The economics of innovation: From profligate to frugal?

The Economics of Innovation: From Profligate to Frugal?


October 2012

As an executive, you probably sit in many meetings where innovation is the only item on the agenda. The script typically goes like this:

A colleague gives a passionate speech on why your company needs more innovation to grow and prosper. This is followed by an innovation guru who describes how other companies have achieved breakthrough innovations. “Disruptive” and “Clayton Christensen” 1 are mentioned, and homage is paid to Steve Jobs. You then break out into smaller groups. Discussion meanders. Invariably, someone asks for a definition of innovation, at which point you realize that you don’t have a common understanding of the concept. The meeting ends with the breakout groups making various recommendations that range from increasing investment in R&D to creating an annual innovation competition.

Sound familiar?

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Listen to an interview with author Kishore Swaminathan on rethinking innovation.
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In my opinion, it’s time to analyze and understand some intrinsic beliefs we hold about innovation, especially in the West, where the concept has evolved over time and under circumstances that raise questions about its relevance to modern times. I believe we will find our current thinking and approach regarding innovation to be rather expensive, even profligate. Once we bring a frugal mindset to innovation, we’ll see a lot more innovation around us than we do today and realize that words like “breakthrough” and “game-changer” only serve to muddy our thinking.

Winding the clock back
Let’s start with the 1970s. The Western world (including Japan) was almost entirely capitalistic and, with the exception of some highly regulated industries (utilities, telecommunications, transportation), for the most part, the market was competitive and the quality of products and services was quite good. Creating better products in a competitive market where the quality was already high meant that the incremental effort required for each innovation was progressively higher—and more expensive.

This extraordinary effort required highly trained scientists and engineers. To remain competitive, leading companies in the United States, Japan and Europe poured money into R&D.

Meanwhile, the space race and the cold war required a complementary kind of innovation. First-of-a-kind weapons, medical instruments, zero-gravity equipment and so on had to be developed. Every innovation by the Soviets had to be matched or exceeded.

The cold war may be history, but in the West, many of the competitive factors still remain the same. Perhaps as a result, many Western companies assume that innovation requires considerable expertise and investment and, to be successful, has to be breakthrough or first-of-a-kind.

Many of those bright young Indian and Chinese scientists and engineers who, in the past, would have emigrated are staying home, where new opportunities are abundant. As a comparison, let’s look at the less industrialized countries during the 1970s and 1980s. In Asia and Latin America, for example, markets were highly regulated. A small number of local private- or public-sector monopolies controlled most industries, there was little competition, and the quality of products and services was low.

This meant little or no innovation was necessary, and even the innovations that were made required very little effort because the baseline was low. 2 And with little opportunity or need for innovation at home, the top talent from many of these countries emigrated, ultimately augmenting the Western talent pool.

Changing times
In the past couple of decades, however, the situation in many emerging-world countries has changed—in five important ways: markets have been opened up to domestic and foreign competition; a large middle class has emerged; powerful, well-capitalized domestic companies have become major players; educational institutions have begun to produce legions of engineers and scientists; and new opportunities at home have slowed the brain drain of these countries’ best and brightest.

All these factors have important implications for the West’s rather profligate, breakthrough-obsessed notion of innovation and could, in fact, herald the arrival of an increasingly frugal approach to innovation, one that will be more integrative by leveraging simple, day-to-day innovations.

Why do these changes make a difference?

First, as emerging economies have embraced more market-oriented policies, there is more domestic competition. Although competition stokes innovation, the fact that the baseline quality remains quite low means that, for many local companies, innovation can be done on the cheap. It does not have to be breakthrough, nor does it require extraordinary talent or education. Further, it can also be copied—legally or otherwise 3— from innovations already developed in the West.

Second, the rapid growth of a large middle class of consumers in these countries—by some estimates, comparable to the total population of North America, Europe and Japan—has created a huge demand for goods and services that far exceeds the installed capacity in many local industries. So despite competition, innovation in these markets often means overcoming supply chain and infrastructure obstacles to increase production by making the sort of changes and fixes that will never grab headlines.

Third, the access to a growing domestic market has helped many large emerging-world companies increase cash flow and build capital, which has in turn enabled them to acquire Western companies along with their accumulated intellectual property and know-how. Two notable examples: CEMEX of Mexico and Tata Motors of India. Having cornered the Mexican cement market, CEMEX used its cash and clout to go on a global expansion spree. Today, CEMEX is among the world’s top three cement makers and one of the world’s largest cement traders. For its part, Tata Motors, India’s largest truck manufacturer and maker of the Nano, the so-called cheapest car in the world, acquired Jaguar and Land Rover—two not-so-cheap brands that were nonetheless affordable for the Indian giant.

