What do the Tata Nano, the Nokia 1100, and the Jaipur leg all have in common? It’s not that they are simply inexpensive products but are in fact, part of a larger process known as frugal innovation.
Frugal innovation creates a business advantage out of limited constraints. Thus, especially in emerging markets, where costs can be tight, frugal innovation develops new methods of creating products and services, which are more customized, appropriate and scalable.
The term itself is defined as “the process of reducing the complexity and cost of a good or service and its production, usually for emerging markets, but not failing on quality” – implying that such products and services need not be of inferior quality, but must be provided cheaply. This point is significant as frugal innovation is not only about making cheap goods and services, but building functional solutions through fewer resources for those with limited means.
As is the case with the aforementioned three products, the innovation needs to be highly robust in order to conform to the harsh conditions they may experience within the developing markets. Further, the key to counter the scarcity of resources is through their optimal use.
One of the key standouts of frugal innovation is that it follows a bottom-up approach. Starting from the base of the pyramid, this approach works its way up to benefit the higher levels, skipping or discounting steps such as heavy investment in research & development.
The recession and the subsequent financial crisis has resulted in global firms eyeing emerging markets including the Indian sub-continent, Brazil, China and parts of Africa. These companies are rediscovering new business models that specifically cater to these locations and their large population base. This process also looks at a complete product redesign so as to keep in mind both the cost margins as well as the utilitarian use of the innovation within the country and its socio-cultural requirements.
A noteworthy example in this regard is General Electric (GE), which has developed an ultra-low cost electrocardiogram (ECG) for rural India-- illustrating the fact that there is a western market for products born out of the constraints of the Indian healthcare sector.
Despite the merits of frugal innovation, western multinationals are facing increasing competition from their Indian (and Chinese) counterparts and have had to rethink their present innovation models so as to keep pace with the tight profit margins of today.
How do you think frugal innovation has changed the nature of business within emerging markets? What more can be done in this regard? Please leave your comments in the section below.
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