Frugal innovation is touted as the key to mass-market success in the developing world. But do western manufacturers have the skills to make it a success?
Outside India, manufacturer Godrej and Boyce is perhaps best known for a product it no longer makes. The Mumbai conglomerate made headlines in 2009 when it closed the world's last remaining mechanical typewriter factory. But it's an innovative refrigerator that the firm hopes to be known for in the future. The market for fridges in the west is saturated, but in India only one in five families is rich enough to own one. Godrej and Boyce believes its low-cost ChotuKool fridge, literally "the little cool", has mass-market appeal.
Co-designed by rural villagers, the ChotuKool is the embodiment of frugal innovation, a method of product simplification suited to serving large, low-income markets. Unlike conventional fridges, which rely on expensive, energy-intensive compressors, the ChotuKool employs a cooling chip and a small fan. Weighing under eight kilograms, it has only 20 components. A conventional fridge has over 200.
As efficient as it is uncomplicated, the ChotuKool opens from the top to minimise the escape of cold air. It runs on electricity but can also switch to battery power, and can stay cool for hours without either - an important consideration in a country where 72 million households are frequently without electricity. The price, around £50, is more than a third cheaper than the next cheapest model on the market, making it affordable to low-income families.
At its heart, frugal innovation is about more than stripping out cost. In fact, frugal rethinks the entire production process, often turning business models on their heads. It is also a reversal of contemporary product design. Instead of celebrating intricacy, it reduces products down to their primal function. It also changes the natural order. Traditionally, product innovation has trickled down from the west. Frugal innovation reverses the stream.
Not just products
Frugal isn't confined to product development, says Simon Bolton, Professor of Creative Design at Cranfield University. Often the innovation lies in the business model. In Brazil, which has "a very diverse income stream", a common mode of payment for staple white goods, such as washing machines, is hire purchase. Bolton says that designing products as a service enables companies to reach greater numbers of low-income consumers. "They might not be able to afford the product but they might be able to afford to rent it for a couple of hours."
In India, where only 0.7 per cent of the population owns a car, Tata's Nano, a stripped-down family vehicle that costs around £1,700, is one of the country's most prominent adverts for frugal innovation. The Nano's utilitarian design incorporates far less steel, a single wiper blade and a trunk that's only accessible from the inside. But sales haven't exactly lived up to expectation. That's partly down to looks: frugality doesn't have to be visible, says Bolton.
Neither, Bolton adds, is it a strategy confined to developing nations. In countries badly affected by the recession, consumer appetites for simpler, cheaper products may be more pronounced. The trend for collaborative consumption, which uses social networking to promote swapping, sharing and renting as an alternative to ownership is an early sign of changing consumer attitudes. "It's a mindset," says Bolton. "The cuts haven't kicked in yet. We're going to have more unemployment, fewer people buying as many products. Feature-packed products will still be around, but there'll be a need for more cost-effective solutions too. I think there will be frugal opportunities to come."
In the meantime, global corporations are testing their frugal capabilities on developing nations. GE develops and manufactures medical hardware for both western and eastern markets. At $1,000 its handheld ECG device, the GE MAC 400, costs a tenth of the price of its western counterpart. Both products enable doctors to help diagnose conditions such as heart disease, but GE's frugally designed version can be carried out to remote villages "on the back of a motorbike," explains Carlos Haertel, managing director of GE's European Global Research Centre. Cheap does not mean low quality, he adds. "A doctor's option for a stethoscope is either to have a cheap one or nothing. An unreliable one is just not an option at all."
Haertel says the world's increasing appetite for frugal is down to a demographic tipping point. It's not that consumers in the developing world have only just discovered a need for ultrasound devices, he says. Or even that new technology suddenly allows it. It's the size of the market opportunity that has changed. "These products were always technically feasible. The fundamental change is that in India and China you now have mass markets that are price sensitive but have a massive purchasing power."
While GE is demonstrating flexibility in its mastery of frugal, Kevin McCullagh, founder of design agency Plan, believes it can be a tricky skill set for western designers to emulate. "Ten years ago there was a complacent idea that manufacturing had gone out east and that the inventive, creative design would remain in the west." But manufacturers in China and India have perfected development techniques that are difficult for the west to copy, says McCullagh. "We've got used to certain ways of working. I think it's hard for say German engineers to try and produce a Nano car for a few thousand dollars. You've got to grow up in an environment where frugality is the only option."
