FINAL TASK_kristie.pdf

FINAL TASK

INTERNATIONAL BUSINESS

GLOBAL MARKETING STUDY CASE: P&G AMONG CHINA

POWER BRANDS; GLOBAL MARKET STRATEGIES

NAME: KRISTIE ONASIS

NPM: 1141153

MANAGEMENT STUDY PROGRAM

UNIVERSITAS INTERNASIONAL BATAM

2014

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Table of Contents

I. International Marketing and Global Marketing ................................................................ 2

II. Global Economic Environment ............................................................................................ 4

Foreign Direct Investment .......................................................................................................... 5

Country Competitiveness ............................................................................................................ 5

Cooperative Global Trade Agreements ...................................................................................... 6

III. Cultural Issues and Buying Behavior .............................................................................. 7

Cross-Cultural Comparison ........................................................................................................ 8

Culture and the Marketing Mix................................................................................................... 9

IV. International Market Assessment .................................................................................. 10

V. Global Marketing Strategies ............................................................................................... 11

Global Strategy ......................................................................................................................... 11

Global Marketing Strategy ........................................................................................................ 13

Competitive Analysis ................................................................................................................ 14

VI. Global Market Entry Strategies ..................................................................................... 16

Exporting................................................................................................................................... 17

Licensing ................................................................................................................................... 18

Franchising ................................................................................................................................ 18

Contract Manufacturing (Outsourcing)..................................................................................... 18

Joint Venture ............................................................................................................................. 19

Wholly Owned Subsidiaries ..................................................................................................... 19

Strategic Alliances .................................................................................................................... 19

VII. Case Study: P&G Among China Power Brands ........................................................... 20

Analysis of the Case Study ....................................................................................................... 22

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I. International Marketing and Global Marketing

If we talk in general, both of the term global and international marketing are used

interchangeably nowadays. But if we look deeply in term of marketing theories, international

marketing is a stage in the evolution of global marketing. Here is the stage of Global Marketing

Evolution in general, based on Kotabe and Helsen (2010):

Stage 1: Domestic Marketing

Companies are manufacturing products and selling those within the country itself. So, there is no

international phenomenon at all.

Stage 2: Export Marketing

Company starts exporting products to other countries also. This is the very basic stage of global

marketing. Approach of marketer in this stage is said to be „ethnocentric‟ because although he is

selling goods to foreign countries, product development is totally based upon the taste of local

customer. So, focus is still on domestic market

Stage 3: International Marketing

Company starts selling products to various countries and the approach is „Polycentric‟ i.e.

making different products for different countries.

Stage 4: Multinational Marketing

Complex form of international marketing that engages an organization in marketing operations in

many countries. the number of countries in which the company is doing business gets bigger than

that in earlier stage. And so, instead of producing different goods for different countries,

company tries to identify different regions for which it can deliver same product. This approach

is called „Regiocentric approach‟.

Stage 5: Global Marketing

Refers to marketing activities coordinated and integrated across multiple markets. This is the

final stage of evolution. In this stage company really operates in a very large number of countries

and for the purpose of achieving cost efficiencies it analyses the requirement and taste of

customers of all the countries and come out with a single product which can satisfy the needs of

all. This approach is called „Geocentric approach‟.

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Actually, there are some reasons which make the international trade conducted or why

global marketing is imperative.

1. Saturation of domestic markets

First and at the most fundamental level, the saturation of domestic markets in the

industrialized parts of the world forced many companies to look for marketing opportunities

beyond their national boundaries.

2. Emerging markets

During the twentieth century, the large economies and large trading partners have been

located mostly in the Triad Regions of the world (North America, Western Europe, and

Japan). However, in the next 10 to 20 years, the greatest commercial opportunities are

expected to be found increasingly in ten Big Emerging Markets (BEMs)—the Chinese

Economic Area, India, Commonwealth of Independent States, South Korea, Mexico, Brazil,

Argentina, South Africa, Central European countries, Turkey, and the Association of

Southeast Asian Nations (Indonesia, Brunei, Malaysia, Singapore, Thailand, the Philippines,

and Vietnam). As the traditional developed markets have become increasingly competitive,

such emerging markets promise to offer better growth opportunities to many firms.

3. Global competition

We believe something profound has indeed happened in our view of competition around the

world. Now the products and brands are not only compete on local or national level, but

already reach the international level.

