Article By: Ashish Rajadhyaksha
Most small successful manufacturers of relatively inexpensive items come to a decision tree from time to time if they should maintain status quo or move up the value chain. While in the face of globalization, it’s becoming quite clear that continuing as before is no longer a completely viable option, but on the other hand, changing focus from making inexpensive items to more innovative products will cost money, require skilled labor and take time to develop.
The fact that it’s competitive out there is an understatement; all one has to do is walk the trade shows such as Heimtextil or check the Request for Quotes (RFQ’s) on MFG.com, TradeIndia.com, or Alibaba.com
to see how quickly those RFQ’s get flooded with responses of cheap prices. The choice then becomes binary “continue as is” and you lose existing customers to lower-cost rivals, or evaluate opportunities to innovate and become a more important vendor to customers, the way Samsung, LG, Infosys, and Lenovo moved up the value chain over time.
So unless one is owned by the Chinese government, there are very few instances where absolute cost leadership can provide sustainable long-term strategic advantages. Even Wal-Mart cannot achieve its cost leadership without its corresponding ability to pass on the cost increases to its vendors. Most existing businesses are currently influenced by factors highlighted in the model below, and are forced to consider pros and cons of innovation made inherent by each of these factors:
CONCLUSION: Whether to maintain status quo or embrace change has been a question for eternity. If the incumbent is an absolute cost leader in its product category with diversified client base, or inexpensive products as critical components of other products, then it mayn’t need to change anything. Otherwise product innovation becomes very important not only for continued profitability, but also for business survival. Innovation and change doesn’t have to be a bad thing however, with companies such as Li & Fung, H&M, Arcelor Mittal, Geely as successful role models of low cost manufacturing turning into world-class business models through their global networks and relationships, technology integration, and innovation leadership.