The CEO’s Frugal Innovation Agenda

INTERNATIONAL BUSINESS

by Navi Radjou, Jaideep Prabhu, and Simone Ahuja

October 05, 2012

Leer en español

CEOs of large companies face a conundrum: they are confronted with a growing number
of frugal consumers clamoring for affordable solutions, yet their existing corporate
culture and incentive systems are designed to support a “bigger is better” business model
— not to deliver more with less. As the Age of Austerity dawns, however, corporate
leaders will have no choice: they will have to bite the bullet and infuse their organizations
with a frugal mindset. In sum, CEOs need a frugal innovation agenda.

Frugal innovation is the ability to innovate cost-effectively and sustainably under severe
resource constraints. In our last blog post, we showed how Carlos Ghosn, CEO of
Renault-Nissan and inventor of the concept of “frugal engineering”, is reinventing his
entire company so it can innovate faster, better, and cheaper in a complex and resource-
scarce global environment.

Carlos Ghosn isn’t the only CEO spearheading the frugal innovation revolution. In our
book Jugaad Innovation, we profile leaders at companies such as GE, Procter & Gamble,
PepsiCo, and Siemens who are also working on frugal ways to innovate and drive
sustainable growth. These visionary CEOs aren’t caving in to Wall Street’s demands for
short-term gains. Rather, they are boldly restructuring every function in their
organizations to boost their firms’ long-term ability to deliver affordable and sustainable
solutions to increasingly cost-conscious and eco-aware consumers.
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Based on our research, we suggest that CEOs eager to do more with less drive systemic
changes across their entire organization — focusing their change management efforts on
three functions: R&D, marketing, and sales. Specifically, CEOs must:

1.) Challenge R&D teams to create “good enough” solutions. CEOs should encourage
R&D teams to move away from pursuing over-engineered “perfect products” — which
today’s thrifty customers find too expensive, hard to use, and eco-unfriendly — and focus
instead on developing “good enough” solutions. By “good enough,” we don’t mean
stripped-down versions of existing high-end products. Such quick-fix solutions could
leave customers feeling less than satisfied, and designers would inevitably have to return
to the drawing board down the road to undo the problems caused by such half-baked
solutions. Rather, engineers of large firms need to create affordable solutions from the
ground up — by heeding the advice of John Maeda, president of the Rhode Island School
of Design, who notes: “R&D engineers must make frugal simplicity the core tenet of their
design philosophy. They must design for the ‘real world’ by practicing…’radical
incrementalism’ — which is doing more with less.”

Emerging markets like Africa, India and China offer Western engineers a great training
ground to practice frugal simplicity. For example, Siemens, the German industrial giant,
is using its R&D teams in India and China to develop minimalist solutions that deliver
higher value to customers. In one instance, Siemens’ engineers in India — working
closely with their German colleagues — developed a Fetal Heart Monitor that uses
inexpensive microphone technology rather than the costlier ultrasound technology. This
“good enough” medical device promises to make quality healthcare affordable and
accessible to more people — not only in emerging markets but also in developed
economies.

2.) Create separate brands to sell the company’s less expensive offerings. Given that
they might already have well-established brands for higher-priced segments, to avoid
brand dilution, marketing heads should develop distinctive new brands for their
company’s affordable segments. Doing so will reduce the problems of brand dilution
while ensuring greater market coverage. For instance, many of Renault’s affordable
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entry-level vehicles are sold under the brand Dacia, which includes the Logan, the highly
successful sedan that sells for about $10,000, as well as an affordable van, pickup, and
even SUV. Rather than marketing its Dacia products as “low-cost” vehicles, Renault is
cleverly positioning them as vehicles that are stylish, comfortable, dependable, and
affordable — i.e., they deliver more value at less cost.

Similarly, Siemens is grouping its affordable offerings — such as the microphone-tech-

enabled Fetal Heart Monitor — under the label SMART, which stands for Simple,
Maintenance-Friendly, Affordable, Reliable, and Timely-to-Market. In other words,
Siemens is positioning its SMART products not only as being less expensive (they are 40-
60% cheaper than high-end solutions) but also faster to deploy and easier to use and
maintain for customers. Siemens’s SMART product portfolio already boasts more than
160 affordable solutions ranging from X-ray machines to steam turbines to railway
signaling systems.

3.) Create incentive systems for salespeople to sell frugal products. Western
companies must recognize that frugal innovation isn’t just about designing affordable
products. It is also about successfully selling these frugal products in the marketplace.
But successful selling won’t happen as long as salespeople have the incentive to sell only
big-ticket items. Instead, companies will have to align their salesforce’s incentive systems
with the corporate strategy of doing more with less. Companies can address this issue by
reorganizing their salesforce along brand lines, with different salespeople responsible for
the low-end and high-end segments. This will also help reduce any internal resistance
based on the fear of cannibalization. Even better, as Renault-Nissan has successfully
proven, healthy internal competition between divisions could drive sales and marketing
personnel responsible for different brands to be more innovative in how they reach and
keep their respective customers.

Consider that for decades, Procter & Gamble maintained a homogeneous sales structure,
selling premium products to mainstream middle-class consumers. But as the purchasing
power of middle-class Americans declines, P&G has restructured its sales force into two
distinct groups that separately target high-income and low-income segments. This
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restructuring of the sales function bodes well for P&G, which is currently engaged in a
“frugal innovation arms race” with its archrival Unilever. Indeed, Paul Polman, CEO of
Unilever, has set a bold goal to double Unilever’s revenue by 2020 while simultaneously
curbing its environmental impact by 50%.

CEOs who are bold enough to implement this frugal innovation agenda — as leaders at
P&G, Renault-Nissan, Siemens, and Unilever are doing — will be able to deliver
significantly more value to customers while saving on costs and reducing environmental
impact. According to the World Economic Forum, corporations can save a whopping $2
trillion by 2030 by implementing frugal innovation strategies that do a better job of
utilizing resources.

In our upcoming blogs, we will share more case studies and proven techniques that can
help you effectively design, make, and market frugal products and services.

Meanwhile, we are curious to hear from you: Is your organization, led by your CEO,
driving a frugal innovation agenda? Are you involved with developing and
commercializing affordable, good-enough solutions for customers feeling the squeeze of
the recession? We want to hear about the challenges you have faced and the lessons you
have learned so far in your frugal innovation journey.

Navi Radjou (left) is a Silicon Valley-based strategy consultant and a Fellow at Judge Business School, University
of Cambridge where Dr. Jaideep Prabhu (middle) is the Jawaharlal Nehru Professor of Indian Business and
Enterprise. Dr. Simone Ahuja (right) is the founder of Blood Orange. Radjou, Prabhu, and Ahuja are co-authors of
Jugaad Innovation: Think Frugal, Be Flexible, Generate Breakthrough Growth.

This article is about INTERNATIONAL BUSINESS

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