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.