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The Frugal Innovation In Africa Economics Essay

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Published: Mon, 5 Dec 2016

Failure by conventional theories such as the product life cycle and closed innovation to explain recent trends in innovation, have laid a foundation for the emergence of different approaches to innovation management. One such approach is frugal innovation which has, in the recent past, been given recognition both by practitioners and academics. Frugal innovation aims at offering goods and services that are affordable, robust and of acceptable quality in a volume-driven market. So far academic attention on frugal innovation has been paid to countries outside Africa. The review of extant literature found only one academic paper on frugal innovation in Africa. This paper was based on a single case study and just focused on the service industry. Therefore, the purpose of this study was to identify examples of successful frugal innovation in Africa and categorize them based on local conditions. Using an analogical method, six successful cases of frugal innovation were identified in different countries. Frugal innovations were categorized into basic needs and luxury frugal solutions respectively. Further from the six cases, five success factors were identified. These are; needs conceptualization, passion, local networks, investing in local R&D and a flexible and well defined rolling out process. These cases suggest that companies wishing to develop frugal solutions aimed at specifically addressing the needs of customers in Africa must be receptive to the above factors. This study highlights the existence of frugal innovation in Africa and the critical factors vital for creating new, affordable and robust products and services for what we call unthawed markets in Africa. The study has also shown that despite frugal innovation attracting academic attention in the last decade, it has existed in Africa for a considerable period of time. For the future, studies should be focused on identifying more cases of frugal innovation in Africa. In addition, such cases should be subjected to in-depth analysis. We also encourage comprehensive studies aimed at developing new theories and testing the proposed ones.

Keywords: Frugal Innovation, Africa, product life cycle, unthawed markets, success factors

1. INTRODUCTION

The ongoing shift in the global innovation landscape has presented numerous challenges (Magnusson 2000; Chesbrough 2003). These challenges have brought conventional theories such as the product life cycle and closed innovation into the spot light. As a result many countries and firms are developing new ways and means of conducting business. For example, multinationals from developed countries are increasingly globalizing their R&D activities. Firms from emerging economies such as India and Brazil, which traditionally played a secondary role in global innovation, have now begun to catch up with developing their own innovative capabilities (Mathews, 2002). Some of these firms have emerged as major players in certain sectors like information technology and mobile communications. In this shift, particular attention has been paid to emerging concepts of innovation. Recent research has identified five distinctive but interrelated innovation concepts for the years ahead (Eagar et al., 2011). These concepts are: customer-based innovation; proactive business model innovation; integrated innovation; high speed/low risk innovation and frugal innovation. The literature on all the five concepts is scant because they are in their infancy phase. Frugal innovation also known as reverse innovation is about minimizing the use of material and financial resources in the complete value chain with the objective of reducing the cost of ownership while fulfilling even exceeding certain predefined criteria of acceptable quality standards (Tiwari and Herstatt, 2012).

From the organization’s point of view, a frugal solution is designed, produced, delivered and maintained to achieve the needs of underserved consumers in constrained environments (Bhatti, 2012). For the consumers, frugal products and services extend from simply costs to functioning with few resources, and lack of necessary infrastructure. Examples of successful frugal innovation include the Tata Nano car in India that costs less than US$3000, a low-cost battery powered refrigerator in India (called Chotukool) created by Godrej Company and a mini-handheld electrocardiogram (ECG) machine called Mac 400 created by GE at its Bangalore laboratory (Howard, 2011).

