Proceedings of the 2012 18th International Conference on Engineering, Technology and Innovation

B. Katzy, T. Holzmann, K. Sailer, K. D. Thoben (Eds.)

Frugal and Reverse Innovation - Literature

Overview and Case Study Insights from a
German MNC in India and China

Nivedita Agarwal, Alexander Brem ,

Friedrich-Alexander-Universitdt, Lange Gasse 20,D - 90403 Niirnberg
agarwal@idee-innovation.de

brem@idee-innovation.de

Abstract

As the world is shifting its attention towards emerging giants like India and China, the big Western multinational
companies [MNCs] are trying to get their foothold in this market. Instead of customizing the western world products
to local markets, these companies are increasingly developing products from scratch for the local consumers. They
are engaging in frugal & reverse innovations, by developing affordable products and solutions with "good enough"
functionalities and minimum frills, and later on, introducing them to the developed countries. This paper focuses on
how multinational corporations [MNCs] are establishing themselves in the emerging markets and their innovation
strategies. The paper initially differentiates between frugal & reverse innovation and goes on to analyze the practices
of a Gennan MNC. The paper concludes that end to end localization, core value identification & a healthy portfolio
mix of both kinds of innovations is necessary for success in emerging markets.

Keywords

Frugal innovation, emerging markets, reverse innovation, SMART.

1 Introduction

Emerging markets have become new centres of gravity for technology because of their large
market size, growing demands and plentiful source of R&D talent. Countries like China and
India, initially playing secondary roles, have now become the global innovation hubs [Jiatao, L.,
Rajiv K. K., 2009]. Local companies in these countries have creatively leveraged the region
specific market requirements to become successful and grow exponentially. Companies like
TATA, Haier, Galanz bear testimony to this trend. These companies have profitably wrestled
market share from established global companies and in some cases like Huawei and ZTE
Telecom have even pushed European and American companies to merge like Siemens-Nokia or
in some extreme cases like Nortel, to go bankrupt.

As these markets are maturing, they are moving away from imitations to innovations of their
own types. The inherent differences in the local needs and lack of infrastructure have led to
newer innovation paradigms like "Frugal Engineering", "Reverse Innovation" and "Constraint
based Innovation" [Saraf 2009, Economist 2010]. In order to maintain their competitive position,
multinationals are being forced to focus on developing products & solutions locally in these
emerging markets. In other words, multinational companies are obliged to participate in these
new innovation paradigms. This paper focuses on the local product development approach of one
such MNC, Siemens AG. The paper also gives examples of successful innovative products
developed by Siemens for India and China and studies the development, acceptance and
implications of such products.

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2 Literature review

Innovation has been a highly researched topic in management literature for past few years
[Johannessen et aI, 2001, Garcia and Calantone, 2001, Christensen, 2003, Govindarajan &
Trimble, 2005, Chandy et al. 2006, von Krogh and Raisch, 2009, Lafley & Charan, 2008]. It is
critical for both economic growth and also for competitive advantage in companies and nations
[Brem, 2011, Drazin and Schoonhoven, 1996, Christensen, 1997].

The high growth rates, huge market size and workforce in emerging countries have ensured
sufficient academic focus on "winning in emerging markets" through region appropriate
strategies [Khanna, T.& Krishna G. P, 2010]. Researchers have studied these countries in all the
phases from initial technology transfer from the developed countries called as 'Exnovation'
[Gardner, 2002] to now technology transfer from emerging to industrialized economies [Brem,
2008].

Various theories like "reverse innovations", "disruptive innovations", "cost innovations", "frugal
innovations" & "jugaad" are being proposed to explain this phenomenon. [Christensen,2003
Zeschky et al. 2011, Immelt et al.,2009]. All these theories mostly relate to the same definition of
redesigning & developing both products and processes from scratch at minimum cost, addressing
the region specific needs. Western consumers are also showing interest in such offerings that
were initially developed specifically for emerging countries. [Flatters & Willmott 2009]. For the
sake of this paper, we limit ourselves to two of these concepts, frugal & reverse innovations.

Zeschky, Widenmayer &, Oliver [2011] define frugal innovations as "good-enough, affordable
products that meet the needs of resource-constrained consumers". Frugal products with heavy
resource constraints have extreme cost advantages compared to existing solutions and are much
simpler and cheaper with limited features. Frugal innovations are generally developed for their
home countries, and not meant for worldwide distribution. On the contrary, reverse innovation
develops market-oriented products in emerging economies through globalized innovation teams,
which are meant to be sold worldwide from the beginning [Immelt et al. 2009]. Therefore the
distinction between frugal and reverse innovation is important, as reverse innovation is also
becoming a vital competence for MNCs.

