Chapter Three

Principle Two

Do More with Less

If I had one dollar to spend, I would invest in solving the biggest problem today—the economics of scarcity.

—Jeffrey Immelt, chairman and CEO, General Electric¹

Gustavo Grobocopatel is a fourth-generation Argentinian farmer of Russian-Jewish extraction. For three generations his family pursued a small-scale, subsistence model of farming in Argentina. Grobocopatel's dream was to break out of this mold and do something more ambitious. But his vision was hindered by scarcity from the very start.²

First, Grobocapatel had difficulty accessing large tracts of land. Although Argentina is a vast country, endowed with rich soil and a favorable climate, farmland is actually hard to come by. Only 10 percent of the land is arable—and much of the arable land is controlled by a few owners who are reluctant to part with it.³

Next, Grobocopatel faced a shortage of the skilled labor needed to scale up his business. Farming is labor intensive, as people are needed to fertilize, sow, tend, and harvest crops. In Argentina such labor is in limited supply, is not formally organized, is spread out across the country and can be costly to hire, especially during peak harvest seasons.⁴

Third, Grobocopatel didn't have the capital to buy the farm equipment he needed to achieve scale without using labor. Funding opportunities to bootstrap new businesses are very limited for entrepreneurs in Argentina.⁵

Instead of giving in to these challenges, Grobocopatel conceived and then implemented an ingenious business model. He overcame the scarcity of land by leasing it rather than acquiring it. He dealt with the scarcity of labor by subcontracting every aspect of farm work to a network of specialized service providers, giving him access to “freelance” laborers he hires only when they are needed. And he overcame the cost of owning equipment and the lack of access to capital by renting the equipment needed from networks of small local companies.

By cleverly leveraging a grassroots network of 3,800 small and medium-size agricultural suppliers, Grobocopatel's company, Los Grobo, operates as an asset-light company, and in this way is able to do more with less. Overcoming the skepticism of his peers, this jugaad entrepreneur has proven the value of his “more with less” model. In 2010, Los Grobo became the second largest grain producer in Latin America, farming over three hundred thousand hectares, trading three million tons of grain per year, and generating US$750 million in revenue—all without owning land or a single tractor or harvester. Having succeeded in Argentina, Los Grobo is now exporting its “frugal farming” model to Brazil, Uruguay, and Paraguay, and helping farmers there produce more with less in their local contexts.

Emerging markets are teeming with innovators like Grobocopatel. Faced with scarcity across the board, these jugaad innovators have mastered the art of doing more with less. In this chapter, we get inside the minds of jugaad innovators and the enterprises they run to better understand how they create more value with fewer resources. Although many factors hinder Western companies from adopting a “more with less” approach, doing so is increasingly imperative—as the American and European economies stagnate and face growing resource constraints. Indeed, Western firms that succeed in adopting frugal innovation methods to create affordable offerings are very likely to gain a significant competitive advantage over their peers in the tough economic times ahead.

Scarcity Is the Mother of Invention

To even a casual observer, the most striking thing about jugaad innovators in emerging markets is their frugal mindset. These entrepreneurs and managers—whether they come from Argentina, Brazil, China, India, Kenya, Mexico, or the Philippines—are constantly looking for new ways to do more with less and deliver greater value to customers at a lower cost. What makes this mindset so fundamental to jugaad innovators, and why are they so good at getting “more for less”? We believe that such a mindset is a rational response to the pervasive scarcity in their environment. For jugaad entrepreneurs, being frugal is not a luxury—it's the key to survival.

While Silicon Valley entrepreneurs typically operate in a resource-rich environment, jugaad entrepreneurs face scarcity of every possible kind. First, they must contend with the scarcity of capital. Quite simply, the availability of financial resources in emerging markets is limited. Banks are conservative, and venture capital and angel investor networks underdeveloped. For instance, 80 percent of South African entrepreneurs report difficulties in accessing funding.⁶ Thus, jugaad innovators cannot afford to invest in capital-intensive R&D equipment. This partly explains why a country like India spends only 0.8 percent of its GDP on R&D (compared with 3 percent in developed countries), and why the private sector's share of this spending is only 20 percent.⁷

Second, jugaad innovators must deal with the scarcity of natural resources. Raw materials in emerging markets—from water to electricity—are expensive and hard to obtain reliably. This makes setting up and running new businesses—especially in the manufacturing sector—costly and difficult.

Third, jugaad entrepreneurs face a scarcity of qualified talent. Emerging markets like India, Brazil, and China have huge populations. But only a small percentage of these populations are qualified professionals who can use or deploy the offerings of emerging market entrepreneurs. According to a survey conducted by ManpowerGroup, 67 percent of enterprises in India and 57 percent of those in Brazil have difficulty finding qualified technicians, sales representatives, engineers, and IT staff. As a result, it is hard to sell complex medical devices in rural areas with few qualified doctors. Or to sell PCs to village schools where teachers lack computer literacy.⁸

Finally, jugaad innovators face a scarcity of quality infrastructure. The poor roads and limited transportation options in emerging markets make it difficult to get goods and services to far-flung places in a timely fashion. Moreover, the cost of doing so becomes a huge challenge, limiting the reach of markets in emerging economies.

In addition to pervasive scarcity, jugaad innovators also have to contend with a frugal and demanding consumer base. This consumer base has low disposable income. For instance, three hundred million Indians earn less than $1 a day. Many of these people either go without or are very careful about what they buy. This forces jugaad innovators to radically rethink price points. Their offerings have to be extremely affordable, not just barely so.

These consumers are also very value conscious. They may be low earners, but they also are high “yearners.” Given their high aspirations, these consumers reject new offerings that do not deliver significantly higher value than existing offerings do. This puts a lot of pressure on jugaad innovators to develop higher value offerings at a lower price.