Based on evidence from frugal solutions in and outside Asia, it is clear that frugal innovation is a cutting edge initiative that has challenged conventional ways of innovation management. It is destined to address the needs of both the lower and middle income groups all over the world. Despite these impressive strides, the initiative has received little academic attention particularly in Africa. Scholarly works that have attempted to deal with this subject have mainly concentrated on emerging economies in Asia (Tiwari and Herstatt 2011, 2012; SAGPA 2011; Tood and Lawson 2003; Fukuda and Watanabe 2011; Kohlbacher and Hang 2011; Pinelli 2011; Eagar et al., 2011). Africa is in desparate need of frugal innovation given the higher levels of poverty in comparison to other continents. For instance in 2011, 35 out of 45 nations identified as having “Low Human Development on the United Nation’s Human Development Index were located in Africa (UNDP, 2011). The implications of these facts are that the gap between the rich and the poor in most African countries is quite high and the population of the lower and middle income groups is higher than those in the high income group. This means that there are fewer people who are able to enjoy certain things in life because of the low purchasing power. More often than note, people in the lower income group would like to enjoy the same goods and services as those at the top of the economic pyramid but are not able to. Therefore there is a seemingly dormant and non-consuming market for which frugal products can take advantage. We call this market “unthawed market” because it is not fully exploited and seems “frozen”. The limited research so far carried out on frugal innovation has not addressed emerging issues in this field in Africa. To our knowledge there has only been one study conducted on frugal innovation in Africa. It was a single case study that focused on service innovation in Kenya (Wooder and Baker, 2012). There is need to cast the net wide and look at Africa as a whole in order to identify other cases of frugal innovation. This will give us a clearer picture of both product and service innovations for mass markets in Africa. As populations in Africa grow and demand for unique and reasonably cheap goods and services go up, frugal innovation is a must for this continent.

Given the foregoing, it is imperative that a preliminary study to find examples of frugal innovation in Africa is conducted. Hence the purpose of this study is to address this gap. More specifically our study aims to identify cases of frugal innovation in African, categorize them and bring out success factors of such innovations. Identifying cases of frugal innovation will provide important insights that will stimulate further research not only in Africa but in other parts of the world.

2. FRUGAL INNOVATION: THEORETICAL BACKGROUND

In this era that is increasingly being defined by the globalization of competition as well as major fiscal and demographic challenges, the task of managing innovation is vital for companies of every size in every industry (Tidd, 2006). Although innovation is a very difficult process to manage, it is critical in sustaining businesses and ensures competitive advantage. The way organizations bring out new ideas and take them to the market has undergone fundamental change. There is a paradigm shift in how companies commercialize industrial knowledge. In the following we have shown how two conventional theories of innovation and product development are no longer sustainable. Subsequently, frugal innovation is becoming relevant.

2.1 The Product Life Cycle cannot explain recent trends in innovation

Historically there were attempts and initiatives to understand product and service innovation. One such initiative was the product life cycle (PLC) theory developed by Raymond Vernon. The PLC is an economic theory that attempted to explain the observed pattern of international trade. Vernon (1966) argued that many products experience cycles. The theoretical rationale behind the PLC theory emanates from the concepts of diffusion and adoption of innovations (Everett, 1962). Schematically, the PLC may be approximated by a bell-shaped curve that is divided into different stages (see Figure 1). Although the number of phases suggested by different scholars varies from four to six, for the purpose of this paper we have adopted a four-phase cycle as proposed by Polli and Cook (1969). The four-phase cycle is realistic. Some cycles, which include a saturation stage, have proved to be unrealistic and questionable. For example, a clear distinction could not be drawn between the mature and saturation stage (Gardner, 1987). Pollit and Cook (1969) stated that sales follow a sequence of stages, starting with product introduction and proceeds with growth, through maturity and eventually decline.

Figure 1. Product Life Cycle

Source: Polli and Cook (1969)

Below is the summary of the four stages in a product’s life cycle:

Introduction – New products are introduced to meet local and national needs. Profits are often low because customers are few. This stage is characterized by significant uncertainty regarding the market size, consumer tastes and technological constraints.

Growth – Products become more widely known and accepted. Profits begin to be earned as the image of the product is developed.

Maturity – Products may be extended by adding both width and depth. Sales are at their peak and profits are high. There is production of standard products through standardized production processes.

Decline – Sales fall very fast and profit go down. Prices are also likely to fall.

