The Frugal Innovation In Africa Economics Essay

Failure by conventional theories such as the product life cycle and closed innovation to explain recent trends in innovation, have laid a foundation for the emergence of different approaches to innovation management. One such approach is frugal innovation which has, in the recent past, been given recognition both by practitioners and academics. Frugal innovation aims at offering goods and services that are affordable, robust and of acceptable quality in a volume-driven market. So far academic attention on frugal innovation has been paid to countries outside Africa. The review of extant literature found only one academic paper on frugal innovation in Africa. This paper was based on a single case study and just focused on the service industry. Therefore, the purpose of this study was to identify examples of successful frugal innovation in Africa and categorize them based on local conditions. Using an analogical method, six successful cases of frugal innovation were identified in different countries. Frugal innovations were categorized into basic needs and luxury frugal solutions respectively. Further from the six cases, five success factors were identified. These are; needs conceptualization, passion, local networks, investing in local R&D and a flexible and well defined rolling out process. These cases suggest that companies wishing to develop frugal solutions aimed at specifically addressing the needs of customers in Africa must be receptive to the above factors. This study highlights the existence of frugal innovation in Africa and the critical factors vital for creating new, affordable and robust products and services for what we call unthawed markets in Africa. The study has also shown that despite frugal innovation attracting academic attention in the last decade, it has existed in Africa for a considerable period of time. For the future, studies should be focused on identifying more cases of frugal innovation in Africa. In addition, such cases should be subjected to in-depth analysis. We also encourage comprehensive studies aimed at developing new theories and testing the proposed ones.

Keywords: Frugal Innovation, Africa, product life cycle, unthawed markets, success factors

1. INTRODUCTION

The ongoing shift in the global innovation landscape has presented numerous challenges (Magnusson 2000; Chesbrough 2003). These challenges have brought conventional theories such as the product life cycle and closed innovation into the spot light. As a result many countries and firms are developing new ways and means of conducting business. For example, multinationals from developed countries are increasingly globalizing their R&D activities. Firms from emerging economies such as India and Brazil, which traditionally played a secondary role in global innovation, have now begun to catch up with developing their own innovative capabilities (Mathews, 2002). Some of these firms have emerged as major players in certain sectors like information technology and mobile communications. In this shift, particular attention has been paid to emerging concepts of innovation. Recent research has identified five distinctive but interrelated innovation concepts for the years ahead (Eagar et al., 2011). These concepts are: customer-based innovation; proactive business model innovation; integrated innovation; high speed/low risk innovation and frugal innovation. The literature on all the five concepts is scant because they are in their infancy phase. Frugal innovation also known as reverse innovation is about minimizing the use of material and financial resources in the complete value chain with the objective of reducing the cost of ownership while fulfilling even exceeding certain predefined criteria of acceptable quality standards (Tiwari and Herstatt, 2012).

From the organization’s point of view, a frugal solution is designed, produced, delivered and maintained to achieve the needs of underserved consumers in constrained environments (Bhatti, 2012). For the consumers, frugal products and services extend from simply costs to functioning with few resources, and lack of necessary infrastructure. Examples of successful frugal innovation include the Tata Nano car in India that costs less than US$3000, a low-cost battery powered refrigerator in India (called Chotukool) created by Godrej Company and a mini-handheld electrocardiogram (ECG) machine called Mac 400 created by GE at its Bangalore laboratory (Howard, 2011).

Based on evidence from frugal solutions in and outside Asia, it is clear that frugal innovation is a cutting edge initiative that has challenged conventional ways of innovation management. It is destined to address the needs of both the lower and middle income groups all over the world. Despite these impressive strides, the initiative has received little academic attention particularly in Africa. Scholarly works that have attempted to deal with this subject have mainly concentrated on emerging economies in Asia (Tiwari and Herstatt 2011, 2012; SAGPA 2011; Tood and Lawson 2003; Fukuda and Watanabe 2011; Kohlbacher and Hang 2011; Pinelli 2011; Eagar et al., 2011). Africa is in desparate need of frugal innovation given the higher levels of poverty in comparison to other continents. For instance in 2011, 35 out of 45 nations identified as having “Low Human Development on the United Nation’s Human Development Index were located in Africa (UNDP, 2011). The implications of these facts are that the gap between the rich and the poor in most African countries is quite high and the population of the lower and middle income groups is higher than those in the high income group. This means that there are fewer people who are able to enjoy certain things in life because of the low purchasing power. More often than note, people in the lower income group would like to enjoy the same goods and services as those at the top of the economic pyramid but are not able to. Therefore there is a seemingly dormant and non-consuming market for which frugal products can take advantage. We call this market “unthawed market” because it is not fully exploited and seems “frozen”. The limited research so far carried out on frugal innovation has not addressed emerging issues in this field in Africa. To our knowledge there has only been one study conducted on frugal innovation in Africa. It was a single case study that focused on service innovation in Kenya (Wooder and Baker, 2012). There is need to cast the net wide and look at Africa as a whole in order to identify other cases of frugal innovation. This will give us a clearer picture of both product and service innovations for mass markets in Africa. As populations in Africa grow and demand for unique and reasonably cheap goods and services go up, frugal innovation is a must for this continent.

Given the foregoing, it is imperative that a preliminary study to find examples of frugal innovation in Africa is conducted. Hence the purpose of this study is to address this gap. More specifically our study aims to identify cases of frugal innovation in African, categorize them and bring out success factors of such innovations. Identifying cases of frugal innovation will provide important insights that will stimulate further research not only in Africa but in other parts of the world.

