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  • 1. FRUGALITY AND GLOBALTECHNOLOGY DEVELOPMENTCourse: Technology ManagementTuesday, 13 November 2012
  • 2. Frugal innovation – a brief introduction • Simple, plain and costing little “Frugal” • Achieving more with fewer resource Cost-effectively Ability to innovate Under severe resource constraints Frugal innovation Redesign products What it involves? Rethinking entire production & biz model • New ways to solve problems by combining Innovation technology with transformational entrepreneurship (Ernst & Young, 2011)
  • 3. More companies looking to tap into the next billions customers • Higher growth rates • Rising young population Why tap into • Expanding middle class  #1 innovation driver emerging among MNEs in emerging market (Andrea Vogel, market? 2012) • Major infrastructure projects • Changing trade patterns The growing of global middle-class1 60 56 Vast majority lives in 40 Asia and other Ems With daily spending 21 of US$ 10-100 20 1.8 4.9 0 2012 2030 # of people in Bn Demand (in US$ Tn)Source: Ernst & Young Innovating for the next three billion
  • 4. As such, the competition is heating up… • More and more local companies innovate other than rely on low- cost to attract customers Reasons • Emerging countries investing higher proportions of global R&D  EM innovation hubs & local engineering • Local EMNEs apply innovative technique to manufacture a new frugal products that could diffuse to other market Shares of global R&D’s spending1 # of patents registered in USA USA EU Japan China India by countries of origin1 2% 2.9% 9.5% 11.5% 2000 2010 14.2% 17.1% 13.5% 11.2% 1652 25.9% 24.1% 465 34.3% 31.1% 112 94 68 115 66 121 • xx 2007 2012 China India Russia Brazil The changing global R&D landscape is inaugurating a new class of competitive products designed, engineered and priced for the low- to mid-range market segments  “Frugal products”Source: Roland Berger
  • 5. Frugal products have shown promising potentials • Frugal product is the growing profit center in Emerging marketsFrugal productssome promising • CAGR 11% compared to 6% for high-end products potentials • Surprising facts:  Good quality, limited function products can create profitable new market niche in advanced economies  Often without cannibalizing sales of higher priced, feature- laden products • Entry level product innovations globally grow at 7% • In China and India reached 10% • Siemens entry-level product innovations resembles 14% of their total sales
  • 6. Its natural for frugal innovations to emerge in poorcountries Case of India: • Culture of jugaad (creative improvisation) required for frugal innovation is abundant • Huge market with growing & aspirational middle class • Customers are price sensitive + willing to experiment  sustain demand of frugal innovation • Extreme conditions and major gaps in service (i.e. health sector)  stimulate demand • New sources of social finances lowering cost of investing in frugal innovations • Strength in service and biz model innovation • Increasingly inclusive science and innovation policy
  • 7. But recently, frugal products have became increasinglyrelevant in rich countries Slowing down • Lacklustre growth of economy • Deleveraging in developed economies • Climate, energy, water and other Environmental resources constraints • Frugal model of production & consumption Aging • New approaches of health and social care population to address aging societies • New technology platforms drastically reduce cost of some forms of innovation Cost reduction • Create huge opportunity for frugal innovators, esp. in services
  • 8. What are the examples of frugal products? (1) Chip X Gold 101 • Chip enabling ultra-low cost mobile phone in EMs • Cost reduction in material and phone design efforts At emerging countries Siemens X-Ray Apparatus • Siemens entered Ems with cheap X-ray machines • Customized for local requirements (heat, humidity and power blackout) • Attempt to create profit through higher volume of sales (~10x of mid-price segment) At developed countries
  • 9. What are the examples of frugal products? (2) Maggi Noodles Danimal Yoghurt Solar radio Anapurna Salt
  • 10. Mismatching offer – opportunity to cater the underserved marketSource: Ernst and Young survey, 2012
  • 11. EMNEs are arriving in the west Conquering HUAWEI western market DELTA ZTE CG TATA Expanding into QOROS emerging market National SMEW champion AVHAN Tech Start up at domestic market Initiation Basic development InnovationSource: Roland Berger’s R&D Think Act Study 2012
  • 12. Local firms seems to have upper hand in generating frugal innovations Which multinationals are best placed for generating frugal innovation? • Reasons often cited for EMNEs advantages:  Fast response to market  Agile  Exposure to constraints make the company tends to be creative in problem solving  Strong local relationshipSource: Ernst and Young survey, 2012
