Frugal Innovations: Siemens - Case Study Example

FRUGAL INNOVATIONS: SIEMENS CASE STUDY Frugal innovations, products and services, are aimed at meeting the unsaturated demands of the large and increasing middle class in various emerging economies. Despite research being conducted on the strategic significance of frugal innovations, this far, the real process of development of these innovations has not been analysed into details. In some instances, the replication, or the reduction, of the quality of products and services in the emerging economies has not lived up to the expectations of the producers and consumers. The aim of this paper is to look into the competence and capabilities that influence the performance of frugal innovations. This will help in understanding how frugal innovators create uniquely efficient methods that achieve outstanding outcomes. Particularly, the paper will explore the major innovations’ capabilities and competences that define the success of frugal innovations, through a case study approach. Introduction Emerging markets have become new destinations for technological companies because of the large consumer markets, the increasing demands for products and services, and available sources of R&D capacity. According to Jiatao and Rajiv (2009), India, China, and Brazil among other emerging economies across the globe, who initially played secondary roles in innovation, have, in the recent past, emerged as important innovation centres in the world. Local corporations in these nations have creatively gained advantage of the regional markets needs to attain success and achieve exponential growth. Companies such as TATA, Galanz, Haier, and Siemens among others have embraced the frugal innovation models to operate in various emerging markets. These companies have realised great profits while struggling to obtain a substantial market share from established multinational corporations, and in some cases, others, like ZTE and Huawei, have forced western corporations to merge in countering the increasing advantages of these companies (such as the Siemens-Nokia merger), and others were forced to declare bankruptcy (such as Nortel). The gradual, but steady, maturity of these markets has enabled the companies to embrace innovation of their own products, rather than imitation of foreign products and services. According to an article published in the Economist (2010), the intrinsic difference in the local requirements and lack of technical infrastructure have sparked new innovation perspectives such as constraint-based innovation, frugal innovation, and reverse innovation. To maintain this competitive advantage, multinational enterprises are under pressure to focus on development of products and solutions locally in the emerging economies. Alternatively, the multinational enterprises are required to take part in these new innovation perspectives. This paper will focus on the local product development model adopted by a multinational company, Siemens AG. Additionally, the paper will provide instances of successful innovative products that Siemens has developed in China and India and researches the development, acceptance and its implications on these products. Frugal innovation at Siemens AG Siemens is a Germany multinational enterprise with headquarters in Berlin and Munich, Germany. The company had annual revenue of €73.5 Billion in 2011. Siemens has split its operations into four major industries: health care, energy, infrastructure and city, and manufacturing sectors. Each one of these sectors is further subdivided, for instance health care has four divisions namely clinical products, imaging and therapy systems, customer services, and diagnostics. Siemens AG has been actively involved in emerging economies for the last century. The company has shown unwavering focus on emerging economies in all the business divisions. The rate of investment in terms of human capital and financial expenditure has had an exponential increase in the last 10 years. Currently, more than a quarter of the labour force and a third of the revenues realised at Siemens are obtained from emerging economies. The table below highlights the growth of the emerging economies from 2005 to 2015. This is obtained from Siemens annual reports 2011 and the company’s investor relations and capital market day of 2011 and 2012. Figure 1 Siemens Capital market day, Shanghai (2011) from Roland Busch Siemens has embraced a SMART initiative to guide the company’s frugal innovation strategy. Exponential economic growth in the emerging economies is responsible for the rapid growth of demands for all sectors of Siemens operations. Nonetheless, the company faced a number of threats in these regions. First, Siemens faced various local and regional players, who were competing both at the local and international markets and commanding substantial market shares. Second, there were global players who had set up shop in the emerging economies before Siemens. This threatened Siemens’s market growth in the regions with their prior regional knowledge and established enterprises. To ensure that the business opportunities are leveraged and ensure market growth and profitability, Siemens comprehended the fact that it was important to start significant expansion of its presence in the emerging economies. The focus of Siemens can be measured from the company’s Management Board member, Dr. Roland’s comments. Roland Busch noted that the emerging markets are still the drivers of growth of the world economy. With Siemens strong presence in the emerging markets and quality products, the company has a perfect position in the market and above average market share of the advancement that can be seen in these markets (Hart & Christensen, 2002). Siemens frugal innovation model SMART initiative Initially, Siemens opted for venturing and competition in emerging markets with new product portfolio particularly targeting the requirements of these emerging markets. The provided the basis of the SMART initiative at Siemens. This entailed simple, maintenance friendly, affordable products, and reliability