Chris Luebkeman, head of innovation, at Arup agrees. His company of engineers and architects uses the term "innovation blowback" to describe the way it adopts frugal techniques from developing countries. Arup's Zimbabwe office designed a turbine extractor that uses wind rather than electricity to power building ventilation. "It worked with a very small breeze to suck the warm air out," explains Luebkeman. Built by hand, the wind-tunnel testing was completed by mounting the structure on the back of a pickup truck and driving round a race track. "It's such a brilliant solution that we brought it back from Zimbabwe and started using it for the high-tech analysis that we can afford to do up here," he says. "That's innovation blowback—where you have something coming out of a country that has nothing except clever people."
Haertel thinks geography is irrelevant. He says GE engineers work "equally well" on products you might find in a university hospital as they do products suitable for the lower end of the market. "The engineering is the same. The difference is the extent to which you have market insight and consumer understanding that allows you to tell what those essential features of the product are."
As the developing world grows its purchasing power, western organisations are globalising operations in order to meet the demand. In the last 10 years GE's revenue in developing markets experienced compound annual growth of sixteen percent. IBM employs more people in developing countries than it does in the US. Eight of the world's ten biggest investors in R&D have plants in China. Haertel says that's largely a function of the changing nature of product development. "The old push strategy was that engineers had good ideas and there was a sales marketing effort to push the product to customers. Today companies use R&D distribution across the world [with] local market intelligence and customer connectivity to understand what the company needs to offer in a particular region."
The so-called globalisation of R&D also has its drawbacks. One of McCullagh's clients is the handset maker Nokia. They suffer pressure from above, he says - namely from Apple and Android phones. "But in places like India a bigger problem is at the bottom end", where tiny Chinese and Indian brands compete to produce decent imitations at very low cost. Employing Taiwanese chip sets and Chinese manufacturing infrastructure, these micro manufacturers can profit from "small runs producing relatively competent mobile handsets" for as little as $20 apiece.
One observed effect of frugal, then, is that it opens up global markets to increased competition. In India, Micromax, an Indian handset manufacturer with a research team of 12, operates in the same market as Nokia, which spends $4bn a year on R&D. To compete, Micromax uses "a network of outsourcers", including a manufacturing plant in China, "that they can produce very competent products with," says McCullagh.
Impact for all
Frugal isn't just for large companies. It's a design principle that can help small firms make a big impact in developing nations. Red Button Design co-founder Amanda Jones says the strategy makes for "an interesting company ethos". Red Button's first product is the Midomo, a water-carrying device for the third world that promises not only to cut down on the amount of time people spend fetching water, but also acts as a mobile filtration device to purify it for safe drinking.
As a social enterprise, Red Button is concerned less about margins and more with the widespread acceptance of its products. Jones says she doesn't want Red Button to be the Midomo's only manufacturer. The cheaper and simpler it is to assemble and repair, the more likely the concept is to fly. The product is "completely devoid of luxury features," says Jones. "It doesn't do anything apart from the thing it's designed to do. We picked the most durable coating, it's very efficient but it's not very pretty. Everything about it came down to needs, not wants."
Jones says the western appetite for differentiation seems gratuitous when compared with the frugality of the developing world. "Frugal innovation is about getting people to buy into reality, but [westerners] don't want to do that." Why? "Perceived benefit sells. Customers want those 25 apps that they'll never use because they like to think they are the kind of person who will." For frugal to spread to developed nations, says Jones, consumers will have to "give up that alternate reality version" of themselves in which they really are "efficient enough to work out what all the bells and whistles do."
Jones doesn't think that's going to happen any time soon. For Haertel, the question is in fact how long developing nations will sustain their demand for frugal. He says it's hard to predict exactly how countries change as they grow richer. "Cities like Beijing and Shanghai - they don't look very different to big parts of central Europe or the US. It may be that frugal innovation is a transient phenomenon. I would not bet that this trend will stay for many decades to come." Consumer taste alone will determine frugal's fate, says Haertel. "Fifteen years down the road, it's whether these consumers get more demanding that will set the standard for what's profitable."