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JIBR
6,1 MNCs in India: focus on frugal
innovation
Abhoy K. Ojha
4 Organization Behavior and Human Resource Management Area,
Indian Institute of Management Bangalore, Bangalore, India
Received 15 December 2012
Revised 27 July 2013 Abstract
Accepted 6 November 2013 Purpose – Frugal innovation is a term that has been used to describe the low-cost products and
services, as well as the systems and processes adopted by organizations to develop them. The purpose
of this paper is to examine the experience of multi-national companies (MNCs) in India as they adopt
the philosophy of frugal innovation to develop products that are high in technology but low in terms of
cost to meet the requirements of the market conditions in India, and similar low-income economies.
Design/methodology/approach – The case study methodology was adopted to understand the
experiences of the Indian subsidiaries of two MNCs, Bosch India and 3M India. Data were acquired
through interviews with key decision makers, documents, and publicly available information.
Findings – The two MNCs have increased research and development (R&D) in India and adopted
the philosophy of frugal innovation which combines high technology with low costs. Based on the
analysis, some propositions are presented indicating that MNCs will shift R&D to India if there are
market opportunities; they will adopt the philosophy of frugal innovation to produce high technology
products that are lost cost and low cost over product lifetime and will also expand to new-to-the-world
innovation and finally contribute to global innovation.
Research limitations/implications – The study is based on only two case studies and a large
sample study may be required before the findings can be generalized.
Practical implications – Other MNCs can learn from Bosch India and 3M India in terms of
adopting frugal innovation practices to be successful in low-income economies.
Originality/value – The field of frugal innovation is quite new and largely based on anecdotal
accounts of successful low-cost innovation. This paper provides a more detailed account of the
experiences of two well-known organizations to present propositions that may be used to conduct a
large sample study.
Keywords Frugal innovation, High technology, Low costs, MNCs in India
Paper type Research paper
Introduction
Research suggests that multi-national companies (MNCs) are disaggregating their
global value chains and locating various activities in different parts of the world to
integrate “ownership-specific” and “location-specific” advantages to create global
production and innovation capabilities. According to Altenburg et al. (2008), while
production capabilities had significantly shifted to low-income economies, innovation
capabilities had largely remained in the high-income economies. They suggested that
much of the research and development (R&D) activities in economies such as India
were focused on low-end technologies and organizations in these economies were only
rarely involved with high-end technologies. However, they also indicated that
Journal of Indian Business Research organizations in India had put in place innovation systems that would facilitate the
Vol. 6 No. 1, 2014
pp. 4-28 transition to higher levels of innovation in the future. Li et al. (2010) found that
q Emerald Group Publishing Limited
1755-4195
increased R&D activities in low-income economies not only had a positive impact on
DOI 10.1108/JIBR-12-2012-0123 product innovation but also enhanced absorptive capacities of the innovative firms
allowing them to more easily assimilate high-end technologies that were developed MNCs in India
for the high-income economies. Bhidé (2009) suggested that even if some R&D moved
to India, and other similar economies, the high-income economies, including the USA
and Europe, would still drive innovation in the new and emerging technologies.
In short, he argued that, in the long run, both the low- and high-income economies
would benefit from the reorganization of global innovation capacities.
Franco et al. (2011) attributed the shift in R&D to high costs, shortage of qualified 5
R&D personnel, and the “war” for limited talent in high-income economies, and the
corresponding low costs, supply of abundant qualified talent, and the easy availability
of high-end knowledge workers in low-income economies. An underlying assumption
in this, and other studies (Bruche, 2009) has been that the attractive markets will
largely continue to be in the currently high-income economies and MNCs need to
globalize their production and R&D to low-income economies to control costs so as
to better address competitive challenges in their traditional markets. The perspective
taken in this paper is that there is significant shift in consumption patterns in the
low-income economies, such as India, which is making them very attractive high
growth markets (Brown, 2005; Fukuda and Watanabe, 2011), even as the traditional
markets of the MNCs adjust to lower rates of growth. As a result, there are
opportunities for MNCs to re-focus their R&D activity towards frugal innovations for
low-income economies, which may be crucial for the financial well-being of many of
them (Prahalad and Lieberthal, 2003). As explained in some detail later in the paper,
frugal innovation refers to the development of products or services using high-end
technology but with an explicit focus on keeping costs to a minimum possible.
