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Rethinking operations for 1 two speed world

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In a new special report, Wharton and the Boston Consulting Group explore how companies need to figure out how to operate in a world where their core markets are developing at radically different …

In a new special report, Wharton and the Boston Consulting Group explore how companies need to figure out how to operate in a world where their core markets are developing at radically different paces.
This is an interesting thesis, and will be of varied value depending on the industry, but for any company in the internet and technology businesses trying to bridge the BRIC countries on the one hand and the developed economies on the West on the other, this is an essential read.
My only quibble with the thesis would be the question “is this a two speed world or ten speed world.” Certainly China and the UK are now growing at two different speeds. On the other hand it could also be argued that the pace of market development varies widely among the BRIC countries, to say nothing of the differences among the BRICs, the West, and Africa.
In short, Wharton is taking the first steps in an important direction with this report, helping companies rethink and restructure to address this emerging challenge of globalization. Expect to see more debate along these lines in the future.

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  • 1. The first in a series of Special Reports Special Report Rethinking Operations for a Two-speed World http://www.bcg.com • http://knowledge.wharton.upenn.edu
  • 2. Special ReportRethinking Operationsfor a Two-speed WorldGlobal companies face a radically altered business landscape following the GreatRecession, most notably a slowdown in world economic growth compared to levelspredating the global financial crisis. What’s more, the growth pattern is uneven. A“two-speed” world is emerging, characterized by slow growth in the developedcountries of Europe, North America and Japan, and faster growth in rapidly developingeconomies such as China, India and Brazil. To succeed in this “new normal, companies ”must develop different strategies, new products, and innovative, low-cost operatingmodels. This special report explores how companies must re-think every aspect of theiroperations to compete in two fundamentally different environments.ContentsStrategies for a Two-speed World Page 1Competing successfully in this new decade requires companies to meet the needs of both low-growthand high-growth markets while differentiating themselves from foreign and local competitors. Buildinga low-cost global production network that taps into the strengths of each geographical region iscritical. Also crucial to success: innovating products, processes and business models to increasemargins wherever possible – and to gain market share. Key decisions will involve looking at profit vs.growth, best price vs. best value, and new rewards systems.Manufacturing in a Two-speed World Page 6Whether a company operates in a high-growth or slow-growth market, lean products and systemsare a must. They allow companies in low-growth markets to respond quickly to customer needs, andin high-growth markets they keep costs down while supporting customization and rapid increases inoutput when needed. Another step up in efficiency: shared production platforms that allow high-endand low-end products to be built at the same facility – sometimes even on the same assembly line. Butall of these considerations – including geographic location and labor costs – must be balanced againstlogistical costs and risks. Customers want lower cost and quick delivery.Winning in Two Worlds: Supply Chain Flexibility Page 11Companies must create adaptable supply chains in a two-speed world that work for both slow- and fast-growing markets – without sacrificing sales volumes or margins. In high-growth emerging economies,this often means creating high volumes of low-cost – and sometimes low-margin – products, anddistributing them at the lowest possible cost. In low-growth developed economies, supply chains mustenhance efforts to defend or steal market share through better and faster innovation, and exceptionalservice.Innovation – the New Two-way Play Page 15It takes a lower price or a better mousetrap to win over potential customers. This is especially true inthe developed world, but to gain a foothold in rapidly growing economies, successful multinationalsincreasingly will have to unleash new products and services while paying strict attention to costs.“We need better products, faster, at a lower cost,” says Joe Manget, global leader of The BostonConsulting Group’s operations practice. In a break with the past, many ideas for these new productsand services now originate in developing countries. Watch for more successful global companies totake this approach.
  • 3. Strategies for a Two-speed WorldManufacturers from developed nations • The growth of China’s middle class is expectedhave been capitalizing on the low labor costs to increase at an 11% compounded rate overof emerging economies for a long time. It’s a the next five years, according to independentfamiliar story: Product design happens in, say, brokerage and investment group CLSA.the United States, and manufacturing gets That’s more than $2 trillion in incrementalcranked out in Southeast Asia. Then the products discretionary spending capability.are shipped to the developed world for final sale. Welcome to “the new normal” – a two-speedBut in recent years a new trend has emerged. world in which two types of economies areMany of these same companies are now moving emerging: low-growth and high-growth. On theR&D, distribution, and sales to China, India and one hand, rapidly developing countries suchelsewhere in the developing world because as China, India and Brazil are characterized bythey see market opportunities where the GDP is high growth but low average household income.growing dramatically and household incomes With GDP ranging from 8% to 12% and some 2.6are on the rise. For example: billion people, these markets are hard to ignore.• GE CEO Jeffrey Immelt said recently that he expects 60% of company revenue growth to come from emerging markets over the next 10 “Big Pharma expects about 70% of years. future business to flow from developing• Big Pharma expects about 70% of future countries.” business to flow from developing countries, says Adam Farber, partner and managing –Adam Farber, partner and managing director, The director at The Boston Consulting Group Boston Consulting Group (BCG).• S&P 500 large-cap companies that break out sales and profits earned abroad (roughly half By contrast, the low-growth countries – most of of that group) reported that 47% of 2009 sales the U.S. and Western Europe, for instance – have (some $2 trillion) originated outside the U.S., a slower rate of economic growth but higher up from 45% in 2007. Many analysts expect to household incomes. With GDP growth of only see 50% soon. 1% to 4%, these economies are expanding more slowly but their populations have higher salaries• China, in 2009, surpassed the U.S. for the – and more to spend. first time to become the world’s top market for new vehicles, according to the market The two types of economies present two very research firm ReportsandReports. different business environments, each with different needs and challenges. Success in each 1 Rethinking Operations for a Two-speed World
  • 4. market requires different products, different ways Wharton management professor Lawrence G. of operating, and different ways of looking at the Hrebiniak believes that the two-speed equation world. In this article, business leaders, Wharton should always begin with senior management professors, and experts from BCG consider how decisions about which countries are attractive this two-speed world will affect global business and which are not. “Corporations have to decide strategies – and what it will take to thrive. which countries to invest in, he says. “If we ” focus on developing countries, how? Strategic To compete successfully, companies must alliances? Acquisitions?” It depends on the understand the needs of each market and attractiveness of these countries in terms of create a strategy for meeting those needs cost their laws and regulations – and whether there’s effectively, all while differentiating themselves already a market to tap. from their competitors – both local players and multinationals. Building a low-cost global Corporate strategy, as well as an organization’s production network that draws on the strengths architecture, helps senior management focus on of each geographical region is critical. So too is what is critical, explains Hrebiniak. “If the product innovating products, processes, and business is big enough, you focus on the product, he ” models to stay one step ahead and increase says. An Apple product, for example, is the same margins wherever possible. everywhere. Before selling it in China, India, Brazil, or any other high-speed economy, Apple No Step-by-Step Process will invest in customer segmentation and market There’s no step-by-step process for