Frugal Innovation

The Economist Magazine published a piece titled A Special Report on Innovation in Emerging Markets in April 2010. This is a summary I wrote of the key points of that report. The company will use the principles of frugal innovation to differentiate itself from its competitors and gain market share.

Frugal cool

Frugal innovation (also known as cost innovation or constraint-based innovation) means re-designing products and processes from scratch to take out any unnecessary costs. It means developing new products so that they cost less and originating new processes that radically change the way products are made and delivered. Frugal innovation typically results in products that are simpler, smaller, easier to use and tougher. These products are less expensive for the consumer, they require fewer raw materials to produce and they have a lower impact on the environment. 

Innovating lower costs

Frugal innovation does not mean just cutting costs. It means innovating lower costs so that products can be priced lower and thus reach more customers. It allows companies to accept thinner profit margins, create additional value and increase market share. Its core focus is nevertheless on the needs and wants of the customer and finding ways to obtain economies of scale.

A standard practice in emerging markets

Frugal innovation has its origins in emerging markets such as China and India. These markets are characterized by high numbers of rural, low-income people and poor distribution networks. There is also a strong and necessary tradition of “making due with what you have” and using both your personal and commercial “connections” to get things done in these markets. Consequently, these markets have produced numerous examples of how companies can operate profitably in such conditions. 

The West is taking note

The principles of frugal innovation are taking hold in the developed markets of the West. This is because the Great Recession of 2008 is expected to result in a sustained period of slow economic growth and weak consumer demand. In anticipation of an era of austerity, western companies are refocussing on the needs of their less wealthy customers and redesigning products, production processes and business models to suit their needs. This means cutting costs and eliminating all but the most essential features of a product or service. There are three ways to achieve this:

Scaling out production and distribution

This means using the Internet and mobile phones to include a wider group of people in the process of production and distribution. It is the opposite of scaling up, which ultimately results in centralized and costly bureaucracy and high fixed costs.

Pull model of production

This means that companies use networks of suppliers, service providers and existing technology to muster resources when the need arises. It is the opposite of the traditional push model, which allocates resources to areas of expected demand and results in high fixed costs (overhead, personnel, bureaucracy).

Mass production techniques to sophisticated services

This means striving to obtain economies of scale in processes that are highly specialized or fragmented geographically. The call center is one example of how mass production techniques can be applied to fragmented and specialized customer demands.