  • 13. Five essentials requirement for frugal innovation Mindset Local resources Requirements for Local decision successful frugal making (LGT) innovations Local financial responsibilities Access to global corporate resourcesSource: Roland Berger’s R&D Think Act Study 2012
  • 14. Rethinking innovation strategies through leveraging frugality Open mindset to understand country’s culture and behavior pattern is a must • Extend to R&D efforts Example: Heinz • Leverage scientists from Applicability emerging markets as they • Does it complement local’s culture? offer different  Outlook Availability  Cultural knowledge • Do we have appropriate sales channels?  Intuitive feel of local sensibility and Affordability pattern • How to deliver products at attractive sales point • Frugal engineering vs high-profile R&D Affinity efforts often • Branding  Faster to market  More financially rewardingSource: Roland Berger’s R&D Think Act Study 2012
  • 15. What are the strategic success factor in developing technology leveraging frugality?  21.5K MNCs do biz in emerging countries Motivations  Prominent MNCs established R&D hubs in • Design economical + emerging markets for: sustainable products +  Explore next-generation biz model & methods for global roll out org structure  Explore R&D products for poor • 90% cost reductions by countries new designs & better financial performance (Jaruzelski & Dehoff, 2008) Main drivers to set up corporate R&D1 High • Local R&D need to Degree of importance align with Sales & 3.7 3.4 2.4 Marketing  New way of mgmt Low • Access to market & Markets access Access to tech Cost reduction tech expertise are know-how critical to decide where to base R&D centersSource: Roland Berger’s R&D Think Act Study 2012
  • 16. Mastering global innovation capabilitySource: Ernst and Young,2012
  • 17. Customer insights is a key to develop “correct” technology Locally: • Local resource to conduct in- depth research • Engage customers & treat them as partners and collaborators of the innovation process Globally: • Use analytics and technology to gather insights • Quantitative research – market size and customer behavior  Spot linkage across marketsSource: Ernst and Young, 2012
  • 18. How to excel in global technology development leveraging frugality Locally: • Increase R&D closer to target market • Develop “Reverse-engineering” approach  affordability • Local R&D has autonomy and authority • Put in place mechanism for new ideas to reach decision-makers, no matter where its generated Globally: • Set up global innovation networks, linking R&D centers  share relevant IP • “Platform technologies”  globally relevant & can be combined with local components at point of delivery • Reallocate R&D resources to cater rising needsSource: Ernst and Young, 2012
  • 19. Embracing frugality needs changes in operating model, people and culture Locally • Delegate decision-making responsibility • Develop ability to take forward new product/service ideas to meet market needs • Embed P&L responsibilities Globally • Manage talent globally – rotation to gain experience across diverse business environment Locally • Select partners across each value chain stages • Efficient operations  cost reduction and margin • Develop agility  respond to new opportunities and risk Globally • Establish clear policies (risk mgmt + compliance) • Leverage global supply chain & CRMs • Decide which aspect to be localized vs globalizedSource: Ernst and Young, 2012
  • 20. Frugal products are characterized by specific attributes Frugal product’s characteristics Attributes Characteristics Performance Low-Low end Low-end Mid-end High End Simplicity Simple Complex Robustness Robust/maintenance friendly Fragile/laboruous to maintain Economies of High volume Medium volume Low volume scale Pricing Low price Medium price High price Should be conceived from bottom up and integrate selected high- end features only when absolutely necessarySource: Roland Berger’s R&D Think Act Study 2012
  • 21. Technology development needs to be tailored to product strategy Levers for successful product strategy in emerging market • Modularization’s reason: 25%  Reduce product cost  Improve time-to- market/speed 8%  Reduce complexity 59% 8% • 67% companies surveyed Modularity plan to extend share of products based on Low cost platform or modules Features strategy with correspondency pricing Specializing (niche)Source: Roland Berger’s R&D Think Act Study 2012
  • 22. To conclude..• Frugal innovation to reach next billions customers: major opportunity + challenges• Deep customer insights and organizational agility are key• Companies must balance need for local customization with global scale  Global innovation networks  enable resources and IP shared across markets  Develop global “platform-technologies” to be combined with local element• Frugal innovations are not only for emerging market• Successful frugal innovation goes beyond R&D  Need to rethink entire business and operating model  Build new relationships with stakeholders across value chain  Rethink new S&D channel• Local firms have upper hand in serving low-income customers, but DMNEs gaining grounds  leverage brand, process excellence