Papers in Brief (VI): Rosca et al. (2016): Business models for sustainable innovation – an empirical analysis of frugal products and services

[Note: This is the sixth post in our “Papers in Brief” series. This series offers a special service as it explains the core ideas of chosen research papers in a nutshell.]

Papers in Brief (VI) by Eugenia Rosca

Rosca, E.; Arnold, M. & Bendul, J. C. (2016): Business models for sustainable innovation–an empirical analysis of frugal products and services, Journal of Cleaner Production, http://dx.doi.org/10.1016/j.jclepro.2016.02.050

Frugal innovation encompasses (re)designing products, services and business models in order to reduce complexity and total lifecycle costs while providing high value and affordable solutions for Base of the Pyramid (BOP) customers in developing countries (Bhatti, 2012). There are numerous examples of frugal innovation outcomes such as cars, refrigerators, medical devices and healthcare services that cost between 50% and 97% less than regular corresponding products and services (Rao, 2013). In the light of increasing sustainability awareness, companies have to develop capabilities on how to do more with less, and therefore the frugal innovation paradigm is regarded as crucial for facing future sustainability challenges (Cunha et al., 2014). The business model perspective has been proposed as a framework to better understand how sustainable innovations’ business model architectures are built in order to enable sustainable outcomes (Boons & Lüdeke-Freund, 2013). This study builds on the business models for sustainability paradigm and investigates 59 cases of frugal products and services based on secondary data analysis in order to evaluate how the business models are designed and how (if) they enhance sustainability outcomes. Main findings of the study are summarized as follows:

Frugal Business Models

Frugal business models can reintegrate value chains, reengineer products and services to account for affordability constraints and local socio-cultural differences, reconfigure resources and reinvent traditional business models. Although for each business model component several patterns have been identified, the combination of these elements is diverse and context/product specific.

  • Value Proposition inherent to most cases is related to higher standards of living. First, the standard of living is increased through the provision of basic services at lower costs, and second, the savings BOP consumers can retain and use for other activities. An important finding is that most of the developed products are based on given social problems (e.g. lack of clean water, transport, education), and the product or service ideas aimed to provide solutions to those problems.
  • Value chains are based on localization strategy where local materials, local suppliers, local production as well as local distribution systems are employed. Local distribution is organized through local shops, local shopkeepers, local entrepreneurs, local NGOs and specifically the involvement of women.
  • Revenue model is characterized by comparably low business margins. Some ventures clearly specify that they are financially successful because of the large number of transactions and customers, such as M-Pesa and Bharti. The low margins also foster low cost structures for the underlying supply chain and distribution systems as well as require a large volume of operations in order to be economically viable.
  • Target Customers – although the literature labels frugal products and services as targeting the BOP, some cases hardly target people in extreme poverty conditions. The described model found in several cases from our sample corresponds to what the literature calls ‘a whole pyramid orientation’ (Jenkins et al., 2010). By exploiting different solvency levels of customers, the companies are able to cross-subsidize the offered services and therefore offer nearly zero-priced services for BOP customers.

Frugal business models for sustainability

The sustainability framework analysis along with the inter-observer consistency coefficient revealed that sustainability is not inherent to frugal and reverse products and services. Based on our sample, on average, every fifth product or service is not related to sustainability or is not based on a sustainable business model or archetype.

Table 1 presents several examples of elements found in the cases which drive the sustainability of frugal business models.

Sustainability dimension Average cases (number/ percentage) Sustainability impact
Economic 12/ 20 Lower production cost per unit, higher productivity, employment, increased agricultural output
Ecological 9/ 15 Reduced use of materials, production resources, energy, water, emissions; substitution with local materials and processes; waste as a resource.
Social 0/ 0 Free up women and child labor, health care services for people in remote villages, education materials for remote schools and universities
Economic and social 17/ 29 Women employment opportunities, access to information and knowledge networks, education and training, access to new or low cost health services
Economic and ecological 2/ 3 Lower production costs per unit, less use of materials and resources, less emissions
Social and ecological 5/ 9 Use of locally produced, clean energy at affordable prices enables increased agricultural output
Economic, social and ecological 14/ 24 Collaborative and inclusive value chains; creation of markets for agricultural waste; increased workforce productivity through education, training and knowledge; provision of basic services to increase standard of living.

Table 1: Overview of findings in terms of sustainability impact

Sustainable business models archetypes analysis

Our study found that most frugal business models can be classified as “Adopt a stewardship model” (16 out of 59), “Repurpose for society/environment” (11 out of 59) and “Substitute with renewable and natural processes” (6 out of 59) archetypes for sustainable business models based on Bocken et al. (2014). Additionally, we found several interesting insights leading to the hypothesis that some sustainable business models archetypes are more likely to occur in industrialized settings, while others in developing countries. It is important to mention that business models of frugal products and services are mostly based on localized value chains, increased standard of living, while business models of frugal innovations which follow a reverse innovation pathway from developing to industrialized markets focus mainly on ecological benefits such as better functionality with less use of resources and unnecessary features.

References

Bhatti, Y. (2012): What Is Frugal, what Is Innovation? Towards a Theory of Frugal Innovation, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2005910.

Bocken, N.; Short, S.; Rana, P. & Evans, S. (2014): A literature and practice review to develop sustainable business model archetypes, Journal of Cleaner Production, 65, pp. 42-56.

Boons, F. & Lüdeke-Freund, F. (2013): Business models for sustainable innovation: state-of-the-art and steps towards a research agenda, Journal of Cleaner Production, 45, pp. 9-19.

Cunha, M.; Rego, A.; Oliveira, P.; Rosado, P. & Habib, N. (2014): Product innovation in resource poor environments: three research streams, Journal of Product Innovation Management, Vol. 31, No. 2, pp. 202-210.

Jenkins, B.; Ishikawa, E.; Geaneotes, A. & Paul, J. (2010): Scaling up Inclusive Business: Advancing the Knowledge Agenda, International Finance Corporation and the CSR Initiative at the Harvard Kennedy School, Washington, DC.

Rao, B. (2013): How disruptive is frugal?, Technology in Society, Vol. 35, No. 1, pp. 65-73.

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