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Competing in China: An Integrated Approach

(originally published by Booz & Company)

This is the second of two articles dealing with the challenges that multinational companies face in China and describing what they should do to achieve profitable growth there.

The first article, "The Right Way to Achieve Profitable Growth in the Chinese Consumer Market," which appeared in Issue 11, highlighted the common pitfalls encountered in China and discussed the expected changes in the Chinese market and competitive environment. Companies have found competing in the consumer market there to be very challenging. They will no longer be able to "wing it;" rather, they will need to take a rigorous, integrated approach.

This second article describes what this integrated approach should entail. Companies should begin by generating deep consumer insights and building strong local capabilities. They should transform these insights into superior product market strategies, effectively manage sales and distribution and aim to achieve operational excellence. They also need to develop an organization that is fiexible, open to learning and adaptive in order to cope with China's vast size, great diversity and rapid rate of change.


The Chinese consumer product sector has much growth potential. Capturing this growth, however, will be very challenging for industry participants. Competition is intensifying across the board. Many multinational companies have announced bold plans of investment in China. In some industries, such as personal computers, household appliances and household chemicals, the top local players are quite competitive. Overcapacity is already evident in a number of industries -- specifically automobiles, appliances and beverages.

Consumer preferences are also changing. This change can be attributed to several factors: higher incomes, a relatively rapid rate of household formation, increased consumer information, more products and more channels.

The liberalization of distribution channels in China has provided more choices for suppliers, but the distributors' skills vary greatly, thereby making the selection of distributors very critical.

Retail channels are also changing quickly. Whole new retail formats such as chain stores and hypermarkets are emerging in large coastal cities, although the more traditional "mom and pops" are still much more common. This fragmented structure makes retail management for consumer product manufacturers very challenging. Manufacturers need to develop sales skills that are commensurate with the requirements of the different sales channels.

Against this backdrop, companies can no longer wing it in China. They must bring superior capabilities and apply an integrated approach for competing in China. The stakes are high, yet the rewards can be large.

The integrated approach should include the following key elements:

  • Articulate a China vision and commit to the vision (and understand its implications).
  • Develop superior consumer insights.
  • Transform consumer insights into superior product market strategies.
  • Effectively manage sales and distribution capabilities.
  • Achieve operational excellence.
  • Build a strong local organization and capabilities platform.


While the potential of the Chinese consumer industry is sizable, the timing and the paths required to realize the potential vary by product market sector. The evaluation of the opportunity in each product market is a function of not only the threshold income but also other enablers. Threshold income may well predict the first purchase of "basic necessity" products, such as refrigerators and washing machines. But as households possess these products, consumer choices shift to more discretionary products. Products of different categories may now compete for a "share of the wallet." Consumers' purchases of big-ticket items like passenger cars are beginning to take place but are still limited today.

Furthermore, opportunities in a well-penetrated urban market may be very different from those in a "virgin" suburban or rural market. The Chinese situation is too complicated to draw a simple overall picture of the product market opportunities. Companies need to evaluate the opportunities carefully on a specific product market basis.

Companies should decide their objectives in China and understand the ramifications of their decisions. Do they want to have broad-based product offerings in China or focus on niche products? Do they want market share or immediate financial return? Do they want to build up the critical mass of their businesses now or later? Do they want to focus on just the top three cities or penetrate a broad geographical area? The answers to these questions vary by company and by product market. For instance, Procter & Gamble and Unilever want to be big throughout China and are willing to invest. This probably makes sense because these companies sell "daily use" products that many Chinese consumers are already able to purchase. On the other hand, the timing and opportunity for "big ticket" consumer goods may be different. Companies must discern this difference and be careful in overextrapolating from the data and experience in one industry sector to another.

Against this backdrop, companies should decide the speed at which they want to develop their businesses and their desired product market positioning and coverage in China. Exhibit I shows a simple framework depicting the choices available for companies. Each strategic option has an associated set of implications in terms of the competitive risks and the resources required. A company's strategic intent, therefore, must be commensurate with the resources it is willing to invest. There have been many cases in which multinational companies that want to dominate the China market quickly have not committed a large enough team of managers or a team with sufficient skills and experience. This has been a key cause of these companies' inability to achieve their business objectives in China.


Developing superior insights into the consumer is critical in any consumer market, but it is particularly important in an emerging market like China with its large market, high degree of diversity and rapid pace of change. Ting Hsin, a Taiwanese company, perceived that Chinese consumers seemed receptive to the convenience and purity of instant noodles packaged in a bowl and captured a significant market share by being first to market with this product. Western companies including Procter & Gamble, Coca-Cola and Ericsson have also developed major presences in China because of similarly excellent consumer insights.

Indeed, the minds of the Chinese consumers are not yet "filled" or "fixed." While there is substantial volatility in the market (with consumers switching among products both within and outside a particular product category), there is also a lot of potential to build brands or market access.

