A few weeks ago, I spent a lovely afternoon and evening with my friend Carol Adrienne and her boyfriend Robert. While we shopped, he browsed the bookstore and ended up reading a fascinating article in the April issue of The Economist, called “First Break All the Rules,” on the topic of “frugal innovation.” Both Carol and I were exceedingly excited about this. I see innovation as the next big wave, and this article was SO hopeful! Here is a section of the article:
There is nothing new about companies adapting their products to the pockets and preferences of emerging-market consumers. Unilever and Procter & Gamble started selling shampoo and washing powder in small sachets more than two decades ago to cater for customers with cramped living spaces and even more cramped budgets. Nike produces an all-enveloping athletic uniform to protect the modesty of Muslim women athletes. Mercedes puts air-conditioning controls in the back as well as the front of its cars because people who can afford a Mercedes can also afford a driver.
But GE and TCS are doing something more exciting than fiddling with existing products: they are taking the needs of poor consumers as a starting point and working backwards. Instead of adding ever more bells and whistles, they strip the products down to their bare essentials. Jeff Immelt, GE’s boss, and Vijay Govindarajan, of the Tuck Business School, have dubbed this “reverse innovation”. Others call it “frugal” or “constraint-based” innovation.
There is more to this than simply cutting costs to the bone. Frugal products need to be tough and easy to use. Nokia’s cheapest mobile handsets come equipped with flashlights (because of frequent power cuts), multiple phone books (because they often have several different users), rubberised key pads and menus in several different languages. Frugal does not mean second-rate. GE’s Mac 400 ECG incorporates the latest technology. Many cheap mobile handsets allow users to play video games and surf the net. Frugal often also means being sparing in the use of raw materials and their impact on the environment.
The number of frugal products on the market is growing rapidly. Tata Motors has produced a $2,200 car, the Nano. Godrej & Boyce Manufacturing, one of India’s oldest industrial groups, has developed a $70 fridge that runs on batteries, known as “the little cool”. First Energy, a start-up, has invented a wood-burning stove that consumes less energy and produces less smoke than regular stoves. Anurag Gupta, a telecoms entrepreneur, has reduced a bank branch to a smart-phone and a fingerprint scanner that allow ATM machines to be taken to rural customers.
Frugal innovation is not just about redesigning products; it involves rethinking entire production processes and business models. Companies need to squeeze costs so they can reach more customers, and accept thin profit margins to gain volume. Three ways of reducing costs are proving particularly successful.