2. FRUGAL INNOVATION: THEORETICAL BACKGROUND

In this era that is increasingly being defined by the globalization of competition as well as major fiscal and demographic challenges, the task of managing innovation is vital for companies of every size in every industry (Tidd, 2006). Although innovation is a very difficult process to manage, it is critical in sustaining businesses and ensures competitive advantage. The way organizations bring out new ideas and take them to the market has undergone fundamental change. There is a paradigm shift in how companies commercialize industrial knowledge. In the following we have shown how two conventional theories of innovation and product development are no longer sustainable. Subsequently, frugal innovation is becoming relevant.

2.1 The Product Life Cycle cannot explain recent trends in innovation

Historically there were attempts and initiatives to understand product and service innovation. One such initiative was the product life cycle (PLC) theory developed by Raymond Vernon. The PLC is an economic theory that attempted to explain the observed pattern of international trade. Vernon (1966) argued that many products experience cycles. The theoretical rationale behind the PLC theory emanates from the concepts of diffusion and adoption of innovations (Everett, 1962). Schematically, the PLC may be approximated by a bell-shaped curve that is divided into different stages (see Figure 1). Although the number of phases suggested by different scholars varies from four to six, for the purpose of this paper we have adopted a four-phase cycle as proposed by Polli and Cook (1969). The four-phase cycle is realistic. Some cycles, which include a saturation stage, have proved to be unrealistic and questionable. For example, a clear distinction could not be drawn between the mature and saturation stage (Gardner, 1987). Pollit and Cook (1969) stated that sales follow a sequence of stages, starting with product introduction and proceeds with growth, through maturity and eventually decline.

Figure 1. Product Life Cycle

Source: Polli and Cook (1969)

Below is the summary of the four stages in a product’s life cycle:

Introduction – New products are introduced to meet local and national needs. Profits are often low because customers are few. This stage is characterized by significant uncertainty regarding the market size, consumer tastes and technological constraints.

Growth – Products become more widely known and accepted. Profits begin to be earned as the image of the product is developed.

Maturity – Products may be extended by adding both width and depth. Sales are at their peak and profits are high. There is production of standard products through standardized production processes.

Decline – Sales fall very fast and profit go down. Prices are also likely to fall.

Vernon (1966) posited that products are initially discovered and produced in developed countries (north) and exported to the less developed countries (south). The emphasis was on the role of innovation, scale ignorance and uncertainty. Vernon discarded the classical assumption that knowledge is a free good. He claimed that developed countries spend more on product development and innovation than developing countries. Hence they tend to develop high end products. Initially, the manufacture of a new product tends to be located in the country that developed it. This is largely on account of large markets in the developed nations therefore early stages of a product’s life production need to be located close to the market. Vernon further argued that when products become mature their degree of standardization and consequently of price elasticity of demand increases, cost considerations become more important and production will often move to less developed countries. Concerns about productions costs and possibilities of economies of scale results in shift of location of production from the ‘north’ to the ‘south’. Hence the north produces only ‘new goods’ while the south produces only ‘old’ goods (Funk, 2004). The cycle arises because what is a new good in one period eventually becomes an old good in another period.

The PLC theory is a conventional concept which has stood the test of time. It has represented central elements of innovation and marketing for four decades (Mercer, 1993). Following its development in the 1960s and subsequent popularization in the 1970s, the theory has remained a stable feature in international trade. A great deal has been written on the subject and several empirical studies have validated its existence (Polli & Cook 1969; Meenaghan & Turnbull 1978; Klepper 1992; Mercer 1993; Funk 2004). The PLC has been used for strategic planning, product development, financial management and has been considered to be an influential concept (Moon, 2005) and an enduring marketing framework (Golder & Tellis 2004). The concept has been used for specific technologies (Abernathy and Utterback, 1978); for dominant designs (Tushman and Anderson, 1990), for customer adaptations of new technologies (Rodgers, 1962) and for specific industries and clusters (Audretsch and Feldman, 1996).

Indeed the evidence supporting the PLC theory and the amount of attention bestowed upon the theory in the academic literature over the years have been impressive. However, in the recent past the PLC concept has begun to appear unsustainable. There is a serious deficiency in the assertion that new products and innovations happen in developed countries and later get adopted in developing nations. Recent scholarly work has brought out evidence showing an increasing trend of product development and innovations originating from developing nations such as India and China (Tiwari & Herstatt 2012; Prahaland 2005; Economist 2010b). These countries are no longer just borrowing innovations from developed countries; but from time to time are contributing innovations to the rest of the world including advanced economies (Govindarajan & Ramamurti, 2011). Recent research has suggested that enterprises are increasingly using fast-growing developing economies as lead markets for innovating specific products, services and technologies (Tiwari & Herstatt, 2012). An example of such innovations is a washing machine called Mini Magical Child introduced by Haier, a Chinese home appliances firm. This washing machine is being sold in the US and Europe. These innovations have been termed “frugal innovation” because they meet the needs of low end customers at affordable prices and have acceptable quality (Zeschky et al. 2011). This trend cannot be sufficiently explained by the PLC theory and by factors such as degree of standardization and price elasticity of demand. To the contrary, the trend has challenged the core assumptions of the PLC theory and proves, in the interim, that innovation and new products can emerge from anywhere and not just in advanced countries. The assertion, by Vernon, that discarded the notion that knowledge in a free good therefore cannot stand.

2.2. The Closed Innovation approach has been eroded

The old paradigm was called closed innovation which was based on the strict control of successful innovation (Chesbrough, 2003). Under this view, organizations generate their own ideas, develop them, finance them and support them on their own. In short, companies maintain complete control of all aspects of the innovation process and inventions are kept highly secretive. Traditionally many organizations followed this model and it worked well for most of the twentieth century (OVO, 2008).