Vernon (1966) posited that products are initially discovered and produced in developed countries (north) and exported to the less developed countries (south). The emphasis was on the role of innovation, scale ignorance and uncertainty. Vernon discarded the classical assumption that knowledge is a free good. He claimed that developed countries spend more on product development and innovation than developing countries. Hence they tend to develop high end products. Initially, the manufacture of a new product tends to be located in the country that developed it. This is largely on account of large markets in the developed nations therefore early stages of a product’s life production need to be located close to the market. Vernon further argued that when products become mature their degree of standardization and consequently of price elasticity of demand increases, cost considerations become more important and production will often move to less developed countries. Concerns about productions costs and possibilities of economies of scale results in shift of location of production from the ‘north’ to the ‘south’. Hence the north produces only ‘new goods’ while the south produces only ‘old’ goods (Funk, 2004). The cycle arises because what is a new good in one period eventually becomes an old good in another period.

The PLC theory is a conventional concept which has stood the test of time. It has represented central elements of innovation and marketing for four decades (Mercer, 1993). Following its development in the 1960s and subsequent popularization in the 1970s, the theory has remained a stable feature in international trade. A great deal has been written on the subject and several empirical studies have validated its existence (Polli & Cook 1969; Meenaghan & Turnbull 1978; Klepper 1992; Mercer 1993; Funk 2004). The PLC has been used for strategic planning, product development, financial management and has been considered to be an influential concept (Moon, 2005) and an enduring marketing framework (Golder & Tellis 2004). The concept has been used for specific technologies (Abernathy and Utterback, 1978); for dominant designs (Tushman and Anderson, 1990), for customer adaptations of new technologies (Rodgers, 1962) and for specific industries and clusters (Audretsch and Feldman, 1996).

Indeed the evidence supporting the PLC theory and the amount of attention bestowed upon the theory in the academic literature over the years have been impressive. However, in the recent past the PLC concept has begun to appear unsustainable. There is a serious deficiency in the assertion that new products and innovations happen in developed countries and later get adopted in developing nations. Recent scholarly work has brought out evidence showing an increasing trend of product development and innovations originating from developing nations such as India and China (Tiwari & Herstatt 2012; Prahaland 2005; Economist 2010b). These countries are no longer just borrowing innovations from developed countries; but from time to time are contributing innovations to the rest of the world including advanced economies (Govindarajan & Ramamurti, 2011). Recent research has suggested that enterprises are increasingly using fast-growing developing economies as lead markets for innovating specific products, services and technologies (Tiwari & Herstatt, 2012). An example of such innovations is a washing machine called Mini Magical Child introduced by Haier, a Chinese home appliances firm. This washing machine is being sold in the US and Europe. These innovations have been termed “frugal innovation” because they meet the needs of low end customers at affordable prices and have acceptable quality (Zeschky et al. 2011). This trend cannot be sufficiently explained by the PLC theory and by factors such as degree of standardization and price elasticity of demand. To the contrary, the trend has challenged the core assumptions of the PLC theory and proves, in the interim, that innovation and new products can emerge from anywhere and not just in advanced countries. The assertion, by Vernon, that discarded the notion that knowledge in a free good therefore cannot stand.

2.2. The Closed Innovation approach has been eroded

The old paradigm was called closed innovation which was based on the strict control of successful innovation (Chesbrough, 2003). Under this view, organizations generate their own ideas, develop them, finance them and support them on their own. In short, companies maintain complete control of all aspects of the innovation process and inventions are kept highly secretive. Traditionally many organizations followed this model and it worked well for most of the twentieth century (OVO, 2008).

However, over the years a number of factors have led to the erosion of the closed innovation approach (Chesbrough, 2003). First, due to an increase in the mobility and availability of highly educated people, large amounts of knowledge leave the research laboratories of many companies. Second, the availability of venture capital has increased significantly in the recent past making it possible for promising ideas and technologies to be further developed outside the organization. Third, other firms in the supply chain began to play an increasingly pivotal role in the innovation process. Finally, today there is an abundance of knowledge in virtually every field. The proliferation of public scientific databases, online journals, low-cost internet access have given firms access to a wealth of knowledge that was far more expensive and time-consuming to reach as recently as the early 1990s.

