viljoen marketing 2009

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Marketing strategies for consumer electronics in China using

trade fairs as entry point

Jean Viljoen

Mini-research report

presented in partial fulfilment

of the requirements for the degree of

Master of Business Administration

at the University of Stellenbosch

Supervisor: Prof FJ Herbst

Degree of Confidentiality: A December 2009


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ii

Declaration

Hereby I, Jean Viljoen, declare that this research report is my own original work and thatall sources have been accurately reported and acknowledged, and that this document has

not previously in its entirety or in part been submitted at any university in order to obtain an

academic qualification.

J. Viljoen 15 October 2009

Copyright 2009 University of Stellenbosch

All rights reserved


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Abstract .

China are one the fastest growing major markets in the world. Since joining the World

Trade Organisation in 2002 China is officially open for business to the rest of the world.

China is both a very lucrative market and a dangerous market to enter for various reasons.

Trade fairs are an age old tradition in China and are still a very effective and widely used

medium of trade in China. To the new entrant to the market, the trade fair offers a very

effective and relatively inexpensive way for promoting your product to a wide and

interested audience.


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Opsomming

China is een van die snel groeiende ekonomie in die wreld. Sedert sy aansluiting by dieWreld Handelsorganisasie in 2002 is China amptelik oop vir beisgheid vir die res van die

wreld.

Om verskeie redes is China n baie winsgewende sowel as n gevaarlike mark om te

betree.

Handelskoue is n eeue ou tradisie in China en is steeds n algemene en baie effektiewevorm van handel dryf. Vir die nuwe toetreder tot die mark bied die handelskou n relatiewe

goedkoop manier om sy produk aan n wye gehoor bekend te stel.


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Table of contents

Declaration ........................................................................................................................... ii

Acknowledgements ............................................................................................................. iii

Abstract . ............................................................................................................................. iv

Opsomming ......................................................................................................................... v

List of tables ........................................................................................................................ ix

List of figures ....................................................................................................................... x

List of acronyms .................................................................................................................. xi

CHAPTER 1: ORIENTATION ............................................................................................. 1

1.1 Introduction ........................................................................................................ 11.2 Literature review ................................................................................................ 1

1.3 Problem statement and demarcation ................................................................. 2

1.3.1 Problem statement ........................................................................................... 2

1.3.2 Demarcation of the study ................................................................................. 3

1.4 Clarification of key concepts .............................................................................. 3

1.4.1 Marketing strategies ......................................................................................... 3

1.4.2

Consumer electronics ...................................................................................... 4

1.4.3 Trade fairs ........................................................................................................ 4

1.5 Research objectives ........................................................................................... 4

1.6 Research proposition ......................................................................................... 5

1.7 Importance and benefits of the study ................................................................. 5

1.8 Research design and methodology .................................................................... 5

1.8.1 Sampling .......................................................................................................... 6

1.8.2 Data collection .................................................................................................. 7

1.8.3 Data analysis .................................................................................................... 7

1.8.4 Content analysis ............................................................................................... 8

1.9 Chapter outline ................................................................................................... 8

1.10 Nature and form of results ................................................................................. 9

1.11 Conclusion ......................................................................................................... 9

CHAPTER 2: AIM OF THE LITERATURE REVIEW ......................................................... 10

2.1 Introduction ...................................................................................................... 10

2.2 The purpose of the critical review .................................................................... 10

2.3 The content of the literature review .................................................................. 11


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2.4 The structure of the review............................................................................... 11

2.5 Conclusion ....................................................................................................... 14

CHAPTER 3: LITERATURE REVIEW .............................................................................. 15

3.1 Local market strategy ....................................................................................... 15

3.1.1 Global business to consumer strategies ........................................................ 15

3.1.2 Asian business to consumer strategies .......................................................... 17

3.1.3 Chinese business to consumer strategies ...................................................... 21

3.2 Product specific strategy .................................................................................. 27

3.2.1 Business to consumer strategies in general ................................................... 27

3.2.2 Business to consumer strategies for consumer electronics ........................... 28

3.3

International mode of entry strategy ................................................................. 29

3.3.1 Generic mode of entry strategies ................................................................... 29

3.3.2 Mode of entry strategies for consumer electronics ......................................... 32

3.3.3 Mode of entry strategies for consumer electronics using trade fairs .............. 34

3.4 Differences in management and corporate structures in Asia and the West .... 38

3.5 Conclusion ....................................................................................................... 39

CHAPTER 4: RESEARCH RESULTS .............................................................................. 40

4.1 Introduction ...................................................................................................... 40

4.2 Local market specific B to C marketing strategies ........................................... 41

4.3 Product specific B to C marketing strategies.................................................... 44

4.4 International mode of entry .............................................................................. 45

4.5 Conclusion ....................................................................................................... 47

CHAPTER 5: CONCLUSION AND RECOMMENDATIONS FOR FUTURE RESEARCH 48

5.1 Introduction ...................................................................................................... 48

5.2 Linking the problem statement and research objectives with the research

results 48

5.2.1 Linking the problem statement with the research results ............................... 48

5.2.2 Linking the research objective the with the research results .......................... 48

5.2.3 Support for the research proposition .............................................................. 49

5.3 Conclusions on marketing strategies for consumer electronics in China using

trade fairs as entry points ................................................................................................... 50

5.3.1 Local market strategy ..................................................................................... 50

5.3.2 Product specific strategy ................................................................................ 51

5.3.3 International mode of entry strategy ............................................................... 51


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5.4 Recommendations for future research ............................................................. 51

5.4.1 Quantifying the effectiveness of trade fairs versus other modes of entry ....... 52

5.5 Conclusion ....................................................................................................... 52

LIST OF SOURCES........................................................................................................... 53


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List of tables

Table 3.1: SWOT analysis of Asian markets ..................................................................... 17

Table 3.2: Stages of market selection process ................................................................. 32

Table 3.3: Management and corporate structures in Asia and the West: 25 key differences

........................................................................................................................................... 38


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List of figures

Figure 1.1: Three starting points for the study .................................................................... 2Figure 2.1: Three starting points for the study .................................................................. 12

Figure 2.2: The local market strategy................................................................................ 13

Figure 2.3: The product specific strategy .......................................................................... 13

Figure 2.4: The international mode of entry strategy ........................................................ 14

Figure 3.1: The determinants of national competitive advantage ...................................... 15

Figure 3.2: A theoretical model of antecedents and performance of trade show processes

........................................................................................................................................... 36

Figure 4.1: The determinants of national competitive advantage ...................................... 41
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List of acronyms

B to C: Business to consumerB to G: Business to government

CE: Consumer electronics

ICT: Information and communication technology

IT: Information technology

MNC: Multi-national corporation

MNE: Multi-national enterprise

LOF: Liability of foreignness

ODM: Original design manufacturer

OEM: Original equipment manufacturer

PMP: Personal media player

R&D: Research and development


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CHAPTER 1

ORIENTATION

1.1 Introduction

China will very soon become one of the largest economies in the world. Since joining the

World Trade Organisation in 2002, China is officially open to business with the rest of the

world.

