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Disruptive Effects of Frugal Innovation when Transferred to Developed Countries

[Background] [Objectives] [Proposed Methodology] [References]

A project of:

Project team: Rajnish Tiwari (Project lead) and Tobias Hagenau

Start: Jan 2012

Duration: Three months

Project Status: Completed (April 2012)

Keywords: Frugal Innovations; Frugal Engineering; Innovation Diffusion; Emerging Economies; India; Lean Innovation; Developed Economies

Schlüsselwörter: Frugale Innovationen; Frugale Innovationsprozesse; Lean Innovation; Innovationsdiffusion; Aufstrebende Volkswirtschaften; Industrienationen; Indien

 

1. Background

1.1. Disruptive Innovation

The phenomenon of Disruptive Innovation was first described by Clayton Christensen in his book "The Innovators Dilemma" more than 10 years ago. Closely examining historical data from different industries, Christensen shows how successful companies can fail due to those very established business practices that have enabled them to succeed in the first place.

Due to different performance criteria (measures used by customers to compare the product) in different market segments, those companies closely listening to their established customers are the most likely to be affected by disruptive Innovations. These innovations, at first, do not meet the primary markets demands but instead have other benefits, valued in alternative markets. Developed by start-ups or independent divisions and ripened in emerging market segments, disruptive innovations gradually become competitive in the initial markets and finally threaten to substitute established technologies (Christensen, 1997).

of Disruptive Innovations (Christensen, 1997)

Figure 1: Performance of Disruptive Innovations (Christensen, 1997)

Since, according to Christensen, there is strong evidence that when dealing with disruptive innovation the first mover advantages are unusually strong (Christensen, 1997), the identification and proper resource allocation to these projects can be crucial to a firm’s survival.

1.2. Frugal Innovation

Also known as „Gandhian“ or „Reverse“ Innovations, the term "Frugal Innovation" describes products and services specifically tailored to the needs of developing countries such as India or China and their mostly rural population (Sehgal et al., 2010, Prahalad and Mashelkar, 2010, Immelt et al., 2009).

in his article ‘Innovation’s Holy Grail’ (2010) C.K. Prahalad along with his co-author R. A. Mashelkar describes how “affordability and sustainability replace abundance and premium pricing as drivers for Innovation” in developing countries (Prahalad and Mashelkar, 2010). Due to limited infrastructure, financial resources and education, the distribution, (interface-)design and cost-structure are of higher importance than in developed countries (Wooldridge, 2010). Instead of simply cutting costs and offering technologically outdated products from western markets at lower prices, true innovation in terms of technology and process are necessary in order to satisfy the demands of developing markets. Stripping products of non-essential features and applying sophisticated technologies in order to reduce costs and adopt products to local environments makes the difference between failure and success of such innovations (Sehgal et al., 2010, Immelt et al., 2009).

1.3. R&D in Developing Countries

Many large western companies establish R&D facilities in developing countries, realizing how quickly local educational standards are catching up to the west and how quickly local markets grow at all levels of the economic pyramid.

By 2007 nearly 70% of researching Fortune 500 companies conducted at least part of their R&D in India, a trend that is still accelerating (Herstatt et al., 2008). With well above 2 million graduates a year, India and China are creating an impressive resource pool for further R&D investments (Knowledge@Wharton, 2005). Additionally, there are a number of homegrown firms in emerging markets which are involved in frugal engineering and coming up with innovative affordable products that are expected to succeed in other comparable markets and in some instance even in developed nations (Tiwari and Herstatt, 2011).

At the same time, local markets are growing rapidly and multinationals begin to understand the potential of as yet untapped segments. C.K. Prahalad estimated the combined purchasing power of the “Bottom of the Pyramid” (BOP) to be roughly 3 trillion US$ p.a. (Prahalad and Hart, 2002), whereby they define BOP as that part of the population which has less than US$ 1,500 p.a. at purchasing power parity at their disposal; which they estimated to stand at roughly 4 billion people worldwide (Prahalad and Hart 2002).