However, over the years a number of factors have led to the erosion of the closed innovation approach (Chesbrough, 2003). First, due to an increase in the mobility and availability of highly educated people, large amounts of knowledge leave the research laboratories of many companies. Second, the availability of venture capital has increased significantly in the recent past making it possible for promising ideas and technologies to be further developed outside the organization. Third, other firms in the supply chain began to play an increasingly pivotal role in the innovation process. Finally, today there is an abundance of knowledge in virtually every field. The proliferation of public scientific databases, online journals, low-cost internet access have given firms access to a wealth of knowledge that was far more expensive and time-consuming to reach as recently as the early 1990s.

The above factors have rendered the closed innovation model unsustainable. Consequently, some mature firms got stuck in a narrow search for efficiency, displaying short sightedness and an inability to innovate to the extent needed to sustain their competitiveness (March, 1991; Dougherty and Hardy, 1996). Hence, many organizations started looking for other ways of increasing the efficiency and effectiveness of their innovation processes. On the other hand, these conditions have led to the globalization of innovation and emergence of what Chresbrough (2003) has called open innovation. Under this paradigm, firms can and should use both internal and external ideas to develop and commercialize products and services. Open innovation provides means to benefit from a much broader base of individuals and organizations. Ideas coming from customers and business partners may identify gaps and needs that internal team may have been ignoring or unable to identify. Firms are tapping into internal and external sources of knowledge to review development cycles, re-think development costs and develop products for particular markets with differing customer tastes, geographic conditions or regulatory requirements (Buse et al. 2010; Cantwell, 1995; OECD, 2008). Internationalization of R&D which was thought to be phenomena of the developed countries such as Japan and Germany has now shifted to developing countries (Carlsson, 2006). There is a remarkable trend of multinational enterprises selecting locations in emerging economies such as India and China to conduct innovation activities (Tiwari, 2007; OECD; 2008).

2.3 The emergence of frugal innovation

The open innovation approach and the failure by traditional theories such as the PLC to elucidate the current innovation trends, have laid a basis for the emergence of different approaches to innovation management. One such approach is frugal innovation which targets middle and lower-income customers in rapid growth markets (Pinelli, 2011). Frugal innovation is also called reverse innovation (Govindarajan and Ramamurti, 2011) constraint-based innovation, meaning sparse in the use of raw materials and their impact on the environment (Innovation Post, 2011). It is driven by resource constraints imposed by infrastructural and business environment (Sehgal et al. 2010). Practitioners have referred to frugal innovation as a holistic rethinking of products and services offered to the customers and underlying processes and business models so that companies can squeeze costs and expand the customer base, business and profit (Jagati, 2011). These customers are enjoying their first taste of modern prosperity and are buying for the basics not for fancy features (Prahalad, 2005). They have unique needs that are not usually addressed by mature market products, mainly due to prohibitive cost base of developed world products.

To produce frugal goods, complex and concerted R&D efforts are required (Jagati, 2011). In this regard, the field of engineering has also undergone some changes in order to face these challenges. In 2006, the Chairman and CEO of Renault-Nissan Alliance, Carlos Ghosn came up with the term frugal engineering to describe the competency and aptness of Indian engineers in developing products like Tata Motor’s Nano. Frugal engineering is an overarching philosophy that enables a true ‘clean sheet’ approach to product development (Sehgal et. al. 2010). It avoids needless costs and addresses millions of consumers at the bottom of the pyramid who are moving out of poverty in developing nations. Kumar and Puranam (2012) in their recent research identified the following underlying principles on which frugal engineering efforts seem to rest:

Robustness – The characteristic of being physically strong and inured to endurance. Most of the developing nations have harsh environments such as extreme temperatures.

Portability – Poor roads and transportation in the emerging economies call for the importance of goods that are easily portable. Small and lightweight products become highly desirable.

Defeaturing – This refers to feature rationalization. Usually features accumulate in products over time. Therefore there is need to remove some of them that do little to enhance the actual product.

Leapfrog technology – Leapfrogging is a process of making progress by large jumps as opposed to small increments. This may seem contradictory for developing nations. However, engineers in India and China have adopted technologies that make dependence on existing infrastructure irrelevant.

Mega-scale production – It is estimated that the middle class in Asia alone is 525 million people, greater than the entire population of the European Union (Pinelli, 2011). This massive population can help firms produce on a massive scale and drive costs down.

Service Ecosystems – By using efficient service ecosystems, firms utilizing frugal engineering have been selling large volumes to multiple segments, each with slightly different needs. With ecosystems low costs have been achieved.

In India, frugal innovation is known as Jugaad innovation which means doing the best with what one possesses (Innovation Post 2011). Jugaad is a colloquial Hindi word which roughly translates as “an innovative fix; an improvised solution born from ingenuity and cleverness” (Radjou et. al., 2012). The term refers to a unique way of thinking and acting in response to challenges. Juggad is, quite simply, achieving more with less. India is becoming a leader in frugal innovation (Tiwari and Herstatt, 2012). In fact it is rapidly emerging as one of the hotspots for the development of innovations tailored to the needs of lower income groups (Kubzansky and Karamchandani, 2009). As mentioned earlier, the best known example of a frugal product is probably the Tata Nano car, which has become so popular in India and dubbed ‘the people’s car’ (Howard, 2011). At the end of 2010, 70,000 units had been sold. Tata’s aim was to develop and produce a car that would be much cheaper than any other car in the world. To achieve this, the company reengineered parts to save weight, reconfigured assembly methods and developed a complex network of third party suppliers to increase efficiency (Pinelli, 2011). In view of this ground breaking technology, some established car manufactures from advanced economies have seen a reduction in their sales. According to the Society of India Automobile Manufacturers, in 2011 Suzuki’s car sales in India dropped by 11.9 percent for the first time in 9 years (Nagata, 2012). Suzuki’s market share in India which was 50 percent in 2009 dropped to under 40 percent in 2011. Another example of frugal innovation is India’s technologically sophisticated solutions. The country is providing satellite launch services at the India Space Research Organization (ISRO). This organization is offering commercial services to space agencies and research institutions all over the world for costs that are significantly lower than those of its competitors in the developed world (Chandrashekar, 2011). In the medical field, a unique and interesting trend has emerged. Sometime back people seeking specialized medical treatment from developing nations would travel to developed nations for treatment. However, because of new and affordable medical services in India, patients from wealthy countries are going there for specialized treatment (Moriyasu, 2012). The comparably decent treatment is much cheaper and waiting time is short. For instance, the heart bypass surgery which costs US$144,000 in the US is available for US$8,600 in India (Moryyasu, 2012). In this regard, the number of medical tourists received by India has grown to 4.6 times the number received five years ago. At Indraprastha Apollo Hospital in New Delhi, patients from the US, the UK and the Persian Gulf States have been treated.

