nielsen.com/content/dam/nielsenglobal/apac/docs/ ... a year using an approach they call âfollow me home,â in ... and
Volume 7 │ Issue 4
Providing insight and analysis for business professionals
Frugal innovation Driving new business approaches and unlocking lucrative markets
Research and innovation Finding and financing tomorrow’s Einsteins and Jobs
When you nurture innovation, what do you think will flourish?
This article is an extract from Performance, Volume 7, Issue 4, November 2015. The full journal is available at ey.com/performance
Frugal innovation: driving new business approaches and unlocking lucrative markets “Frugal innovation” derives from “frugal engineering,” a term coined by Carlos Ghosn, CEO, RenaultNissan.1 Its increasing influence and adoption is visible particularly in the manufacturing sector. However, by leading frugal innovation, organizations across all sectors, including consumer products and financial services, can transform not only products, but entire business models and markets. In a slowgrowth global economy, frugal innovation, and the organizational revolution it requires, is predicted to be essential for continued success.
1.
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http://blog.alliance-renault-nissan.com/blog/less-more-ceocarlos-ghosn-frugal-engineering, accessed September 2015.
Volume 7 │ Issue 4
Volume 7 │ Issue 4
Providing insight and analysis for business professionals
Frugal innovation Driving new business approaches and unlocking lucrative markets
Research and innovation Finding and financing tomorrow’s Einsteins and Jobs
When you nurture innovation, what do you think will flourish?
This article is an extract from Performance, Volume 7, Issue 4, November 2015. The full journal is available at ey.com/performance
Author Navi Radjou Innovation and Leadership Strategist, Silicon Valley, US and Fellow of Judge Business School, University of Cambridge, UK
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Volume 7 │ Issue 4
Providing insight and analysis for business professionals
Frugal innovation Driving new business approaches and unlocking lucrative markets
Research and innovation Finding and financing tomorrow’s Einsteins and Jobs
When you nurture innovation, what do you think will flourish?
This article is an extract from Performance, Volume 7, Issue 4, November 2015. The full journal is available at ey.com/performance
Frugal innovation: driving new business approaches and unlocking lucrative markets
F
rugal innovation is, in essence, the art of doing more with less; to quote Benjamin Franklin, one of the Founding Fathers of the United States and renowned polymath, “Waste neither time nor money, but make the best use of both.” However, the drivers and scope are vastly more complex and potent than this narrow definition suggests.
particularly water, need to be conserved and reused. The majority of people are now looking for meaningful, demonstrable sustainability commitments, both from the brands they buy and the organizations they want to work for.2 Leaders must embrace frugal innovation for these reasons and more.
In a world that is increasingly volatile, uncertain, complex and ambiguous, business as usual may mean no business tomorrow. New players are reinventing entire markets overnight. Consumers want more conversation with brands and have higher expectations of them delivering products they want. Natural resources,
A memorable, headline objective is essential for driving successful frugal innovation throughout an organization. Going even further, an audacious statement of ambition grabs the attention of people within and beyond the organization. For example, Unilever’s Sustainable Living Plan3 aims to reinvent the company’s entire product range and processes on the basis of sustainability, double sales to €80b (US$96b) and halve its environmental footprint by 2020. CEO Paul Polman argued that Unilever had no choice but to find frugal solutions in order to deliver more value, using fewer resources, to the four billion consumers it aims to serve by
Navi Radjou is the coauthor, with Jaideep Prabhu, of Frugal Innovation: How To Do More With Less, published by The Economist.
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Audacious objectives
Volume 7 │ Issue 4
2020. This clear statement of necessity has galvanized its people into finding solutions. In 2007, UK-based retailer M&S launched “Plan A,”4 a set of 100 ambitious goals for waste reduction, energy efficiency, sustainable sourcing and more, across the company’s whole ecosystem — factories, stores, products and suppliers. The plan helped motivate M&S’s 86,000 employees worldwide to find innovative solutions to meet these ambitious goals. Today, M&S boasts an 80% employee engagement rate, one of the highest among retailers globally.5
2.
