Capturing the Power
of Frugal Innovation
Simple solutions that meet customers’ needs are
rising in popularity. Frugal innovation—doing more
with less—can help forward-thinking players improve
their global market position, but it will require untangling
a complexity mindset.
Capturing the Power of Frugal Innovation
1
The latest trend in innovation taps into an age-old problem-solving technique. For millennia,
individuals and communities around the world have solved day-to-day issues to improve
their living conditions as fast as possible by using available resources. Today’s businesses—
operating amid stiff competition in an increasingly global economy—are looking for ways to create
more value with fewer resources. What’s emerging is a business trend called frugal innovation.
Creating more value in developed markets does not necessarily imply providing moresophisticated offers. For example, as mobile phones become increasingly complex and
“smart,” user value is increased by providing a “light” version with tailored functionalities to
meet the needs of elderly users. When addressing emerging markets, leading Western
corporations turn their attention to rapidly growing mass market segments, where simple
solutions hold powerful growth potential. Frugal innovation supports these trends, and as
a result is rising to the top of C-suite agendas.
Frugal innovation doesn’t mean simply coming up with another low-cost offer. Superior frugal
innovations are quality products that are affordable, accessible, and sustainable.1 Successful
players are meeting each of these requirements—while also undercutting the prices of mainstream offers. Consider Tata Motors’ compact car, the Nano. Launched in 2009 as the world’s
cheapest family car, its $2,000 price tag was 20 percent lower than the cheapest offer on the
market at that time, Suzuki’s Maruti 800.
If necessity is the mother of invention, constraint is the father. The secret of success for any
frugal approach is scarcity, one of the most powerful creativity boosters.2 When limited
resources get in the way of meeting a basic need, our brains naturally begin to try to solve the
problem. This principle holds true in an array of situations, from castaway Robinson Crusoe’s
challenges in trying to stay alive, to the efforts of an innovation management department
seeking to develop a product in a simpler, more efficient way amid drastic budget cuts.
Forward-thinking players are capturing the power of frugal innovation by focusing on customers’
core needs. The result is products and services with core functionalities that serve customers in
the simplest and shortest way.
Tapping into the power of simplicity often requires untangling complexity. Today’s R&D departments seem to more readily support the beast of complexity rather than the beauty of simplicity.
More generally speaking, for sophisticated innovators, one of the main challenges will be to
forget building on technological breakthrough and instead focus on simplicity. This challenge is
less a matter of techniques and more a matter of acquiring a different innovation culture.
Driving Profitable Growth by Going Frugal
Outdated 20th-century methods will no longer work in today’s global economy. For most
industries, growth opportunities have been expanding across the world for the past few
decades. However, competition has also become tougher and more global as geographical
battlefields overlap between developing and industrialized countries. And what customers
want in this global market can vary drastically between high-end buyers and frugal-savvy
shoppers. For years, the number of high-end customers in developing countries has been
rapidly growing, and now the number of frugal-savvy consumers in industrialized countries is
Navi Radjou, Best Innovator Club presentation, Berlin 2013
1
M. Boden, “Creativity and Unpredictability,” Stanford Humanities Review, volume 4, issue 2, 4 June 1995
2
Capturing the Power of Frugal Innovation
1
expanding. As these buying patterns shift, developing a frugal offering is no longer optional for
most Western corporations, no matter whether they are in an offensive or defensive position.
Industrialized markets turning to frugal to combat complexity overload
In the decades after World War II, consumers in the industrialized world wanted products that
could do more. They wanted more variety, and they wanted more sophisticated choices. As a
result, companies invested in their R&D departments, and product and service development
cycles became more sophisticated. However, three factors in industrialized markets are making
it more attractive to offer frugal products and services:
• Buying patterns are shifting to less wasteful products. Consumers are buying products and
services with an improved ecological footprint, especially in terms of resource consumption.
• The global financial crisis led to today’s lower revenue per capita and less disposable income.
• Values are shifting toward a better work-life balance. People are willing to earn less money and
adapt their consumption patterns toward low-frills offers. For example, more people are opting
to share rather than own, and brand loyalty is slipping while transparency on alternative prices
and other offers is growing. The Internet and other communication technologies support this
trend, as does the fact that many traditional prestige products such as luxury cars are less
important for younger generations in the Western world.