4. Global cooperation

Global competition also brings about global cooperation. This is most obvious in the

information technology industry. IBM and Japan‟s Fujitsu used to be archrivals.

5. Internet revolution

The proliferation of the Internet and e-commerce is wide reaching. The number of Internet

users in the world reached 1.4 billion by March 2008, which amounts to almost three times

that of 2000. Compared to business-to-consumer (B2C) e-commerce, business-to-business

(B2B) e-commerce is larger, growing faster, and has less unequal geographical distribution

globally.18 Increases in the freedom of the movements of goods, services, capital,

technology, and people, coupled with rapid technological development, resulted in an

explosion of global B2B e-commerce.

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II. Global Economic Environment

The global economic environment plays a large role in the development of new markets for

organizations. Some realities that conducting right now are the capital movements have replaced

trade as the driving force of the world economy that make the production has become uncoupled

from employment. Besides that, the struggling between capitalism and socialism has almost

ended by the role of e-commerce. E-Commerce diminishes the importance of national barriers

and forces companies to re-evaluate business models.

Keegaan (2011) believed that there are four types of economic systems in the world;

market capitalism, centrally planned socialism, centrally planned capitalism and market

socialism. The graphic is shown below.

Graphic 1. Types of Economic System

In international economic, we know a term economic freedom; which has a range from

“free” to “depressed”. The economic freedom variables considered include trade policy, taxation

policy, banking policy, wage and price controls and property rights. Based on the variables, we

can conclude that the member of free economic freedoms are Hong Kong, Singapore, Ireland,

New Zealand, US, UK, Netherlands, Australia, and Switzerland. Whereas the countries on

repressed economic freedom are Bosnia, Vietnam, Laos, Iran, Cuba, Iraq, Libya, North Korea

and Congo.

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Foreign Direct Investment

Foreign direct investment—which means investment in manufacturing and service

facilities in a foreign country with an intention to engage actively in managing them—is another

facet of the increasing integration of national economies.

Two things should be noted. In the past, foreign direct investment was considered as an

alternative to exports in order to avoid tariff barriers. However, these days, foreign direct

investment and international trade have become complementary. For example, Dell Computer

uses a factory in Ireland to supply personal computers in Europe instead of exporting from

Austin, Texas. Similarly, Honda, a Japanese automaker with a major factory in Marysville, Ohio,

is the largest exporter of automobiles from the United States. As firms invest in manufacturing

and distribution facilities outside their home countries to expand into new markets around the

world, they have added to the stock of foreign direct investment. Second, although not shown in

the exhibit, the composition of FDI has shifted from manufacturing to services in all regions.

FDI in services increased from being one-quarter of the world inflow FDI stock in 1970s to 49

percent in 1990, and to 62 percent with an estimated value of $6 trillion in 2005.

The increase in foreign direct investment is also promoted by efforts by many national

governments to woo multinationals and by the leverage that the governments of large potential

markets such as China and India have in granting access to multinationals.

Country Competitiveness

Country competitiveness refers to the productiveness of a country, which is represented by

its firms‟ domestic and international productive capacity. Human, natural, and capital resources

of a country primarily shape the nature of corporate productive capacity in the world, and thus

the nature of international business.

Although wholesale generalizations should not be made, the role of human resources has

become increasingly important as a primary determinant of industry and country competitiveness

as the level of technology has advanced. Clearly, human resources are crucial for the long-term

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economic vitality of natural resource-poor countries. All the top-10 ranked countries, with the

exception of the United States and Canada, are scarce in natural resources.

Cooperative Global Trade Agreements

The evolution of cooperative global trade agreements listed on below.

1. ITO (International Trade Organization);

Established after World War II with the objective of ensuring free trade among nations

through negotiated lowering of trade barriers.

2. GATT (General Agreements on Tariffs and Trade);

Established after 1950 to replace the ITO. GATT succeeded ITO in lowering trade

barriers.

3. WTO (World Trade Organization);

Created in the 8th

round of GATT talks (Uruguay Round). Its main function is to ensure

that trade flows as smoothly, predictably and freely as possible. As of February 28, 2009,

the WTO had 153 member countries.35 This round was successful in bringing many

agricultural products and textiles under the purview of GATT.

