Many executives, in an effort to grow the business, turn to emerging markets, using leading-edge technologies to drive new market opportunities. While newer technologies are certainly driving innovation, there may be far broader growth opportunity by using existing technologies in new, creative ways.
This growth strategy is called frugal, or reverse, innovation. While these terms are sometimes used interchangeably, it is worth understanding the differences between the two.
- Frugal innovation, also called frugal engineering, is the process of reducing the complexity and cost of certain goods and their production to make them more affordable. This generally involves removing nonessential features from a durable good — such as a car or phone — and selling it in developing countries where consumers cannot afford the “full-feature” versions.
- Reverse innovation involves developing new, low-cost products — based on current technologies — to sell in developing countries. The developer then expands its market by selling these new products at low prices in more developed Western countries.
Frugal innovation is absolutely valid. That said, it presents the smallest profit margins and targets the most affluent segments of society in these developing countries. Reverse innovation, however, seems to have the greatest potential for growth.
In India, for example, businesses are rapidly adopting new technologies without the burden of having to refresh existing costly infrastructures and legacy systems. Farmers in rural India never had landlines; that technology skipped a generation. Now, a farmer in India has a better wireless connection than you can get in the United Kingdom. In fact, in the village where I grew up, one farmer sells his vegetables by bicycle, riding from farm to farm, but connects to his suppliers and customers using his mobile phone and applications such as WhatsApp.
In places where healthcare services are scarce, companies are sending mobile telemedicine vehicles to remote villages to allow people to see doctors via videoconferencing. These same services are then being taken as “reverse innovation” and implemented in rural areas in developed markets.
As a company executive, how can you tap into this growth opportunity? The key is in understanding the local communities; not all consumers are the same. In fact, it is critical for companies to establish local partnerships in order to exploit global platforms but deliver localized services.
Other factors you should consider when looking to grow in emerging markets through reverse or frugal innovation are:
- Demographics. For example, younger digital-savvy populations will be quicker to adopt Western-inspired technologies, while consumers over 60 will contribute to increased consumption in housing, transportation and entertainment.
- The emerging middle class. This group is growing, giving rise to growing consumerism around the world — including in emerging markets.
The takeaway here is to think outside the proverbial box: Look at innovative ways individuals, governments and other companies are taking what we may consider ordinary technologies such as the internet of things (IoT) and using them in unexpected ways. Instead of looking to new technologies, augment current technologies through innovative use cases. Or help those who are finding success that way, and scale to grow their business.