and timeliness of the products to the market. In understanding the SMART strategy, it is required that one understands the operations of Siemens and its perspective of the market. Siemens classified the international market into various sectors. As described by the table below, there are various factors that Siemens has come to realise: Market segmentation Standards/Values/Functionality Top End Insistence on global standards/ certifications should be met High processing and completion speeds Most advanced functionality needed. High end Insistence on global standards and local standards/ certifications should be met High processing and completion speeds Advanced, but standards functionality needed. Medium end National standards to be met and certification should be complied with Normal speeds of processing Core functionality needed Low end National standards to be met and certificate is enough Low speeds of processing Basic functionality needed This market segmentation is in all geographical locations, but the market share of these segments is different from one region/country to the other. Even developed economies in America and Europe have significant shares of low end, medium end, high end, and top end market segments. Emerging economies, particularly in Brazil, China, and India, also indicate the availability of these four segments. Nonetheless, large portions of the markets in these countries are dominant in low and medium end segments of the markets. Unlike the high and top end market segments, the low and medium end market segments are price sensitive. The consumers are mostly small and medium enterprises – for business to business operations – who lack high-skilled labour and require simplified, easy to comprehend and user-friendly products. These market segments are not so much interested or cautious about brands and always require products that have less or no maintenance costs. Siemens’s SMART products and services have these segments as their target market (Hang et al., 2010). Siemens conducted a market research and found that consumer needs in low and medium end segments in emerging economies such as Brazil, China, India, and China were not in tandem with its initial high end market portfolio. Costs-reduction strategies through de-featuring existent high-end segment products would not serve towards this strategy, and ensure successful competition in the emerging markets. Further innovative features on the Siemens products to meet the unique local needs were introduced on the products. The rationale is the pillar of the SMART operations strategy within Siemens. SMART, as discussed earlier, describes Siemens products and services that are manufacture is a simple, maintenance friendly, affordable, reliability, and timeliness to the emerging markets. The main goals of the SMART frugal innovation strategies at Siemens include: First, Siemens seeks to gain market share in the emerging economies through the development of profitable services and products. Second, the company seeks to mitigate the local competition in the emerging countries (Tidd & Bessant, 2013). In developing SMART strategy at Siemens, the products and services from Siemens are justified at different phases of the product development. A typical SMART product development projects undergoes three phases. The first phase involves need identification. At this stage, experts are tasked with the identification of the needs and requirements of the target market and segment and the unique selling strategies (the core values and identification patterns). The second phase cost reduction and the review of the strategies and methods of reducing the manufacturing costs provided by the SMART solution can be reduced, for instance by utilising cost-effective raw products, emergent technologies, utilising the connections during the process of production among other processes. The third phase is the mix and match. This involves the individual components of the assembled solutions and focuses on the basics on interactions among the foundational factors (Siemens & Gaus, 2012). SMART produced products and developed services are later supported on the measurements like proper functionality and low pricing strategy without compromise on the quality of the products. After meeting these procedures, SMART products and services are introduced to the market. Siemens has also applied the Disruptive SMART models to enter the Chinese market. The disruptive SMART models have these goals: Identification of new methods of utilising the old technologies Offering sustainable solutions that provide a competitive advantage in low-end and medium-end markets and the proper prices for such markets. Ensure an improvement of the innovations that can be used at a later date for different needs for the international markets. Disruptive SMART services and products have their focus on reverse and frugal innovations. This innovation strategy is also supported by the company’s localisation strategy. Product and services localisation involves localisation of the team and the whole value chain through concept development to research and development and finally to the market introduction. Siemens has achieved significant success with the SMART strategy applied in frugal innovation over the years, since the introduction of this type of innovation in the emerging markets. Currently, the company has realised immense growth, in terms of revenue from the sales of SMART products and has grown its market share by above 19 percent in the financial year 2010. Siemens has introduced large numbers of SMART products and services in the market in the current times. Innovation capabilities that underpin the Siemens’ success in frugal innovation Human machine interface (HMI) is a critical factor in automation and has many applications in various sectors. Siemens creates human machine interface technologies towards achieving the increasingly complicated processes of modern systems and machines. It is effectively optimised to achieve particular HMI needs through standardised and open interfaces in software and hardware, which