China currently consists of one fifth of the world population. Although it is not yet the

biggest economy in the world, no one can ignore the vast rising middle class of China and

an annual growth rate of between 10 and 12 percent in the near past

(www.economist.com, 2008). China is supplying more and more goods to western

countries. The days of Chinese goods being type cast as poor quality in the Western

world, are long gone. Many big brands that the average consumer perceives to be

Western, are manufactured in China under licence. Furthermore, these products are

often developed by Chinese original equipment manufacturers (OEM) and research and

development (R&D) houses. Not only will a successful product end up in a Chinese home,

but also in big and small brand Western products.

A number of trade shows are held annually in Hong Kong and mainland China. The

research will lay down the most effective ways for a Western company to utilise these

trade shows for entry into the market.

1.2 Literature review

The study is based on a comprehensive literature review. The research results,

conclusions and recommendations for future research follow from the literature review.

The literature review is comprehensively discussed in Chapter 2.

Three themes are depicted in Figure 1.1 and serve as the point of departure for this study:

Local market specific business to consumer (B to C) marketing strategy.

Product specific business to consumer (B to C) marketing strategy.

International mode of entry.


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The approach of using the three themes was developed by the researcher. This allows the

researcher to focus on clearly demarcated aspects of the main theme.

Figure 1.1: Three starting points for the study

Each theme will start at a wide and generic level and then focus towards the specific

applicable strategy for the particular theme. Once the three themes have been narrowed

down, the report answers the specific question of how the new entrant to the consumer

electronics market in China uses trade fairs to enter the market.

Recent and up to date surveys from the electronics industry will identify new trends in

consumer electronics and assist in the marketing and positioning strategy. The recent

growth in CEs like personal media players will be analysed to determine an effectivemarketing strategy.

1.3 Problem statement and demarcation

1.3.1 Problem statement

Based on the three themes described in paragraph 1.2 above, the problem statement may

be defined as follows:

Product

Specific

Strategy

LocalMarket

Strategy

Mode of

Entry


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How does the supplier or manufacturer of consumer electronics as a new entrant to the

market, employ the numerous trade fairs in China to penetrate a vast untapped consumer

base?

1.3.2 Demarcation of the study

The study area is delimited to consumer electronics. The trade fair industry in general will

be surveyed to understand the impact of these trade fairs on Chinese business, but final

conclusions and recommendations will be aimed at the consumer electronics industry.

More specific recommendations will be made as to how to use these fairs to enter a new

untapped market. Untapped implies that the entrants to the market have not previously

marketed (or sold) to the Chinese market.

1.4 Clarification of key concepts

1.4.1 Marketing strategies

A generally accepted definition of marketing strategy is presented by Perreault and

McCarthy (2005: 36) as A marketing strategy specifies a target market and a related

marketing mix. It is a big picture of what a firm will do in some market. Target marketis

defined as a fairly homogenous group of customers to whom a company wishes to appeal.

Marketing mixis defined as the controllable variables the company puts together to satisfy

this target group.

Thompson, Strickland and Gamble (2007: 4) offer the following definition of a companys

strategy: the competitive moves and business approaches that managers are

employing to grow the business, attract and please customers, compete successfully,

conduct operations, and achieve the targeted levels of organisational performance. For

the purpose of this research the researcher will define strategyas a careful plan by the

company of how to best utilise available resources for the running of the marketing effort.

Marketing would refer to the manner in which the products are presented to retain current

clients and engage future clients with your companys offering.


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1.6 Research proposition

P1: The strategy followed for the trade fair exhibits can be married with the overall

company strategy.

P2: The new entrant to the market is to some extent unfamiliar with the Chinese market

and customs.

P3: The new entrant to the market will have the financial and logistical means to attend

and exhibit at trade fairs on the Chinese mainland.

1.7 Importance and benefits of the study

China is officially open for business to the rest of the globe. With one fifth of the worlds

population living in one geographical region, it makes sense for the Western business man

to venture into this market that was previously extremely hard for the Westerner to enter.

A rapidly rising middle class coupled to a culture that traditionally spends greatly on

consumer electronics, makes this a very lucrative market for consumer electronics.

1.8 Research design and methodology

Saunders, Lewis and Thornhill (2007: 153) define research designas turning a research

question and objectives into a research project. It considers research strategies, choices

and time horizons. The purpose of any research can be classified as exploratory,

descriptive or explanatory.

An exploratory study is a way of discovering why certain things happen or why they

happen in a certain way. By asking questions one may be able to understand and

explain a certain phenomena in a new way (Saunders, et al., 2007: 133).

A descriptive study will aim to portray an accurate profile of persons, events or

situations (Robson, 2002: 59).

Explanatory studies aim to find the relationship between variables of a certain

situation or problem (Saunders, et al., 2007: 134).


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This research is of an exploratory nature, based on a literature review. The research

question will be answered in a qualitative manner by building a conceptual model from

existing literature.

1.8.1 Sampling

In many cases it is not possible to gather data from the whole population the research is

performed on. Sampling is described by Keller (2005: 145) as using a small part of a

population to draw a conclusion about the whole population by means of statistical

inference.

It is further important to distinguish between probability and non-probability sampling.

Saunders, et al., (2007: 207) present the following definitions: With probability samples,

the chance, or probability, of each case being selected from the population is known and

usually equal for all cases. For non-probabilitysamples, the probability of each case being

selected from the total population is not known and it is impossible to answer research

questions or to address objectives that require you to make statistical inference about the

characteristics of the population.

Non-probability sampling does not necessarily mean that the sample is not representative

of the population, but it does mean that the non-probability sample cannot depend upon

the rationale of probability theory. The non-probability sample may or may not represent

the population and you may not be able to know if it is a representative sample or not.

A subset of non-probabilistic sampling is used for this research, namely purposive

sampling, meaning we will sample with a purpose in mind. A subset of purposive sampling

is expert sampling. In expert sampling, the sample group will consist of a group of persons

with a certain expertise in a certain field. The application of expert sampling in this

research will be to find respondents, both Oriental and Western, that are conducting

marketing through trade fairs in China.


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1.8.2 Data collection

From Saunders, et al., (2007: 595) follows their definition of data: Facts, opinions and

statistics that have been collected together and recorded for reference or for analysis.

For the purpose of this study, data collection is limited to a literature study.

The literature study is conducted in such a fashion as to gather the most critical and up to

date data relevant to the topic from experts and authorities on the subject. Both Chinese

and Western literature will be studied.

1.8.3 Data analysis

The literature study is a source of qualitative data. Qualitative data is of a non-numerical

source and can not be quantified. Inference about the whole population may not

necessarily be made with qualitative data (Saunders, et al., 2007:207).

Qualitative data is well suited for the exploratory type research proposed here. Saunders,

et al., (2007: 317) warn that the researcher should pay special attention to three aspects

that may influence the quality of the data. These are:

reliability

forms of bias

validity and generalisability.

In order to be able to analyse the data, the first steps would be to:

categorise the data

unitise the data

recognise relationships and develop categories to facilitate this

develop and test theories to reach conclusion (Saunders, et al., 2007: 476).

The conclusion of the study will be common success factors for a marketing strategy using

trade fairs in China.
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Chapter 4 will provide the research results. The results will be presented orderly and

interpreted. Interpretation of the results will enable the researcher to draw conclusions

and make recommendations.

Chapter 5 will provide conclusions and the recommendations for future research. It is the

aim of the study to present concise and focussed information to assist any marketer of

consumer electronics to tailor his marketing strategy for maximum effectiveness.

1.10 Nature and form of results

The results will be conclusions drawn from the propositions. These conclusions will be

presented in the form of recommendations for a Western company to employ a successful

marketing strategy for consumer electronics in China with the aid of trade fairs.

