Management and technology
March 24th, 2010
Price Matters - Interview with ESMT Associate Dean of Executive Education Olaf Plötner
In the emerging industrial markets in India and China, where price still matters more than sophisticated high-tech solutions, basic no-frills-products are in demand. Traditional American and European providers, though, are slow to supply what is needed. We have discussed some aspects of this development with ESMT Associate Dean of Executive Education, Olaf Plötner, whose research is focused on B2B markets and who is currently writing on this turn-around in the development of capital goods.
ESMT: The fact that poor people can’t afford expensive goods is nothing particularly new. Just as no-frills products are nothing new. We have had generic consumer goods, pharmaceutical products, and low-budget airlines for a long time. Why did B2B suppliers never come up with no-frills solutions?
Olaf Plötner: For one, these B2B-goods are highly complex and can’t be easily stripped down just by removing a couple of extras or services. They also have more than a few ingredients, which means they can’t be easily copied. For two, until a few years ago, there was no interesting market for no-frills industrial products. These markets have now emerged with India and China.
ESMT: Still, wouldn’t you say that traditional Western suppliers have been slow and inflexible regarding the requirements of these markets? It seems that rather than developing the low-budget machines needed, they tried to sell their high-budget equipment just like before?
Olaf Plötner: In an ideal world they would have responded earlier, yes. In the normal world in which we live, producers change their portfolio only when they feel market pressure. Siemens, GE, MAN, Klöckner etc., reacted when they were in danger of losing vital market share in Asia. Then they started to compete against local low-budget producers.
ESMT: But will they succeed? It must be difficult for famed German engineers, for example, to switch from the development of sophisticated machinery to the production of basic equipment and to get rid of items which have been their pride and joy.
Olaf Plötner: Sure, the German engineers will have problems with this demand. Developing a lesser or “just-enough-product” goes against their grain and is therefore painful. That is why manylow-frills high-tech goods are developed and produced in the emerging markets and not at headquarters.
ESMT: Developed abroad? This sounds like a revolution.
Olaf Plötner: That’s exactly what it is. And as we know, revolutions don’t make everybody happy. Low- frills product management, R&D, production, sales and services, all have to be done in close vicinity of the Asian clients, i.e., neither in Munich nor in upstate New York - and will have to be accompanied by the strictest cost management.
ESMT: Okay, but why would I – as a traditional buyer of high-end products – then continue buying on the high-end market? Why would I not switch to less expensive machines if I see that they work fine in India and China?
Olaf Plötner: You won’t, if the premium product still contains those elements of differentiation you are eager to possess. But if these elements are irrelevant for you, then, yes, you might prefer the low-frills solution. It won’t be the end of the world, by the way. On the contrary, for high-end producers this may even open new segments on their traditional markets in the developed countries. GE has had this experience just as Siemens with their medical divisions.
ESMT: Which also means that these producers might be cannibalizing their traditional products.
Olaf Plötner: Yes. But as Ferdinand Piëch is supposed to have said when buying Skoda: "Better we cannibalize our products than our competitor does it."