03 January 2012 00:00 [Source: ICB]
Product development strategies need to change as the aging Western population and nascent developing-world middle class look for value for money, not high-end products
© Rex Features
The gloomy global economic outlook means consumers need to spend wisely
Cost must be the key criteria when examining the opportunities for research and innovation. Equally, the money that is available must be spent wisely. We cannot afford to waste precious resources in satisfying mere "wants," when "needs" are still unmet.
Chapter eight of our free Boom, Gloom and the New Normal ebook examines the application of this philosophy to the four megatrends that we have identified as being key to the future of the chemical industry:
It argues that the key need is to be practical. Companies should focus:
This philosophy is quite different from that seen during the 1982-2007 economic supercycle. Then, companies competed for the middle ground, as we saw in Chapter 7. They added features, and pursued the concept of adding value in order to boost profits. Over time, they focused more and more on the wealthier parts of the global population, and became increasingly disinterested in those outside this privileged group.
Today, however, it is no longer viable to focus in this way. The Western baby boomers are joining the New Old generation of those aged 55-plus, and they face the prospect of much lower incomes as they transition from salaries to pensions. Equally, the rest of the population faces a world where credit is much less available to support their desired lifestyles.
Thus, the focus must be on more basic products and services. This is especially true for those aiming to target sales in the developing and emerging economies. Incomes in these regions are dramatically lower than those in the West. It is wishful thinking to imagine they can somehow replace the demand for added-value products that is disappearing in the west.
This is not bad news, although it may seem like it at first. We argue that the opportunities ahead are enormous. To access these, we propose a new philosophy for research and product development. This starts with megatrends, and is based on the work done to produce theUN Millennium Development Goals in 2000.
This means that affordability will become the key parameter, rather than value in use. Whatever we produce must be usable by as many people as possible. The core markets for these products will be driven by volume, whether we are talking about potential consumers in the emerging, developing or developed worlds.
The advantage of this approach is that more functionality can be added to meet the specific needs of the middle income groups in the developing world, and for the middle classes in the West. Value-in-use thinking can then be employed when selling the more limited volumes required at the top of the pyramid in the global luxury sector.
Ford's launch of its new EcoSport SUV range of cars in India provides a good example of how this concept may work in practice. Ford believes increased affordability is the key to meeting its goal of boosting global sales volumes by 50% by 2015. It has therefore developed a new 1 liter version of the Ecosport for sale in low-cost markets, and will manufacture it in India. This will complement sales of more expensive models, which have engine sizes ranging from 1.6 to 3.5 liter luxury models.
Our proposed new philosophy also takes a wider view of companies' responsibilities to the societies in which they operate. As we have argued in previous chapters, operating only by reference to financial parameters is no longer affordable. Instead, we need to adopt the concept of "shared value" (creating value for society as well as profits) because, as US Harvard University economist Michael Porter has argued, this is the only way to "drive the next wave of innovation and productivity growth in the global economy".
AGRICULTURE DRIVES GROWTH
The use of water for agricultural purposes highlights the scale of the opportunity. The US Geological Survey estimates that "almost 60% of all the world's freshwater withdrawals go toward irrigation." Cotton production alone accounts for more than 3% of all agricultural water use. Traditional cultivation processes such as field flooding are obvious targets for reducing water use.
This challenge has led to the development of a program organized by the Better Cotton Initiative and including companies such as Levi Strauss, to provide technical know-how to Indian farmers. Over three years, this has enabled a 32% drop in the use of water and pesticides. The farmers' profits are 20% higher as a result, thus also helping to stimulate economic development.
The key is to use drip irrigation systems, essentially plastic veins that can direct water to each plant's root system. This not only spreads water and fertilizer more evenly than traditional pumping, but also means less water is available to encourage weed growth around the plants. In addition, electricity consumption is reduced, as drip irrigation requires less pumping.
THE NEW NORMAL
Chapter eight of Boom, Gloom and the New Normal - How Western Baby Boomers are Changing Global Chemical Demand Patterns, Again is now available free to download at icis.com/NewNormaleBook.It is co-authored by Paul Hodges, chairman of International eChem, who writes the ICIS Chemicals and the Economy blog, and John Richardson, director, ICIS training Asia, who writes the Asian Chemical Connections blog. ICIS and International eChem have also launched a training course, aiming at helping companies to become a winner in the New Normal. Visit icis.com/newnormalseminars
We believe examples such as these can provide companies with potential ground rules for success, as summarized in the chart. This can help to guide research and developmentproject selection and portfolio development.
Societal value is the key factor. This provides the essential motivation to attract potential stakeholders and value-chain partners, and thus drive fast adoption.
Value for money is also critical. The market for products that require long-term subsidy, or high margins to recoup development costs, will be much smaller than in the past.
Local market presence is essential. A centralized organization will almost certainly either fail to notice the new opportunity, or regard it as being too small to matter.
Up-front investment in developing the initial offering is required. Companies have to be prepared to develop new products and services, rather than just following a me-too process.
Long-term ambition is also key. The focus should not be on "cute technology" products, but on those that have genuine major growth potential.
Doing more with less is therefore our motto for future success. The chapter contains, as always, a wide range of practical examples to help stimulate ideas within your own business. We are convinced that those who accept its challenges will benefit for many years to come.
PRINCIPLES FOR SUCCESSFUL NEW PRODUCT R&D
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