An imminent threat to Western brand owners

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It is always good to have one’s ideas validated.  It is fantastic when the validation comes from no less than the Economist.  I wrote a blog  in June 2009 titled “Recession or Reset?” in which I explored what the new normal would look like after the recession.  It is always easier to analyze, and a lot more tricky to predict.  However I felt secure in the use of the Nirma case study to bring out 2 key points:

  • There is a huge consumer market in the rapidly developing economies (these being principally the BRIC countries) largely untapped by companies in the developed economies.
  • To reach the consumers in these markets will require a different type of innovation, exemplified by the Nirma case study, focused on product simplicity (and price) and distribution effectiveness.

In their April 15th, 2010 edition, the Economist ran a special report called “The new master’s of management” (subscription may be required) in which the authors state

“Emerging countries are no longer content to be sources of cheap hands and low-cost brains. Instead they too are becoming hotbeds of innovation, producing breakthroughs in everything from telecoms to carmaking to health care. They are redesigning products to reduce costs not just by 10%, but by up to 90%. They are redesigning entire business processes to do things better and faster than their rivals in the West. Forget about flat—the world of business is turning upside down.”  They go on to say “the rich world is losing its leadership in the sort of breakthrough ideas that transform industries.”

In a supplemental report “The world turned upside down”, the Economist states that

“They (the BRIC countries) are coming up with new products and services that are dramatically cheaper than their Western equivalents: $3,000 cars, $300 computers and $30 mobile phones that provide nationwide service for just 2 cents a minute. They are reinventing systems of production and distribution, and they are experimenting with entirely new business models. All the elements of modern business, from supply-chain management to recruitment and retention, are being rejigged or reinvented in one emerging market or another.”

On the issue of reaching the broad consumer market the Economist goes on to state that

“It is not enough to concentrate on the Gucci and Mercedes crowd; they have to learn how to appeal to the billions of people who live outside Shanghai and Bangalore, from the rising middle classes in second-tier cities to the farmers in isolated villages. That means rethinking everything from products to distribution systems.” (My emphasis.)

And then there is Apple, with record sales into the BRIC countries confusing the issue.  A Wall Street Journal article in September 2009 titled “Apple Rides Recent Growth in Asia to Earn Top Honors” states that “Apple held just a 1.6% share of the personal-computer market in Asia in the second quarter of this year, and a 0.6% sliver of the region's mobile-phone market, according to technology market-research firm IDC.”  It is Apple’s latest results that are startling.  Shipment of iPhone units grew 474% in Asia Pacific, 183% in Japan, and 133% in Europe. Total revenue from iPhones was $5.45 billion, and China accounted for $1.3 billion, up 200% following the iPhone’s launch at China Unicom.  I am not sure what this means in terms of market share growth, but the unit growth is impressive. I must say I consider Apple’s results to be the exception rather than the norm.  I think Nokia’s approach is a safer bet for most Western companies that do not have the “trendiness” of Apple, even though Nokia’s stock price has plummeted on the back of Apple’s gains.  Focus on bringing innovation to large populations, not the elites in the BRIC countries.  Work out how to get your products to the “last mile” in countries that do not have the most sophisticated infrastructure.  On the other hand, perhaps Apple’s approach is correct because of the huge increase in disposable income in the BRIC countries. Whatever your approach, I think it is absolutely necessary for Western companies to place a lot of emphasis on their growth in the BRIC countries.  Many of the large companies are doing this already.  What about the mid-sized companies that employ the bulk of the people in the Western countries?  What are they doing in terms of supply chain innovation to reduce costs?  I’d really like to hear your stories and opinions.

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