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III. Cultural Issues and Buying Behavior

Culture comes in many guises. The literature offers a lot of definitions. But Terpstra and

David offer a more business-oriented definition:

Culture is a learned, shared, compelling, interrelated set of symbols whose meanings provide a

set of orientations for members of society. These orientations, taken together, provide solutions

to problems that all societies must solve if they are to remain viable.

Culture consists of many components that interrelate with one another. Knowledge of a

culture requires a deep understanding of its different parts. Here are the elements that are most

likely to matter to international marketers: material life, language, social interactions, aesthetics,

religion, education, and values.

1. Material life

Refers primarily to the technologies that are used to produce, distribute, and consume goods

and services within society. Differences in the material environment partly explain

differences in the level and type of demand for many consumption goods.

2. Language

Language is often described as the mirror of a culture, which affects primarily to the

communication aspect.

3. Social interactions

A critical aspect of culture is the social interactions among people. Social interplay refers to

the manner in which members of society relate to one another.

4. Aesthetics

Refers to the ideas and perceptions that a culture upholds in terms of beauty and good taste.

Cultures differ sharply in terms of their aesthetic preferences, though variations are mostly

regional, not national.

5. Religion

Refers to a belief in supernatural agents. Religion plays a vital role in many societies. To

appreciate people‟s buying motives, customs, and practices, awareness and understanding of

their religion is often crucial.

6. Education

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Education is one of the major vehicles for channeling culture from one generation to the

next. Two facets of education that matter to international marketers are the level and the

quality of education. The level of education varies considerably between countries.

7. Values

All cultures have value systems that shape people‟s norms and standards. These norms

influence people‟s attitudes toward objects and behavioral codes.

Cross-Cultural Comparison

Cultures differ from one another but usually share certain aspects. Cultural classifications

allow the marketing manager to see how much overlap is possible between the marketing

programs to be implemented in different markets. Recent social psychology research reveal key

cultural differences between East (high) and West (low) context cultures in how people perceive

reality and reasoning. High-context cultures interpret messages rests on contextual cues; e.g.,

China, Korea, Japan. Low-context cultures put the most emphasis on written or spoken words;

e.g., USA, Scandinavia, Germany.

Geert Hofstede also make Cultural Classification Scheme, which shown below.

1. Power distance: The degree of inequality among people that is viewed as being equitable

2. Uncertainty avoidance: The extent to which people in a given culture prefer structured

situations with clear rules over unstructured ones

3. Individualism: The degree to which people prefer to act as individuals rather than group

members.

4. Masculinity: The importance of “male” values (assertiveness, success, competitive drive,

achievement) versus “female” values (solidarity, quality of life).

5. Long-term orientation versus short-term focus: Future versus past and present orientations

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Culture and the Marketing Mix

Culture is a key pillar of the marketplace. The success of international marketing activities

is to a large extent driven by the local culture. These cultural variables may act as barriers or

opportunities.

1. Product policy

Certain products are more culture-bound than other products. Food, beverages, and clothing

products tend to be very culture-bound. Products or services can also be banned or restricted

due to cultural reasons. The implied meanings of brand names also exemplify the role of

culture in global marketing.

2. Pricing

Customers‟ willingness to pay for your product will vary across cultures. Products that are

perceived as good value in one culture may have little or no value in other cultures. Pricing

policies are driven by four Cs (Customers, Company (costs, objectives, and strategy),

Competition, Collaborators or distributors).

3. Distribution

Cultural variables may also dictate distribution strategies. Retailers must often fine-tune

their practices when entering foreign markets. Companies often need to tweak their

distribution model in emerging markets; even their model is a key success factor in their

home market.

4. Promotion

Promotion is the most visible element of the marketing mix. People who do not buy your

product for whatever reason may still be exposed to your advertising. Culture will typically

have a major influence on a firm‟s communication strategy. Local cultural taboos and norms

also influence advertising styles.

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IV. International Market Assessment

International market assessment is an evaluation of the goods and services that the

multinational company can sell in the global marketplace. The steps on international market

assessment are:

1. Initial screening: basic need and potential

2. Second screening: financial and economic condition

3. Third screening: political and legal forces

4. Fourth screening: socio-cultural forces

5. Fifth screening: competitive environment

6. Final selection

Also, there are some important indicators considered to the international market

assessment.

1. Market indicators: The indicators used for measuring the relative market strengths of various

geographic areas.

