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First break all the rules | The Economist

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Special report: Innovation in emerging markets

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First break all the rules

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The charms of frugal innovation
Apr 15th 2010 | From the print edition

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GENERAL ELECTRIC'S health­care laboratory in Bangalore contains some of the company's most sophisticated products— from giant body scanners that can

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accommodate the bulkiest American football players to state­of­the­art intensive­care units that can nurse the tiniest premature

Nina Simone: Don't let her be misunderstood babies. But the device that has captured the

Prospero | 2 hours 55 mins ago

heart of the centre's boss, Ashish Shah, is much less fancy: a hand­held

June 26th 2015 edition: Pick of our week, in audio

electrocardiogram (ECG) called the Mac
400.

International | Jun 26th, 16:15

The device is a masterpiece of simplification.
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The multiple buttons on conventional ECGs

Middle East and Africa | Jun 26th, 16:12

have been reduced to just four. The bulky printer has been replaced by one of those tiny gadgets used in portable ticket

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machines. The whole thing is small enough

Europe | Jun 26th, 15:18

to fit into a small backpack and can run on batteries as well as on the mains. This miracle of compression sells for $800,

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instead of $2,000 for a conventional ECG,

Democracy in America | Jun 26th, 14:33

and has reduced the cost of an ECG test to just $1 per patient.

Barbara Hepworth: Carving a niche
Prospero | Jun 26th, 14:25

In Chennai, 200 miles (326km) farther east,
Ananth Krishnan, chief technology officer of
Tata Consultancy Services (TCS), is equally

Gay marriage in America: A constitutional right excited about an even lower­tech device: a water filter. It uses rice husks (which are

Democracy in America | Jun 26th, 13:22

among the country's most common waste products) to purify water. It is not only robust and portable but also relatively cheap, giving a

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large family an abundant supply of bacteria­free water for an initial investment of about $24 and a recurring expense of about $4 for a new filter every few months. Tata Chemicals, which is making the devices, is planning to produce 1m over the next year and hopes for an eventual market of 100m.
These innovations are aimed at two of India's most pressing health problems: heart disease and contaminated water.
Some 5m Indians die of cardiovascular diseases every year, more than a quarter of them under 65. About 2m die from drinking contaminated water. The two companies are already at work on “new and improved”—by which they mean simpler and cheaper—versions of these two devices.

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There is nothing new about companies adapting their products to the pockets and preferences of emerging­market consumers. Unilever and Procter & Gamble started selling shampoo and washing powder in small sachets more than two decades ago to cater for customers with cramped living spaces and even more cramped budgets. Nike produces an

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Test your EQ
Take our weekly news quiz to stay on top of the headlines Muslim women athletes. Mercedes puts air­conditioning controls in the back as well as the front of its cars because people who can afford a
Mercedes can also afford a driver.
But GE and TCS are doing something more exciting than fiddling with existing products: they are taking the needs of poor consumers as a starting point and working backwards.

