The path to frugal innovation

How large firms can grow faster with fewer resources

Nov 03, 2016
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Consumers have never been more active; companies never more sensitive to public opinion. Stagnant incomes, austerity and environmental concerns have heightened awareness not just of a product’s value but also the company’s values. While striving to get by, consumers also want their favourite firms to be more socially, economically and environmentally responsible.

To realise these goals, highly engaged citizens have turned into so-called prosumers—part producer, part consumer. Whether as activists or entrepreneurs, they use smartphones, cloud computing, 3D printers, crowdfunding and social media to help create faster, better and cheaper products with fewer resources. They are the pioneers of frugal innovation, the grassroots innovators—exemplified by the maker movement and the sharing economy—who are challenging the way business is done. And their impact on a widening range of sectors from finance to healthcare has become increasingly apparent.

Unsurprisingly, large incumbent firms—typically wedded to slow, insular and expensive approaches to innovation—feel threatened. But frugal innovation provides them too with a way forward. And there have been notable successes. In the automotive sector, for example, Renault worked with local engineers at its Dacia car plant in Romania, producing a no-frills Logan model, which went on sale in 2004 for a mere €5000. Initially intended for poorer East Europeans, sales soared in the West too following the 2008 financial crisis. Carlos Ghosn, Renault CEO and a frugal engineering champion, then introduced an entire new line of frugal vehicles that now accounts for over 40% of Renault’s global sales.

Another frugal pioneer, Unilever CEO Paul Polman, launched his Unilever Sustainable Living Plan, designed to double sales while halving the company’s environmental footprint by 2020. The strategy has forced the company to innovate not just in production but throughout the supply chain, finding new ways to source ingredients, design factories and package products.

Steps to frugality

Transforming how a major—or even a small—enterprise does business is inevitably complex and often uncomfortable for those forced to adapt. But the following six ideas might help firms achieve greater frugality.

  • Actively seek customer feedback. Innovation starts with the customer. In one case, Scott Cook, founder and CEO of software company Intuit, went home with new customers to see how they installed and used his product, and then adapted his product to suit them.
  • Turn consumers into prosumers. After engaging customers, formalise ways to co-create products and services. GE’s online platform FirstBuild, for example, pays prosumers for good ideas in home appliance design.
  • Be nimbler. Pharma giant Novartis can produce drugs more quickly in small, mobile factories with lower capital and operating expenditure and less environmental impact than in traditional batch-mode factories. GSK CEO Andrew Witty once said of his bureaucratic R&D division, that he wanted a “nimble fleet of destroyers, rather than two or three vulnerable battleships”.
  • Emphasise sustainability. Consider how far the company can move from a traditional ‘take, make, sell and dispose’ approach to a ‘reduce, reuse and recycle’ model. And be ready to change the core business proposition if necessary. Tarkett, a French flooring company, for example, aims to reuse and recycle all its raw materials inputs; its business model has shifted from selling products to providing flooring services.
  • Change customer behaviour. Companies can make their customers more environmentally-minded. Utility firms, for example, are using smart metering, big data and apps to get customers to monitor their own energy or water usage, and then consume it more efficiently. In a similar way, healthcare providers are helping consumers to lead healthier lives, while banks are getting clients to save more.
  • Partner with start-ups. If you can’t beat them join them. Barclays bank operates ‘accelerators’ in London, Manchester and New York, mentoring fin-tech start-ups for three months, after which the bank either adopts, invest in, or passes on the new idea.

Change makers

The biggest frugal challenge, however, may lie in trying to change attitudes within the organisation. More cautious firms might attempt a one-off pilot project as a first move. This will allow them to test the process, win over sceptics, and build internal support for future projects, as Renault did with its Logan and subsequent Dacia line.

When frugality is accepted in principle, companies can create a platform for developing a series of low-cost, sustainable frugal products and processes throughout the value chain, as Unilever is doing.

Finally, as the company establishes a track record of successful frugal innovations, leaders can try to embed a “frugal mentality” into the company’s culture, with staff continuously thinking about how to do their jobs in faster, better and cheaper ways.

Jaideep Prabhu

Professor of Marketing, Judge Business School, University of Cambridge

Jaideep Prabhu is Professor of Marketing at Cambridge Judge Business School, and co-author of Frugal Innovation.