Affordability now the key to future success

Middle ground.pngThe ‘middle ground’ was the place to be to capture maximum profits during the Boomer-led SuperCycle between 1983-2007. But now, people have less money to spend, and credit conditions are tighter. So margins are disappearing as volumes come under pressure.

Instead, as we discuss in Boom, Gloom and the New Normal, smart companies are realising that ‘affordability’ is the key value proposition for the future. This underpins competitive positioning in both Niche and Mass-Markets, as the slide shows:

• Procter and Gamble (P&G), the giant consumer products company, are now completely changing the business model for laundry products. Instead of encouraging consumers to waste detergent, they have introduced Tide Pods which reduce the actual amount used
• This is a very clever way of using innovation to challenge the low-cost discounters. These, of course, are complaining bitterly as they lose volume
• The strategy has enabled P&G to grow US market share and profit in a market that declined 2.1% in the year to March. As CEO Robert McDonald noteswe are laser focused on making sure consumers get the right dose, and that may have consequences for our competitors“.

P&G has been actively planning its strategy in this area for some time. We analyse their ‘white space’ concept as a case study in chapter 7 of the eBook, and clearly this is now becoming a model for all major P&G businesses.

The same pattern, of course, is true in emerging economies. As the blog noted in January, Apple is rapidly losing ground in China to smartphones costing less than $100, and is now in 6th place in terms of market share. Its own low-cost model will likely appear too late to rescue it.

This matters, as China is now the world’s 2nd largest smartphone market. And affordability also matters in India, poised to become the 3rd largest market by 2017. Locally-made smartphones there are priced at just 3,599 rupees ($66), compared to Apple’s iPhone 4 at 26,500 rupees. Even Samsung is struggling to compete, with the Galaxy Y Duos Lite selling at 6110 rupees.

An even bigger development is also on the horizon. O3b Networks, a consortium including Google is poised to challenge high-cost telecom companies by providing low-cost satellite-based broadband coverage across Africa, the Middle East, and parts of the Americas and Asia.

These examples confirm that major, and very disruptive, changes are underway in an increasing number of important markets as we transition to the New Normal. Companies need to recognise and plan for these changes today, to ensure they continue to remain successful tomorrow.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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