Create Value, But Capture It Too!

In the world of manufacturing if you are to listen to all the media hype, you would be likely to come to the view that China is where all the action happens these days. To some extent that is true, but it is not the full story. This was brought home by an article published in Forbes (forbes.com) at the back end of last year, which gives a breakdown of who makes what from two of the world’s powerhouse brands, the iPhone and the iPad.

 

Both are made in China from locally sourced components but are Chinese companies and employees getting rich on the back of their global success? Not so it would seem. Chinese labour accounts for a mere 1.8 per cent of the final price of an iPhone while a further 22 per cent is accounted for by the cost of inputs and materials. But contrast these numbers with Apple's profits which reach 30 per cent for the iPad and soar to almost double that for the iPhone.

These numbers demonstrate the very important distinction between value creation and value capture. Through the use of good, reliable materials which are well put together, Apple's products are functionally strong and do the jobs that they are supposed to do. High levels of performance value are being created but the companies that are creating it are making relatively little money. Apple controls product design, software development, marketing and retailing and this is where the money is! The lesson in this is clear. Always examine the full supply chain and figure out where the value is being added and where the costs are being incurred. If you are operating in a high cost, low value part of the industry life is not going to be easy!

The Value of Condoms!

So there you are, marketing manager for a condom manufacturer and wondering what your value proposition is going to be. The rules of this particular game are already fairly well set. Emotional value reigns. When it comes to these matters, consumers want a brand they can trust, witness the dominant mindshare held by the likes of Durex, Ansell and Trojan. A price value proposition is always going to be a challenging one, because if they are cheap can we be sure that they are up to the job!

But what about the performance value option – could we argue that ours are the best in the business. No we are not thinking about that kind of performance ….. but rather contemplating the claim that we have the first fully virus-proof product on the market. Now that is a compelling claim and one that would lend itself to a premium pricing position as well! In fact, a Chinese company, Safedom is already there having produced a product that tests better than its big name rivals though its claims have yet to be verified by international bodies.

But rather than exploiting this performance lead, Safedom is looking to partner with a well-known brand to give is products a global presence. Recognition there perhaps that building mindshare is a long slow process. And in another interesting twist, the company’s segmentation strategy has been to target women who make up four fifths of its customer base. So while its rivals like to go with names like ‘Magnum’ (is that a pistol in our pocket …..) and ‘Performa’, its brand names include ‘Beautiful Girl’ and ‘Green Lemon’. Plaudits there for a novel strategy focusing on female health benefits.