Frugal Innovation in Emerging Markets

Extracted 18AUG2011 from

There is more to this than simply cutting costs to the bone. Frugal products need to be tough and easy to use... Frugal often also means being sparing in the use of raw materials and their impact on the environment...

Frugal innovation is not just about redesigning products; it involves rethinking entire production processes and business models. Companies need to squeeze costs so they can reach more customers, and accept thin profit margins to gain volume. Three ways of reducing costs are proving particularly successful. The first is to contract out ever more work... The second money-saver is to use existing technology in imaginative new ways... The third way to cut costs is to apply mass-production techniques in new and unexpected areas such as health care.

Indians often see frugal innovation as their distinctive contribution to management thinking. They point to the national tradition of jugaad—meaning, roughly, making do with what you have and never giving up—and cite many examples of ordinary Indians solving seemingly insoluble problems. But China is just as good as India at coming up with frugal new ideas.

The Chinese have made two distinctive contributions to frugal innovation. The first is the use of flexible networks—powered by guanxi or personal connections—to reduce costs and increase flexibility... It puts together customised supply chains from its vast network of associates and keeps an eye on quality and order fulfilment... These post-modern guanxi have several powerful qualities. They can contract or expand with demand.

A second area where the Chinese excel is in “bandit” or “guerrilla” innovation, known as shanzhai. The original bandits lived in isolated villages and carried out raids on upright citizens. Today’s bandits live at the margins of official society but are much in evidence... In their own way the bandits deploy as much innovation and ingenuity as their legitimate counterparts.