2. Market size: An economic screening consideration used in international marketing, which is

the relative size of each market as a percentage of the total world market.

3. Market intensity: The richness of a market or the degree of purchasing power in one country

as compared to others.

4. Market growth: The annual increase in sales in a particular market.

5. Trend analysis: The estimation of future demand by either extrapolating the growth over the

last three to five years or by using some form of average growth rate over the recent past.

6. Estimation by analogy: A method of forecasting market demand or market growth based on

information generated in other countries.

7. Regression analysis: A mathematical approach to forecasting that attempts to test the

explanatory power of a set of independent variables.

8. Cluster analysis: A marketing approach to forecasting customer demand that involves

grouping data based on market area, customer or similar variables.

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V. Global Marketing Strategies

Global Strategy

Global strategy consists of five conceptualizations:

1. Global industry

Those where a firm‟s competitive position in one country is affected by its position in other

countries, and vice versa. There are four major forces determining the globalization potential of

industry.

Graphic 2. Industry Globalization Drivers

Market Forces

Per capita income convergence

Rich consumers in emerging markets

Revolution in communication

technology

Organizations behaving as global

customers

Growth of global and regional channels

Establishment of world brands

Spread of global and regional media

Cost Forces

Global economies of scale and scope

Steep experience curve

Global sourcing efficiencies

Favorable logistics

Difference in country costs

High product development costs

Fast-changing technology

Shorter product life cycles

Government Forces

Favorable trade policies

Compatible technical standards

World Trading Regulations

High growth/low labor cost developing

countries

Deregulation/privatization of industries

Competitive Forces

High exports and imports

Competitors from different continents

and countries

Interdependent countries

Globalized competitors

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2. Competitive industry

Competitive industry structure is the second conceptualization that is useful in

understanding the nature of global strategy. Competition is not limited to the firms in the

same industry. If firms in an industry collectively have insufficient capacity to fulfill

demand, the incentive is high for new market entrants. However, such entrants need to

consider the time and investment it takes to develop new or additional capacity, the

likelihood of such capacity being developed by existing competitors, and the possibility of

changes in customer demand over time. Indirect competition also comes from suppliers and

customers, as well as substitute products or services.

3. Competitive advantage

Competitive advantage is a third conceptualization that is of use in developing and

understanding a strategy on a global scale. Companies may adopt different strategies for

different competitive advantage. The firm has a competitive advantage when it is able to

deliver the same benefits as competitors but eat a lower cost, or deliver benefits that exceed

those of competing products. Thus, a competitive advantage enables the firm to create

superior value for its customers and superior profits for itself.

4. Hyper competition

Hyper competition, a fourth conceptualization, refers to the fact that all firms are faced with

a form of aggressive competition that is tougher than oligopolistic or monopolistic

competition, but is not perfect competition where the firm is atomistic and cannot influence

the market at all.

5. Interdependency

A fifth aspect of global strategy is interdependency of modern companies. Recent research

has shown that the number of technologies used in a variety of products in numerous

industries is rising. Because access to resources limit how many distinctive competencies a

firm can gain, firms must draw on outside technologies to be able to build a state-of-the-art

product. Since most firms operating globally are limited by a lack of all required

technologies, it follows that for firms to make optimal use of outside technologies, a degree

of components standardization is required.

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Global Marketing Strategy

Multinational companies increasingly use global marketing. Global marketing is not about

standardizing the marketing process on a global basis. Although every element of the marketing

process—product design, product and brand positioning, brand name, packaging, pricing,

advertising strategy and execution, promotion and distribution— may be a candidate for

standardization, standardization is one part of a global marketing strategy and it may or may not

be used by a company, depending on the mix of the product-market conditions, stage of market

development, and the inclinations of the multinational firm‟s management.

There are some benefits of global marketing:

1. Cost Reduction

2. Improved Products and Program Effectiveness

3. Enhanced Customer Preference

4. Increased Competitive Advantage

However, the limits to the global marketing are:

1. Standardization vs. adaptation issues

2. Globalization vs. localization

3. Global integration vs. local responsiveness

4. Scale vs. sensitivity

One salient aspect of the globalization of markets is the importance of the emerging

markets, known as ten Big Emerging Markets (BEMs) including China, India, Indonesia, Russia,

and Brazil. As multinational companies from North America, Western Europe, and Japan search

for growth, they have no choice but to compete in those big emerging markets despite the

uncertainty and the difficulty of doing business there. A vast consumer base of hundreds of

millions of people—the middle class market, in particular—is developing rapidly. When

marketing managers working in the developed countries hear about the emerging middle class

markets in China or Brazil, they tend to think in terms of the middle class in the United Sates or

Western Europe.

