The Emergence of Frugal Innovation

The old innovation paradigm was called closed innovation which was based on the strict control of successful innovation. Under this view, organizations generate their own ideas, develop them, finance them and support them on their own. In short, companies maintain complete control of all aspects of the innovation process and inventions are kept highly secretive. Traditionally many organizations followed this model and it worked well for most of the twentieth century.

However, over the years a number of factors have led to the erosion of the closed innovation approach. First, due to an increase in the mobility and availability of highly educated people, large amounts of knowledge leave the research laboratories of many companies. Second, the availability of venture capital has increased significantly in the recent past making it possible for promising ideas and technologies to be further developed outside the organization. Third, other firms in the supply chain began to play an increasingly pivotal role in the innovation process. Finally, today there is an abundance of knowledge in virtually every field. The proliferation of public scientific databases, online journals, low-cost internet access have given firms access to a wealth of knowledge that was far more expensive and time-consuming to reach as recently as the early 1990s.

The above factors have rendered the closed innovation model unsustainable. Consequently, some mature firms got stuck in a narrow search for efficiency, displaying short sightedness and an inability to innovate to the extent needed to sustain their competitiveness. Hence, many organizations started looking for other ways of increasing the efficiency and effectiveness of their innovation processes. On the other hand, these conditions have led to the globalization of innovation and emergence of what called open innovation. Under this paradigm, firms can and should use both internal and external ideas to develop and commercialize products and services. Open innovation provides means to benefit from a much broader base of individuals and organizations. Ideas coming from customers and business partners may identify gaps and needs that internal team may have been ignoring or unable to identify. Firms are tapping into internal and external sources of knowledge to review development cycles, re-think development costs and develop products for particular markets with differing customer tastes, geographic conditions or regulatory requirements. Internationalization of R&D which was thought to be phenomena of the developed countries has now shifted to developing countries. There is a remarkable trend of multinational enterprises selecting locations in emerging economies to conduct innovation activities.

The Emergence of Frugal Innovation

The open innovation approach and the failure by traditional theories such as the Product Life Cycle (PLC) to elucidate the current innovation trends, have laid a basis for the emergence of different approaches to innovation management. One such approach is frugal innovation which targets middle and lower-income customers in rapid growth markets. Frugal innovation is also called reverse innovation or constraint-based innovation, meaning sparse in the use of raw materials and their impact on the environment. It is driven by resource constraints imposed by infrastructural and business environment. Practitioners have referred to frugal innovation as a holistic rethinking of products and services offered to the customers and underlying processes and business models so that companies can squeeze costs and expand the customer base, business and profit. These customers are enjoying their first taste of modern prosperity and are buying for the basics not for fancy features. They have unique needs that are not usually addressed by mature market products, mainly due to prohibitive cost base of developed world products.

Frugal Innovation

To produce frugal goods, complex and concerted R&D efforts are required. In this regard, the field of engineering has also undergone some changes in order to face these challenges. In 2006, the Chairman and CEO of Renault-Nissan Alliance, Carlos Ghosn came up with the term frugal engineering to describe the competency and aptness of Indian engineers in developing products like Tata Motor’s Nano. Frugal engineering is an overarching philosophy that enables a true ‘clean sheet’ approach to product development. It avoids needless costs and addresses millions of consumers at the bottom of the pyramid who are moving out of poverty in developing nations. Following underlying principles on which frugal engineering efforts seem to rest:

  1. Robustness – The characteristic of being physically strong and inured to endurance. Most of the developing nations have harsh environments such as extreme temperatures.
  2. Portability – Poor roads and transportation in the emerging economies call for the importance of goods that are easily portable. Small and lightweight products become highly desirable.
  3. Defeaturing – This refers to feature rationalization. Usually features accumulate in products over time. Therefore there is need to remove some of them that do little to enhance the actual product.
  4. Leapfrog technology – Leapfrogging is a process of making progress by large jumps as opposed to small increments. This may seem contradictory for developing nations. However, engineers in India and China have adopted technologies that make dependence on existing infrastructure irrelevant.
  5. Mega-scale production – It is estimated that the middle class in Asia alone is 525 million people, greater than the entire population of the European Union. This massive population can help firms produce on a massive scale and drive costs down.
  6. Service Ecosystems – By using efficient service ecosystems, firms utilizing frugal engineering have been selling large volumes to multiple segments, each with slightly different needs. With ecosystems low costs have been achieved.

In India, frugal innovation is also known as Jugaad innovation which means doing the best with what one possesses. Jugaad is a colloquial Hindi word which roughly translates as “an innovative fix; an improvised solution born from ingenuity and cleverness”. The term refers to a unique way of thinking and acting in response to challenges. Jugaad is, quite simply, achieving more with less. India is becoming a leader in frugal innovation. In fact it is rapidly emerging as one of the hotspots for the development of innovations tailored to the needs of lower income groups. As mentioned earlier, the best known example of a frugal product is probably the Tata Nano car, which has become so popular in India and dubbed ‘the people’s car’. Tata’s aim was to develop and produce a car that would be much cheaper than any other car in the world. To achieve this, the company reengineered parts to save weight, reconfigured assembly methods and developed a complex network of third party suppliers to increase efficiency. In view of this ground breaking technology, some established car manufactures from advanced economies have seen a reduction in their sales. According to the Society of India Automobile Manufacturers, in 2011 Suzuki’s car sales in India dropped by 11.9 percent for the first time in 9 years. Suzuki’s market share in India which was 50 percent in 2009 dropped to under 40 percent in 2011. Another example of frugal innovation is India’s technologically sophisticated solutions. The country is providing satellite launch services at the India Space Research Organization (ISRO). This organization is offering commercial services to space agencies and research institutions all over the world for costs that are significantly lower than those of its competitors in the developed world. In the medical field, a unique and interesting trend has emerged. Sometime back people seeking specialized medical treatment from developing nations would travel to developed nations for treatment. However, because of new and affordable medical services in India, patients from wealthy countries are going there for specialized treatment. The comparably decent treatment is much cheaper and waiting time is short. For instance, the heart bypass surgery which costs US$144,000 in the US is available for US$8,600 in India. In this regard, the number of medical tourists received by India has grown to 4.6 times the number received five years ago.

Another country with successful cases of frugal innovation is China. For example, BYD in that country has developed a very low-cost method of producing lithium-ion batteries whose cost has been reduced from US$40 to less than US$5 per unit. Other frugal products in China include a washing machine called Mini Magical Child developed by Haier, a home appliance company in 1996. The product was designed for small daily loads and offered an alternative to large expensive washing machines. These are all examples of “good enough” products designed to fulfill the basic needs at low cost thereby providing high value.

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