Finally, the consumer base in emerging markets is huge and diverse. Markets like China, Brazil, and India have millions of consumers. But these consumers are not homogeneous. To deliver higher value to a large and diverse base, jugaad innovators have to find clever ways of deriving both economies of scale and scope in whatever they do.

The pervasive scarcity and the demanding nature of the consumer base make jugaad innovators masters of frugality. Let's consider some of the ways in which they manage to do more with less.

Being Resourceful in a Resource-Scarce Environment

Jugaad innovators are able to get more from less by applying frugality to every activity they perform at every step along the value chain. They are frugal in how they design products, how they build them, how they deliver them, and how they perform after-sales maintenance. Their frugality shows up not only in their parsimonious use of capital and natural resources but also in how they maximize their limited time and energy: rather that doing everything themselves, they rely extensively on partners to perform various operations, thus saving time and energy. The following are some frugal approaches employed by jugaad innovators to gain more from less.

They Reuse and Recombine

Rather than creating something entirely new, from scratch, jugaad innovators are more likely to reuse or seek new combinations of existing technologies or resources both to come up with new solutions and to commercialize them in markets. For instance, Zhongxing Medical, a Chinese medical device maker, borrowed Digital Direct X-ray (DDX) equipment technology from its parent company (Beijing Aerospace)—which wasn't using it effectively—and reengineered DDX for use in everyday applications like chest X-rays. As a result, its X-ray machines cost just $20,000 to build, compared to $150,000 for the equivalent GE and Philips models (which use DDX only for high-end applications). By creating low-cost, mass-market applications out of an underused technology, Zhongxing cornered 50 percent of the Chinese X-ray machine market—forcing rival GE to cut its prices by 50 percent while Philips, unable to compete, withdrew from this segment altogether.⁹

Similarly, jugaad innovators in African countries are leveraging existing cellphone networks to devise frugal business models that make services like health care and banking affordable to more people. In Kenya, for instance, only 10 percent of the population has access to banking services. Yet mobile penetration is over 50 percent. Sensing an opportunity, Safaricom, a local telecoms service provider, 40 percent owned by UK-based Vodafone, launched a service called M-PESA in 2007. M-PESA is an SMS-based (text message) system that enables people to spend, save, and transfer money using their cellphones at a fraction of the cost of money transfer services like Western Union—and without having a bank account. Users of M-PESA can convert cash into electronic money that is stored on their cellphones at any one of hundreds of M-PESA outlets, including village mom-and-pop shops that act as M-PESA agents. On receiving an M-PESA user's cash, the agent texts the equivalent amount in electronic money (e-money) to the user's phone. The user can then text a part or all of this e-money to either an M-PESA agent or to another M-PESA user. All the e-money in circulation is backed up by real money in a bank account owned and managed by Safaricom. This safeguards the system against fraud while obviating the need for users to have their own bank accounts. As of this writing, over fourteen million Kenyans—or 68 percent of the country's adult population—have subscribed to M-PESA. This is much more than the number of people who have bank accounts!¹⁰ Migrant workers in Kenyan cities now routinely use M-PESA to safely and cost-effectively transfer earnings to their families who live in remote villages.¹¹

They Remain Asset-Light

A second strategy that jugaad innovators use to get more from less is to leverage the capital assets of others to scale up their business model. This is precisely what Gustavo Grobocopatel did in Argentina. But Grobocopatel is hardly an exception. Many jugaad entrepreneurs in emerging markets choose to operate an “asset-light” business model with as few fixed assets as possible on their balance sheet. Thus, instead of owning physical assets, they rent or share them. This approach not only makes their cost structures lean but also allows them to quickly scale operations up or down to meet shifts in demand without investing in additional assets.

For instance, Indian cellphone companies like Bharti Airtel used this frugal strategy not only to get started but also to turn their industry into one of the largest and most competitive in the world. In the early 2000s, as the mobile revolution was taking off in India, Airtel was short of both the capital and the technology it needed to scale up its business. Undeterred, Airtel's chairman Sunil Mittal used a jugaad approach to getting more with less: he boldly decided to outsource all but key marketing and branding activities to partner companies that had capital, technology, or both.¹² Today, IBM manages Airtel's IT infrastructure while Ericsson and Nokia Siemens Network (NSN) manage its network infrastructure. (This might just be one of the first examples of Indian companies outsourcing to Western ones, with both benefiting hugely from the process.) Today Airtel—which boasts over 170 million subscribers—is the world's largest “asset-free” telecom service provider. It is also the first mobile carrier that dared to outsource all its core network infrastructure; most telecom operators prefer to own and manage this in-house given its strategic nature. Its frugal operating model enables it to deliver better value to its customers at less cost. By transforming fixed technology costs into variable costs, Airtel not only succeeded in getting more for less, it also did so at breakneck speed—at times signing up as many as ten million subscribers per month.

They Leverage Existing Networks for Distribution

A third “more with less” strategy that jugaad innovators use is focused on solving the “last mile” problem—that is, the difficulty of reaching far-flung customers in an economical way. Rather than investing in expensive logistics networks, jugaad entrepreneurs leverage existing networks to cost-effectively deliver their products and services to people in hard-to-reach markets. In particular, they rely on grassroots partners in local communities to reach more customers and personalize their offerings for them. These grassroots distribution partners are often micro-entrepreneurs themselves. By building on already developed and trusted social networks in emerging markets, jugaad innovators can compensate for the poor state of the physical infrastructure there. More important, by enrolling grassroots entrepreneurs as their channel partners, jugaad innovators drive their own financial sustainability while also creating new economic opportunities in local communities.