The above factors have rendered the closed innovation model unsustainable. Consequently, some mature firms got stuck in a narrow search for efficiency, displaying short sightedness and an inability to innovate to the extent needed to sustain their competitiveness (March, 1991; Dougherty and Hardy, 1996). Hence, many organizations started looking for other ways of increasing the efficiency and effectiveness of their innovation processes. On the other hand, these conditions have led to the globalization of innovation and emergence of what Chresbrough (2003) has called open innovation. Under this paradigm, firms can and should use both internal and external ideas to develop and commercialize products and services. Open innovation provides means to benefit from a much broader base of individuals and organizations. Ideas coming from customers and business partners may identify gaps and needs that internal team may have been ignoring or unable to identify. Firms are tapping into internal and external sources of knowledge to review development cycles, re-think development costs and develop products for particular markets with differing customer tastes, geographic conditions or regulatory requirements (Buse et al. 2010; Cantwell, 1995; OECD, 2008). Internationalization of R&D which was thought to be phenomena of the developed countries such as Japan and Germany has now shifted to developing countries (Carlsson, 2006). There is a remarkable trend of multinational enterprises selecting locations in emerging economies such as India and China to conduct innovation activities (Tiwari, 2007; OECD; 2008).

2.3 The emergence of frugal innovation

The open innovation approach and the failure by traditional theories such as the PLC to elucidate the current innovation trends, have laid a basis for the emergence of different approaches to innovation management. One such approach is frugal innovation which targets middle and lower-income customers in rapid growth markets (Pinelli, 2011). Frugal innovation is also called reverse innovation (Govindarajan and Ramamurti, 2011) constraint-based innovation, meaning sparse in the use of raw materials and their impact on the environment (Innovation Post, 2011). It is driven by resource constraints imposed by infrastructural and business environment (Sehgal et al. 2010). Practitioners have referred to frugal innovation as a holistic rethinking of products and services offered to the customers and underlying processes and business models so that companies can squeeze costs and expand the customer base, business and profit (Jagati, 2011). These customers are enjoying their first taste of modern prosperity and are buying for the basics not for fancy features (Prahalad, 2005). They have unique needs that are not usually addressed by mature market products, mainly due to prohibitive cost base of developed world products.

To produce frugal goods, complex and concerted R&D efforts are required (Jagati, 2011). In this regard, the field of engineering has also undergone some changes in order to face these challenges. In 2006, the Chairman and CEO of Renault-Nissan Alliance, Carlos Ghosn came up with the term frugal engineering to describe the competency and aptness of Indian engineers in developing products like Tata Motor’s Nano. Frugal engineering is an overarching philosophy that enables a true ‘clean sheet’ approach to product development (Sehgal et. al. 2010). It avoids needless costs and addresses millions of consumers at the bottom of the pyramid who are moving out of poverty in developing nations. Kumar and Puranam (2012) in their recent research identified the following underlying principles on which frugal engineering efforts seem to rest:

Robustness – The characteristic of being physically strong and inured to endurance. Most of the developing nations have harsh environments such as extreme temperatures.

Portability – Poor roads and transportation in the emerging economies call for the importance of goods that are easily portable. Small and lightweight products become highly desirable.

Defeaturing – This refers to feature rationalization. Usually features accumulate in products over time. Therefore there is need to remove some of them that do little to enhance the actual product.

Leapfrog technology – Leapfrogging is a process of making progress by large jumps as opposed to small increments. This may seem contradictory for developing nations. However, engineers in India and China have adopted technologies that make dependence on existing infrastructure irrelevant.

Mega-scale production – It is estimated that the middle class in Asia alone is 525 million people, greater than the entire population of the European Union (Pinelli, 2011). This massive population can help firms produce on a massive scale and drive costs down.

Service Ecosystems – By using efficient service ecosystems, firms utilizing frugal engineering have been selling large volumes to multiple segments, each with slightly different needs. With ecosystems low costs have been achieved.

