THE Frugal Way to Grow
Pioneering companies in mature economies are
learning from emerging market companies a new way to expand their businesses.
In
China, the Siemens R&D team has designed a high-end computed tomography (CT
scanning) device that’s simple enough for health
professionals who are not doctors to use. To develop this, the company
pioneered a type of innovation it called “industrial design thinking”: The
innovators convened workshops with users of its devices and used craft supplies
such as colored paper to build models in order to get a clearer idea of what
people wanted.
For
example, conventional CT scan devices in Western hospitals are used for a wide
variety of purposes, including the detection of rare diseases. The settings and
controls are so complicated that operators must be trained at length to use
them. But the Chinese users were much more interested in a few basics, such as
diagnosing sports-related injuries and other common ailments. As these
operators talked about their needs, making models of what would work for them,
the possibilities became clear. The result was a Siemens scanner built for
speed and simplicity. It consumes less energy but processes images faster than
a conventional scanner. It cuts the cost of treatment by 30 percent and reduces
radiation by as much as 60 percent. And it is remarkably easy to use.
Another
medical device that benefitted from Siemens industrial design thinking
workshops is a urinalysis machine originally developed through
conventional processes. When it was launched, the device quickly gained an 80
percent market share worldwide, but only a 2 percent share in China. It was
then put through a workshop, which uncovered that the Chinese healthcare market
craved a much simpler, less expensive piece of equipment. In response, Siemens
created a microscope with automatic image processing that could identify solids
in the sample. Its technology makes the frugal machine more accurate than
chemical analysis done manually.
These
frugal medical devices have become popular in China, but they are also selling
surprisingly well in Western markets. It turns out that people in those
markets, too, value simple devices that do sophisticated things. Delivering
frugal products in mature markets has become a growth industry for Siemens, as
well as for other companies in a variety of industries, including automobiles,
consumer products, education, home furnishings, and even luxury goods.
Frugal
innovation is associated with resource-constrained and low-income emerging
economies such as those of Africa, India, and China, but we have recently seen
the rise of frugal innovation efforts in developed nations including the U.S.
and in Europe. These are not primarily cost-cutting measures, a response to
financial constraint or a tepid economy. Rather, across the developed world,
companies are beginning to use frugal innovation as a growth strategy. They are
introducing a larger lineup of new products and services, often with greater
economic and social value, at a much lower cost and using fewer natural and
financial resources. Their goal is not to create cheap offerings. They want to
create more effective offerings that draw people in with their simplicity,
while also cutting down on the use of various resources.
It
turns out that the four key attributes of frugal innovation —
affordability, simplicity, quality, and sustainability — are exactly the
qualities that customers in mature markets want most. This makes frugal
innovation a viable growth strategy for companies expanding in those markets,
not just in emerging economies.
The
Link to Responsibility
Low
prices and value, of course, have always been important drivers of growth, but
they are generally insufficient in and of themselves: Something else needs to
attract new customers and make it worth their while to switch or experiment.
Increasingly, that second factor for consumers in relatively mature markets is
environmental and social responsibility, embedded into the products and the
processes by which they are made. These consumers — especially those in gen Y —
are increasingly both value-conscious and values-conscious. For
instance, according to one Nielsen study from 2014, more than 40 percent of
U.S. and European consumers today say they are willing to pay
extra for
products and services from companies that are socially and environmentally
responsible. Moreover, reducing environmental impact is inherently frugal and
innovative: It means developing designs and practices that cut waste, use less
energy, and make better use of materials, including those in recycling bins.
Technology
and values combine to make many of these innovations feasible. Many of the
early adopters are found in grassroots communities of “prosumers,”
tech-empowered consumers who use maker tools such as 3D printers and peer-to-peer sharing platforms including Airbnb and BlaBlaCar to
create their own products or share their apartments and cars with other people.
Other early adopters are companies in service sectors such as retail,healthcare, education, banking, and
insurance. For example, Leroy Merlin, one of Europe’s top home improvement
retailers, teamed up with the do-it-yourself platform provider TechShop to upgrade some
of its retail stores into “maker spaces” equipped with industrial tools and 3D
printers that cater to digitally savvy prosumers. Thus, if your washing machine
breaks down, rather than ditching it and buying a new one, you can bring the
defective component to a Leroy Merlin store in your city, 3D-print a
replacement part, and take it home to fit into your machine. This innovation
allows Leroy Merlin to expand its service dramatically without adding
inventory, creating a new high-growth business that didn’t exist before and
building loyalty with customers who are now aware that this retailer is
innovating on their behalf.
