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Being Cheap Leads to Innovation, Savings and Success

HCLI Research

Published 3 December 2015

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Is frugality a virtue that business has forgotten? Gerry George, Dean at the Lee Kong Chian School of Business at Singapore Management University, argues that Asia must be cheap to tackle its core issues.

Innovation is a much overused word in the corporate lexicon, so much so that it has lost its inspirational overtones and meaning in both business and society.

To innovate is to bring about new products and services — even though these products and services may sometimes be new in context, rather than actuality. Over the past few decades, the centre of gravity for innovation for multinationals has shifted eastwards. What this fact belies, however, is that the products being innovated upon have not necessarily become East-centric.

The potential consumer and customer bases in Mumbai or Jakarta may have significant overlap with Paris and Chicago, but there are also substantive differences. Rather than replicating what works in the West, multinationals can better satisfy the particular needs of Asian communities and consumers by revisiting their business models. This is especially true given 30% of South Asia’s population remains at subsistence levels of poverty, while in the EU or North America poverty is usually understood as being relative to the general standard of living.

As we look at Asia, we need to innovate in a way that makes sense for Asia. We need to shift our focus to inclusive innovation — innovation that creates or enhances opportunities to improve the well-being of those in the bottom 30% of economic activity. We can do that only by being cheap. Frugality is a virtue that businesses have forgotten.

When innovating to move products and services closer to the community they wish to serve, organisations may want to consider the following four points:

1. Adopt a Grand Challenge

In 1900, mathematician David Hilbert stood in front of a conference and said there were 23 problems that made up the ‘grand challenges’ in mathematics. If these problems were solved, they would revolutionise the world. They were, and it did. We now have geometry, mathematical physics and formalism in mathematics. This grand challenge concept was adopted by institutions, like the Bill & Melinda Gates Foundation, to address seemingly intractable problems, such as malaria or HIV/AIDS, with innovative solutions.

Now, when I discuss innovation with innovators, I ask them to think of an 80% solution at 20% of the cost. If we can reduce costs by 80% and meet 80% of the customer’s needs, that’s huge progress. The concept of a grand challenge inspires our business with purpose. It also requires a radical rethink of business models, products and processes.

Ask yourself this question: what is your grand challenge?

2. Focus on the Core User Need

We are often so constrained by thinking around an existing product platform that we forget the core users and their needs. This leads us down a path where we focus on product attributes and forget core functions. We don’t ask: what is the core need and how can we serve it?

For example, Lifestraw is a water filter. Unlike other filters, which try to be robust, but also refined enough to deliver the filtration required of running tap water, the Lifestraw filter is housed in a straw that allows people to safely drink from stagnant pools of unclean water. It helps users to avoid water-borne diseases like typhoid, cholera and dysentery by removing particles as small as 15 microns. It is priced to be affordable and disposable and costs less than US$2 to produce. It doesn’t pretend to be everything for everybody.

By thinking of a core need, we are likely to come up with more innovative products at lower cost.

3. End Super Functionality

We tend to add functions to products as though all consumers ascribe equal value to these functions. This creates a problem, as we tend to combine functions into the same product, thus making it more expensive. This is not the same as serving the core user need. Instead, we take multiple user needs and combine them into one product, while assuming the customer will benefit from having them together. Some call this process bundling services, while others call it product value add. Whatever the name, this super functional approach tends to address multiple needs, but at an increased cost to the consumer.

For example, 80% of ultrasound scanner use tends to be for pregnant women. GE Healthcare, the medical services subsidiary of General Electric, realised it needed a low-cost, portable ultrasound scanner for rural, developing markets. As a result, it introduced the GE VScan, a relatively low-cost, small, easily portable ultrasound scanner that served a single purpose: scanning pregnancies for prenatal care. However, despite seeing the market potential, GE Healthcare was slow to introduce the GE VScan because the company was also offering more comprehensive, but expensive, ultrasound scanners.

However, other medical technology and service providers also recognised the opportunity to provide function-specific solutions. For example, Mobisante, a US company that develops mobile-based diagnostic devices for medical professionals, introduced a smartphone that is also a portable ultrasound.

4. Implement a Life-Cycle Cost Approach

Many businesses are now analysing the life-cycle cost for their products, and often implement new business models that see the product returned for refurbishment or repositioning. For example, Apple has designed its components in a modular form in order to extend product life and reduce costs for servicing. An even better approach would be to use someone else’s waste product as a key input, which would also reduce material costs.

Consider Freitag, the Swiss bag manufacturer that makes bags from used tarpaulin and sources its raw material from used shipping containers and plastic sheets. Container companies pay Freitag to dispose of the material, which reduces sourcing costs. Customers design their own bags online, meaning design costs are borne by consumers, who see added value in the personalisation and customisation.

Another approach is taken by Company Shop in the UK. Company Shop receives food and drink from retail stores that would otherwise have gone to waste. Then it resells the food and drink to local shoppers, via a mix of community shops and large outlets, at up to 70% discounted retail prices. Company Shop now moves over 30,000 tonnes of surplus food a year through its exceptional supply chain management, a business model that favours social dividends, and a 30% margin.

The business model is clever and the cost structure is lower because of that model. We need to think about how our businesses can be better at doing-it-themselves or creating value from what others would discard as useless.

Frugality is Strategic Innovation, Not Jugaad Improvisation

For some, being cheap and frugal means a quick-fix solution, improvisation or simply making stuff up on the fly with limited resources. Around Asia there are alternative names for this process, including the colloquial Hindi-Urdu word used in India, jugaad, which roughly translates as ‘improvised solution’. The problem is that many of these frugal solutions cannot be scaled at mass. Instead, what is needed is a concerted effort to drive down the costs of a clear and compelling product, which addresses a specific and important customer need.

Thinking through the insights mentioned in this article will help lead us down a path of thinking about design, redefining the customer need and changing our own internal processes to address these needs. It will raise important issues such as user interface experience, product positioning and customer reach. But above all, these four insights ask us to focus on delivering our promise of satisfying a core need at a fraction of the original cost.

In an age of excess, thinking about frugality may be going against the grain. However, if we truly want to address Asia’s needs, it is necessary to think about uniquely Asian approaches to innovation. Doing so will allow us to tackle several of the problems that appear seemingly intractable, and may just have the potential to transform our world.