ANALYSIS
FRUGAL INNOVATION AND ENERGY: FASTER, BETTER, CHEAPER
An expert in international business, marketing and innovation, Professor Jaideep Prabhu of University of Cambridge’s Judge Business School explains how frugal innovation is inspiring people to do more in the energy sector using fewer resources while delivering better results
You are a co-author of the best-selling book Jugaad Innovation: A Frugal and Flexible Approach to Innovation for the 21st Century. What is jugaad innovation? Jugaad is the word that people in India use to describe frugal, flexible and inclusive innovation. It is not just about frugality – you know, doing more with less – it’s also about ingenuity. Thinking outside the box and laterally to find a way around problems. Often, there is a social component to jugaad innovations. They try to address some kind of market gap where basic needs are unmet in the mass market. Is jugaad innovation the same thing as the Western concept of frugal innovation? To me, these two terms are essentially the same thing. Like jugaad innovation, frugal innovation captures basic ingenuity where people are trying to do more and better with less. The word frugal makes it sound like the concept is specifically about finance. Is this true? Some people equate the word frugal with cost cutting, but frugal innovation is not just about cutting costs. It is about coming up with better solutions using less.
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INTERNATIONAL INNOVATION
To achieve this, innovators and entrepreneurs are having to go back to the drawing board and rethink a whole problem to then come up with a solution that is just as good (or preferably better) than the current solution in place while also having more desirable characteristics; for example, a lower carbon footprint. It’s no small order! Often when you talk about jugaad and frugal innovation, you also mentioned the formal and informal economy. Who is part of the informal economy and why? There are about 4 billion people – which is about half of the world’s population – who are outside or have limited access to the formal economy. There are many attributes that qualify someone as being in the informal economy. People in this economy do not have access to the kinds of everyday solutions we take for granted in the formal economy – banking, for instance. Many people equate the informal economy with developing countries. Is this fair? Not at all. The number of people in the informal economy who live in Western Europe and North America is shockingly high, as shown by a recent study that the US’s regulator for the banking industry – the Federal Deposit
Insurance Corporation (FDIC) – published a few years ago. It found that approximately one-third of US households are either unbanked or underbanked (eg. not fully using the banking system and don’t have credit cards, etc.). It also found that, at least in the US, there is a very large number of people who operate in the cash economy. Often they are migrants who don’t see the benefit of having a bank account or simply cannot gain access to one where they pay a monthly fee. Since people who are not banked, or are underbanked, do not have access to formal ways of saving, borrowing, insuring themselves or paying bills, they often have to resort to informal ways of getting the same services. What types of informal methods are starting to crop up? Innovative business models involving mobile phones is a major one. Whilst people in the informal economy may not have access to things like banking, they do have access to mobile phones. Not only is this tool helping people across the planet communicate, it is also helping those in the informal economy gain access to financial services they would not have otherwise had, for instance through mobile payment services like M-Pesa. Increasingly, financial service providers are starting to use mobile phones’ data to track how people pay their bills and to get a sense of a person’s credit worthiness. Another solution that we see cropping up in the emerging world is similar to a ‘pay-as-you-go’ model. People are paying bills in tiny chunks – perhaps pennies at a time in some cases. For example, in Kenya a company called Azuri Technologies offers pay-as-you-go solar systems that provide energy to rural, off-grid communities. Azuri collects payments using prepaid scratch cards. How does that work? Azuri will come and install a kit in a home and every week the homeowner will buy a scratch card that reveals a number the homeowner must then text to a central server. This server sends back a code that the homeowner must punch into their equipment, allowing the energy to flow from the panel to the lights for a week. This example shows another hallmark of the informal economy – namely, that people in this economy often don’t have access to the electricity grid. How has jugaad and frugal innovation started to apply to the energy sector? The energy sector is such an important sector. It is at the heart of pretty much everything. For example, you quite often can’t have good healthcare or education without energy. Unfortunately, large parts of the world – more so in the emerging world, but also in the developed world – don’t have access to cheap, clean energy. Especially in developing countries, they still have to use things like kerosene or biomass for lighting, cooking and heating. These are bad for their health – for example, kerosene can cause fires and kill people in huts – and for the health of the environment. Whilst we have technologies that are clean (such as solar) that also provide a much better quality of electricity,
we need to overcome a new challenge affecting the developing and developed world alike – the cost! This is where we are seeing very innovative models. The frugal innovations are not so much about the technology (though the technology is frugal because it is using fewer resources or ones that are renewable), as much as they are about the business model. As in the Azuri example, entrepreneurs are figuring out how to make clean energy affordable for people considering a wide array of complexities – such as those who are earning on a daily basis, only have small amounts of money to spend, don’t have bank accounts and can’t buy things upfront. There seem to be some deep-seated social elements underpinning these frugal innovations and their success. Can you discuss the social side of frugal innovation? One of the very exciting things I have encountered is the rise of what one can call social businesses. These are social enterprises or start-ups that are trying to solve a specific problem. While their objective is similar to companies (eg. they are market driven, want to generate a profit and aim to scale their activities), their metrics are more like a charity’s. For example, instead of shareholder returns, they may be more interested in number of lives impacted. Increasingly, we are also seeing big businesses being as concerned about other stakeholders (eg. customers, regulators, members of society) as they are about turning a profit and maximising shareholder value. There are many industries having to be increasingly like this, not just energy – food, banking and fast moving consumer goods, to name a few. Finally, we are seeing purpose-led organisations. Unilever is a leader in this field. For example, its CEO Paul Polman launched the Unilever Sustainable Living Plan that calls for the whole company to double its sales and halve its footprint by 2020. Why do you think this social enterprise trend and greater focus on purpose and values are on the rise? The social mission seems to be coming back to large companies for all sorts of reasons. I think in many cases companies are recognising that it is in their strategic interest to do these things. For their own long-term viability they need to think about securing scarce resources such as water, wood, minerals, etc. Moreover, they have to secure their customers and their employees. They are thinking up credible stories that will bring all these people along with them on their journey. For example, things like the Sustainable Living Plan give everyone a vision of what to do and a purpose that is beyond ‘sell more of this stuff no matter what’. In fact, Unilever was recently the third most searched company on LinkedIn behind only Apple and Google! I believe it is because they are giving people a larger purpose to work towards.
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