Consumers in big emerging markets are increasingly aware of global products and global

standards, but they often are unwilling—and sometimes unable—to pay global prices. Even

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when those consumers appear to want the same products as sold elsewhere, some modification in

marketing strategy is necessary to reflect differences in product, pricing, promotion, and

distribution. Some unnecessary frills may need to be removed from the product to reduce price,

yet maintaining its functional performance; and packaging may need to be strengthened as the

distribution problems, such as poor road conditions and dusty air, in emerging markets hamper

smooth handling. Promotion may need to be adapted to address local tastes and preferences. As

these emerging markets improve their economic standing in the world economy, they tend to

assert their local tastes and preferences over existing global products. Further, access to local

distribution channels is often critical to success in emerging markets because it is difficult and

expensive for multinational companies from developed countries to understand local customs

and a labyrinthine network of a myriad of distributors in the existing channel.

Local companies from those emerging markets are also honing their competitive advantage

by offering better customer service than foreign multinationals can provide. They can compete

with established multinationals from developed countries either by entrenching themselves in

their domestic or regional markets or by extending their unique homegrown capabilities abroad.

In an era when manufacturing, customer service, and increasingly, the bulk of new sales are

coming from Asia, a growing number of U.S. and European companies are starting to look east

to India, China, and other emerging markets for their next generation of board leadership.

Competitive Analysis

One particularly useful technique in analyzing a firm‟s competitive position relative to its

competitors is referred to as SWOT (Strengths, Weaknesses, Opportunities, and Threats)

analysis. A SWOT analysis divides the information into two main categories (internal factors and

external factors) and then further into positive aspects (strengths and opportunities) and negative

aspects (weaknesses and threats). Based on this SWOT framework, marketing executives can

construct alternative strategies. For example, an S*O strategy may be conceived to maximize

both the company‟s strengths and market opportunities. Similarly, an S*T strategy may be

considered in such a way as to maximize the company‟s strengths and minimize external threats.

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Thus, a SWOT analysis helps marketing executives identify a wide range of alternative strategies

to think about.

Graphic 3. SWOT Analysis

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VI. Global Market Entry Strategies

A crucial step in developing a global expansion strategy is the selection of potential target

markets. Companies adopt many different approaches to pick target markets. To identify market

opportunities for a given product (or service) the international marketer usually starts off with a

large pool of candidate countries. The following describes a four-step procedure that a firm can

employ for the initial screening process.

Step 1. Indicator selection and data collection

First, the company needs to identify a set of socioeconomic and political indicators it believes are

critical. The indicators that a company selects are to a large degree driven by the strategic

objectives spelled out in the company‟s global mission.

Step 2. Determine the importance of country indicators.

The second step is to determine the importance weights of each of the different country

indicators identified in the previous step.

Step 3. Rate the countries in the pool on each indicator.

Next, each country in the pool is assigned a score on each of the indicators.

Step 4. Compute overall score for each country.

The final step is to derive an overall score for each prospect country. To that end, the weighted

scores that the country obtained on each indicator in the previous step are simply summed.

Several decision criteria will influence the choice of entry mode. Roughly speaking, two

classes of decision criteria can be distinguished: internal (firm-specific) criteria and external

(environment-specific) criteria.

Market Size and Growth. Large markets justify major resource commitments in the form of

joint ventures or wholly owned subsidiaries. Market potential can relate to the current size of

the market. However, future market potential as measured via the growth rate is often even

more critical, especially when the target markets include emerging markets.

Risk. Risk relates to the instability in the political and economic environment that may

impact the company‟s business prospects. Generally speaking, the greater the risk factor, the

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less eager companies are to make major resource commitments to the country (or region)

concerned.

Government Regulations (Openness). In scores of countries, government regulations heavily

constrain the set of available options.

Competitive Environment. The nature of the competitive situation in the local market is

another driver.