Moreover, as the Chinese consumer market develops, more stratified market segmentation will inevitably evolve. Companies should develop within their China organizations the core capability of capturing consumer information. Many Chinese consumers are open to talking about their consumer preferences, and so traditional research approaches such as focus groups, interviews and surveys work well. Procter & Gamble, for instance, captures Chinese consumer information using a 30-plus-person market research team. Employing the tools of Procter & Gamble's global research organization, this team collects market information to gain insights into Chinese markets, probably earlier than its competitors. Today, Procter & Gamble has extensive product coverage, selling in more than 500 Chinese cities.

However, in a rapidly evolving market like China, one does not necessarily need to have a large, formal organization to be able to collect useful consumer information. A multinational company making disposable products collects and institutionalizes information on markets and competitors through regular trade visits by its marketing managers.

Companies should look deep into Chinese consumption behavior to try to understand the fundamentals -- such as, what key factors are driving demand, how these drivers may change over time and how people may select one product substitute over another. Further, companies should focus not only on understanding existing consumer demand but also on uncovering latent demand. Doing that requires creativity in the research approach. For some categories, bench-marking the evolution of consumer behavior in other Chinese economies such as Hong Kong, Taiwan and Singapore can often shed light on potential developments in China.

Because of the fast pace of change in China, speed in collecting information is critical. It is often better to focus on the real fundamentals quickly and get enough data to make business decisions. All too often, companies focus on insuring statistical significance, sometimes concentrating on the wrong set of measurement parameters, and they delay decision-making. In every situation, companies need to trade off between being approximately right and perhaps precisely wrong. In addition, there have been quite a few situations in which by the time the rigorous research process was completed, significant changes had already happened in the Chinese consumer market.

The entire organization should be empowered to direct consumer and market information to the relevant decision-making units. "Rank and file" people can often be good sources of information on Chinese consumer tastes and preferences. Companies can learn a lot by soliciting feedback from these people. Organizations that can capture this information systematically can benefit from such input.


Clearly, companies should turn consumer insights into effective product market strategies. But in doing so, companies need to understand what levers they can pull to generate growth in their businesses. Our experience in China is that companies tend to focus on one or two dimensions, such as geographic expansion and portfolio extension. Many companies have not considered their product strategy in the context of an overall framework, failing to understand the relative impact of each lever and the cost required to "pull" each lever. We encourage companies to rethink their product market strategy in China in light of this framework, while leveraging their superior consumer insights. (See Exhibit II.)

Geographic expansion must be planned carefully. Plenty of companies make the mistake of misinterpreting the real market size by regions in China and often end up with overexpansion in various geographic markets. Based on our experience, companies can indeed plan for geographic expansion for profitable growth. The starting point is the understanding of the real market size, as indicated in Exhibit III.

The cost to serve is a key in the assessment of regional market size for any product, but this fact is often neglected. To generate a visible impact in any local market, companies need to invest advertising and promotion beyond a certain minimum level in that market. (See Exhibit IV.) Too often, companies sprinkle a little bit of advertising money in too many scattered regional markets and in turn create only a little impact.

Another lever is usage breakthrough. The objective here is to infiuence Chinese consumers to step up their consumption of a product. This may require much skill and many tools. One lever would be to create demand for a product characteristic. Procter & Gamble did this for Head & Shoulders shampoo by establishing dandruff as a social stigma in China. Another lever would be to position a brand as superior through communication of performance advantage. A third lever would be to address consumer dissatisfaction through product improvement, promotions, consumer education or more consumer-oriented packaging.

Many companies in China also use product extension for generating growth. Procter & Gamble extended from hair care and skin care to detergent, oral care and personal care products. Coca-Cola sells locally branded fruit drinks in addition to its core branded carbonated drinks. S. C. Johnson extended from Raid, its core insect control brand, to a range of household products for kitchens, furniture, toilets and fioors.

Companies need to understand clearly the impact of pulling each of these levers and the implications on resources. Importantly, companies need to make trade-offs within a holistic framework. The ultimate product market strategy should be the result of optimized trade-offs among all the levers involved. As strategists for their companies, general managers in China should develop the vision and capabilities to capture the strategic elements in a holistic way.


Sales and distribution are usually the bottlenecks to multinational companies' expansion in China. Companies should therefore make the building of strong sales and distribution capabilities in China an imperative. Our experience in China indicates that this capability building can be planned and executed in a programmatic way.

The general approach to developing sales and distribution capabilities in China is actually not fundamentally different from that in other economies. The elements include: developing an in-depth understanding of the distributor and trade channels in each of the target markets; understanding the economics of selling directly to retailers versus using wholesalers at each market, and deciding the right combination by type of account and by market.

Skills of wholesalers or distributors vary greatly in China, and many of them do not have the required level of talent to be effective in the nation's new market economy. The retail structure is rapidly changing and is still fragmented in many places. Retail skills also vary a great deal across different types of channels. Though the situation is improving, there are relatively few highly skilled salespeople. The physical infrastructure, though improving, is still a major bottleneck to transporting consumer goods.