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Visit The Economist e­store and you’ll find a range of carefully selected products for business and pleasure, Economist books and diaries, and much more Instead of adding ever more bells and whistles, they strip the products down to their bare essentials. Jeff Immelt, GE's boss, and Vijay Govindarajan, of the Tuck Business School, have dubbed this “reverse innovation”. Others call it “frugal” or “constraint­based” innovation. There is more to this than simply cutting costs to the bone. Frugal products need to be tough and easy to use. Nokia's cheapest mobile handsets come equipped with flashlights
(because of frequent power cuts), multiple phone books (because they often have several different users), rubberised key pads and menus in several different languages. Frugal does not mean second­rate. GE's Mac 400 ECG incorporates the latest technology. Many cheap mobile handsets allow users to play video games and surf the net. Frugal often also means being sparing in the use of raw materials and their impact on the environment.
The number of frugal products on the market is growing rapidly. Tata Motors has produced a $2,200 car, the Nano. Godrej & Boyce Manufacturing, one of India's oldest industrial groups, has developed a $70 fridge that runs on batteries, known as “the little cool”. First
Energy, a start­up, has invented a wood­burning stove that consumes less energy and produces less smoke than regular stoves. Anurag Gupta, a telecoms entrepreneur, has reduced a bank branch to a smart­phone and a fingerprint scanner that allow ATM machines to be taken to rural customers.
Frugal innovation is not just about redesigning products; it involves rethinking entire production processes and business models. Companies need to squeeze costs so they can reach more customers, and accept thin profit margins to gain volume. Three ways of reducing costs are proving particularly successful.
The first is to contract out ever more work. Bharthi Airtel, an Indian mobile company that charges some of the lowest fees in the business but is worth $30 billion, has contracted out everything but its core business of selling phone calls, handing over network operations to
Ericsson, business support to IBM and the management of its transmission towers to an independent company. To make this work, Bharthi had to persuade its business partners to rethink their business models too. For example, Ericsson had to agree to be paid by the minute rather than for selling and installing the equipment, and rival mobile companies to rent their towers rather than own them outright.
The second money­saver is to use existing technology in imaginative new ways. TCS is looking at using mobile phones to connect television sets to the internet. Personal computers are still relatively rare in India but televisions are ubiquitous. TCS has designed a box that connects the television to the internet via a mobile phone. It has also devised a remote control that allows people who have never used keyboards to surf the web. This idea is elegant as well as frugal: by reconfiguring existing technology it can potentially connect millions of people to the internet.
The third way to cut costs is to apply mass­production techniques in new and unexpected areas such as health care. Devi Shetty is India's most celebrated heart surgeon, having performed the country's first neonatal heart surgery on a nine­day­old baby, and numbered
Mother Teresa among his patients. Yet his most important contribution to medicine is not his surgical skill but his determination to make this huge industry more efficient by applying
Henry Ford's management principles. He believes that a combination of economies of scale and specialisation can radically reduce the cost of heart surgery. His flagship Narayana http://www.economist.com/node/15879359 2/5

6/27/2015

First break all the rules | The Economist

Hrudayalaya Hospital in the “Electronics City” district of Bangalore, not far from GE, Infosys and Wipro, has 1,000 beds (against an average of 160 beds in American heart hospitals), and Dr Shetty and his team of 40­odd cardiologists perform about 600 operations a week.
The sheer number of patients allows surgeons to acquire world­class expertise in particular operations, and the generous backup facilities allow them to concentrate on their speciality rather than wasting their time on administration. Dr Shetty has performed more than 15,000 heart operations and other members of his team more than 10,000. The hospital charges an average of $2,000 for open­heart surgery, compared with $20,000­100,000 in America, but its success rates are as good as in the best American hospitals.
Dr Shetty has devoted much of his energy to boosting his customer base, largely for humanitarian reasons but also because he believes that higher volumes lead to better quality. He has established video and internet links with hospitals in India, Africa and
Malaysia so that his surgeons can give expert advice to less experienced colleagues. He also sends “clinics on wheels” to nearby rural hospitals to test for heart disease. He has created a health­insurance scheme, working with various local self­help groups, that covers
2.5m people for a premium of about 11 cents a month each. About a third of the hospital's patients are now enrolled in the scheme. A sliding scale of fees is used for operations so that richer customers subsidise poorer ones. The entire enterprise is surprisingly profitable given how many poor people it treats. Dr Shetty's family­owned hospital group reports a
7.7% profit after taxes, compared with an average of 6.9% in American private hospitals.
The group has recently built three other hospitals next to the heart clinic—a trauma centre, a
1,400­bed cancer hospital and a 300­bed eye hospital. They all share central facilities such as laboratories and a blood bank. Dr Shetty is also setting up “medical cities” in other parts of the country. Over the next five years his company plans to increase its number of beds to 30,000, making it the largest private­hospital group in India and giving it more bargaining power when it negotiates with suppliers, thus driving down costs further.
From jugaad to shanzhai
Indians often see frugal innovation as their distinctive contribution to management thinking.
They point to the national tradition of jugaad—meaning, roughly, making do with what you have and never giving up—and cite many examples of ordinary Indians solving seemingly insoluble problems. But China is just as good as India at coming up with frugal new ideas.
Mindray, for example, specialises in cheap medical products such as ECG devices, and
BYD has radically reduced the price of expensive lithium­ion batteries by using less costly raw materials and learning how to make them at ambient temperatures rather than in expensively heated “dry rooms”. This has reduced their price from $40 to $12 apiece and made them competitive with less powerful nickel­cadmium batteries.
The Chinese have made two distinctive contributions to frugal innovation. The first is the use of flexible networks—powered by guanxi or personal connections—to reduce costs and increase flexibility. Li & Fung, a Hong Kong­based company, has long been a pioneer, working closely with a network of about 12,000 companies operating in more than 40 countries. It puts together customised supply chains from its vast network of associates and keeps an eye on quality and order fulfilment. Similarly, Dachangjiang, a motorcycle­ maker in China's Guangdong province, works with hundreds of parts suppliers.
Next in Special report