A look at the range of products and services in highly industrialized markets reveals that frugal
innovation is already prevalent. Traditional and recently established companies alike are meeting
the demands of specific market segments with frugal products. Renault, for example, has its
low-cost brand, Dacia, and EasyJet focuses on no-frills flights. Ibis Budget Hotels offers basicservice accommodations, and Flinkster offers options for car-sharing. The consumer-to-consumer
market is even pushing the frugal trend, with services such as private homestay platform Airbnb,
German-based carpool service Mitfahrzentrale, and Migros’ m-way, a start-up that connects
people in Switzerland with e-mobility car-sharing options. Based on these trends, even from a
conservative perspective, the demand for frugal innovation offers is expected to skyrocket.
Emerging markets turning to frugal simplicity to meet consumer needs
Global markets and market power are shifting toward the East and the South, especially to India
and Africa, which are seeing a substantial shift in the size of the low-income and middle-class
markets (see figure 1 on page 3). These huge markets have very diverse needs—from water and
food to energy, mobility, and communication.
Established suppliers of these bottom-of-the-pyramid markets, often local players, have a sizable
opportunity to grow along with these market segments. Large, growing national markets have
historically played a significant role in the evolution of large multinationals. On one hand, these
markets can be a solid financial springboard, and on the other, they can create a branding
advantage with regard to internationalization, especially for consumer goods. For example,
consumers living in one country might have some first-hand experience with products sold in
another country as a result of their travels, such as Cadbury’s drinking chocolate from the
United Kingdom, Manner wafers from Austria, or Ladurée macarons from France.
To avoid falling in global industry rankings, established players from industrialized markets can
no longer consider conquering emerging mass markets an option they are free to take up or
shrug off. Successful Western players will be those that employ an appropriate offensive strategy
Capturing the Power of Frugal Innovation
2
Figure 1
A growing middle class will require a new business model
Population by income class
(million)
+4%
Example: India
–17%
2010
+16%
2020
CAGR
+21%
19
478
123
Upper middle
class
More than
$10,000 PPP
628
651
1,206 total
1,330 total
433
104
101
Middle class
$4,000 to
10,000 PPP
Low income
$2,500 to
4,000 PPP
Poor
Under
$2,000 PPP
Note: PPP is purchasing power parity. CAGR is compound annual growth rate.
Sources: U.N. population studies; A.T. Kearney analysis
Figure 2
Frugal innovation can help Western players secure market share
Global market
(21st century)
Other
markets
Local markets
(20th century)
1
Home
markets
2
3
3
Developing
countries
Industrialized
countries
Developing
countries
Industrialized
countries
Frugal-savvy consumers markets
High-end consumers markets
Local champion
Source: A.T. Kearney analysis
to provide products and services along with business models that meet the affordability and
accessibility criteria of their emerging target groups.
For industrialized home markets, competition will get even fiercer when today’s frugal
champions in developing economies become tomorrow’s disruptive rivals by conquering
industrialized markets with their frugal offerings.
For Western companies, frugal innovation should be a core focus as an offensive or preventive
strategy to secure market share (see figure 2). Three moves will be essential:
Capturing the Power of Frugal Innovation
3
• Address large and rapidly growing low- and middle-income markets in developing countries.
• Include frugal-savvy market segments in industrialized home-turf markets into the target group.
• Defend the home turf against competitors (such as BRIC players) that might also be attracted
to serving lower-income and frugal-savvy consumers in Western countries.3
How to Innovate Frugally
The A.T. Kearney House of Innovation gives an all-encompassing view of innovation management,
built around five dimensions (see figure 3). Frugal innovation has an impact on each dimension.
Figure 3
Frugal innovation affects each dimension of innovation management
A.T. Kearney’s House of Innovation
The impact of frugal innovation
Strategy
Strategy
Innovation
results
Organization
and culture
Product
development
Organization and culture
• Roles and responsibilities
• Organizational structure
• Organizational culture and climate
Life-cycle management
Life-cycle management
Idea
management
• Vision and strategic focus on innovation
• Implementation of strategy
Launch and
continuous
improvement
Supporting
factors
• Idea management
• Product, service, business model, organizational,
or process development
• Launch and continuous improvement
Supporting factors
• Project management
• Human resources and incentives
• IT and knowledge management
Leveraging the power of supplier innovation
Source: A.T. Kearney analysis
Strategy
An innovation strategy consists of a dedicated, written declaration that determines a company’s
vision of and strategic focus on innovation activities. Incorporating a frugal approach into an
innovation strategy might mean consciously including an expected demand for frugal innovations
as an important trend. As a consequence, frugal expectations will be incorporated into the
company’s offering portfolio to address customers’ expectations and needs.
Within the innovation strategy, a focus on consumers’ needs is a vital factor for success.