For instance, toothpaste maker Colgate Palmolive scaled up its logistics network to serve remote villages in India by creating a mobile network of young people. Mounted on bicycles carrying a few oral care products, these salespeople go from village to village with their “micro-stores on wheels”—thus solving the last mile problem. This solution costs less to Colgate than setting up physical distribution in these villages would. Plus it delivers more value to local communities—improving their health and providing jobs for local youth.¹³

Similarly, MicroVentures in the Philippines—cofounded in 2006 by Bam Aquino, nephew of former President Corazon Aquino—is making a wide range of consumer products and services accessible to consumers at the base of the (socioeconomic) pyramid (BOP).¹⁴ Rather than setting up its own distribution network—a costly and nearly impossible task, given the fragmentation of the BOP market spread across hundreds of villages—MicroVentures leveraged an existing ad-hoc logistics network made up of eight hundred thousand sari-sari (mom-and-pop) stores. These tiny stores—found across the entire seven-thousand-island Philippine archipelago—are operated by entrepreneurial women who set them up as an extension of their homes.¹⁵ MicroVentures applied what is known as the conversion franchising model which consists in converting already existing, independently owned stores into members of a standardized and branded network known as the Hapinoy Program.¹⁶ By converting and upgrading some of the existing sari-sari stores into branded Hapinoy Community Stores, MicroVentures rapidly scaled up its distribution network: ten thousand sari-sari stores have joined the Hapinoy Program since 2007—a figure that Aquino predicts could go up to a hundred thousand in the coming years. It's worth noting that a number of sari-sari stores that have joined the Hapinoy Program are also members of CARD MRI, the largest microfinance institution in the Philippines, with whom MicroVentures had established a synergistic partnership.

The women who own sari-sari stores enjoy many benefits by joining the Hapinoy Program:

Aquino explains:

Helping Customers Get More Value

By relying on a frugal operating model, jugaad innovators strive not just to reduce their own costs, but also to pass value on to consumers. Thus, unlike their counterparts in the West, they do not typically focus on wowing customers with products that have cool features or the latest technologies. Instead, they pursue functionally minimalist solutions that offer superior value to customers—often transforming their lives in the process. Simply put, they help their customers get more value for less cost by offering them quality products and services at highly affordable prices.

For instance, in 2010, KPIT Cummins Infosystems, an Indian engineering and IT services provider, unveiled Revolo, a low-cost plug-in parallel hybrid solution for cars. (Revolo is the brainchild of Tejas Kshatriya, an engineer who works for KPIT Cummins. Kshatriya came up with the idea while stuck in a traffic jam in Mumbai in 2008.) By installing the Revolo kit in their cars, owners of cars that run on gas can cost-effectively convert their existing vehicles into fuel-efficient, high-performance hybrids. The conversion kit—which includes a rechargeable battery pack, an electric motor, and a pulley—can be retrofitted into most cars in just six hours by a KPIT Cummins–certified mechanic.

Revolo works best in stop-and-go city traffic, as it captures the kinetic energy generated every time the brakes are applied and stores it in its batteries for later use. Tests show that the Revolo technology boosts fuel efficiency by over 35 percent and reduces greenhouse gas emissions by at least 30 percent. Most important, at a price between $1,300 and $3,250 for the Indian market—and around $5,000 when sold in Western markets—the Revolo system costs 80 percent less than other hybrid car options.¹⁸ Revolo can be plugged into any car, whatever its brand or age, without interfering with the carmaker's transmission configuration. KPIT estimates that, when used at an average daily run of thirty-one miles, the Revolo conversion kit pays for itself in less than two years. Hence Revolo is a win-win for both car owners and auto manufacturers. Ravi Pandit, CEO of KPIT Cummins, notes: “With Revolo, we found an affordable and retrofittable solution to transform a gas-guzzling car into an environmentally mindful, fuel-efficient, high-performance hybrid. With Revolo, car owners get more value at less cost.”¹⁹

KPIT Cummins is negotiating licensing deals with several U.S. and European carmakers that are eager to initially offer Revolo as a branded aftermarket service to their existing car users—while exploring the long-term possibility of incorporating Revolo as a standard feature in their future models. Large-scale commercial production of Revolo is expected to begin in 2013.²⁰ It is worth noting that it cost KPIT less than $2 million to develop the Revolo technology—much less than the $1 billion it costs, on average, to develop a new car.²¹

How do jugaad innovators know what is of value to their customers and how much customers will be willing to pay to get that additional value? Rather than considering these questions in the abstract in an R&D lab, jugaad innovators spend time in the field, observing and interacting with potential customers to identify their latent needs and requirements. Only then do they zero in on the essential features of a solution that are most relevant to their unique customers. In other words, they first seek to identify the appropriateness of a solution. Armed with these insights into what customers need rather than want, jugaad innovators design, from the ground up, an appropriate product or service—as well as a business model—that can best fulfill these needs. Very often they don't get it right the first time. But by trial and error and rapid experimentation, they eventually settle on the set of features—and the business model—that is likely to deliver the highest value at the lowest price for their market.

To understand this better, let's consider another jugaad example, one that can make a life-or-death difference to many people around the world. Twenty million babies are born prematurely or with a low birth weight each year worldwide, and four million of them die, most in developing nations. Those who survive often suffer from low IQ, diabetes, and heart disease when they reach adulthood. Many of these deaths and ailments could be averted by simply keeping these premature babies warm. Unfortunately, current options for warming babies in developing nations are either expensive or unsafe. The incubators sold in Western countries cost up to $20,000 and require electricity—which is unreliable in developing nations. And ad-hoc solutions like positioning babies under bare light bulbs are simply risky.

