Why the West must embrace frugal and reverse innovation

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February 10, 2016

by Surajit Kar, Stimulator of Innovation @ PwC

Increasingly, Western companies are viewing Asia through a new lens—as a source of innovation and talent, not just a supplier of low-cost materials or a market for Western products. As the balance of economic power shifts to Asia, two closely linked innovation operating models that blossomed in the East are becoming more mainstream in the West: frugal and reverse innovation.

Frugal innovation is the creation of products or services at ultra-low price points, typically one or two orders of magnitude below the norm.  The model was born to serve low-income markets with severe resource constraints and price sensitivity.  Reverse innovation involves exporting to the West innovations developed in the East—reversing the traditional flow of innovation.

Developing frugal innovations requires challenging assumptions in order to radically reduce costs.  The Tata Nano, launched in 2009, is the prototypical example.  To build a car for $2,000, Tata Motors had to rethink every aspect of product design, manufacturing, and even distribution.  Rather than build cars in traditional automotive factories, Tata shipped Nanos as modular components that could be easily assembled at distribution facilities near customers.  The company was able to succeed by challenging long-held industry beliefs.

Many other examples of frugal innovation are coming out of Asia, from prosthetic limbs priced as low as $45 (versus $10,000 in the US) to a fuel-efficient, motorcycle-based tractor that sells for around $300.[1]  Some lead to reverse innovation, as companies export their disruptions to Western markets.  For instance, GE Healthcare, which built a $500 portable ECG machine to meet the needs of Indian buyers, found a market niche in the US, among first responders.[2]  And London-based Unilever, which developed smaller package sizes of detergents, mayonnaise, and other products to meet the needs of consumers in emerging markets, is selling these products successfully in the US and other Western markets as well.[3]

To succeed in frugal innovation, Western companies must operate in their target markets and understand the needs, lifestyles, and social dynamics of potential customers.  The Tata Nano had to be developed in a low-income country; an engineer sitting in Detroit might imagine designing a car for $15,000, perhaps $10,000, but not $2,000.  Similarly, frugal innovations designed solely for the needs of cost-conscious consumers won’t succeed among Western buyers with different needs and preferences.

As the balance of economic power shifts to Asia, more Western-based companies will have to integrate frugal and reverse innovation into their innovation strategies and operating models.  Companies that fail to do so risk being disrupted by more innovative competitors from the East or West.

[1]    Arion McNicoll, “Enter India’s amazing world of frugal innovation,” CNN, September 16, 2014. http://www.cnn.com/2013/06/25/tech/innovation/frugal-innovation-india-inventors/

[2]   Natalie Zmuda, “P&G, Levi’s, GE Innovate by Thinking in Reverse,” Advertising Age, June 13, 2011. http://adage.com/article/global-news/p-g-levi-s-ge-innovate-thinking-reverse/228146/

[3] “Kala Vijayraghavan, Unilever takes HUL strategies like small packs, cheaper variants to developed markets,” Economic Times of India, September 28, 2012.http://articles.economictimes.indiatimes.com/2012-09-28/news/34148327_1_unilever-spokesperson-d-e-markets-unilever-ceo

 

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