Frugal and Reverse Innovation - Essay Example

? Frugal Innovation & Reverse Innovation: Does Reverse innovation represents a threat or opportunities for western companies? : Date: Frugal innovation is the response to severe resource constraints with products having extreme cost advantages compared to existing solutions (Zeschky et al 2013.p.39). Another slightly different definition forwarded by Nesta, a UK innovation foundation, identifies frugal innovation as a response to limitations in resources, whether financial, material or institutional, and turns these constrictions into a merit. The basic idea is to cut on resources employed in the development, production and delivery stages or by leveraging resources in novel ways resulting to lower-cost products and services (Bound & Thornton, 2012.p.14). Another term closely related to frugal innovation but one which is fundamentally different is reverse innovation. Reverse innovation represents innovations originally developed and/or adopted in emerging market economies which later become prominent in mature world markets (Attached source). Reverse innovation defies conventional conceptions of global innovation processes and marks a shift away from the perspective that innovation from emerging countries is less pertinent, or only appropriate for application to other emerging countries (Devinney et al 2010 .p.506). Prahalad and Hammond (2002) figuratively paint two contrasting worlds, one laden with economic stagnation and another represented by flourishing economies. The two argue that the difference between these two scenarios is the activities and focus of the multinational companies (MNCs). On one hand, MNC can choose to continue focusing on present innovation models, where products are fashioned in the developed countries and then channeled to the developing (emerging) markets. The best that is done is a slight modification to fit into the specific needs of the emerging markets a phenomenon known as glocalization (Immelt et al 2009). On the other hand, MNC can focus on the emerging markets in which case they will identify specific factors, mainly social and economic and base their R&D on these observations. The resulting products would be obviously cheaper and in some cases superior opening up a new revenue channel and in the process helping augment revenues from the mature and stagnating markets. However, the most important factor, and which is the focus of this study is whether the emergence of these products in emerging markets and their subsequent flow to the mature markets (reverse innovation) would represent a threat or an opportunity for the Western MNC. To start with, reverse innovation provides an opportunity for Western MNC. This opportunity is best represented by Karnani (2007) who cited that there is much untapped purchasing power at the bottom of the pyramid. MNCs can make significant profits by selling to the poor (.p.90). This view is best brought into focus by looking at General Electric Corporation. GE China leveraged GE’s global resources to develop a cheaper ultrasound machine at a price ranging $15,000-$100,000 (Uploaded Source). This reality points to the fact that for the MNCs to share in the high-growth potential markets in China, India and the rest of the emerging markets it makes little sense to carry out demand analyses in mature markets. Most important are emerging markets which play host to the largest yet unsatisfied markets as the existent products (availed through glocalization) remains largely unaffordable. Another worthy example is that of money transfer using mobile phones. This was largely developed by Vodafone and it came to prominence with Safaricom, Vodafone’s subsidiary operating in Kenya. This innovation has been amplified and is fast being adopted in the developed markets, England, U.S. among other developed countries (Jordan, 2012.p.154). M-pesa, the name of the pioneer mobile money transfer service was born out of the growing need for masses to transfer money in Kenyan rural settings. As the innovators identified, there lacked an adequate banking network to serve the people, and there were structural, economic as well as education challenges. Though initially intended to serve the unbanked, the service was of great convenience and the banks themselves have become mainstream users of the service through which they provide mobile money services. In extension, the success, ease of use and cost of operability made the service very attractive and it is currently being applied in developed markets. A caveat for Western MNCs in regard to these opportunities is that they must extensively invest in R&D in these emerging markets (Plo?Tner, 2011.p.64). For successful investors, reverse innovation is an opportunity as they are at the centre of these