In India, frugal innovation is known as Jugaad innovation which means doing the best with what one possesses (Innovation Post 2011). Jugaad is a colloquial Hindi word which roughly translates as “an innovative fix; an improvised solution born from ingenuity and cleverness” (Radjou et. al., 2012). The term refers to a unique way of thinking and acting in response to challenges. Juggad is, quite simply, achieving more with less. India is becoming a leader in frugal innovation (Tiwari and Herstatt, 2012). In fact it is rapidly emerging as one of the hotspots for the development of innovations tailored to the needs of lower income groups (Kubzansky and Karamchandani, 2009). As mentioned earlier, the best known example of a frugal product is probably the Tata Nano car, which has become so popular in India and dubbed ‘the people’s car’ (Howard, 2011). At the end of 2010, 70,000 units had been sold. Tata’s aim was to develop and produce a car that would be much cheaper than any other car in the world. To achieve this, the company reengineered parts to save weight, reconfigured assembly methods and developed a complex network of third party suppliers to increase efficiency (Pinelli, 2011). In view of this ground breaking technology, some established car manufactures from advanced economies have seen a reduction in their sales. According to the Society of India Automobile Manufacturers, in 2011 Suzuki’s car sales in India dropped by 11.9 percent for the first time in 9 years (Nagata, 2012). Suzuki’s market share in India which was 50 percent in 2009 dropped to under 40 percent in 2011. Another example of frugal innovation is India’s technologically sophisticated solutions. The country is providing satellite launch services at the India Space Research Organization (ISRO). This organization is offering commercial services to space agencies and research institutions all over the world for costs that are significantly lower than those of its competitors in the developed world (Chandrashekar, 2011). In the medical field, a unique and interesting trend has emerged. Sometime back people seeking specialized medical treatment from developing nations would travel to developed nations for treatment. However, because of new and affordable medical services in India, patients from wealthy countries are going there for specialized treatment (Moriyasu, 2012). The comparably decent treatment is much cheaper and waiting time is short. For instance, the heart bypass surgery which costs US$144,000 in the US is available for US$8,600 in India (Moryyasu, 2012). In this regard, the number of medical tourists received by India has grown to 4.6 times the number received five years ago. At Indraprastha Apollo Hospital in New Delhi, patients from the US, the UK and the Persian Gulf States have been treated.

Another country with successful cases of frugal innovation is China. For example, BYD in that country has developed a very low-cost method of producing lithium-ion batteries whose cost has been reduced from US$40 to less than US$5 per unit (Kharas, 2010). Other frugal products in China include a washing machine called Mini Magical Child developed by Haier, a home appliance company in 1996 (Hang et. al., 2010). The product was designed for small daily loads and offered an alternative to large expensive washing machines. These are all examples of “good enough” products designed to fulfill the basic needs at low cost thereby providing high value.

From the scarce literature, three studies that attempted to address frugal innovation theoretical issues were identified. The first one proposed a frugal theoretical model on the basis of resource constraints, institutional innovation and social innovation (Bhatti, 2012). According to this model, the intersections among these three innovation streams present a fertile space where frugal innovation can be located. If each stream is taken separately, it cannot deal with the challenges of innovating for the underserved in emerging markets. The second study presented a conceptual framework for product innovation (Ray and Ray, 2011). As shown in Figure 2, they contended that to serve the markets at the bottom of the pyramid three concepts need to be harnessed; architectural innovation, modularity and collaborative partnerships. When performance of existing product technologies far exceeds what customers in mass markets are able to utilize or pay for; innovators need to develop simpler and cheaper products. They likened this to Christensen’s model of disruptive technologies. In this context, architectural innovation becomes the logical low cost choice, since it recombines existing component technologies in new ways, to create and alter price-performance packages without further investments in developing new core technologies. Modularity incorporated in such products enables firms to improve performance overtime to appeal to more discerning mainstream customers, eventually facilitating a technology to emerge. In short modularity is for customization and improvements. Furthermore, given that developing disruptive technologies is prone to high uncertainties and unforeseen costs, which maybe further exacerbated by institutional weaknesses in emerging economies, the authors drew on the concept of collaborative partnerships. Such firm practices will lower the costs and risks associated with innovation. The third study focused on frugal service innovation in Kenya, Africa. The aim of the study was to explore how the MPESA solution (which will be discussed later in this paper) was conceived, designed and delivered to the customers (Wooder and Baker, 2012). The study proposed a service innovation framework comprising how to; create, deliver, capture, defend and sustain value. Unlike the model proposed by Bhatti, the last two conceptual frameworks have been subjected to some testing. While the three models are in tandem on affordability, resource constraints and internal capacities of firms, the Bhatti model appears complicated and difficult to implement. To test the intersection of social innovation, institutional innovation and resource constraints is such a mammoth task.

