A cell phone that makes phone calls — and does little else; a portable refrigerator the size of a small cooler; a car that sells for about US$2,200 (100,000 rupees). These are some of the results of “frugal engineering,” a powerful and ultimately essential approach to developing products and services in emerging markets.
To get a handle on what frugal engineering is, it helps to understand what it is not. Frugal engineering is not simply low-cost engineering. It is not a scheme to boost profit margins by squeezing the marrow out of suppliers’ bones. It is not simply the latest take on the decades-long focus on cost cutting.
Instead, frugal engineering is an overarching philosophy that enables a true “clean sheet” approach to product development. Cost discipline is an intrinsic part of the process, but rather than simply cutting existing costs, frugal engineering seeks to avoid needless costs in the first place. It recognizes that merely removing features from existing products to sell them cheaper in emerging markets is a losing game. That’s because emerging-market customers have unique needs that usually aren’t addressed by mature-market products, and because the cost base of developed world products, even when stripped down, remains too high to allow competitive prices and reasonable profits in the developing world.
Frugal engineering recalls an approach common in the early days of U.S. assembly-line manufacturing: Henry Ford’s Model T is a prime example. But as industries grew and matured over the decades, and as consumers prospered to levels few would have predicted a century ago, product development processes became hardwired and standard operating procedures worked against frugality.
In addition, the profit structure in mature markets reduced incentives for major change. Constant expansion of features available to consumers in the developed world, frivolous or not, has provided many businesses with their richest profit margins. Mature-market customers continue to accept price premiums for new features, leading companies to over-engineer their product lines — at least from the point of view of emerging-market customers. The virtual extinction of manual car windows in the United States is just one example.
Frugal engineering, by contrast, addresses the billions of consumers at the bottom of the pyramid who are quickly moving out of poverty in China, India, Brazil, and other emerging nations. They are enjoying their first tastes of modern prosperity, and are shopping for the basics, not for fancy features. According to C.K. Prahalad, author of The Fortune at the Bottom of the Pyramid (Wharton School Publishing, 2005), these potential customers, “unserved or underserved by the large organized private sector, including multinational firms,” total 4 to 5 billion of the 6.7 billion people on Earth. (See also Prahalad’s “The Innovation Sandbox,” s+b, Autumn 2006.) Although the purchasing power of any of these new consumers as an individual is only a fraction of a consumer’s purchasing power in mature markets, in aggregate they represent a market nearly as large as that of the developed world.
Attracted by the size and rapid growth of emerging markets — concurrent with a growth slowdown in the developed world — companies in a range of industries are establishing distribution and manufacturing operations as well as research and development centers in these regions. However, some of these companies may not fully grasp the challenges that competition in emerging markets entails. The prospect of high-volume profit streams may be enticing, but those profits must be earned in the face of lower prices, lower per-unit profits, and stringent cost targets.
In addition, too few companies realize how demanding emerging-market customers can be. They don’t spend easily, because they don’t have much to spend. They require a different set of product features and functions than their developed-world counterparts, but still insist on high quality. Global companies, therefore, must change the way they think about product design and engineering. Simply selling the cheapest products on hand or reusing technologies from higher-priced products will not cut costs enough and is unlikely to result in the kind of products these new customers will buy.