positioning analysis to see if will fly. But if your product can a company to excel in both worlds, no one-size- be customized for different markets it becomes fits-all strategy, even for players in the same a question of where you focus. It starts with due industry. The key is to retool strategies when diligence at the corporate level, says Hrebiniak. necessary, implement lean principles, and rethink “Business leaders must decide how to organize where and how to conduct value-chain activities to do this – by country, by product, by strategic such as manufacturing and R&D. For instance, business unit. ” GE Healthcare designed, developed, and built Sometimes, gaining market share fast is budget-priced MRI machines in India and China paramount, says Gang Yu, PhD, chairman of for sale in India. But potential demand for the The Store Corporation – China’s fastest-growing machines proved strong in the U.S. as well, so e-commerce company – and former vice the company is currently awaiting FDA approval president of Amazon.com’s supply chain. Amazon to begin selling them. wanted to gain market share quickly in China, According to Joe Manget, BCG senior partner but building its brand there would take too long. and global leader of the firm’s operations “Amazon felt it was easier to enter China [through practice, the two-speed economy is forcing a partner] that already had a large market share, ” companies to develop new operating models says Yu. So instead of starting from scratch to successfully compete. “Take Tata Motors’ in a country where it was not well known, launch of the Nano car, he says. “The rapid ” the e-commerce giant acquired Joyo (which pace of product development and the extremely means “excellence” in Chinese) in 2004 when low product cost will have Western companies e-commerce was revving up in the developing struggling to improve their operating models to world. At the time, however, Joyo didn’t meet catch up.” Amazon’s quality standards. So at first the partners operated as two separate businesses. Ultimately, success in a two-speed world Eventually, when Joyo improved its service level depends on having a flexible organization – one to Amazon’s standards, they integrated their two that can tailor different approaches on the basis Websites. In other words, Amazon took a two- of market needs, product characteristics, cultural stage approach. First it grabbed market share by differences, available resources and strategic acquiring a local partner. Then, it built its brand. goals, according to experts at Wharton and BCG. “It uses both names right now, says Yu. “People ”2 Knowledge@Wharton Special Report
  • 5. know that Joyo is Amazon. Web shoppers can go ” name of the game as policy makers in Beijingto either site today. focus on economic restructuring and factor costs. Companies need to be operating at multipleThe key lesson: Amazon didn’t follow a speeds even just within China.prescribed rule for winning in a high-growtheconomy. It looked at the market where it wanted Balancing fast- and slow-growth marketsto gain share and crafted an acquisition strategy demands different skills and new approaches.based on its existing strengths, weaknesses and Companies that do it successfully are abletarget time frame. to differentiate themselves at both speeds. “Companies that want to win at two speedsCompanies should expect to fine-tune their may need to adjust basic strategies, says ”strategies if they want to change speeds, just as Pinney, “even choosing where lean productsracecar drivers must adjust their strategies for and processes considered part of the ‘companydifferent tracks. According to Benjamin Pinney, DNA’ are not the right answer. The question, ”a principal in BCG’s Shanghai office, what works he says, is how to design your operations toat one speed won’t always work at another. compete in fundamentally different marketsAs an example, he mentions a fast-moving against competitors from both low-cost countriesbeverage company that built a strong position and developed economies. When it comes toin China through acquisition. In the past and manufacturing, you need to “clutch” betweenin other markets, the company had succeeded different approaches.through disciplined integration and cost-cutting,driving lean operations and standard sales-and- For instance, some companies use the samemarketing playbooks into acquired companies. facilities to manufacture parts or sub-assemblies that are later customized according to marketBut the company had to adjust its approach need and demand. “Postponement strategiesin China: “When you bring business systems, such as delaying customization allow companiesmindsets, and behaviors driven by cost and to buy time until demand signals are clearer, ”efficiency into a high-growth, dynamic market, explains Pinney. Based on specific orders andyou’re setting yourself up to lose, Pinney notes. ” close-to-market signals, they often do assemblyThe playbook for winning in developing market for high-end and low-end products at the sameis different. It’s not that efficiency doesn’t matter, plant, then customize for either high-growthbut if a management team in a fast-growing or slow-growth markets in a different facility.economy turns inward and spends its time With this approach, final assembly, finishing, orinstalling structures and systems mandated by packaging can be done separately – and closer toheadquarters in the developed world, it takes its the end-market. This requires attention to detail, aeyes off the market. In a slower moving market, careful analysis of every step of the process, andthis might not matter. But in this case, it took a thorough knowledge of the markets served.many quarters and decision cycles just to get The worlds of the small craft shop and the masspermission to re-focus on growth. And in each production line are far apart, and it requiresquarter that passed, more agile competitors significant management skill to run both as a partwere taking market share. In effect, each passing of a single value chain.quarter diminished the value of the company’scostly acquisitions. Better Localization, Better Acceptance“China’s in a go-go-go mode, especially in Yu says that localization is a key to successfullyconsumer markets, says Pinney, comparing the ” navigating the two-speed world. Segmentingsituation to a U.S. land rush in the 1880s, when customers and understanding demand at50,000 people lined up on the Missouri border the local level (in both high- and low-growthto get free homesteads. “When the bell rang, economies) is required. “When Dell enteredeveryone grabbed a parcel of land. Of course, ” China, he says, “no one believed that its direct ”this era won’t last forever in China any more than sales model would work there. It was a new ”it has in other economies. In some industries, model – direct sell, not through a retail channel.consolidation and efficiency are already the This was new in China, where sales typically 3 Rethinking Operations for a Two-speed World
  • 6. come through computer stores or department markets are looking for the best value, which stores, not from the Web or a call center. Dell’s may be lowest price, but could be the best model didn’t fit China’s buying habits. “So when quality at a premium price. “In either market, Dell entered China, the company had to operate companies need a fundamentally better value Chinese style, says Yu. Dell revised its model. ” proposition than their competitors, notes Sirkin. ” It began to make some sales through channels, Differentiated product design – Because of their and much less through direct sales. It gained a different needs and income levels, high-growth name and reputation by lowering server prices and slow-growth markets require different types by a whopping 40%. “Then a lot of Chinese of products. Sirkin contends that companies companies began to know about Dell, says Yu. ” must design products for the “current billion” Before that, he says, Sun and HP dominated the consumers in the U.S., Western Europe, and server market. But when Dell entered the market Japan at the same time that they design products with decent quality and lower prices – “Chinese for the “next billion” consumers in China, India, companies are sensitive to price, says Yu – Dell ” and other emerging economies. began to gain market share. New reward systems – The projections of single- In addition to customizing products for specific digit growth in mature markets and double-digit markets, every company entering an emerging, growth in emerging markets mean we’ll need to high-growth economy has to localize the rethink how we structure growth-based incentive business model to fit the local customers, says and compensation plans to keep them fair, says Yu. One way to do this is to hire local people who Sirkin. For instance, increasing business by 5% know the countries and the customer segments, in a market that’s only growing at 2% is better who trained locally but understand the developed than a 5% increase in a market that’s growing at world as well. That’s what Dell did, says Yu. “It a rate of 10%. But current systems would tend to knows how to combine the two cultures, he ” reward both equally. says. “The