When Less is MorePosted: September 7, 2012 Filed under: Strategy and Execution | Tags: Haier, innovation, middle-class, pricing strategy, product development, strategy 1 Comment
A number of factors are making it more attractive for established companies to develop products and services that are dramatically lower in price (and cost), One factor in developed markets is the inexorable squeezing of the middle class and its pocket books. “The West is doomed to a long period of austerity, as the middle class is squeezed and governments curb spending. Some 50m Americans lack medical insurance; 60m lack regular bank accounts. Such people are crying out for new ways to save money,” wrote the Economist in its coverage of this phenomena titled “Asian Innovation.” In their journal, Outlook, Accenture, a consultancy, wrote that a
long-term shift in demand is reduced consumer spending and increased frugality in developed markets, where cost-conscious customers are demanding more value at lower prices. At the same time, demographic trends in many developed economies, such as the slowing rate of women entering the workforce, have reduced the growth of household income, driving further reductions in spending.
Yet despite the opportunities, managers too often treat cost reduction and innovation as separate activities. Cost reduction is mainly applied to mature products that have run out of steam, especially during times of economic expansion. Meanwhile, little attention is paid to managing the costs of driving further innovation in new products with enhanced features.
Now, in leaner times, companies can more easily bring a cost focus to the design and development side of the business, attracting customers through cost-driven innovation. They can look to provide, at one end of the price spectrum, ultra-low-cost but well-designed basic products. Near the high-price end, they can uncover ways of adding new features at minimal cost.
The second reason is that firms developing products for the smaller incomes (but increasing aspirations) of developing markets are, by necessity, developing ways to develop and build things that provide high utility at much lower cost, altering the entire value equation and threatening not only the prospects of Western firms in those markets but their developed markets when the firms from abroad start selling their high-value products in the West.
For example, cites The Economist, “India’s Mahindra & Mahindra sells lots of small tractors to American hobby farmers, filling John Deere with fear. China’s Haier has undercut Western competitors in a wide range of products, from air conditioners and washing machines to wine coolers. Haier sold a wine cooler for half the price of the industry leader. Within two years, it had grabbed 60% of the American market.”
Although fear of cannibalizing their own sales has been the reason/excuse to not take action, it is a moot point if an off-shore firm takes your sales away anyway. In addition, companies often fail to imaginatively explore the potential for increasing markets by dramatically lowering prices.
GE’s Vscan, a portable ultrasound device that allows doctors to “see” inside patients, was developed in China and is now a hit in rich and poor countries alike. (Mr Immelt believes that these devices will become as indispensable as stethoscopes.) Walmart, which created “small mart stores” to compete in Argentina, Brazil and Mexico, is reimporting the idea to the United States.
The standard worry among Western firms is that this strategy will cannibalize the existing market for expensive technology. Why buy a $10,000 device if the same firm makes a slightly simpler one for $1,000? This is too pessimistic. GE opened up a new market among doctors for its cheap electrocardiograms; previously only hospitals could afford the things. Besides, standing still is not an option. Whether or not Western firms sell frugal products in the West, Asian firms will.
Several books have highlighted this trend in the developed markets such as “Treasure Hunt” by Michael Silverstein who writes about how consumers will trade down on many items to afford to trade-up on the few items that matter most to them. There are also many books, gurus, and websites dedicated to the idea of the simplification of lifestyles and the reduction of consumption in general. Firms ignore these ideas at their peril.