Developing winning
products for emerging markets
To
master the extremes of a fast-changing competitive landscape, challenge your
company’s assumptions about designing, developing, and manufacturing
products for these regions.
A large automaker designed, developed, and—with appropriate fanfare—launched
a commercial truck in India’s burgeoning and highly competitive market. The
vehicle was engineered to let owners in a range of emerging markets run the
trucks longer and faster, and at a relatively low operating cost. Higher asset
utilization, company leaders believed, would improve profits for truck owners
and, ultimately, the automaker.
The truck was a disappointment. The
company hadn’t adequately accounted for India’s poor roads and infrastructure,
which often prevent vehicles from maintaining the most efficient operating
speeds. Even though the truck’s price was competitive against local
offerings—and half that of a comparable vehicle in developed markets—in the
buyers’ eyes the potentially higher utilization wasn’t worth the expense.
Think this was a ham-fisted
multinational dabbling in a market it didn’t fully understand? Think again: the
automaker was based in India. To be sure, multinationals tend to suffer such
setbacks more often than local players do, but this company’s example
underscores the difficulty of understanding customer needs in fast-changing
emerging markets.
Indeed, around the same time,
another domestic competitor suffered a similar fate. That company’s commercial
vehicle, offered at an even lower price, was also tailored for India; it
featured a lower-capacity, low-cost engine well-suited to run efficiently on
the country’s grid-locked roads. Yet it too proved a letdown. The cause: an
unfairly earned reputation for unreliability that the company ultimately
attributed to owner–operators who, to maximize profits, overloaded the trucks
far beyond recommended weight limits. Within a couple of years, the overloaded
engines began to malfunction, customers became angry, and the vehicle’s sales
plummeted.
Such cases underscore the challenges
of designing, developing, and manufacturing products for fast-changing emerging
markets—environments where customers are both extremely price conscious and
demanding. Against this backdrop, a growing number of companies find that they
must reexamine their traditional approaches to product development and tailor
them to these realities. We call this process “design to value.” In some cases,
designing to value means applying traditional tools in new ways, in others
adopting a new mind-set about what customers want and how to deliver it.
It’s still early days in this space,
and no organization has yet mastered the challenges. But a look at the
practices that leading product developers use offers at least three lessons for
companies wrestling with the extremes of competition in emerging markets. The
urgency to adapt will only increase as consumption in these markets contributes
a growing share of global economic growth in the decade ahead.1
1.
Shake up your thinking
The combination of rapid change and
heightened competition in emerging markets puts a premium on useful customer insights,
even as they become harder to get. Indeed, poor infrastructure, vast distances,
and fast-changing customer segments make traditional fact-gathering approaches
(such as ethnographic research or even focus groups) expensive and
time-consuming. Therefore, top companies don’t pass up any opportunity, however
modest, to sharpen their understanding of customer needs.
Collision workshops—which might
include customers but primarily convene suppliers, marketers, product
engineers, and other company representatives— can help. They offer a low-tech
way of quickly generating and discussing customer insights and a forum to
identify hypotheses that companies can later test more traditionally. To some
extent, these meetings represent a cheaper and more flexible way of generating
the kinds of insights that R&D pioneers such as Bell Labs and IBM’s Watson
Research Group achieved through formal, multidisciplinary R&D labs. As with
these venerable examples, an important goal of collision workshops is to challenge
ingrained habits of thought by pulling together representatives from functional
groups that normally don’t interact.2
The resulting insights can be quite
useful. An automotive-parts manufacturer in a fast-growing Asian market used a
collision workshop to identify a new niche in its wheel business. During a
discussion about products for passenger vehicles, a marketer mentioned that the
company’s wheels were heavy—an observation he’d heard from a customer. This
comment, made in passing, intrigued the engineers in the room, who went on to
sketch out a counterintuitive proposal that the company ultimately refined and
adopted: using a slightly higher grade of steel to make wheels lighter and more
fuel efficient. Even though the new steel was more expensive, the company
lowered its total costs because the wheels now required less steel than they
had before.
A large telecommunications and
data-services provider used a collision workshop to discuss how B2B customers
in smaller, tier-two and -three cities differed from those in the largest urban
areas. The “aha moment” came when marketing and pricing experts teamed up with
product engineers to ask whether the company might offer price discounts to
some customers in smaller cities in exchange for slightly lower network uptime
than the near-100 percent guaranteed to commercial customers in major
metropolitan areas. The company ultimately found it could lower its price for
some customers in tier-two cities, making its offer highly competitive there,
while slashing the cost to serve by a factor of four through the use of a
different network architecture and a simpler, redesigned version of its
standard network-switching equipment.
Another way companies shake up their
thinking is to look beyond traditional competitors for design ideas. A low-cost
appliance maker learned of a more high-tech approach for coating its fans by
studying painting techniques developed in the automotive industry. The fan
maker’s executives had always resisted technological solutions, preferring to
substitute labor for capital because of low workforce costs. But after studying
the automakers’ approach, which kept the thickness of each coat of paint to specified
levels, the executives changed their minds. Ultimately, a 4 percent savings in
paint costs more than offset the expense of new equipment.