Doing Well By Doing Good, Nielsen, 2014, http://www. nielsen.com/content/dam/nielsenglobal/apac/docs/ reports/2014/Nielsen-Global-Corporate-SocialResponsibility-Report-June-2014.pdf, accessed September 2015.
3.
Unilever Sustainable Living Plan, Summary of Progress 2014, Unilever, 2014, http://www.unilever.fi/Images/ uslp-Unilever-Sustainable-Living-Plan-Scaling-for-ImpactSummary-of-progress-2014_tcm106-427774.pdf, accessed October 2015.
4.
http://corporate.marksandspencer.com/plan-a, accessed September 2015.
5.
Your M&S, Plan A Report 2014, M&S, 2014, http:// corporate.marksandspencer.com/plan-a/ b6867fa1340d482da1ebde62c099dd69, accessed September 2015.
Volume 7 │ Issue 4
Providing insight and analysis for business professionals
Frugal innovation Driving new business approaches and unlocking lucrative markets
Research and innovation Finding and financing tomorrow’s Einsteins and Jobs
When you nurture innovation, what do you think will flourish?
This article is an extract from Performance, Volume 7, Issue 4, November 2015. The full journal is available at ey.com/performance
Investors also like the plan because it enables cost-efficiencies. For instance, the plan has made M&S’s facilities 34% more energy efficient and 27% more water efficient since 2006. To make frugal innovation really work, corporate leaders must put their reputations on the line by repeatedly making public statements of commitment to their goals. In 2008 to 2009, M&S’s profits fell by 40% during the depths of the recession – rather than backing off from Plan A, then CEO Sir Stuart Rose held firm in the organization’s commitment. Indeed, when Marc Bolland replaced Rose as M&S’s CEO in 2010, he pushed Plan A even further, raising targets across M&S’s global operations, clarifying how the 100 goals will benefit customers, employees and partners, and making the goals an integral part of its communications and marketing activities.
Align R&D with customerfocused strategy One of the foundations of frugal innovation is focusing on customer needs.
In September 2013, French multinational retailer Auchan set up a website, powered by crowdsourcing platform Quirky, inviting customers to submit innovative product ideas.6 Within two months, customers had submitted 800 ideas, from which four were short-listed and developed into finished products, based on votes by Auchan shoppers and Quirky’s community of designers and inventors. Since then, Auchan has introduced a greater range of consumer products designed by, or with, customers. Consumers are not always aware of what they want, however, and in this instance, “ethnographic” consumer study is invaluable. Home accountancy software firm Intuit says employees from across the organization spend a total of 10,000 hours a year using an approach they call “follow me home,” in which they literally follow customers home and observe how they use the software.7 This enables Intuit to identify features in the software that are causing trouble for customers, and inversely, identify features that customers
Frugal innovation is, in essence, the art of doing more with less.
are looking for that are not currently built into the software. Intuit is frugal in its focus: all efforts are channeled into a defined strategy of making personal finance less tedious for customers.
Hypercollaborate It is unrealistic for organizations to be able to reinvent themselves around frugal innovation overnight, and this
6.
http://www.groupe-auchan.com/en/who-is-auchan/news/ news-detail/?no_cache=1&tx_ttnews%5Btt_news%5D=54, accessed September 2015.
7.
N. Radjou and J. Prabhu, Frugal Innovation: How to Do More with Less, p70, Profile Books, 2015. Also http://www.intuit. in/html/careers_culture.htm, accessed September 2015.
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Volume 7 │ Issue 4
Providing insight and analysis for business professionals
Frugal innovation Driving new business approaches and unlocking lucrative markets
Research and innovation Finding and financing tomorrow’s Einsteins and Jobs
When you nurture innovation, what do you think will flourish?