Another country with successful cases of frugal innovation is China. For example, BYD in that country has developed a very low-cost method of producing lithium-ion batteries whose cost has been reduced from US$40 to less than US$5 per unit (Kharas, 2010). Other frugal products in China include a washing machine called Mini Magical Child developed by Haier, a home appliance company in 1996 (Hang et. al., 2010). The product was designed for small daily loads and offered an alternative to large expensive washing machines. These are all examples of “good enough” products designed to fulfill the basic needs at low cost thereby providing high value.

From the scarce literature, three studies that attempted to address frugal innovation theoretical issues were identified. The first one proposed a frugal theoretical model on the basis of resource constraints, institutional innovation and social innovation (Bhatti, 2012). According to this model, the intersections among these three innovation streams present a fertile space where frugal innovation can be located. If each stream is taken separately, it cannot deal with the challenges of innovating for the underserved in emerging markets. The second study presented a conceptual framework for product innovation (Ray and Ray, 2011). As shown in Figure 2, they contended that to serve the markets at the bottom of the pyramid three concepts need to be harnessed; architectural innovation, modularity and collaborative partnerships. When performance of existing product technologies far exceeds what customers in mass markets are able to utilize or pay for; innovators need to develop simpler and cheaper products. They likened this to Christensen’s model of disruptive technologies. In this context, architectural innovation becomes the logical low cost choice, since it recombines existing component technologies in new ways, to create and alter price-performance packages without further investments in developing new core technologies. Modularity incorporated in such products enables firms to improve performance overtime to appeal to more discerning mainstream customers, eventually facilitating a technology to emerge. In short modularity is for customization and improvements. Furthermore, given that developing disruptive technologies is prone to high uncertainties and unforeseen costs, which maybe further exacerbated by institutional weaknesses in emerging economies, the authors drew on the concept of collaborative partnerships. Such firm practices will lower the costs and risks associated with innovation. The third study focused on frugal service innovation in Kenya, Africa. The aim of the study was to explore how the MPESA solution (which will be discussed later in this paper) was conceived, designed and delivered to the customers (Wooder and Baker, 2012). The study proposed a service innovation framework comprising how to; create, deliver, capture, defend and sustain value. Unlike the model proposed by Bhatti, the last two conceptual frameworks have been subjected to some testing. While the three models are in tandem on affordability, resource constraints and internal capacities of firms, the Bhatti model appears complicated and difficult to implement. To test the intersection of social innovation, institutional innovation and resource constraints is such a mammoth task.

BOP

DISRUPTIVE TECHNOLOGY – simpler, cheaper than mainstream products

Architectural Innovation

Modularity

Collaborative Partnerships

Figure 2: A Conceptual Framework for product innovation for mass markets in emerging economies

Source: Ray and Ray (2011)

In order to understand how MNCs are organizing frugal innovation efforts in emerging markets, an in-depth study of five firms was carried out (Zeschky et al., 2011). Initially 13 firms, representing a variety of industries, were identified. The firms were sieved and eight dropped due to insufficient available data. The remaining five were found suitable case studies. Analysis was based on three criteria; product characteristics, motivation for developing products and implementation of product development. The study found that besides having similar structures regarding organization of R&D, all of the five firms had a successful history of frugal innovation. Based on the above criteria it was established that successful frugal innovation:

Should be grounded in the drive to meet the needs of resource-constrained customers at the lowest possible cost.

Require local organizational structures and resources.

Should result in products and services that are easy to use, robust and reliable.

The above and other previous studies provide empirical evidence and a yardstick upon which future studies can be benchmarked. First, primary data was used; second the sample was reasonable and third firms represented different industries.

3. RESEARCH METHODOLOGY

This research focuses on identifying examples of frugal innovation in Africa. Being the first study of this kind in Africa, we used analogical thinking to identify of frugal innovation. The use of analogies in research involves the transfer of knowledge gained from one area (source domain) to another area or field (target domain) (Kalogerakis et al. 2010; Keane 1988). The knowledge and evidence of frugal innovation in some emerging economies (source domain) presented in this paper was used to identify examples of frugal innovation in Africa (target domain). As shown in this paper, there are successful examples of frugal innovation in India and China and these will be the yardstick against which cases in Africa will be identified.. Specifically the Zeschky et al. (2011) selection criterion was used to locate exceptional cases of frugal innovation in Africa. We scanned research databases and reviewed reports, articles and papers from previous studies and projects. Sources of such data included the United Nations Development Programme (UNDP), World Bank, reputable journals, African Union (AU) and New Partnership for Africa’s Development (NEPAD). This methodology was appropriate at this stage of the research. For the future, there will be need to carry out comprehensive in-depth case studies of the identified cases. Such studies will provide us with detailed insights of the firms’ design, and production processes and commercialization of products.

