From “Premium” to “Good Enough”: Frugal Innovation in the Emerging Markets

By: Hans Joachim Fuchs

Frugal engineering means developing simple products for emerging markets and is becoming increasingly important for many companies. Frugal products are not cheap or inferior, they are simplified and yet qualitatively robust. But how can frugal products be developed successfully?

A company that wants to successfully enter the emerging markets normally has to adapt and customize its products to often completely new market conditions. The customers there are demanding and price-cautious at the same time. They require the high quality of industrialized countries, yet they are not ready to pay for this quality. Besides, such factors as heat and dust, power breakdowns and underqualified personnel limit the application of high-end products. The solution lies in frugal engineering – construction of simple and therefore low-priced products that are however robust and of high quality.

Frugal is not cheap or inferior, but simplified and good enough.

Frugal engineering does not mean slimming the complex Western products to make them cheaper. How can for example a high-end European fridge-freezer machine be simplified for the Indian market, if there is neither enough space nor sufficient power supply in the narrow Indian kitchens? A lot of high-end products are simply not implementable in the emerging markets.

But how to develop products tailored to the emerging markets? The word “frugal” means “simple, but good”. In the industry it means designing functionally reduced and thus lower-priced, but qualitatively robust products. Frugal is not cheap or inferior, but simplified and good enough.

Local knowledge as innovation fundament

The strategy of frugal engineering is to innovate in the target market on the basis of the local knowledge. The most important aspect is to identify the basic conditions and local customer needs through monitoring and active on-site participation. To understand the utility of a product it is absolutely essential to have access to the field, to approach local customers systematically and to be constantly present on-site, and thus receive the necessary insights.

It is a challenge for product designers to largely ignore the knowledge and experience they have generated over years. They have to forget what they have learned, the classic approaches as well as past success formulas. Frugal engineers start from scratch and develop a zero-based design mentality to realize the clean slate assessment. The constructors of frugal products start the development of new, simple solutions from the beginning, guided by humbleness and curiosity.

Field research in the emerging markets often leads to surprising outcomes. The Tata engineers in India, for example, discovered a natural process for low-cost water filtration. They used rice husks combined with silver nanoparticles to clear the polluted water even without access to power supply. Based on this process they have developed the frugal machine “Tata Swach Smart” that can purify up to 1500 liters of water before the filter has to be changed. The cartridge can be replaced by anyone without much effort. The price of this machine is 15 Euros; a new filter would cost 5 Euros. The high-end product “Tata Swach Ultima Silver RO” is operated with electrical power and uses diverse filters, granulates, membranes, and UV-light, and costs around 200 euros.

Toshiba has constructed the THL series SCARA-Robot for the Chinese market. This low-priced and lightweight machine is easy to operate, weighs 60% less than machines of other series and reduces the energy consumption by 20%. The scope of application of frugal robots is very wide, from food production and logistics over metal cutting and manufacturing up to the pharmaceutical industry.

Another example of successful frugal innovation was set by a producer of assembly lines who found out that in Asia fully automated systems are not always in demand. The field research in the Asian factories revealed that the employment of cheap labor is still very welcomed there, and that full automation is often seen as too expensive and possibly fallible. The solution was the development of hybrid systems that made possible 50% automated and 50% manual operation.

The Chinese company Heli developed a hybrid forklift truck for the Chinese market, which makes use of an energy recuperation system when lowering the forks and therby saves up to 20% energy in comparison to conventional models. The regained energy is being conducted to the hybrid system combination of a petrol-operated engine, a power generator and the most modern battery technic, thus considerably prolonging the operating life time of the machine. Smooth-running hinges as well as robust components make the Anhui Heli forklift truck an economical and durable frugal product that can resist even the harsh conditions of the Chinese hinterland.

Frugal: Functional, Robust, User-friendly, Growing, Affordable, Local.

Fundamental requirements for frugal products

For the construction of frugal products one should keep in mind the acronym that displays six main requirements for the frugal products:

• Functional: The product has to come with high-graded functionality. It cannot include any unnecessary extras or superfluous knickknacks and has to satisfy all fundamental needs in its basic functions. Its functional scope can be considerably limited, but it has to be tailored exactly for the key demands of local customers.
• Robust: The product developed for the emerging markets has to be highly resistant, low-maintenance and robust against climate factors, dust and poor infrastructure.
• User-friendly: The product has to be comprehensible, uncomplicated and easy to operate in both its composition and functioning.
• Growing: It has to be developed not for niches but for a fast growing market that allows for high production capacities and price advantages through economies of scale.
• Affordable: The product has to offer a low price level and a high price-performance ratio to match the financial capability of its target group. The rule of thumb is: 50% efficiency for 15% of the price.
• Local: The product has to be developed in the target market and by local talents.

