Innovation at the bottom of the pyramid.
Depending on where exactly you draw the line between poor and really poor, somewhere around 4 billion people live at the bottom of the pyramid--that is, they live on $8/day or less. Those numbers set up a paradox: each consumer has very little to spend, but the vast numbers mean that, taken together, they constitute an enormous market. In 2007, according to a Sloan Management Review article by Jamie Anderson and Costas Markides, "Brazil's poorest 25 million households have an annual income of around $73 billion per annum; China's 286 million lowest-income households have an annual income of about $691 billion; and India's 171 million poorest households have spending power of about $378 billion."
It's easy to see why those numbers have attracted the attention of western firms, especially as many developed markets have saturated and even stagnated and the marginal cost of attracting one new customer continues to increase. But cracking that market is not easy. As many firms have discovered, to their distress, it's not as simple as stripping features out of a western product, cutting margins to the bone to reduce cost, and relying on volume to make up the difference. As Erik Simanis warned in a 2012 Harvard Business Review article, making that equation work requires a fantastic penetration rate, even as pervasive infrastructure challenges can increase the marginal cost of each sale exponentially. In addition, emerging market consumers, and especially bottom-of-the-pyramid consumers, have distinct needs and particular cultural preferences that must be addressed if a product is to succeed.
Instead, Simanis recommends an approach that sees the poor not merely as consumers but as partners in innovation. Indeed, those companies that have succeeded in emerging markets have largely done so by embedding themselves in the markets they wish to penetrate, looking to local expertise and local experience. This is the approach G. N. Bajpai, an Indian businessman who has experience with many of India's giants, recommends in his 2011 interview with Jim Euchner--companies wishing to sell to the bottom of the pyramid, Bajpai says, absolutely must focus on price first, but they must do so with an understanding of what these consumers actually need: "The entire philosophy of innovation and production is starting from the point that the consumer has a problem. And do I have a solution? And if I have a solution, can I deliver the solution at the price that my target customer can afford?" Arriving at that price point may require completely reimagining the product from the ground up.
Those that have engaged fully in emerging markets, and in the poorest segments of those markets, have discovered a robust, thriving culture of innovation--inventiveness born of necessity, nurtured by scarcity, and driven by an innate resourcefulness. That innovative spirit has most recently been captured by a term that comes from India, jugaad. Navi Radjou and Jaideep Prabhu did much to introduce the term to the western business world with their 2012 paean to the creativity of Indian entrepreneurs, Jugaad Innovation. In a 2016 RTM interview with Jim Euchner, Radjou defined it as "a Hindi word that means a makeshift solution--I call it 'the MacGyver spirit.' ... This combination of big problems and limited resources leads to a lot of improvisation and a lot of frugality in how you create solutions. That is the spirit of jugaad innovation." This definition suggests that jugaad has a lot in common with what once would have been called "Yankee inventiveness." In fact, Radjou and Prabhu invoke that Yankee spirit in their 2015 book. Frugal Innovation, quoting Benjamin Franklin: "The way to wealth is as plain as the way to market. It depends chiefly on two words, industry and frugality: that is, waste neither time nor money, but make the best use of both. Without industry and frugality nothing will do, and with them everything." Others have equated the idea of jugaad to a "hack" or, at least in particular segments of the United States, a "kluge"--a workaround solution that solves a problem quickly using available resources. It's not always pretty, but it does the job.
That last set of definitions suggests why some see the "spirit of jugaad" as potentially problematic. Wired blogger Abhijnan Rej points out that the street definition of the word includes some darker implications, not least the elimination of barriers through petty corruption and a willingness to disregard considerations such as the safety of the solution or its sustainability (in terms of both environmental sustainability and maintainability). India's Reserve Bank Governor, Raghuram Rajan, sees jugaad as an obstacle to India's growth. In the 2015 C. K. Prahalad Memorial Lecture, reported in DNA, he argued, "Jugaad, or working around difficulties by hook or by crook, is a thoroughly Indian way of coping, but it is predicated on a difficult or impossible business environment. And it encourages an attitude of shortcuts and evasions, none of which help the quality of the final products or sustainable economic growth." Similarly, Tufts University professor Bhaskar Chakravorti, during a February 2014 panel discussion at Emory University reported by Trevor Williams for Global Atlanta, worried that "building your economy on a knack for 'making lemonade out of any lemon you're given,' as Mr. Radjou put it, can actually perpetuate adversity by limiting the ability to scale up products and build underlying institutions that help countries deal with major problems like public health and education."
Still, Western companies see the value of jugaad as a way to develop products that consumers really need and get them to market quickly, and that's the spirit in which they have latched onto the idea. Jugaad has become institutionalized as "frugal innovation," most notably by Radjou and Prabhu in Frugal Innovation. Frugal innovation as Radjou and Prabhu define it is not merely an approach to making do; in a 2013 commentary for INSEAD Knowledge, they characterize it as a new paradigm, for innovation and for business. and a "a whole new mindset, a flexible approach that perceives resources constraints not as a debilitating challenge but as a growth opportunity." Organizations that have embraced "the jugaad mindset," according to Radjou and Prabhu, "perceive scarcity as an opportunity to innovate and leverage employees' ingenuity to create frugal solutions that offer greater value to customers at lower cost."