Cultural Distance. Some scholars argue that the cultural distance between countries also has

an impact on entry mode choice decisions. Some argue that through higher percentages of

equity ownership, MNCs are able to bridge differences in cultural values and institutions.

Others note that by relying on joint ventures instead of wholly owned subsidiaries MNCs are

able to lower their risk exposure in culturally distant markets.

Local Infrastructure. The physical infrastructure of a market refers to the country‟s

distribution system, transportation network and communication system.

Company Objectives. Corporate objectives are a key influence in choosing entry modes.

Need for Control. Most MNCs would like to possess a certain amount of control over their

foreign operations. Control may be desirable for any element of the marketing mix plan:

positioning, pricing, advertising, the way the product is distributed, and so forth.

Internal Resources, Assets and Capabilities. Companies with tight resources (human and/or

financial) or limited assets are constrained to low-commitment entry modes such as

exporting and licensing that are not too demanding on their resources. Even large companies

should carefully consider how to allocate their resources between their different markets,

including the home-market.

Flexibility. An entry mode that looks very appealing today is not necessarily attractive 5 or

10 years down the road. The flexibility offered by the different entry mode alternatives

varies a great deal.

Exporting

Most companies start their international expansion by exporting. For many small

businesses, exporting is very often the sole alternative for selling their goods in foreign markets.

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Companies that plan to engage in exporting have a choice between three broad options: indirect,

cooperative, and direct exporting. Indirect exporting means that the firm uses a middleman based

in its home market to handle the exporting. With cooperative exporting, the firm enters into an

agreement with another company (local or foreign) where the partner will use its distribution

network to sell the exporter‟s goods. Direct exporting means that the company sets up its own

export organization and relies on a middleman based in a foreign market (e.g., a foreign

distributor).

Licensing

Licensing is a contractual transaction where the firm—the licensor—offers some

proprietary assets to a foreign company—the licensee—in exchange for royalty fees. Examples

of assets that can be part of a licensing agreement include trademarks, technology know-how,

production processes, and patents. In high-tech industries, companies often enter cross-licensing

agreements. Under such agreement, parties mutually share patents without exchange of licensing

fees when the patents involved are nearly equal in value.

Franchising

To snap up opportunities in foreign markets, the method of choice is often master

franchising. With this system, the franchisor gives a master franchise to a local entrepreneur,

who will, in turn, sell local franchises within his territory. The territory could be a certain region

within a country or a group of countries (e.g., Greater China). Usually, the master franchise

holder agrees to establish a certain number of outlets over a given time horizon. The benefits of

franchising are clear. First and foremost, companies can capitalize on a winning business

formula by expanding overseas with a minimum of investment

Contract Manufacturing (Outsourcing)

With contract manufacturing (also known as outsourcing), the company arranges with a

local firm to manufacture or assemble parts of the product or even the entire product. The

marketing of the products is still the responsibility of the international firm. Cost savings is the

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prime motivation behind contract manufacturing. Significant cost savings can be achieved for

labor-intensive production processes by sourcing the product in a low-wage country.

Joint Venture

With a joint venture, the foreign company agrees to share equity and other resources with

other partners to establish a new entity in the host country. The partners typically are local

companies, but they can also be local government authorities, other foreign companies, or a

mixture of local and foreign players. A cooperative joint venture is an agreement for the partners

to collaborate but does not involve any equity investments. For instance, one partner might

contribute manufacturing technology whereas the other partner provides access to distribution

channels. A major advantage of joint ventures compared to lesser forms of resource commitment

such as licensing is the return potential. With licensing, for instance, the company solely gets

royalty payments instead of a share of the profits.

Wholly Owned Subsidiaries

Multinational companies often prefer to enter new markets with 100 percent ownership.

Ownership strategies in foreign markets can essentially take two routes: acquisitions where the

MNC buys up existing companies, or greenfield operations that are started from scratch. As with

the other entry modes, full ownership entry entails certain benefits to the MNC but also carries

risks.

Strategic Alliances

A strategic alliance can be described as a coalition of two or more organizations to achieve

strategically significant goals that are mutually beneficial. The business press reports like

clockwork the birth of strategic alliances in various kinds of industries. Eye-catching are

especially those partnerships between firms that have been archenemies for ages.

