LOW COST DAYS ARE OVER
The process of
doing business has changed over the last 2 decades across the globe. With the opening up of the gates of free
trade and Liberization in the emerging economies married with technological
advances in Developed nations the business has become more competitive rather
than a challenge. Challenge used to be the era for 1980 and 90’s time when
setting up business and eliminating the rivals was used to be the prime game
plan. Now the business game runs on theory of competitive advantage rolling
over the cycles of the business phase.
We often find
that in the past decade and also recently business plans process fails to
remain sustain in the present globalised world economy. Despite of free trade
and prudent opportunities for investments ROI and ROE remains an albatross
around the neck for the companies. Billions are being spent to touch the profit
island but it always remains half short within the reach. Drilling hard I found
that Developed nations went with their existing business models into the
emerging economies and failed bitterly. The experience became so hard that next
time the management took any decision for new investments they went for
astrologers to predict the future. The developed nations companies just adopted
a simple policy where they thought that by adopting the policy growth will be
their slave. Cost Reduction and low cost of production are the policies which
made them fail bitterly. Cost reduction and cost modeling will only work when
your existing product is accepted by the consumers or rather it matches with
the demand of the consumer.
The affect of
cost reduction and low cost of production will only come into force when one
has rightly assessed the market and its demands. This is the prime area where
the competitive advantage of an business is developed. Many of my learned
friends will come up with an argument that innovation is alive and kicking the
business models. I agree but where do you want to apply the innovations is the
first question which needs to be heard. Product innovation should always be
matched requirements of the end users. Through this one will get the competitive
advantage over the life cycle of the business. To make it more simple say your
innovation is really worth but has less demand in the market in all times. That
innovation itself comes at a huge cost of R&D added with production cost.
Hence the expectation from the product innovation and its cost increases the
albatross around the neck of the company in terms of higher profitability
(above normal).
Companies that
needs to survive in emerging economies needs to identify and access the
requirements of their and then design products as well as business process.
Godrej Company
came up with a refrigerator for the rural market designed exclusively for the
rural people requirements. Godrej changed the structure of its refrigerator for
the rural market completely opposite of what the urban market consumed. Before
they came up with the product they went for an market survey where they found
that the minimum requirements of the cooling system in rural place was only to
have storage of foods items for an day or two and just to have cold waters. Not
an inche more than this, was on the demand list for the rural market. Even
Godrej found that power facility was a big problem for the rural market. Hence
Godrej required keeping this aspect also while designing/innovating the new
product into the market.
Godrej worked
hard on its innovation and came up with an refrigerator designed exclusively
for the rural market where they cut down on many areas which automatically
reduced their cost in all aspects and boosted up profitability from minimum
cost of production without an price hike but with an price cut down to 1/3 from
the existing business models. The rural refrigerator did not required any
compressor as required in an normal refrigerators moreover it consumes half the
power consumed by regular refrigerators and uses high-end insulation to stay
cool for hours without power. In the engineering process it’s required only 20
parts as compared to the ordinary models where it takes 200 parts. The name of
the product is ChotuKool. Price is also within the reach of the rural people
married with power saving cost at the end user. This is called innovation
matched with cost modeling. Business growth will grow over the years as the
innovation leads to a competitive advantage.
The survey of
the Godrej followed with better understanding of the markets and its behaviors
helped the company not only to innovate and generate high ROI but also to fill
up the gap of products.
In the similar
way when I drilled in other emerging nations I found some more strategic
revolution in business models being developed and adopted within the process.
In North and East Africa Vodafone became the leading support system through its
telecom service. Vodafone hold certain percentage of in Safaricom which is Kenya's
largest mobile network operator.
Vodafone
through its business survey found that there has been tremendous problem
regarding money transfer. North and East African nations already had a system
of money transfer inherently linked to the religion of Islam, known as Hawala.
This also increased the cost of lending for the lenders which created a ripple
effect on the borrowers. Vodafone did not introduce its most famous download
and other social business platforms over there since; consumption of the same
is less as compared to India in all terms. Vodafone identified well that it has
to dig deep into the system to find out the real growth based innovative
product. Finally they came up with MPESA.MPESA simply rode on this behavior,
without trying to introduce new ones and simply made it more efficient by
leveraging the mobile network to track the movement of money. The user-agent
relationship remained the same while the agent-agent relationship was improved
drastically. Instead of logging in transactions on a book and settling them at
a later date, the m-payments system allows the agents to settle money transfer
instantly.
The result of
the innovative product was that M-Pesa quickly captured a significant market
share for cash transfers, and grew astoundingly quickly, capturing 17 million
subscribers by December 2011 in Kenya alone. This is innovation based on
competitive advantage.
Today business
process needs to be more defined so that the most appropriate opportunities
comes ahead for riding the cycle of growth. Gone are the days of low cost
production and cost reduction methodologies. Low cost of production will not
last for long and cost reduction is not the prudent tool for every business
growth. Innovation too fails short if it don’t match with the competitive
advantage. Why much business process failed is a matter of small concern since
they simply replicated the nations not the process neither the products.