1.11 Conclusion

This chapter described the framework for the study. All terms used throughout were

defined. The data gathering and analysis and expected outcomes were presented.

Chapter 2 will define the aim and direction of the literature review as described in

paragraph 1.2.


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sample current opinions in newspapers and trade journals and present newsworthy

information of current trends that may not be included in formal research.

With trends changing ever faster, especially in consumer electronics, it is necessary toexpand the literature review to up to date information and not only limit it to a study of

formal research results. Newspapers and trade journals provide more up to date and

current information on trends. The quality and detail of the data are less than that from

formal research, but provide very up to date information.

2.3 The content of the literature review

As the literature review will make up the bulk of this study, the presentation of the literature

review is of paramount importance. The researcher will present the key research on the

topics and draw parallels and relationships between the existing findings. Further, the key

trends will be identified and discussed in the context of the study. Important here is to

present both the facts and the deductions unbiased.

All of the above will be surveyed for the underlying (but not limited to) Western Chinese

interaction. The work of well respected writer on Chinese customs, Geert Hofstede, will be

consulted for his in-depth research on Chinese customs. In the book The Competitive

Advantage of Nations, Porter (1990: 71) explains why some nations prosper economically

and others dont. Porter (1990: 71) explains that success is dependent on the interaction

of certain determinants. These determinants can be graphically represented as a diamond

which is known in the literature as the Porters diamond. Porter (1990: 71-130) further

explains the four stages of national competitiveness development. This literature will be

surveyed to pinpoint Chinas position and the factors that make it a competitive nation and

what is needed to tailor the Western marketing strategy of the new entrant to the market.

2.4 The structure of the review

The research question and objective will be the drivers and focus of the critical literature

review. It is the primary research objective of the study to present a summary of present

literature, compare various authors opinions and facts and identify shortcomings and gaps

in present research to make recommendations for future research.


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The critical review will allow this study to:

present present findings

pass judgement on the present state of the literature

draw conclusions from the existing literature

make recommendations for future research.

Figure 2.1 below is a representation of the three starting points for the study. The

researcher developed these distinctive starting points to evaluate the theme from three

perspectives. From here the final conclusions and recommendations will be formulated.

Figure 2.1: Three starting points for the study

The conclusion of the study will be reached by funnelling towards the research question

from three starting points. By using the three starting points as depicted in Figure 2.1

above and working towards the research question, the three important aspects of the

study are addressed in their own context, while also keeping the impact of the other

factors in mind. The three starting points for the study are:

Local market specific B to C marketing strategy

Product specific B to C marketing strategy


Product Specific

Strategy

Local Market

Strategy

InternationalMode of

Entry


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Figure 2.4: The international mode of entry strategy

The local market B to C marketing strategy will start by looking at global strategies, then

Asian specific strategies and then strategies for entering the Chinese market. The product

specific B to C marketing strategy will firstly review general marketing strategies for all

products and then limit the study to consumer electronics. The international mode of entry

strategy will start with generic market entry strategies, then limit to market entry strategiesfor consumer electronics and then limit to using trade fairs as entering the consumer

electronics market.

2.5 Conclusion

This chapter described the aim and structure of the literature review. The structure of the

literature review will be based on three approaches linked to the theme and by focussing

each of these approaches, the study will arrive at answers and conclusions to the specific

research question. Chapter 3 contains the critical review as described in paragraph 2.4.

International Mode of Entry

Generic

Electronics

Using trade

fairs


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CHAPTER 3

LITERATURE REVIEW

3.1 Local market strategy

The chosen market entry strategy is of paramount importance for success. The entry

strategy becomes even more critical when the new market that is entered is a foreign

market and one that you are not familiar with. The chances of failure increases as the

number of unknown factors increases in the foreign market.

The market entry strategy will shape the manner in which the multi national enterprise

conducts its business and ultimately the success of the MNE.

3.1.1 Global business to consumer strategies

Figure 3.1 below is a representation of Porters determinants of national competitive

advantage (Porter, 1990:127).

Figure 3.1: The determinants of national competitive advantage

Source: Porter, 1990: 127.

Firm

strategy,

structure

Related

and

supporting

Factor

Conditions

Demand

Conditions

Chance

Govern-

ment


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3.1.1.1 Porters Diamond model

Porter describes in his The Competitive Advantage of Nations (1990: 71-130) what makes

certain nations more competitive than others. He lays the foundations with what has

become known as the Porters Diamond model. The Porter Diamond model is depicted in

Figure 3.1 (Porter, 1990: 127).

The four determinants will be briefly discussed. This is a necessary step to provide insight

into the components of the strategy for the Western firm entering China. When one

begins to understand what attributes give a firm a competitive advantage, one can tailor

your own strategy to give you the same, or better advantages. It is also important to

understand the culture of the target market, as the strategy in a Western environment willbe vastly different to strategy for a Chinese market.

The factor conditions

Every nation has particular factors that give it an advantage (or disadvantage) in

production. These factors include skilled labour or infrastructure necessary to compete in

a given industry.

Demand conditions

These are the conditions of the home demand for the industrys product or service.

Related and supporting industries

This factor evaluates the presence (or absence) of a nations supplier industries and the

related industries that are competitive.

The firm strategy, structure and rivalry

The nature of the domestic rivalry and the national conditions of how companies are

created, organised and managed.

Porter (1990: 126) further elaborates on two other factors, impacting on all four of the

determinants. They are the role of chance (events that you have no control over, for

example war or rising oil prices) and the role of government. The role of government is

very important in the Chinese economy and deserves a more detailed look.


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3.1.1.2 Liability of foreignness

Chen, Griffith and Hu (2006: 640-642) present the concept of liability of foreignness.

Chen, et al. (2006: 640-642) argued that foreign firms will face additional costs that arise

from

the multi-national enterprises unfamiliarity with the foreign environment

discrimination by the government, suppliers, and customers

the additional costs associated with operating internationally.

The above factors will naturally erode a companys competitive advantage.

The liability of foreignness deserves a closer look as it will have a big impact on the multi-

national enterprises market entry strategy. The literature on the subject is reviewed in

paragraph 3.1.3

3.1.2 Asian business to consumer strategies

A study by Kumar and Waheed (2007: 180) provided a SWOT analysis performed on

China. A summary of the study is presented in Table 3.1.

Table 3.1: SWOT analysis of Asian markets

Strengths Weaknesses

China added to WTO in 2001

Top destination for FDI in developing worldBroad manufacturing baseAvailability of skilled labourInexpensive labour

Underdeveloped financial sectors and primarymarkets

Underdeveloped infrastructureRelatively low levels of disposable incomePolitical instability

Poor protection of intellectual propertyCorruptionPoor regulatory systemsLow literacy levelsLabour inflexibilities

Opportunities Threats

Domination in manufacturing

Domination in outsourced servicesBenefit from technology transfers

Growth in wealth and employment levelsDeveloping service industry

Unfocused, unbalanced development

Political instability

Source: Kumar and Waheed, 2007: 180.


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The analysis from Kumar and Waheed (2007: 180) is a good summary and used in

conjunction with information from the Porter studies (1990: 71-130). Together with the

ideas of Liability of Foreignness (Chen, et al., 2006: 640-642), it can provide the newentrant to the Chinese market with powerful tools and clear guidelines for the crafting of

the marketing strategy as well as identifying potential areas of dangers.

