FRUGALITY AND GLOBAL TECHNOLOGY DEVELOPMENT

Course: Technology ManagementTuesday, 13 November 2012

Frugal innovation – a brief introduction

• Simple, plain and costing little• Achieving more with fewer resource

“Frugal”

Frugal innovationAbility to innovate

Cost-effectively

Under severe resource constraints

What it involves?Redesign products

Rethinking entire production & biz model

• New ways to solve problems by combining technology with transformational entrepreneurship (Ernst & Young, 2011)

Innovation

More companies looking to tap into the next billions customers

• Higher growth rates • Rising young population• Expanding middle class #1 innovation driver

among MNEs in emerging market (Andrea Vogel, 2012)

• Major infrastructure projects • Changing trade patterns

Why tap into emerging market?

2012 20300

102030405060

1.8 4.9

21

56

# of people in Bn Demand (in US$ Tn)

The growing of global middle-class1

Vast majority lives in Asia and other Ems With daily spending

of US$ 10-100

Source: Ernst & Young Innovating for the next three billion

As such, the competition is heating up…

• xx2007 2012

34.3% 31.1%

25.9% 24.1%

13.5% 11.2%9.5% 14.2%

2.00% 2.9%

Shares of global R&D’s spending1USA EU Japan China India

China India Russia Brazil

112 94 68 66

1652

465115 121

# of patents registered in USA by countries of origin1

2000 201011.5% 17.1%

• More and more local companies innovate other than rely on low-cost to attract customers

• Emerging countries investing higher proportions of global R&D EM innovation hubs & local engineering

• Local EMNEs apply innovative technique to manufacture a new frugal products that could diffuse to other market

Reasons

The changing global R&D landscape is inaugurating a new classof competitive products designed, engineered and priced for the

low- to mid-range market segments “Frugal products”Source: Roland Berger

Frugal products have shown promising potentials

• Frugal product is the growing profit center in Emerging markets

• CAGR 11% compared to 6% for high-end products

• Surprising facts: Good quality, limited function products can create profitable

new market niche in advanced economies

Often without cannibalizing sales of higher priced, feature-laden products

• Entry level product innovations globally grow at 7% • In China and India reached 10% • Siemens entry-level product innovations resembles 14% of

their total sales

Frugal products some promising

potentials

Its natural for frugal innovations to emerge in poor countries

• Culture of jugaad (creative improvisation) required for frugal innovation is abundant

• Huge market with growing & aspirational middle class

• Customers are price sensitive + willing to experiment sustain demand of frugal innovation

• Extreme conditions and major gaps in service (i.e. health sector) stimulate demand

• New sources of social finances lowering cost of investing in frugal innovations

• Strength in service and biz model innovation

• Increasingly inclusive science and innovation policy

Case of India:

But recently, frugal products have became increasingly relevant in rich countries

• Lacklustre growth• Deleveraging in developed economies

Slowing down of economy

• Climate, energy, water and other resources• Frugal model of production & consumption

Environmental constraints

• New approaches of health and social care to address aging societies

Aging population

• New technology platforms drastically reduce cost of some forms of innovation

• Create huge opportunity for frugal innovators, esp. in services

Cost reduction

What are the examples of frugal products? (1)

Chip X Gold 101• Chip enabling ultra-low cost

mobile phone in EMs• Cost reduction in material and

phone design efforts

Siemens X-Ray Apparatus• Siemens entered Ems with cheap X-ray

machines • Customized for local requirements (heat,

humidity and power blackout) • Attempt to create profit through higher

volume of sales (~10x of mid-price segment)

At emerging countries

At developed countries

What are the examples of frugal products? (2)

Maggi Noodles Danimal Yoghurt

Solar radio Anapurna Salt

Mismatching offer – opportunity to cater the underserved market

Source: Ernst and Young survey, 2012

EMNEs are arriving in the west

Source: Roland Berger’s R&D Think Act Study 2012

Initiation Basic development Innovation

Start up at domestic market

National champion

Expanding into emerging market

Conquering western market

AVHAN Tech

SMEW

DELTA

CG TATA

ZTE

QOROS

HUAWEI

Local firms seems to have upper hand in generating frugal innovations

Source: Ernst and Young survey, 2012

Which multinationals are best placed for generating frugal innovation?