Similarly, a global farm-equipment
manufacturer looked to an adjacent vehicle category in which it didn’t compete
to create a simpler, cheaper design for the claw mechanism in a new low-cost
rice-transplanting machine. By applying this thinking to other products, the
company also identified comparable improvements in a different low cost product
line.
2.
Start from scratch
By now, most companies recognize
that trying to interest discerning emerging-market consumers in stripped-down,
low-cost versions of the products they sell globally is a recipe for letdown.
Yet many companies still aren’t fully aware of how far they must go to
differentiate their products for these customers. Top companies, by contrast,
are highly disciplined, even relentless, about setting priorities and putting
aside existing assumptions. Leaders start by identifying the most important
feature or two and focusing heavily on them (exhibit). This approach is quite
different from the one that many companies tend to have: regarding all features
as equally valuable and preferring more rather than fewer of them—an attitude
deeply ingrained in some engineering cultures.
The farm-equipment maker started
with a feature that its analysis showed mattered most to small-scale farmers:
the durability of tires. Farming in one region required considerable
back-and-forth driving in mixed terrain (tar roads and soil). By redesigning
tires to maximize their useful life, the company made its vehicle far more
appealing to local customers. This company’s crucial willingness to challenge
its assumptions ultimately led to a broader set of improvements.3
By contrast, companies that fail to
reexamine the assumptions inherent in their product designs risk making
ill-informed decisions. A global maker of electrical products learned this the
hard way when it introduced a minicircuit-breaker system to offer customers in
India better protection from the country’s frequent power fluctuations and
brownouts. The product, adapted from a comparable developed-world model, was technically
sound and arguably superior to the alternatives. Yet sales suffered as
customers turned to products from competitors offering an older—and
cheaper—“use and throw” fuse technology. Not until the company started over
with a new design incorporating the older technology did the product became
competitive.
A handful of leading companies
extend this thinking further still, approaching their product portfolios with a
“zero-based design” mentality. The benefits can be profound. A global
consumer-products company, for example, was losing share in an important Asian
market to a domestic competitor offering a lower price for a common
personal-care product. Instead of responding with a marketing push or a price
cut, the consumer-goods maker ran a head-to-head comparison of the two
products—including a sophisticated analysis of chemical ingredients. This
investigation showed that the low-cost company, using a formulation that was
half as costly as the global player’s, was achieving the same levels of efficacy.
What’s more, the rival’s pump bottle maximized margins by delivering 10 percent
more “product per pump.” After receiving this wake-up call, the global company
redesigned its product from the ground up, ultimately changing the formulation,
packaging, and even design of its pump bottle. The rejuvenated product, vastly
cheaper to produce and no less effective than its predecessor, generated a 40
percent margin improvement.
Similarly, the telecommunications
and data-services provider recognized that its mobile-phone towers were
overdesigned compared with those of its competitors. By starting over from
scratch, the company lowered its cost to build each tower by almost 30 percent,
while still meeting or exceeding local safety regulations.
3.
Design for manufacturability
A final way top product makers
separate themselves from the competition is to go on challenging their
assumptions well into the manufacturing process. Surprisingly, perhaps, though
most global companies have manufactured products in emerging markets for years,
they typically don’t go as far as they could to design them with
emerging-market customers and workers in mind. By contrast, clever
product makers look for easy opportunities to tweak their products and
processes further and thereby lower their capital costs. To be sure, this is
good practice anyplace companies operate, but an especially important
one in emerging markets given the fierce levels of competition there.
For example, a large producer of
engines and industrial equipment recognized that by making straightforward
design changes to one of its drive-shaft assemblies, it could reduce the
complexity of the machines needed to build them. Just allowing for more
generous radii and bends in a few key spots would make it possible to produce
the components with hot forging hammers, a cheaper technology than the
high-speed cold-forging machines the company used at home. The changes helped
reduce costs for materials by 10 percent, in part by enabling the company to
source more goods and equipment from local suppliers.
The farm-equipment maker lowered its
costs in a similar fashion by identifying places where its frontline workers
could replace expensive fasteners with cheaper welds during product assembly.
This reduced not only the company’s manufacturing costs but also the cost of
maintenance for farmers, who otherwise had to replace the fasteners as they
fell off.
Traditional approaches to product
development are coming under strain as emerging markets start to dominate the
global economy. Companies that learn to shake up their thinking and effectively
challenge the assumptions about how they design, develop, and manufacture
products are more likely to master the extremes of this new competitive
landscape.
May 2013 | bySauri Gudlavalleti,
Shivanshu Gupta, and Ananth Narayanan
http://www.mckinsey.com/insights/Innovation/Developing_winning_products_for_emerg
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