better the localization, the better the acceptance. ” Still, there’s no clear-cut approach for doing business at both speeds. Different companies do BCG senior partner and managing director it differently. “Take a look at Apple Computer vs. Hal Sirkin agrees. “It sounds like a cliché, but Research in Motion (RIM), says BCG’s Manget. ” companies really do need to master the ability RIM manufactures Blackberries in each region. to think globally but act locally. Customizing They manufacture in Mexico for the North everything for local markets is key. He offers ” American market and in Asia for the Asian four other guidelines for companies that want market. Apple builds everything in one mega to compete successfully in both high- and low- factory. Which one is better?” he asks. “If you growth worlds: believe that it is all about cost, Apple has a better Profit vs. growth – In a two-speed world, model. If you believe it’s all about efficiency, companies must differentiate themselves in maybe RIM has a better approach. ” different ways for each market, says Sirkin. They The big tradeoff is cost vs. local customization. “If must focus on profits in slow-growth markets, you make Blackberries in Mexico, but you don’t increasing their margins wherever possible understand Chinese demand or the currency through lean operations and by developing changes, says Manget, “you’ll have problems. ” ” new products and services that can command a premium price. But in rapidly expanding economies, they need to focus on growth, on A Different Challenge laying the groundwork for future profitability. According to Wharton management professor Mauro F Guillen, some high-growth countries . Best price vs. best value – In the emerging such as Russia and Brazil are thriving because economies, many people are buying their first they have natural resources. China, on the cell phone or their first car, so companies need to other hand, imports natural resources and has develop “best price” offerings that are affordable positioned itself as the low-cost manufacturing at lower income levels. But buyers in developed hub of the world. “But that is an ephemeral4 Knowledge@Wharton Special Report
  • 7. advantage, says Guillen. “When household ” changed. Successful companies will keep costsincome catches up with GDP China may lose its , low by manufacturing in developing countriesmanufacturing edge. If and when that happens, ” when it makes sense and applying lean tools andChina will still be an attractive consumer market. techniques; they will move R&D to high-growthBut since its consumers behave differently than nations with burgeoning markets for innovativethose in the developed world, success will require products; and they will become experts inmore than just manufacturing and selling there. the local laws, customs, and cultures of those“You want to keep an eye on your R&D. You want countries so that they can compete against – andto keep it close to your manufacturing center.” when appropriate, acquire – local companies.For mature products that require less innovation, What has changed, says Chatain, is that a lotit can be a different story, notes Wharton of the economic growth today is not in themanagement professor Olivier Chatain. western world. “That’s what’s new. It’s a differentWhen innovation is critical, companies from challenge. And it’s more complex, he says. ”developed countries have an edge because “There may be a renewed sense of urgency,they generally have access to more resources but doing the work of succeeding abroad hasn’tand better technology. But when products are changed. ”mature and need less innovation, manufacturers One thing is clear, says Manget: You can’t justfrom low-cost, emerging economies can steal export your operating model to an emergingmarket share. “Take the aircraft industry, he ” economy. “To compete successfully, you have tosays. “Embraer, a Brazilian aircraft maker, is develop a fundamentally new model – one thatgaining global market share because the basic embraces the cultural and growth differences, ”technology is mature and less innovation is he says. “Then you can take some of those keyrequired. Meanwhile, major players such as ” insights you gained and use them to reinventBoeing and Airbus are not as advantaged in the your Western operating model. ”world market as they were 50 years ago whenthey had more innovation and experience under In a two-speed world, each market has lessonstheir belts. for the other.Bottom line on the two-speed world: The basic ⇄principles of how to succeed globally have not 5 Rethinking Operations for a Two-speed World
  • 8. Manufacturing in a Two-speed World With a sticker price of up to $1.6 million, So GE Healthcare began development of the MRI machines were not affordable across Brivo 355 and its sister product, the Opimta much of the developing world in 2007. After 360, MRI machines for technicians using all, household incomes are considerably lower the technology for the first time. Designed, than in developed countries, and in India, for developed, and built in India and China, the example, there is no formal health insurance machines don’t compromise quality but do have system to compensate providers for MRI exams. an easier-to-read user interface and are easy to Indian physicians charge about $150 for an MRI operate by technicians who may lack the degree procedure, compared to $1,000 and up in the of training they would receive in the developed United States. world. Davis calls them “the right machines for emerging markets. And at $700,000 to $900,000, ” Yet, the Indian market (and others throughout they are the right price. the developing world) is enormous – and the demand is real. But a scaled-down, low- GE Healthcare is currently selling its budget- quality MRI unit was out of the question for GE priced MRI machines in India. Since the Healthcare. For one thing, Indian physicians company began taking orders in January 2010, know the state of the art of western technology. according to Davis, “sales have surpassed our “They attend conferences here, they have family expectations by at least 50%.” here, says Jim Davis, vice president and general ” Interestingly, the units – designed and built manager of GE Healthcare’s Magnetic Resonance lean – are awaiting FDA approval for sale in the U.S. “We’ll maintain our manufacturing “We are on a mission to provide quality care footprint in China and India, says Davis, “and ” sell it in the U.S. as well” After all, the U.S. has in all markets. A human being is a human pockets of underserved populations that can benefit from the budget-priced devices that were being.” manufactured in the developing world, where –Jim Davis, vice president and general manager of labor and development costs are lower than in GE Healthcare’s Magnetic Resonance business the U.S. GE Healthcare’s strategy is a departure from the traditional model where no-frills products that were built for the developing world business, who is based in the United States. stayed in the developing world. “Some of them trained here. Besides, he says, ” “We are on a mission to provide quality care in Lower cost, stripped-down products that can all markets. A human being is a human being. We be sold both in high-growth and slow-growth don’t want to discriminate. We want to bring the markets are one example of how companies same diagnostic tools to India as the U.S. ” are addressing “the new normal” – a two-speed6 Knowledge@Wharton Special Report
  • 9. world with two types of markets, each with high-growth, emerging markets. But productiondifferent characteristics. On the one hand are can start at the same factory – even on the samethe high-growth economies such as China, India, assembly line – with components common toand Brazil. With growth rates of 8% to 12% and both models. The specifics change by industrysome 2.6 billion people, these markets are hard and market, says Pinney. “With automobiles, theto ignore, despite their low average household common components can be subassemblies orincomes. On the other hand are the slow-growth the partly completed chassis. In pharma, it’s theeconomies – the U.S. and Western Europe, for intermediate chemicals. With assembled goodsexample – with growth rates ranging from 1% like mobile phones, it can be partially kitted parts.to 4%, but relatively high average household With electrical equipment, it can be mechanicalincomes. components for switchgears. ”In this article, experts from Wharton and The Almost all the automotive manufacturers areBoston Consulting Group (BCG) consider some of doing this, notes Pinney. In med-tech, manythe key challenges that global manufacturers face companies are leveraging “split models”as they attempt to synchronize their worldwide for sales aimed at both worlds. Bicycleoperations to meet the needs of these two very manufacturers are doing it too, and in thedifferent markets. appliance sector, LG is producing frost-free and non-frost-free refrigerators – the former for low-The Need to Be Lean speed countries, the latter for high-speed.To grow, multinationals from the slow-speed,developed economies must target fast-growing, A New Level of Complexityemerging markets. But to compete against