Frugal Innovation

Challenges of Frugal Innovation and Role of Business Models

The following is a presentation to students of Radha Basu’s Engineering for the Developing World class at Santa Clara University’s Frugal Innovation Lab. The topic focused on showing how technology innovation alone is insufficient to overcome challenges in emerging markets and the role business models play in incorporating wider issues such as institutional and social innovation into the solution.

Challenges of Frugal Innovation and Role of Business Models by Yasser Bhatti is licensed under a Creative Commons Attribution 3.0 Unported License.

Based on a work at Said Business School, Oxford University and at Santa Clara University.

This license lets you distribute, remix, tweak, and build upon my work, even commercially, as long as you credit the original creation.

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Response to The Economist

In the Schumpeter column of The Economist on ‘Asian Innovation’, 24 March, 2012, the Economist argues ‘frugal ideas are spreading from East to West’. I’d like to take this opportunity to clarify and dispel some notions of frugal innovation as presented by the Economist articles.

Since the Economist’s seminal special report espousing frugal innovation in April 2010, there tends to be a focus on purely cost reduction through component redesign or the stripping of superfluous features to a level of basic needs. While component innovation is important, I’ve found, based on interviews of many of the “frugal innovators” exemplified in the Economist articles, that they equally embrace modular, architectural, and business model innovation.

I have proposed a theory of frugal innovation which argues that frugal innovation isn’t being practised solely within the Schumpeterian domain of technology innovation, but inevitably overlaps and extends into the boundaries of institutional innovation and social innovation. It is in those intersections that hold the sweet spot which characterizes the true nature of frugal innovation, one that transcends a new value proposition based on cost or a specific marketing strategy.

This confluence of technology, institutional, and social innovation is necessary given the unusual contexts of emerging markets marked by resource constraints, institutional voids or even complexities, and large populations with affordability constraints. So simply put, frugal innovation provides functional solutions through few resources within complex or extreme contexts for the many who have little means.

Given local institutional contexts, frugal innovation discovers new business models, reconfigures value chains, and redesigns products to serve users who face extreme affordability constraints, in a scalable and sustainable manner. It involves overcoming or tapping resource constraints and institutional voids and complexities to create more inclusive markets (Bhatti, 2011).

So there is potential to demonstrate that this is a new kind of innovation process which leverages the challenges of institutional and resource challenges to debunk heavy R&D investment claims, and achieve profitability from underserved consumers. It is different from the standard innovation approach predominantly practiced in more developed contexts.

But to what degree are the two different, is a question I am in the middle of finding answers to.

Presentation

Research Summary

I study innovation in emerging markets, contexts marked by institutional voids, resource scarcity, and affordability constraints. My DPhil (PhD) programme’s broad research question is “How do institutionally complex and resource constrained environments affect the discourse in innovation and the practise thereof?” I look at the particular case of emerging markets and therein the emerging field of ‘frugal innovation’. I focus on the rise of talk, practices, and policy about ‘frugal innovation’, a trend questions prevalent notions of innovation — on what is innovation, where it stems from (sources), whom to target (users), how best to achieve (design process), and how it spreads (diffusion).

This research entails understanding how localization and globalization processes are shaping innovation in and for emerging and developing market economies. Innovators in emerging markets have to devise low cost strategies to either tap or circumvent institutional voids and resource limitations to innovate, develop and deliver products and services to low income users with little purchasing power, often at mass scale and arguably in a sustainable manner. Hence, two main challenges persist in emerging nations for innovation and entrepreneurship: First is the issue of dealing with complex institutional contexts (Mair, Marti, & Ventresca 2012), institutional voids (Khanna and Palepu 1997 and others) and resource constraints and second is the issue of addressing the needs of the bottom of the pyramid i.e. the largest and poorest socio-economic segment of the population (Prahalad 2005). Despite institutional voids or complexities, emerging market entrepreneurs and firms are producing innovations which are resolving their local needs, and at the same time scaling to neighboring developing nations and even beyond to developed markets (Khanna 2008).

Through field work, interviews, and archival data, I am revealing how actors in the private, public, and community sectors are creating the market for frugal innovations — affordable, high value and sustainable solutions for local problems of global concern, often in complex environments where resources are unavailable or hard to control. These range widely in terms of core technology, focus, and impact. To date, I have inductively addressed why this emerging organizational field is gaining traction, how the space is being negotiated, and how to operationalize the practice of frugal innovation towards future deductive empirical research.

 

Theory of Frugal Innovation

Based on thus far 30 plus interviews and five focus groups as well as over 150 documentary evidence of innovation from real ventures, I find that frugal innovation spans the boundaries across social, technical and institutional innovations to carve out a unique space that is enabling the development of a new field within innovation studies. Further, I find that ‘frugal’ is neither cheap nor substandard, but rather uses market forces to provide for under-served populations in the most efficient and sometimes sustainable manner. Social entrepreneurs, MNCs, communities, and states alike are involved in this market building and field generation activity which leads to as many questions as answers.