Focus on only few main features

Frugal engineering focuses on the lower and mid-market segments, constricts the corset of product functions and accepts the premium-quality features only if they are imperative. The first step is to determine all the product features that technically can be amended or omitted and thus come under discussion. In a second step these features have to be evaluated and categorized to identify the really essential functions of a frugal product. Three dimensions can be applied for their evaluation; these dimensions are of crucial significance from the customer’s perspective:

• The relevance of a feature for the customer. A cruise control in the cars for the Indian market has no significance for the customers, as the roads where this feature would be useful are simply not existent there. On the contrary, USB-ports for smartphones and internet are extremely important; they are expected by the Indian customers in every new car.
• The costs that are caused for a producer by the implementation of a feature. Is the installation of a USB-port in a car for the Indian market a relevant cost factor and thus a cost driver?
• The comprehension of a feature by the customers. Does the user fully understand the functions of a cruise control or a USB-port in a car? Would he ask for it when purchasing or miss the feature if it is lacking?

The art of frugal engineering lies in combining the local demands and user preferences with the newest technologies.

During the planning of a frugal product only those features should be included which are of essential importance for the user, not too expensive to implement and clearly and fully comprehended by a customer. The rule of thumb in many industries is to restrict the functionality of a frugal product down to three to five features.

Designing frugal products is often only possible if engineers have access to the latest technologies and processes of the company. The mobile ultrasonic device “Vscan” by General Electrics or the portable compact refrigerator “Chotukool” by Godrej were only possible, because their designers had access to the most modern high-performance chips. The “Vscan”, developed by General Electric for the Indian market, was so successful, that is has even found its way back to the developed markets – this process is called reverse innovation.

The art of frugal engineering lies in combining the local demands and user preferences with the newest technologies in such a way, that an attractive frugal product is created. This requires local development teams with a lot of freedom of action, working bottom-up in a developing country, yet receiving top-down support from the headquarters. These teams have to be closely connected with the parent company and have full access to its resources so that they don’t have to reinvent the wheel. They have to approach the work process in a strictly disciplined way and they have to be rewarded for their learning progress.

An alternative strategy is to take over a local producer the way Krones AG acquired the Italian company Kosme. The core business of Kosme is production of filling and packaging machines for lower and mid-tier companies in the beverage industry. Kosme focuses on the lower performance range while Krones operates in the higher segment.

Patent research & competitive intelligence

There are many methods to help the frugal inspiration off the ground. One of these methods is research of competitors’ frugal products. It makes sense to obtain the products offered by local producers or the Chinese export products and take a closer look at them. If there is no opportunity to purchase the local products, easily accessible documents such as technical brochures, data sheets or sales presentations can be very helpful.

The patent competitive intelligence for frugal products has also gained in importance. Patents of the competitors can often fuel the ideas for new solutions. In many branches the Chinese patents stand in the spotlight, but also increasingly the Japanese and Korean intellectual property rights. The art of analysis lies in the research through the Asian databases with keywords in the relevant local language.

Patent competitive intelligence can fuel ideas for new solutions.

Practical tips: Gear the company towards frugal engineering and reverse innovation

Tips for corporate organization:

• Concentrate personnel, power and money where there is growth: in China and Asia.
• Relocate a decision maker to Asia.
• Create leading positions with overview over the emerging markets and measure their success in a separate profit and loss statement.
• Plant and nurture frugal philosophy in the company.
• Attach higher priority to the emerging markets through operations abroad, exchange of experience on site, assignment of creative board members, and charismatic actions on the CEO-level.
• Raise R&D expenditures in the emerging markets and adjust R&D activities to the local market.
• Conduct cost-saving experiments in the emerging markets.
• Keep a close eye on the new Chinese champions.

Tips for project organization:

• Establish Local Growth Teams (LGT) with full capacity (product development, production, supply chains, marketing, sales, service) for every frugal project.
• Provide for unbiased evaluation of the local market demands through LGTs and their new, uninfluenced organizational structure.
• Empower local teams to access and utilize worldwide resources of the parent company.
• Steer frugal initiatives locally and eliminate errors and imponderables fast and inexpensively.

By Hans Joachim Fuchs, PhD