Jane Chen, Linus Liang, Naganand Murty, and Rahul Panicker cofounded Embrace to come up with an affordable infant warmer for use in developing countries, one that costs far less than incubators available in the West. The founders came up with the idea for Embrace's frugal business model while they were all attending Stanford University's Entrepreneurial Design for Extreme Affordability program. After producing an initial prototype—a stripped-down version of traditional incubators powered by electricity—they traveled to Nepal to test it in an urban hospital. But they soon found that 80 percent of babies that die prematurely in developing nations like Nepal are born at home in villages, far from well-equipped hospitals and without access to regular electricity.²²

That insight led them to fundamentally rethink who their users really were. Realizing that their customers were doctors and parents in villages, they set out to identify what product features would bring the most value to these rural users. That inquiry led them to design a portable infant warmer that looks like a tiny sleeping bag and gives mothers greater mobility and more intimate contact with their babies. The bag in turn contains a pouch of a wax-like phase-change material (PCM) that keeps babies warm for up to six hours at regular body temperatures. Not only is this infant warmer intuitive to use, but it requires only thirty minutes of electricity to heat up the PCM pouch—using a portable electric heater that comes with the product. Further, this design dovetails well with the recommended practice of “kangaroo care,” whereby a mother holds her baby against her skin (hence the company name “Embrace”).²³ Most important, the Embrace portable infant warmer costs less than 2 percent of the cost of incubators available in Western markets.

In 2011, Embrace piloted this product in India, where 1.2 million premature babies die each year. Early results have been very encouraging. A preliminary study validated Embrace's safety and efficacy with twenty infants. Embrace then undertook a more extensive clinical study of 160 premature babies. In one instance, a two-pound baby born to parents from a village near Bangalore, in Southern Indian, was kept in the Embrace infant warmer for twenty days and began to gain weight—bringing great joy to its parents who had lost two babies previously.

Embrace uses rapid prototyping techniques to get customer feedback on new product features fast and zero in on the product attributes that are of highest relevance and value to rural customers. For instance, after noticing that mothers in Indian villages didn't trust numerical displays that indicate whether the temperature is right, Embrace replaced the numerical scale with symbols indicating “OK” or “Not OK.” Similarly, Embrace is planning to release a future version of its product targeted at mothers who live in far-flung villages with no electricity at all: in this version, the PCM pouch will be heated—and thus “recharged”—using a heating device that runs on hot water (instead of electricity).

Embrace is also experimenting with different pricing models—such as a rental option—to make its product affordable in countries like India where hundreds of millions in villages live on less than $2 a day. “Entrepreneurs often fall in love with their original product idea or business model and fail to listen to customers,” Chen explains. “We, on the other hand, have no qualms about modifying our product features and pricing again and again till we find a solution that delivers the highest value to our customers at the lowest cost for them. For us, innovation is a dynamic process that never ends.”²⁴

Embrace is currently negotiating partnerships with multinational pharmaceutical and medical device companies such as GE. The company is also working with local NGOs to piggyback on their extensive distribution networks to make the Embrace infant warmer accessible to as many hospitals and clinics as possible in countries like India. Finally, Embrace is testing its infant warmer at the Lucile Packard Children's Hospital at Stanford University: the entrepreneurs believe there is a big market for Embrace's product in the United States where infant mortality rates are among the highest in the developed world. Embrace has set itself a bold target of saving the lives of over one hundred thousand babies over the next three years, as well as preventing illness in over seven hundred thousand babies.

In sum, jugaad innovators are able to find abundance in scarcity—and to share that abundance with customers and other stakeholders who also face scarcity. Jugaad innovators may lack financial, natural, and technological resources, but they compensate by finding ingenious ways to leverage social networks and their intimate knowledge of customers to create and deliver more value at less cost. In many ways jugaad innovators embody Theodore Roosevelt's belief that “all the resources we need are in the mind.”

Welcome to the Age of Austerity

Prestigious Western organizations such as GE and Lucile Packard Children's Hospital at Stanford are adopting Embrace's low-cost incubators, even though they clearly have access to many high-performing incubators in the West. These forward-thinking Western organizations recognize that a frugal approach is increasingly critical for survival in the age of austerity that is upon us. The warning signs are all around. Indeed, these signs are not very different from the more general indicators, discussed in Chapter Two, of increased adversity in Western economies. Nevertheless, it's worth examining the specific factors that are shaping a new culture of austerity in the West. These include

• Increasingly frugal customers. The recession has made Western middle-class consumers far more cost-conscious than they were in the boom years of the housing bubble. Similarly, in business-to-business markets, power is shifting from buyers who value features and functionality to those who prefer value pricing. For instance, in hospitals the technology buyers are no longer doctors (who typically favor technically superior but overpriced medical devices), but instead cost-conscious purchasing managers.²⁵
• Dwindling natural resources. Because the oil and water needed to produce energy and food are in short supply, Western companies are motivated to identify more efficient ways of using these scarce resources. Also, Western consumers are becoming environmentally conscious and voting with their wallets for eco-friendly brands that use less of those natural resources.
• Government regulations. More policies are being put into place to deal with financial and environmental pressures. For instance, to deal with its huge budget deficit, the U.S. government is asking Big Pharma to make more drugs available to more Americans at a lower cost. Similarly, increasingly stringent environmental regulations are forcing U.S. carmakers to develop cars that deliver more miles with less fuel and lower greenhouse emission.
• Competition from low-cost rivals from emerging markets. Across industries, Western companies are facing competition from low-cost emerging market companies. For example, Western pharmaceutical companies are threatened by generic drug makers from Brazil and South Africa who produce and sell cheaper medicine; Western automakers are being challenged by low-cost car manufacturers from India and China who are producing affordable electric vehicles and ultra-compact cars; and Western cellphone companies such as Nokia and Apple are being taken on by low-cost Chinese cellphone makers such as HTC and Huawei.
• Rivalry from agile Western startups. Western start-ups with high-value offerings for cost-conscious consumers are popping up across industries, from hospitality to consumer goods to fashion. In the process, these start-ups are stealing customers from larger players. For example, Warby Parker, founded by four Wharton MBAs while still at B-School, is trying to break the oligopoly—steeped in the old “more for more” business model—that controls the global eyewear industry. The startup offers fashionable high-quality prescription eyewear for just $95, a fraction of what high-end eyewear manufacturers charge.²⁶ It provides more value to consumers by allowing for home try-ons of different frames and contributes to a larger cause by donating one pair of glasses for each pair it sells.

