According to the Economist, "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...."
Therein are the dots we can use to connect to Chen’s theory. His 80-3-2 rule also addresses the issue of how a company finds a way to develop a product and a business process to squeeze costs, gain volume and reach millions of new customers.
(Full disclosure here. The Economist article was first pointed out to me by a U.K.-based engineering executive who works for Taiwan’s chip giant MediaTek. He was explaining how MediaTek’s recent success has a lot to do with "frugal innovation." MediaTek, virtually unknown 10 years ago, is now a power house with huge market share in the Chinese smartphone and media tablet markets.)
MediaTek has fundamentally changed the playbook for the chip industry here, especially for smartphones and tablets. More chip suppliers for smartphones and tablets who are competing with MediaTek are now expected to provide similar “turnkey systems” that MediaTek delivers, rather than just reference designs.
Technology development, especially in the electronics industry, has historically been one-dimensional. It all pretty much comes down to how your engineering team makes a system operate faster, run more apps and features, while consuming less power.
Frugal, or reverse, innovation and the 80-3-2 rule both suggest that it’s time to rethink innovation in more in multi-dimensional terms.
I can think of two good examples for how ignoring reverse innovation costs companies.
Much has been written about the decline of mobile phone maker Nokia. Many blame it on Nokia's late entry to the smartphone market. I disagree. Nokia’s failure is directly related to its inability to beat its competitors in the global feature phone market, where Nokia once dominated. Mind you, Nokia had quality products and production was outsourced. Still, Nokia neglected to develop a “good enough” product, and failed to develop a more innovative and imaginative process.
The same goes for Japanese LCD TV manufacturers like Sharp, which insisted on building a mega fab to handle ultra-thin, large LCD panels. Sharp's strategy, which raised Japanese manufacturing to the highest "craftsmanship-like" level, was admirable but, ultimately, wasted effort. Sharp’s job was manufacturing TVs, not developing works of art.
Chinese companies that are repeatedly bashed for their reverse engineering practices may soon surprise the world with their reverse innovation ingenuity. If successful, they could reach the neglected 6 billion people on the earth.
Meanwhile, China's competitors, still steeped in the one-dimensional technology innovation, will be scrambling to compete in the replacement market of 1 billion consumers in developed countries.
Many companies fail because they do not have adequate funding to maintain their daily operations through the difficult economic periods. There are many large companies like Nokia that have the funding to get through slow business cycles. However there are many really good small businesses that are struggling in this difficult economy and do not have the funding to get through tough cycles. Either bad credit has limited a company's ability to access business loans or the business has simply exhausted all available capital.
What many of these business owners do not realize is that today there are business loans for bad credit and other types of funding available online. A great example of a lender offering bad credit business loans can be found at https://shieldfunding.com/business-loans/business-financing-options/bad-credit-business-loans.
It is the first time that I hear the name 80-3-2 but the practice described is something that has been done by many companies before. I am not fully convinced that it is applicable in all cases. If you can offer 80% of the spec at one third of the price, you can maybe double your revenue but what will your margin be? Maybe Feng Chen can let us know the fourth number in the sequence?
Smart phones and tablets are still a growth market driven by new functionality and specs. Chinese companies have been trying to get a foothold by offering the same for a lower price but I do not think that they have been successful. These comanies often do not offer the same but less for indeed a lower cost. There is rumor these days that chinese companies are looking for consolidation or possible take-overs.
The same holds to some extent for Taiwanese companies. Mediatek is still there but the big breakthrough predicted 3 years ago has not happened. They have not been successful to take significant business from Qualcomm. Not because they are not cheaper but because they have not been able to offer a good 3G solution on time. They have now merged with one of their former competitors. The other problem Mediatek has had is that the pirate phone market in China is no longer what it was.
This may all change when the smart phone and tablet market stop innovating and competition starts to focus on price rather than on functionality. I think that we are not there yet.
Just my two cents...
You are correct, the so-named 80-3-2 is nothing new. People call it different names at different times. Japan, Taiwan, Korea all took this approach in the past. I am surprised that this is considered new at all especially when history always repeats itself!
Thank you for the article and stimulating conversation. There is another imortant item that might need attention.
Nufront (about which I know next to nothing) just introduced a 3G baseband (TeLink7619)chipset (BB+XCVR+PMU) in SiP - the baseband uses CEVA DSP in 65nm.
What is interesting is that Samsung also introduced an 4G LTE baseband (backward compatible down to 2G) - also based on CEVA DSP.
So the question is who designed these basebands - CEVA or IC vendors? Does CEVA now has an 4G LTE baseband? Since SW is very different between 3G and 4G basebands.
It would be great to review CEVA - it looks like it is becoming in BB DSPs as significant as ARM cores in application processors.
Many thanks in advance.
I think The 80-3-2 rule works for Chinese manufacturers trying to sell their products globally. Because of their inherent lower cost structure, they can use this strategy.
Cost of capital is way too low.
I too was immediately reminded of Muntzing as I was reading this story.
But "reverse innovation" can also be described simply as re-writing the technical specs and including lower cost as a fundamental spec that takes priority over performance or design margins.
Muntz figured out that a TV set could still function without things like "extra" capacitors, which allowed him to make the TV set cheaper, but also less reliable.
Another example would be restricting the number of unique parts in a product's bill of materials, to reduce inventory handling costs and to maximize volume discounts -- as when an engineer specifies a single 3.3 uF cap somewhere on his board, while using a number of 2.2 & 4.7 uF caps elsewhere on the same board. The reverse-innovation minded boss tells him sorry, you can't use 3.3 uF -- it has to be either 2.2 or 4.7, and we will take the performance hit or design margin hit or whatever.
Bear in mind that it costs far less to *live* in China than it does in the West. That "1/3 of the salary of their western counterparts" may be good money, relatively speaking, and a Chinese worker might be better off in terms of what their money will buy than their western counterpart.
And the factory workers who get the press in the west tended to be peasants from rural areas. Those factory jobs offered better hours, better working conditions, and much better pay than being a farmer back home, so there was competition to *get* those jobs. China is coping with urban sprawl and inadequate infrastructure as it copes with the migration from country to city.
China's lower cost vis the West has more than one underlying cause.
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