4. EXAMPLES OF FRUGAL INNOVATION IN AFRICA

Drawing from the literature, we present six examples of successful frugal innovation in Africa. These cases are drawn from a range of broad areas ranging from housing construction to electronic money transfer technologies.

4.1 Moladi: Affordable houses in South Africa

In many African countries, housing is one of the most sensitive issues affecting the lower income groups. In South Africa for example, close to 13% of the 14.3 million households are informal dwellings (Statistics South Africa, 2011). The term “informal dwelling” is often used in South Africa to designate shacks, corrugated-iron structures and other makeshift shelters. The above statistics represents about 1.8 million households (between 7.2 and 10.8 million people). Informal structures are often made of highly combustible materials such as wood and cardboard which pose serious safety and environmental concerns. The structures are easily damaged and exposed to the external elements meaning that people often live in damp, very hot or very cold conditions. The other concern is inadequate or lack of sanitation and running water which constitute a serious health hazard for the population. Similar conditions are present in many parts of Africa.

In order to address this problem and as part of public policy, the South African government took a number of initiatives. It became one of the few countries in the world where the right to ‘adequate housing’ of all citizens is enshrined in the constitution. According to section 26 of the constitution, the state has an obligation to take “reasonable legislative and other measures, within its available resources, to achieve the progressive realization of this right [to housing].” (Republic of South Africa, 1996). In order to translate this commitment into results, the first fully democratic South African government, immediately upon taking office in 1994, embarked on a far-reaching economic policy framework called the “Reconstruction and Development Programme”, widely known as the RDP (Republic of South Africa, 1994). Despite these serious efforts to address the lack of housing, the Department of Human Settlements (the government department in charge of housing) estimates the current backlog to still be of at least 2.1 million units affecting 12 million people (Times Live, 2010). As a result of rapid urbanization and demographic pressure, this backlog keeps growing. Recent service delivery protests across South Africa have, once again, shown the plight of the poorest and the urgent need to address their challenges (Burger, 2009).

4.2 Safaricon and Vodafone: Electronic Money Transfer in Kenya

In Kenya there are less than two million bank accounts serving the country’s population of 32 million people (UNDP, 2007). The reasons for this disparity include the high cost of banking and the fact that the majority of the people have low incomes with a large percentage of them living on an average of one dollar a day. Such people do not feel comfortable interacting with commercial banks that typically target middle and upper income customers. Micro-Finance Institutions (MFIs) such as Faulu Kenya do successfully provide financial services for the poor, but they are hampered by poor infrastructure and low levels of technology.

In order to address this problem Safaricom Kenya and Vodafone, the two mobile service providers currently operating in Kenya, developed an appropriate technology. The technology was called “M-PESA”, an electronic money transfer product aimed at making financial transactions faster, cheaper and more secure for the less privileged. M-PESA (“M” for Mobile, “PESA” the Swahili word for cash) is a mobile money transfer service innovation (Wooder and Baker, 2012). It allows the transfer of money between individuals, transfer of money between individuals and businesses, cash withdrawal and deposit at registered retail outlets as payment for goods and services through the mobile phone short message service (SMS). M-PESA account holders can deposit or withdraw money into or from their virtual accounts at Safaricom vendor shops or at an increasing number of outlets such as supermarkets and petrol stations. Once the money is in their accounts, they can use it to pay bills, transfer to other people or purchase goods and services.

In October 2005, M-PESA trials were successfully launched in Mathare (a Nairobi slum) and Thika (a market town an hour’s drive from Nairobi). The trials featured eight Safaricom dealer shops and 450 Faulu Kenya clients and concluded in May 2006. Vodafone Group Plc provided 990,000 Sterling Pounds (GBP) and DFID 910,000 Sterling Pounds to finance the pilot project. The product has been successfully launched by Safaricom. More financial institutions and users were recruited. Vodafone also plans to introduce the system in other developing countries. M-PESA was an original idea of Vodafone. The company initiated discussions among the partners with the overall aim of extending social benefits to mobile phone subscribers. Safaricom Kenya provided the local mobile telephone network, Vodafone and DFID funded the pilot project, Faulu Kenya provided the micro-finance clients who pilot tested M-PESA and the Commercial Bank of Africa was the banker to M-PESA.

At the start of the pilot, the clients selected to participate were issued cell phones equipped with a special subscriber identity module (SIM) card. The special SIM card enabled the virtual transactions to be tested. Clients holding M-PESA accounts applied for micro-finance loans in the normal way, but when the loan was granted, they were not given a cheque or cash. Instead the money was transferred from Faulu’s M-PESA bank account into the Faulu field officers M-PESA account. The field officer then dispersed the loan via SMS to the micro-finance clients at a group meeting. The client then had many options; she or he could withdraw cash from an authorized agent shop, transfer value to other individuals or pay for purchases from merchants. Clients of Faulu may turn their loans into cash by visiting nearby authorized retailers such as Safaricom shops or other outlets and transfer credit from their phones to the shop, receiving cash in return. The retailers receive a commission for each transaction. The clients also have the option of paying for goods and services by transferring value from their accounts to the retailers’ M-PESA accounts.

The M-PESA technology is a digital financial transfer initiative. Among the M-PESA’s innovations advantages include the following:

Replacing cash with electronic money among low-income people

Applicability for both urban and rural poor

Radically reducing transaction costs for the poor

New functionality including remote payments or other monetary transactions

A safer way of sending money and customers had no need to carry cash.