Following Nunes and Breene [2011], we suggest the following distinction between frugal &
reverse innovation:

Frugal innovation involves designing solutions specifically for low-income market

segments

Reverse innovation involves new products developed in emerging markets, which are
then modified for sale in developed countries.

The potential mass markets in this so-called "bottom of the pyramid [BOP]" [Prahalad, 2005]
have caught the attention of multinational companies from around the world. Developing frugal
products for such BOP markets offers tremendous opportunity for these companies to establish a
strong foothold in emerging contexts [Hart & Christensen, 2002]. Initially, the intention of
western MNCs was to exploit the low-cost manufacturing. However, now the same companies
have established local set ups, are investing heavily in R&D and are developing long-term
partnerships in emerging countries [Singhal ,2011, Aggarwal, A., 2000]. These efforts are also
due to the challenges the Western firms are facing. The home grown companies compete on
aggressive price/performance ratios required by emerging contexts and endanger the market
share of these Western firms. These western firms because of their experience in their home
markets are generally not prepared for and are often insensitive to some of the demands
emerging from the resource constraints in these nations [Immelt, Govindarajan, and Trimble
2009, Hang, Chen, & Subramian, N.D, 2010, Khanna & Palepu 2006].

In some situations, even a deep cost management strategy may still not enable a firm to reach
BOP customers. "Core value identification" is very critical and to understand this concept of core

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value, devoid of all frills, requires knowing the essential needs that the product/service should
satisfY [Christensen & Raynor, 2003]. Firms need to understand the circumstances of the
customer and how the customer is currently meeting those needs and also recognize that BOP
customers' needs and wants are quite different in kind and/or degree from the needs and wants of
more affluent customers. As a result, even more fundamental redesign might be essential
[Gollakota, Gupta, & Bork, 2010]. Hence the organization needs to move beyond cost reductions
to finding creative ways to add value for BOP customers.

Organizations like Siemens and General Electric [GE] have already started developing such
unique products which are developed specially for the BOP customers and also have potential to
succeed in the developed markets. They illustrate examples for both frugal and reverse
innovation. GE has developed a cheap ultrasound device, originally for the Chinese market, but
has now become the basis of a global business, with eager customers in the developed as well as
the developing world. GE is one of the benefactors of reverse innovation, announcing $3billion
to create at least 100 health-care innovations that would substantially lower costs, increase
access, and improve quality [Immelt, Govindarajan, and Trimble 2009]. Especially two of those
products have already been developed - a $1,000 handheld electrocardiogram [ECG] device and
a $15,000 ultrasound machine that are now making inroads into the developed countries such as
United States.

Siemens also has various frugal products already existing in the markets known as SMART
[Simple, Maintainable, Affordable, Reliable, Timely to market] products and is also
experiencing reverse innovations through them. This paper analyses "Siemens' s Frugal
Products" in form of a case study which focuses on the strategy behind developing these
products and their degree of acceptance in emerging markets. This paper also discusses the effect
of localization and substantial degree of autonomy on frugal innovations.

3 Research Methodology

Our research focuses on the question of how Western companies are organizing their frugal
innovation activities in emerging markets. We chose a large MNC, Siemens because such
companies are typically at the front end of international developments because of their sizes and
global presence [Zeschky, M., Widenmayer, B., Oliver, G., 2011].

Siemens, a global conglomerate, perfectly fits the requirements for our study. We contacted
Siemens and conducted interviews to get deeper information about their strategy to tackle the
emerging markets. We chose Siemens, to focus on a company having frugal innovation
initiatives as an example of changing strategies of big MNCs. We capture the innovative work
done on products and equipment' s which are not copies of western models but are new solutions
themselves.

Our case study in this paper is based on analysis and evaluation of secondary data [corporate
documentation analysis] and interviews [Yin, 1981]. Using a qualitative case study approach
[Eisenhardt 1989; Yin 2003], we collected data and information mainly focusing on the SMART
products of Siemens considering their proven success and high degree of acceptance in emerging
markets mainly India and China. The data was collected through interviews and information
material provided by Siemens.

4 About Siemens

Siemens AG is a German multinational conglomerate company headquartered in Munich &

Berlin, Germany, with revenues of 73.5 Billion Euros in 2011. Siemens AG has divided its
business into four sectors Energy, Healthcare, Industry and Infrastructure & Cities. Each of these
sectors has various further divisions, for example Healthcare has four division namely Imaging
& Therapy systems, Clinical products, Diagnostics and Customer solutions. Siemens has been

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Proceedings of the 2012 18th International Conference on Engineering, Technology and Innovation
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active in emerging markets for over 100 years. Siemens shows a consistent focus on emerging
markets in all its business sectors. The pace of investment in terms of people and capital
expenditure has increased significantly in the past 5 years. Today more than 25% of the
workforce and 30% of the revenues are from the emerging markets. The following table shows
the growth in these markets from 2005 - 2010 [Siemens Annual report 2011, Siemens investor
relations - capital market day 2011 & 2012, Siemens status October 2011].

