Bottom-up tweaking – or top-down defeaturing?

-->

Here is an article from the most recent newsletter of the Suitable for Growth project at the Universe Foundation. You can read the rest of the newsletter here. 

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.

Fremtidens innovation: fra Dubai eller Mumbai?

Kontrasten kan dårligt blive større. At tage fra mylderet i Mumbai’s største slumkvarter Dharavi til de funklende skyskrabere og endeløse shoppingcentre i Dubai er som at bevæge sig til en helt anden virkelighed – men der er under to en halv times flyvning.

Jeg prøvede turen for nylig. Som sidste punkt på programmet af nogle ugers research i Indien, hyrede jeg en lokal guide til at tage mig på en lang vandretur rundt i Dharavi slummen. Der bor over en million mennesker på under to kvadratkilometer. Der er mangel på vand, på toiletter, på plads – der er i det hele taget mangel. I nogle kvarterer bor folk ubegribeligt tæt, man dykker ind i en labyrint af mørke gyder, hvor man kun akkurat kan passere hinanden, med en åben rende af spildevand i midten mellem blikskure i tre etager. Det er ikke for de klaustrofobiske. 

Fra Dharavi slummen tog jeg direkte til Mumbais lufthavn og fløj til Dubai. Og vupti, så skifter logikken unægteligt.

I Dubai er der rigeligt af alt: penge, biler, luksus. Alt er nyt, rent, skinnende. Man må lige sunde sig lidt over hvor forskellig verden kan være, når man står udenfor det enorme shoppingcenter Mall of Dubai og kigger henover en kæmpe kunstig sø, op på det sølvskinnende Burj Khalifa, der med sine 828 meter er verdens højeste bygning.

Årsagen til at jeg var taget til Indien, var at jeg arbejder på et projekt med titlen “Nøjsommme Løsninger”. Ideen er at finde eksempler på virksomheder, der forstår at udvikle produkter, der passer godt til deres kunders behov, men som koster langt mindre end vi er vant til.

Efterspørgslen efter billige produkter, der kan opfylde dagligdagens behov, er enorm i den voksende middelklasse i udviklingslandenes storbyer – og indtil videre har danske virksomheder haft meget svært ved at tilbyde noget til priser, der er lave nok til at være bredt tilgængelige.

Jeg var i Indien for at undersøge nærmere, hvordan indiske virksomheder udvikler den type “nøjsomme” løsninger, som eksempelvis Tata Nano, verdens billigste bil, eller de private hospitalskæder, der kan tilbyde hjerteoperationer for 2.000 dollars.

Der er en særlig indisk opfindsomhed, som ofte kaldes “jugaad”. Den er drevet af mangel, og den fører til løsninger, der får løst et behov med et absolut minimum af ressourcer.

Det er en form for innovation, der udmærker sig ved at gøre livet lettere og behageligere for masser af mennesker, der kun netop er kommet ud af fattigdommen, og nu får mulighed for at opleve lidt af forbrugersamfundets goder.

Når metoderne bag nøjsomme løsninger er interessante at forstå for danske virksomheder, er det fordi lave priser er en forudsætning, hvis vi skal kunne eksportere i stor skala til de markeder, hvor der i disse år er allermest gang i væksten. Men nøjsomme løsninger kan også vise sig at være et krav fra de stadigt flere, stadig mere økonomisk trængte forbrugere herhjemme og i vores nabolande. Arbejdsløshed, faldende realløn og truende gæld får forbrugerne til at vælge de billigste varer – og de kommer sjældent fra Danmark. Derimod vil de i stigende grad blive tilbudt af nye globale producenter fra Kina og Indien. Om få år vil vestens forbrugere formentlig være langt bedre bekendte med varemærker som Haier, Huawei, Tata og Godrej, hvis produkter er udviklet til at konkurrere under helt andre prisforhold end her.

Forskellen mellem forbruget i Mumbai og Dubai viser med fuldkommen tydelighed, hvordan opfindsomheden er helt anderledes, når man skal udvikle nøjsomme løsninger. 

Både i Mumbai og i Dubai er der en vældig foretagsomhed. I Dharavis slum sidder folk ikke og hænger. Der er ingen tiggere, alle lader til at have travlt med at arbejde – om end det arbejde så er ekstremt beskidt, usundt og dårligt lønnet. Alt genbruges og repareres, husene (eller skurene er det vel snarere) er som fuglereder, bygget af forhåndenværende materialer, med improviserede løsninger fra døre til lamper og satellitantenner.