local The growing consumer market across the high-companies, they need to drive out costs, sharply speed world is hard to ignore. For instance,improve quality – or both. In these high-growth analysts say that some 70% of future businessmarkets, the challenge for manufacturers is to for big pharma over the next few years will bemaintain flexibility and responsiveness while in developing countries, says BCG partner andkeeping costs down. managing director Adam Farber. But it’s not simply a matter of making more or differentWhether competing in high-growth or slow- drugs in their current plants for shipment togrowth markets, companies need lean products these emerging economies. Instead, globaland systems, contends BCG partner and pharma companies are searching for new waysmanaging director Hal Sirkin. “In the slow-growth to organize their go-to-market model in the new,world, you need low costs and the ability to two-speed world.respond quickly to customer needs, he says. ”“And in the high-speed world, you need to be One challenge is how to reconstruct theirlean to lower your costs, customize products for networks to serve the local markets. “Brazil andemerging segments and create the capacity to Russia require that pharma companies have localgrow. Companies that cut out waste through ” manufacturing operations to access the market, ”lean products and systems have lower costs and says Farber. “In several countries, governmentsare more responsive, with shorter cycle times say it is critical to the public’s health and wellnessand higher quality. or to create jobs. So, in addition to knowledge ” of local customs and culture, drug makers andRethinking Manufacturing other manufacturers need to steep themselvesBenjamin Pinney, a principal in BCG’s Shanghai in the relevant laws. In some countries, a globaloffice, says that some manufacturers from the producer is not allowed to manufacture unlessslow-growth world are responding to market it brings on a local partner. “The global model, ”demand in emerging economies by defining a says Farber, “means more languages, more rules,shared platform for production of high-end and and different duty, tax and patent issues – a newlow-end products, often at the same facility. level of complexity that has to be managed. ”Typically, the high end gets shipped to slow- Considering the degree of localization required,growth Western markets and the low end to bringing a local partner on board might be a 7 Rethinking Operations for a Two-speed World
  • 10. good idea even if the law didn’t require it. The begin developing more affordable products for local companies know the market and know their local consumers – and for global export. Clearly, way around. And some are ripe for acquisition. this is a company to keep on the radar screen. “It’s a ‘think local, act global’ thing, explains ” Farber. “There are regulatory, packaging, and More Than Just Low Labor Costs cultural differences. You need to understand local Companies face a range of challenges as markets and how distribution works. Of course, ” they formulate a two-speed strategy for this has been true all along for multinationals manufacturing, says Michael Zinser, BCG partner seeking to capitalize on low labor costs by and global co-leader of the firm’s manufacturing manufacturing in developing nations. But it’s group. “Yes, labor costs are lower in developing even more important now that these emerging economies. But companies need to balance the economiesComplexity in Services: Stay Close tocost of labor with the added logistical costs Taming are not just manufacturing hubs low Your Customer (But Not Too Close) but real growth markets – and now that there’s and the risks inherent in lengthier supply chains, ” a greater number of small, local companies to he notes. Add to that the rising expectations of compete against. buyers. “Customers don’t just want the lowest Marshall L. Fisher, a Wharton professor of cost, they want to get their products quickly too!” operations and information management, The best solution may be for companies in slow- agrees that what’s new is that these emerging growth, developed markets to manufacture in economies are becoming attractive markets, not low-cost, high-growth markets and sell to local just manufacturing bases. “The emergence of consumers as well as to Western buyers. That consumer markets is interesting, says Fisher, ” way, the slower sales growth in the developed noting that one of the missions of the Communist markets and the higher logistics costs would be Party in China is to develop the country’s internal offset by the robust local sales. But it’s easier said economy. “They think people are saving too than done. much money. Whatever problems the U.S. has, “When companies first started manufacturing China has the reverse. The Chinese government’s ” in Asia there were tax incentives, labor rates desire to grow the internal economy and increase that were among the lowest in the world, and the percentage of income that people spend excess capacity, says Zinser. But some of those ” in China creates opportunities for non-Chinese incentives have gone away, labor rates are companies to make inroads there. “That’s rising (as they are at Foxconn), and logistics heightening the interest, says Fisher, who adds ” costs are higher. “That said, the cost savings are that the megabrands in the U.S. such as Nike, still there, he notes, “but you need to be clear ” Wal-Mart, and Amazon are not the top brands in about what your objectives are. For instance, if ” China. “Maybe it suggests that you don’t need to a company is based in North America and just be #1” to be big enough there. China, according wants to cut its production costs, it might be to Fisher, tends to be a more fragmented market. better off going to Mexico or to some parts of the In the U.S., only the top firms have global share. U.S. “But if you want to tap into the fast-growing But China’s potential market is so big, there is markets of the developing economies, you might room to be #10 – and still make money. want to set up manufacturing operations there – But China also has huge companies with very and local sales channels too, he adds. ” little global name recognition – yet. Fisher Keep in mind, too, that the no-frills products points to Foxconn, a $40 billion company made for emerging markets might also be with 300,000 employees and a 10-square-mile embraced by consumers in the developed world. campus. The company makes products for Apple Again, this can create more complexity, but more and Motorola, largely for export. “They’d be opportunity too. Zinser gives the example of a Fortune 25 in the U.S. but no one has heard of U.S.-based manufacturer of lawn-care products them. Fisher is interested to see what happens ” that competes against domestic companies with to Foxconn as the internal Chinese economy high-end products and against companies from develops. “They could use the emerging home India and other emerging economies with low- market to develop new skills, he says, or to ” cost products. “But a segment of U.S. consumers8 Knowledge@Wharton Special Report
  • 11. will always want lower-priced products, he says. ” be owned by a foreign corporation. OtherIn order to provide both premium and low-end challenges are structural. “India’s is an informalproducts to the domestic market, the company economy with lots of little shops by the road,has migrated some production to Mexico. But it so distribution is an enormous problem, notes ”has also started manufacturing in Southeast Asia Cohen. He recalls meeting with the CEO of ato capitalize on the low labor costs and Asia’s large Indian cell phone company that uses Wal-growing consumer markets. Mart as a distributer, not a retailer, because the Wal-Mart name isn’t well-known in India. TheMany companies set up overseas operations to distribution challenges are compounded by thetake advantage of lower labor costs, but don’t country’s substandard roads and infrastructure.take the opportunity to rethink their production “China has done a better job of managingprocesses with an eye toward cutting costs and infrastructure than India, he says. “Local markets ”reducing complexity. Others let quality, health are more easily penetrated because it is easier toor safety standards slip, says Zinser. A hands- transport goods there. ”off approach in unknown markets can lead toproblems. The best way to avoid these problems Much depends on where you are selling, saysis to be on site, not on the other side of the Sirkin. “You can produce in these markets, sellworld. “There is no alternative to having feet on for less, get your costs down, and take advantagethe ground, he stresses. “You have to be there ” of local market knowledge. Or you can do whatand see exactly what’s going on. Otherwise, Apple does: design in the U.S. and outsourceyou can end up with massive recalls and a PR production to companies that are cheaper. Of ”nightmare, he says. “You have to do your due ” course, Apple can design its products in thediligence, and you can’t make assumptions. U.S. and make them in China because, unlikeI’ve seen companies working with contract GE Healthcare’s budget MRI machines, Applemanufacturers