Workforce Number of manufacturing facilities Revenues [in Billion ]

FY 2005 FY 2010 FY 2005 FY 2010 FY 2005 FY 2010

Brazil 5,300 9,200 10 13 0.6 l.6

Russia 1,000 1.500 1 2 0.6 Ll
India 7,000 13,600 10 20 0.6 l.9
China 12,000 28,500 24 45 2.3 5.5
Middle 3,400 6,100 4 4 2 4.6
East
Source: Roland Busch, SIemens CapItal market day, Shanghai, June 2011

Table 1: Siemens growing in emerging markets

4.1 Siemens frugal innovations strategy: the SMART initiative

Strong economic growth in the emerging markets is creating enormous demand for all sectors
Siemens is active in. However the company faced dual threat in these markets:

1. Increasing number of local player, competing not only locally but globally and taking
away market share.

2. Global players who had set up base in emerging markets prior to Siemens endangering
Siemens' growth in the emerging markets with their regional know-how and installed
base

To leverage the business opportunities in these markets & grow profitably, Siemens understood
that it was necessary to considerably expand its presence in the emerging markets. The focus of
the company can be gauged from the following comment by Siemens Managing Board member
Dr. Roland Busch, "The emerging markets are still the growth engines of the global economy.
With its strong local presence and the right products, Siemens is excellently positioned to capture
an above-average share of the growth taking place in these markets". [Siemens Capital Market
Day in Shanghai June, 2011].

4.1.1 Starting the SMART initiative

Siemens decided to venture and compete in emerging markets with a new product portfolio
specifically targeting the needs of these markets. This laid the foundation of the SMART
[Simple, maintenance friendly, affordable, reliable & timely to market] initiative at Siemens.

To understand the SMART strategy, it is necessary to understand how Siemens views its
markets. Siemens categorized the global market into different segments. Table 2 describes the
various markets and respective features which Siemens has discovered:

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Market Segment FunctionalityNalue/Standards

Top End Market Most advanced functionality required

Highest processing speed

Strict international standard / certificate needs to be met

High End Market Advanced but standard functionality, sometimes customized

High processing speed

International and local standard / certificate needs to be met

Medium End Market Only core functionality is required

Normal processing speed

National standard / certificate is enough

Low End Market Only basic functionality is required

Low processing speed

National standard / certificate is enough

Table 2: Siemens market segmentation

These market segments exist in all geographies, but the share of these segments vary from
country to country. Even developed countries like USA & Germany have sizable proportions of
top end, high end, medium end and low end market segments. Emerging countries, especially
China, India and Brazil, also show the presence of all four segments. However large portions of
the markets in China, India & Brazil exist in medium and low end segments.

Unlike the top & high end markets, the medium & low end market segments are extremely price
sensitive. The customers are typically medium to small size local companies [for B2B
businesses] who don' t have highly skilled labour and need simple, easy to understand and user
friendly systems. They are less "brand cautious" and need a maintenance free solution. The
Siemens SMART products are targeted at these segments.

Siemens understood that the customer needs in medium & low end market segments in emerging
markets like Brazil, Russia, India and China were not met by its traditional high end portfolio.
Cost-reduction by de-featuring existing high-end products would not be enough; to compete
successfully. Additional innovative features to meet the unique regional requirements were
necessary. This philosophy is the cornerstone of the SMART movement within Siemens.
SMART stands for products & solutions, that are; Simple, Maintenance-friendly, Affordable,
Reliable, and Timely to market. The primary objectives of SMART initiative are:

Gaining market share in the emerging countries by developing profitable products.

Mitigate local competition.

To develop a SMART product Siemens experts justify the products at every phase of product
development. A typical SMART product development project goes through 3 phases:

1. Need identification - Experts identify the needs of the target market and the unique
selling points (core value identification).

2. Cost reduction - Reviewing whether - and if so, how - the manufacturing costs of a
SMART solution can be minimized, for example by using cost-effective materials, new
technologies, exploiting synergies during the production process, etc.

3. Mix & match - Here the individual components of a solution are assembled. Focusing
primarily on interactions among individual building blocks.