Folk kæmper for at få adgang til goder, som vi i Vesten, ser som fuldstændigt grundlæggende, og hvis nogen kan levere det til en tilstrækkelig lav pris, er der et kæmpe uopfyldt behov at forsyne.

For virksomheder handler det om at sælge med meget lille fortjeneste på den enkelte vare – til gengæld kan man sælge til millioner og atter millioner af stræbsomme forbrugere. 

 

I Dubai er det lige omvendt: Her har folk rigeligt i forvejen. I de overdådige butikker og shopping malls handler det om overbevise folk om at de skal udskifte det, de allerede har, med nye modeller, i et flottere design og med endnu flere fancy funktioner.

Der er godt at sige om begge typer innovation. Dubai-modellen fører videre i retning af det ypperste og mest forfinede i alle detaljer: Mod højere kvalitet i udførelsen, bedre materialer, avanceret teknologi, større bekvemmelighed – og funktioner, man ikke anede, at man kunne have brug for.

Det er en form for udvikling, der ligger godt til den danske industri: Design, højt vidensindhold, banebrydende teknologi, og høje priser, der kan retfærdiggøre vores høje lønninger. I mange tilfælde er det produkter, hvor selve det funktionelle er underordnet: Det er en selvfølgelighed, at produktet virker godt. I stedet konkurrerer man om kunderne igennem de drømme, som produktet repræsenterer. Man sælger status, historier, og oplevelser til kunder, der forlængst har fået stort set alt i adskillige eksemplarer.

I Mumbai handler det om at skabe løsninger, der billigt og effektivt løser et konkret, grundlæggende behov, hvad enten det er transport, bolig, tøjvask eller sundhed. Det må selvfølgelig også gerne se smart ud og være nemt at bruge - men det skal først og fremmest være billigt.

Kort sagt: I Dubai er udviklingen drevet af rigelighed, I Mumbai er det knaphed, der former løsningerne.

Spørgsmålet er selvfølgelig, hvilken form for løsninger, der bliver mest behov fremover? Hvad skal vi leve af at levere?

Svaret er vel: Begge dele. Men pointen er, at vi i øjeblikket kun er gode til Dubai-typen af løsninger. Vi er gode til det eksklusive, niche-prægede, det holdbare og smukke. Men det er ikke nok, for det er ikke dér, væksten og dynamikken ligger idag. Vi kan ikke i længden leve af at sælge til de øverste få procent af markedet, og vi kan ikke opnå tilstrækkelig omsætning til at finansiere den udvikling, der er brug for, hvis vi skal kunne konkurrere med alle de nye og hastigt voksende global spillere på verdensmarkedet.

Danmarks industri er nødt til at forny sin relevans, og derfor er udfordringen at lære at tænke anderledes på hvad kvalitet og innovation vil sige. Det nytter ikke, hvis den eneste form for kvalitet, vi kan skabe, er så dyr, at vi dårligt nok selv har råd til den.

Danske virksomheder får det svært, hvis vi ikke evner at tilbyde løsninger til den globale middelklasse i udviklingslandene. I praksis svarer det til at ignorere over en milliard forbrugere, hvis indkomst vokser med 5-10% årligt.

I vores nabolag viser Eurostats seneste opgørelse, at 120 millioner mennesker i EU lever under fattigdomsgrænsen. Om man opfatter dem som reelt fattige eller ej, så er det afgørende, at en meget stor og desværre voksende del af Europas forbrugere er hårdt klemt økonomisk. De køber nok ikke varer fra Dubai-segmentet.

Derfor: Hvis vi er så dygtige i Danmark, kunne vi så ikke udvikle løsninger på dagligdagens behov, der er smukke, som fungerer godt, er nemme at bruge, billige i drift, miljøvenlige, genanvendelige – og til at betale?

Det er hårde krav, beklager, men det er det, der skal til. Det kræver, at vi begynder at tænke anderledes: At vi fokuserer mere på hvad kunden er nødt til at have, snarere end hvad der kunne være rart at have. At vi lærer at forenkle. At vi bruger masser af computerkraft og data til at spare på råmaterialer og energi. At vi er gode til at udnytte viden udefra, så vi ikke selv skal opfinde alting. At vi begynder at inddrage brugerne i at skabe noget af værdien…

Måske kan vi lære noget af opfindsomheden i Dharavi? Ellers bliver der ihvertfald ikke råd til at tage Dubai fremover, hvis det er det, vi vil. 