This article is an extract from Performance, Volume 7, Issue 4, November 2015. The full journal is available at ey.com/performance
Frugal innovation: driving new business approaches and unlocking lucrative markets
To make frugal innovation really work, corporate leaders must put their reputations on the line by repeatedly making public statements of commitment to their goals.
is where wider collaboration — or “hypercollaboration” — is critical. Organizations can become more agile and learn to innovate faster and more cheaply, just as start-ups do, by engaging nimble entrepreneurs and innovative partners. Flooring manufacturer Tarkett has a target of zero industrial waste going to landfill by 2020, which has necessitated looking further afield for the sustainable resources, and ideas, it needs.8 Tarkett invests heavily in training its 12,000 employees, and collaborates extensively with suppliers, distributors and customers, as well as universities, trade associations, scientific labs and environmental protection agencies in the US and Europe. To make sure that frugal partnerships work effectively, organizations should create an innovation-brokering function. The broker’s role is to identify and nurture these partnerships, pulling innovative, relevant ideas from the external ecosystem and bringing them to the attention of committed board-level stakeholders when they support the company’s strategy. In this way, hotel group Accor teams up with innovative start-ups and small to medium-sized businesses (SMBs) that can help deliver a better customer experience or better resource efficiency in its hotels. It is led by a newly created organizational role, Senior Vice President of Entrepreneurship Advocacy, who chooses SMBs that have a promising product, service or technology.9 The SMB can effectively trial its product in Accor hotels, and potentially get an opportunity to sell its solutions in all Accor’s global markets. For Accor, this approach has the combined
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benefit of driving frugal innovation without any significant investment.
Leverage existing assets Just as Accor allows SMBs to use its hotels as testing grounds, so other organizations can leverage what they already have in order to drive frugal innovation. In the automotive sector, Renault-Nissan is using its super-efficient Indian operations to learn about frugal engineering and then disseminate ideas across its operations, including in France and Japan.10 In health care, companies such as GE are creating a whole new generation of affordable medical devices in their Indian and Chinese R&D centers, not just for sale locally, but in western markets too, where there is growing pressure to reduce the costs of health care delivery.11 Human resources offers perhaps the greatest potential; for example, restructuring teams around a specific part of the frugal innovation agenda. Large organizations, particularly, should keep teams small and tight-knit, which imbues people with a greater sense of purpose, and in turn increases efficiency and creativity. A good example of this kind of innovative environment is the partnership between Ford and TechShop. A warehouse in Detroit provides the space to allow employees to spend their spare time experimenting with 3D printers and other DIY technologies.12 Ford engineers feel empowered to develop more experimental ideas than in other, more straitlaced R&D labs and, as a result, Ford has increased its patentable ideas by over 100%, without investing more in R&D.13
Volume 7 │ Issue 4
Potential obstacles There may be a number of stakeholders in a company who push back against venturing into frugal innovation:
1. R&D Some R&D engineers may not be excited by the idea of frugal innovation, believing that “frugal” equals cheap and low quality. However, as Renault-Nissan found, the constraints of creating something great with a fixed budget or with innovative materials can inspire a new approach to creative design. In 2005, Renault launched Logan, a US$6,000 car destined for emerging markets. To Renault’s surprise, the Logan also found a big market in affluent Western Europe, where budget-conscious consumers were increasingly looking for more affordable, functional products.14 This discovery
8.
http://www.tarkett.com/en/content/reuse, accessed September 2015.
9.
Open innovation : Quels modèles économiques et quelle valeur pour l’entreprise? Electronic Business Group, 2014, http://www.ebg.net/sessions/pdf//1944.pdf, accessed September 2015.