BOP

DISRUPTIVE TECHNOLOGY – simpler, cheaper than mainstream products

Architectural Innovation

Modularity

Collaborative Partnerships

Figure 2: A Conceptual Framework for product innovation for mass markets in emerging economies

Source: Ray and Ray (2011)

In order to understand how MNCs are organizing frugal innovation efforts in emerging markets, an in-depth study of five firms was carried out (Zeschky et al., 2011). Initially 13 firms, representing a variety of industries, were identified. The firms were sieved and eight dropped due to insufficient available data. The remaining five were found suitable case studies. Analysis was based on three criteria; product characteristics, motivation for developing products and implementation of product development. The study found that besides having similar structures regarding organization of R&D, all of the five firms had a successful history of frugal innovation. Based on the above criteria it was established that successful frugal innovation:

Should be grounded in the drive to meet the needs of resource-constrained customers at the lowest possible cost.

Require local organizational structures and resources.

Should result in products and services that are easy to use, robust and reliable.

The above and other previous studies provide empirical evidence and a yardstick upon which future studies can be benchmarked. First, primary data was used; second the sample was reasonable and third firms represented different industries.

3. RESEARCH METHODOLOGY

This research focuses on identifying examples of frugal innovation in Africa. Being the first study of this kind in Africa, we used analogical thinking to identify of frugal innovation. The use of analogies in research involves the transfer of knowledge gained from one area (source domain) to another area or field (target domain) (Kalogerakis et al. 2010; Keane 1988). The knowledge and evidence of frugal innovation in some emerging economies (source domain) presented in this paper was used to identify examples of frugal innovation in Africa (target domain). As shown in this paper, there are successful examples of frugal innovation in India and China and these will be the yardstick against which cases in Africa will be identified.. Specifically the Zeschky et al. (2011) selection criterion was used to locate exceptional cases of frugal innovation in Africa. We scanned research databases and reviewed reports, articles and papers from previous studies and projects. Sources of such data included the United Nations Development Programme (UNDP), World Bank, reputable journals, African Union (AU) and New Partnership for Africa’s Development (NEPAD). This methodology was appropriate at this stage of the research. For the future, there will be need to carry out comprehensive in-depth case studies of the identified cases. Such studies will provide us with detailed insights of the firms’ design, and production processes and commercialization of products.

4. EXAMPLES OF FRUGAL INNOVATION IN AFRICA

Drawing from the literature, we present six examples of successful frugal innovation in Africa. These cases are drawn from a range of broad areas ranging from housing construction to electronic money transfer technologies.

4.1 Moladi: Affordable houses in South Africa

In many African countries, housing is one of the most sensitive issues affecting the lower income groups. In South Africa for example, close to 13% of the 14.3 million households are informal dwellings (Statistics South Africa, 2011). The term “informal dwelling” is often used in South Africa to designate shacks, corrugated-iron structures and other makeshift shelters. The above statistics represents about 1.8 million households (between 7.2 and 10.8 million people). Informal structures are often made of highly combustible materials such as wood and cardboard which pose serious safety and environmental concerns. The structures are easily damaged and exposed to the external elements meaning that people often live in damp, very hot or very cold conditions. The other concern is inadequate or lack of sanitation and running water which constitute a serious health hazard for the population. Similar conditions are present in many parts of Africa.

In order to address this problem and as part of public policy, the South African government took a number of initiatives. It became one of the few countries in the world where the right to ‘adequate housing’ of all citizens is enshrined in the constitution. According to section 26 of the constitution, the state has an obligation to take “reasonable legislative and other measures, within its available resources, to achieve the progressive realization of this right [to housing].” (Republic of South Africa, 1996). In order to translate this commitment into results, the first fully democratic South African government, immediately upon taking office in 1994, embarked on a far-reaching economic policy framework called the “Reconstruction and De


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