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Is it possible to defeature a product created
for a developed world market – a top-down approach – or should you start bottom
up? Or put in another way: Is it in fact possible to change a high-end product solution
to a mid-market product solution?
This is a critical question when a Danish
company sets out to target the Chinese mid-market.
Western
companies are trying to lower their prices in order to compete in the Chinese
mid-market. Chinese companies are trying to raise the quality of their products
to compete with imported brands. The prices and quality of Western and Chinese
products are converging – but they arrived at the same level from different
directions.
A western
company that wishes to adapt or change its existing product to make it better
suited for a lower cost market – in emerging markets or in the West – often
finds this difficult, painful and not sufficient to lower prices substantially.
“Transplanting”
a western product 1:1 for production in China can give some savings due to
lower cost of manual labor, etc., but often not enough to compete in the local
mid-market.
Defeaturing
the product by removing specific nice-to-have features and functionalities can
bring down costs further, but likely still not enough for the product to become
competitive in the Chinese mid-market, where prices are typically 50% lower
than in the high-end segment.
One reason
could be that the original product and the entire value chain, which surrounds
it, are ”native” high end. The functionality, the quality, the supply chain,
the marketing, and the development efforts are all rooted in the Western
culture and economy, and the various elements have been optimized as a system
for this context.
Individual
elements may not be easily removed, and even if they are, the result may not
affect costs substantially.
What’s
really needed is a radical re-engineering of the product and the processes to
eliminate the things that don’t add value, while keeping or even adding functionalities
and features that customers are willing to pay for.
However, such
radical cost innovation can be rather difficult to execute on its own for a
Danish SME, as it can be costly and it also challenges the organizational
mindset and culture.
Starting
from bottom instead
Re-designing
an existing product, which was originally developed for the Western market and
for manufacturing in the West can be described as a “top-down” product
development – and as described, this approach tends to be both difficult and
insuffiicient for reaching the Chinese mid-market.
Instead,
companies might consider using a “bottom up” approach – as one of the
participants in the SfG project did.
They found
a local manufacturer, which had developed a solution for matching a certain set
of functions and a level of quality, which could be suitable for the particular
low-end customers that the company was trying to target.
Then the
company added a number of tweaks that raised the functionality to a level where
the product had positive differences compared to competitors, and which added a
certain feel and functionality that lifted it beyond being merely ”good enough”
to a level where the company felt comfortable lending their name to it.
This
allowed them to offer a new line of products at 50% of the price of their high-end
products.
One could
call this approach ”tweaking from the bottom”. It offers some interesting potential advantages over a
”defeaturing from the top” strategy.
Just like a
product developed in the West is ”native” high-end, a Chinese product will be
”native” low cost, in the sense that the way it was developed, the components
used and the manufacturing process is grounded in Chinese circumstances.
Likewise, the features it offers and its level of quality are based on the
local producers’ knowledge of the market.
The bottom
up approach makes full use of this local knowledge.
Doing
what you are best at
One of the
greatest obstacles to the top-down defeaturing is culture.
Western
engineers may not have the inclination to take away features and essentially
making a great product less great. Also, they don’t likely have the insights to
prioritize on behalf of customers in a low-cost market.
In
contrast, the bottom-up tweaking approach gives the Western engineers a chance
to do what they are best at: developing solutions that are better. By tweaking
something that is not quite up to Western standard and adding a few selected
touches make a real difference.
For an SME
company, it is demanding and risky to develop a completely new solution that is
radical enough to create the cost reductions that are needed to compete in the
Chinese mid-market. Indeed, radical innovation is in itself a very western and
high-end approach, compared to the incremental, market driven way, Chinese
companies typically use.
By starting
from an existing, locally developed solution, the investment in innovation from
the SME is limited to the tweaking of the product – and for this, the company
can typically draw on knowledge from its high-end products.
This also
indicates that as markets, production and development become more globalized,
Danish engineers and designers could find an important role – and employment -
specifically focusing on tweaking and improving low-cost designs to lift them
beyond being merely “good enough”..
5 approaches to cost reduction
1) Local production in China:
Manufacturing of the same product 1:1. cost reduction mainly achieved through
reduction in labor costs, transportation costs and import tax
2) Defeaturing: Removing
nice-to-have features and functionality. Costs reduction achieved through lower
product (material) and process costs.
3) Cost innovation: Re-engineering
the product and processes. More fundamental changes of product and
manufacturing processes adapted to the local situation. Costs reduction
achieved through lower product (material) and process costs.
4) Radical innovation: Start from
scratch. Clean slate development of new product, based on deep knowledge and
insights into customers need and local manufacturing processes and competences.
5) Tweaking
bottom up. Building on the inherent low cost of a Chinese designed product, and
adding value by tweaking up some features to make the product stand out in the
market.