As a starting point, companies should define the optimal mix of direct versus wholesale accounts based on cost-to-serve economics, a company's preference and culture, and its willingness to invest in building its own sales force rather than finding third-party wholesale or distribution partners.

All too often, multinational companies in China lack a real understanding of these costs for their target geographic markets. Companies should define how they will optimize their services to the direct accounts and how they can manage the wholesalers for optimal effectiveness. Regarding the service to direct accounts, companies should segment trade accounts by a set of clear, explicit and consistent criteria; define the service approach for each customer segment, and refine the geographic resource deployment. To manage wholesalers properly, companies need to define their wholesaler selection criteria and performance metrics; choose the most qualified wholesalers; link performance with incentives, and provide regular, scheduled training to the selected wholesalers.

In the same way they develop an understanding of Chinese consumers, companies should develop a forward-looking understanding of the rapid changes in the external distribution and retail environment. Using that as an input, companies should align their sales structure and skills with the new environment. For instance, modern retail formats have very different requirements from those of traditional retailers. Some of these modern retail formats may become key accounts for some consumer products companies, and management of these key accounts can require very different approaches and skills. Companies that are able to anticipate these changes can plan for their own sales force structure, skills and approach.


China is not necessarily a cheap place in which to operate. Companies should focus on controlling manufacturing costs and insuring quality control. Our experience is that for most fast-moving consumer goods, these objectives can be achieved in China; however, companies need to have the proper awareness, pay the right attention to their management and constantly monitor their compliance and make adjustments if necessary. Companies can optimize their production costs by managing their sourcing. Increasingly, companies are localizing their supplies, although the speed of the localization varies a great deal by product categories and by company. Some companies with multiple subsidiaries in China (joint ventures or wholly owned foreign enterprises) are beginning to investigate whether cross-subsidiary coordination in sourcing can lead to cost savings and enhance overall delivery efficiency.


Successful companies in China are able to build a strong local organization and capability platform. Given China's operating environment and its rapid speed of change, companies should be able to learn, adapt and adjust at the local level.

Managing in an emerging market like China is very different from managing in developed economies. Managers need to be entrepreneurial and willing to accept ambiguities. They must be sensitive to local business practices and culture and have a nose for capturing broad trends. Managers also need to maintain open and effective communication with the rest of the company, especially the headquarters, to set the right level of expectations for the China operation and to communicate the challenges of doing business in China on a frequent basis.

Some well-performing multinational companies have found that while localization is a noble objective and certainly is the right long-term goal, complete localization in China will remain practically difficult for the next three to five years. Companies should take a dual approach to building their local organizations.

At the entry and middle-management levels, companies should put priority on recruiting and developing local talent. More managers with the right basic qualities are appearing in China. Companies should identify and recruit such people and equip them with the right skills. While capable local functional managers are also emerging, turning over the senior management role completely to a local team is premature for most companies, given the near-term imbalance in the supply and demand of capable and qualified local managers.

Some well-performing multinational companies continue to rely on "expatriates" who have the right experience and skills, together with the right outlook and commitment, to continue to play an important role in the leadership of their local companies. In fact, local leadership of a multinational company in China typically requires the effective handling of multiple distinctive roles that require different sets of skills and experience -- such as communicating with the headquarters, building the local organization and understanding the local market and the competitive environment. Some companies have found that instead of assigning a single person to take on all three roles, creating a core team of local and expatriate managers to share these responsibilities is better.


In addition, in light of the dynamics of China's consumer market and its business laboratory nature, some top-performing multinational companies are using China as a training ground for their up-and-coming global managers. These managers are assigned to China as part of their rotation. Companies expect these managers to obtain valuable skills in market and business development and organization by being posted in China.


China's consumer industry will continue to evolve rapidly, and the market and competitive landscape will inevitably change. Regulations will also evolve. All too often, multinational companies tend to overreact to short-term events in China, driven by their herd instincts. Multinational companies should develop a steady view on China and articulate and commit to a sound China vision, consistent with the headquarters' expectations as well as the realities of the local operating environment. They should also develop, evolve and adopt a rigorous, capability-based, integrated approach to competing in the China market.

Achieving all these will not be easy. But success will be rewarding -- financially, organizationally and intellectually. In addition, more multinational companies will integrate their China operations with the rest of their global business systems, organization and capability deployment mechanisms. For globalizing multinational companies, this integration should be a key item on the chief executive's agenda. This matter merits a thorough evaluation, deep understanding of its impact on the global competitive dynamics and forward planning of the appropriate strategy.

Reprint No. 98403 

Edward Tse,

Edward Tse is a vice president of Booz-Allen & Hamilton and the managing partner of its Greater China operations. A native of Hong Kong, Mr. Tse consults to multinational companies and Chinese enterprises on strategy, operations and organization. He holds a B.S. and an M.S. from the Massachusetts Institute of Technology, as well as an M.B.A. and a Ph.D. from the University of California, Berkeley.

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