on the other side of the world products are the same whether you’re buyingand forgetting to ask them what their production them in New York, London, Mumbai or Shanghai.schedules looks like. But when you’re there on ” There is no budget-priced iPad designed forthe shop floor, you can look around, kick tires, developing economies. GE Healthcare, though,ask questions and learn a lot more than you has gone through the process of customerwould in a meeting. segmentation – drilling down, analyzing the market data, and coming to a deeperWharton management professor Morris A. Cohen understanding of its target customers’ buyingwas recently in India meeting with Unilever habits, favorite brands, and – perhaps mostexecutives. There was some discussion of the important – their aspirations.difference between selling in India and in theU.S. “There is not much need for marketing Bottom Line on a Two-speed Worldin India, he says. “There is so much demand ”that companies feel if they can just get their According to Pinney, “Companies that areproduct in front of the customers, they’ll buy it. thriving in this two-speed world are really good atIt’s not worth spending on marketing. Instead, ” managing both mass production and just-in-timeUnilever in India spends on distribution and production. They’re able to make fast adjustmentsconsumer education. In some cases, he says, up and down the value chain in response toIndian people don’t know how to use bottles that changing market dynamics. And they makecontain consumer products. “So Unilever sets smart use of subcontracting to manage capitalup stores run by women in the local villages. It’s commitments against different production steps. ”a combination of technology and outreach that Manufacturers that want to optimize theirmeets the local market’s needs. And knowing ” operations in the two-speed world can learn fromwhat the local market needs at a granular level those that faced tough economic restraints inrequires a local presence. the past. “Necessity is the mother of invention, ”Cohen points out that India has significant says Sirkin. “The Japanese had to compete.barriers to entry, such as ownership rules that They had to keep costs down and eliminate alldetermine how much of a local company can the waste they could. The companies that got ” 9 Rethinking Operations for a Two-speed World
  • 12. lean produced low-cost, high-quality products constrained will figure out how to do more with that changed the rules of competition. Case in less, as China and India have proven, says ” point: the U.S. auto industry. When the big three Sirkin. “In competitive markets, if your company automakers were producing big cars, Toyota doesn’t come up with a better value proposition, came in with a low-end product and tailored it someone else will. ” for the U.S. market, and then moved up the value chain to higher-end models. ⇄ “Any country or company that is resource-10 Knowledge@Wharton Special Report
  • 13. Winning in Two Worlds: Supply Chain FlexibilityEven before the recent global downturn, more mature, low-growth economies have well-a two-speed world was emerging. Its hallmarks: developed infrastructures, while emerging high-a slow rate of growth and high per capita income growth countries – with the exception of Chinain developed regions such as Europe and North – tend to lack the highways, bridges and airportsAmerica, and far faster growth in emerging needed to transport goods efficiently.economies with low per capita income, such Developed economies also have more matureas China, India and Brazil. Now, after the most distribution systems and highly developed retailsignificant recession since the 1930s, these industries. In the U.S, for example, major retailersdivergent growth patterns have become even such as Costco and Wal-Mart are configured forsharper, with implications for every aspect of a high volumes of goods. Huge loading bays andglobal company’s operations. elevated platforms allow forklifts to load palletsA key challenge will be to create flexible and of merchandise onto 18-wheel tractor-trailersadaptable supply chains that can serve both that take the goods directly to stores – oftentypes of markets while optimizing sales and with thousands of square feet of retail space –margins. In high-growth emerging economies, where the lion’s share of sales occur. In India, bythis means delivering rapidly increasing volumes contrast, goods can be delivered to very smallof low-cost and sometimes low-margin products retailers through a chain of wholesalers that keepprofitably – even in the face of poor infrastructure decreasing in size. “There’s a whole cascade ofand convoluted distribution channels. In the low- distribution, where trucks keep getting smallergrowth developed economies of Western Europe, and smaller. In some cases, the ultimate deliverythe United States and Japan, companies must vehicle might be a bicycle, Mercier says. ”defend or steal market share by providing better,faster innovation and exceptional service withoutsacrificing profit margins. “There’s a whole cascade of distribution,In this article, experts from Wharton and The where trucks keep getting smaller andBoston Consulting Group (BCG) discuss how smaller. In some cases, the ultimatecompanies can make their global supply chainsmore flexible and responsive in order to meet the delivery vehicle might be a bicycle,”needs of this two-speed world. –Pierre Mercier, BCG partner and leader of the firm’s supply chain groupTwo Worlds, Stark DifferencesA close look at high- and low-growth countries Because “mom and pop” stores still tend toreveals sharp differences that can have a major be a huge part of high-growth-rate economies,impact on supply chain management, notes distribution involves delivering small quantitiesPierre Mercier, BCG partner and leader of the of products to a staggering number of locations.firm’s supply chain group. For instance, the Large consumer products companies can have 11 Rethinking Operations for a Two-speed World
  • 14. millions of delivery points in India compared These stark differences leave little opportunity with just a few thousand in their more developed for synergy between supply chains of low- and markets. high-growth economies, Mercier says. Synergies are hard to find even just within emerging Meanwhile, the more fragmented distribution markets, given the significant variations among systems and the undeveloped nature of high- economies, says Morris A. Cohen, a professor of growth economies affects forecasting ability, says management at Wharton who focuses on supply- Senthil Veeraraghavan, a professor of operations chain issues. There’s no one-size-fits-all strategy. and information management at Wharton. “Each country has its own unique flavor, with Companies operating in those countries lack differences in infrastructure, distribution and up-to-the-minute sales metrics generated by the retail systems. This diversity calls for different computerized supply-chain-management systems supply chains. ” of more developed economies. “In Western countries, you get a lot of aggregated data from Price, Customization and Service in retail centers with which you make informed decisions. In developing countries there is less Mature Economies reliable data available, says Veeraraghavan. ” So how can companies adapt their supply “You have to do a lot of guesswork and legwork. chains to a two-speed world? In mature, low- I can tell you how many Droid phones were sold growth economies, strategic pricing is integral to in Philadelphia with certainty. I can’t say that of profitability. “If you want to make more money certain regions in India. ” without selling more, then you have to maintain or increase price levels, Mercier says. “Better service ” This difference in planning capabilities and more innovative products allow you to charge dramatically changes service expectations a premium. To that end, companies must be able ” among companies and their customers. The to move quickly, working with the best suppliers, typical proprietor of a mom-and-pop store in developing the right products and getting them to an emerging economy is quite flexible about market faster than the competition. schedules and delivery, Mercier says. But retailers in mature economies demand speedy Because of these needs, sourcing from low-cost delivery of specific quantities at specified times countries isn’t always the best solution. Many – and companies that want to hold on to market companies are rethinking their sourcing networks share must provide good service. and looking at “near shore” production. Making or buying goods closer to end markets may cost It helps that highly skilled third-party logistics more, but shorter supply chains result in greater providers are readily available at a reasonable speed, responsiveness, and flexibility – and less cost. But developing markets generally lack risk. Weighing the trade-offs can be complex, service providers with sufficient expertise. however, and companies need to analyze the Increasing service levels in these countries calls economics, Mercier says. China or India may be for either using Western providers or working a good source for easily transported goods or closely with suppliers to get them up to speed, those with high labor content. But when factors says Mercier. such as weight, bulk, or shelf life are considered, Moreover, a company selling in a mature the conclusion might be to source closer to economy can expect to send and receive home. He points to Mattel, which makes its invoices electronically, order components miniature Hot Wheels cars in China and its larger, in advance, share demand forecasts with its bulkier Fisher Price ride-on cars – which are more suppliers or customers and pay retailers to stock difficult and costly to ship – in Mexico. certain goods and carry inventory. In emerging Another factor to consider is the degree of economies, however, businesses stick to the customization that a product requires. A basics and companies are likely to pay C.O.D., commodity-like product can be made in high buying right off a delivery truck instead of pre- volume at a large-scale plant in a low-cost ordering. country. “But high-end customized products12 Knowledge@Wharton Special Report