10. J. Crabtree, “How Renault embraced Indian frugality with the $4,700 Kwid,” The Financial Times, 2015, http://www. ft.com/intl/cms/s/0/27240398-ffd8-11e4-bc30-00144feabdc0. html#axzz3lFipZDoK, accessed September 2015. 11. N. Radjou, “Frugal innovation a pioneering strategy from the South,” Innovation for Sustainable Development, The Energy and Resources Institute, 2014. 12. “TechShop and Ford Celebrate One Year of Innovation in Metro Detroit,” TechShop, 2013, http://www.techshop.ws/ press_releases.html?&action=detail&press_release_id=42, accessed September 2015. 13. M. Hatch, “Will Makerspaces Jumpstart a New Industrial Revolution?” Techonomy, 2015, http://techonomy. com/2015/08/will-makerspaces-jumpstart-a-new-industrialrevolution/, accessed September 2015. 14. https://group.renault.com/en/news/blog-renault/ the-dacia-saga-3-2004-2012-a-success-story/, accessed September 2015.
Volume 7 │ Issue 4
Providing insight and analysis for business professionals
Frugal innovation Driving new business approaches and unlocking lucrative markets
Research and innovation Finding and financing tomorrow’s Einsteins and Jobs
When you nurture innovation, what do you think will flourish?
This article is an extract from Performance, Volume 7, Issue 4, November 2015. The full journal is available at ey.com/performance
Organizations can become more agile and learn to innovate faster and more cheaply, just as start-ups do, by engaging nimble entrepreneurs and innovative partners.
led Renault to create the low-cost Dacia brand for European consumers, which has grown rapidly beyond the company’s expectations — its “nofrills” vehicles now account for over 40% of global sales.15 Renault recently launched another low-cost model, the Kwid, intended as a first-time buy for drivers in India. The Kwid is a modern, simple, reliable vehicle that retails for under US$5,000. Karim Mikkiche, former Managing Director of Renault-Nissan’s Indian R&D center, said of the challenge, “When you put a limitation on resources, you remove the limitation on creativity.”16
2. Sales and marketing Sales teams may, understandably, struggle to be motivated to sell an inexpensive product, especially when they are used to marketing premium products and their bonuses are linked to the value of sales they make. In this instance, a restructured sales approach may be necessary: for example, forming separate sales teams dedicated to frugal products and the other to high-end products. Similarly, marketing departments may be concerned that promoting a frugal product could devalue the brand. However, in the case of Logan and Dacia, the products are never marketed as “cheap” — they, too, are marketed in an aspirational way; for example, the Dacia vehicles are marketed as “very attractive cars” that are “outrageously affordable.” Stephen Norman, former Senior Vice President Global Marketing,
Groupe Renault, commented about Dacia: “We understand very clearly that ‘low cost is beautiful’.”17
3. Board members There can also be resistance from board members who are worried about the extra investment required to develop and launch frugal new products, and would instead prefer to stick to the current business model that is presently working and delivering profits. It is important, then, to keep on looking to the future and trying to anticipate where their market is vulnerable to disruption, either by new digital players rewriting the rules, or by an existing industry leader finding success in a previously untapped market. Frugal innovation can be seen to be driving many changes in markets and within organizations, and will continue to do so as its influence spreads from economies, such as in India and China, across Western Europe and Japan, to the US, where frugal innovation is still in its infancy.
In conclusion, it is worth noting the single most important factor for implementing and realizing the benefits of frugal innovation: an inspiring, committed leader to galvanize the mindset of an entire organization, just as Paul Polman, CEO, Unilever is doing, and, of course, as Carlos Ghosn, CEO, Renault-Nissan identified when crystalizing the very concept of “frugal engineering” way back in 2006, which evolved to be known today as frugal innovation.
15. “Renault’s Global Sales Up 4.7 Percent in First Six Months Fueled by Dacia Demand,” Carscoop, 2014, http://www. carscoops.com/2014/07/renault-global-sales-up-47percent-in.html, accessed September 2015. 16. N. Radjou and J. Prabhu, Frugal Innovation: How to Do More with Less, p94 Profile Books, 2015. 17. http://www.daciagroup.com/en/news/interview/ stephen-norman-marketing-director-groupe-renault-monde, accessed September 2015.
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