• Reasons often cited for EMNEs advantages: Fast response to market Agile Exposure to constraints make the company tends to be creative in problem

solving Strong local relationship

Five essentials requirement for frugal innovation

Source: Roland Berger’s R&D Think Act Study 2012

Requirements for successful frugal innovations

Mindset

Local resources

Local decision making (LGT)

Local financial responsibilities

Access to global corporate resources

Rethinking innovation strategies through leveraging frugality

Source: Roland Berger’s R&D Think Act Study 2012

Open mindset to understand country’s culture and behavior pattern is a must

Example: Heinz

Applicability

• Does it complement local’s culture?

Availability

• Do we have appropriate sales channels?

Affordability

• How to deliver products at attractive sales point

Affinity

• Branding

• Extend to R&D efforts• Leverage scientists from

emerging markets as they offer different Outlook Cultural knowledge Intuitive feel of local

sensibility and pattern

• Frugal engineering vs high-profile R&D efforts often Faster to market More financially

rewarding

What are the strategic success factor in developing technology leveraging frugality?

21.5K MNCs do biz in emerging countries Prominent MNCs established R&D hubs in

emerging markets for: Explore next-generation biz model &

org structure Explore R&D products for poor

countries

• Design economical + sustainable products + methods for global roll out

• 90% cost reductions by new designs & better financial performance (Jaruzelski & Dehoff, 2008)

Motivations

Market's access Access to tech know-how

Cost reduction

3.7 3.42.4

Main drivers to set up corporate R&D1

Degree of importance

Low

High • Local R&D need to align with Sales & Marketing New way of mgmt

• Access to market & tech expertise are critical to decide where to base R&D centers

Source: Roland Berger’s R&D Think Act Study 2012

Mastering global innovation capability

Source: Ernst and Young,2012

Customer insights is a key to develop “correct” technology

Locally: • Local resource to conduct in-

depth research

• Engage customers & treat them as partners and collaborators of the innovation process

Globally: • Use analytics and technology to

gather insights

• Quantitative research – market size and customer behavior Spot linkage across markets

Source: Ernst and Young, 2012

How to excel in global technology development leveraging frugality

Locally: • Increase R&D closer to target market • Develop “Reverse-engineering” approach

affordability • Local R&D has autonomy and authority • Put in place mechanism for new ideas to

reach decision-makers, no matter where its generated

Globally: • Set up global innovation networks, linking

R&D centers share relevant IP • “Platform technologies” globally

relevant & can be combined with local components at point of delivery

• Reallocate R&D resources to cater rising needs

Source: Ernst and Young, 2012

Embracing frugality needs changes in operating model, people and culture

Source: Ernst and Young, 2012

Locally• Delegate decision-making responsibility • Develop ability to take forward new

product/service ideas to meet market needs• Embed P&L responsibilities

Locally• Select partners across each value chain stages• Efficient operations cost reduction and margin • Develop agility respond to new opportunities

and risk

Globally• Manage talent globally – rotation to gain

experience across diverse business environment

Globally• Establish clear policies (risk mgmt + compliance) • Leverage global supply chain & CRMs • Decide which aspect to be localized vs globalized

Frugal products are characterized by specific attributes

Source: Roland Berger’s R&D Think Act Study 2012

Attributes

Performance

Simplicity

Robustness

Economies of scale

Pricing

Characteristics

Low-Low end Low-end Mid-end High End

Simple Complex

Robust/maintenance friendly Fragile/laboruous to maintain

High volume Medium volume Low volume

Low price Medium price High price

Frugal product’s characteristics

Should be conceived from bottom up and integrate selected high-end features only when absolutely necessary

Technology development needs to be tailored to product strategy

Source: Roland Berger’s R&D Think Act Study 2012

59%

8%

8%

25%

Modularity

Low cost

Features strategy with correspondency pricing

Specializing (niche)

Levers for successful product strategy in emerging market

• Modularization’s reason: Reduce product cost Improve time-to-

market/speed Reduce complexity

• 67% companies surveyed plan to extend share of products based on platform or modules

To conclude..

• Frugal innovation to reach next billions customers: major opportunity + challenges

• Deep customer insights and organizational agility are key

• Companies must balance need for local customization with global scale Global innovation networks enable resources and IP shared across markets Develop global “platform-technologies” to be combined with local element

• Frugal innovations are not only for emerging market

• Successful frugal innovation goes beyond R&D Need to rethink entire business and operating model Build new relationships with stakeholders across value chain Rethink new S&D channel

• Local firms have upper hand in serving low-income customers, but DMNEs gaining grounds leverage brand, process excellence