  • 15. should be made in a local facility that can react Emerging, High-growth Economies:quickly to changes in demand, Veeraraghavan ” Wringing Costs from the Systemsays. A San Francisco-based manufacturer ofmessenger bags has a dual manufacturing In low-wage, developing countries, the averageand sourcing strategy. It produces most of its consumer cannot afford expensive products, soproducts in a low-cost country, but it uses a local cost and value are very important. A company’sfacility for high-end U.S. customers willing to pay supply chain must reflect that reality. “In emerginga premium for customized products. economies, you need a very low-cost, streamlined supply chain, says Mercier. “If you deliver a ”In mature economies, efficiencies can also truckload of cookies that you sell at 10 cents acome from combining forces with other pack, it better cost you less than it does to delivercompanies, Mercier says. Several years ago, a truckload of cookies that sell for $3 a pack.”two consumer products companies, workingthrough a European logistics group that helps That makes it essential to wring as many costsmembers identify others with similar distribution out of the system as possible. “You need theroutes, discovered that 93% of their combined lowest possible delivery cost because theproducts were being delivered to the same 127 consumer can’t pay a premium for a product, ”drop-off points. In a pilot effort, they set up Mercier says. One solution is to strip awayshared delivery schedules and created a shared processes and procedures that work in Westernwarehouse to supply inventory to their plants markets but are unnecessary in high-growthand, in turn, to provide finished products for areas. “There’s no need for invoicing systems ifretailers’ distribution centers. The combined retailers pay cash on delivery, for instance. Even ”volume justified an investment in warehouse pallets – a staple in developed economies for aautomation to reduce handling costs. The result: century – may be an unnecessary investment inInventory fell by 65%, out-of-stocks decreased by developing economies where labor costs are low.30% and costs were dramatically reduced. Multinationals also face a growing threat fromAnother part of the equation in mature ambitious local companies, creating eveneconomies is the need to provide higher levels more urgent pressure to tailor systems to localof service to retailers and end-customers as cost- markets, Mercier says. Many of the factories thateffectively as possible. “In developed countries, companies set up in low-cost countries werewhere growth is slow and consumers have many replicas of their high-cost domestic plants. By notchoices, you need to make sure retailers sell your capitalizing on local conditions and capabilities,product, Mercier says. “If you’re not there, your ” they never achieved all of the potential savings.competitors will be. One solution is to improve ” “You can use your old manufacturing andsystems and processes that can boost service sourcing processes for a while, as long aslevels. For example, computerized demand- your competition is like you. But if you’re stillforecasting systems can better determine operating with a largely Western model in aappropriate inventory levels, lowering costs and low-cost country, you won’t win against localcreating greater efficiency. Another approach is to competitors, he says. ”communicate more closely with customers and When wages are relatively low, for instance,suppliers. This allows you to monitor demand companies can create labor-intensive processessignals more effectively and make the right trade- to reduce the cost of equipment, technologyoffs regarding where to re-supply and when, and automation. Further savings can comesays Mercier. He points to Procter & Gamble, from rethinking product design, choosingwhich has a sizable number of employees fewer and simpler features that better suit thestationed near Wal-Mart’s Bentonville, Arkansas, market instead of over-engineering. “You can’theadquarters. By collaborating with Wal-Mart’s change an industrial footprint and supply chainteam on planning and promotions, for instance, overnight, says Mercier. “Western companies are ”P&G is able to respond more effectively, readily still struggling with legacy systems, while localincreasing or decreasing the supply of particular competitors are unencumbered. ”products as needed. 13 Rethinking Operations for a Two-speed World
  • 16. Another way foreign companies can cut costs According to Wharton’s Cohen, the effort involves is to use local suppliers, who pay less for “one of the most sophisticated supply-chain raw materials, labor and other inputs –and systems in the world. The company is able to can therefore charge less for their parts and do statistical analysis through sophisticated components than Western suppliers. But modeling and access to complex, timely data industries with highly complex products or about goods being sold in remote villages. stringent safety requirements face a greater And so while state-of-the-art data-aggregation challenge since most suppliers in emerging systems may not be the norm, innovative economies fall short of the quality standards and thinking can sometimes combine best practices process excellence of suppliers in the developed from both mature and developing and world. “In these cases, the risks of using sub- economies, further underscoring the need to standard inputs far outweigh any potential cost tailor efforts to local markets. savings, notes Stefan Mauerer, a BCG principal ” Increasingly, multinationals may need to think based in Munich. “Given the need to squeeze about supply chains in emerging, high-growth out costs, the solution may be to develop the economies both as routes into local markets capabilities of key suppliers in these emerging and a source of parts and finished goods to economies. A focused development program ” be distributed globally. Again, though, local can lead to major improvements in processes, conditions should dictate the approach. In productivity, quality and costs. “Local suppliers China, Wal-Mart has two supply chains – one can be a source of innovations as well as cost- for sourcing and distribution within China, the saving ideas, so building closer relationships other for sourcing just about everywhere else, can be well worth the effort, adds Mauerer. ” according to Marshall L. Fisher, a management Gain-sharing programs can provide an incentive. professor at Wharton whose research focuses “When any savings are shared in an equitable on China. Wal-Mart China sells products from way, everyone has an incentive to contribute and thousands of small, local farmers to 187 stores collaborate, Mercier says. ” in-country, while Wal-Mart Global Sourcing supplies tens of billions of dollars worth of Playing to Local Strengths private label goods to Wal-Mart each year, Foreign companies should also explore Fisher says. “It’s not a slam dunk to pull this off. approaches to distribution that play to local It’s easier to move products 20 miles to a port market strengths. To reach small villages in India, and then ship them to the U.S. than to supply for example, Hindustan Unilever Limited taps hundreds of Wal-Mart stores in China that want to women’s self-help groups. The company provides buy locally, he says. ” training in sales and bookkeeping to help these women become direct-to-consumer distributors Because of the stark differences between slow- for Unilever’s soaps and shampoos. About 45,000 growth and fast-growth economies, supply chain agents serve 3 million consumers in 100,000 synergies will be hard to come by. Moreover, villages spread out over 15 states. the increasing interdependence of countries in the global marketplace and the lingering uncertainties of the recent downturn present ongoing challenges. The key is for companies to scan the horizon, keep their options open, and respond quickly to opportunities as they present themselves. “A multinational with a truly global strategy can make, buy or sell wherever the customers, talent or resources are, and wherever it makes the most sense from a cost, quality or efficiency standpoint, says Mercier. “That’s why ” a flexible, adaptable supply chain is so critical. ” ⇄14 Knowledge@Wharton Special Report