3.1.2.1 The role of government

From the Porters Diamond model (1990: 127) we learn that four major factors play the

biggest role in the competitiveness of a nation. Two secondary factors are also

mentioned, namely that of government and chance. Even though they are regarded as a

little less important than the four primary factors, the role of government deserves a closer

look in the Chinese context. In the opinion of the writer, the role of government has been

the biggest catalyst and driving force for the Chinese economic boom over the past

decade.

Not only did the political changes in China open the door to economic prosperity, but also

the governments active economic policies. With the recent (3rd quarter of 2008) global

economic crisis one should look at governments role over the past decade or two, as well

as their recent responses to the crisis.

A recent good example of the Chinese governments active involvement in economic

upliftment deserves a closer look. In response to the global economic crisis that emerged

in September 2008 and the subsequent slowdown of consumer spending, the Chinese

government identified seven quick moving consumer products (including induction cookers

and electric motorcycles) and issued a directive to lower retail prices on these seven

products by 8 15 percent. This was part of an effort to stimulate consumer spending and

boost domestic consumption. Prices of energy and most resources were cut up to 50

percent in the months after the melt down (Chen, 2008) in order to assist industry to stay

competitive.

The role of government over the past three decades in the economic bloom of China has

been the subject of many a study. The new entrant to the market also needs to


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understand that the Government could potentially be the biggest barrier to entry for a new

business venture.

Low (2005: 101) describes how the Chinese government encourages, supports andprotects local manufacturers in the telecommunications industry. He argues that local

support is not a foreign concept, but the big difference to Western countries is the fact that

the Chinese government places considerable pressure on the foreign manufacturers for

technology transfer in the cases where joint ventures have been established.

Low (2005: 107) continues to describe how local Chinese (technology) companies have

well established networks of relationships and guanxi with local operators as well asprovincial and national government officials. This leads to a natural advantage to the local

operator and continues to pose a threat to foreign entrants.

Low (2005: 107) concludes his study by highlighting (amongst others)

Governments continuation of preferential treatment of local equipment

manufacturers.

Governments resolve to police copyright infringements.

3.1.2.2 Understanding the impact of ODMs and OEMs on the industry

Original Equipment Manufacturer (OEM) refers to the manufacturer of a component of, or

subassembly used in, the production of a larger item (Kidder, 1997). It is common practice

for both brand name and unbranded vendors of consumer electronics to use pre-

assembled and often standard modules in the assembly of the complete product. For

example, Philips may be selling a Blue Ray DVD player under the Philips brand, but the

DVD tray mechanism, the LCD display and the power supply circuitry is supplied as sub

assemblies by other vendors, called the OEMs.

It is not common practice to credit the OEMs and they generally stay invisible from the

end user.

As expert designer and manufacturer of DVD tray mechanisms (for example), the OEM

company will not only sell to one brand (e.g. Philips mentioned earlier), but may sell to a


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variety of DVD player manufacturers, although they may have certain loyal and/or

preferred customers.

When the OEM starts playing a larger and more important role in the design cycle too,they are referred to as Original Design Manufacturers (ODM). The designs are usually

highly customised (as opposed to the OEM model where designs are usually standard or

generic). A much closer relationship exists between the ODM and the reseller. As in the

case of OEMs, the ODMs are usually not credited under the parent brand.

Having a competent and cost effective OEM or ODM is a major source of competitive

advantage and the parent brand usually signs secrecy clauses with the OEM / ODM in aneffort to prevent competitors hijacking the OEM / ODM supplier and gaining the same

competitive advantage.

A company starting off with one business model may often migrate that model into another

as the company changes focus, grows or changes strategy. Konka, the largest LCD

television maker in China, changed from a model where most subcomponents for the LCD

televisions were supplied by OEMs, to a manufacturer where all subcomponents are

manufactured in-house.

This fact is very important in the Chinese manufacturing model where a company will often

start up by cloning popular products and / or brands and as the start-up gathers

momentum under a good management, more and more development, design and

manufacturing will be moved in-house until it is a brand that can stand on its own legs.

Konka described earlier is a typical example of where they started with sub units from

various OEMs and ODMs (for example: the LCD display panels for the televisions were

supplied by Samsung and LG from South Korea, who were the leaders in LCD display

technology at the time).

It is important for the vendor of consumer electronic components and modules to approach

the correct segment in the value chain. It is clear from the a foregoing discussion that it

may not necessarily be the Philips of the world you need to reach to be able to sell your

product, but also their OEMs and ODMs. This is an important point to be cognisant of

when crafting your marketing strategy for the Chinese market.


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This fact leads us into the next focus point of how to tailor your local market strategy for

the Chinese market.

3.1.3 Chinese business to consumer strategies

In a study by Jagersma and Van Gorp (2003: 28), they identify eight hurdles to entry of the

Chinese market by foreign newcomers.

Management orientation differs significantly

Differences in cultures are difficult to bridge

A fragmented market

Ever increasing bureaucracy

Lack of judicial code to do business

Insufficient logistic infrastructure

Poor quality of labour

Vulnerable financial system.

The results are based on a survey of 381 managers of foreign multinational companies

that are active in China. The managers interviewed were both general and specialised

and included sales and marketing managers.

(i) Differences in management orientation

The study highlights three important factors to consider:

Chinese managers care more about quantity than quality manufactured.

The notion of agreement differs vastly to Western interpretation of an agreement: the

Chinese may not always regard the agreement as binding and it is therefore easy to

break.

A Chinese business partner pays close attention to the status of the person signing

the contract it is important to determine that you are signing the contract with a

person of appropriate seniority, else the contract may not necessarily be binding.


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(ii) Difficulties in bridging cultural differences

Discussions on the cultural differences between Western and Chinese cultures could be

the subject of millions of pages of writing. In this particular context, the important

differences to understand are how Western people seek individualism and how Chineseindividuals always display a collectivist attitude. In Western culture the welfare of the

business weighs more than the individuals interest, where in Chinese culture, the interest

of the group is always highest priority, even before that of the business (Jagersma & Van

Gorp, 2003: 29).

The Jagersma and Van Gorp study (2003: 29) explains how this attitude has a big impact

on decision taking of managers and the attitude towards risk taking. Western managerswill seek risks to achieve the highest returns, whereas a Chinese manager will take lower

risk direction in respect of the group's interest and well being.

Jagersma and Van Gorp (2003: 29) quote a Chinese politician: In the West, people are

born with individual rights, in China people are born with social obligations.

(iii) A fragmented market

Due to the geography and extreme diversity of the Chinese culture, the market is

extremely fragmented. The low degree of homogeneity is closely connected to the

regional differences in income. Many multinationals entering China (Jagersma and Van

Gorp (2003: 29) uses the Unilever example) will use partnerships and alliances in the

various regions to enter the market. This is a strategy of using local talent and knowledge

of the local market to enter that particular regions market. The philosophy behind this

approach is that the Chinese market is easier to be entered by the Chinese than the

foreigner.

(iv) Increasing bureaucracy

The greatest influence in China is held by the Communist party, closely followed by the

government and then the National Peoples Congress. Usually the roles and decision

making roles are poorly defined and overlap between ministries. Therefore decision

making may often become very lengthy and expensive. The impact on the foreign entrant

is usually longer times to achieve certain milestones and higher costs than initially

anticipated.


