Business Today

The importance of frugal engineering

Providing new goods and services to "bottom of the Pyramid" customers requires a radical rethinking of product development.

Vikas Sehgal, Kevin Dehoff and Ganesh Panneer/ Booz & Co.         Print Edition: October 17, 2010

A cellphone that makes phone calls - and does little else; a portable refrigerator the size of a small cooler; a car that sells for about $2,200 (Rs 100,000). These are some of the results of "frugal engineering," a powerful and ultimately essential approach to developing products and services in emerging markets. To get a handle on what frugal engineering is, it helps to understand what it is not. Frugal engineering is not simply low-cost engineering.

It is not a scheme to boost profi t margins by squeezing the marrow out of suppliers' bones. It is not simply the latest take on the decades-long focus on cost cutting.

Instead, frugal engineering is an overarching philosophy that enables a true "clean sheet" approach to product development. Cost discipline is an intrinsic part of the process, but rather than simply cutting existing costs, frugal engineering seeks to avoid needless costs in the fi rst place. It recognises that merely removing features from existing products to sell them cheaper in emerging markets is a losing game. That's because emerging market customers have unique needs that usually aren't addressed by mature-market products, and because the cost base of developed world products, even when stripped down, remains too high.

Vikas Sehgal
vikas.sehgal@booz.com is a partner in Booz & Company's global engineered products and services team based in Chicago. He specialises in emerging markets strategy, product strategy, engineering globalisation and policy formation.

Kevin Dehoff
kevin.dehoff@booz.com is a partner in Booz & Company in Florham Park. N. J., and is the global leader of the fi rm's innovation business. He has spent more than 15 years helping clients drive growth and improve performance through innovation.

Ganesh Panneer
ganesh.panneer.@booz.com is a Booz & Company senior associate based in Chicago. He specialises in emerging markets product strategy and innovation for clients in the automotive and industrial sectors.
Mature-market customers continue to accept price premiums for new features, leading companies to over-engineer their product lines - at least from the point of view of emerging-market customers. The virtual extinction of manual car windows in the United States is just one example. Frugal engineering, by contrast, addresses the billions of consumers at the bottom of the pyramid who are quickly moving out of poverty in China, India, Brazil, and other emerging nations. They are enjoying their fi rst taste of modern prosperity, and are shopping for the basics, not for fancy features. According to the late C.K. Prahalad, author of The Fortune at the Bottom of the Pyramid, these potential customers, "unserved or underserved by the large organised private sector, including multinational fi rms," total 4 to 5 billion of the 6.7 billion people on Earth. Although the purchasing power of any of these new consumers as an individual is only a fraction of a consumer's purchasing power in mature markets, in aggregate they represent a market nearly as large as that of the developed world.

However, many may not fully grasp the challenges that competition in emerging markets entails. The prospect of high-volume profi t streams may be enticing, but those profi ts must be earned in the face of lower prices, lower per-unit profi ts, and stringent cost targets.

In addition, too few companies realise how demanding emerging market customers can be. They don't spend easily, because they don't have much to spend. They require a different set of product features and functions than their developedworld counterparts, but still insist on high quality. Global companies, therefore, must change the way they think about product design and engineering. Simply selling the cheapest products on hand or re-using technologies from higher priced products will not cut costs enough and is unlikely to result in the kind of products these new customers will buy.

The central tenet behind every frugal engineering decision is maximising value to the customer while minimising nonessential costs. The term frugal engineering was coined in 2006 by Renault Chief Executive Carlos Ghosn to describe the competency of Indian engineers in developing products like Tata Motors' Nano, the pintsized, low-cost automobile. Companies such as Suzuki paved the way for the development of low-cost automobiles, but there may be no better example of frugal engineering than the Nano, which will allow millions of people with modest means to drive their own car. The Nano is not - like so many other low-cost vehicles - a strippeddown version of a traditional, more expensive car design.

Even global companies uninterested in the growth offered by the world's lowest-income consumers will have to pay attention to the lessons of frugal engineering: Products developed with this approach are beginning to compete with goods sold in developed countries, a trend that's likely to continue. Deere & Company, for example, designed and sold small, lower-powered tractors in the Indian market, but didn't begin selling such models in the US until an Indian company, Mahindra & Mahindra, beat them to it. Mahindra & Mahindra has proven an able competitor to Deere in larger tractors as well. General Electric (GE), on the other hand, has been more proactive; for example, it has sold a revolutionary new low-cost handheld ultrasound scanner in developed markets by incorporating frugal engineering lessons learned in its Indian medical research and development lab. A low-cost GE electrocardiogram machine, developed at the same Indian lab for the local markets, is now being sold in the United States and Europe as well.