Let’s consider how all this is likely to affect the Western markets.

Many emerging countries have expanded their domestic educational institutions and can now train a large number of skilled personnel. China now produces more scientists and engineers than the United States and is aggressively establishing academic programs to attract foreign talent—both people of Chinese origin and non-Chinese—to join the faculty of some of its top universities. 4

Brazil has been able to train scientists and engineers to build world-class aerospace and biofuel industries. And India has shown that it can grow, on demand, a cottage industry, outside the formal university system, for training technicians in any field—whether it be IT, mechanical engineering or biotechnology.

Finally, despite considerably lower wages, many of those bright young Chinese and Indian scientists and engineers who, in the past, would have emigrated are opting to stay home, where new opportunities are abundant. So even if an emerging-markets company needs breakthrough innovation to cater to its demanding customers in a competitive global market, there will be a growing source of inexpensive innovation in its own backyard.

However you look at it, the economics of innovation has changed. Emerging-world companies can get away with little or no innovation for several years. With rapidly growing domestic markets, they can accumulate capital and buy know-how from the West when necessary. With improved educational infrastructure and opportunities at home, emerging countries can also do Western-style innovation a lot more frugally.

The term “frugal innovation” is not new. Carlos Ghosn, the legendary CEO of Renault and Nissan, uses the term “frugal engineering” in reference to building products for the emerging world. To implement frugal engineering, he recommends that Western companies create a healthy rivalry among their global R&D teams, leverage emerging-world partners who are used to working with resource constraints and send top executives to emerging countries so that they can develop a frugal engineering mindset. A recently published book, Jugaad Innovation, by Navi Radjou, Jaideep Prabhu and Simone Ahuja, provides extensive case studies of frugal innovation from around the world.

The world has changed in fundamental ways that should make you rethink your company’s approach to innovation. Frugal innovation is not just about developing products and services for emerging-markets customers; in a world where labor can be sourced from anywhere, it will become the way of innovating for your Western customers as well. Here are a few tips.

  • Breakthrough innovations are few and far between, and even the game-changers are often accidental. So invest in R&D that is relevant to your customers and your business. An innovation that clearly targets a customer or business need is more likely to produce breakthrough results than breakthrough innovations aimed at poorly defined problems.

  • Innovation does not need to cost a lot. Develop an innovation model that encourages your innovators to start small and prove their concept or build a prototype quickly so that it can be evaluated for its commercial potential.

  • You don’t need a Ph.D. to have a good idea. Create a program that gives anyone with a good idea time off to develop it further. Connect these would-be innovators to your R&D organization so that their ideas can be evaluated, nurtured and developed.

Innovation does not happen only at high-tech companies or in R&D labs. It happens everywhere. Or as Rodgers and Hammerstein put it in their Broadway musical Flower Drum Song, “A hundred million miracles are happening every day. And those who say they don’t agree are those who do not hear or see.”

Footnotes

1. The author of The Innovator’s Dilemma, the book that popularized the concept of disruptive innovation. (Back to story.)

2. The most telling example of this phenomenon is the Ambassador car, which is ubiquitous in India. Produced continuously since 1958, the Ambassador—which is based on the British Morris Oxford from the late 1950s—did not change significantly for the next 40 years.(Back to story.)

3. The line between these two can be murky—and just got murkier. In an extraordinary step, the Indian government recently invoked the WTO’s “compulsory license” clause, which legally permits generic-drug companies to produce a life-saving cancer drug in the “public interest.” India has perhaps the world’s largest generic-drug industry, and it supplies cheap medicines not only to the Indian domestic market but also to a large number of emerging countries.(Back to story.)

4. The Chinese government has two programs that sound similar but are aimed at very different goals. The Thousand Talents program is aimed at attracting star scientists of Chinese origin back to China. This is not to be confused with the Thousand Foreign Experts program, which offers a subsidy of 1 million yuan (approximately $160,000) and a 3 million- to 5 million-yuan research allowance to attract top international scientists to spur research and innovation.(Back to story.)

 

About the author
Kishore Swaminathan is based in Beijing.

 

 

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 This Article is Tagged: Technology. Innovation.
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The economics of innovation: From profligate to frugal? | Accenture Outlook 
It’s time to rethink innovation—no “breakthroughs” or “game changing” required.
economics, innovation
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