It negated the need to travel to the bank and queue

Simple and fast to use

The M-PESA system is meant to provide the poor with efficient, reliable and affordable banking services and to simultaneously stimulate business operations that provide the poor with a means of livelihood and employment. To turn these intentions into reality, Vodafone and its partners plan to expand M-PESA to other local MFIs and banks so that they can reduce transaction costs and more easily provide access to affordable loans for micro-entrepreneurs. Safaricom and Vodafone benefit from the system by charging a small fee for every transaction conducted through the system. By keeping transaction costs very low, millions of Kenyans can be drawn into the new system, resulting in millions of transactions being conducted through the system daily and eventually creating bigger profits for Vodafone and Safaricom. The MFIs on the other hand, would make profits through the interest they can charge on loans and through the fees that they can charge for all the transactions they would conduct for their clients through the M-PESA system. DFID can benefit by succeeding in their mission to reduce poverty in Kenya.

4.3 Eskom: Prepaid Metering Technology in South Africa

Eskom is a South African state owned enterprise established in 1923 and is responsible for the generation and distribution of electricity. In 2002, Eskom was converted from a statutory body into a public company as Eskom Holdings Limited in terms of the Eskom Conversion Act 13 of 2001. Prior to 1989, Eskom’s electricity distribution activities were limited to direct sale to large commercial and municipal clients. The municipalities then sold electricity to residential consumers. As municipal electricity distribution was concentrated on the affluent and largely white areas, large parts of the township population were left without electricity. This was identified as a significant problem, and consequently in 1989 Eskom launched the ‘Electricity for All’ programme, which aimed to extend electrification to over one million households in traditionally underprivileged areas. Recognizing the low income levels of the targeted households, inadequate infrastructure and high administrative costs of administering the credit based system, the company began to look for alternative ways of providing electricity to the lower income group (Iliev, 2005). The socioeconomic conditions in the targeted areas made the use of existing technology (the credit-based metering) difficult and costly. Most of the targeted consumers were in informal employment, had limited access to banking, postal or other infrastructure and were subject to high levels of crime.

Eskom identified the Pre-Paid Metering (PPM) technology as a way of increasing the provision of electricity to these consumers and mitigating the impact of the problems on the costs and administration of the electrification. The availability of appropriate PPM products domestically and internationally was explored. However, in the 1980s and 1990s the PPM technology internationally was still in the early stages of development, and did not meet Eskom’s operational requirements. The leading PPM technology was in the UK, but it was seen as inadequate for Eskom’s strategy; as the prepayment meters were operated either by coins or transferable magnetic strip cards, the security level was low and the fraud risk was seen as very high. Given the realities of the South African situation, Eskom decided that a transferable token system would carry a very high level of theft and fraud risk, and that a non-transferable system would be most appropriate. Hence, a crucial decision was then taken to develop a local technology (Iliev, 2005). Eskom would co-ordinate the development of a non-transferable token PPM system, with the help of the private sector.

Eskom led a strategic alliance of domestic manufacturers for the development of a South African PPM technology. Once the technology had matured sufficiently, Eskom withdrew from active participation in the technology’s development, focusing on driving the cost of the product down. As at the end of 2005, the objective of providing electricity to one million households had been achieved, with 2.6 million South African households using the PPM technology. The South African manufacturers and developers of PPM technology have successfully grown export levels and attracted multinational investment in the industry. The standard underlying the technology has received international recognition through its adoption as the basis for a new International Electrotechnic Commission standard for pre-paid metering technology. The PPM industry represents a case of successful local development of cutting edge global technology, based on the creative combination of inherited local technological capabilities, imported knowledge, and strong collaboration of public and private sector actors.

4.4. Uniliver: Food, soap and sanitary products in different parts of Africa

There is evidence that much of Africa’s growth is driven not by the sale of raw materials, such as oil or diamonds, but by a burgeoning domestic market, the largest outside of India and China (Guo, 2010). In the last few years, the surge in private consumption of goods and services has accounted for two thirds of Africa’s GDP growth. It is expected that this consumption will grow along with the population of Africa. By 2030, the population of Africa will exceed the population of North America, Europe and Japan combined. For now, few African consumers have the kind of disposable income found in Asia and the West. Yet, African accountants, teachers, maids, taxi drivers, even roadside street vendors, are driving up demand for goods and services including cell phones, bank accounts, upmarket foodstuffs and real estate (Mahajan, 2009)

Uniliver, a London-based multinational company, has conducted business in Africa selling food, soaps, personal-care products and more for more than a century. From the 1920s through the early 1990s, Unilever dominated trade but wasn’t focused on a specific product line. In fact, Unilever’s West Africa Company would sell anything from washing powder to trucks. Today, the company is much more focused and defines its market as sub-Saharan, an area of 657 million people, and sells products in 48 countries. Unilever has developed a strategy focused on the low income consumers. It has started using the “small unit packs/low unit price” concept. For example, Uniliver packages its Omo washing powder or Blue Band margarine in small sachets and sells them for less than the equivalent of 10 cents (US) a packet. In Ghana, the company produces tiny packs of Frytol cooking oil and Close-up toothpaste, simply because that is all most consumers can afford. The company’s distribution network, built up over many years, is also adapted to these economies where many people have no savings. Goods are effectively given to street traders on one week’s credit, and the payment is collected a week later when the trader has accumulated some cash from his or her customers.

With this strategy, the company has successfully moved consumers through the value chain. Unilever starts by selling poor Africans the low cost per unit packs of Omo and then moves them to larger packs when they become more affluent. In a business report on Unilever’s African strategy, Anthony Simon, the head of marketing for Unilever’s food division said: “The loyalty of poor consumers to a brand is at least as strong as a more affluent one.” (Nissa, 2003).

