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A Frugal Medical Device in a Western Company
A project of:
Start: Sept. 2015
Duration: Six months
Project Status: Completed (Feb. 2016)
"A task that can be achieved by a needle, often cannot be performed by a sword."
The meaning of the quote above represents the possible superiority of simple solutions over complex ones. Today’s customers increasingly demand simple, affordable, robust, user-friendly and resource-efficient solutions (Tiwari & Herstatt 2013). In addition, they are reluctant to buy over-engineered products with unnecessary functionalities sold for a premium price. A study by Roland Berger (2013) supports this phenomenon by showing that low- and mid-end product segments grow above world average. Furthermore, it argues that company managers believe that the importance of these kinds of products within their company will almost double within five years. Products that obtain the mentioned characteristics and address fundamental needs are associated with the term “Frugal Innovation” (FI) (Herstatt & Tiwari 2015; Roland Berger 2013). The connected challenge in developing a Frugal-product is to increase the living standard without losing sight of the proportionality of value and costs (Tiwari & Herstatt 2013). The term originated in regard to product development in India (Tiwari & Herstatt 2012), where cost-efficient solutions are a necessity to manage the daily life. However, FI is also gaining momentum in developed countries like Germany and its healthcare market (Tiwari & Herstatt 2013). Markets in the industrialized nations are sometimes seen as dominated by over-engineered products. Tthe German healthcare system is regarded as one of the best in the world in terms of quality, but also the most expensive after France and the Netherlands (Kaiser 2014).
With 11.3% of Germany’s total economic output being consumed by healthcare, the system may not be financially sustainable on the long term. Reasons for this are, inter alia, the demographic developments, like the increasing poverty (Welt.de 2015) and the ageing population (DGH 2013), but also the continuously rising cost in healthcare overall (Tiwari & Herstatt 2013). Cheaper solutions therefore seem to be a necessary change (Tiwari & Herstatt 2013). FI may be a possibility to improve this discrepancy. Khanna (2014), has revealed in a case-study that cost savings up to 90% can be achieved by using a frugal methodology in the medical domain. Ultimately, medical enterprises developing technology-driven high-tech products could soon lose their customer focus in view of the mentioned change in customer demographics and needs (Tiwari & Herstatt 2013; Khanna & Sur 2014).
A surgical-care department of a western company (name not allowed to be disclosed) could benefit from the application of FI as well. They understand themselves as a high-tech premium manufacturer of medical devices with a substantial customer focus. In order to maintain this focus, they are interested in diverging from their premium path to participate in the FI momentum and thereby serve changing customer needs. Due to the fact that they have developed premium products for the majority of cases, a completely different product development process (PDP) is needed to pursue this intention. Ideally, it should be free from any previously existing governance and not use existing company practices (Herstatt 2015). Further, Herstatt (2015) even warned to use the standard PDP and just strip down features, since a frugal innovation is considered to be much more than that. For example, in the present process, specialists are the main source of information for current customer needs of the industry. However, FI is about affordable products for the average customer and may not be suitable for specialists. In fact, it is estimated that only 20% sold products are used by specialists. Therefore, the fundamental needs of the other 80% general practitioners have to be elicited, which may be significantly different from the specialist-needs. After the evaluation of these needs, it will be possible to develop a fitting product with a frugal intention.
The frugal innovation concept is probably only transferrable to specific product segments, since FI it is generally connected with high volumes and small margins (Roland Berger 2013). Therefore, only a product segment with a substantial turnover can be chosen to make a development profitable. The leadership-team of the company decided that the product suitable for this concept is a specific medical device with the largest sales volume. The project lead is confident that Germany is an attractive market for the intended product in view of its price structure and reputation. The prices for such medical devices are exceptionally low compared to other European countries due to the present compensation system in healthcare. This reasoning led them to the conclusion that a frugal product will be an innovative and lucrative strategy for the German market. The goal of applying the FI approach at this company is consequently to develop a medical device for the German market with a fundamental functionality. However, the criteria under which a customer is satisfied with the product, while it fulfills acceptable quality standards, are not known for this customer group yet.
Ideally, the PDP to discover the needs for a frugal solution should differ compared to the approach currently used by the company. Herstatt and Tiwari (2015) recommend to use sophisticated methodologies, namely value analysis and target costing in combination. These are not applied at the company and a fitting instrument for FI. At first, target costing estimates the price the customer is willing to pay for the product on the basis of their needs (Tamm 2007). With a quantitative analysis, it is possible to determine the target price for the broad basis of average customers. Secondly, value analysis puts the value of a function of a product and the necessary expenditure in a proportion (VDI 2010). Thereby, basic functions with a value greater than one (value higher than expenditure) are necessary to be included in the product. Then, the fundamental needs and their functional share to the whole product can be evaluated. In the end, the two methodologies can be combined in order to elaborate target prices for the different functions with varying importance. This combination contributes to the basis of FI, which means serving the fundamental needs while minimizing the financial resources needed. However, so far no author evaluated how well the reasoning of FI is supported by the methodologies target costing and value analysis. Therefore, the question arises how one could achieve a FI by using these methodologies.
Target of this thesis will consequently be to develop an approach to integrate FI into the methodologies of target costing and value analysis. Afterwards, it shall be explored which characteristics in terms of price and functional fulfillment of the researched product are necessary on the German market. Therefore, a few more detailed questions are asked. First, the price is important, which could be characterized as a FI. Second, how important are the different functionalities of the product. Third, how good is “good enough” as a FI in view of the functionalities. Lastly, it is interesting how much the customer is willing to pay for each of them. The expected outcome is a product with frugal intentions completely different from the present company portfolio.
Important notice: Research proposals containing project description generally depict initial ideas submitted by students in response to a call for project initiated by the RPGI team, an external enterprise or on their own. Even though the proposals are cross-checked and edited by the RPGI team before putting them in the public domain, no guarantees can be taken at this stage of the quality and/or other aspects of good academic practices. Their adherence is, however, duly examined when students submit their reports, and prior to any publication of the report.