Thus, frugal innovation is defined by the products it creates. In the RTM interview, Radjou listed five attributes associated with a frugal product: affordability, simplicity, sustainability, quality, and purpose. Timo Weyrauch and Cornelius Herstatt, in a recent article in the Journal of Frugal Innovation, offer three defining criteria, based on an extensive literature review (that included Radjou and Prabhu's work) and also on interviews with managers: jugaad means "substantial cost reduction, concentration on core functionalities, and optimized performance level."
The key, as Radjou has pointed out in multiple venues, is that products for bottom-of-the-pyramid markets can't be merely stripped-down versions of western products. Unilever, for instance, began by repackaging its soaps and shampoos into smaller, single-use portions for poorer consumers in emerging markets; it found real success when it reformulated products to accommodate Indian women's habit of using the same soap for body and hair. When appliance maker Haier found that consumers in some of its markets thought having a machine just for washing clothes was wasteful, the company redesigned its washers so they could be used for washing vegetables as well.
Creating truly frugal products means completely reimagining how a product is engineered, with a ruthless focus on what's important to its user and the real context of its use. That means considering repairability and durability as well as ease and efficiency of use. RTM has carried a number of articles detailing companies' journeys with frugal innovation; see, for instance, "Developing Disruptive Products for Emerging Economies" (2010)--which includes more about Haier's journey, as well as four other cases--and 2011's "Frugal Innovation in Emerging Markets" for the story of a Western company attempting frugal innovation.
Ultimately, it turns out, it's not just emerging-market consumers who look for these kinds of products. A number of firms have found that their frugal products have appeal in Western markets, as well, creating a pipeline of reverse innovations. GE's low-cost, compact ultrasound machine; Renault's Logan automobile; Haier's appliances--all have been welcomed in Western markets, and not just by poorer consumers. The slow recovery from the financial crisis, increasing concern about sustainability, and--in some cases, at least--growing frustration with overly complicated, hard-to-use high-tech products have driven middle-class consumers to consider the simpler, more efficient, and more robust products resulting from frugal innovation.
Ultimately, by remaking the customer experience, frugal innovation may produce truly disruptive products, in Clayton Christensen's sense, that upend markets and reconfigure value chains--not just in emerging markets but across the globe.
G. N. Bajpai and James Euchner. 2011. Innovation in emerging markets: An interview with G. N. Bajpai. Research-Technology Management 54(4): 12-16.
Chang-Chieh Hang, Jin Chen, and Annapoomima M. Subramian. 2010. Developing disruptive products for emerging economies: Lessons from Asian cases. Research-Technology Management 53(4): 21-26.
C. K. Prahalad. 2006. The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits. Upper Saddle River, NJ: Pearson Education.
Navi Radjou and Jim Euchner. 2016. The principles of frugal innovation: An interview with Navi Radjou. Research-Technology Management 59(4): 13-20.
Navi Radjou and Jaideep Prabhu. 2012. Jugaad Innovation: A Frugal and Flexible Approach to Innovation for the 21st Century. New York: Random Business.
Navi Radjou and Jaideep Prabhu. 2015. Frugal Innovation: How to Do Better with Less. Philadelphia, PA: Public Affairs Books.
Marco Zeschky, Bastian Widenmayer, and Oliver Gassman. 2011. Frugal innovation in emerging markets. Research-Technology Management 24(4): 38-45.
Jamie Anderson and Costas Markides. 2007. Strategic innovation at the base of the pyramid. MIT Sloan Management Review, Fall (October 1). http://sloanreview.mit. edu/article/strategic-innovation-at-the-base-of-the-pyramid/
Navi Radjou and Jaideep Prabhu. 2013. Frugal innovation: A new business paradigm. INSEAD Knowledge, January 10. http://knowledge.insead.edu/ innovation/frugal-innovation-a-new-business-paradigm-2375
DNA. 2015. Raghuram Rajan slams Indian culture of "jugaad." DNA: Daily News & Analysis, September 18. http://www.dnaindia.com/money/report-raghuramrajan-slams-indian-culture-of-jugaad-2126296
Abhijnan Rej. 2013. Jugged: Frugal innovation or hacking the Indian way? Wired Innovation Insights, October 23. http://insights.wired.com/profiles/blogs/ jugaad-hacking-indian-way-1
Erik Simanis. 2012. Reality check at the bottom of the pyramid. Harvard Business Review 90(6): 120-125. https://hbr.org/2012/06/reality-check-at-the-bottom-ofthe-pyramid
Timo Wehrauch and Cornelius Herstatt. 2016. What is frugal innovation? Three defining criteria. Journal of Frugal Innovation 2(1). https://jfrugal.springeropen. com/articles/10.1186/s40669-016-0005-y
Trevor Williams. 2014. Is frugal innovation hampering India's growrth? Global Atlanta, February 18. http://www.globalatlanta.com/is-frugal-innovationhampering-indias-growth/
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|Author:||Gobble, MaryAnne M.|
|Date:||May 1, 2017|
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