The frugal revolution
General Electric’s healthcare laboratory in Bangalore contains some of the company’s most sophisticated products—from giant body scanners that can accommodate the bulkiest American football players to state-of-the-art intensive-care units that can nurse the tiniest premature babies. But the device that has captured the heart of the center’s boss, Ashish Shah, is much less fancy: a handheld electrocardiogram called the Mac 400.
The device is a masterpiece of simplification. The multiple buttons on conventional ECGs have been reduced to just four. The bulky printer has been replaced by one of those tiny gadgets used in portable ticket machines. The whole thing is small enough to fit into a small backpack and can run on batteries as well as on the mains. This miracle of compression sells for $800, instead of $2,000 for a conventional ECG, and has reduced the cost of an electrocardiogram to just $1 per patient.
In Chennai, 202 miles farther east, Ananth Krishnan, chief technology officer of Tata Consultancy Services (TCS), is equally excited about an even lower-tech device: a water filter. It uses rice husks (which are among the country’s most common waste products) to purify water. The device is not only robust and portable but also relatively inexpensive, giving a large family an abundant supply of bacteria-free water for an initial investment of about $24 and a recurring expense of about $4 for a new filter every few months. Tata Chemicals, which is making the devices, hopes for an eventual market of 100 million.
GE and TCS are doing something more exciting than fiddling with existing products: they are taking the needs of poor consumers as a starting point and working backward. They are producing radically simpler products in order to reduce costs: instead of adding ever more bells and whistles, they strip the products down to their bare essentials. But there is more to frugality than simply cutting costs to the bone. Frugal products need to be highly adaptable.
Anurag Gupta, a telecom entrepreneur, has reduced a bank branch to its essence—a smartphone and a fingerprint scanner—so that banks can take ATMs to rural customers. These products also need to be tough and easy to use. Nokia’s cheapest mobile handsets come equipped with flashlights (because of frequent power cuts), multiple phone books (because they often have several different users), rubberized key pads, and menus in several different languages. Nor does frugal mean second-rate: emerging-market consumers are obsessed by both value-for-money and the latest trends. GE’s Mac 400 ECG incorporates the latest technology. Many inexpensive mobile handsets allow users to play video games and surf the net.
The fortune at the bottom of the pyramid
Frugal innovation is not just about redesigning products; it involves rethinking entire production processes and business models. Companies need to squeeze costs so they can reach more customers, and accept thin profit margins to gain volume. Three ways of reducing costs are proving particularly successful.
The first is to contract out ever more work. Bharti Airtel, an Indian mobile-phone company that charges some of the lowest fees in the business but is worth $30 billion, has contracted out everything except its core business of selling phone calls, handing over network operations to Ericsson, business support to IBM, and the management of its transmission towers to an independent company. To make this work, Bharti had to persuade its business partners to rethink their business models, too. For example, Ericsson had to agree to be paid by the minute rather than for selling and installing the equipment, and rival mobile-phone companies to rent their towers rather than own them outright.
The second money-saver is to use existing technology in imaginative new ways. TCS is looking at using mobile phones to connect television sets to the Internet. Personal computers are still relatively rare in India, but televisions are ubiquitous. TCS has designed a box that connects the television to the Internet via a mobile phone. It has also devised a remote control that allows people who have never used keyboards to surf the Web. This idea is elegant as well as frugal: by reconfiguring existing technology it can potentially connect millions of people to the Internet.
The third way to cut costs is to apply mass-production techniques in new and unexpected areas. India’s software companies blazed the trail. Wipro applied the Toyota manufacturing system, with its emphasis on continuous improvement, to software development. Other entrepreneurs are extending it to new areas such as healthcare. Devi Shetty is India’s most celebrated heart surgeon, having performed the country’s first neonatal heart surgery on a nine-day-old baby, and numbered Mother Teresa among his patients. Yet his most important contribution to medicine is not his surgical skill but his determination to make this huge industry more efficient by applying Henry Ford’s management principles. He believes that a combination of economies of scale and specialization can radically reduce the cost of heart surgery. His flagship Narayana Hrudayalaya Hospital in the “Electronics City” district of Bangalore, not far from GE, Infosys, and Wipro, has one thousand beds (against an average of 160 beds in American heart hospitals), and Dr. Shetty and his team of forty-odd cardiologists perform about six hundred operations a week.
The sheer number of patients allows surgeons to acquire worldclass expertise in particular operations, and the generous backup facilities allow them to concentrate on their specialty rather than wasting their time on administration. Dr. Shetty has performed more than 15,000 heart operations and other members of his team more than 10,000. The hospital charges an average of $2,000 for open-heart surgery, compared with $20,000 to $100,000 in the United States, but its success rates are as good as in the best American hospitals.
Adapt or die
Frugal innovation is already beginning to make itself felt in the West, particularly in healthcare. GE’s inexpensive ultrasound device, originally developed for the Chinese market, has become the basis of a global business, with eager customers in the developed as well as the developing world. Dr. Shetty is building a 2,000-bed hospital in the Cayman Islands, a short flight from Miami, where he will offer surgery at half the price charged by American hospitals. But the trend is apparent in consumer goods, too. Haier has become the market leader in the West for cheap fridges. Most Western carmakers are producing small, inexpensive vehicles that have been influenced by the Nano. Mahindra & Mahindra’s nifty little tractors are popular with hobby farmers and gardeners in America.
John Hagel and John Seely Brown have predicted that the emerging world’s advance will lead to a serious “blowback” in the West: rich-world companies that exported capitalism to developing countries may soon find themselves humbled by more innovative companies from the East, and rich-world voters, who once regarded globalization as a plus, may eventually turn against it as they see one product market after another turned upside down.
Yet it is important to remember that disruption will bring benefits as well as problems to rich countries. Reengineered medical devices could slash healthcare costs without reducing the quality of care. Compact and fuel-efficient cars will allow people to keep driving but cause less damage to the environment. And the developed world still has some powerful weapons in its arsenal. The average Western company is much better managed than the average emerging-world company: for every Infosys and Haier there are plenty of poorly managed and uncompetitive firms in developing countries. Michael Gibbert, of Italy’s Bocconi University, notes that the West also has a long tradition of inventiveness in hard times, demonstrated during the Second World War. Williamson points out that Western companies such as Walmart are already making a success of value-for-money strategies. And some of the most articulate promoters of reverse engineering and frugal innovation from emerging countries run Western companies or teach in Western business schools.
The United States and other first-world countries quickly learned the art of Japanese manufacturing. American companies formed joint ventures with Japanese companies, largely to learn the secrets of lean production. Western companies also improved on what they learned. There is no reason to think that this cannot happen again, given time, with the frugal revolution.
This is an excerpt from MASTERS OF MANAGEMENT: How the Business Gurus and Their Ideas Have Changed the World–For Better and for Worse. © 2011 by Adrian Wooldridge. Reprinted by arrangement with HarperBusiness, an imprint of HarperCollins Publishers.