After some teething troubles, frugal innovation is on the rise
BusinessJan 22nd 2015 edition
Jan 22nd 2015
VICTOR HUGO once said that "nothing can stop an idea whose time has come". He failed to add that a lousy product launch can delay it. In the first decade of this century it seemed that frugal innovation's time had indeed arrived: to meet surging demand from new consumers in emerging economies, innovative firms in those countries were stripping products of their fripperies and cutting their cost drastically. The new world had at last produced a big, new management idea.
Then along came the Tata Nano. The $2,000 car bore the imprimatur of one of the emerging world's best companies. But some of the earliest Nanos burst into flames. Although Tata Motors fixed its engineering problems, aspirational Indians made it clear that they did not want to be seen driving "the world's cheapest car". Frugal innovation looked as if it might go from promising to passé without having made any impact.
In a new book, "Frugal Innovation: How to Do More with Less", Navi Radjou, a consultant, and Jaideep Prabhu, an academic at Cambridge University's Judge School of Business, reassure readers that this is not the case. (Its publisher, Profile, has a business relationship with The Economist, but neither of the authors has any editorial relationship.) Frugal innovation has not only continued to advance in the emerging world. It is also conquering a rich world in which a financial crisis and recession have been followed by a spell of stagnant household incomes and, in parts, persistently high unemployment.
Some of the West's biggest multinationals are designing no-frills products in developing countries with the intention of selling them in developed ones, too. General Electric designs affordable medical devices in India and China. Renault-Nissan has a centre for frugal engineering in India. The carmaking group sells a variety of no-frills cars built in low-cost countries, including Dacia models made in Romania and Datsuns made in Indonesia.
Sales teams accustomed to the fat commissions from selling full-price products are hardly going to be keen on pushing frugal ones. So companies such as Renault and Procter & Gamble have created separate sales departments for their no-frills lines. In some cases they are using new distribution channels to reach impecunious consumers: American Express, for example, is marketing Bluebird, a low-cost current account, through Walmart stores.
Companies are realising that the "fortune at the bottom of the pyramid" is not just to be found in poor countries. Vianney Mulliez, the boss of Auchan, a big French retailer, says that "there are many 'emerging markets' within Western economies that we are eager to serve." Walmart has opened hundreds of "money centres" in its stores, offering cheap financial products such as Bluebird to low-income customers. Costco, another big American retailer, now sells a range of cut-price medical devices, such as a $34.99 blood-pressure monitor.
Western firms are adopting frugal business practices pioneered in the emerging world. Bharti Airtel, an Indian mobile-phone operator, is able to offer remarkably low prices in part because it shares wireless towers with other providers. Among rich-world firms inspired by the idea of cutting costs by sharing infrastructure, Ericsson and Philips are working together on projects in which mobile-phone antennae are embedded in streetlights in European cities. And Hershey and Ferrero, two confectioners, are sharing warehouses and vehicles in North America.
As part of their frugal-innovation strategies, some rich-world companies are "crowdsourcing" product-development ideas from their customers and workers. Ford has converted a Detroit warehouse into an innovation centre where employees can spend their spare time experimenting with new technologies. Having at first gone into a defensive crouch when hackers tried to improve Kinect, a motion sensor for its video games, Microsoft decided to co-operate with them to solve problems its own researchers had not yet turned their attention to.
Ideas from everywhere
Messrs Radjou and Prabhu are right that a frugal revolution is sweeping the rich world. But they sometimes give the East too much credit for leading the way. The West led the frugal revolutions in low-cost airlines and discount supermarkets. It is also pioneering the use of digital technology to replace expensive physical plant and to help people share resources. The Khan Academy, founded by Sal Khan, an American entrepreneur, offers free maths and science lessons on YouTube (Bill Gates, the world's richest man, encourages his children to attend the academy). Airbnb lets people supplement their incomes by renting out spare rooms to cost-conscious travellers.
Three-dimensional printing is opening up all sorts of possibilities for frugal, small-scale manufacturing. New Matter and M3D, two startups, are developing 3D printers that will sell for a few hundred dollars. Shapeways, a global network of 3D-printing factories, delivers cheap, high-quality copies of products its customers have designed at home. Entrepreneurs are creating apps and attachments that turn smartphones into measuring devices, replacing all sorts of expensive industrial and medical instruments with something far cheaper. Crowdfunding outfits such as Kickstarter, KissKissBankBank and MedStartr provide a frugal source of financing for frugal innovators.
The reason that the launch of the Nano was such a disaster was that its early mishaps played into people's suspicion that cheap products are bound to be shoddy. But that prejudice looks increasingly outdated as the discounting revolution gathers pace. Middle-class Britons are flocking to Aldi and Lidl, having discovered that a lot of their products are as good as those at Tesco and Sainsbury's supermarkets, and a lot cheaper. As frugal innovation continues to spread, such retailers will have an ever greater variety of bargains to put on their shelves.
This article appeared in the Business section of the print edition under the headline "Cheap and cheerful"
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