It is quite well known that India had not produced any innovation in the recent
times that has had a major impact on the world. Firms had largely acquired patented
technologies and know-how from international collaborators or the open market
leading to a large number of “new to the firm” and also “new to the market” but not
“new-to-the-world” innovative products (Arora, 2011). Tseng (2009) concluded that
Indian organizations focused largely on incremental innovation rather than
radical innovation. However, Manimala et al. (2005) found that while many of the
innovations in India were indeed “incremental” in terms of technology evolution, but
the same innovations had significant positive outcomes for the organizations,
including revenues generated and costs saved. Krishnan (2010) suggested that a lack of
a proper eco-system in the country to support innovation, and the excessive reliance on
creative improvisation or jugaad, had prevented the adoption of systematic innovation
which is essential for successful innovation.
However, despite some of the concerns discussed above, there has been
acknowledged changes in the levels of innovation in some industries in India. Kale
and Little (2007) concluded that in the last few years, the pharmaceutical industry in
India had moved from duplicative imitation to creative imitation which had helped the
creation of the local competence to conduct advanced collaborative innovative R&D.
Similarly, Ojha (2005) concluded that innovation in the information technology had
improved significantly, although subsidiaries of MNCs were involved with higher
levels of product innovations than the Indian firms, which were more involved with
incremental process innovations. Further, a study by Munshi (2009) questioned the
theory that significant innovation had not happened in India and documented 11 cases
of breakthrough innovations in India. The inspiring accounts of overcoming
JIBR significant challenges to establish commercially successful innovations went a long
6,1 way in trying to shed the image that India-based organizations would always be
known for simple improvisations rather than genuine innovations.
The changing market conditions in India and the general increase in innovation in
the country had thrown up challenges for MNCs, even if they had been present in the
market for long. They were realizing that global innovations do not necessarily have
6 direct applicability in the Indian market, and merely replicating global products in
India may provide only limited growth opportunities (Zeschky et al., 2011). As stated
by a prominent scholar of innovation in India:
India is essentially a cost sensitive market. Hence, by implementing ideas from the west here
just as they are will not work. One needs to redesign the product for the Indian audience and
bring down the cost by a factor of 2-3. This is where innovation comes into play
( Jhunjhunwala, 2009, p. 25).
Ray and Ray (2011) explained how Tata Motors established new industry standards
for frugal innovation by championing a low cost no-frills car called the Nano to meet
the unique affordability and acceptability criteria for a completely new market
segment. According to Kumar and Puranam (2012), frugal innovation is a necessity in
India to meet the needs of consumers that are both demanding in terms of features as
well as constrained in their ability to pay. Hence, MNCs operating in India need to
adapt to the demand conditions and price sensitivity of the Indian market (Prabhakar,
2010; Brown, 2005; Singh and Choudhury, 2009; Radjou et al., 2012). They need to
develop new product and process innovations looking through the lens of constraints
(Singh and Choudhury, 2009) rather than a lens of abundance.
The focus of this paper is on MNCs that had seen growth opportunities in the
low-income economies (Fukuda and Watanabe, 2011) and have established innovation
capabilities to developed products for economies such as India (Iyer et al., 2006)
and other fast growing low-income economies. As Singh and Choudhury (2009),
Radjou et al. (2012) and Brown (2005) argue, MNCs that want to cater to the low-income
economies, including India, cannot replicate global products or global development
and production processes in India. They need to adopt innovation systems that cater to
the conditions that prevail in India, instead of assuming that the innovative products or
processes that work in the home base also apply to India. The innovation systems in
the Indian subsidiaries of two MNCs, Bosch India Limited and 3M India Limited, are
examined to understand how they had developed products based on the philosophy of
frugal innovation for the India market, and how their R&D governance processes had
evolved over time.
Frugal innovation
In the past, more often than not, the literature on innovation had glorified radical
innovation and treated incremental innovations as somewhat unimportant. However,
from the perspective of business both types of innovation are important. As stated by
Varadarajan:
Over the years, successful radical innovations have undisputedly had a significant impact on
the fortunes of a number of companies. At the same time, firms cannot afford to overlook the
role of incremental innovations in enhancing and sustaining the revenue and profit streams of
successful radical innovations (Varadarajan, 2009, p. 21).
