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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
1
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
2
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‟.
3
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.
4
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.
5
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
6
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.
7
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
8
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
9
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.
10
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.
11
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
12
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.
13
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
14
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.
15
Thus, a SWOT analysis helps marketing executives identify a wide range of alternative strategies
to think about.
Graphic 3. SWOT Analysis
16
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
17
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.
18
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
19
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.
20
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!
21
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.