4.5 Toyola: Charcoal stove in Ghana

Over the past three decades various initiatives and policies have been adopted at international and national levels for sustainable energy use. For instance, under the European Bank for Reconstruction and Development (EBRD) Sustainable Energy Initiative, up to â‚¬1.5 billion was to be invested in energy efficiency, renewables and clean energy projects over a three-year period starting in 2006 (Osei, 2010). In Ghana, the Ministry of Mines and Energy in 1989 developed the “Ahinbenso” improved charcoal stove with the aim of improving the efficiency of the cook stoves used predominantly by poor households. This is indicative of the crucial role energy plays in the development agenda of nations. Hence, in seeking to minimize poverty and improve human development, access to affordable and sustainable energy services is essential. Wood continues to be the main domestic fuel for both urban and rural households in Sub-Saharan Africa, where it is relatively easily available and cheaper than modern fuels (Wood and Baldwin, 1985). However, the inefficient burning of these fuels is reported to result in very high concentrations of indoor air pollutants such as carbon monoxide and fine particulate matter. The most affected are women and children since they spend a comparatively greater part of their time in the kitchen. Globally, indoor pollution as a consequence of burning biomass and coal for energy needs causes two million deaths annually, almost all in developing countries (Legros et al, 2009). There is also evidence of links to eye disease, tuberculosis and low birth weight (Pokhrel et al. 2005). Coupled with these major health concerns are the potentially devastating effects of greenhouse gas emissions and depletion of forest resources, aggravated by the fact that the demand of developing countries for their principal domestic fuel is expected to grow in proportion to population growth. Thus, switching to fossil fuels such as kerosene and liquefied petroleum gas (LPG) or alternative energy sources such as wind and solar would reduce the amount of greenhouse gases emitted by African households. However, the cost implications put these energy sources beyond the reach of most people in Africa and other parts of the developing world. The case in Ghana points to a situation where many poor households cannot afford modern and efficient fuels. The majority of the poor continue to use fuel wood for their most intensive energy use; cooking. Even though successive governments have enacted policies to increase household access to fuels such as kerosene, gas and electricity, the high costs associated with the use of these energy types have counteracted such policies (Heltberg, 2003).

Toyola Energy Limited saw this opportunity and started producing and distributing energy efficient charcoal stoves and solar lanterns for domestic use in both urban and rural areas in Ghana. Toyola is a limited liability company whose entrepreneurs are Mr. Suraj Wahab and Mr. Ernest Kyei. The two artisans implemented an innovative business model that includes the poor along the whole value chain as suppliers, manufacturers, retailers and customers and accounts for positive economic, social and environmental effects. The Toyola cook stove is fitted with a ceramic liner to improve fuel efficiency by 50% in comparison with the traditional coal pot. This technology is aimed at minimizing the rate of deforestation and carbon emissions. Users benefit from reduced indoor air pollution and from saving money. The efficient stove also creates employment especially for the youth. Toyola has trained and created employment for over 300 artisans in Ghana. Employment is generated along the whole value chain which comprises scrap suppliers, stove manufacturers, distributors and retailers. Toyola believes that inclusion creates significant positive impacts on the socio-economic well-being of the people in their value chain.

The metal scrap suppliers go around scavenging or buying the scrap to sell it to Toyola. However, when they come across large quantities of scrap metal which they cannot afford to buy, they contact Toyola to buy it directly and the scrap dealer/supplier is paid a commission of approximately 10% of the value of the scrap metal. The scrap metal constitutes an important component of the cook stoves. The Toyola cook stoves are manufactured by three categories of artisans namely, the component suppliers, the metal frame suppliers and those who assemble the components. A number of artisans produce various components of the stove using their own scrap metal. In the end, the components are sold to Toyola to be assembled by a group of artisans who specialize in assembling the stoves.

Toyola encourages artisans to specialize in producing one of the 26 parts that make up the coal pot. Wahab and Kyei estimate that this increased specialization helps to increase the productivity of the artisans by about six-fold. Toyola delivers stoves to rural dwellers that largely depend on firewood and charcoal for their domestic cooking and also on kerosene for lighting. The Toyola products (stoves and lanterns) provide the users with cleaner, healthier and cheaper energy. Toyola often sells their products on credit to local market vendors who earn 10% commission from selling the product. Toyola sometimes also allows barter financing to give the most deprived access to their products. Over the past three years of operation, the company estimates that it has supplied about 35,000 households (out of a total of 3,701,241 households in Ghana) with their products and has offset 15,000 tons of carbon dioxide emissions.

4.6 Appropriate Development, Architecture and Planning Technologies (ADAPT): Construction Technology in Egypt

In Egypt in 1997, 92% of dwellings in the urban sector and 87% of holdings in the rural sector were informal. The combined real estate was equivalent to US$240 billion of dead capital. This value for example was 55 times greater than the value of foreign direct investment in Egypt until 1996. While 90% of residents build their own homes, they do so without technical assistance, planning or consultation regarding cost or resistance-tests on materials utilized. Technical inefficiencies means that construction materials such as cement, which pollute air and soil resources, or expensive imported materials, are overused in an inappropriate building cycle, due to the lack of updated knowledge or technology. There is an estimated demand of 5.3 million middle and low cost units over the next ten years. This is a clear indication that there are great opportunities for value creation that are rooted in assets already within close reach in local markets. Hence a company called Appropriate Development, Architecture and Planning Technologies (ADAPT) developed a solution to deliver affordable houses to the Egyptian market. As part of its business model, ADAPT partnered with master builders and masons in the informal sector to create value by configuring local resources and building knowledge into new business models. The company includes greater participation of communities and uses technology-intensive and low-cost methods. Resultant solutions are relevant for the poor, and also for any market seeking ecological and energy efficient techniques in the green construction industry. ADAPT develops low-cost housing that is environmentally sustainable by leveraging technology to produce appropriate building material. The company cuts the cost of housing by 30% through two main strategies:

Sourcing materials that are locally abundant (such as clay and stone). This saves on high importation and transportation costs.