In the West, frugal consumers and competitors are rewriting the rules of engagement for manufacturers and retailers alike—pressuring them to develop goods and services that are affordable and eco-friendly. As a result, Western businesses are being forced to rethink how they address the aspirations and needs of their value-conscious customers. But doing so will not be easy.

For Most Western Companies, Bigger Is Still Better

In the new era of scarcity, Western companies must learn how to produce greater value with fewer resources. Despite the benefits of doing more with less, Western companies face significant obstacles in adopting this approach.

For a start, the top management in many companies is wedded to a previously successful “more for more” strategy. To differentiate their products from competition, large Western companies are used to spending huge sums on R&D to develop expensive, often overengineered products for which they charge customers a hefty premium. In the past, this strategy worked because customers were able to afford such premiums, and these premiums in turn enabled companies to recoup their large R&D investments. However, this “bigger is better” approach is no longer sustainable, as Western companies face greater resource constraints and cost-conscious consumers in the West shift from premium products to value-for-money offerings.

Not only is top management wedded to a “more for more” strategy, but senior managers in Western companies also lack the incentive to pursue opportunities in low-income segments. They perceive these segments as too small, unprofitable, or both. Moreover, the margins that companies can charge in value segments are typically low. So, even though the numbers of potential consumers in low-income segments may be large, these markets need up-front investment and require time to develop and grow. Therefore, senior managers who are under pressure from shareholders to deliver quarterly results are not motivated to make these long-term investments in growing value markets.

On the R&D side, Western engineers have come to equate complexity with progress. These engineers come to work every morning with a desire to push the boundaries of technology. For many of them, “doing less” would seem a step back rather than forward. As a result, they tend to design products that cost more and that are overloaded with features that customers don't necessarily want. For example, the most effective way of making cars fuel efficient and inexpensive is to make them lighter. But the pursuit of technology for its own sake—and the need to differentiate cars from each other—has resulted in their getting heavier with time. Specifically, designers add more electronics to cars to deliver ever more bells and whistles. This increases their weight, drag, and hence fuel inefficiency, which in turn makes them more, not less, expensive.

Arguing against this trend, John Maeda, president of the Rhode Island School of Design, says: “It's not necessarily beneficial to add more technology features just because we can. R&D engineers must make frugal simplicity the core tenet of their design philosophy. They must design for the ‘real world’ by practicing what I call ‘radical incrementalism’—which is doing more with less. Wouldn't it be nice if rather than complimenting their R&D teams with ‘Wow! You worked so hard to come with this new product with all the bells and whistles: it is amazing!’ CEOs told R&D engineers ‘Wow! You did almost nothing—and yet produced a ‘good enough’ product that gets the job done: Congratulations!’ ”²⁷ (In Chapter Five we discuss the importance of simplicity when designing new products and services.)

Engineers may be the ones who create more expensive products by piling on complex functionality and features that customers don't want. But sales managers have a role to play too: more often than not they love to sell these expensive products. In fact, they typically lack the motivation to sell affordable products, fearing that these products might draw consumers away from their more expensive offerings. After all, selling cheaper products doesn't help them earn larger commissions. Further, a common misconception among sales managers is that the market for low-cost products is “too niche” and therefore doesn't deserve time and effort to build. But they fail to recognize that even mainstream customers are now turning away from premium products and seeking affordable solutions that deliver better value at lower cost. Seventy-eight percent of U.S. online consumers say that they are willing to switch from their current brand to a private label for personal goods primarily because the price is lower.²⁸ And 22 percent of the customers shopping at dollar stores earn $70,000 or more annually. When even Middle America begins patronizing thrift stores, the trend is undeniable. (In Chapter Six we explore the impact of the shrinking American middle class on businesses.)

Despite these changes in consumer behavior, however, marketing executives in large companies still equate “low-cost” with “poor quality” and are concerned that promoting low-cost offerings will damage their company's brand. But marketing executives must recognize that, in this new age of austerity, with a rapidly dwindling middle class, the notion of “premium” is being redefined as “more value for the money” even in middle to high-end markets.

Thus, Western companies face a conundrum: they are confronted with a growing number of frugal consumers clamoring for affordable solutions, yet their existing corporate culture and incentive systems are not designed to deliver more with less. As scarcity deepens in the West, Western corporate leaders will have no choice: they will have to bite the bullet and infuse their organizations with a frugal mindset. A jugaad approach could be just the way to undertake such a transformation.

How Western Companies Can Find Abundance in Scarcity

To compete and win in the dawning Age of Scarcity, Western CEOs must boldly revamp their companies' R&D approaches, business models, and incentive systems for sales and marketing—all of which were designed for success in the Age of Abundance. Rather than caving in to Wall Street's demand for short-term gains, CEOs of Western companies must restructure their organizations to boost their long-term ability to continually design and deliver affordable and sustainable solutions to frugal consumers. Here are some suggestions for undertaking such systemic changes.

Tie Senior Management's Compensation to Frugal Performance

It's not enough for CEOs to adopt a frugal mindset and strive to do more with less. They must also encourage their senior managers to follow suit. One way to do that is by linking senior executives' compensation to performance metrics aimed at driving frugality. Take the case of Ramón Mendiola Sánchez, CEO of Florida Ice & Farm Co., a large food and beverage producer and distributor in Costa Rica that is deeply committed to sustainability. In 2008, Mendiola set up a balanced scorecard with a set of key performance indicators (KPIs) to track how well his company was reducing its consumption of natural resources such as water while simultaneously delivering more value to customers and other stakeholders. He linked these KPIs to his senior executives' compensation so they have some skin in the game: 50 percent or more of their compensation is tied to their meeting—or exceeding—these KPIs. Mendiola is leading by example—he has linked 65 percent of his own pay to the balanced scorecard that combines financial, social, and environmental KPIs to compute a “triple bottom line” of people, planet, and profit.