Despite such cautionary arguments, most large MNCs had adopted systems and processes MNCs in India
to primarily support radical innovations. Radjou et al. (2012) believe that the very same
capabilities that made these firms so successful in the past may hurt their future.
According to them, most large MNCs would be unable to deal with the speed and
complexity requirements of future innovations, particularly in the low-income economies,
as the traditional innovation systems were expensive, lacked flexibility, and were too
elitist and insular. Others have argued that in low-income economies, incremental 7
innovation may be more appropriate than radical innovation (Iyer et al., 2006) and MNCs
need to acquire capabilities to conduct R&D to develop “frugal innovations” to suit the
market needs of low-income economies. With stagnant markets in the high-income
economies, and high growth rates in India and other similar economies, “appropriate
technology” was at the core of the operation of several MNCs (Kaplinsky, 2011).
Prahalad’s (2002) and Prahalad and Hammond (2002) call to revise assumptions
about the poor to see them as an opportunity to develop new innovative products to
meet their needs at affordable prices attracted a lot of attention in the academic world.
Prahalad (2012) identified the bottom of the pyramid (BOP) in low-income economies
as a new and large source of untapped revenues if managers focused on the
four as namely, creating awareness, access, affordability, and availability. In another
paper, Prahalad and Mashelkar advocated “Gandhian innovation” that focused on
affordability and sustainability, so labeled as the authors claimed that the two
attributes are consistent with Mahatma Gandhi’s philosophy (Prahalad and
Mashelkar, 2010). Kumar and Puranam (2012) identified six principles that underlie
the system of frugal innovation, namely:
(1) robustness;
(2) portability;
(3) defeaturing;
(4) leap frog technology;
(5) megascale production; and
(6) service ecosystem.
Methodology
The case study method (Yin, 2009) was adopted to examine the experiences of
two organizations. Bosch India and 3M India were selected as two organizations for the
study as both had been in India for some time, and both had recently publically
announced their focus on R&D for India. The author had conducted several executive
education programs for Bosch India and a program for 3M India, and the interactions
with executives in designing the programs, and discussion of issues during the
program provided him ample opportunity to understand the general issues around
frugal innovation. The two cases were selected with the confidence that both
organizations would be rich sources of data for a study on frugal innovation. Formal
data on the innovation activities in the two organizations were acquired through
interviews with key persons directly involved with various innovation initiatives in the
organizations. Before the interviews were conducted, the author conducted a review of
the literature on frugal innovation, and innovation in India in particular, to understand
the issues to prepare for the data collection process.
At Bosch India, in-depth interviews of about one hour to one-and-a-half hours were
conducted with four executives. The interviews were semi-structured with a protocol to
guide the conversation but with enough flexibility to allow the interviewee to provide
information that he thought was relevant. One of the interviewees was part of initial
group of engineers that was sent to Germany to train to transition some R&D activity
to India, and could share the chronology of developments. Another was the head of the
R&D department of the Diesel Division who had been the leader of the team that
created a “new-to-the-world” innovation for India that was getting attention in Europe.
The other two executives were heading two different R&D programs in collaboration
with R&D units in China and Brazil to develop frugal innovations. Permission was
provided to record, so these interviews were recorded and transcribed. In addition,
there were follow up telephone calls and email exchanges with the first two executives
to clarify doubts and seek further information.
At 3M India, in-depth interviews of over an hour each were conducted with two
senior executives, and an open-ended interview with a third executive for more than
an hour before the other two interviews were conducted. The open-ended interview MNCs in India
was with a business development executive who promoted some of the innovations in
the Indian market. The first formal interview was with an executive who was part of
the earliest 3M R&D team in India, and again could narrate the chronology of events at
3M. The second interview was with the head of R&D in 3M India. As in the earlier case,
the interviews were semi-structured. The interviews at 3M were captured in the notes
taken during the interviews. 9
In addition to the formal interviews, relevant documents pertaining to the
discussions, that could be made available to outsiders, were obtained from
the interviewees in both organizations. Further, publically available information
from the press, including interviews by senior executives of both organizations, and
company web sites were also acquired to substantiate and triangulate the information
that was obtained during the interviews and the documents that were made available.