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(v) Lack of judicial code to do business

China has no formal company law. In instances where collision could happen between

local and foreign companies, solving them by legal means does not exist. This means that

foreign companies are vulnerable to the political views of the local authorities.

(vi) Insufficient logistics infrastructure

Both transport and energy supply infrastructure is poor in quality, quantity and reliability.

In order to manage the situation, companies usually resort to keeping higher stock levels

of raw materials and quoting longer lead times to allow some buffer against the insufficient

logistical infrastructure. These buffers drive up cost and lower competitiveness.

(vii) Poor quality of labour

Chinas labour situation is a double edged sword: It is both one of the major sources of

competitive advantage, but can also be a major barrier for foreign companies. The

competitive advantage stems from the fact that you have a big blue collar workforce

employed at rates much lower than what can be achieved in first world Western countries.

However, only a small percentage has an academic or business education and finding

adequate management candidates can prove a major stumbling block for foreign

companies. The well trained Chinese employees actively engage in job hopping. Foreign

companies often have to resort to employing their own foreign staff. The benefit being that

you have a higher retention rate and return on your education investment in the staff. The

downside is the disconnection between your middle management and your staff and

clients you would have preferred to have your middle and low management from the

local workforce in order to be closer to the local market needs and the companys

workforce.

(viii) Vulnerable financial system

According to the interviewees, the Chinese financial system is insufficiently tailored to the

financial needs and services that a Western company has become used to and relies on

for success and competitiveness. The financial policy of Chinese officials is extremely

restrictive and bureaucratic and is designed to rather restrict business than support

business.


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from another country that will be much more familiar with the Chinese way of doing than a

Western firm.

Chen, et al. (2006: 641) describe the strategy of utilising capital and labour competitiveadvantage as an entry strategy for an MNE to benefit from the lower labour costs of the

Chinese market. Studies have shown that investments in China from Hong Kong

companies have focussed on the more labour intensive and less technology intensive

industries (Chen, et al., 2006: 642; Schroath, Hu & Chen, 1993: 277-290; Pan, 1996: 1-

26). One can therefore deduct that an investor that understands the advantages and

disadvantages of the host country will rather exploit the advantages and steer clear of the

disadvantages.

3.1.3.2 The impact of guanxion doing business in China

A number of translations and definitions of guanxi exist in the literature. In the very

simplest definition, guanxi refers to a special relationship between two persons. Fan

(2002: 543-561) classifies a guanxibase into the following three categories

(i) Relationship by birth or blood

Family

Kinship, in-laws.

(ii) Relationship by nature

Locality (from the same town or province)

Classmate or alumni

Teacher-student

Co-worker: colleague or superior-subordinate

Neighbour

In the same profession.

(iii) Relationship acquired

Acquaintance

Knowing the same person (intermediary)

Friend

Sworn brotherhood.


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Blood connection forms the basis for the first group and is largely predetermined. The

second and third group are social bases.

Without deviating too much into the definitions of guanxi, it is important to note that guanxi

relationships in Chinese cultures form a strong and invisible band in society that is multi

faceted and the impact usually reaches well beyond normalrelationships.

Fan (2002: 543-561) makes an important definition that guanxi could be classified into

three categories, that of

Family guanxiHelper guanxi

Business guanxi.

Fan (2002: 543-561) defines business guanxias the process of finding business solutions

through personal connections.

Two types of business guanxican be distinguished:

Both parties in the relationship are business persons.

One person in the relationship is from business and the other from government.

The majority of business guanxirelationships are of the latter part and most literature on

guanxideals with the business to government (B to G) guanxi.

The literature has different opinions on the extent, cost and effect of B to G guanxi. A

survey conducted by the Hong Kong Independent Commission Against Corruption

estimated that guanxiaccounted for up to five percent of total costs in doing business in

China (Fan, 2002: 15).

Fan (2002: 543-561) elaborates further on the ties between corruption and guanxi and

concludes that almost all B to G guanxirelationships are tainted by corruption.

The implications of business guanxi is therefore not so much a barrier to entry. It can

however be a very powerful strategic tool to get into the correct markets, assist you greatly


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in dealings with government and opening doors that may not have been easily opened (or

opened at all) had it not been for a particular guanxirelationship.

3.2 Product specific strategy

3.2.1 Business to consumer strategies in general

Research by Rau (2005: 67-72) shows that very successful companies adopt one of four

focussed strategies:

Product leaders

Distribution giants

Innovation superstars

Customer lovers.

According to Rau (2005: 67) product leaders are the companies that focus their resources

on product innovation. Rather than rewrapping old products, these companies are

innovative and often imitated by others.

The distribution giants are the ones that focus their efforts on getting their products in the

hands of their customers. Often price strategy is employed with the mass distribution

network adding the critical value to the chain.

The innovation superstars spends money and critical resources on fundamental research,

as opposed to the product leaders that spend resources on applied research. This is often

the most difficult strategy according to Rau (2005: 68). These companies often have to

partner with others to get their products to market. Typical companies in this category arethe pharmaceuticals, as well as some technology and IT orientated firms. They have to be

able to work on multiple innovative products simultaneously as chances are that only one

of them would be a success.

Customer lovers value the long-term relationship with their customers. Often the product

is nothing special or out of the ordinary, but the company relies on the loyal customer and

the contact staff and technology to imprint the companys products and services. This

approach may not be the best for a market entry strategy into a foreign market as you

have no established perceived value in a new market.


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For the purpose of this study, one should understand the role that the product and the

service plays on the successful entry of a consumer product. The chosen strategy could

be more than one (or even all) of the above, but with more or less emphasis on certainaspects. If follows intuitively that the successful strategy for a consumer electronic market

entry should rely heavily on the innovation and product leader strategy.

Rau (2005: 69) highlights three building blocks linking the product development:

Properly defining the companys products.

Ensuring firm linkages between product development and corporate strategy.

Winning by meeting customer needs reliably, regularly and profitably.

3.2.2 Business to consumer strategies for consumer electronics

In an article by Fischer, Gebauer and Fleish (2008: 3), they mention that risks mainly

result from the tendency of Chinese competitors to move from low-end to medium market

segments. Predictably, they will use their expanding competence base to further move to

the high-end market segment, financed by massive sales volumes in the low-end and

medium market segments.

This is a common trend in China and where Chinese products were typecast as poor

quality 10 years ago, Chinese products, and more so consumer electronics products, are

rapidly moving from a poor quality product to a medium (and even high-end) quality

product at very competitive prices.

When formulating the product strategy, managers need to clarify the aspects of market

information, time of market entry, product specification and price. Fischer, et al., (2008: 3)

emphasise here that it is important that mangers do not restrict themselves to high-end

market information only customers in the medium market segment require a different

product package as far as the expectations for performance and price go.

Fischer, et al. (2008: 4) emphasises a separate and dedicated channel for gathering

market information from the low-end, medium-end and high-end markets each requires a


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specific set of indicators. They further suggest it is necessary to have separate networks

of sales staff, technical staff and research departments that collect market information.

Summarising the product strategy, Fischer, et al., (2008: 4) highlight the three criticalfactors to be considered for a successful implementation of the product strategy:

Consider the power of the high-end segment.

Allocation of financial resources for the entry level products.

Support from management for both the high-end and entry level segment.