This strategy has been successful: since its implementation, Florida Ice & Farm's senior executives have found creative ways to do more with less by motivating their employees to improve manufacturing and distribution processes and help local communities better conserve natural resources. Under Mendiola's leadership, Florida Ice & Farm has reduced the amount of water it requires to produce a liter of beverage from 12 liters to 4.9—and aims to soon further reduce it to 3.5 liters. It has also eliminated solid waste from all its operations and is well on its way to meeting its target of becoming “water neutral” in 2012 and “carbon neutral” by 2017.²⁹ Meanwhile, the company achieved a compound annual growth rate of 25 percent between 2006 and 2010—twice the industry average. Mendiola notes: “By using incentives, we motivate our employees at every level to get creative and invent frugal and sustainable ways to deliver significantly more value to all our stakeholders by using far fewer natural resources—while saving substantial amounts of money for our company.”³⁰

Senior Management Must Challenge R&D to Do More with Less

The recession is forcing many Western CEOs to cut their R&D spending with the hope of increasing their innovation performance at lower cost. But this will happen only when engineers and scientists are offered challenging projects that give them the incentive to do more with less. For instance, in the late 1990s, Louis Schweitzer—former CEO of the French carmaker Renault—visited Russia, where he found that low-cost domestic cars like the Lada—that cost merely €6,000 (US$7,800)—were outselling his company's €12,000 (US$15,600) cars. Following this visit, Schweitzer challenged his R&D team to come up with a modern, reliable, and affordable car for less than €6,000. As Schweitzer recalls: “Seeing those antiquated cars, I found it unacceptable that technical progress should stop you from making a good car for €6,000. I drew up a list of specifications in three words—modern, reliable and affordable—and added that everything else was negotiable.”³¹ The result was the Logan, a no-frills car priced at €5,000, which, since its 2004 launch, has become Renault's cash cow across recession-wary European markets as well as in many developing economies. Interestingly, Schweitzer's successor Carlos Ghosn—who coined the term “frugal engineering” in 2006—is now pushing Renault's R&D team in France to do even more with less to compete effectively with low-cost carmakers from emerging market such as Tata Motors (which developed the $2,000 Nano).³²

Marketing Executives Should Create Separate Brands for Their Affordable Offerings

To avoid brand dilution, Western companies need to create distinct brands for distinct segments. Given that they might already have well-established brands for higher-priced segments, they should develop distinctive new brands for their affordable segments. Doing so will reduce the problems of brand dilution while ensuring greater market coverage. For instance, the Starwood Group opened two affordable but chic hotel chains—Aloft and Element—to cater to value-conscious consumers.³³ Similarly, in an attempt to reach mainstream consumers, high-end designer Vera Wang has recently adopted a three-tiered branding approach: the top tier includes her pricey luxury bridal wear, the middle tier is made up of her eponymous line sold at accessible prices, and the bottom tier includes casual budget-priced brands—such as Simply Vera—that are selling like hotcakes through mass-market retailers like Kohl's.³⁴ Finally, high-end restaurateurs and star chefs have now adopted a low-cost venue—the food truck, traditionally used by hot dog vendors—to dish out gourmet items at affordable prices. In New York City you now find food trucks that sell lobster rolls, Van Leeuwen's artisanal ice cream, and even sophisticated dishes put together by celebrity chefs.

Create Incentive Systems for Salespeople to Sell Affordable Products

Western companies must recognize that jugaad innovation isn't just about designing affordable products. It is also about successfully selling these products in the marketplace. But successful selling won't happen as long as salespeople have the incentive to sell only big-ticket items. Instead, companies will have to align their sales force's incentive systems with the corporate strategy of doing more with less. Companies can address this issue by reorganizing their sales force along brand lines, with different salespeople responsible for the low-end and high-end segments. This will also help reduce any internal resistance based on the fear of cannibalization. Even better, healthy internal competition between divisions could drive sales and marketing personnel responsible for different brands to be more innovative in how their reach and keep their respective customers. Consider that for decades Procter & Gamble maintained a homogeneous sales structure, selling premium products to mainstream middle-class consumers. But as the purchasing power of middle-class Americans declines, P&G has restructured its sales force into two distinct groups that separately target high-income and low-income segments.³⁵

Design Affordable Solutions from the Ground Up

R&D teams should move away from pursuing overengineered “perfect products” and focus instead on developing “good enough” solutions. By “good enough” solutions we don't mean stripped-down versions of existing high-end products. Such solutions could leave customers feeling shortchanged and less than satisfied. And although a stripped-down approach could help reduce costs in the short term, companies will pay the price later, as designers will have to return to the drawing board and undo the problems caused by such quick-fix solutions. Rather, Western engineers need to create affordable solutions from the ground up. And emerging markets can help with this: they offer Western engineers a great training ground on which to practice such frugal innovation. Indeed, a few forward-thinking Western companies across sectors are increasingly using their R&D teams in emerging markets like India and China to develop minimalist solutions from the ground up that deliver higher value to customers. For example, when GE Healthcare's R&D engineers in India had to come up with low-cost alternatives to the company's high-end ECG machines to serve local needs with limited means, they didn't attempt to strip down GE's existing product to meet local price points. Instead, they went back to the drawing board and, based on deep observation of customers, they developed the MAC i, a radically affordable, portable ECG machine with basic features and a long battery life that is priced at around $500—one-twentieth of the cost of ECG devices available in the West.³⁶ Similarly, Nokia's 1100 model, an ultra-low-cost cellphone with a simple interface and a flashlight to help users see their way in the dark, was designed from the ground up for emerging markets. This product has been a huge seller in India and Africa, where millions of people who live beyond the reach of the electricity grid find a simple feature like a flashlight invaluable.

