Example: General Electric's VSCAN perfectly demonstrates the principles of frugal innovation. In the 1980s GE's Healthcare division was the leading provider of traditional ultrasound machines in the world. They demanded premium price for their superior products, but when they tried to penetrate the Chinese market through traditional strategy they made little inroads in ten years of trying. Their products were too pricey (>$100k), especially for the rural regions of China.
Subsequently, GE established a local growth team (LGT) with full profit responsibility in Wuxi (China) - consisting of a small cross-functional entrepreneurial unit whose first task it was to understand the local market's needs, work flow, and most important, what ultrasound applications were in biggest demand. This LGT reported directly to the highest level back at GE headquarters, and was able to leverage the full resources and capabilities of GE's research labs across the world.
They started with a clean slate in 2002 and with the help of a technology break-through in another project in an Israeli laboratory, the team managed to replace the expensive custom hardware of traditional ultrasound machines with orders-of-magnitude cheaper software. Hence the VSCAN, a portable, lightweight and ultra-low cost ultrasound device was introduced in 2010, and it took the Chinese market by storm.
This device reportedly offers 50% of the solution at around 15% of the price of a low-end traditional unit. Were they to follow good-enough innovation, the end result would not have been possible.
A frugal innovation fulfils the same basic purpose as an existing first-world product but is engineered, from scratch, specifically for resource-constrained consumers in emerging markets.
To achieve this frugal innovations often utilise new technology platforms and product architectures and hence are offered at a much lower price, typically 10 to 20% of the equivalent premium product.
Frugal innovations may sacrifice somewhat in terms of performance when compared to the premium product, but will always meet the acceptable use requirements of the target market.
Source: Zeschky et al., 2014