The Nexus Q: A New Beginning for American Manufacturing?

When Google released the Nexus Q, a media streaming device, in June 2012, the company positioned itself in contrast to conventional electronics manufacturing. Rather than building the devices overseas and then shipping orders from foreign distribution centers, the Nexus Q was designed and manufactured entirely in the United States. As emphasized during our next week in class, this production feature was a management decision made early in the product conception process to gain a competitive advantage over other media streaming devices.

On June 27^th, 2012, the New York Times profiled the Nexus Q to assess whether increases in American manufacturing are aberrations or new manufacturing trends based in conditions of the global market.

WHY AMERICAN MADE

This next week in class we will focus on how and why supply chain management decisions are incorporated early in the product conception process. Or readings highlight how IKEA ensures its efficiency (lowest cost and high volume) by detailing specific vendors and production processes before products are even designed and how Tata Motors built its business model, of reaching rural residents at low cost, by constructing its vehicles in sections which can be combined in auto kits by minimally trained local shops.[1][2]   

The design and manufacture of the Nexus Q in the United States was a strategic decision made early in the development process of the device. The New York Times suggests four primary reasons for this:

1. Increases in labor and energy costs in China

To be competitive, Google wanted the Nexus Q to have low product construction costs. Rising wages and energy costs in Chinese factories made overseas production more expensive than in the past. The United States was considered a feasible manufacturing alternative because, although wages were higher, they were predictable.

2. Increases in transportation costs

To be competitive, Google wanted the Nexus Q to have low transportation costs. Rising oil prices convinced Google that by manufacturing its devices in the United States, it could ship the devices less expensively to customers in North America.

3. Theft of intellectual property

Electronics manufacturing overseas also increases risks of intellectual property theft and leaks. Rather than attempting to maintain positive relationships with foreign suppliers, as IKEA does, Google wanted higher security and safeguards during its design and manufacturing process—security that was only feasible at a U.S. based plant (which ended up being only a few miles from Google headquarters in California).

4. Time-to-market competitive advantage

Google wanted its media streaming device to be highly responsive (a feature of more expensive goods) to public demand. By designing and manufacturing the Nexus Q in California, Google was able to design the product faster and with significantly more flexibility than had it been designed and manufactured overseas. To ensure speed and quality of production, Google sought out and used American suppliers for most Nexus Q components as well. [3]

WILL NEW AMERICAN MANUFACTURING BE A TREND?

The question that arises from the debut of the Nexus Q is, “Will more companies shift their manufacturing divisions back to the United States?

The outcome of the Nexus Q itself may not provide an answer. By August, 2012, Google had halted production of the Nexus Q indefinitely. At $299, the device was too expensive (its production costs with American wages were too high) and critics panned it for being poorly designed (poor quality/uncertain design responsiveness). [4]

Still, in an April 2012 report, Boston Consulting Group suggested that large manufacturing firms are, indeed, considering moving production lines from China to the United States. The study revealed that one third of U.S. companies with sales greater than $1 Billion USD are planning or considering moving manufacturing from China back to the United States. Top motivators for such plans are labor costs, product quality, ease of doing business, and proximity to customers. [5]

This movement has already been seen by Caterpillar, Kubota, and Toyota who have invested over $430 million dollars to build manufacturing plants in the State of Georgia. Rising transportation costs and proximity to the Panama Canal were cited as factors behind the investments. [6]

ADDITIONAL THOUGHTS AND QUESTIONS

Paired with the April report from BCG, the failure of the Nexus Q presents several additional questions that our class may be able to look at.

-If wages in China are not yet equivalent to those in the United States but are rising, when should U.S. firms begin shifting their manufacturing out of China?

- Is the United States the best alternative manufacturing location? If not, what other alternative locations are there?

-How much volume of parts can U.S. suppliers handle? Are any common electronic components unavailable from U.S. suppliers?

SOURCES
[1] Margonelli, Lisa. "How IKEA designs its sexy price tags." Business 2.0, October, 2002.

[2] Brown, John Sealy and John Hagel. "Learning from Tata's Nano: The innovations of the $2,500 car carry important lessons for Western Executives." Bloomberg Businessweek, 27 February, 2008.