X

These post­modern guanxi have several powerful qualities. They can contract or expand with demand. Li & Fung and Dachangjiang seldom have problems with excess capacity

Easier said than done

Emerging­market consumers are hard to reach when times are hard or with waiting lists when times are flush. And they can be turned into

engines of innovation. Li & Fung relies on its partners to help solve problems, not just fulfil orders. Dachangjiang provides its suppliers with rough sketches rather than detailed blueprints and encourages them to innovate.
A second area where the Chinese excel is in “bandit” or “guerrilla” innovation, known as

From the print edition Apr 17th 2010

shanzhai. The original bandits lived in isolated villages and carried out raids on upright citizens. Today's bandits live at the margins of official society but are much in evidence: in
Shanghai's People's Square you will be offered a cheap watch or phone at every step.
These bandits are parasites who profit from China's weak property rights, but they are also http://www.economist.com/node/15879359 3/5

6/27/2015

First break all the rules | The Economist

talented innovators, quickly producing copies of high­tech gadgets that are cheap enough for migrant workers to be able to afford them but also fashionable enough for young professionals to covet them. Some of the more exotic phones are designed to look like watches or packets of cigarettes (they even have room for a few real ones) and often have striking new features, such as solar chargers, superloud speakers, telephoto lenses or ultraviolet lights that make it easier to detect forged currency. In their own way the bandits deploy as much innovation and ingenuity as their legitimate counterparts.
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...case analysis History and growth of McDonald across Globe : McDonald Corporation is the world's leading food service retailer with more than 31,000 restaurants in 120 countries serving more than 50 million customers each day. Origin of this US based company can be traced back in 1940 as a barbecue restaurant operated by the Richard and Maurice McDonald . Ray Kroc another business man joined the company as a franchise agent in 1955. He subsequently purchased the chain from the McDonald brothers . McDonald's first filed for a U.S. trademark on the name "McDonald's" on May 4, 1961, with the description "Drive-In Restaurant Services,". In the same year, on September 13, 1961, the company filed a logo trademark on an overlapping, double arched "M" symbol. McDonald serves some of the world famous favourite food like French fries ,Big Mac, hamburgers, soft drinks ,desserts, shake etc . Mc Donald focus on global expansion strategies .McDonald’s first opened stores outside the United States in 1967 in British Columbia and Puerto Rico . Currently it has made its presence in 120 countries . McDonald Business model is based on Franchises . Almost 85% of its restaurant is based on franchise model only 15% is owned by company. In India, McDonald's is a joint-venture company managed by two Indians. While Amit Jatia, M.D. Hardcastle Restaurants Pvt. Ltd. owns and spearheads McDonalds in west & south India, McDonald’s restaurants in North & East India are owned and......

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Managemnt Effect

...economic factors, technology factors, social-cultural factors and legal factors (Wheelen & Hunger, 2001). Political Factors and legal Factors: Political environment exercises great impact on any industry and business. The developments on the political front affect the economy all the time and thus, the economic environment is a byproduct of the political environment (Kotler, 2002). In addition to the government and legislative measures, institutions like media, social and religious organizations and pressure groups and lobbies of several kinds, are also a part and parcel of the political environment. The political factors affect the productivity and profitability of the company. The pressure on food suppliers has been imposed and increased by the UK government. The government emphasizes that the food suppliers such as McDonald's should supply healthier foods (Arndt, 2007). The government also emphasizes and supports healthy eating in the schools. This is one of the effective activities, which affect the public as well as the customers of McDonald's Corporation (Wheelen & Hunger, 2001). These practices affect the buying decision of the customers. The legal and political factors also emphasize that different food policies are made by the government, which affect the business of the company (Kotler, 2002). Economical Factors: The timing and relative success of some strategies can be a result of the economic conditions. If the economy is growing, as a whole or in some......

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投稿日 | Rileys.First.Date.2015.720p.BluRay.x264-NeZu | Katheryn Winnick