Frugal Innovation: Market-driven value innovation or resource scarcity?

Long ago, a multinational shoe company sent three salesmen to Africa to explore market opportunities. The first one wired back: "Nobody here wears shoes, no market potential." The second wired back: "Nobody here wears shoes, great market potential." The third wired back: "Nobody here wears shoes, great market potential, I have tied up with a man here who can make shoes and  can also ship some back to the corporation at a fraction of the current purchase cost. He also has people making shoes for him in Vietnam, India, Bangladesh, China..." good but old example of today's 'Frugal Entrepreneurship'.

Two key observations here - frugal innovation requires the mindset to think of opportunity and not constraints; and frugal innovators should focus on 'value innovation' and not be driven by scarcity.

From $2,500 cars to $35 laptops to $800 heart surgeries, frugal innovations that characterise the art of improvising effective solutions using limited resources have been the characteristic of the emerging economies, to do more for less, to cater to broader markets. And why just companies, even not-for-profit institutions and government bodies have started realising the importance of being frugal. Even Stanford University (Entrepreneurial Design for Extreme Affordability), and Cambridge University (Inclusive Design) have programs focused on frugal innovation. The Obama administration has an office of Social Innovation and Civic Participation to encourage grassroots entrepreneurs in health-care and energy.

Does the need of being frugal change by emerging or developed economies? Businesses or consumers in the developing economies are resource-constrained and affordability is an important criterion for product success. Companies addressing these markets have no option but to reduce the upfront costs of development and the direct cost involved in the production and delivery of products.

Further, a common worry among western firms is that being frugal will cannibalise the existing market for expensive technology. Why buy a $10,000 device if the same firm makes a slightly simpler one for $1,000? But, if you think carefully, this is too pessimistic. Consider this, GE opened up a new market in the developing countries among doctors for its cheap electrocardiograms (ECG); previously only hospitals could afford these costly devices.

Some people have associated frugal innovation with jugaad and quick-fix solutions. But, there are two major reasons why such solutions won't work:

>> Today's consumers are aspirational: A product that lacks "integrity" and fails to provide a smooth user experience will be rejected. While the farmer of the past may have been satisfied with using a makeshift jugaad vehicle, today's consumer has exposure to the best the world has to offer. Expectations regarding ergonomics and "look and feel" have gone up everywhere. Makeshift solutions are no longer acceptable

>> The rise in safety and quality standards: The embarrassment faced by one of the world's largest automobile manufacturer, Chevrolet, in a huge recent recall of its multi-utility vehicles (Tavera) from the Indian market underlines how cutting corners is not a viable approach So, what's the mantra for success? The key mantra for success, when thinking of being frugally innovative is that instead of doing things 'FOR' other people, you should focus on doing things 'WITH' other people. This in turn will help build capacity, participation, pride, and long term relationships.

Here are a few other thoughts for successful frugal innovation strategy:

>> Immerse for better consumer insights: The importance of good understanding of user needs can't be overestimated. Several recent product successes, including Gillette's low-cost razor Guard, demonstrate the importance of immersion in the customer's life to understand the specific conditions in which the product will be used, the customer's priorities, and what kind of trade-offs can be made to lower costs. In the case of the Razor Guard, this immersion revealed that the main challenge faced by men in India was avoiding a cut while shaving without running water and poor illumination. Based on this learning, Gillette innovated a single-blade system razor, lined with a safety comb designed to prevent nicks and cuts

>> Market driven v/s cost reduction: Tata Motors' Ace, a sub-one tonne commercial vehicle, has sold more than a million vehicles. At the same time, the company's much-touted Nano has struggled to make a dent in the car market. There were major differences in the way these vehicles were designed and manufactured - whilst the Ace was outcome of 'market-driven', structured development process (concept to design to pilot to a scaled up launch), the Nano was more inward-looking with a strong engineering focus on 'cost reduction'

>> Develop ideas in emerging markets and deploy in West: Walmart, which created "small mart stores" to compete in Argentina, Brazil and Mexico, is re-importing the idea to the United States. Diagnostics for All, a Massachusetts-based start-up that has developed paper-based diagnostic tests -- the size of a postage stamp - chose to commercialise its idea in the developing world so as to avoid America's dreadfully slow approval process for medical devices I agree with Stuart Hart: "Frugal designs must be upgraded to appeal to the wealthy; low-cost innovations can often be easily imitated, and competitors with lower cost structures can enter as fast as seconds after the pioneers have incurred all the development costs." After doing a wonderful job in India, Narayana Hrudayalaya joined hands with Ascension Health to build the Cayman Health city in the US. India's Mahindra & Mahindra sells lots of small tractors to American hobby farmers. Mahindra & Mahindra sells its tractors for $50K or less and competes with John Deere in the US market.

I believe that the trend of 'being frugal' will accelerate in future. With many developed economies facing extended periods of austerity as governments curb spending, steadily rising unemployment further squeezes the majority 'middle class'. This challenge, however, does in itself present a significant opportunity. So many people are crying out for new ways to save money, and being frugal can be a good way to make a shift towards 'value innovation'.

As a business designer, focused on in-market validation of innovative business models in emerging markets, I see a growing pattern of companies wanting to do more with less. In the wake of successful pilots allowing the 'value innovation' to be reverse-engineered for the more developed markets, these companies will begin to consciously invest more through the frugal approach, in a faster and repeatable (thus sustainable) manner.

(Sanjeev Jha is a Partner at InvYramid Innovation Strategy Consulting. Previously, he founded Priority Research and 30rupees.com. A Different Take is his fortnightly online column for Business Today, focusing on business model innovation, business strategy, consumer insights, & entrepreneurship. Follow @BT_India and @sanjeev__jha to be alerted of Sanjeev's columns)