enables effective integration into the operating systems. Siemens Line HMI system is utilised for direct plant visualisation tasks. Integrated panel computer devices involve an industrial system and an operational section, and then provide a cluster of performance, versatility, and brilliance. This system offers ‘close-to-machine’ operations and monitor-to-control systems, processing of data, and tasks that enable motion control. These are significant in processes of production in hostile industrial environment, and in most cases involve easy touch-screens and membrane-keyboard functionality. Siemens HMI line panel is a frugal innovation that focuses on the SMART strategy in the emerging markets. Siemens line had a target market of original manufacturing customers making production machines in packaging, textile, and print services. Originally, the company made the HMI panel KTP 178 that was produced in Germany and was mainly for developed economies. Siemens introduced this product in the Chinese market, with minimum modifications that would fit the Chinese cost sensitive market. It became difficult for the Siemens product to penetrate the Chinese market and experienced reduced revenues because of plunging sales. Siemens had about 4 percent of the Chinese market share with this product (Siemens Capital Market, Shanghai, 2011). A strategic appraisal of this situation made the company to identify the purposes for the slow penetration of the product in China and found that: First, the product had a high price in a low end market segment. This meant that the Chinese market was mainly dominated by local manufacturers and the market price of the Siemens HMI was higher by more than 35 percent than the local products of the same functions. Second, the strategic analysis revealed that there was a low adoption of the product to fit the consumer requirements. The Chinese wanted a robust product with basic functioning and lower costs and the product from Siemens had a relative low adoption to the Chinese market needs (Dodgson et al., 2008). Siemens noted that for its product to succeed, it was necessary that it created localised products, made to target the entry level consumers and their basic requirements. This could not succeed through introducing a similar product initially targeting high-end consumers that were meant for the developed countries. Thus, the local research and development in China made a different design to solve this issue. Siemens in China began product conceptualisation from the first stage and integrated the SMART strategy in their products that is focused identification of the needs, reducing the costs, and mix and matching of the consumer needs and product specifications. Siemens decided to take major steps that would ensure that their next products penetrate the market. These included: The company conducted a complete localisation of the value chain at Siemens Nanjing. This included conducting local production, local research and development, and localised product management. The product management and local research and development were accorded the responsibilities of ensuring that the products were perfectly segmented and penetrated the market. Localisation was also ensured through optimisation of costs. The new SMART developed products were introduced into the Chinese market and were accepted by the Chinese consumers. This can be noted through these facts: There were 15 times more sales in the amount of units than when the product was first introduced into the Chinese market in the past nine months. The product also achieved large penetration of original product manufacturers in China. The product was also well received in the Chinese market as the Siemens product attained the street prices and offered additional Siemens benefits. Another frugal innovation that has been introduced into an emerging market by Siemens is the Multix Select DR. This is a digital X-Ray product that shows how SMART strategy was utilised and illustrates the concept of reverse innovation, which is associated with frugal products and services. The product was manufactured, not only for emerging economies, but also to assist in international markets, high end, low end, and medium ends (Govindarajan & Trimble, 2005). The X-ray analysis is among the most used medical procedures performed in health facilities. It is projected that approximately 90 percent of all hospitalised patients are subjected to X-ray analysis of their internal organs. Emerging economies are improving 3 times as fast as the developed economies for this diagnosis technology. Despite this, X-rays have not been widely used with 4.5 billion persons currently not having the opportunity to use X-ray services. Siemens created a new digital X-ray technology, Multix Select DR, which is a low level system that ensures that people access the cost effective X-ray diagnosis. At a price approximately 30 percent below the others initially launched by the company, the product is versatile, attractive, and highly adaptable in small and medium sized hospitals in emerging countries and to small hospital and clinics in the developed nations. The costs that one incurs when buying this unit is approximately 30 percent less than the available high end products developed by Siemens, but in terms of quality comply with the standards supplied in the developed nations. It is also available in the developed nations and hospital facilities as back up X-ray systems. The company also reduced the minimum requirements of the X-ray system by approximately 50 percent, making it medically safe for doctors and patients. The product is being produced in China and is marketed into the global market. The amounts of sales for the X-ray product have experienced an exponential growth and have a good future projection in terms of sales. Another product that Siemens has developed in the emerging economies is the Foetal Heart rate monitor. The Siemens FHM is an instance of frugal innovation that is developed exclusively for the Indian consumers. This product was not initially available to the global market, but is