Often the high-end segment will yield extraordinary power in a companys R&D segment

and the high-end customers will try to protect their technology from the low and medium-end. By means of an example: a premium consumer electronic device like the i-Phone or

i-Touch will reluctantly hand over the technology behind the user interface to a medium

end product that will erode sales and the prestige of the premium product.

In general, the high-end segment will be much more lucrative with less competition.

Convincing a company to allocate financial and other resources for development in a

sector with much higher competition and lower margins, may be extremely difficult.

Management will have to support the high-end and lower end products with R&D efforts,

financing, sales and marketing channels and all the support required for a successful

market launch. Buy-in from management to support this segment may be difficult due to

the inherent risks. The risks are a combination of the longer time required for a return on

investment, higher competition and lower margins.

3.3 International mode of entry strategy

3.3.1 Generic mode of entry strategies

3.3.1.1 Global / international market

Porter (1990: 14) describes how global competition is changing the way business is being

conducted. Firms compete worldwide with truly global strategies involving selling

worldwide, sourcing components and materials worldwide and locating activities in many

nations to take advantage of low cost factors. The greatest advantage for a Western firm


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entering the Chinese arena, is that you can have your manufacturing done in China,

taking full benefit of the lower cost of labour, raw materials, manufacturing and logistics.

Firms can therefore compete with local vendors of CE components drawing on the

strengths of the Chinese supply chain while bringing your own intellectual property to thevalue adding stream.

In the case, for example, of a South African company, research and design activities can

be performed in the relative low cost environment of South Africa (versus Silicon Valley for

example) and all manufacturing be done in China.

One has to evaluate your international competitive position: What will make youcompetitive on the international market? It is important to understand your home-grown

advantages and maximise those for your international expansion.

Kumar and Waheed (2007 :178) quote Dunning (1979: 269-295) who pinpointed the

following reasons for foreign expansion and foreign direct investment:

(i) An imperfection in the product market

(ii) Imperfections in the factor or input market

(iii) Economics of the internal operation

(iv) Preservation of an established customer base

(v) Entry into a growing or high growth market

(vi) Desire to have control over a raw material source.

Koch (2001: 65) highlights the following important decisions on overseas market entry

strategies:

(i) The choice of a target market/product

(ii) The objectives and goals of the target market

(iii) The choice of an entry mode to penetrate the market

(iv) The marketing plan to penetrate the market

(v) The control system to monitor the target market.

According to a study published by Root in 1994 (quoted by Koch, 2001: 65), three

approaches to entry mode selection are possible:


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(i) Selection in absence of any market entry strategy, or the sales approach

characterised by, amongst others, short time horizons, no systematic selection

criteria, few product adaptations and no effort to control overseas distribution.

(ii) Selection in accordance with an existing market entry strategy (i.e. nave orpragmatic rules).

(iii) Selection which considers some strategy rule(s) and involves systematic

comparisons of alternative modes available.

Koch (2001: 68) lists the categories of factors that influence this selection process:

Product-market factors

Firm/foreign venture specific factorsHost-market factors

Home market factors.

Koch (2001: 68) expands on the above by including

Cultural factors

Global industry structure

Global corporate objectivesRelational dimensions of inter-firm collaborations

Firms bargaining power with respect to foreign governments

Political leverage of the home country government.

In Table 3.2, Koch (2001: 67) summarises four views from authoritive sources and

concludes that the structure for foreign market evaluation and selection has negligible

differences and therefore concludes that most models for market selection are composedof three stages:

Screening

Identification (in-depth screening)

Selection.


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Table 3.2: Stages of market selection process

Stage 1 Stage 2 Stage 3 Stage 4

Cavusgil (1985) Screening Identification Selection

Johansson

(1997)

Country

identification

Preliminary

screening

In-depth

screening

Final screening

Kumar (1994) Screening Identification Selection

Root (1994) Preliminary

screening

In-depth

screening

Final selection

Source: Koch, 2001: 67.

3.3.2 Mode of entry strategies for consumer electronics

Cui and Liu (2000: 56) highlight the fact that many MNC's assumed the notion of a global

consumer assuming that all consumers aspire to the same quality in goods to enhance

their quality of life. Arnold and Quelch (1998: 7-20) proved in their research that market

evolution in emerging markets is very unlikely to be similar to developed markets. Cui and

Liu (2000: 56) stress that in order to compete effectively, MNCs need to define the

consumers of emerging markets. They differ significantly from consumers in the West.

Batra (1997: 97) re-iterates that assessing the market size and consumer purchasing

power effectively and understanding their attitude towards new and Western products are

amongst the critical issues to be addressed by an MNC entering an emerging market.

In a research paper by Gabrielsson, Gabrielsson, Darling and Luostarinen (2006: 650-671)

they answer the question of how product strategies change when ICT companies move

from international to global and why. Gabrielsson, et al. (2006:650-671) conclude that

globalising international companies, i.e. companies that first internationalise after the

domestic period and then globalise their operations outside the domestic continent,

develop towards standardised product strategy alternatives, wider product assortment and

advanced product categories.

Gabrielsson, et al. (2006: 652), summarise that product strategy of high technologycompanies can be seen to consist of three dimensions:


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Product platforms

Product lines

Individual products.

Meyer and Lehnerd (1997: 39) define a product platform as a set of subsystems and

interfaces that form a common structure from which a stream of derivative products can be

efficiently developed and produced. In the context of globalisation, competitive product

platform will enable the company to remain competitive, even though adjustments of

adaptations may be required to adapt to certain countries or regions.

The product line dimension is defined by Gabrielsson, et al., (2006: 653) as the number ofproduct lines (width of the product assortment) and the number of products in a line (length

of a product line).

The third dimension of the individual product may be defined as a good, services or know

how. For the purpose of this study the researcher we will focus on the tangible goods.

Kotler and Armstrong (2001: 294) define the product as consisting of three levels of

content:

The core product

The actual product

The augmented product.

In the case of a consumer electronic device, the core product includes elements like

performance, technology, reliability and importantly the main functional features. The

actual product is what the user sees and experiences including the brand name, styling,

feature set and quality. Aesthetics are becoming increasingly important for consumer

electronics as many personal devices become status symbols. Thirdly, the augmented

product includes additional services, benefits, for example future upgrades or other

services bundled with the good.

Building on previous research, Gabrielsson, et al., (2006: 654) develop the following

product strategy for globalising companies:


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Localised product strategy. The company decides to develop products for only

one country of a limited area. This does not leverage the often high cost in the high

technology area, but allows for customisation to the local market requirements.

Modified product strategy. The company develops a common product platform

that is used across the globe, but allows for product adaptation based on regional or

country specific requirements.

Standardised product strategy. The company pursues to develop a standardised

product across the globe. This provides the highest leverage in both development

and manufacturing.

Cheng and Shiu (2007: 174-189) focussed on the re-innovation rather than innovation inthe electronics industry (specifically in Taiwan). Great similarities exist between the

Taiwanese and the Chinese electronics industry. The findings of Cheng and Shiu (2007:

174-189) as critical success factors of new product development by re-innovation are:

(i) Shorter lead time in the product development process.

(ii) Lower costs in product manufacture.

(iii) Products with greater customisation offer more relative advantages and added value.

(iv) Firms with greater internal co-ordination and external co-operation have a larger

chance at success.

(v) Re-innovation offers better product introduction timing.

(vi) The success of the new product development relies to a great extent on the

aggressiveness of the competitors response.

