FRUGAL INNOVATION is probably the only pragmatic way out today for any successful enterprise that operates in a volatile, uncertain, complex and ambiguous world. This is the message given by authors Navi Radjou and Jaideep Prabhu in their book Frugal Innovation. We live in a world where resources are scarce and time matters for successful implementation. Further, customers insist on quality and demand value from the products they buy. How exactly we marry these demands with the scarcity concept is the crux of the analysis done by the authors, who punctuate their storyline with several examples that the reader can relate to.
Frugal innovation is all about doing more with less, which means extracting higher value by being economical in the use of resources. In the earlier era, there were plenty of resources that could be used to produce goods. But today, with scarcity and concerns about the environment, it has become progressively difficult to do so, and we need to revisit our business models.
The authors give a very illuminating example at the beginning of the book relating to Renault. A senior manager went to Russia and saw that there was a car that cost $6,000 and the challenge was to produce a similar vehicle within this cost range in France, which seemed unthinkable. The ‘more for less’ struggle led to the creation of the ‘Logan’. To get more for less, the production facility was moved to Romania, as Romanians were more cost-sensitive than the French, having grown in a communist regime. The car used 50% fewer parts than a typical Renault car and boasted of a simpler architecture. The rest, as the cliché says, is history.
Frugal economy basically deals with mass customisation, recycling along the value chain, sharing resources and ideas, and producing faster but better-quality and cheaper goods. There are, however, barriers that need to be overcome when pursuing this line, as companies fear that frugal products may dent their brand value and also cannibalise their existing products. These mindsets have to change. Often, there is concern that the shareholders may not like the idea of going to this lower end of the chain, but then this can be overcome if the venture follows a simple six-step path.
The first step is to engage with the customer. This has to happen at the front and back ends for improving the product. It involves continuous interaction with customers and adapting the interaction with cheaper and better solutions. The authors suggest the concept of crowdsourcing and social media to get these ideas, as it is cheap and smart. Starbucks does this through its dedicated site to get ideas from customers.
The second step is what the authors call ‘flexing the assets’ of the company, which is all about saving money and time along with resources. By flexing their production and distribution networks, companies are able to move goods faster by making them locally, hence saving on costs. The old model of huge factories and energy guzzlers is passé and the new model is based on using new materials, tools and new approaches for manufacturing. ‘Reshoring’ is in fashion now, as production facilities have moved back from countries like China to the US. Local sourcing and sharing of resources have helped to bring about the required economies in scale. The whole idea now is not to look back and plan, but to look forward and strategise. Even the business of advertising has been affected by social media, with Internet bringing great reinvention.
The third step is to create sustainable solutions, as everyone talks about the environment. Regulation, too, is being introduced by almost all countries. Companies all over are working to use fewer materials, especially water and energy, and better materials, while simultaneously ensuring that the final products are not harmful. This has involved the new process called ‘cradle to cradle’, or C2C, where all products can be recycled. Sustainability is important because there is scarcity of resources to begin with and consumers are asking for eco-friendly solutions, with the shadow of the regulator falling quite sharply on all. The authors quote McKinsey’s view that such circular economies can save $700 billion annually. Special mention is made of Unilever, Kingfisher and Marks & Spencer in this context.
The fourth step is to shape consumer behaviour and logically follows from the first three principles. The fundamental contradiction today is that while consumers care about the environment, they are still profligate. The authors argue that for saving, say, energy, we can use ‘visualisation’ through signs, leaflets, advertisements, etc, to make consumers aware of the problem. Changing consumer behaviour is difficult, as all kinds of cognitive and psychological biases intervene and scupper the best intentions of consumers. However, this can be done over time.
The strongest ally here, as per the authors, is the creation of ‘prosumers’ among consumers. This is the fifth principle. The idea is to get consumers to design a product, so that it works with them in the store. This is effective, as consumers always look for personalised solutions and, as a corollary, always seem to be dissatisfied with the existing array of products. They want to have a say in the brand and would like their ideas to be used for other products too. This has led to the proliferation of peer-to-peer sharing platforms and crowdfunding approaches for new ventures. Getting in prosumers means co-discovering the need and dreams of the consumer (Harley Davidson’s electric motorbike), co-developing the solution (a low-carb yoghurt by Danone), and co-marketing, co-branding and co-distributing the product (Saatchi & Saatchi use social media and word-of-mouth).
As an extension to the role of prosumers, the authors talk of different roles for the otherwise passive customer. There are dreamers (Volkswagen’s competition for designs), validators (Hasbro gets consumers on Facebook to vote for their new game of Monopoly), ideators (Lego invites new ideas), makers (Kimberly Clark’s grant to DIY mothers) and evangelists—a combination of all these personalities become brand managers. They are complemented by sales agents and fixers (Yatango Mobile offers credit to customers who provide technical support).
The final principle or step is to make innovative friends through collaboration. This will be at the stage of suppliers, partners in design, sharing of assets and resources with other companies, working with the social and public sectors, etc.
As per the authors, almost all industries are witnessing this frugal innovation and leading companies like Renault, GE, Siemens, etc, are shaping and leading new markets for affordable products. Besides the tangible benefits, they also bring in intangible advantages in the form of increased brand recognition, customer loyalty, higher employee engagement and more public goodwill. This turns out to be a win-win solution for everyone.
Frugal Innovation is easy to read, as there are examples given everywhere to explain the point being made. It is also quite amazing to learn that a large number of leading companies have already entered this frame and have made rapid strides on the global business map, which should be an inspiration for others.
Madan Sabnavis is chief economist, CARE Ratings