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«RESEARCH Open Access Research and development from the bottom up - introduction of terminologies for new product development in emerging markets ...»

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Brem and Wolfram Journal of Innovation and Entrepreneurship 2014, 3:9

http://www.innovation-entrepreneurship.com/content/3/1/9

RESEARCH Open Access

Research and development from the bottom

up - introduction of terminologies for new product

development in emerging markets

Alexander Brem* and Pierre Wolfram

* Correspondence:

Abstract brem@idee-innovation.de School of Business and Economics, This paper gives a comprehensive overview of the commonly used terms jugaad, frugal Friedrich-Alexander-Universität innovation, frugal engineering, constraint-based innovation, Gandhian innovation, Erlangen-Nürnberg, Findelgasse 7-9, Nuremberg 90402, Germany catalytic innovation, grassroots innovation, indigenous innovation, and reverse innovation. Based on that, a conceptual framework is introduced consisting of three core dimensions: sophistication, sustainability, and emerging market orientation. On the basis of these dimensions, analogies and distinctions between the terms are identified and general tendencies are explored such as the increasing importance of sustainability in social and ecological context or the growing interest of developed market firms in approaches from emerging markets. Hence, the presented framework supports further research in new paradigms for research and development (R&D) in developed market firms (DMFs), particularly in relation to emerging markets. This framework enables scholars to compare concepts from developed and emerging markets, to address studies specifically by using consistent terms, and to advance research into the concepts according their characterization.

Keywords: Frugal innovation; Reverse innovation; Emerging economies; DMFs; R&D Background In the current phase of globalization, emerging market firms (EMFs) have begun to catch up with those from developed economies in terms of developing innovative capabil- ities (Jiatao and Rajiv 2009). Western companies entered emerging markets thinking they could simply harvest the fruits of research and development (R&D) a

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In this context, it is not surprising that, when surveyed, developed market firms (DMFs) said their preferred prospective international R&D locations are China (62%), the USA (41%), and India (29%) (UNCTAD 2005). However, developing products in and for resource-constraint markets is far different from product development in Western countries. It means for Western companies to unlearn traditional R&D approaches including the reduction of many complex and resource intensive steps (Ray and Ray 2010;

London and Hart 2004). The ability of integration technologies and knowledge developed in local institutions may be the enabler to serve customer needs in mass markets (Almeida and Phene 2004). Some multinational companies succeed already by even bringing innovations from developing countries in the West. General Electric, as a well-known example, has launched a cheap ultrasound device originally developed for the Chinese market. It has become the basis of a global business with eager customers in both developed and developing countries. This trend is apparent in consumer goods as well.

Other examples from the healthcare or telecommunication sector are also based on frugal principles. For instance, Ray and Ray (2010) present a case study about C-Dot (indigenous enterprise of the governmental Department of Telecommunications in India) which is the enabler of telecommunications in rural regions by developing a simple and affordable switching technology called RAX (R&D costs about $36 million instead of $1,400 million). Hereby, C-Dot focused on frugality, local requirements, integrated local talents, and local partners to establish an ecosystem.

Hence, innovation, an often investigated research topic among organizational theory researchers (Brem 2011), is increasingly shifting to emerging markets (Petrick 2011).

The tendency of the growing importance of emerging markets and the awareness concerning innovation for economic success are reflected in the dramatic increase of articles in the press about innovation in combination with emerging markets (e.g., Reena 2009; Saraf 2009; Govindarajan and Trimble 2005; Christensen et al. 2004).

Considering science, however, academic papers are rare which investigate innovations in/from emerging markets. Though, the new approaches from emerging markets are able to contribute remarkably to theory, i.e., to the resource-based view (RBV). Amit and Schoemaker (1993), for instance, divide the RBV into resources and necessary capabilities where resources are the ‘stock of available factors’ and capabilities are the ‘capacity to deploy resources […] using organizational processes, to effect a desired end’ (p. 35).

Companies within emerging markets face strong constraints of resources and develop capabilities to create valuable product solutions by replacing elements of capital with local labor at low costs (Ray and Ray 2010; Dawar and Chattopadhyay 2002). Such capabilities are worthy for further investigation since increasing scarcity of resources came into focus in developed markets, too. The innovative concepts from emerging markets need to be considered and understood.

However, by reading articles regarding innovative approaches from emerging markets, it is conspicuous that there is no common understanding of used terms and the relations between the approaches. The different terms are partly confusing, and no delineation between the terms is made. That hinders the desired academic discussion gaining deeper insights from different perspectives. Therefore, a common understanding of these terms is a prerequisite for further research and a foundation for exchanging ideas and building knowledge (Suddaby 2010). Hence, the following research question is asked: What are applicable characteristics to delineate the terms from emerging markets?





Brem and Wolfram Journal of Innovation and Entrepreneurship 2014, 3:9 Page 3 of 22 http://www.innovation-entrepreneurship.com/content/3/1/9

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Frugal innovation Due to the emerging market potential, frugal innovation - a derived management approach based on jugaad - has developed in the last decade. Gupta (2011) states that ‘frugal innovation is a new management philosophy, which integrates specific needs of the BoP markets as a starting point and works backward to develop appropriate solutions that may be significantly different from existing solutions designed to address needs of upmarket segments’ (p. 1). This statement describes the phenomenon in various dimensions. First, frugal innovation is basically focused on the investigation of the poor classes in (emerging) markets as target groups and as co-developers of appropriate products (Zeschky et al. 2011; Woodward 2011; Arnold and Quelsch 1998). Second, as a management philosophy, it refers to the extensive approach of adapting product management, production, and development to achieve a sufficient level of taxonomy but without high R&D investments (Bhattacharyay 2012). Third, the resulting solutions are able to satisfy upmarket demand (Immelt et al. 2009; Lifland 2010).