innovations. The opportunities discussed earlier can also represent a threat for Western MNCs. This happens when enterprises in these markets develop cheaper and convenient products that lock out products developed by Western MNCs. A good example of such a scenario was the development of speaking books in South Africa. The speaking books are easily designed audio books modeled to bear potentially life-saving health messages to thousands of people living in isolation and who are under certain health risks. The books speak to the user at the turn of every page and have helped reach millions in remote communities and provide information on how to access help and how conditions such as AIDS, malaria and maternal health can be handled. Since development, the audio books have found their way to China, South America, and are being fast adopted throughout the globe. Another overwhelming example is that of Professor Muhammad Yunus who ventured into the financial markets by advancing $15-$25 to the poor. From these otherwise negligible advances, Yunus built Grameen Bank, a multi-million dollar business that is now a focal point of numerous institutions across the world centered on fighting poverty. These examples represent a situation where indigenous organizations develop ideas that trickle upwards. The only threat in these situations is the fact that ideas generated through reverse innovation have the capacity to cannibalize the existent products driving out revenue and livelihood for thousands and possibly millions. In discussing the opportunity that lie in the emerging markets we recognized increasing R&D in emerging markets giving an example of GE and Siemens. However, the rate at which these Western MNCs are shifting their innovation models is not at par with the rate at which developing countries MNCs are growing and breaking new ground. This fact is illuminated by the number of these indigenous MNCs joining the Fortune Global 500, as at 2010 they were 69 of them (Laperche & Lefebvre, 2012.p.74). This is a pointer that competition in these markets has intensified and Western MNCs must rethink their established business models (Zeschky et al 2013.p.39). They have to focus on resource constrained customers as opposed to high margins from affluent consumers. Secondly, these MNCs must alter their organizational structures such that they have a mechanism which enables extensive understanding of the specific environment and needs of emerging markets (Zeschky et al 2013.p.40). In conclusion, reverse innovation represents a major opportunity for Western MNCs to revitalize global demand for their products. However, this will only happen if they promptly initiate necessary adjustments that would ensure they are the innovators and not the followers/imitators. Unless this happens, the fast rising indigenous MNCs will galvanize the emerging markets and through reverse innovation they will take competition to the Western MNCs dominated markets. For inadaptable Western MNCs the sorry state envisioned by Prahalad and Hammond (2002) will befall them and reverse innovation would definitely be a threat for them irrespective of the highlighted opportunities. Bibliography Bound, K., & Thornton, I. (2012, July). Our Frugal Future: Lessons from India's innovation system. Retrieved April 14, 2013, from NESTA: http://www.nesta.org.uk/library/documents/OurFrugFuture.pdf Devinney, T. M., Pedersen, T., & Tihanyi, L. (2010). The past, present and future of international business & management. Bingley, Emerald. Immelt, J. R., Govindarajan, V., & Trimble, C. (2009, October). How GE Is Disrupting Itself. Retrieved April 13, 2013, from Harvard Business Review: http://hbr.org/2009/10/how-ge-is-disrupting-itself/ Jordan, J. M. (2012). Information, technology, and innovation: resources for growth in a connected world. Hoboken, New Jersey, Wiley. Karnani, A. (2007). The mirage of marketing to the bottom of the pyramid: How the private sector can help alleviate poverty. California Management Review Vol.49 No.4 , 90-113. Laperche, B., & Lefebvre, G. (2012). The globalization of Research & Development in industrial corporations: Towards “reverse innovation”? The cases of General Electric and Renault. Journal of Innovation Economics , 53-79. Plo?Tner, O. (2011). Strategic advantage: response and defense. Basingstoke, Palgrave Macmillan. Prahalad, C., & Hammond, A. (2002, September). Serving the World's poor, profitably. Harvard Business Review: Harvard Business School. Zeschky, M., Widenmayer, B., & Gassman, O. (2013, March 26). Frugal innovation in emerging markets. Retrieved April 2013, 2013, from http://docserver.ingentaconnect.com/deliver/connect/iri/08956308/v54n4/s8.pdf?expires=1365251414&id=73656598&titleid=5483&accname=Guest+User&checksum=2C8D9C846F76FA4282EF8021921E7E26 Read More