1.4. Transferring Frugal Innovations

As of now, few publications exist of products that were originally designed for an emerg-ing market and have later been successfully transferred to developed countries. One such prominent case is that of GE’s health-care division. Having been unsuccessful in selling ultrasound probes designed for western hospitals to rural clinics in India and China, GE managed to design and build a streamlined ultrasound probe at 15% of the cost of the es-tablished models. In addition to this price advantage, the device is highly portable in con-trast to the heavy and large variants common in western hospitals. This considerable R&D effort has been rewarded with successful sales in India and China.

When trying to globalize this invention however, sales to western hospitals were disap-pointing, since the portable ultrasound scanners could not match the imaging performance of their traditional counterparts. However, unexpected market segments started to show a high interest for the new devices. Emergency doctors and ambulances are using the device for first diagnoses before or during transports (Immelt et al., 2009).

2. Objectives

The issues, problems and solutions encountered by GE during their recent Frugal R&D projects and their globalization closely resemble those described by Christensen for Dis-ruptive Innovations. Looking at the accelerated growth of emerging markets and their equally growing R&D opportunities, more and more Frugal innovators (be they of local origin or not) are going to try a globalization of their projects, yet as of now, few success-ful transfers have been published.

In this context, it seems to be of high interest to conduct an analysis of the processes gov-erning the success/ failure of Frugal innovations being transferred to developed countries. This study therefore aims at identifying the decisive properties of successful and unsuc-cessful transfers of innovations from developing to western markets. The following topics will be analysed to realize the objectives:

  1. Identify the kinds of innovations that emerge in frugal environments in terms of type and degree of innovation;
  2. Identify instances of the diffusion/ transfer of Frugal innovations to developed countries with respect to their success or failure;
  3. Discern the governing factors of the transfer of Frugal innovations;
  4. Confirm or reject the applicability of the Disruptive Innovation framework to these transfers; and
  5. Adapt and complement the framework where necessary in order to account for particularities of Frugal innovations and improve the rate of success when trans-ferring.

The results of this study will help companies actively innovating in frugal environments to better understand and use the peculiarities and advantages of Frugal Innovations not only in the countries of their emergence, but also in worldwide developed markets; thereby facilitating the successful identification and application of disruptive opportunities. The findings will also contribute to the scientific understanding of Disruptive Innovations and their impact on increasingly globalized markets as well as the importance of Frugal Innovation for economic growth .

Proposed Methodology

To meet the above objectives the following procedure will be followed:

  1. A database of Frugal Innovations and their regions of commercialization will be composed from available data sources as a basis for an empirical study;
  2. Based on a literature review, criteria for the identification of successful innovation transfers will be deducted;
  3. The gathered data will be analysed according to the evaluation criteria, so as to discover decisive properties of Frugal Innovations and their transfers;
  4. The findings will be compared to the framework of Disruptive Innovations; and finally
  5. The framework of Disruptive Innovations will be complemented to account for the findings.

References

  1. CHRISTENSEN, C. 1997. The Innovators Dilemma, New York, HarperCollins.

  2. HERSTATT, C., TIWARI, R., ERNST, D. & BUSE, S. 2008. India's National Innovation System: Key Elements and Corporate Perspectives. East-West Center.

  3. IMMELT, J. R., GOVINDARAJAN, V. & TRIMBLE, C. 2009. How GE is Disrupting Itself. Harvard Business Review, October 2009, 56-65.

  4. KNOWLEDGE@WHARTON. 2005. Human Capital: Can India Bridge the Knowledge Gaps Needed for Research?

  5. PRAHALAD, C. K. & HART, S. L. 2002. The Fortune at the Bottom of the Pyramid. strategy+business.

  6. PRAHALAD, C. K. & MASHELKAR, R. A. 2010. Innovation's Holy Grail. Harvard Business Review.

  7. SEHGAL, V., DEHOFF, K. & PANNEER, G. 2010. The Importance of Frugal Engineering. Economic Times Mumbai.

  8. TIWARI, R. & HERSTATT, C. 2011. Role of Lead Market Factors in Globalization of Innovation: Emerging Evidence from India & its Implications. Proceedings of IEEE International Technology Management Conference (IEEE-ITMC), pp. 475-483 June 27-30, 2011, San José (USA).

  9. WOOLDRIDGE, A. 2010. The World Turned Upside Down. The Economist.

 

[ For further enquiries, please contact Rajnish Tiwari]