MASTER OF SCIENCE IN BUSINESS ADMINISTRATION Strategy and Management in International Organizations Closing the gap between frugal and reverse innovation Lessons learned from the case of the Tata Nano Martin Aschmoneit Dijana Janevska Tutor: Malin Tillmar Spring semester 2013 ISRN Number: LIU-IEI-FIL-A--13/01597--SE Department of Management and Engineering (IEI) English title: Closing the gap between frugal and reverse innovation – Lessons learned from the case of the Tata Nano Authors: Martin Aschmoneit and Dijana Janevska Advisor: Malin Tillmar Publication type: Master of Science in Business Administration Strategy and Management in International Organizations Advanced level, 30 credits Spring semester 2013 ISRN Number: LIU-IEI-FIL-A--13/01597--SE Linköping University Department of Management and Engineering (IEI) www.liu.se Abstract Title: Closing the gap between frugal and reverse innovation – Lessons learned from the case of the Tata Nano Authors: Martin Aschmoneit ([email protected]) Dijana Janevska ([email protected]) Supervisor: Malin Tillmar Date: May 27, 2013 Background: Emerging markets are growing and have become increasingly important for the global economy, while the growth of developed markets has slowed down. Emerging economies are the home of a new type of innovation that can help multinationals (both Western and local) to achieve further growth. Reverse innovation is a new approach that entails developing frugal products in emerging markets that are later introduced in advanced economies. Aim: To develop a framework of reverse innovation, and to use this framework to find critical issues necessary for the Tata Nano to enter developed economies. Hence, we develop our own definition and a model of reverse innovation that will be used in the analysis of the Nano, with a specific focus on: the search for reverse innovation features present in the case and the problems/obstacles in the reverse innovation process. Methodology: Qualitative approach using a single-case study based on predominantly secondary data. The case study of the Tata Nano was chosen due to its compatibility with our research aims. Completion and results: The case of the Tata Nano fulfills all but one of the requirements for a reverse innovation: the last step of the process or the transition of the innovation to a developed market. Several critical issues regarding the reversal process were identified and discussed. Keywords: reverse innovation, frugal innovation, emerging markets, multinational companies, Tata Nano. i Acknowledgements We would like to express our deepest gratitude to our supervisor Malin Tillmar for her continuous guidance and support throughout our research. Her advice and feedback have been valuable inputs in our writing process. The past semester has been an exciting journey and a valuable learning experience that enabled us to broaden our knowledge in an exceptionally interesting topic. Furthermore, we extend our gratitude to Arup Mukherjee, Assistant General Manager for Corporate Communications at Tata Motors in India, for his forthcomingness in providing us with empirical data for our research. His cooperation is highly appreciated as it helped us build a stronger and more comprehensive case study. We would like to extend our appreciation to the respondents of our questionnaire - Nivedita Agarwal, Alexander Brem and Simone Corsi, for their openness and participation. Their valuable responses were an inspiration for our critical thinking. We thank our fellow students from the SMIO program for their constructive feedback which always led to insightful discoveries and enabled us to continuously improve our work. In addition, we would like to extend our sincerest appreciation to Udo von Öhsen for proof- reading our final draft and pointing out ways to improve our thesis. Lastly, Dijana Janevska would like to thank the Swedish Institute (Svenska Institutet) whose scholarship program made her studies in Sweden possible. ii Table of Contents 1. Introduction ....................................................................................................................................... 1 1.1. Background ............................................................................................................................... 1 1.1.1. Overview of innovation and the modern-day business environment ................................ 1 1.1.2. New solution for old problems: reverse innovation .......................................................... 3 1.2. Research problem ...................................................................................................................... 5 1.2.1. Previous research ............................................................................................................... 5 1.2.2. Problem statement ............................................................................................................. 6 1.3. Purpose and research questions ................................................................................................. 7 1.4. Thesis scope, Limitations and Target groups ............................................................................ 8 2. Methodology ..................................................................................................................................... 9 2.1. Research strategy ..................................................................................................................... 10 2.2. Research philosophy ................................................................................................................ 11 2.3. Literature review ..................................................................................................................... 12 2.4. Research method ..................................................................................................................... 13 2.5. Research techniques for data collection and analysis .............................................................. 15 2.6. Research quality ...................................................................................................................... 17 2.7. Ethical considerations .............................................................................................................. 18 3. Frame of reference ........................................................................................................................... 19 3.1. Introducing reverse innovation ................................................................................................ 19 3.1.1. Conventional understanding of innovation ...................................................................... 19 3.1.2. Measuring and comparing innovation activity between emerging and developed economies ........................................................................................................................................ 21 3.1.3. Reverse innovation defined ............................................................................................. 25 3.1.4. Reverse innovation actors ................................................................................................ 29 3.1.5. Why reverse innovation? ................................................................................................. 30 3.2. Factors influencing reverse innovation ................................................................................... 32 3.2.1. Global challenges as influencing factors ......................................................................... 32 3.2.2. Developed-developing countries gaps as influencing factors ......................................... 35 3.3. Emerging markets defined ....................................................................................................... 36 3.3.1. Emerging markets – the term .......................................................................................... 36 3.3.2. Characteristics of emerging markets ............................................................................... 37 3.3.3. Emerging markets and the BOP ...................................................................................... 38 3.4. Distinguishing reverse innovation from other types of innovation ......................................... 40 iii 3.4.1. Frugal innovation............................................................................................................. 40 3.4.2. Disruptive innovation ...................................................................................................... 42 3.4.3. Jugaad innovation ............................................................................................................ 44 3.5. Benefits and drawbacks of reverse innovation ........................................................................ 45 3.6. Toward the development of a reverse innovation framework ................................................. 47 4. Empirical data .................................................................................................................................. 49 4.1. Case study context ................................................................................................................... 50 4.2. Company profile ...................................................................................................................... 51 4.2.1. Tata group .......................................................................................................................