worthy to explore. This study elucidates an overall spectrum of frugal innovation and reverse innovation. It emphasizes the necessity of adopting open innovation as radar to benefits through them. References
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