3.3.3 Mode of entry strategies for consumer electronics using trade fairs

Trade fairs are an important source of ideas for new product development and exposure to

competitor products (Hollows and Clegg, 2006: 393).

In a comprehensive study by Herbig, OHara and Palumbo (1998 : 425-435), the major

advantages and disadvantages of trade shows are highlighted. The greatest advantages

according to Herbig, et al., (1998: 425) are:

A message is delivered to a large number of qualified interested people

Introduction of new products to a large number of people

Uncovering potential customers


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Enhancing goodwill

Gaining free publicity.

While the greatest disadvantages are:

Cost of exhibiting is rapidly rising.

Many executives believe trade shows are social activities for the employees

attending.

More than half of companies that exhibit dont have clear and set goals.

Herbig et al., (1998: 426) summarise from existing literature some further advantages of

exhibiting at a trade fair:(i) Identifying prospects

(ii) Servicing current accounts

(iii) Introducing products

(iv) Improving corporate image

(v) Gathering competitor information

(vi) Selling.

3.3.3.1 Chinese trade fairs

The trade fairs have been playing an important role in business for many years. Literature

describes and discusses trade fairs in general, even though all may not be directly in the

Chinese context.

Ling-yee (2008: 35-47) discusses in great detail the effects of the firm resources on trade

show performance. Her theoretical model of antecedents and performance of trade show

processes are depicted in Figure 3.2.


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Exhibit resources

Exhibit resources refer to the budget related resources and include the size of the booth,

the design and location of the booth (Gopalakrishna & Lilien, 1995: 22-43). Ling-yee

(2008: 35) argues further that the exhibit resources can enhance the pre-show promotion

process: Large booths with attractive designs and premium positions can be used in the

pre-show promotional activities to attract attention and increase the number of visitors to

the booth.

(i) Booth personnel resources

A study by Gopalakrishna and Lilien (1995: 22-43) showed empirically that sufficiently

trained staff can interact and contact with prospects in a more effective manner and that

sufficient booth manpower can convert sales contacts into sales leads in an effective

manner. Lodish, Curtis, Ness and Simpson (1998: 5-20) argued that better trained booth

personnel can make a more persistent selling effort and result in a greater number of sales

leads.

Figure 3.2: A theoretical model of antecedents and performance of trade show

processes

Source: Ling-yee, 2008: 37.

Exhibit resources

Trade show marketing

processes

Booth personnel resources

Customer-linking capabilities

Managerial capabilities

Partnering capabilities

Pre-show promotion

At-show selling

Post-show follow-up

Achievement of trade

show goals

Sales goals

Non-sales goals


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Gopalakrishna and Lilien (1995: 22-43) proved further that well trained booth staff can

analyse and size-up quality of sales leads and determine the amount of follow-up effort

required.

(ii) Customer linking capability

Hooley, Greenley, Cadogen and Fahy (2005: 19) define customer linking capability as the

outside-in capability to identify customer wants and requirements together with the

capabilities to create and build appropriate relationships with those customers. Ling-yee

(2008: 37) quotes the definition by Tanner (1994: 15) of customer linking capability in the

context of trade shows as the capability to forming an adaptive selling technique.

According to Smith and Smith (1999: 29), exhibit salesmen adapted sales messageswhereby they provided transactional information focussing mainly on price, delivery and

credit terms to address end-users desire to make buying decisions. Exhibit salesmen can

offer technical and competitive information focussing mainly on customer education and

relationship building. In addition, customer linking capability enables exhibit salesmen to

adjust their post-show follow-up effort that improves customers purchase intention as well

as the trade shows return on investment.

(iii) Managerial capabilities

Ling-yee (2008: 37) summarises the managerial capabilities as the

traditional functional activities

people management and staff development

product innovation

operations management

financial management

and as factors for attaining a competitive advantage. Using the various managerial

functions effectively will give the organisation a competitive advantage in the marketplace.

In the context of trade show, Ling-yee (2008: 37) argues that effective managerial

capabilities will enhance post-show follow up processes.


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(iv) Partnering capabilities

Srivastava, Shervani and Fahey (1998: 12) define partnering capabilities as the capability

to gain access to intangible assets associated with strategic partners and network

relationships such as managerial know how, local market knowledge and networkedservice support. Ling-yee (2008: 38) argues that trade shows are good venues for working

on relationships. Ling-yee (2008: 38) further argues that these relationships will also be

utilised to enhance pre-show performance.

3.4 Differences in management and corporate structures in Asia and the West

No study on the successful market entry of a Western firm into the Chinese market can be

complete without taking serious note of the major differences in culture. Not only do the

individuals culture differ vastly, but also that of the firm and the organisation. A summary

from Michael Backman (2009: 78) provides 25 key differences in Table 3.3.

Table 3.3: Management and corporate structures in Asia and the West: 25 key

differences

Large Western Firms Large Asian Firms

1. Short time horizons in decision making2. The company is driven by profits and / or market

share3. Corporate direction determined by overall corporate

vision and strategy4. Highly structured5. Wide ownership (institutions)6. Professionally managed7. More concentrated8. Invest on the basis of research9. Minority shareholders well treated10. Dispersed decision making11. Relatively small number of units/companies12. Prefer accrual accounting13. Lots of contracting out and buying in

14. Reliant on external funding15. Services are very important16. R&D-intensive17. Participative management18. Senior management is relatively aloof19. Well-defined career ladder for staff20. High priority given to transparency, auditing, and

disclosure21. Fringe benefits are generally a small part of total

remuneration22. Staff training is formal and structured23. Employees tend to be promoted on the basis of their

inherent productivity24. Job descriptions are precise and employees are

encouraged to use initiative25. Staff initiative expected and rewarded

1. Long time horizons in decision making2. The company is growth-driven3. Corporate direction determined by opportunity4. Often poorly structured5. Narrow ownership (family)6. Family managed7. Highly diversified8. Invest on the basis of connections9. Minority shareholders abused10. Centralized decision making11. Large number of units/companies12. Prefer cash accounting13. High degree of vertical integration; lots of

internal transactions14. Prefer internal funding

15. Dislike services16. Little or no R&D17. Patriarchal management18. Senior management is hands-on19. Vague career ladder for staff20. Low priority given to transparency, auditing,

and disclosure21. Fringe benefits are a high component of salary

(remuneration is paternalistic)22. Staff are trained informally and on the job23. Employees tend to be promoted on the basis

of their connections and perceived loyalty24. Job descriptions are vague and employees

work as directed

25. Staff initiative discouraged

Source: Backman, 2009: 78.


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Backman (2009: 78) comments on Table 3.3 as not trying to pass any judgement, but

merely making an observation from his vast experience in Asian business.

3.5 Conclusion

This chapter looked at available research and literature on the subject of employing a

successful market entry strategy for consumer electronics in China utilising trade fairs.

The chapter was divided into three major categories:

Local market specific B to C marketing strategy

Product specific B to C marketing strategy


Under the above headings the literature and relevant research have been presented. All

three categories were funnelled down in order to present answers to the questions of how

a foreign entrant to the Chinese consumer electronics market uses trade fairs effectively.

The next chapter will present the results from the literature review.