SMART product is then justified on parameters like good functionality & low price without
compromising on the product quality. After satisfying these criterions SMART products are
brought to the market. Siemens has also used Disruptive SMART approaches to address the
Chinese markets. A disruptive SMART approach has the following objectives:

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Identify newer ways of using old technologies

Strong solutions to compete in average or low-end markets and have the right price for
these markets.

Improve the innovations that can be later used for different requirements of global
markets.

Disruptive SMART products focus on both frugal and reverse innovation. This initiative is also
backed by Siemens' localization strategy. Localization of the product developed, of the team
involved and of entire value chain from concept designing to R&D to final go-to-market.

4.1.2 SMART stories

Siemens has had considerable success with its SMART strategy over the past years. Today
company generates significant amount of revenues from SMART products and has grown its
volume by over 19% in the fiscal year 2010. Siemens has introduced large number of SMART
products in the market today.

4.1.2.1 SMART Line HMI panel

Human Machine Interface [HMI] is a vital factor in the world of automation and has numerous
applications in various industries. Siemens develops human machine interface technology to
meet the increasingly complex processes of today' s machines and systems. It is highly optimized
to meet specific human machine interface needs using open and standardized interfaces in
hardware and software, which allow efficient integration into the systems. Siemens SMART
Line HMI Panel is used for direct machine or plant visualization tasks. All in one Panel PC
devices integrate an industrial PC and an operating unit, and then offer a combination of
ruggedness, performance and brilliant display. It provides close-to-machine operation and
monitor to control, data processing and motion control tasks. They are ideal for production
processes in harsh industrial environments, and always include easy touch screen or membrane
keyboard operation.

SIEMENS

Figure 1: Siemens HMI Line panel example

4.1.2.1.1 Why is Siemens HMI Line panel a SMART innovation?

Siemens Line panel targeted original equipment manufacturing customers producing machines in
textile, packaging, printing. Initially, Siemens produced a product HMI Panel KTP 178 which
was developed in Germany and was basically for developed markets. Siemens brought the same
product to China, with minimal adaptation for Chinese cost conscious market. The product was
unable to capture the market and experienced a continued decrease in sales. Siemens had less
than 4% market share with this product in China. [Siemens Capital Market days - emerging
markets, Shanghai, June 2011].

A strategic analysis of the situation led Siemens to identify the reasons for the lower acceptance
of the product and the most important findings were as follows:

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Expensive product in a low end market - Market was dominated majorly by local players
and the price of the Siemens HMI panel was more than 35% higher than the other local
products

Low adoption to customer needs - Customers needed a robust product with basic
functionality and low cost and Siemens product had very low adoption to Chinese market
requirement

The company realized that in order to succeed it was imperative to develop localized products,
designed targeting the entry level customer and their basic needs. It could not succeed by just
launching the same high end products that were sold in the developed world. Hence the local
R&D team in China redesigned the entire solution.

Siemens team in China started the product conceptualization from scratch and adopted the
SMART approach of need identification, cost reduction and mix and match. The critical steps
taken by Siemens were:

1. Siemens did a full localization [local production, local R&D, local product management]
of the value chain at Siemens Nanjing.

2. Responsibilities were given to the product management and the local R&D.

3. Cost optimization was done through localization.

The new SMART product was launched into the Chinese market and was very well received by
the customers in China, which can be gauged from the statistics below:

1. It sold 15 times more in number of units than KTP 178 in first 9 months of its launch.

2. Achieved large penetration of original equipment manufacturers in China.

3. It was well accepted by customers as the product reached the street price with additional
Siemens premium.

4.1.2.2 Multix Select DR

Multix Select DR machine, a digital X-Ray product is another example of SMART product
which also shows illustrates reverse innovation concept associated with these frugal products.
This product was developed not only for emerging markets but was also designed so as to
address the global markets.

I, IOF

Figure 2: Siemens Multix Select DR

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The X-ray examination is one of the most common medical diagnostic procedures. It is estimated
that 90% of all hospitalized patients get an X-Ray examination. Emerging markets are growing
almost three times as fast as the developed markets for this diagnostic modality. In spite of this,
X-rays have not penetrated much with almost 4.5 billion people today not having access to X
rays.

Siemens developed a new digital X-ray system, the Multix Select DR, which is an entry level
system that facilitates cost-effective access to X-rays. At a price which is around one third below
comparable predecessor products of Siemens, Multix Select DR is attractive to small and
medium-sized hospitals in newly industrializing countries as well as to small hospitals and
physicians' clinics in industrialized countries.