Reconfiguring available materials using technology (lab-testing). This produces inexpensive and environmentally friendly construction material mixes.

Lab-testing material is the technology used in the early stages of the business model’s value chain. It helps identify and innovate building material. At the production stage, simple tools like wood moulds or hydraulic machines used to make bricks are developed as well. With scientific planning, the types and quantities of building material used in urban development are certifiably ecological and already abundant. The pilot testing process takes on average three to six weeks, depending on the environment of the site. By using technology that is inexpensive, based on local inputs and simple to learn, a more compatible, less expensive therefore lasting solution has been established. This solution has created value and lower costs over time.

5. PATTERNS OF ORGANISING FRUGAL INNOVATION

All the firms identified had a similar approach to organizing their frugal innovation (see Table 1). From a strategic perspective they all wanted to serve the poor people of Africa. They took advantage of unthawed markets. Although cost advantages were a persistent motivation for developing these solutions, the results show that understanding the users and local environments was key to frugal innovation success. Unilever found, through its local presence, that big and fancy packaging was expensive. Based on that finding, they reduced the packaging. Toyola, discovered that conventional energy sources such as petroleum gas, wind and solar were beyond the reach of most people in Ghana. Through collaboration with local artisans, they developed an energy efficient charcoal stove. Eskom, through the combination of inherited local technological capabilities, led an alliance of domestic manufacturers to develop a home grown pre-paid metering solution. With the exception of Toyola, all of the firms initially developed solutions for Africa and only later marketed these products to other continents. All the solutions developed by firms were affordable and easy to use. At this stage the issue of quality with some solutions might be raised. However, the majority went to great lengths in ensuring robustness and high quality of their products was achieved. Moladi obtained quality accreditation and conformed to all regulatory requirements. The pre-paid metering technology developed by Eskom has successfully grown to export levels. In fact it has received international recognition for electrotechnic standard for pre-paid metering technology.

Table 1. Analysis of Frugal Innovation in Africa

Moladi: Affordable houses.

Safaricon and Vodafone: MPESA Technology

Eskom: Prepaid Metering Technology

Uniliver: Food, Soap and Sanitary Products.

Toyola: Charcoal Stove

ADAPT: Construction Technology

Product/Service Characteristics

-Replaced conventional brick walls with injection-molded plastic walls.

-Passed robustness tests.

-Better thermal properties for walls.

-Disaster resistant.

-Electronic money transfer solution.

-User friendly through mobile phones.

-Cheaper and more secure.

-Simple functions.

-Prepaid metering technology.

-Easy to use.

-Non-transferable system to avoid thefts and fraud.

-Robust design.

-Small unit packs.

-Easy to use.

-Energy efficient charcoal stove.

-Fuel efficient.

-Easier to use than traditional braziers.

-Affordable houses that.

-Environmentally sustainable.

-Use of locally abundant material.

Motivation for developing Product/Service

To develop an appropriate technology for construction of affordable houses and meet the needs of 2.1 million poor South Africans who do not have proper houses.

To provide banking solution to low income groups who cannot afford conventional banking facilities.

To increase provision of electricity to low income consumers and mitigate problems on the costs and administration of electrification.

To help low income consumers become more affluent.

To help many poor households who cannot afford modern and efficient fuel.

To configure local resources and building knowledge to develop low-cost housing.

Implementation of Product/Service

-Initial target market: South Africa.

-The product has been sold to all over Africa, Mexico and Panama.

Initial target market: Kenya

-Plans underway to introduce the technology in other developing countries.

Initial target market: South Africa

-Technology has been used in other countries such as Zambia.

-Multinational firms have invested in the technology.

Initial target market: Sub-Saharan Africa

-Products now sold all over the world.

Initial target market: Ghana

-Product now sold to neighboring countries.

Initial market target: Egypt

-Product now sold to many countries in Africa.

6. CATEGORIZATION OF FRUGAL INNOVATION IN AFRICA

The six cases in the previous section present an opportunity to categorize frugal innovation, in Africa, into two broad groups. The fact that the majority of the population lives in abject poverty and lack basic human needs, a great deal of initiatives are targeted at meeting needs such as water, food and shelter. Most of the African countries are poorer today than they were in the 1970s (UNDP, 2007). While there has been some growth on the continent over the past few years, very few countries have achieved and maintained the economic growth rates necessary to reduce poverty. Africa still tails behind other regions in most measures of economic development (UNDP, 2007). Underlying this poverty are high levels of income inequality and the desire to meet basic needs. Therefore the majority of the cases in our study fall into what we call “basic needs frugal solutions” category. As shown in Table 2, out of six companies, four developed solutions aimed at meeting the basic needs of the populations. Moladi and ADAPT developed a housing solutions to provide shelter for the people. Uniliver’s initiative on food packaging has enabled many Africans to buy commodities in smaller and affordable quantities. The need for food cannot be overemphasized. Toyola’s charcoal stove solution has gone a long way in meeting the basic energy requirements for the lower income populations of Ghana.

The second category of frugal innovation identified from the remaining two companies is what we call “luxury frugal solutions”. Most of the goods and services such as cars, electricity, mobile phones and bank accounts which are necessities in developed countries are still regarded luxurious in Africa. This is mainly due to many factors such as costs and limited supply. It has been estimated that more than 80 percent of the residents in Africa are off the power grid (McDonald, 2009). The proportion of the continent’s population without electricity and access to banking services is higher than any other continent. The situation is worse in rural areas where only 2 percent of th

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