The CEO’s Frugal Innovation Agenda

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 Austeritydawns, 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.

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 inemerging 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 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 morevalue 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 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 todouble 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.