How do big companies compete with quick, small competitors?

They focus on customer value.

McKinsey says that leading companies combine insights about customers, competitors, and costs to develop more innovative and cost-effective products.

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Excerpted from McKinsey Quarterly’s, “Designing products for value”

A rising tide of prosperity in developing economies is reshaping the nature of competition. Recognizing the challenges of the new environment, a few product makers … are taking a different approach.

Here are some examples:

  • Appliance maker:Senior executives were concerned about the sluggish performance of the company’s household fan business. The company’s leaders suspected that a stagnant product portfolio was partly to blame. The company started by conducting focus groups and ethnographic research aimed at identifying unmet needs among middle-income families in emerging markets. Next, the executives brought together a group … to conduct a series of product teardowns [which] showed that the company was “overbuilding” its products. Many of the individual cost-saving opportunities were small. But the collective impact was huge—helping reduce the total cost of manufacturing its fans by more than 10 percent … and contributing to a 50 percent jump in operating profit.
  • Medical-capital-equipment maker:A large manufacturer of medical devices and capital equipment was losing market share to an Asian-based entrant. To get more information, the company’s marketing experts analyzed the situation from a customer perspective. The picture wasn’t pretty. While the manufacturer did enjoy a lead over the competitor in product quality, the gap was smaller than expected. Moreover, the manufacturer slightly lagged behind its competitor on several other critical attributes that mattered more to customers. In response, the company quickly moved to close the cost gap, generating ideas that bridged 80 percent of the cost disadvantage, without compromising features that users valued. The exercise also gave the company’s marketers and sales personnel an important new (and more targeted) set of customer-prioritized attributes to use in differentiating their product.
  • Medical-device manufacturer:An acquisition created big expectations—and challenges—for the operations group of a medical-device maker. The merger had left two business units making, in some cases, essentially the same product. The natural place to start was to redesign the product with the highest degree of overlap. To ensure that the effort remained grounded in customers’ needs, the new R&D team began by familiarizing itself with the results of a series of customer and dealer interviews. To gain further insights, the company brought together a group to dismantle the competitor’s product. The teardown proved an important milestone in the effort to meet the company’s goal of cutting costs … and helped the company’s R&D and procurement groups begin to work together in a new, more collaborative way.

By combining deep insights about customers, competitors, and costs, a few leading companies are finding the “sweet spot” in product development: lowering costs while designing better products that customers value more. Along the way, these companies are strengthening organizational capabilities that will help them thrive in an era of heightened global competition.

Edit by JDC

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