Sunday 21 November 2010

Frugal Innovation: Two Titillating Tales

Perhaps the hottest notion floating through international management circles is the idea of "reverse", or "frugal" innovation.  Roughly speaking, the notion is that the time-honoured direction of innovation, namely from West to East/from developed world to developing world, is giving way to a more multi-directional approach. In particular, the idea focuses on emerging markets, such as China and especially India: these markets increasingly have the ability to hone "frugal" innovations intended for the local market, placing a premium on stripping costs while satisfying essential requirements and functionality. The best of these frugal innovations are then ripe for transfer to mature markets as well.

The notion became a particular focus of business school parlour talk after the publication of an article, "How GE is Disrupting Itself", in the Harvard Business Review here, late in 2009, by Jeffrey R. Immelt, Vijay Govindarajan and Chris Trimble. Imeldt is the CEO of GE and Govindarajan, professor at the Tuck Business School at Dartmouth College, is a leading proponent of the "reverse innovation" concept. We ourselves had an early inkling about the potential potency of this concept and already wrote about it on this blog site with great favour in the spring of 2009, here and here.

It is against this backdrop that two recent items drew my intention. The first is a
brief report in the November 13 issue of The Economist, "Tata's Nano: Nah, no." To remind the reader, the Nano is the much-heralded compact car, intended to cost around the equivalent of $2,500 plus taxes, which is meant to address the vehicular needs of the massive emerging middle class in India and elsewhere. I seem to recall that over 100 patent applications were filed in connection with the development of the Nano, which sought to merge world-beating technology in the service of producing frugal innovation at its best. Indeed, the Nano was lauded as a prime example of frugal innovation.

The problem is that there have been relatively few buyers for the car. Cumulative sales to date for 2009 are 40,467 (which seems to me the number of cars struggling to advance at a given moment at any major intersection in Mumbai). Sluggish sales are attributed to the fact that the car is marketed in only a few places in India, the higher-than-expected actual costs, and some early technological glitches in the vehicle. Whatever the reasons, and without discounting the possibility that the Nano might yet become a big success and a bell-wether for frugal innovation in the passenger car industry, its post-natal difficulties point to the dififculties that confront efforts to commercialize the fruits of frugal innovation, first in local markets, such as India, and thereafter to other emerging (and even developed) markets.

The second item was a brief report published on November 18 on and written by the prolific Scott Anthony. Entitled "Three Innovation Lessons from the Gillette Guard", it discussed one part of a webinar that will appear as part of an article in the January 2011 issue of "Havard Business Review". Anthony's article describes the efforts of Procter & Gamble to develop a double-edged razor for the Indian market that will meet the requirements of its Indian customers, but which will retail at the price of 15 rupees (about $0.33), with refill cartridges to cost five rupees (about $0.11).

Unlike a previous attempt by P&G in this area, which apparently used MIT graduate students from India, comfortably ensconsed in their Cambridge, Massachusetts surroundings, as its focus group, this time P&G seems to have reached out to actual consumers in the target market to come up with a potentially successful product. As well, P&G appears to have adopted distinctive forms of manufacturing, distribution and promotion for the product. In so doing, according to Anthony, P&G parlayed three fundamental features of product development appropriate for the Indian market: (i) go the source, (ii) delight, don't dilute and (iii) match the model to the market.

What is notable here is that frugal innovation may not be solely the purview of innovators in the emerging market. In this case, the frugal innovation seems to have been carried out by a standard-bearer of the mature market world. The interesting question is whether any of the features adopted by P&G for its Indian-focused market can be repatriated to Western markets. Paying $0.33 for a razor with limited, but satisfactory functionality, and $0.11 for replacement cartridges, sounds like something to which the Western consumer might also be attracted. Or are the economic and cultural demands of the two markets so different that there is nothing that P&G can bring back to its Western markets in connection with this product? And what happens to the P&G brand if there are substantial price differentials, based on the locus of the market, for products of the same category?

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