Coming up with a frugally designed offering requires understanding the core client need and
creating a product or service that meets that need. This is not about simply removing a few
features from offers that were developed for an industrialized market. In fact, that offer would
BRIC refers to Brazil, Russia, India, and China.
3
Capturing the Power of Frugal Innovation
4
not likely be affordable. In addition to taking into account the buying-power limits of frugal
consumers, it may also be necessary to consider technical constraints, such as different
electricity voltage conditions that may be not suitable for the original product specifications.
Several examples illustrate this point: Nokia developed a bicycle-powered mobile phone
charger for use in Kenya, Ikea created a solar-powered desk light, and remote villages in India
are using MittiCool, a clay refrigerator that works without electricity.
Organization and culture
The innovation organization and culture is an essential part of successful innovation management.
Clear roles and responsibilities, an appropriate organizational structure, and a fertile culture and
climate for innovative impulses throughout the company are vital.
A frugal-friendly organizational structure is rather flat and less specialized than a traditional one
as disruptive approaches often emerge when a diverse team of non-experts is confronted with a
certain challenge and starts to work on it in an interdisciplinary, open-minded way.
Organizational and cultural
transformation is always a long
journey, but enlarging the pool
of innovations is a vital move.
Further, role descriptions and handbooks are based on guidelines rather than laid down as
instructions in a manual. Too much focus on traditional procedures can block the creativity
needed to come up with, for example, simple, disruptive solutions.
Organizational and cultural transformation is always a long journey, but enlarging the pool of
innovations is a vital move. We have identified two key success factors to make it happen:
Collaborate with local external partners. One of the key takeaways from A.T. Kearney’s Best
Innovator contest in 2012 and 2013, throughout Europe and in the United States and Brazil, was
that innovation leaders have better processes in place that involve a broad range of stakeholders
generating and selecting ideas. To accelerate the speed of innovation and to multiply the angles
taken to meet consumer needs, open innovation with suppliers, universities, clients, and even
competitors is a must. When considering frugal innovations, the development team has to be
particularly sensitive to its target groups’ needs. Collaboration will be essential, for example
with start-ups or with research institutes, which have much tighter development budgets, or
with users in target markets.
Globalize the innovation network. The traditional Western company used to have its R&D
center in its primary home markets even when manufacturing centers were moved to low-cost
countries. Historically, there have been several reasons for this. Many players hold on to this
structure because of a “sticky” locally embedded culture and mindset, even after becoming
a global player. R&D is also often kept in industrialized countries to capitalize on economies of
scale, obtain co-funding from research programs, and protect national know-how, technologies,
and skilled workers.
Capturing the Power of Frugal Innovation
5
This approach is no longer appropriate for successfully serving new global—and frugal—
market segments, as local needs and conditions need to be top of mind. Innovation centers are
re-locating in emerging core target markets to capitalize on local talent and to connect with
local market needs and customer expectations (think PepsiCo and GE). The biggest challenge
remains connecting efficiently with local centers in order to capitalize on their value on a global
level by sharing technologies, ideas, and talents to support the innovation strategy.
Exchange and learning opportunities can also help in building a frugally conscious mindset,
for example with job rotations across departments and between countries or by sending
development engineers from industrialized regions to visit developing countries for a real-life
frugal boot camp. Forming mixed development teams, for example between successful frugal
innovators and employees of sophisticated corporate research labs, and staff projects with
young researchers and start-up entrepreneurs is also a proven important success factor.
An interesting example of both collaborating with local external partners and globalizing the
innovation network is InnoCentive. This crowdsourcing innovation platform enables access to
a global network of millions of problem solvers who provide solutions and ideas for business,
social issues, policy, and science.
Innovation centers are relocating
in emerging core target markets to
connect with local market needs
and customer expectations.
Life-cycle management
The innovation life-cycle process has three principal stages: idea management; product and
process development; and launch and continuous improvement until the end of the offering’s
life cycle. Adding frugal elements in line with a company’s frugal approach defined in the
innovation strategy will affect each stage. For example, idea management might include
concepts such as the ruthless competitor approach or rapid prototyping. Developing and
prioritizing ideas and selection criteria will include frugal characteristics such as affordability,
accessibility, sustainability, and quality.
