Hyundai's Sriperumbudur plant near Chennai (Courtesy: Hyundai Motors India)
Ideas for Leaders #718

Using Frugal Innovation to Serve Emerging Market Customers

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Key Concept

Using a case study of Hyundai in India in support, two professors show how multi-national corporations from developed countries can access a growing middle class in major emerging companies. The two key success factors: engaging in frugal innovation, based on frugal engineering, bricolage and modularity, and developing collaborative ecosystems

Idea Summary

To sell innovative products in emerging markets, companies from developed countries must take into account two fundamental facts about emerging markets. The first is that the growing middle class in emerging economies that represents the most valuable market for new products is price-sensitive — they do not earn what their middle-class counterparts in developed economies earn. At the same time, these potential customers still expect quality, robust products. Second, emerging markets are often dominated by local companies who are familiar with local conditions. These conditions are radically different from what companies from developed market are used to, and include lack of risk capital and skilled talent, political uncertainty, and often a lack of functioning institutions.

According to Rifat Sharmelly of Quinnipiac University and Pradeep Kanta Ray of the University of New South Wales, developed economy multinational corporations who want to sell innovative products will not succeed if they simply try to sell cheaper versions of their developed market products. Instead, developed economy MNCs must engage in what they call frugal innovation — developing innovative high-end technology products with low costs, in order to overcome the limited resources (including raw materials) of the market and still meet the financial constraints and quality demands of the market’s customers.

There are three distinct approaches for developing frugal innovations:

  • Frugal engineering. Traditionally product development is capital- and resource-intensive, with cost-cutting measures taken post-design. Frugal engineering looks to minimize cost and resource usage from the very beginning of the product design and development process. 
  • Bricolage. Bricolage is the art of using or re-using available resources, often unconventionally, in order to reduce costs.
  • Modularity. Modularity involves building products as combinations of modules. Thus, products can be improved or upgraded by improving or adding modules.

The second element for successfully developing innovative products for emerging economies is to build a collaborative ecosystem, which leads to deep embeddedness of the company in the market. A business ecosystem, as with the biology ecosystem that inspired it, involves a number of different actors who depend on each other for their success. With a collaborative ecosystem, deliberate collaboration between the actors is fundamental.

Sharmelly and Ray use an in-depth case study of Hyundai Motor India Limited (HMIL), a wholly owned subsidiary of Korea-based Hyundai and the second largest car manufacturer in India, to research the role of frugal innovation and collaborative ecosystems in helping developed market MNCs develop cost-effective and value-adding products in emerging economies. The researchers looked specifically at HMIL’s efforts to develop the Eon, an affordable car targeted to middle-class Indian buyers purchasing their first cars.

The following are examples pulled from the case study that illustrate the various elements of frugal innovation and collaborative ecosystems.

  • Frugal engineering. To minimize cost and resource usage, the HMIL team reengineered a number of core processes, using self-invented procedures to replace expensive machineries. One example involved painting the cars. Hyundai uses different primers for every base colour (red primer for red base, etc.), which required a sophisticated production line. In batch production, this meant that a significant amount of primer went to waste. HMIL replaced this process with a simpler process that involved just five primer colours, which significantly reduced the waste of primer and saved HMIL $50,000 per year.
  • Bricolage. The company used aluminium to build the cylinder blocks for its unique three-cylinder engine. The process rejection rate of aluminium is very high. The company addressed both the resource and financial cost of the rejection rate with an ingenious solution: reprocess the rejected aluminium cylinder blocks into aluminium ingots (an ingot is when an amount of pure metal is processed into shapes that are easy for reprocessing) for car engine production.
  • Modularity. The architectural design of the Eon was modular, which meant that it could be modified into a more sophisticated design by adding more modules. For example, the modular architecture of the Eon’s power trains meant that the power train’s main elements — engines, motors, and transmissions — could be configured in different ways to offer different power train categories (base versions to advance versions) to customers.
  • Collaborative ecosystems. HMIL collaborated with more than 100 local Indian suppliers, who manufactured components, modules and integrated systems for its cars. The collaboration extends beyond manufacturing-buyer transactions to a continuous learning relationship, including special training offered by HMIL on topics such as design engineering. HMIL also collaborates with 38 industrial training and vocational training institutes throughout India. HMIL has thus developed an ecosystem that enhances the knowledge and capabilities of its suppliers and also builds a strong base of skilled human capital. These collaborations clearly embed the company in the local market — an embeddedness further enhanced by HMIL’s state-of-the-art R&D facility and design centre in India. 

Business Application

The HMIL case study offers clear lessons for developed market multi-national corporations seeking to develop innovative products for emerging markets:

  1. MNCs must realize that customers in emerging markets are cost-sensitive but at the same time want high quality and robust products.
  2. At the heart of frugal engineering, bricolage and modularity is a willingness to rethink the entire product design and production processes. It’s likely that existing processes are too costly and resource-intensive.
  3. MNCs must recognize that frugal engineering and bricolage approaches are likely to conflict with well-established and rigorous new product development routines. Managers need to be flexible and creative.
  4. Simply locating manufacturing activities in emerging markets is not good enough. MNCs must be prepared to establish product design and R&D units in low-income markets. Operating in resource-constrained environments is the only way to fully understand and fulfil local user needs.
  5. MNCs must fully embrace the concept of building a local ecosystem bringing together local innovation partners. These partners must including traditional partners such as suppliers and distribution channel partners, but also unconventional partners, such research and training institutions and NGOs, who can often fill the void of the institutional structures found in developed economies. 
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Authors

Institutions

Source

Idea conceived

  • July 2018

Idea posted

  • November 2018

DOI number

10.13007/718

Subject

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