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Frugal innovation - a path for Romania?

Frugal products are on the rise across emerging markets of the world. Romanian companies could adjust their mindsets and processes in order to offer successful frugal products both for other emerging markets but also for Western consumers (partly based on a recent study on frugal products conducted by Roland Berger Strategy Consultants)

For several years now, emerging markets (China, India, Central and Eastern Europe) have no longer been merely an extended workbench for Western companies wanting to benefit from lower factor costs for simple tasks in these countries. Some R&D hubs have been created here for many years in some industries, and these hubs have been gaining international importance recently.

 

What is essential for market success in these countries is to develop products tailored to these specific market segments in an innovative way that can lead to adaptability and lower prices – attributes that in time can make a product popular not only in the emerging markets, but also in the developed ones. These special products, designed for mass-market segments, highly innovative and adaptable, with affordable prices, have some specific features that rank them as "FRUGAL":

 

Functional – The product's performance is medium to low, but it is precisely tailored to the core product usage requirements of the region.

Robust – The product is robust, low-maintenance and resistant to variable environmental conditions such as dust or power cuts.

User-friendly – The product is intuitive and easy to use without training.

Growing – The market is growing fast and enables high production volumes and economies of scale, reflected in lower unit costs.

Affordable – The product's low price level corresponds to the target group's willingness to pay and thus offers good value for money.

Local – The product is designed specifically for emerging markets and is partly made in the region.

 

The importance of frugal products is the focus of a recent study by Roland Berger Strategy Consultants. Some 60 top managers interviewed for the study predict that sales of frugal products will almost double in the next five years, to 22% of total sales. But at the same time, they are dissatisfied with the development status of frugal products in their own companies. To help improve matters, the study analyzed the success factors of frugal products along the value chain, as well as the key elements required for successful national innovation policies, that are able to foster the innovation business climate in a country.

 

Frugal products – what are they all about?

 

Traditional products for the global market tend to be wrongly designed or overly complex for the growth segments described in the low-end and mid-range segments, not to mention too expensive. So companies have already learned to develop products especially for these market segments. Below are some examples of frugal products which have been marketed with increasing success.

 

The medical devices industry is a good first example. This industry develops and sells, for example, imaging methods such as x-ray machines. Several leading companies are focusing more and more on emerging markets. The x-ray machines developed for China and India, among other countries for example, differ from those available in highly industrialized countries. They are designed for key standard procedures such as examining broken bones or tuberculosis patients and not equipped for more complicated examinations. Also, using steel instead of brass materials makes the product cheaper, and a simpler camera cuts the cost of the function by more than half (from USD 2,500 to USD 1,200 in individual machines). The machines are also much more robust and last longer in the harsh day-to-day conditions in emerging markets – they are designed to cope with high humidity and occasional power cuts. The market for these machines, priced at below EUR 20,000, is estimated to be over 1,000 units per year, for example in India. By contrast, an x-ray machine for the German market costs over EUR 50,000 and around 100 of them are sold each year. This example clearly shows that companies must learn to adapt to different requirements, and how large the potential can be in emerging markets.

 

 

But successful examples go far beyond the medical devices industry of the Indian / Chinese geographies. In fact, several frugal breakthroughs could be exemplified for the Central and Eastern European regions and even Romania. The example of Dacia Logan is by far the most accessible one. The affordable car by Renault, focusing on value for money, simplicity and automotive basic features, has long exceeded the emerging markets barriers and is now mainly intended for exports towards rich countries. Similarly, Delphia's inexpensive yachts, produced in Poland, are considerably cheaper than competitor products, but their innovative, cost efficient materials make room for the high standards that are so coveted by yacht owners. Allview tablets produced in Romania are another good example. Often sold for less than EUR 200, they focus on practicality while still allowing for special features similar to Retina Display, for example.

 

Although originally intended for home emerging markets, most of the frugal products end up extremely popular among Western customers as well, partly also due to the global crisis which made clients all over the world increasingly careful with their budgets. Thus, also from Poland, a local company devised an affordable, pocket ECG device, combining the accuracy and interactivity of hospital telemetry with the comfort of the patient's home. Although intended for countries with poor medical infrastructure, the company’s 90% of revenues are currently gained via exports to the US.