Engage Eco-Aware Consumers in the Sustainability Dialogue

An explosion of social media tools, such as Facebook and Twitter, has given rise to well-informed and powerful consumer communities around the world. Often, the consumers who participate in these communities congregate on product fan pages or websites created by other consumers, far beyond the reach of the company that offers these products. Frequently, participants in these user communities are young, frugal, and environmentally conscious. They aren't just looking for a deal; they're searching for—and willing to champion—products that fit into their personal value system. These consumer communities can help build brands they favor, or cause the demise of brands they disapprove of. Companies should proactively engage with such communities on issues like sustainability and resource scarcity—and use such engagement to identify ways to do more using fewer natural resources. Doing so will not only help companies shape their own strategies but also bolster their brand and help them differentiate themselves from competitors. Because most companies have been slow to understand how to work with user communities online, those companies that succeed in doing so can stand out from the competition and garner long-term brand loyalty.

Partner Extensively

Partnering with key external players offers a powerful way for companies to get more out of their limited R&D dollars. Partners can cost-effectively bring companies better ideas than they already have, help companies develop existing ideas more efficiently, or enable them to commercialize these ideas more extensively and at lower cost. An outstanding example of a company that has used partners to improve its R&D efficiency is Procter & Gamble (P&G). In 2000, A. G. Lafley, then P&G's CEO, noted that “for every P&G researcher there are 200 scientists or engineers elsewhere in the world who are just as good—a total of 1.5 million people whose talents we could use.”³⁷ Lafley wanted to tap into this global brainpower so P&G could innovate more widely, radically, and rapidly than before—without investing more in internal R&D. To do so, he set a challenge for his until-then internally focused R&D organization. Within ten years P&G was to move from being a research and develop (R&D) company to being a connect and develop (C&D) organization, one that sourced as much as 50 percent of its new product ideas from outside the company. To achieve this ambitious goal, Lafley opened up P&G's old R&D model to the creative input of a wide array of external stakeholders—customers, suppliers, universities, venture capitalists, and think tanks. In one instance, P&G found a cost-effective and speedy external solution to the problem of printing trivia questions in edible ink on Pringles chips. Rather than solving the problem internally (as they would have done in the past, thereby costing the firm a fortune), P&G used its links with universities around the world to identify a professor in Bologna, Italy, who had already developed a means of printing on pizza and bread. P&G then worked with this professor to adapt his solution to printing on Pringles chips. This collaboration yielded a commercially successful P&G product without incurring huge in-house R&D expenditure.

Our research shows that the strategies just outlined are among the more common ones adopted by Western companies who are embracing the jugaad approach to innovation. These frugal strategies are also the ones that we are increasingly called on to share with Western leaders who seek our advice on incorporating a “more with less” approach in their organizations. Of all the invitations we've received to consult on this jugaad principle, one stands out as particularly memorable.

PepsiCo: A Refreshing Approach to Doing More with Less

In January 2010, we had lunch with Indra Nooyi, chairman and CEO of PepsiCo, Inc. and, according to Fortune magazine, one of the world's most powerful women.³⁸ Nooyi had read an article in Bloomberg Businessweek that profiled our research on jugaad, and she was eager to discuss how PepsiCo had infused the efficient and innovative mindset that is jugaad's trademark into its operations.³⁹

Jugaad innovation is definitely on top of Nooyi's mind—and for a strategic reason. PepsiCo's products are made, manufactured, or sold in more than two hundred countries. They cover consumer preferences and needs that evolve on an ongoing basis. Given that the macroeconomic environment is in a constant state of change, PepsiCo must be ready to refresh and diversify its products to meet the needs of a dynamic marketplace—especially in light of the growing consumer demand for healthy and nutritious food.

Understanding the demonstrated potential of the global packaged-nutrition market—valued at $500 billion and growing—PepsiCo, the second largest food and beverage business in the world, has expanded its vast product portfolio to include foods and beverages that deliver positive nutrition.⁴⁰ Today, PepsiCo provides foods and beverages that are “good-for-you” (featuring brands such as Quaker and Tropicana), complementing its “fun-for-you” (with brands such as Pepsi and Lay's) and “better-for-you” (including brands such as zero-calorie Pepsi Max and Propel Zero) portfolios. This expansion into products that deliver positive nutrition is in line with Performance with Purpose, PepsiCo's guiding principle.

For PepsiCo, Performance with Purpose means delivering sustainable growth by investing in a healthier future for people and the planet. Specifically, four planks make up Performance with Purpose: financial performance, human sustainability, environmental sustainability, and talent sustainability.⁴¹ It is this push for sustainability, both financial and societal, that stimulates jugaad innovation at PepsiCo.

Nooyi has brought in the right talent to enable PepsiCo's expansion into the nutrition area. To hone PepsiCo's focus on nutrition, Nooyi appointed Dr. Mehmood Khan—an M.D. whose experience includes serving at the Mayo Clinic as the director of the Diabetes, Endocrinology and Nutrition Clinical Trial Unit and as consultant physician in Endocrinology—as PepsiCo's chief scientific officer as well as CEO of its Global Nutrition Group (GNG).⁴² Khan's crossover role, which is unique in the global food and beverage industry, enables him to translate the science of nutrition—in which he is an expert—into commercially viable products. Khan's goal as head of GNG is to grow PepsiCo's portfolio of good-for-you products to $30 billion in net revenue by 2020 by increasing the amount of whole grains, fruits, vegetables, nuts, seeds, and low-fat dairy in its global product portfolio. For instance, Khan's GNG team is researching ready-to-eat—and even drinkable—breakfast products that combine fruit, dairy, and grains like oats.

