Management

The Case for Frugal Thinking


The Case for Frugal Thinking

Photograph by Ruth Fremson/The New York Times via Redux

This has been adapted from Vijay Govindarajan’s latest book, Reverse Innovation: Create Far From Home, Win Everywhere (Harvard Business Review Press).

Innovation in the rich world is based on the approach “Spend money and innovate.” In the U.S., you can see this clearly in health care. We push the frontiers of medical science and technology with very little attention paid to cost. Our health-care system is prohibitively expensive, yet does not guarantee the highest quality; nor does it provide universal coverage.

There is an alternative model of innovation: “Spend less and innovate.” This is the only feasible model in poor countries that are resource-constrained. As some companies have discovered, constraints can be liberating. This notion is at the heart of reverse innovation. General Electric (GE) was able to come up with an ultralow-cost electrocardiogram (ECG) only when it bumped up against many constraints in rural India.

The ECG is the most widely performed cardiac test in the developed world, and GE Healthcare is the market leader. An ECG machine costs about $5,000 and a scan about $20. This complex equipment is heavy and bulky, and requires a skilled technician to operate it, as well as elaborate service support. In other words, GE’s premium ECG machines were nonstarters in rural India, because patients didn’t have the money to pay for the test and small clinics and physicians couldn’t afford the machine or the support costs.

These constraints defined the sandbox for GE Healthcare to develop an $800 ECG machine for rural India that is portable, battery-operated, easy-to-use, and easy-to-repair.

GE found many ways to cut costs. The high-end machine was custom-designed, so GE built a machine using commodity components, realizing huge cost advantages. For a cost-effective printer, GE used the kind of ticket printer found on public buses and in movie theaters. Since these printers are produced in the millions, GE could enjoy significantly lower costs due to economies of scale.

The small printer reduced the weight of the machine—less than a can of Coke—and helped make it portable. By eliminating the monitor, GE reduced the need for huge power consumption. This, in turn, contributed to longer life for the rechargeable battery.

GE also found ways to build a machine that if you know traffic signals, you can operate: A “green” button indicates start and a “red” button means stop. GE did away with the need for extensive service support, designing the machine with a few standard modules that can be easily replaced. If the device failed, users could swap modules.

What this example illustrates is the need to shift our innovation process to frugal thinking based on constraints. GE’s innovation in India has transformed its global business, since the machine is sold in more than 90 countries. Thus, reverse innovation has come full circle.

Vijay_govindarajan
Vijay Govindarajan is the Earl C. Daum 1924 Professor of International Business at the Tuck School of Business at Dartmouth. He writes a blog and a newsletter on innovation and execution. His most recent book is Reverse Innovation: Create Far From Home, Win Everywhere.

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