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.
Yes, certainly the 80-3-2 rule makes sense, although those exact numbers might not, in every instance. I don't think we need to limit this "rule" just between Eastern and Western products, though.
Most companies offer multiple similar products at different price points. True for cars, true for clock radios, true for TV sets, refrigerators, and anything else you can name. GM USA can sell a whole lot more volume if they offer Chevy Cruzes AND Cadillac XTSs.
The problem I see is mostly that the trade media has come to assume that the way Apple operates is the way Western industry operates, and all the rest happens in the East. This is all part of the media hype surrounding Apple products.
Understanding China's approach to innovation is fundamental to figuring out the future direction of technology markets. There is another name for what Junko Yoshida describes above, a notion called "second-generation innovation," an approach that has worked very well for China. It allows Chinese companies to limit risk while serving domestic markets and generating more than enough profit to keep pressing ahead.
Join our online Radio Show on Friday 11th July starting at 2:00pm Eastern, when EETimes editor of all things fun and interesting, Max Maxfield, and embedded systems expert, Jack Ganssle, will debate as to just what is, and is not, and embedded system.