Understanding the customer
The ultimate goal of frugal engineering couldn't be more basic: to provide the essential functions people need - a way to wash clothes, keep food cold, get to work -at a price they can afford. Critical attention to low cost is always accompanied by a commitment to maximising customer value. The Tata Nano development team's decision not to include a radio on the standard model wasn't a simple move to avoid cost. The team understood that the typical Nano customer places far more value on extra storage space. Using what normally would be the radio slot for storage not only avoided a major cost, but also added value for the customer.

The Nokia 1100 cellphone is another example. Experience has shown that when low-income people in just about any country begin to enjoy a bit of economic prosperity, one of their fi rst purchases is a cellphone. Many new cellphone customers in emerging markets are agricultural workers who spend their days outdoors. When Nokia developers watched fi eld-workers using mobile phones in India, they noticed that the intense humidity made the phones slick and hard to hold or dial. So the phone was built with a non-slip silicon coating on its keypad and sides. The handset was also designed to resist damage from dust that is common in arid climates and some factory environments. The phones are otherwise basic: they can send and receive phone calls and text messages. The screens are monochrome. Because the phones lack fancy software, the power draw is smaller, so they can operate longer between charges. The only real extra is a tiny, energyeffi cient fl ashlight that's proven popular in areas where power blackouts are common - in other words, in most rural villages and many emerging-market cities. At a price of $15 to $20 or Rs 690 to Rs 920, the Nokia 1100 is the best-selling cellphone ever.

Refrigerators provide another good example. Customers at the bottom of the pyramid can't afford traditional energy-sucking, compressor-driven refrigerators, not even the "small" fl oor models a Western business might have installed under the offi ce credenza to keep drinks cold.

Rather than cut costs out of a bigger refrigerator, India's Godrej Appliances started with a clean sheet, closely observing the occupants of village huts. Most Indians, they noted, go to the grocery every day. They don't buy in bulk. A refrigerator that could hold just a few items would be plenty. So Godrej produced the ChotuKool, which translates into "Little Cool" in English.

The top-opening fridge measures 1.5 feet tall by 2 feet wide (roughly 46 by 61 centimeters) and has a capacity of only six litres. It has no compressor, instead using a cooling chip and fan similar to those that keep desktop computers from overheating. It can run on a battery during the power outages that are inevitable in rural villages. And since rural Indians change residences frequently, the ChotuKool also comes with a handle, making it easier to transport. By keeping the number of parts down to around 20 instead of the 200-plus used in conventional refrigerators, Godrej keeps the price low, too, at about $55 or Rs 2,500.

The frugal engineering approach is not limited to consumer products. Zhongxing Medical, a small medical devices company in China, developed an X-ray machine with a price tag one-twentieth that of the typical X-ray machines made by foreign companies. To achieve this, Zhongxing, a subsidiary of Beijing Aerospace, made a trade-off: Rather than engineer the machine to accommodate the wide range of sophisticated scans common in Western hospitals, the company focused on a machine that could perform only the most routine chest scans, which represent the vast majority of scans. By understanding the fundamental needs of its target hospitals - hospitals that cannot afford a conventionally priced X-ray machine but still hope to serve a majority of patients - Zhongxing has captured about 50 per cent of the Chinese X-ray market.

Bottom-up inovation
Typically, when a well-established automaker designs and builds an inexpensive car, the company's thinking is biased by decades of practices and procedures, and by its relationships with employees, customers, and suppliers. The approach reuses existing designs and relies on existing components. In essence, these companies start with a more expensive car and focus on ways to make it cheaper. That may count as a form of cost cutting, but it is not frugal engineering.

In contrast, when Tata Motors engineers began creating the Nano, they were inspired more by the three-wheeled vehicles known in India as auto-rickshaws than by any existing car models in Tata Motors' lineup. Building up from the bare minimum enabled the engineers to achieve their cost (and price) targets without compromising the essential functions of the car. If instead the Tata Nano had been designed on the platform of the-then cheapest Tata car, it would have been twice the price.