The data was coded by the author and analyzed to understand any common patterns
as well as noticeable differences in practices within and across the two organizations.
This search was largely driven by issues identified during the literature review,
while the author attempted to be open to other patterns to emerge during the process.
While the focus was on frugal innovation which is captured in Propositions 1-5, certain
patterns associated with the evolution of R&D governance in the subsidiaries that were
identified are also reported as Propositions 6-8.
Frugal innovation by MNCs in India: the cases of Bosch India and 3M India
In the next sub-section, brief background information on the two organizations is
presented. This is followed by the description of propositions that have been extracted
from the data along with brief support information for each proposition.
Reverse innovation
Govindarajan (2012) argued that when MNCs are successful in developing innovations
for emerging markets, they can often find opportunities for those innovations in some
niche markets in the high wage economies. He referred to this as “reverse innovation”.
However, he argued that many MNCs might not be able to experience this phenomenon
as it requires major changes in attitudes at headquarters and also major changes in
organizational structures, product development process in home countries and also a
re-orientation of the sales force.
As discussed earlier, Bosch India had already developed a product for a European car
manufacturer. However, in that case, the advantage that the R&D unit in India had was
that it was the only center of excellence for that technology in the Bosch world. Hence, the
client requirement was assigned to it. However, now Bosch India was in the early stages MNCs in India
of developing products based on technologies that were still used in Europe, but with
frugal philosophy to cater to some segments of the European market. For example, the
product platform that was developed for the small vehicle market in India was now
being standardized for usage across the world. Many European car manufacturers were
expected to return to producing small cars with fewer cylinders, and Bosch was
attempting to take the platform developed in India and adapt the applications for 21
European conditions. This had been a learning experience for Bosch India.
When platforms were developed only for Indian markets they reflected the belief that
“Indians do not want anything that is nice to have, only what is must to have”. In other
words, platforms were developed without attention to the need to add features in the
future. Now that the platforms were being adopted in other markets, R&D engineers
were alert to the idea that the platforms should be designed for Indian market but with
provisions for addition of applications and features to make them suitable for “reverse
innovation” for European markets. For example, a technology platform for generators
developed for the regional requirements of India, China and Brazil, and launched in 2010
was ready to be launched in Europe with additional applications to customize it for
European needs. The head of the R&D team for generators in India said:
We have a successful product that is now being standardized for usage across the world.
Many European customers are looking for smaller cars and this product is being upgraded to
meet the European requirements. So Europe is taking a platform developed in India and
adapting it for European applications.
He suggested that while products designed for India adopt frugal principles, the design
had to be modified to accommodate addition features in the future if the Indian market
started demanding those features or the product had to be introduced in another
market. He said:
We have to adjust the design of the products to allow for the addition of nice to have features
for other markets.
At 3M India, there was no ready example of “reverse innovation” although it might
happen in the future. There are several possible explanations for this. First, the
high-end technology innovation efforts in India were very new. It may take some time
for the R&D unit in India to establish itself to be ready for reverse innovation. Second,
unlike, Bosch, 3M followed a geographic division structure. Hence, it was less likely
that there would be explicit attention to other markets when developing products for
the Indian market. As stated by the head of R&D:
The mandate for the R&D center is to develop technology for the India market. However, if it
becomes globally relevant it is fine.
However, given the open flow of information across R&D units in different
geographies and corporate R&D there was always a possibility for reverse innovation
to happen just as it had with other mature R&D units of 3M.
In other words, since the R&D infrastructure and human capability had been
established in Bosch India for some time, there was evidence of early “reverse
innovations” in the organization. On the other hand, the capabilities at 3M India were
still focused on India and there were no examples of reverse innovations but there was
potential for them in the future:
JIBR P6. MNCs in India, after successfully developing products for India, will
6,1 contribute innovations to the related markets, and even the traditional
markets.
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Christensen, C.M. and Overdorf, M. (2000), “Meeting the challenge of disruptive change”,
Harvard Business Review, Vol. 78 No. 2, pp. 66-76.