“The future of innovation is recognizing resource constraints as enabling, rather than inhibiting innovation,” says professor Martin Hoegl, Whu-Otto Beisheim School of Management. Although top CEOs around the world recognize the importance of innovation in staying ahead of the competition, they are not sure about getting sufficient returns on their investment in innovation. In a 2009 BCG report, 73 percent of the executive respondents believed that innovation should be tracked as rigorously as other business operations, but only 46 percent said that their companies actually do so.
Source: Measuring Innovation 2009
Traditionally, the concept of innovation has involved a significant use of resources and has required substantial financial investments. When a project starts lagging, managers attempt to put it back on track by adding more resources. Thus, resource constraints are viewed as obstacles to innovation. PwC’s 2017 Innovation Benchmark Report observes that “over the past dozen years, our annual Global Innovation 1000 study has found no statistical relationship between dollars spent on innovation and financial performance, suggesting that the way you spend your innovation dollars is more important than how many of those dollars you spend.”
Resource-constrained innovation (RCI)
Ray and Ray (2010) used the term “resource-constrained innovation (RCI)” to describe innovation models that suit the needs of emerging markets, where low-cost, affordable products are in demand. RCI promises high customer benefit at a very low cost, thus making the product attractive and/or affordable for consumers with financial limitations. Ray and Ray identified three critical factors for RCI:
- Entrepreneurial leadership and vision
- Modular designs to fulfill user demands of affordability, operability, and functionality through architectural innovation
- Exploitation of the local knowledge base and creation of local innovation clusters
Ways to innovate with resource constraints
Zeschky, Winterhalter, and Gassmann (2014) differentiated between four types of innovation methods that can be adopted when one has fewer financial resources—cost innovation, good-enough innovation, frugal innovation, and reverse innovation.
Cost innovation is not a new concept. It is applied through ongoing process improvements enabled using advantageous locations in low-cost countries. Cost innovations attract both poor and affluent consumers because they appeal to consumers seeking cost-efficiency as well as consumers with a limited budget. Williamson explored the term “cost innovation” in his 2010 paper “Cost Innovation: Preparing for a “Value-for-Money” Revolution.” The method aims to deliver an existing solution at a cheaper cost to first-time consumers or poorer consumers. It typically relies on the use of cost-effective raw materials, standard components and commodities, local production, and local sourcing.
An example of cost innovation is Huawei’s ability to sell first-rate smartphones at a cost 20 percent less than Western companies. In 2009, Huawei was also able to beat Ericsson and win a 4G mobile network by providing the same quality and functionality at a lower cost. Similarly, Nokia, in 2006, was able to manufacture and sell a variety of low-cost mobile phones in China.
Like cost innovation, good-enough product innovation is not a completely new concept. It entails adapting or re-engineering an existing product to meet the specific requirements of customers with limited budgets. In short, good-enough innovation is equivalent to cost innovation plus feature optimization.
Good-enough innovation also takes advantage of cost-effective raw materials, standard components and commodities, local production, and local sourcing. In addition, it relies on less automation, high robustness, high ease of use, and limitation to core features.
For example, Mettler Toledo, a Swiss laboratory equipment manufacturer, used the existing weighing scale present in Western markets to create a new, low-cost weighing scale suited to the needs of the Chinese market. The company used cheaper materials, simple design, and low-cost manufacturing, and retained only essential features to keep costs low. Similarly, Logitech created low-cost versions of its products for emerging markets by using low-cost materials, reducing packaging, and removing non-essential features.
Frugal innovations are originally developed products, processes, or applications intended for consumers with low budgets. They are not re-engineered products like good-enough innovations, but have been created from scratch with new features that often disrupt the existing norm. Frugal innovation is also known by other terms such as “jugaad” or Gandhian innovation to emphasize the Indian context in which such innovations often take place. Frugal innovations are new from both a technological and a market perspective. They often employ an existing technology in a completely new way to access underserved markets.
GE’s portable ultrasound device, Logiq Book, developed for rural areas in China in 2002, is a good example of frugal innovation. Although it had reduced functionality as compared to traditional ultrasound devices, its advantage was that doctors could carry it directly to their patients. This helped patients in rural areas access medical help without having to travel to hospitals in far-off places. Thus, GE helped bring ultrasound technology in previously unserved locations with a price reduction of nearly 80 percent.
In the past, innovations would move from the established markets in the West to emerging markets in the East. However, with the rise of global innovation, products are being developed for both established markets as well as emerging markets. Reverse innovation occurs when cost, good-enough, and frugal innovation products are adopted in emerging markets first and then sold in other emerging markets and established markets. Reverse innovations are sometimes called trickle-up innovations as well.
GE’s Logiq Book is an example of reverse innovation as well. After its introduction in Chinese rural markets, an advanced version of the product has been developed for Europe and the United States, where new applications have been discovered. Currently, this advanced version is being used in operating rooms and emergency rooms where stationary ultrasound machines do not fit, or in ambulances which use the machine directly at the accident site.
Innovating with minimal resources has become a global phenomenon now, with tools and technologies such as cloud computing, social media, and crowdfunding, smartphones, and 3D printing empowering people to do more with limited budgets.