ROLAND BERGER SRL

 | 

CODRUT PASCU

  |  2013-11-07

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)

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ROLAND BERGER SRL


CODRUT PASCU

CODRUT PASCU

MANAGING PARTNER at ROLAND BERGER SRL

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.

 

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