- Rollin King, Herb Kelleher, and Lamar Muse
co-founded Southwest Airlines in 1967.
Their value proposition?
At least 60% lower fares than the average of other airlines.
They would serve customers who were being viewed
as non-viable by other airlines.
That is, extremely price-sensitive customers
who would otherwise travel by car, rail, or motorbike,
or not travel at all.
Southwest's success
has wildly exceeded the founders' expectations.
Its market value remains higher than United,
American, or Delta airlines.
In many years, it has exceeded the combined market value
for all three.
Southwest's business model has also been copied
by a number of airline startups worldwide,
including JetBlue in the U.S.,
AirAsia and IndiGo in Asia,
and Ryanair and easyJet in Europe.
Southwest figured out
how to achieve dramatically lower costs
despite flying the newest airplanes
in the industry with the best-trained pilots
and a unionized workforce.
It continues to be rated as the safest major airline
in the world.
Obviously, Southwest did not scrimp
on any of the fundamentals in the airline business.
Instead, the company pioneered
what I call "frugal innovation."
That is, the design of an ultra-low-cost business model
by eliminating waste across the entire system.
Let's look at some of Southwest's wild ideas.
First, no travel agents.
They use secondary airports in large cities.
They have only one class of service.
They used a standardized fleet
with just one type of aircraft,
resulting in much lower training and maintenance costs.
They have a high level of employee stock ownership
and flexible union contracts
and 15-minute rather 40-minute gate turnarounds
and thus much longer flying hours
for each aircraft in a typical day than the other airlines.
With the rapid rise of emerging markets,
the concept of frugal innovation is now being embraced
by a growing number of companies
across a wide range of industries.
In emerging markets, one of the biggest challenges
that companies face is the very low buying power
of potential customers.
Take China and India, the two biggest emerging markets.
The average Chinese is only 15% as rich
as the average American.
The average Indian, only 4% as rich.
Given the very low buying power,
companies have three choices.
They can focus on just the very top of the income pyramid
and ignore the rest for the next decade or two.
They can create very basic, good-enough versions
of their rich-country products
by eliminating all secondary features.
Or they can pursue frugal innovation
and develop a game-changing alternative.
Take GE, for example.
Some years back, GE India launched Mac400,
a portable electrocardiogram, or ECG, machine,
priced at just a few hundred dollars,
a fraction of the price of its standard ECG machines.
So what was the company's goal?
To address an unmet need in poor rural markets
that otherwise could not afford ECG tests.
The Mac400 was a small, portable ECG machine,
a first in an industry worldwide.
Instead of asking a rural patient
to visit the city-based hospital,
a doctor could carry the portable machine in a backpack
on a trip to the villages.
Using laptops as role models,
engineers used leading-edge technologies,
such as chip design and software,
coupled with modified versions
of existing cell phone chargers.
They also opted for components already in widespread use,
such as low-cost printers used for printing bus tickets.
To its pleasant surprise, GE discovered
that portable ECG machines have a big market
in the U.S. and Europe also.
An upgraded version has been wildly successful
in this market.
The key to success at frugal innovation
lies in the following:
Be extremely customer-centric
to figure out core functionalities
and the target end price.
Then leverage as much of the current infrastructure
as possible in order to keep costs low.
And undertake a complete redesign
of the entire system from the bottom up.