Strategy

Low cost provider or a niche, value provider?

I came across this article by Katie Two reasons for college students to breathe easier about their future. Katie is a graduate student at the University of Malta’s Institute for Thinking working towards a degree in Creativity and Innovation. I started out writing a few lines of comment, but it turned out to be longer than I expected and I decided to turn it into a post.

It is always refreshing to hear a different opinion. It makes me pause and look at an alternative argument. An interesting perspective, Katie. Unfortunately, the link to the news item on your page has expired; i.e. you get a page not found error.

But first some facts. There were over 80,000 Indian students enrolled in American Universities in 2005. Close to 3500 students were accepted in Australian universities in 2002. Canada accepted over 1,500 Indian students in 2004. I suspect these numbers would tend to be higher in each succeeding year. I have not researched Indian students in other countries like the UK, Germany, etc. and all individuals who are on work permits across the globe. I suspect most students who leave for higher studies are from families are economically well-off. It it only recently that financial institutions have started marketing student loans. So it may be a while before we see its impact in the general student demographics.

I do agree - to a certain extent - that the Indian educational system places much emphasis on cramming. I, myself, am a product of that system. But one cannot seek admissions in foreign universities based solely on that attribute. Cramming did not stop my thinking process, so how can it stop a million other students? For those who just cram, they will be unable to survive for long in the very competitive market that is India.

At this point, let me ask a question in turn. Why do you think countries like China, India, Philippines can charge so little for their services? I come across articles that say who cry foul. Even in my MBA classes not too long ago, this seemingly unfair advantage was the topic of numerous discussions. I will give an analogy of a business organization to explain my point of view. If the operational costs for my organization is low, why will I not pass that on to my customers (in this case the foreign markets)? The standard of living is not high in these countries as it is out here. I can live like a king if I have a monthly salary of even $1500 or $2000 in India or the Philippines at current exchange rates. I can even save a bundle.

From the customer standpoint, would you pay more than $3,000 for a laptop computer or $2000 for a desktop desktop computer -a basic configuration with no bells and whistles? Or would you pay $100 /hour for customer support? I doubt it. Every city in North America had a “dollar store”. Why are sales in such stores brisk? I once counted over a 150 people entering a similar “dollar store” in an hour. And O, by the way, think about the number of times you seek the services of a plumber - or an electrician. The bottom line is - the North American cost-base is very high. In order to provide consumers with quality goods and services at a price they can afford, companies have to look beyond its national borders. However, customers have a choice. They can vote for or against an organization with their pockets.

On the flip side, being a low cost manufacturer has its disadvantages. There will always be someone who will beat me on price. Competition on price is a function of efficiency, while that of providing value is a function of effectiveness. If countries like India continue to focus on low cost, it will lose out to others whose cost-base is still lower. Operations like call centers are focused around efficiency and will always get outsourced to low cost-base countries. There are reports that even Indian companies are outsourcing call center operations to still low cost-based countries. (Are you managing efficiently or effectively?)

I also realize there is a social aspect to this issue. Do I have an answer? No. A laissez-faire may not work due to social pressures. But I do know, that rising a din on outsourcing and clamoring the government for subsidies or controls will only hurt local businesses. You can look at the ailing Indian public sector companies to see how bad such protectionist policies are. I think universities and other educational institutions may have a role to play. They can focus their curriculum on topics that aim to prepare students to move up the value chain in their respective industries. (For the uninitiated, here is a link to Porter’s value chain analysis.)

Perhaps the readers of this blog can provide some ideas?

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