particularly designed for the purposes and particular needs of the Indian consumers. Siemens foetal heart rate monitor was developed at the Siemens’s India research institute. The product is designed to focus on the country’s rural consumers. The FHM is an apparatus that monitors the heart beat rate of the foetus while developing in the womb. The high-end market segment utilises the products through ultrasound that can require several a lot of money; the Siemens FHM applies special acoustic sound amplifies, which makes it cheaper to buy and use. Although the impression was created and developed into products of Siemens’s Indian research institute, it was global inputs with consorted efforts of research bodies in the United States, Germany, and India. Inexpensive amd robust medical apparatus such as the FHM assists in improving the health care sectors of persons living in the rural areas and has major benefits on the sector. Lessons that can be learned from the Siemens case study Multinational corporations focus on localisation and the identification of core values, which are significant in ensuring the success of multinational corporations in the emerging economies. According to Bruche (2009), studies have noted that innovation and research are highly localised interdependent processes of innovation as significant sections of the frugal innovation require knowledge of the targeted local market and effective knowledge transfer, which is complicated and can only be achieved through physical interaction. In that case, successful product development, marketing, and distribution of the frugal products and services require strategic locations to the emerging market throughout the value chain, ranging from conceptualisation to creation, to team composition to research and development. By 2005, the company on this case study consisted of approximately 45 thousand employees in the targeted markets. By the end of the year 2010, the number of employees in these areas had risen to eighty-five thousand. During the period of the five years, the amounts of the company’s production plants in these regions were up at 117 from 64 in 2005. There has been a steady growth in the increase in the number of production personnel and research and development teams in the regions, which is an indication that the company has focused on localisation of its operations. In addition to localisation, the company has focused on comprehending the core value requirements of the consumers, which appears to differ with their initial consumers’ needs from the developed economies for the frugal innovations. This can be noted from the company’s innovation of the HMI panels, which realised great success in the emerging markets and the identification of core values and localisation played major roles. Second, according to the case study, it is realised that the focus on reverse innovation in addition to frugal innovation. On this note, frugal products have achieved success in these markets and realised potential for the developed economies since the nations are also increasingly getting cost sensitive consumers. The company also concentrates on reverse innovation and organises products to attain success, not only in the emerging markets, but also in the international platform. Within the company, the health care division has always set trends in reverse innovation and has achieved success in its introduction of SMART developed products in the international market, for instance the FHM and the DR X-ray machine. It is also evident that Siemens sees an opportunity of penetrating the developed countries’ markets with its frugal innovations. This indicates that SMART-developed frugal products have different segments and positioning in the different markets and customer needs. Conclusion Emerging economies and markets have a higher growth potential and multinational corporations have adopted the concept of localising their products and services to match the values and needs of different levels of consumers in the emerging markets. Innovative approaches and localisation offers sustainable growth to large multinational corporations. As identified in this case study, Siemens has exhibited the benefits of flexibility in comprehending consumer values and the development of frugal products, which has become a fruitful market penetration strategy for such multinational enterprises. This case study advances the understanding that end-to-end localisation and the identification of consumers’ core values are crucial for the sustenance of emerging markets. Sustained focus on the development of the SMART strategy and products helps Siemens attain exponential growth in Chinese and Indian economies. Other multinational entities attempting to operate in these markets, and other emerging markets across the world, should adopt the reverse and frugal innovations and depend on retaining their strong brand names in penetrating the markets. According to the case study, Siemens has attained growth through this strategy. Through the SMART products targeted at the four market segment and the consumer values and needs, Siemens sole task was to review its pricing strategy to have a grip of the Chinese market with its frugal product. Since there are other emerging economies in Asia, Africa, and the Latin America, Siemens should focus on localisation of its R&D team, product development team, and marketing strategies to identify the frugal products that will enable them penetrate these markets and sustain their global presence. References Bruche, G. (2009), The Emergence of China and India as New Competitors in MNCs Innovation Networks. Competition & Change, Vol. 13, No. 3, pp 267-288. Dodgson, M., Gann, D. and Salter, A. (2008) The Management of Technological Innovation, Oxford University Press. Economist (20 I 0), ‘The power to disrupt’, Vol. 395, Issue 8678, pp 16-18. Govindarajan V & Trimble C. (2005). 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Tidd, J. and Bessant, J. (2013), Managing Innovation: Integrating Technological, Market and Organisational Change, 5th Edition, John Wiley & Sons. Read More