Unlike Gupta (2011), many authors focus (merely) on the product perspective. With regard to frugal innovation, products typically do not have sophisticated technological features but meet customers’ basic needs at a low cost by providing a comparably high value (Zeschky et al. 2011). Gupta and Wang (2009) see frugal innovation as the development of simple and ecological products, processes, services, and business models with a low input of resources, low cost, and little environmental intervention. Howard (2011) assigns similarly inherent ingenuity and a low carbon footprint. The main commonality of frugal innovations is the low-cost aspect (Hartigan 2011; Kingsnorth et al. 2011; Nunes and Breene 2011). Some authors argue that to achieve a cost advantage over existing solutions, frugal innovation goods (especially those based on Western-developed products) are stripped down to their core benefits by eliminating unessential functions to lower costs and maintain quality (Hartigan 2011; Moore 2011). Other authors like Samuelson and Scotchmer (2002) have suggested that these new products and technologies are derived using a technique called reverse engineering. Reverse engineering is the exploitation of competitors’ know-how ‘by starting with the known product and working backward to divine the process which aided in its development or manufacture’ (U.S. Supreme Court 1974). However, as seen above, the phenomenon of frugal innovation has its starting point in jugaad. It is noteworthy that the fundamental idea of frugal innovation originates as a result from imaginative problem solving and the regional circumstances of poverty and exigency, not only for abolishing the surplus functions of sophisticated products or for investigating them. The target is to maximize value for customers and minimize inessential costs (Seghal et al. 2011, p. 35) up to 90% price reduction compared to Western products (Gallis and Rall 2012). Seghal et al. (2011) suggest that to achieve this ambitious aim, an intrinsic cost discipline is imposed to avoid needless costs and to satisfy emerging market customers by considering their unique needs (p. 33).

As Nunes and Breene (2011) note, the focus of frugal innovation is on the emerging markets only by designing products and services especially for people from the BoP whereby other concepts, such as reverse innovation, are mainly targeted to Western markets despite the fact that the products and services are designed first for emerging markets.

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However, this is known as frugal engineering or constraint-based innovation. In this context, it is considered the ‘ability to absorb, adapt, and build upon the technologies imported from abroad rather than produce completely novel technologies’ (Kumar 2008, p. 251) to reduce total cost, accelerate product development (Reddy 2011, p. 1), and deliver value for money (Kumar 2008, p. 254). Frugal engineering or constraint-based innovation focuses on awareness and a cognitive approach in developing new products, services, and businesses in constrictive conditions (Sharma and Gopalkrishnan 2012).

Because innovations address unique needs, the development of appropriate products under constrictive conditions requires a suitable customization of products, processes, and services as well as technology and business models, according to the environment of local customers. Prahalad (2012), Varadarajan (2011), and Sheth (2011) remind us to consider the perspicacious requirements for innovation in emerging markets, such as affordability, availability, accessibility, and usabilityc, as well creating customer awareness (Prahalad 2012). To meet the requirements, Prahalad (2006) advises collaborative work with both customers and civil society organizations or governments. Altman et al. (2009) refer additionally to social development players, delivery providers, and local entrepreneurs (p. 47).

Simultaneously, Moore (2011) argues that frugal innovation goes beyond R&D by increasing the efficiency of the whole supply chain: there is no use of modern technology, no fuel, and no capital investment but a high level of service and adaptation to circumstances in the operating environment (p. 1). Moreover, Gupta and Wang (2009) highlight that ‘the key to leveraging any product or service as a platform for future growth is to treat it as a bundle of capabilities instead of becoming overly constrained by its current features, branding, distribution channels, or targeted customers’ (p. 12). Tata Motors, for example, is recognized for its cheap car, the Tata Nano (Tata Motors 2012). The Tata Nano costs about US$2,500 and is used by thousands of low-income customers. In spite of the low price, the car has passed the European crash-test safety standards. The company’s capabilities include insights into customer needs in low-income areas (e.g., India), proprietary technologies, a supplier network, and the internalized philosophy of frugal engineering (Gupta and Wang 2009). Hence, if DMFs want to imitate such a product (or product development), they need to extend their capabilities behind the processes, not just copy the frugal approach.

In summary, the central basis of frugal innovation is to consider emerging markets to be serious markets with potential for sales, as source of resources, and potential points of origin for goods and services demanded worldwide (Chattopadhyay and Sarkar 2011 p. 44).

The products are able to move upmarket to satisfy customers’ needs in developed countries as well (Hang et al. 2010, p. 26). Govindarajan (2012) states that if ‘we can innovate for India we can also simultaneously innovate for the world’ (p. 87). Fukuda and Watanabe (2011) designate the predominant benefit of frugal innovation as enabling a shift of emerging economies from growth driven by consumption into growth driven by investment, which is currently the significant difference between developed and developing economies (p. 91 ff.). As seen above, some EMFs are breaking this new ground yet.

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(e.g., partitioning work in the IT sector that leads to the outsourcing of assignments from DMFs to Indian engineers or EMFs). The second type is the capability-driven innovation, which involves creating or obtaining new internal capabilities (i.e., technical expertise) to solve problems; collaborations with other companies and R&D are common practices.

Tata Motors, for instance, cooperates with numerous technologically advanced companies (Bosch, Johnson Controls, Toyo, Behr, etc.) to develop the appropriate components for their $2,500 car. The third type combines external technology with the internal capability approach by merging different standard technologies to get advanced products requiring lower production costs. For example, in 2007, Computational Research Laboratories (CRL) developed the fourth fastest computer in the world at a cost reduction of more than 20% compared to other supercomputers, by designing a holistic new design and using off-the-shelf technology (p. 135).



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