Within the innovation life-cycle management, success will hinge on two factors:
Accelerating time to market and flexibility. The strategy dynamics of frugal innovations are
market-pull oriented rather than technology-push oriented. As the average income of the
bottom-of-the-pyramid population rises, consumers’ expectations will also rise. This is why
adopting a just-in-time rather than a just-in-case product and service development philosophy is
so important. There are several good examples of frugal products that reached the market
quickly. For example, GE developed a low-cost electrocardiogram machine that is portable,
battery-operated, and easy to use. Nokia’s 1280 mobile phone has an affordable price tag yet
comes with a flashlight and multiple address books for users to share. Tata Chemicals has its
low-cost Swach water purifier, and Natura Cosmético offers high-end health and beauty products.
Capturing the Power of Frugal Innovation
6
Inventing a new distribution and selling model. Frugal innovation is not just about creating new
products or services. The frugal approach includes the way these new offers are distributed and
sold. It takes into account demographic and linguistic facts and trends, wages, payment habits,
levels of access to and quality of banking services, and infrastructure development. From the
perspective of the industrialized world, even the decision to offer a website-based distribution
channel only—such as Amazon—could be regarded as taking a frugal route. Another interesting
frugal business model was inspired by Matternet, a U.S.-based company offering personal flying
vehicles; these are in use in emerging countries where no road-based logistics network exists.
Pharmaceuticals in some rural areas of Africa are being distributed by automated helicopters,
an operating model that is being adapted for Germany, where DHL has recently used a drone
to deliver parcels to a North Sea island.
Supporting factors
Innovation enablers—program and project management, improvement processes, incentives
and compensation systems, and IT and knowledge management—are important ingredients for
successful innovations. They comprise all the necessary capabilities and skills as well as all
kinds of support services to smooth the steps from idea generation to development and launch
all the way until an innovation comes off the market.
For HR, frugal elements can be woven into personnel recruiting by adapting the search criteria
for hiring new employees. For example, set a goal to make the workforce more diverse by hiring
people from different cultural and social backgrounds to better understand and address the needs
of new target groups with more frugal offers. When it comes to program and project management,
a dedicated internal requirement to continuously ease approaches and processes to make them
leaner, more flexible, and more frugal should be accompanied by shortened development cycles.
Innovation results
An innovation is deemed successful only after it has proven itself on the market with some
commercial success. Applying frugal elements to all of the dimensions of innovation
management should positively impact the innovation results on at least two levels. Incorporating
low-income and middle-class segments into a company’s target group should increase the
number of units sold and thus improve economies of scale, and serving different target segments
including frugal markets with common modules can help reduce the production costs of the
non-frugal product portfolio.
Practical Implications of Frugal Innovation
Frugal innovation is more than a good opportunity—it is a necessity for players that want to
conquer developing markets while defending the established ones. Success will depend on
more than simply adapting processes, introducing new KPIs, and developing new products to
serve frugal-savvy consumers. What’s needed is a frugal state of mind to enable additional value
creation through achieving more with less. This culture change might easily be seen as clashing
with how innovation management has been understood in industrialized countries over the past
several decades, where the spotlight is often more focused on technological breakthrough
rather than simplicity. That is not to imply that a frugal approach makes breakthrough innovation
impossible, as demonstrated by the recent frugally developed Mars Orbiter Mission (MOM),
developed by the Indian Space Research Organization (ISRO). The mission was successful,
Capturing the Power of Frugal Innovation
7
reaching the Mars orbiter on September 24, 2014, and the estimated costs of the MOM were less
than 10 percent of a comparable U.S. program called Maverick.
Adopting this new mindset and implementing a new frugal innovation strategy is a long transformational journey. That is why the most remarkable and fruitful frugal innovation strategies
have been designed, launched, and supported by C-suite leaders. Renault-Nissan CEO Carlos
Ghosn, who developed a variant called frugal engineering, is one of the most striking examples:
the Dacia brand relaunched in 2005 as a result of its frugal innovation strategy accounts
today for 19 percent of the total number of vehicles sold by Renault and, together with the
Nissan contribution, allows it to be profitable. However, if top management is unaware of the
need for change, small steps and a pilot approach are a good starting point. Each dimension
of A.T. Kearney’s House of Innovation provides opportunities to include frugal flavors in an
innovation management system independently from an overall innovation strategy reversal.
Forward-thinking players that can untangle complexity and focus on customers’ core needs
will discover the power of frugal innovation. As Leonardo da Vinci said, “Simplicity is the
ultimate sophistication.”
Authors
Kai Engel, partner, Dusseldorf
[email protected]
Etienne Sebaux, principal, Paris
[email protected]
The authors wish to thank Isabella Grahsl for her valuable contributions to this paper.
Capturing the Power of Frugal Innovation
8
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