NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Friday, January 23, 2015

Victor Hugo once said that “nothing can stop an idea whose time has come”. He failed to add that a lousy product launch can delay it. In the first decade of this century it seemed that frugal innovation’s time had indeed arrived: to meet surging demand from new consumers in emerging economies, innovative firms in those countries were stripping products of their fripperies and cutting their cost drastically. The new world had at last produced a big, new management idea.

Then along came the Tata Nano. The $2,000 car bore the imprimatur of one of the emerging world’s best companies. But some of the earliest Nanos burst into flames. Although Tata Motors fixed its engineering problems, aspirational Indians made it clear that they did not want to be seen driving “the world’s cheapest car”. Frugal innovation looked as if it might go from promising to passé without having made any impact.

In a new book, “Frugal Innovation: How to Do More with Less”, Navi Radjou, a consultant, and Jaideep Prabhu, an academic at Cambridge University’s Judge School of Business, reassure readers that this is not the case. (Its publisher, Profile, has a business relationship with The Economist, but neither of the authors has any editorial relationship.) Frugal innovation has not only continued to advance in the emerging world. It is also conquering a rich world in which a financial crisis and recession have been followed by a spell of stagnant household incomes and, in parts, persistently high unemployment.

Some of the West’s biggest multinationals are designing no-frills products in developing countries with the intention of selling them in developed ones, too. General Electric designs affordable medical devices in India and China. Renault-Nissan has a centre for frugal engineering in India. The carmaking group sells a variety of no-frills cars built in low-cost countries, including Dacia models made in Romania and Datsuns made in Indonesia.

Sales teams accustomed to the fat commissions from selling full-price products are hardly going to be keen on pushing frugal ones. So companies such as Renault and Procter & Gamble have created separate sales departments for their no-frills lines. In some cases they are using new distribution channels to reach impecunious consumers: American Express, for example, is marketing Bluebird, a low-cost current account, through Walmart stores.

Companies are realising that the “fortune at the bottom of the pyramid” is not just to be found in poor countries. Vianney Mulliez, the boss of Auchan, a big French retailer, says that “there are many ‘emerging markets’ within Western economies that we are eager to serve.” Walmart has opened hundreds of “money centres” in its stores, offering cheap financial products such as Bluebird to low-income customers. Costco, another big American retailer, now sells a range of cut-price medical devices, such as a $34.99 blood-pressure monitor.