Stronger government at lower cost

Government is facing two, almost conflicting, demands in the future:

We need a stronger public sector, but at a lower cost

We need more effective governance, also at a lower cost

Smarter innovation project at the Universe Foundation

At the Universe Foundation, where I work, we are just starting up a new project in collaboration with the Danish Industrial Foundation – it’s called SMART.

The idea is to assist and follow a handful of Danish 5 medium sized companies as they try to lower their costs and prices in order to adapt to an increasing pressure on prices in the European market.

What’s important is that the reduction in cost should not cause a reduction in utility and satsifaction for the end-user. Ideally, we are looking for ways to increase the experience quality in new wasy that do not add cost.

From our research over the past year with “suitable” innovation in Shanghai and with “frugal solutions” in India and in the West, we have learned that it’s very hard for companies to move downwards in prices – particularly for established companies, that are operating in the main export markets in Europe, where price used to be less of an issue.

We are trying hard to lower the threshold for the companies to get started, so were are specifically not attempting radical innovation, but rather applying a systematic, incremental approach of understanding customers needs exactly and modifying products to deliver just the utility and quality that really matters to end-users.

We have just launched a website for the project at: www.smarterinnovation.org

Google Art: poetry generator

Another example of art based on Google: Google poetics. 
Very simple idea, it's a collection of "poems" that have showed up when Google made a list of suggestions to automatically complete a search. The phrases that Google suggest are based on the most common queries, so in that sense the poem reflects the interest of all we Google users.
Mesmerizing stuff. Open for contributions.

Too cheap: booking a Ryanair ticket

I just ordered a ticket with Ryanair and the main impression that I came away with was one of feeling almost unclean, after dealing with someone a bit too sleazy for comfort. I acknowledge that they have been pioneers in changing the level of prices for air travel – but to me they are pushing it too far now. I’m glad I’m not an employee there, but even as a customer, you get a sense that they are trying to trick you.

The moment I enter the website, I am on alert, because I know that unless I move very carefully, I will either spend more money than I thought I would – or I will waste a lot of time, before finally quitting in frustration and protest.

The first thing I want to know is whether they have a departure that fits my plans. But in order to search for flights, I have to declare that I have read and accepted the conditions. I don’t have the patience for that, so I accept – with a slight unease: what am I accepting that they do with the information about me?

 


The design of the website is explicitly cheap, Typography and colors are LOUD, pop up windows appear, ads for all sorts of additional stuff is everywhere – they’re even selling ad-space for competing airlines. 
The box that asks for permission to keep spamming me with offers has a intriguing backwards phrasing:

 

Obviously they are very eager to sell additional services – like insurance:

Not only does this big and loud sales pitch come up, but for every extra item they offer – airtime for phoning (…), sightseeing tours, luggage – you must specifically click no or scroll all the way down to the ”not interested” option. 

  
It goes on for several screens, including one for rental cars, and finally one for some sort of lottery - which you must also explicity reject:

 

Finally you get your total price – I noticed an extra charge for paying with my credit card, of course.

Then they send you a confirmation and itinerary. Again, filled with colorful ads for extra service. For me as a customer, I would like a simple document, that didn’t force me to spend precious color ink on printing ads for stuff I don’t need.

So, now I’m ready. I just have to remember, that when I check in from home, I must print out the boarding card. Otherwise Ryan air will charge me 70 pounds to print one!

It’s the only departure that fits my schedule for this travel. And it’s cheap – but maybe a bit too cheap.

Rising wages and aging population in China

A recent article in BusinessWeek details the rising salaries in Chinese factories. In 2012, 25 provinces increased wages by an average of 20,2%. The article describes how large manufacturers like Fox Conn and Flextronics move inland for lower wages, but also because there are more workers available. BusinessWeeks points out that, according to China Bureau of Statistics, the number of working-age Chinese in 2012 fell by 3,45 million – due to the aging of the population.  

http://www.businessweek.com/articles/2013-06-20/chinas-manufacturers-seek-ways-to-cut-costs

Nøjsomme løsninger i Radio24syvs kina program

Jeg fortalte om vores konklusioner i projektet om nøjsomme løsninger i Globus, Radio24syvs ugentlige program om Kina.
Du kan høre indslaget her - det starter ved 11:42 og varer 11 minutter: