Frugality

In the past few weeks the word 'frugality' has cropped up in connection with organizations and consumers. I wonder if it is the new buzz word and we are now going to see a crop of books on 'frugal organizations'? This could be a good author opportunity – there are many books on frugal living including 'Frugal Living for Dummies' but nothing specifically about frugal organizations that I stumbled across when interrogating amazon.com.

An article in strategy+business, March 15 2010, 'The New Consumer Frugality' reports that

A new frugality, characterized by a strong value consciousness that dictates trade-offs in price,
brand, and convenience, has become the dominant mind-set among consumers in the United States – and probably in other wealthy countries as well. Two-thirds of American shoppers are cutting coupons more frequently, buying low price over convenience, and emphasizing saving over spending. Per capita consumption expenditure has declined across demographic groups. Consumer sentiment remains weak. These trends are not going to change, no matter the pace of economic change.

Some organizations already have a mindset of frugality. Walmart is the classic example here. There's a debate on this in Business Week putting the pros and cons of Walmart's approach, and there are many tales (perhaps apocryphal of Walmart employees sharing hotel rooms, using free pens, etc that reinforce the image of very tight financial controls). Tesco has a similar attitude – for example, its headquarter building reflects caution when it comes to discretionary spend.

McKinsey Quarterly in discussing China's economy made the point that it growing it faced several challenges one of which is the consumption to GDP ratio. A related debate noted that:

Spending by Chinese households as a percentage of GDP is roughly half the US consumption ratio and remains significantly below private spending levels in Europe and Japan. And despite rising sales of items such as automobiles and household appliances, the ratio of private spending to GDP in China today has actually fallen relative to Chinese spending levels of a decade ago.

Austerity, with similar connotations, is another word being bandied about. HBR in 2004 printed an article on Funding Growth in an Age of Austerity by Gary Hamel and Gary Getz but it's one worth reading again at this point as it suggests that cutting spending on innovation is not the way to go even in frugal organizations

"Everyone knows that corporate growth–true growth, not just agglomeration–springs from innovation. And the common wisdom is that companies must spend lavishly on R&D if they are to innovate at all. But in these fiscally cautious times, where every line item of every budget in every company is under intense scrutiny, many organizations are doing just the opposite.

The pros and cons of frugality are many but and leadership attitudes to this shape organization designs. The point made by Bai Chong'en, Professor and Chair of Department of Economics, Tsinghua University, is worth leaders bearing in mind as they design and redesign their organizations:

The old consumption pattern cannot be sustained any more. The main idea now is how to create consumption for all these consumers-from China, India, and from other countries-given our resource constraints, given our environmental constraints. That's the biggest challenge to the world.

Designing frugal organizations that add value different from financial growth and conspicuous consumption may be the way to go.

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