Consider the conventional approach: Decades' worth of engineering value is built into even the least expensive of today's automobiles. Components, right down to the steel used, have steadily become more sophisticated, and often more expensive. The cost base, the design thinking, the very idea of what makes an automobile - all combine into a set of structural costs that simply go unquestioned. Reversing course is diffi cult, and few want to try. For example, if you asked Western designers to come up with a low-cost wiper system for cars, it's unlikely they would challenge the fundamental architecture of two-blade wipers. But it would be cheaper to place one blade in the centre that sweeps from end to end. India's auto-rickshaws have a single blade. Now, so does the Nano.

To achieve the drastically lower prices that emerging markets require, companies must be open to rethinking all aspects of the product. The Nano uses not only just one wiper, but also just one sideview mirror, and the seats are not adjustable. Making these sorts of radical decisions is a form of innovation. Such choices are answers to questions that too few global companies are asking.

Organisational Agility
Frugal engineering requires that companies be open to organisational innovation, as well. Three areas are particularly important.

1. Cross-functional teams. The Tata Nano was developed by a team of 500 mostly young engineers, signifi cantly smaller than the teams of 800-plus typically employed by Western automakers. In fact, a team for a new platform like the Nano at a US or European car company would likely total more than 1,000. To make sure that the project got the attention it required, Tata created a separate unit, isolated from the rest of the company. In addition to its compact size, the Nano engineering team had another advantage over traditional engineering groups: It worked cross-functionally with other teams to maximise the chances of fi nding ways to keep costs low. When a legacy automaker like General Motors launches a car, its marketing group might be fi ve times the size of the Nano's marketing team, which totalled three people.

The computer chip that replaced the compressor in Godrej's low-cost refrigerator represented such a radical move that it likely would not have made it to the fi nal product had the development group started with the standard operating procedures of the refrigerator industry. The procurement team instead raced to identify a low-cost component supplier while the manufacturing team quickly re-engineered the assembly line to handle chips instead of compressors.

Why would that kind of agility be diffi cult for a Western company? Typically, the more mature an organisation, the more rigid the functional silos. There tends to be little coordination between functions without an explicit effort from top management, which must either create a new structure for the team or use brute force to encourage communication. That is happening more often, but it's still more the exception than the rule.

In mature industries, companies are optimised for their main customers. For emerging markets, a different organisational approach is required, both within and outside the organisation.

2. A non-traditional supply chain. When reducing costs, most companies focus on getting better prices from their suppliers. The problem with this approach is that the reductions can go only so far; cut too deep, and the suppliers' margins are eliminated. Frugal engineering instead treats the suppliers as an extension of the enterprise. Such a lean manufacturing approach is not new, of course. But frugal engineering pushes the concept further, by demanding new levels of cost transparency, and by requiring that suppliers grant genuine authority to their representatives on the core product team.

At the same time, suppliers step up and become more involved in development projects. Traditionally, original equipment manufacturers (OEMs) dictate their requirements to suppliers; the suppliers ask few questions and compete on price. In frugal engineering, the game is different. OEMs and suppliers team up to set cost targets and a cost structure.

Rather than focus on individual components, they work together to optimise entire systems. For example, the Nano uses a simple motorcycle-style speedometer and forgoes a tachometer in the instrument cluster, but it includes a digital odometer. The costs saved on one were spent on the other, avoiding an analog odometer and a tachometer that few customers would use. By cooperating on developing the whole system, the supplier and Tata created a more appealing instrument cluster while still meeting the target cost.

3. Top-down support. Nothing is more important to frugal engineering than commitment from the top - and not just from suppliers. The best examples of frugal engineering were championed by company founders. Ratan Tata, chairman of Tata, said, "I will design a car for $2,200. Period." The same happened at Mahindra & Mahindra, when Anand Mahindra, the managing director, publicly backed the cost control plans of Pawan Goenka, the company's automotive chief. Mahindra's personal support proved essential to keeping costs low. A new automobile platform in the US might cost anywhere from $700 million to $1 billion. Mahindra's Scorpio SUV was developed at a cost of $150 million. The car may lack the sophistication and status of other makers' luxury models. But it's right for its market.

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