  • 17. Innovation – the New Two-way PlayA Chinese firm is currently designing a Innovate to differentiaterough equivalent of the iPad, Apple’s smash-hit To compete in both the high- and low-speedtablet computer. The Chinese version is expected worlds, companies need a fundamentally betterto retail for about $80, or a fifth of the iPad’s value proposition than their competitors so$499 base price at launch. A European carmaker that customers are willing to switch. Takingis also midway through a new design – for market share is the name of the game, eithervehicles targeting several emerging markets. from established incumbents in the developedThe company is borrowing design features world, or to gain a foothold in rapidly growingand manufacturing ideas from its joint venture economies. Customers need a reason to dopartner in India. And Fiat Brazil’s Fiat Mio, an business with your company – either a lowerurban-targeted compact car, is being designed in price or a better mousetrap.Brazil for global markets.Product development efforts at these threecompanies underline an accelerating trend of “We need better products, faster, at asourcing innovation from within mostly large, lower cost.”rapidly developing economies for end users in –Joe Manget, senior partner at BCGhome markets, but also for export, includingto the developed world. Once viewed as low-cost copycats, companies from China, India and New products and services are importantBrazil are moving up the value chain, creating differentiators in both markets, but especiallyinnovative products with global appeal. Ignore in slower growing developed economies. “Inthem at your own peril – especially as a new the low-growth (typically Western) markets,“two-speed” world emerges. This duality is the primary way for companies to grow is tocharacterized by high incomes but slow GDP gain share, says Joe Manget, senior partner at ”growth in the developed countries of Western BCG and global leader of the firm’s operationsEurope, the U.S. and Japan; and explosive GDP practice. “They can’t rely on market or populationgrowth but low household incomes in rapidly growth to drive their revenue growth. And share ”developing economies – most notably China, gain requires fundamentally better products andIndia and Brazil. This parallel dynamic is likely to services, especially given the pace and intensitycontinue for years. In this article, experts from of emerging market competitors entering theWharton and The Boston Consulting Group (BCG) developed markets, says Manget. As a result,look at the importance of innovation as a source companies will need to focus more on innovationof competitive advantage in this two-speed world. and product development. “We need better products, faster, at a lower cost. ” 15 Rethinking Operations for a Two-speed World
  • 18. It’s not just a matter of creating lower cost, growth emerging markets of China, India and scaled-down products for developing nations and Brazil, among others, including some in the premium ones for mature markets, says Christian Middle East. But that is easier said than done. ” Terwiesch, Wharton professor of operations To successfully compete in rapidly developing and information management. For one thing, economies, where Western companies typically Western markets have a growing population of have much lower market shares and much less people who cannot afford high-value, high-cost well-established positions, they must bring products. Job losses and the weak employment something new to the party. Frequently, that market, a result of the economic downturn, have involves innovation, Andrew points out. “They exacerbated that trend. Job losses, high personal often can’t rely on their strong brand names, they debt, a weak housing market and high health usually don’t have go-to-market and distribution care costs have changed the complexion of strengths, and they rarely have the lowest costs. ” markets in developed countries. Sachin Nandgaonkar, partner and director at Jim Andrew, a senior partner in BCG’s Chicago BCG India, believes it makes sense for Western office and head of the firm’s global innovation companies to partner with Indian collaborators to practice, agrees with this assessment. “Given the develop products well suited for the two-speed slow growth and the stagnating real incomes in economy. “In many cases, it is about leveraging much of Europe, the U.S. and Japan, affordability the existing Indian product platform to improve continues to move up the list of most important offerings for the Indian market and to open buying criteria. That is one reason why many new markets in other emerging economies. of the innovations that occur in high-growth The partnerships can also help Western countries will also be applied rapidly back into companies access some niche market segments developed markets. ” in developed countries, he explains. “The idea ” is to leverage the Indian platform, test it for The Call of Growth in Emerging suitability in other markets, make the required Economies modifications and build a cost-competitive global supply chain. Emerging markets can offer ” For many western companies, the size of these double-digit growth opportunities. emerging markets is a major attraction, but the growth potential is an even bigger driver, says BCG’s Andrew. “Companies love growth. Wall Low Costs Are Still a Draw Street and other equity markets greatly reward Cost advantages, of course, are often the it. But most Western companies still have about immediate drivers for multinational companies 75% of their sales in the developed markets, sourcing innovation from high-growth countries. which most observers believe will have a growth The manufacturing cost for the $80 Chinese rate only in the low single digits, he notes. “At ” version of the iPad now in development is about that rate, your stock is essentially a fancy bond $40, says Idris Mootee, CEO of Idea Couture disguised as a stock. Real growth needs to come Inc., a design consulting firm. His company is from somewhere else if you want to increase working with a Chinese manufacturer of telecom your market value. ” equipment on the product. How are they able to knock off so much cost? “It is a combination of The big question for many Western companies in factors. There are some savings on quality control developed markets is where to find that growth, and even more savings on customer service Andrew says. “There are really three places you – there is no 1-800 number to call, he says. ” can find it. You can take market share in your “Also, there are no marketing, branding or R&D established markets, which generally requires budgets. It is extremely lean manufacturing. ” strong innovation capabilities. The second option The Chinese manufacturer expects to earn gross is to buy your growth through acquisitions, but profit margins of up to 40%. that comes with all the deal risks and integration problems that cause most M&A efforts to fail. ” Low costs are also helping Narayana The third option is to build positions in the high- Hrudayalaya, a hospital chain based in Bangalore,16 Knowledge@Wharton Special Report
  • 19. attract a steady stream of international patients, Scaling Down to Scale Upsays Ravi Aron, a senior fellow at Wharton’s Western companies sourcing innovation fromMack Center for Technological Innovation. In this high-growth countries might start small, butcase Westerners are drawn to the hospital’s high could have big gains further down the road, saysquality and low prices – which more than offset Aron. “Initially, companies profit by creatingthe travel costs. lower-cost products for developing markets.Narayana Hrudayalaya has perfected a way to Some of these will remain just that – lower costdeliver cardiac surgery at dramatically lower costs products that find a mass market in the large,than in Western countries. India’s health care populous markets of the developing world. ”industry “does not need a magic pill or the fastest But an equally important aspect of innovationscanner or a new procedure, the nine-year-old ” is increasing the value of these products byhospital chain’s founder, Dr. Devi Shetty, told improving their performance without increasingIndia Knowledge@Wharton. Instead, it requires the cost – a process Arun calls “scaling down toimprovements and innovations that lower costs scale up.”and make medical services more widely available. Notes Arun, “The first step of the scale-He calls his model “the Walmart approach. ” upwards movement is actually scaling down;Cardiac surgery in the U.S. costs about $50,000, that is, creating a radically different, muchcompared to $5,000 to $7,000 in India. Shetty lower-cost product that is a simpler version ofattributes his hospital chain’s lower costs to a the sophisticated product sold in developedcombination of process improvements, lower economies. The next step is to take this scaled-construction costs, and bulk buying of equipment down product and start increasing qualityand supplies from vendors. He now wants to without adding significant cost. The resultingbuild a