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Frugal innovation is more than just jugaad

Wilfried Aulbur | Updated on January 24, 2018 Published on January 30, 2015

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Essential engineering: Car manufacturers realise that frugal innovation is critical in emerging markets and other parts of the world. -- Kamal Narang

It can lead to sustainable development that saves valuable resources and energy

India's prowess in frugal innovation has often been misunderstood. Many executives have come to think of the country in terms of "jugaad", or quick fix solutions that address acute customer needs.

Examples of jugaad abound: a plastic water bottle used as a gas tank for a modified motorised bicycle, using a motorcycle to drive a pump in the fields, modifying a tractor to turn it into a road roller etc. While jugaad is a reflection of innovative capability, India's breakthrough innovations have been brought about by frugal innovation, a structured process that focuses on delivering customer value at pre-determined price points.

More with less

Doing more with less is the new challenge for all companies. Emerging market customers offer a significant opportunity that can only be profitably leveraged when value proposition and cost structure match price expectations. In developed markets too, value-for-money is the new mantra especially in population segments that have suffered from the global financial crisis. Doing more with less is more ecologically viable and sustainable than over-engineered products.

In emerging markets, frugal products will play a key role until 2030. Nearly 95 per cent of global population growth and 70 per cent of GDP growth between 2010 and 2030 will happen in emerging markets. Asia without Japan will account for 54 per cent of population and 46 per cent of GDP growth. In Latin America, population growth will amount to eight per cent of total and GDP growth to nine per cent. In less fortunate markets like Africa, share in population growth at 33 per cent is over twice as much as share in GDP growth (15 per cent).

A recent Roland Berger survey that covered 60+ participants across industrials, automotive, consumer goods, pharma, services and other industries clearly shows that the share of frugal products in sales is likely to grow from 12.3 to 22.3 cent in five years.

In terms of profit, frugal products will contribute an estimated 18.4 per cent in five years against 10.4 per cent today. These results are homogeneous across industries and indicate the growing importance of value-oriented customers in emerging and developed markets.

Frugal products lead to sustainable development through process optimisation and use of environment-friendly methods, which saves valuable resources and energy. A focus on reusable or recyclable products rather than disposable products brings down cost of ownership. Use of renewable resources also brings down overall CO{-2} emissions.

Take the development of the INR 1 mosquito paper by Godrej as an example. The goal of providing one night of uninterrupted sleep to farmers who prefer to sleep outdoors in summer required a complete change in production methods. Formulations had to be changed, water content was driven down and as a consequence energy consumption for drying the sheets was more than halved compared to standard mosquito coils.

Developed market companies that do not take frugal competitors do so at their own risk. Take the case of Haier, the Chinese manufacturer of home appliances. From a low-quality contract manufacturer for Western brands, it has now graduated to a company known for low-cost, high-quality appliances with a thorough understanding of customers' needs.

Haier's entry in the US is an example of its approach to precisely target market segments. It realised that low-priced compact refrigerators (mostly used by students) and electric wine cellars were underserved market niches. Through successful entry in these segments, Haier built a reputation with Walmart, Best Buy and others that allowed market penetration.

‘Disruptive innovation’

This in turn enabled the company to aggressively expand into other major home appliances such as washing machines, air conditioners, dishwashers, etc. In 2013, Haier could boast of a global market share of 9.6 per cent and revenue of $26 billion.

The success of frugal innovators, both emerging market players as well as Western MNCs, is rooted in the belief that disruptive innovation that meets basic requirements at affordable prices is possible and must focus on rugged reliability; modular serviceability; user-friendly simplicity; few/no consumables; extreme affordability; portability; and protracted power.

"Hand me down" approaches from global markets have not been able to penetrate emerging markets successfully due to a lack of an adequate value-for-money proposition and operational challenges. As a consequence, product development for frugal innovations should be done close to the market with a clear understanding of customers needs and constraints. Ideally, co-creation with customers needs to be pushed to ensure that relevant features find their way into products.

Cost and quality can be simultaneously optimised by focusing consistently on opportunities along the value chain (use of proven parts, leverage of the local supply chain etc). Value can hence be created without compromising on quality and safety.

A structured process for frugal innovation is necessary to drive disruptive technology based on the belief that low cost does not imply low tech. Low cost simply requires us to work harder, to understand customers more deeply and to drive efficiency and innovation in our value chains rigorously.

Frugal innovations in medical devices have opportunities in borderline markets such as the US, UK, Spain and Italy. Even in markets such as Germany healthcare costs and effective (healthcare) services in rural areas are an issue. As has been shown by GE and others in healthcare, there is significant potential for "reverse innovation", i.e., disruptive innovations that improve the standard of living in developed nations.

Wilfried Aulbur is Managing Partner, Roland Berger Strategy Consultants India

Published on January 30, 2015
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