The Great Escape
Here in the United States we are going to continue to experience more casualties of the global commoditization of jobs, products and companies. The facts are in. U.S manufacturing has already lost its competitive edge. It's now more than a trend. Engineering positions are being outsourced to China, Eastern Europe and India. Over 200,000 engineers were graduated from Chinese universities in 2000 compared to 59,000 in the U.S. Even Industrial Design is at risk to China and Singapore. Over 400 design schools exist in China today.
Unless we can differentiate our products and services from this kind of competition we may have trouble sleeping. Consumers continue to reward low cost producers from the Far East for U.S. designed products. Many of those same producers are actually manufacturing multiple lines of competitive branded products, including their own, all in one facility! In the face of competitive cost pressures these brand companies and marketers continue down the commoditization path by outsourcing design and engineering development to these same producers. There is a trap here, however. These products are all beginning to look alike. It is no big mystery that eventually all products and services move toward commoditization but what is alarming now is how fast it is happening and our once favorite brands are starting to suffer from a lack of differentiation. It is estimated that brands are losing anywhere from 10% to 30% of their value depending on the industry. Can you tell the difference between a Mr. Coffee and a Hamilton Beach coffee maker? The problem is not just in traditional consumer commodity products alone. Witness how America's embattled contract manufacturers are scrambling to do product development and yes, even industrial design. So if design, one of the last bastions of differentiation, is starting down the global path of consolidation, how long before the absolute last stronghold, your brand loses its value and becomes worthless. Remember Polaroid? Consider this. The jobs are gone—. The products are gone—. The company is gone—But there is something, however, that remains. It has proven more durable than anything. The Polaroid brand still actually lives on! Polaroid boasts the third largest market share in DVD players in the U.S. Yes, DVD players and...batteries.
Given our current paradigms and understanding about brand, if we were to continue to promote a defunct brand, say by giving it an expensive new logo or facelift and invest hefty amounts in advertising or pay a prestigious PR agency to “spin” it and build awareness, can we extend the life and value of the brand?
Perhaps, for a short time, until people catch on that there is nothing inside it, that there will be no delivery on the promises or that it's actually not delivering any product or service. It simply cannot deliver any revenue to pay for this work if there is no service or product to fill or support the brand. It remains to be seen if the Polaroid brand can survive the ingestion of such a diverse array of products as DVD players to batteries. Brands may be durable but they are not indestructible.
A new paradigm is unfolding in the U.S. regarding brand. What is changing is that brand development and management is shifting to become more focused on innovation and design. So-we already know innovation and design is important so what's new here? The focus on product innovation and product design as a brand function is what's new. Traditionally brand has usually been understood only in the context of the communications disciplines such as corporate identity, advertising, marketing and sales. Countless volumes of books, articles, and seminars have been written about brand in the context of everything but the product itself! Brand is hardly ever couched in terms of or in the context of product quality, design or innovation. Just look at companies who hire trained innovators called industrial designers. To what executive do they report? Historically it's been primarily to engineering management. This is starting to change and innovation is getting attention from the C-level executives, the champions of shareholder value, who are becoming concerned with the value losses of their brands. Technology innovation and product design are becoming more prominent brand attributes and strategic points of differentiation given the emerging forces of global commoditization. As Elaine Ann points out in her article on The Top Ten Myths and Truths about Design in China The importance of Strategic Design and Innovation is compelling when Chinese corporations can produce a mature product at one-fifth of the price (compared to American Companies). “It is now a requirement for businesses to engage in innovation, rather than the "when we have the money to spare on design”-type of business environment they are used to."
There is another very disturbing fact that has only recently started to come to light as a result of the global product development pressure on the U.S. We experience failure rates anywhere from 50% to 80% in the design and development of new products as reported by Industry Week and Price Waterhouse Coopers 2002 Value Chain Survey. Because we have been the largest and wealthiest consumer market in the world, American manufacturers, with their internal product development resources have been sloppy and undisciplined and have swept the failures under the rug.
In his book Winning at New products, Robert G. Cooper points out, “Successful products have about 75% more person-days devoted to the predevelopment activities than do failures. What ails product innovation is that we're simply taking too many shortcuts--that we're leaving too many things out along the way.”
Further, Ralph E. Grabowski reports in The Corporate Board (May/June 1998, Vol. XIX No. 110: 22-27) “The evidence is in. Super successful technology-based enterprises average about two dollars in market research for every dollar invested in engineering. Business disasters invest less than a nickel in upstream marketing for each engineering dollar. The implication for the board of directors is that prudent oversight of a company's affairs must include a commitment to invest resources in decisive, up-front marketing. The Marketing/Engineering Investment Ratio (M/E Ratio) was developed as a new ratio to guide technology-based enterprises. In this metric, created for the MIT Enterprise Forum, marketing is defined as the market research process that comes before the product is ready, and excludes promoting or selling. The M/E Ratio should be a minimum of 1. The magnitude of the challenge simply requires it.”
Nationally we do better in iterative product development but continually improved, reliable, and competitively priced products that function as well as or slightly better than the competition are "table stakes" in today's economy. Design that serves the engineering function by “perfuming the pig” cannot compete in this new type of competition.
The truth is, its always been products or services that have built brand but it's only been in the last 50 to 60 years that budgets for advertising and marketing communications have grown to prop up and pay for the product failures stemming from not understanding what customers will buy, to the arrogance of “build it and they will come” to poorly designed, unimaginative and undifferentiated products. Again the global market demands something different. The three dimensional language of products such as design, quality fit, finish, color, technology innovation and ergonomics are universal languages that transcend the regional language barriers of verbal communication, print and logos elements of two dimensional branding.
The giant, Korean consumer products company, Samsung now faces the same commodity dilemma and has come to a clear understanding of what it will take to compete in this global economy. Moreover, it has implemented a radical plan. “An enterprise's most vital assets lie in its design and other creative capabilities,” Kun-Hee Lee, Chairman and CEO of the $36.9 billion Samsung Electronics said in a recent speech, identifying design as the single most critical factor in determining the “ultimate winner of the 21st century”—So how do we prosper in this global economy?
- People place higher value on unique ability or products. Outsourcing is simply a practical application of this principle and it goes two ways. Outsource design and innovation process if you are not absolutely excellent at it. People don't want to pay for mediocrity. Keep internally only what you are absolutely excellent at doing or providing. Here in the U.S. we will retain core technology competencies and intellectual capital, innovation and brand.
- Because technology and functional advantage is becoming increasingly short-lived we must develop products and services faster and more accurately.
- Because customers have access to better sources of information our research technologies must be smarter about getting to the things consumers value.
- Make our development processes faster.
- Learn to co-develop, customize your value chain and how to manage the process.
- A new development strategy must team design with the ability to create universal design language and technology innovation with marketing brand management.
- Realize that products and services are driven more intensely today by emotion and experience than pure function.
- Realize that customers are not homogenous here in the U.S. or abroad.
- Spend more on marketing than engineering.
- Realize customers now aspire to well-designed products.
- Innovate out of the middle.
- Realize that even in the global economy products still don't sell themselves.
Design and innovation partnered with solid brand management as strategy is the way of escape from being commoditized.