series of 5,000-bed “health cities” across “scaled-up” product begins to resemble theIndia. “We want to have 30,000 beds in the original, more sophisticated offering sold innext five years, says Shetty. “As our volume ” developed markets, but at a far lower cost. In ”increases, we will get further economies of scale. later stages, it is easier to start adding features –In the next five years we want to be able to do a while holding down costs – to this scaled downheart operation for $800 from point of admission version rather than trying to lower the coststo point of discharge. We believe it is possible.” of manufacturing of the sophisticated product. “By starting at the opposite end, pruning theAron points to other examples: cost of manufacturing the original product in• Aravind Eye Care System, a chain of hospitals the first-world market, you might get a 4%-8% based in Madurai, India, has fine-tuned its improvement at best, Aron says. “By taking a ” processes to deliver low-cost eye surgeries completely different product and scaling it up, and related treatments at a fraction of what it is far more likely that the performance to cost they would cost in developed countries. Last ratio will see an order of magnitude change. ” year alone, Aravind says it performed more Sourcing design and innovation from low-cost, than 300,000 eye surgeries and examined high-growth countries is about more than cutting more than 2.5 million patients. engineering and manufacturing costs. It extends• GE Healthcare cuts the price of its medical to reconfiguring products to increase flexibility. imaging system by 10 % by making it in Besides the cost savings, Mootee says his Bangalore vs. in the U.S. By manufacturing Chinese client is looking to improve the “Apple the system locally for local markets, it speeds user experience ... by 50% by freeing users from deliveries, reduces waiting periods and further the world of iTunes, Apple’s online music store. ” boosts sales. “The innovations from here Says Mootee: “There are lots of people who like could lead to an entirely new line of products, Apple but don’t like the idea that they have to which in turn could create whole new market buy music only from Apple. They would like an opportunities for us, notes John Dineen, GE ” open-source equivalent. The product will be on ” Healthcare’s president and CEO. the market before mid-2011, he adds. 17 Rethinking Operations for a Two-speed World
  • 20. Also on tap for 2011 is Fiat Brazil’s novel design “Talent is a real driver in many of these cases.” for an urban concept car. Fiat Brazil is developing The big advantage is “being able to attract and the Fiat Mio (or “My Car”) using input from hire talent that knows the market better and has a public “suggestion box” posted on the the necessary technical skills. Some of the more company’s website. Fiat launched this innovative, developed markets have a shortage of certain “crowd-sourcing” approach in early 2009, with a types of technological talent, he notes. This is ” goal of unveiling the new car’s design in the fall less of a problem in some of the emerging, high- of 2010 at the International Automobile Show in growth economies, which have a tremendous San Paulo. number of highly qualified technical graduates. According to some projections, India will Few companies, even among big Western graduate 600,000 engineers, mathematicians, multinationals, have a clear strategy for how to technicians, and scientists by 2010, while China tap opportunities in emerging-country markets, will produce 800,000 graduates with engineering and suffer from a myopic, “U.S.-centric” mindset, and other technical degrees in the same time contends Mootee. But some companies, like period. By contrast, the U.S. graduated about Siemens of Germany, have well-calibrated plans. 75,000 engineers in 2008. Inspiration struck Siemens’ global CEO Peter Loscher after he visited India and drove around As companies from developed markets New Delhi in the $2,500 “people’s car” developed increasingly turn to emerging economies for by India’s Tata Motors for the local market. Not innovation and talent, they must weigh the pros long after the visit, Siemens announced a plan and cons of various business models. When does to invest US $3.7 billion in India, China, Russia it make sense to set up a wholly owned R&D and Brazil to develop more than 80 “base operation overseas, for instance, rather than level” products for “financially constrained partnering with an established local player? Is markets, according to a report in the Financial ” it smarter to start with a technical or marketing Times. Those products will include wind- collaboration or a licensing arrangement, and power generators, voltage switchgear, traffic take equity stake later, if things work out? management systems and steam turbines, and “It’s all about managing tradeoffs, Andrew says. ” will cost 70% less to develop, the report says. The Ownership and control issues come to the fore, entire innovation effort could increase Siemens’ especially when intellectual property rights are Indian sales alone 10-fold, it adds. involved. “The question is, what tradeoff do you want to manage? If you want to do everything Making Innovation Work at Both Speeds yourself, that’s perfectly fine and there are many Innovations in design and manufacturing can reasons why a company might want to do that. But flow comfortably in both directions, as India’s you are also likely to have some challenges around Tata Motors showed with its recent acquisition speed, resources and managerial bandwidth if you of Jaguar Land Rover of the U.K. Europe’s tough go it alone, he contends. “Are those challenges ” emission standards will force Jaguar Land Rover worth dealing with for what is likely to be more to look at smaller engines – such as those already control over the outcome and a lower risk of losing made by Tata Motors, notes P Telang, the .M. valuable intellectual property?” The answer varies company’s managing director, in an interview by company and situation. with The Economic Times. At the same time, Tata Motors will use Jaguar Land Rover’s expertise in Aron offers these guidelines: design to reduce engine noise and vibration, and • When intellectual property is at risk, to make cars that are more sophisticated than companies tend to own the innovation- its current offerings, which include the Nano, producing business unit, as is often the case in the Indigo sedan and the Indica hatchback. In China. fact, the two companies plan to look at jointly developing engines. • Companies are unlikely to share ownership with third-party innovation partners Having a local presence also helps companies whose chief strength is in navigating local find needed skills and talent, says BCG’s Andrew. regulations.18 Knowledge@Wharton Special Report
  • 21. • A local partner that understands how to get an it’s often difficult to take a product designed for innovation to market and get quick feedback developed markets and copy-paste it successfully will likely be used as a distribution channel. into an emerging market, it’s equally difficult to The innovating company will retain ownership. copy-paste in the other direction. The real gains,• Innovation may be a joint activity when the according to Andrews, “come through deeper local partner offers significant product insight insight into the techniques and capabilities of and/or is skilled at creating new products. innovators in developing countries that can be For example, Cisco’s partnership with India’s applied more generally in developed markets – HCL Technologies is more of a “peer-to-peer” and are therefore more sustainable. ” relationship. And those insights should come from as manyCompanies like Procter & Gamble tend to acquire sources as possible. “If you believe the next highsmaller companies with innovative products. tech idea will come from Silicon Valley, chances“P&G is as open to innovations that come from are you’re right, but it is a dangerous strategyits own labs as it is to innovations from the labs to pursue, says Terwiesch. It might just come ”of the companies it acquires” Aron says. from the engineering student that dropped out of some university in India or China. A good ”Copy-paste vs. Reapplied Learning innovator will identify multiple sources of ideas from different parts of the world and then isolateThe regional cross-fertilization of innovative the best ideas through a process of eliminationideas is as exciting as it is challenging. But and filtering. Companies that understand and areBCG’s Andrews cautions that any back-and-forth quick to internalize these new realities will gainexchange stands less chance of success if it is a leg up on those who wait for herd instincts tomerely transactional. “Western companies that kick in down the road.source innovation from developing countriesshould be aiming for more than just a cheaper ⇄product for their home markets, he says. Just as ” 19 Rethinking Operations for a Two-speed World
  • 22. Special Report Rethinking Operations for a Two-speed World http://www.bcg.com http://knowledge.wharton.upenn.eduhttp://knowledge.wharton.upenn.edu

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