The cost of this system is around 30% less than the existing high end products within Siemens
but in terms of quality to a large extent adheres to the standards used in the western world. This
product is also used in western world as back up machines. Siemens also reduced the dose
requirements of the system by 50%, making it safer for the patients & doctors. [Siemens Capital
Market Day Healthcare, 2012]. Select DR is being developed in China and marketed globally.
The sales numbers for the product have been growing significantly and show a promising future.

4.1.2.3 Fetal Heart rate monitor

The Siemens Fetal Heart rate Monitor {FHM} is an example of frugal innovation which is
developed exclusively for India market. This product did not exist before in the Siemens global
portfolio but is specially conceptualized for the specific needs of the Indian market. Siemens
Fetal Heart Rate monitor, developed at Siemens' India research centre addresses the needs of the
Indian rural market. The FHM is a device that can monitor the heart rate of foetuses in the
womb. The high end market segment uses products based on the ultrasound technology which
can cost several thousands of dollars; The Siemens FHM uses special acoustic microphones
instead, making it significantly cheaper. Although the idea was conceived and developed into a
product at Siemens' Indian research Centre, it was a global effort with joint efforts across
research teams in India, Germany & USA. Robust and inexpensive medical devices like Fetal
Heart Rate Monitor helps to improve the health care of people in rural areas and has huge
potential. [Siemens Pictures of the Future, Spring 2011].

5 Implications based on the case study

1. MNCs emphasize on localization and core value identification - Both these factors (end
to end localization and core value identification) are critical for success of MNC' s in
emerging markets. Researchers have identified that learning and innovation are highly
localised interactive processes of innovation [Bruche, 2009] as a large part of the frugal
innovation require know-how of the local market and tacit knowledge transfer which is
complex and can be done only by face to face interactions. Therefore, successful
creation, development and commercialisation of these frugal products need proximity to
the local markets throughout the entire value chain from conceptualization of the product
to designing, to team formulation to R&D to commercialization. world. In 2005, Siemens
had about 46,000 employees in the emerging markets. By 2010, the figure had risen to
85,000. During the same period, the number of Siemens main production facilities
increased from 64 to 117. To tailor products to the particular requirements of individual
markets, R&D must be local. From 2005 to 2010, the number of Siemens' personnel
employed in R&D and engineering in the emerging markets grew, accordingly, from
8,600 to around 15,500. A clear orientation toward customers in the emerging markets,
where Siemens already has 27 percent of its sales employees, is a further lever. Also
along with localization, understanding the core value needs of the end users which can be
different from the western consumer needs is important for frugal product development.

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Stated example of HMI Panels of Siemens has been a success in the market and value
identification and localization were the key factors.

2. Focus on reverse innovation along with frugal innovation - Frugal products are not only a
success in emerging markets but also have potential for the developed countries as
western world becoming more cost cautious. Siemens also works on reverse innovation
and plans product in order to be successful not just in emerging markets but in the global
arena. Within Siemens, the "Healthcare sector" has been a trendsetter for reverse
innovation and has successfully launched its SMART products in the global market, for
example, the Multix Select DR. In one of the interviews with Siemens we found that,
they see a similar demand for the entry level products in the developed countries too. For
example the Imaging products like Magneto Resonance [MR], Computed Tomography
[CT] of Siemens developed and sold as a primary product in hospitals in 2nd tier cities of
China are at the same time are used as backup system in the United States for simpler
applications. In US the primary products are top end, expensive machines but are backed
up by cheaper machines for better throughput and higher efficiency. So, the SMART
products can be positioned in the developed world also, however with different end
customer applications..

6 Conclusion

Emerging markets show high growth potential and western organizations are slowly localizing
their product development and portfolios to match the needs of entry level consumers.
Localization and innovative approach is offering sustained growth to large MNCs. As mentioned
in the literature review and depicted from the Siemens case study flexibility in understanding the
core value and developing innovative frugal products can become a winning strategy for western
firms. Siemens helps us to understand that end to end localization and core value identification
are critical for sustaining in emerging markets. Continued focus on expansion of SMART
product portfolio is helping Siemens strong growth in India & China.

Multinationals trying to get foothold in these markets should focus on both frugal and reverse
innovation and of course if they manage to launch truly disruptive products, their brand names
are likely to help them win market share for their good-enough innovations. Siemens is a
beneficiary of such a strategy. Looking at the high degree of acceptance and increasing sales of
SMART products Siemens will continue developing and growing its SMART product portfolio.
It is well established and localized in India, China, Brazil and is now looking for further growth
in other "Second wave countries" like Turkey, Mexico, Chile, Columbia etc. [Siemens Capital
market day, Emerging markets 2011]. However, by analysing and past experience they don' t
intend to set up plants in each of these countries but because of the similar demands of the end
customers Siemens will bring the products developed for China and India to other emerging
markets.

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