With the goal of identifying frugal business practices, PepsiCo also set up the Global Value Innovation Center in India in late 2010. Here is how Tanmaya Vats, who heads the Center, explains his mandate: “We want to discover disruptive business practices that can significantly lower the cost of operations in our supply chain—in manufacturing and distribution. We look for radical ways to reduce the capital intensity in our business model—by, for instance, developing cost-effective and eco-friendly capital equipment that delivers significantly more value and yet costs drastically less than currently available solutions.”⁴³ Rather than reinventing the wheel, Vats's unit is partnering extensively with jugaad innovators worldwide—such as academic institutions, researchers, entrepreneurs, and domain experts—who have already invented—or helped in inventing—jugaad solutions for making manufacturing and distribution processes more efficient. Once a promising jugaad innovation is identified for reducing capital intensity, Vats's unit will then work with various business units at PepsiCo to help adopt and roll it out globally.

Nooyi is also using a “bottom-up” approach to dealing with scarcity. She is empowering her employees in different regions to experiment with out-of-the-box solutions that address scarcity in their local supply chains.

One of the critical resources fundamental to PepsiCo's business is water. There is a clear need for PepsiCo to achieve water use efficiency to both improve product outputs and provide access to safe water for those in water-distressed areas. In India, an environment of severe water scarcity prompted members of the PepsiCo India team to investigate ways to reduce water use throughout the supply chain. For example, they developed an eco-friendly agronomic technique called “direct seeding” of rice paddies. Here is how direct seeding works. In India, rice is traditionally cultivated by sowing seeds in a small nursery where they germinate into seedlings. The seedlings are then manually transferred into the main field and grown with four to five inches of water at the base of the crop for the first six to eight weeks, mainly to prevent weed growth. Direct seeding, in contrast, avoids three basic water-intensive operations—puddling (compacting the soil to reduce water leakage), transplanting, and growing in standing water—thereby saving on average about 30 percent of the usual water requirement in paddy cultivation, or approximately 900 kiloliters (238,000 gallons) of water per acre. In addition, direct seeding cuts greenhouse gas emissions by 70 percent.⁴⁴ In essence, direct seeding helps farmers increase their yields while reducing their water input and saving time. While experimenting with direct seeding, the PepsiCo India team members relied heavily on jugaad. For instance, rather than designing their direct sowing machine from scratch, they repurposed an imported peanut planter powered by a normal tractor—and had their repurposed machine prototyped and built by a small local manufacturer.

Impressed by the success of the direct seeding experiment, PepsiCo's management picked up this grassroots innovation and piloted it on a larger scale across a few Indian states over a three-year period. The pilot was a huge success—farmers were raving about the results, which generated cost savings of more than 1,500 rupees (US$33) per acre, thus raising net revenue/return per acre. In 2010 alone, through direct seeding, PepsiCo India saved more than 7 billion liters (1.85 billion gallons) of water, which helped make it water positive in India—meaning that the company was saving more water through frugal initiatives such as direct seeding than it was consuming in the rest of its business.⁴⁵

Nooyi is also fostering some healthy competition among its regional business units to encourage them to embrace the “do more with less” principle.⁴⁶ For instance, PepsiCo's beverage plants in India draw about two-fifths of their energy consumption from renewable sources such as biomass and wind turbines. The jugaad example set by the PepsiCo India team is serving as inspiration for—and is being replicated in—other regions, including in the United States, where PepsiCo Frito-Lay's Casa Grande, Arizona, facility has achieved “near net zero” status, running primarily on renewable energy sources and recycled water while producing nearly zero landfill waste.⁴⁷

In the end, PepsiCo's pursuit of efficient and responsible use of resources is what allows the company to deliver on its Performance with Purpose promise, using jugaad principles. As Nooyi told us: “We need to bring a frugal mindset to the United States, which is going to face scarcity of all sorts in coming decades. PepsiCo and other U.S. companies need some jugaad thinking to come up with economical and healthy solutions that deliver better value to our customers—and do so in a responsible way.”

By reframing scarcity as an opportunity to drive disruptive innovation—a key attribute of jugaad thinking—Nooyi is positioning PepsiCo for sustainable success in a global economy characterized by eco-aware, frugal, and health-conscious consumers. Indeed, if Nooyi's experiment with “doing more with less” succeeds, PepsiCo's efficient business model will revolutionize the global food and beverage sector for many years to come.

Conclusion

As we've seen, because emerging markets face scarcity on a grand scale and across the board, jugaad innovators who operate within them are masters of frugality and the art of doing more with less. Western companies, however, are facing scarcity too—as they confront dwindling natural resources and value-conscious and demanding consumers. To survive in this dawning age of austerity and scarcity, Western leaders need to learn from jugaad innovators like Gustavo Grobocopatel of Los Grobo (Argentina) and Sunil Mittal of Bharti Airtel (India) how to get more from less by applying frugality to every link of the value chain. Western leaders can also learn from Jane Chen (Embrace) and Ravi Pandit (KPIT Cummins) how to help their customers get more value for less cost by offering them quality products and services at very affordable prices.

Practicing frugality, however, requires a fundamental shift in how Western companies think and operate. Western leaders need to eschew their traditional “bigger is better” R&D approach. They need to radically overhaul their R&D structure and incentives systems to create and sustain a frugal culture in their organization that espouses “doing more with less” as its core value—just as Indra Nooyi is doing at PepsiCo.

However, jugaad innovators aren't focused only on frugality and responding to adversity. To do more with less and turn adversity into opportunity, they also draw on another key principle of the jugaad approach: thinking and acting flexibly.