Building
a Frugal Capability
The
growth opportunities in frugal innovation are clear; however, its disruptive
nature means that companies need to be strategic about how they adopt and
implement it within their organizations. We suggest three entry points for
companies seeking to embark on a frugal innovation journey. The higher the
level, the greater the risk and complexity, but also the more enduring benefits
conferred on companies adopting it.
Level 1: Frugal products and services.
This
is a good starting point and creates a tactical competitive advantage for
companies facing stiff price competition from low-cost rivals. Think of
fast-moving consumer goods companies trying to win back thrifty consumers who
have been switching to private-label products; brick-and-mortar hotel chains having
to fend off Airbnb; or multinationals desperate to crack emerging markets such
as India and China where frugal local companies reign supreme. Level 1 is also
suited to companies with a high environmental impact, such as those in the
automotive, chemicals, and electric power industries. These businesses may be
under pressure from regulators and eco-conscious consumers to redesign existing
products and services, or to create new ones that are environmentally friendly.
Frugal innovation can help.
Companies
with a conservative culture, where innovators are treated with skepticism,
should generally start at level 1. This stage often involves prototyping
one-off pilot projects to test specific ideas. With a well-designed prototype,
and a great deal of rapid innovation (often abetted by digital fabrication),
companies can quickly develop and launch a new frugal product or service, win
over the skeptics, and thereby build momentum to launch more frugal solutions
down the road.
French
carmaker Renault has followed this strategy with its low-cost Dacia auto line.
Since launching the Logan — a US$6,000 sedan — in 2004,
Renault has gradually expanded its product line of entry-level vehicles to
include an affordable van, pickup, and SUV — all sold under the Dacia brand.
Renault has set up a sizable sales and marketing group devoted to Dacia.
Shunning the low-cost label, this team shrewdly promotes Renault’s entry-level
products as stylish, comfortable, dependable, and “outrageously affordable.”
Renault
will be rolling out another frugal car in India in late 2015. It’s called Kwid,
and it has been developed from scratch using exclusively local design, R&D,
and manufacturing talent. Boasting a sporty look, the Kwid incorporates many
innovative components, such as a robust chassis and a fuel-efficient engine, to
meet the demanding transportation needs of developing nations. It is also
exceptionally roomy: CNN-IBN described it as a “compact car aping…an SUV.” Priced below
$5,000, Kwid will be sold first in India to aspiring middle-class consumers
seeking a car that combines affordability, elegance, and reliability. It’s a
prototype in the sense that Renault is testing the larger opportunities for
this type of vehicle worldwide. It could easily be adapted to China, Russia,
Africa, Brazil, Eastern Europe, and Southeast Asia. And although the company
has no explicit plans to bring the car to more mature economies in Europe, it
refers to the Kwid as a “global platform for a global car.”
Companies
that succeed at level 1 achieve only a tactical advantage because their frugal
products and services can potentially be copied — and exceeded in value and
performance — by rivals. To stay ahead of competition and gain a sustainable
advantage, companies need to move to level 2.
Level 2: Frugal business models.
Companies
that sell commodity products in mature or saturated markets, and firms whose
supply chains depend on increasingly costly or scarce natural resources (such
as water, wood, and oil), face huge pressures to do more with less. To stay
competitive, these companies need to advance from seeking tactical advantage to
enabling strategic change. They must reinvent their operations and practices
systematically, using both cost savings and a reduced energy and environmental
footprint to distinguish themselves as companies that avoid waste. This
involves going beyond lean manufacturing and process reengineering, to a full
redesign of the company’s value chain, encompassing sourcing, R&D,
production, distribution, and product and customer service.
To
make this work, leaders must secure the buy-in and commitment of all these
functions — and value chain partners — and embed frugality in all their
activities. This may involve setting up a frugal innovation lab to regularly
test new practices and processes, dedicating a section of R&D to frugal
efforts, or extensively partnering with external innovators to accelerate and
scale up internal initiatives.
Unilever
began to do all these things in 2010, using its dedication to environmental
quality as a starting point. CEO Paul Polman made a public commitment to double
the company’s revenues to €80 billion (US$90.1 billion) by 2020 while halving
its environmental footprint. Since then, every functional and regional unit of
Unilever has been involved in actively implementing the frugal business model.
The R&D function, for instance, is developing resource-efficient products
such as soaps that kill germs more quickly using less water. Supply chain teams
are reducing waste and boosting energy efficiency in the firm’s global value
chain, which comprises 260 factories and 460 warehouses across 90 countries.
And Unilever’s purchasing and sales groups are engaging with thousands of
suppliers and distributors worldwide to source and distribute frugal products
to 4 billion consumers by 2020 in a socially inclusive and ecologically
responsible way.
At
level 2, a company that has successfully implemented a frugal business model
can better defend its competitive position. It is hard for any rival company to
comprehend — let alone reverse-engineer and imitate — the ingrained systemic
changes and habits that now suffuse the company’s organization and value chain.
