Wednesday, March 19, 2008

The China syndrome

The early part of my career was concerned with new product development. As a product manager I conducted the whole process from initial concepts and market research, through design and development, into manufacture and eventually a product launch. Our b-2-b marketing clients today generally do not have a product development process. Either they are providing a service or marketing products where the design decision is taken remotely – typically in another country. As a consequence our marketing role has become far more focused on communications, so it came as something of a surprise when one client mentioned that the source of a top selling product was ceasing manufacture and supplies would soon be exhausted. Interestingly another client had rapidly withdrawn a product for a similar reason, in their case the basic component that made the thing work was no longer available. It caused me to stop and think. When was the last time we had included anything about new product development in a marketing plan for a client? Not because we forgot to ask, but because they had no plans. My thoughts soon strayed to another client inspired remark made to me about 6 or 7 years ago concerning a meeting in China. To his amazement he was shown products used for scientific purposes similar to those produced by his own company, which subject to testing (subsequently confirmed by independent laboratories as very accurate) appeared their equal. His USP was based on years of research, materials selection, manufacturing development, quality controls and skills of the work force. Volumes were not high so cost and price reflected this and such a device cost maybe $200 to manufacture. When asked for a price the Chinese contact seemed not to know the cost and suggested $3 would suffice. Why tell this story? Firstly it is not an isolated example, secondly the whole economics, new product development and marketing rationale were stood on their head. From a position of semi exclusivity, expertise and a ‘black art’ process that produced these devices, suddenly they were available to anyone at give away prices. Soon there were importers entering the market which still commanded a price premium, but what the importers could not offer was input into the application development. But here our client faced another problem. In order to get a product specified the company had traditionally worked with engineers working on a prototype so that when the product entered production their device would automatically be specified. But now buyers substitute the cheapest alternative, or production is offshore and sourced locally, so the development process rather than a marketing cost should really be a chargeable activity. It is possibly the only charge or sale the company will be able to make. Our client has yet to fully make this transition but a major rethink seems inevitable. When product development becomes product sourcing much is lost in the understanding of what the market needs. The other big issue to my mind is cost. As a product manager producing a product at a cost commensurate with a price that we judged the market would stand and achieve returns on investment and earn good gross margins was always a challenge. The low cost of Chinese products that does not truly reflect materials and other costs in the example my client cited cannot be sustainable in the long run. Already China is forcing up world commodity prices due to the sheer volume of world production whilst contributing to pollution on a heroic scale which prompts the question, is building a business on extremely low cost imports viable longer term. And what happens to that accumulated knowledge and black art if people like our client should completely opt out of manufacture?

Tuesday, March 18, 2008

Putting lipstick on a pig

The sub prime mortgage crisis seems to have been the catalyst for the huge losses recently incurred by banks, the first run on a British bank for a hundred and fifty years or so , collapse of a major US financial institution and the prospect of worse to come. How much of this I speculate is due to an inappropriate application of marketing techniques. I have long been dubious about the idea of promoting financial services as products, but this concept has also been accompanied by, or perhaps even led to, a major change in financial institutions transforming them into businesses that sell products like grocers. In fact the major grocery chains of supermarkets have got in on the act themselves in selling financial products. Although much of what people see of marketing is the advertising and other market communications, like the proverbial iceberg below the surface should be something substantial. We look first to understand the business model and test this before developing marketing plans for a client or prospect. Sometimes the business model is hard to define, or as in the case of one notable potential client back in the ‘dot com era’ – non-existent. Swept up in the enthusiasm of the time this ‘dot com king’ was busy buying other ailing dot coms for ridiculous amounts and raising funds on a stock market aided by investment banks that had collectively lost touch with the fundamentals of business. The financial institutions by transforming themselves into aggressive sales driven businesses abandoned financial prudence so devaluing the product. Banking staff steeped in a long understanding of finance have largely been replaced by sales staff, incentivised by selling products and often recruited from high street retailers. In fact banks actually talk about their retail business. Think for a moment about the marketing process starting with the product. In the traditional model a company would research the market or uncover an unsatisfied need, design or improve a product and add value to the manufacturing process transforming raw materials and components into a product to satisfy an identified or perceived marketing need. Now look at the sub prime business model. Loans made to people on welfare cheques in the American Budweiser belt at 5 or 6 times imagined income were the unpromising raw material that was diced and divided to emerge without any actual added value, as triple A quality investment products. The products backed by the credibility of a major financial institution then traded on global financial markets. What anyone selling goods could have told them is that quality control is also a critical ingredient – as one American colleague once remarked it is no good putting lipstick on a pig. You cannot successfully market an inferior product without some backlash. Of course a brand carefully nurtured over a couple of centuries like a major bank builds goodwill and trust – customers with scant knowledge of financial services believe in the products because of this trust. It is the credibility of the bank that is being leveraged and their professional advice. Bankers trade on their perceived professional status, customers accept their advice the same as they would from doctors or lawyers, in general they are not buying a product at all but simply following investment advice. But breach this implicit contract between buyer and seller and customers soon take their business elsewhere. What is amazing is that the financial institutions thought they could get away with such a devious scheme. Once lost trust is hard if not near impossible to rebuild. The marketing lesson is clear - the product, the business model and marketing message must be credible and sustainable to achieve long term success. Short term views cannot prevail in the long run. If banks had taken an imprudent approach to financial matters they would not have built up a solid reputation in the past.

Thursday, March 06, 2008

Immediate post sales support

We hadn’t planned to buy new light fittings, or luminaires to give them their correct name, but a visit to a local DIY store of the type that we once called ‘sheds’ hastened a decision that we had apparently been contemplating for some months to upgrade lighting in the home. Beyond the humble lamp shade that most people can manage to install, anything requiring electrical connection presents a real challenge, one I was well aware of from previous experience. Domestic electrical installation it seems, remains largely unchanged since around the turn of the last century. Thomas Edison modelled his electrical distribution on the then standard gas system and today’s system would surely be recognisable to a time traveller from the 1870’s. While most electrical appliances are plug and play and the addition of the plug itself by the unskilled strongly discouraged as nowadays they are not made re-wirable, the typical domestic luminaire has to be connected - that is hard wired to the supply. Of course the packaging makes no reference to this and the display model is attached to a wooden panel. Fixing to a real ceiling is altogether a different matter. I try to look both interested in the choice of luminaire while surreptitiously sneaking a look at the ease, or otherwise of actually installing the purchase, but the packaging usually defeats this attempt. So having got the box home and overcome the not inconsiderable challenge of prising open the vacuum-sealed packaging the reality is revealed. The instruction leaflet carefully avoids showing the actual electrical interface and the collection of looped cables and switch runs to be found in the ceiling rose. A bracket is helpfully enclosed on non-standard fixing centres along with the suggestion to employ an electrician. Do the thousands buying light fittings over the counter really all employ electricians? I seem to recall that in Germany sockets for lights are just as standard as wall sockets for other appliances. In fact years ago when I was a product manager an inventor tried to sell our company a UK ceiling light socket, but it really needs both wiring accessory manufacturers and installers to introduce and of course house builders to specify. Meanwhile fiddling with brackets and wiring while perched up a ladder and holding the unit looks set to continue. Nobody seems prepared to make the quantum change needed in the market, but at least the information could be more practical. In industrial marketing the documentation available to ensure the product is specified is essential. Typically 20 per cent of project time is spent researching and specifying. A pity that hard to install consumer products don’t actually invest a bit more in both design and documentation.