Back to basics

Providing goods and services for emerging markets requires a radical rethink of product development. Vikas Sehgal, Kevin Dehoff and Ganesh Panneer describe how basic cars, telephones and refrigerators must be designed from the bottom up rather than being redesigned simply by removing features from more expensive versions
 

 A cell phone that makes phone calls, and does little else, a portable refrigerator the size of a small cooler, a car that sells for about US$2,200 (100,000 rupees). These are some of the results of ‘frugal engineering’ – a powerful and 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 profit 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 a 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 first place.

It recognises that merely removing features from existing products to sell them more cheaply in emerging markets is a losing game. That’s because emerging-market customers have unique needs that usually are not addressed by mature-market  products. The cost base of developed-world products, even when stripped down, remains too high to allow competitive prices and reasonable profits in the developing world.

Frugal engineering recalls an approach common in the early days of assembly-line manufacturing – Henry Ford’s Model T is a prime example. But as industries grew and matured over the decades, and as consumers prospered to levels that few would have predicted a century ago, product development processes became hardwired and standard operating procedures worked against frugality.

In addition, the profit structure in mature markets reduced incentives for major change. Constant expansion of features available to consumers in the developed world, frivolous or not, has provided many businesses with their richest profit margins. Mature-market customers continue to accept price premiums for new features, which encourages 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 US is an example of this process.

Theory into practice

Frugal engineering 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 first tastes of modern prosperity, and are shopping for the basics, not for fancy features.

According to CK Prahalad, author of The Fortune at the Bottom of the Pyramid (Wharton School Publishing, 2005), these potential customers, ‘unserved or underserved by the large organised private sector, including multinational firms’, account for four to five 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.

Attracted by the size and rapid growth of emerging markets – concurrent with world – companies in a range of industries are establishing distribution and manufacturing operations as well as research and development centres in these regions.  However, some of these companies may not fully grasp the challenges that competition in emerging markets entails. The prospect of high-volume profit streams may be enticing, but those profits must be earned in the face of lower prices, lower per-unit profits, 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 set of product features and functions that are different from their developed-world counterparts, but they still insist on high quality. Global companies, therefore, must change the way they think about product design and engineering. Simply selling the cheapest products or reusing technologies from higher-priced products will not cut costs enough and is unlikely to result in the kinds of products that these new customers will want to buy.

The central tenet behind every frugal engineering decision is maximising value to the customer while minimising non-essential 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 such as Tata Motors’ Nano, the ‘pint-sized’ low-cost automobile. The Nano is not – like so many other low-cost vehicles – a stripped-down version of a traditional, more expensive car design. Like other newly engineered products selling well in emerging markets, ranging from refrigerators to laptop computers to X-ray machines, it is based on a bottom-up approach to product development.

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 – and that trend is 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 Ltd, beat them to it.

Meeting all these challenges will require a change in corporate culture. Some companies will be up to it, others will not. Successful frugal engineering involves new ways of thinking about customers, innovation, and organisation.

Understanding the customer’s real requirements

The ultimate goal of frugal engineering is 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 was not simply 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 cost but also added value.

Such carefully calculated trade-offs, made at the product planning stage, serve the dual purpose of maintaining low costs and increasing the product’s overall functionality and utility for the buyer.

The Nokia 1100 cell phone 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 first purchases is a cell phone. Many new customers in emerging markets are agricultural workers who spend their days outdoors. When Nokia developers watched field-workers using mobile phones in India, they noticed that the intense humidity made it difficult to hold the phones and to 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 and 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, energy-efficient flashlight that’s proven popular in areas where power blackouts are common – ie in most rural villages and many emerging-market cities. At a price of $15 to $20, the Nokia 1100 is the best-selling cell phone 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, floor models that a Western business might have installed 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 store every day. They do not 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 is 1.5 feet tall by 2 feet wide and has a capacity of only 1.6 gallons. It has no compressor, instead it uses a cooling chip and fan design 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 so it is easy 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.

Bottom-up Innovation

Typically, when a well-established car manufacturer 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 an 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.

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’ line-up. Building on the bare minimum enabled the engineers to achieve their cost and price targets without compromising the essential functions of the car. If 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 have steadily become more sophisticated, and often more expensive. The cost base, the design thinking and the very idea of what makes an automobile, all combine into a set of structural costs that simply go unquestioned. Reversing course is difficult, and few companies 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 wiper blades. 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. The Nano also has just one side-view mirror, and the seats are not adjustable. This involves questioning the form and necessity of so-called standard features.

 Organisational Agility

Frugal engineering needs companies to be open to organisational innovation. Three areas are particularly important.

 1Cross-functional teams. The Tata Nano was developed by a team of 500, mostly young, engineers. The team was significantly smaller than the teams of 800-plus typically employed by Western automobile makers. In fact, a team for a new platform like the Nano at a US or European car company would probably involve more than 1,000. To make sure that the project got the attention it required, Tata created a unit separate 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 finding ways to keep costs low. When a legacy automaker such as General Motors launches a car, its marketing group  might be five times the size of the Nano’s marketing team, which was three people.

The computer chip that replaced the compressor in Godrej’s low-cost refrigerator represented such a radical move that it probably would not have made it to the final 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 reengineered the assembly line to handle chips instead of compressors.

Why would that kind of agility be difficult 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 between teams.

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.

A frugal development team must look beyond the usual, approved list of suppliers. The targets in frugal engineering projects are often so tight that conventional suppliers are unlikely to be able to meet the requirements for cost, quality, and timeliness of delivery.

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 join forces 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 has a digital odometer. The costs saved on one were spent on the other, avoiding an analogue odometer and a tachometer that few customers would use. Often, a higher-level commitment from suppliers has required a mandate from the supplier’s chief executive officer (CEO).

For example, Bosch CEO Bernd Bohr took on the cost-target challenge for the Nano and made sure Bosch came through by adapting a motorcycle starter motor to save weight and by finding a way to trim several ounces from the generator.

3Top-down support. Nothing is more important to frugal engineering than commitment from the top – and not just from suppliers. A good example of frugal engineering is when Ratan Tata, chairman of Tata, said: ‘I will design a car for $2,200. Period.’ Also, at Mahindra & Mahindra, managing director Anand Mahindra publicly backed 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 $700m to $1 billion. Mahindra’s Scorpio SUV was developed at a cost of $150m. The car may lack the sophistication and status of other makers’ luxury models, but it’s right for its market.

 This is an edited version of an article that appeared in strategy+business, published Summer 2010, Issue 59. Vikas Sehgal, partner, Booz & Company. Kevin Dehoff, vice-president, Booz & Company. Ganesh Panneer, project manager, Booz & Company. www.booz.com

Engineers at Tata Motors were inspired by the design of three-wheeled vehicles in India known as auto-rickshaws, which use minimum technology to provide the essential requirements of transport

Carefully calculated trade-offs, made at the product planning stage, serve the dual purpose of maintaining low costs and increasing the product’s overall functionality and utility for the buyer