Indeed,
the biggest obstacle to a successful implementation of level 2 is typically the
company itself. If a drastic change occurs in the external environment or
internal conditions (such as the CEO’s departure), the organization’s atavistic
instincts may gain the upper hand and the company may revert to its un-frugal
habits. A company can achieve an enduring competitive advantage in the
resource-constrained 21st century only by embedding frugality into the
corporate culture. To do so, senior leaders must move to level 3.
Level 3: Frugal mental models.
Like
Unilever, the Tarkett Group has reinvented itself to meet the demands of its evolving
environmental strategy. But this global flooring and sports surface solutions
provider, headquartered in Paris, has adopted “circular economy” principles. In this
type of industrial design, waste is eliminated. Biological elements are put
back into the ecosystem in a sustainable way, while all other materials are
designed to be reused, recycled into new products, or used as input into some
other industrial process.
Operating
this way takes a kind of openness to the outside world that is rare among
business leaders. Tarkett is working with other companies to develop
eco-friendly products made using only rapidly renewable raw materials such as
pine resin, walnut shells, jute, and linseed oil, as well as recycled plastic.
It is also working with retailers such as Walmart, which collects recycled
carpet in many of its stores. By reinventing its entire value chain to make it
sustainable, Tarkett intends to eliminate industrial waste entering the
landfill by 2020; currently, it maintains seven recycling centers that have
captured (as of the end of 2014) about 13,500 tons of discarded flooring and
other waste from its own products as well as products of other manufacturers.
Michel
Giannuzzi, CEO of Tarkett, is not the only leader striving to inculcate a
frugal mind-set at all levels of an enterprise. At health insurer Aetna, CEO
Mark Bertolini is promoting value-based care, a frugal strategy for delivering
better care at lower cost for more U.S. residents — which will require major
shifts in the 162-year-old company’s corporate culture.
Similarly, John Fallon, CEO
of leading education company Pearson, has proposed a shift in the mental model
of all his employees from selling books to selling digital education services. These software-based
offerings are more affordable than traditional textbooks and can be more
effective in promoting learning, because students can personalize the
information they access according to their needs.
Making
this kind of radical change and striving to cultivate a frugal mind-set won’t
be easy for conservative organizations that have operated for decades under the
assumption that bigger is better. It will require unlearning old thinking
patterns and habitually doing more with less.
Deciding
Where to Start
It
may seem as if many of the basic tenets of frugal innovation are simply those
of good management. Indeed, we posit that frugal innovation is part of good
management. Yet companies across industries and regions do not uniformly
practice its tenets. In particular, we find that firms in developed nations lag
well behind their peers in emerging markets in the frugal innovation journey.
We estimate that only 5 percent of companies in developed economies (the U.S.,
Europe, and Japan) have advanced to level 3. An additional 15 percent operate
at level 2 or 1, having incorporated frugality into only some parts of their
organization. The remaining 80 percent have yet to articulate a coherent and
wide-ranging frugal innovation strategy.
These
firms in particular should consider kick-starting their frugal innovation
engines without delay, for three reasons. First, as government and household
budgets continue to face downward pressure in the developed world, frugal
products and services are quickly moving from niche markets into the
mainstream. Second, regulators in the U.S., Europe, and Japan are increasingly
driving companies to develop products and services that are more affordable,
accessible, and environmentally friendly. And third, a range of frugal and agile
competitors are beginning to take big chunks of market share away from
incumbents in the West, across several sectors. Such frugal rivals include
emerging market companies breaking into the rest of the world, well-known
digital disrupters (Apple, Google, Amazon, Airbnb, and many others), and large
interlopers from mature sectors (such as Walmart, which is expanding into
financial services and healthcare).
It’s
important to note that frugal innovation isn’t a panacea for all businesses.
Nor may it be a strategic imperative for all companies. For instance, companies
selling premium products such as luxury goods and vendors of high-end
technologies are not typically pressured by their brand- and quality-conscious
clients to develop frugal products. And yet, even these premium product
suppliers can adopt frugal business practices internally to develop new
products faster and better and to become more efficient and agile in responding
to customer needs. Luxury conglomerates Kering and LVMH, for example, are both
instituting circular economy principles in order to reduce their carbon
footprint and boost resource efficiency in their global supply chain.
Each
of the three entry points in our framework offers a way for companies to get
started on the frugal innovation journey. To decide which level is best for
their company, leaders need to consider the degree of urgency in their industry
along with their own leadership style and the existing corporate culture.
However, in the long run, we believe that almost all companies will eventually
need to get to level 3 to gain a sustainable advantage.
http://www.strategy-business.com/article/00368?gko=40fca NOV2 2015
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