 

Moreover, the FRUGAL philosophy also applies to services. Selected service examples include microcredit/ micro - financing services, tailored mobile phone services, pre-paid credit cards, low resolution traffic control webcams, medical interventions, long-distance low cost flight service or even just services distributed through innovative channels in order to reach customers that could not be accessed otherwise (e.g. mobile ATMs for country-side areas, etc.).

 

Frugal key success factors – How to get there?

 

The majority of the interviewed managers (55%) reported to currently be dissatisfied with the development status of frugal products in their own companies. To help improve matters, the study analyzed the success factors of frugal products along the value chain. The key success factors can be described using the five stages of value creation:

 

1. Market analysis: When developing a product, companies need to know what customers want and what they are willing to pay. To achieve this target price, it must be clear what functionalities the customer does not need or is not willing to pay for.

 

2. Product development: When developing a product, it is essential to understand the target markets. If all divisions work together on development, this ensures an optimized product in all aspects.

 

3. Purchasing/supply chain: Local sourcing or local supplier bases are the key to inexpensive purchasing conditions. But open-ended review of existing specifications (such as tolerances) must be performed.

 

4. Production: The focus should be on efficient manufacturing, not flexibility, in order to optimally serve the mass market.

 

5. Marketing/sales: This should take into account specific market requirements in order to be able to sell efficiently. Companies could also use innovative channels to successfully market their products.

 

So what does a company need to do to achieve success in emerging countries' mass markets? In addition to rethinking old ideas and shaking up structures, it is crucial to be close to the target market and thus understand customer wishes.

 

The following chart gives an overview of the key success factors across the value chain:

 

 

 

Frugal innovation – a path for Romania?

 

We believe companies in Central and Eastern Europe (CEE) can benefit from FRUGAL products/services and become future FRUGAL champions. They could benefit from market growth for these products/services in their regional markets, or go on to provide frugal products/services to other emerging markets, e.g. Asian or African markets, or even to developed ones i.e. Western Europe or US.

 

Romania in particular, with its large domestic market and the cultural flexibility to tap different other markets, could become a FRUGAL innovation champion, on the mid-term. We have repeatedly stated our view on the fact that Romania should make the transition from a low-cost economy to a more innovative one. Frugal innovation could just be the link between the two stages. For the moment, and over the last years, Romanian government R&D investment has been low and not constant, which has also contributed to low levels of R&D from business. As share of GDP, Romania's total R&D expenditure from public and private sources has stayed almost constant at very low levels (around 0.5% of GDP) over the last 10 years, ranking last in the EU.

 

The contribution of business R&D is even lower and fluctuant, also due to a lack of a coherent public R&D strategy, since stable public investment is a contributing factor for the development of business R&D. Under these conditions, FRUGAL innovation could be a solution for Romania, as it is less capital intensive as high-tech R&D. Moreover, Romania's manufacturing R&D business expenditures, though extremely low, have a favorable structure for frugal innovation (high share of medium-high tech). However, in order to partially overcome the very low value, overall business expenditure needs to become more focused towards either business services or manufacturing, since current efforts seem not to be very widely spread (the "others" segment now accounts for an unusual high share) – to better match the examples of Poland, or even Germany.

 

 

In order to get there however, Romania needs to adopt a coherent national innovation policy covering critical elements in five key areas, something we call the five INs of Innovation policy:

 

1. INspiration: in the sense of being able to set ambitious goals and placing innovation competitiveness among the national priorities

 

2. INsight: obtaining a deep understanding of what innovation really requires and entails

 

3. INstitutional innovation: creating the right public infrastructure and eco-system to support innovation

 

4. INcentives: providing incentives to innovation creation, such as fiscal facilities and support schemes, etc.

 

5. INvestments: finally, increased public funding will be necessary in order to support the necessary infrastructure and incentives

 

The shift from a low-cost economy to an innovative one (at least to a certain degree) will not be something to be accomplished by Romania on the short term. However, with the right approach and mentality, we strongly believe Romania has the chance to become an increasingly important innovation actor over the next 20 years. FRUGAL innovation might just be the first step towards that!

 

Authors

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ROLAND BERGER SRL