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VII. Case Study: P&G Among China Power Brands

It is common knowledge that having dominated the Triad region comprising of North

America, Europe, and Japan for the better half of the last century, multinationals firms (MNCs)

turned their heads toward emerging economies like China, India, and other Asian economies,

which are no longer just sources of cheap labor for MNC operations but are also large consumer

bases. China, with the largest national population in the world, just became part of the World

Trade Organization and therefore even more attractive to Western multinationals.

However, as MNCs are aware, doing business in China is not simple even though the

economy is more open to foreign firms now than it has ever been. Local Chinese firms are

growing rapidly and therefore pose a significant threat to foreign firms that are often unable to

provide goods at competitive prices the way the local firms can. Today, more MNCs are finding

success in the unique Chinese market than they used to. But they have learned the formula to

success the hard way.

Take the example of American consumer products giant Proctor & Gamble (P&G) that

first set up shop in China in 1998 through a joint venture with a local partner, Hutchison

Whampoa. Eventually P&G bought out the remaining stake in the venture. P&G‟s brands like

Tide detergent, Crest toothpaste, and skin-care product Oil of Olay made their place in homes in

over 75 different countries worldwide and P&G‟s modus operandi included marketing its

products as quality goods at profitable prices. When the company started selling its products in

China, it soon discovered that its tried and tested global marketing strategy would not work the

same way it had in other markets for a variety of reason.

A developing market like China is characterized by huge disparity in income levels

between the wealthy and the not so wealthy. Another glaring feature is the diversity in consumer

needs based on whether it is a rural, urban, semi-urban area. These differences are further

enhanced by the variety of outlets for sale of consumer goods ranging from large-scale foreign

stores like French retailer Carrefour to local Chinese retailers and independent small stores.

Therefore, for a company to succeed in China would mean offering a wide variety of products at

reasonable prices. And succeed P&G did!

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After entering the Chinese market, P&G soon figured out that selling its premium priced

products would not help it achieve a significant market share let alone grant it the status of

market leader, like many of its brands enjoyed in other foreign markets. Therefore, the company

planned out a detailed marketing strategy specifically for the Chinese market. An important

feature of strategic implementation was the three-tiered market system, where by P&G divided

the Chinese market up into three segments. According to Laurent Philippe, head of P&G‟s

Greater China region, „„because we aspire to leadership, we need to compete in more than the

premium segments. We need to compete at least in the middle segment as well. In volume terms,

you can segment our categories into three price tiers: the top tier is 15 percent of the volume in

units; the middle tier is 30 percent, and the bottom tier is 55 percent. The split in value, or

revenue, is a little bit different: it is 30 percent in premium, 40 percent in the mid-priced

segment, and only 30 percent in the low-end segment. This segmentation, by the way, is not

mechanical; it is consumer driven.‟‟ The main objective behind the company‟s marketing efforts

in China was to promote their global products sold in China as Chinese brands so that consumers

could identify with these products. And this strategy proved to be important given that P&G‟s

competitors in the market include not only other foreign firms but also indigenous Chinese ones.

So, how did the company manage to successfully implement this strategy? Well, in the

words of Philippe, „„you cannot just take a global technology and make it cheaper by simply

removing or replacing certain ingredients. The cost gap is too big. So we are now using our

research-and-development capabilities to create different value offerings superior to those of the

local competitors but at an equal or even lower manufacturing cost. These products are designed

from the outset to meet certain cost, and therefore pricing, targets.‟‟ P&G realized that low-

income consumers in China often purchase single serve packets of shampoo, detergent, etc. and

it soon began offering some of its products in these sizes. The company is using local resources

to achieve its goals. Research and development for the Chinese market is done in Beijing at the

Beijing Technical Center and it makes use of local ingredients desired by consumers.

P&G is also sending its advance staff into as many out-of the-way villages as it can to get a

feel for what rural Chinese want to buy and how much they are willing to spend. Just as it has

done for years in the cities, P&G‟s teams of so-called customer research managers descend on

villages, often moving in with families for a few days. They have discovered that while low

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prices surely help sales, it is equally important to develop products that follow cultural traditions.

Urban Chinese are happy to pay more than $1 each for tubes of Crest toothpaste with exotic

flavors such as Icy Mountain Spring and Morning Lotus Fragrance. However, those living in the

countryside are apt to prefer 50-cent Crest Salt White, since many rural Chinese believe that salt

whitens teeth. P&G applies similar segmenting strategies to its Olay moisturizing cream, Tide

detergent, Rejoice shampoo, and Pampers diapers.

