Creating Greater Value in an Age of Scarcity
The lessons of frugal innovation allow companies in both emerging and developed economies to do more with fewer resources.
Note: This article was originally published by Booz & Company.
Frugal innovation is the ability to do more with less—that is, to create significantly more business and social value with increasingly limited financial, natural, and time-based resources. Although the “frugal” concept has many proponents today, it was Carlos Ghosn, chairman and CEO of the Renault-Nissan Alliance, who coined the term frugal engineering in 2006 to describe Indian engineers’ ingenious ability to innovate cost-effectively and quickly under severe resource constraints.
Since the early 2000s, we have studied how frugal innovation is being used by thousands of inventive entrepreneurs and firms in emerging markets like Africa, Brazil, China, and India. In recent years, we have also observed that leading Western firms such as Pearson, Siemens, and Unilever are adopting frugal innovation to fuel game-changing business strategies. Indeed, as Western economies irrevocably enter an age of scarcer resources, U.S. and European firms are facing growing pressure from cost-conscious and eco-aware customers, employees, and governments to create products and services that are simultaneously affordable, sustainable, and of high quality. To compete and win in this tough new environment, Western firms need to cultivate a flexible new mind-set that perceives resource constraints not as a debilitating challenge, but as a unique opportunity for creating greater value for all stakeholders using fewer resources. Frugal innovation encapsulates and embodies that mind-set.
This is the first blog post in a series that will take readers deep inside the Western businesses and industries that are adopting frugal innovation in response to three macroeconomic factors:
1. A steady decline in the purchasing power of middle-class consumers in Europe and the U.S., who are seeking products and services that give them the most bang for their buck.
2. The faster-than-expected depletion of natural resources such as oil and water, which are becoming ever more scarce and costly.
3. Heightened competition from ambitious low-cost rivals in emerging markets and from nimble digital startups that are forcing large Western firms to innovate faster, better, and cheaper.
The vanguard Western firms we will discuss are embracing frugal innovation as a way to disrupt and reinvent their own business models before agile rivals do. They are adopting a flexible mind-set to radically transform the way they operate, build, and deliver products, interact with customers, and create value for themselves and society. In the process, these pioneers are rewriting the rules of the game across industries and services—from healthcare to manufacturing to financial services to education.
In upcoming posts, we will take you inside the frugal innovation labs of pioneers like Renault-Nissan, Siemens, Unilever, and Pearson to show how their leaders are driving systemic changes across their entire organizations—even their extended supply chains and ecosystems. We will extract key insights and lessons from these companies and position them as best practices, tools, and techniques for readers seeking to implement frugal innovation within their own organizations. In particular, we will identify the specific leadership traits that C-level executives need to demonstrate in order to effectively carry out a frugal innovation agenda.
Navi Radjou and Jaideep Prabhu are the co-authors, with Simone Ahuja, of the bestseller Jugaad Innovation: Think Frugal, Be Flexible, Generate Breakthrough Growth (Jossey-Bass, 2012), which the Economist called “the most comprehensive book” on the subject of frugal innovation.