[3] Markoff, John. "Google Tries Something Retro: Made in the USA." The New York Times, 27 June, 2012. Internet; Available from http://www.nytimes.com/2012/06/28/technology/google-and-others-give-manufacturing-in-the-us-a-try.html?pagewanted=all

[4] Miller, Claire Cain. "Google Goes Back to the Drawing Board for Nexus Q." The New York Times, 8 August, 2012. Internet; Available from http://www.nytimes.com/2012/08/09/technology/google-goes-back-to-the-drawing-board-for-nexus-q.html?pagewanted=all

[5] "More Than a Third of Large Manufacturers Are Considering Reshoring from China to the US." Boston Consulting Group, 20 April, 2012. Internet; Available from http://www.bcg.com/media/PressReleaseDetails.aspx?id=tcm:12-104216

[6] Sams, Douglas. "Caterpiller moving to 'Orkin Tract' megasite." Atlanta Business Chronicle, 17 February, 2012. Internet; Available from http://www.bizjournals.com/atlanta/news/2012/02/17/caterpillar-to-build-plant-near-athens.html?page=all

Value-Based Pricing

£ coins by Images_of_Money 

The prospect of identifying a vacant market-niche and its associated price-point gap prior to sourcing and design (as in Ikea) is compelling: Ikea first identifies a market niche (customers with small kitchens) then the need for a product range (cabinets that fit) and next a vacant price point. Only then do they turn their attention to design and manufacture of a product to fill the need.[1] Indeed, design is the last step in their process rather than the first, considered only after materials and manufacturing environments are agreed upon.

My initial reaction to Ikea’s product development strategy was “how novel,” however further exploration reveals that my response reflects how little I know about current pricing theory.

While casting about for references to help me get a better handle on How Pricing Is Done, I stumbled on the Value Pricing Group, a consulting firm in St. Louis specializing in “value-based pricing”. Their CEO, Jerry Bernstein has written a number of articles on the subject that are well worth a look. His landmark article "Engineering New Product Success"[2] was published in 2002, around the same time as Margonelli’s article about Ikea.

“Engineering New Product Success” describes an alternative to the classical model of establishing price on the basis of cost of production and distribution. Bernstein describes a multi-step process developed during his tenure at Emerson Process Management, a manufacturer of equipment for industrial process-control.

The steps, in order, are laid out here:

1. Qualitative research to ascertain that the product and feature set in question is being evaluated in the proper set of prices ranges by the right customer population.
2. Quantitative research to provide formal analysis of the information gleaned in step one, e.g. how much value do potential customers attach to specific features, and how should those values be reflected in pricing? In other words, how much are intangibles such as  “name brand” worth to customers, or what value do customers attach to incremental changes in device performance, e.g. +/- 1% accuracy in measurement versus +/- 5%?
3. Creation of a “numbers story” to compare likely outcomes from introducing the product at one price versus another. This step takes into account questions such as how introduction of the new product might impact sales and revenue from existing products: it is one thing to maximize revenue from any given product, but quite another to price a product in such a way that profit is optimized across the entire product line to maximize benefit for the producer.

Bernstein takes care to point out that successful implementation of this process requires significant commitment, training and dedication of resources. That is, the overhead to value-based pricing is non-trivial. He also emphasizes the importance of hearing the customer to ensure that the product offered is one that will fit their needs.

Bernstein also takes pains to emphasize the importance of integrating questions regarding pricing and perception of value into the design process earlier rather than later.

The outcome of Emerson’s pre-production market research for the item in question was the realization that they would be better setting a price of $3150 than the $2650 that their marketing department had initially specified. The higher price permitted them to maximize profit while minimizing cannibalism of revenue from existing products. Emerson’s analysis permitted them to charge significantly more per item while nevertheless satisfying their customers that they were receiving good value for their money. They also ensured that they were producing an item for which there was sufficient demand to make the endeavor worthwhile.

In short: Emerson did not finalize design or even think about nailing down production details until well after empirically establishing market demand and price point.

Compelling though the concept of value-based pricing might be, there are some obvious potential pitfalls, e.g. the expense of the commitment, training and dedication of resources mentioned above. Careful selection of product environment is clearly a critical initial step when considering implementation of this technique.

Questions:

How might value-based pricing be applied to service industries such as banking or healthcare?

Under what circumstances might pursuit of value-based pricing be good use of resources? Contrariwise, when would it be wasteful or yield a low return?

References:

[1] Lisa Margonelli, "How Ikea Designs Its Sexy Price Tags", Business 2.0 (October 2002) http://www.business2.com/articles/mag/print/0,1643,43529,00.htm

The URL is dead, alas. The current Business 2.0 archive only dates back to 2004. I have been unable to find a live mirror for the article.

[2] Jerry Bernstein “Engineering New-Product Success: The New Product Pricing Process at Emerson http://www.valuepg.com/Articles/EngineeringNew%20ProductSuccess.PDF accessed 2012.08.30. Article Copyright 2001 Elsevier Science Inc. Industrial Marketing Management 31, 51 – 64 (2002)