With more than $2.5 billion of annual sales, P&G has become the biggest consumer goods

company in China today.

Analysis of the Case Study

Emerging economies will become a bigger slice of Procter & Gamble‟s business in the

next decade as it looks to ameliorate the effects of the US slowdown by tapping into the fast-

growing markets of China. P&G is now the biggest consumer goods company in China, with

more than $2.5bn of annual sales. Now we are analyzing some main factors that contributed on

the P&G‟s success story in China.

1. P&G's Entry into China

The Chinese government began to open local markets to foreign investment in the early

1980s. At this time, the government started establishing Special Economic Zones (SEZ) to

promote free trade. One of the most prominent SEZs came up near the village of Shenzhen, in

Guangdong province. As a result of the SEZs, there was explosive industrial growth in this belt.

By 1984, China increased the number of economic zones to 14, and widened the scope of

activity. It was during this time that P&G began to focus seriously on China. P&G conducted its

first market research in the Chinese market in Beijing and Shanghai in 1985. During that time,

foreign trade was still restricted and was channeled through 'friendship stores' where consumers

with access to foreign currency could buy a limited range of imported goods. Hence, to

understand and develop the Chinese consumer market, P&G sent Berenike Ullmann (Ullmann), a

young, Chinese-speaking market researcher.

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2. The Marketing Strategies

Though P&G usually carried out extensive market research activities, there were some

occasions when it used the gut instincts of its marketers to formulate its marketing strategies. For

instance, most Chinese experts warned the company that 'nobody in China could afford to

purchase Head & Shoulders.

However, P&G rejected such advice and entered the market with a sound strategy. The

company's market research revealed that though there were several shampoo marketers in China,

there was no shampoo that could remove dandruff from the scalp. Dandruff was a common hair

problem among the Chinese consumers. P&G hence launched Head & Shoulders, a brand that

was known for its anti-dandruff properties. Within three years of its launch, Head & Shoulders

became China's bestselling shampoo, even though it was priced three times higher than the local

brands. P&G aspired for market share leadership in all its core categories including personal and

beauty care products, laundry products, pet nutrition products and baby products. The company

customized product packaging, product formulas and advertising campaigns to cater to the

Chinese market.

3. Market Research

P&G was a pioneer in developing the discipline of market research during the 1920s.

However, by the early 2000s, the company had made significant changes in the way it handled

market research. Instead of finding out what products consumers used, P&G had initiated an

exercise to learn how consumers used them. In China too, P&G invested significantly in

consumer research. Jim Stengel, P&G's Global Marketing Officer and his team of 3,500

marketing executives visited places where consumers lived and worked, in order to observe their

behavior.

4. Brand Stretching

Brand stretching was another strategy adopted by P&G in China. This strategy had a

considerable risk element. If the strategy failed, it could potentially damage the brand name and

sales of the original brand.

To avoid cannibalization while stretching a brand, P&G conducted extensive studies to

understand the preferences of different groups of consumers so as to develop a distinctive

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product that could also be differentiated at the point of sale. After careful deliberations, eight

years after the Chinese launch of P&G's Crest toothpaste, it launched 'New Crest' toothpaste in

2004, with a price 30 percent lower than that of its premium product and on par with its

competitor - Colgate's middle-market toothpaste. At the time of the launch of this product, Crest

was a premium brand in China and by 2000, Crest held about 55% market share of the up-market

segment. About 70% of the total toothpaste market consisted of middle and lower-end segments.

5. The HR Strategies

P&G's HR strategy focused on superior recruiting and retention of its employees. In its

initial years in China, P&G brought in experienced Americans to manage the country's

operations. The company also hired Chinese at that time but gave them a set plan to follow. It

trained these locals to think the American way.

With time, the locals gained experience and were absorbed into senior positions. P&G

believed in promoting from within the organization and so the company recruited people who

were starting their career or had little work experience. P&G was among the first multinationals

to conduct campus placements in reputed Chinese universities and had gained strong awareness

among university students. It provided world-class training programs to build general business

skills as well as core functional skills. Achievers were also given overseas assignments. In May

2005, P&G employed 4,000 people in China, out of which only about 50 were not Chinese.