Lean and mean innovation gives high-cost R&D a run for its money

Doing more with less is not merely a recessionary response to weak consumer demand but an increasingly necessary business strategy that addresses global environmental concerns, radical market disruption and increasingly empowered and value-conscious consumers.

Businesses that don’t adapt to the new realities face multiple threats from both traditional and emerging players in their markets.

That's the message from Jaideep Prabhu, co-author with Navi Radjou, of Frugal Innovation – How to Do More with Less. According to Prabhu, traditional large industrial models, with expensive overheads, complex hierarchies and long lead times to market, are no longer appropriate.

A combination of closeness to the consumer, nimbleness and strong operating efficiencies are what is required to succeed.

Prabhu accepts that the long-lasting recession in the West and the eroding purchasing power of the middle classes have provided a fertile ground for those who can provide lower-cost but “good enough” products to consumers.

Dacia car

The book details, for example, how the stripped down Dacia car was a surprise hit with western consumers. Renault had originally targeted poorer eastern and central European motorists with the new low-cost model.

The car exceeded expectations. Challenged by management to do what seemed impossible, its French engineers had used a range of innovative design approaches to keep costs down while also leveraging low-cost manufacturing facilities in the east.

"Austerity is a backdrop and certainly there are a lot of budget-constrained consumers in the West as well as Governments that are cutting back. But there are a lot of positive drivers of frugal innovation too," he tells The Irish Times. "Frugal innovation is not about producing cheap, lower-quality products. It's about delivering value while having values."

Asked to single out a poster child for frugal innovation, Prabhu plumps for Unilever, which has balanced sustainability with growth.

As part of this process it has changed its shareholder base from short-term hedge funds to those happier with a longer-term growth plan and has ditched quarterly reporting, he says. Its sustainable living plan exhorts its 170,000 employees to double sales while halving its carbon footprint by 2020.

The sales growth will involve finding two billion more customers, many of whom are low-income consumers in emerging markets.

“This is not a case of greenwashing. Unilever’s frugal innovation strategy is not merely altruistic but also makes sound business sense,” he says.

“Serving all of these customers will involve access to increasingly scare natural resources such as water, agricultural land and energy. The company feels it has no choice but to find frugal solutions.”

He notes the comments of Unileverchief executive Paul Polman, who says: "Business cannot survive in a society that fails so it is stupid to think that a business can simply be standing on the sidelines of a system that gives it life in the first place."

Internal resistance

While frugal innovation makes clear sense from a market perspective, in many cases, the resistance to it is internal.

R&D departments like to push technological boundaries and introduce complexities. Classically, for example, it is estimated that most users only take advantage of about 10 per cent of the functionality of Microsoft Word Traditionally large western companies spend huge sums on such functionality.

The 1,000-largest corporate R&D spenders racked up $647 billion in 2014, for example. The return on this investment is increasingly poor.

Moreover, the real problem is that digital disrupters have huge access to resources too, at low – or in some cases no – cost.

As the book notes, the iPhone 4 reputably has more embedded technology than the Apollo spacecraft of the 1970s and Facebook has 1.3 billion monthly users. This ability to quickly and freely leverage social media and mobile technologies is spawning a virtual R&D platform that is permanently switched on. It represents an enormous threat to larger companies with huge operating costs.

Compounding that, there’s a growing trend towards “prosumers” solving their own problems, a phenomenon known as the “MacGyver” effect – named after the US television series secret agent character famed for solving problems with improvised household items.

Cannibalisation

Thousands of US and European consumers are now eschewing the high street and building their own products with the aid of free or cheaply sourced materials.

Fear of cannibalisation is another problem that needs to be addressed. The temptation is to stick with established, often higher-cost products, trusting that consumers will refund the higher costs of R&D and product delivery. Innovation can get stifled in such environments.

"Kodak, for example, had patents and technology in place for digital photography as far back as the 1970s but there was huge internal resistance to a strategy that it was felt would blow away decades of investment in its traditional products," notes Prabhu.

Six of the best: frugal innoavtion strategies

Engage and iterate
Reach out to consumers in their environments to see unmet needs rather than relying on secondhand market research Flex your assets Rework your manufacturing to operate multiple but smaller, nimbler plants with versatile production capabilities.

Create sustainable solutions
See sustainable practices as an advantage rather than a burden

Shape customer behaviour
Educate and reward customers for resource efficiency

Co-create value with 'prosumers'
Allow consumers an opportunity to help design and produce brands and to share their enthusiasm with others

Make innovative friends
Make use of an eclectic group of partners to challenge senior management thinking to ensure a continuous process of unlearning and relearning Frugal Innovation by Navi Radjou and Jaideep Prabhu is published by The Economist