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CHAPTER 4

RESEARCH RESULTS

4.1 IntroductionOne of the important aspects any researcher should understand about Chinese culture, is

the philosophy of Cunfuciusm. Around 500 BC, Kong Fu Ze (which was westernised to

Confucius by missionaries) proposed that the stability of society is based on unequal

relationships between people (Hofstede, 1991: 40). The five basic relationships are:

ruler-subject, father-son, older brother-younger brother, husband-wife and senior friend-

junior friend. It is important for any businessman conducting business in China to be

aware of these customs. Hofstede (1991: 40) explains that all of these relationshipscontain mutual and complementary obligations: the junior in the partnership owes the

senior respect and obedience, while the senior owes the junior partner protection and

consideration.

As a background to this study and understanding of the Chinese culture, the teachings of

Confucius is summarised here from the work of Hofstede (1991: 165):

The stability of society is based on unequal relationships between people (these are the

five relationships mentioned earlier).

The family is the prototype of all social organisations this means that a person is not

primarily an individual, but rather a member of a family. Children should learn to restrain

themselves, to overcome their sense of individuality as to maintain harmony in the family.

Harmony is found in maintaining everybodys face in the sense of dignity and respect.

Virtuous behaviour towards others consists of treating others as you would like to be

treated yourself.

Virtue with regard to ones tasks in life consists of trying to acquire skills and education,

working hard, not spending more than necessary, being patient and persevering.

Having an understanding and respect of all of the above virtues of Chinese culture, will be

a great advantage for the new entrant to the Chinese business arena. Ultimately, not only


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the business decisions in the marketing strategy, but equally important the human aspect

in the equation, will determine a successful entry into the Chinese market.

No strategy can be crafted or exist in isolation from a deep understanding of the Chineseculture.

4.2 Local market specific B to C marketing strategies

First and foremost, the entrant to the new market should be aware of the fact that chances

of failure increase as the number of unknown factors increase in the foreign market.

Paragraph 3.1.1.1 discussed how the new entrant should understand the forces that drive

and could potentially impact on his business but also gives him a competitive advantage.

These forces are summarised by Porter (1990: 127) in what is called the Porter diamond

(repeated in Figure 4.1).

Figure 4.1: The determinants of national competitive advantage

Source: Porter, 1990: 127.

Firm

strategy,

structure

Related

and

supporting

Factor

Conditions

Demand

Conditions

Chance

Govern-

ment


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Every nation has factors that give it an advantage (or disadvantage). In the case of

China, the relative low cost of labour and low cost of manufacturing (Kumar & Waheed,

2007: 180) are the greatest factor conditions giving it its competitive advantage. An

abundance of technically skilled workers (iSupply, 2009) coupled to the low manufacturingcost has propelled China to the centre of the electronics industry universe (iSupply, 2009).

An IBM Electronics podcast (2005) reports that the Chinese consumer is becoming more

sophisticated and has deeper pockets. This class is growing and demand better

consumer products and products unique to the Chinese environment.

When looking at the related and supporting industries China offers the whole valuechain in consumer electronic manufacturing process. This is typically from the

semiconductor manufacturing (usually all consumer electronics has some microcontroller

and numerous other semiconductor parts) all the way to final assembly of the plastics and

other parts. Having well developed and comprehensive related and supporting

industries are a the major competitive advantage for the Chinese consumer electronic

industry.

Not understanding the dynamics of domestic rivalry could potentially be a major

disadvantage for a foreign entrant (Chen, et al., 2006: 640-642). The additional cost

associated with doing foreign business and the MNEs unfamiliarity with the foreign

environment may erode a companys competitive advantage.

A common thread through all the literature on doing business in China is the role of

government. In paragraph 3.1.2.1 the role of government in the Chinese economy was

evaluated. Government has played a paramount role in the unprecedented growth of the

Chinese economy but can also be one of the major stumbling blocks for the foreign entrant

to the Chinese market. Political instability, poor protection of intellectual property,

corruption and poor regulatory systems have been cited by Kumar and Waheed (2007:

186) as some of the major weaknesses in the Asian market. In paragraph 3.1.3 a study

from Jagersma and Van Gorp (2003: 30) is summarised. It explained in detail how

increasing bureaucracy is increasingly making the achievement of certain milestones and

getting certain applications approved difficult. The foreign entrant will find that his cost of

entering the market will be higher and usually longer due to bureaucracy.


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The results from the Jagersma and Van Gorp (2003: 28) study of paragraph 3.1.3 are

repeated below. Eight hurdles to entry of the Chinese market by foreign newcomers were

identified:Management orientation differs significantly

Differences in cultures are difficult to bridge

A fragmented market

Ever increasing bureaucracy

Lack of judicial code to do business

Insufficient logistic infrastructure

Poor quality of labour

Vulnerable financial system.

The results are based on a survey of 381 managers of foreign multinational companies

that are active in China. To the new entrant it is of paramount importance to be aware of

these factors and to take precautionary steps to minimise the impact of these factors.

The notion of liability of foreignness was investigated in paragraph 3.1.3.1. Chen, et al.,(2006: 640-642) argue that foreign firms will face additional costs that arise from

the MNEs unfamiliarity with the foreign environment

discrimination by the government, suppliers, and customers

the additional costs associated with operating internationally.

The above factors will naturally erode a companys competitive advantage and together

with the other hurdles to entry identified, the market entry strategy should take into accountthese factors.

The role of guanxihas a definitive impact on the way that business is conducted in China.

The various forms of guanxiwas described in paragraph 3.1.3.2 and in its simplest form

can be described as a special relationship between two persons (Fan, 2002:543). Guanxi

could both be a barrier to entry if the new entrant to the market does not have the

necessary relationships with the correct people, or it could be a very powerful advantage if

you do have the correct relationship with the necessary decision makers.


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Fan (2002: 543-561) argues that most of the guanxi relationship in business concerns

business to government guanxiand he concludes that almost all B to G guanxiis tainted

by corruption.

4.3 Product specific B to C marketing strategies

In paragraph 3.2.1 research by Rau (2005: 67-72) showed that successful companies

adopt one of four focussed strategies:

Product leaders

Distribution giants

Innovation superstars

Customer lovers.

Customer lovers are those who rely on the loyal customer to whom they want to sell a

product that may not necessarily be anything out of the ordinary. This strategy will be the

least successful in the Chinese and the consumer electronics market where the new

entrant has no established perceived value.

The innovation superstars usually face long research and development and design

phases. In the fast moving high technology milieu of consumer electronics where the

Chinese consumer is constantly looking for the newest technology around, this strategy

may also prove unsuccessful. Coupled to that the fact that the new entrant will most likely

face piracy of his design/development, this may not be a suitable strategy for a new

entrant either.

The distribution giants are the ones that get the products to the customers at the lowest

price. The new entrant to the Chinese consumer electronics market may not necessarily

be faced with the challenge of effective logistics and distribution as he will most probably

supply to an OEM or ODM house. Two factors that do however play an important role are

the factor of cost and shortend lead times. The Chinese consumer electronics market is

ever changing with the product life cycle of a Chinese no-brand mobile phone typically

being three months.


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Lead times of eight to twelve weeks of component supply to which Western firms are

typically used to is not acceptable in the Chinese fast moving consumer electronics

industry. You have to be able to deliver at very short lead times. In especially the

computer related industries you may often find your stock obsolete after three to sixmonths, adding additional pressure to balance high stock volumes (in order to deliver at

short lead times) with the ability to sell the stock before it becomes obsolete.

Suppliers

viljoen marketing 2009

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