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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Declaration
Hereby I, Jean Viljoen, declare that this research report is my own original work and that all 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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Acknowledgements
This study is dedicated to my best friend and wife, Leana, who talked me into doing the MBA and supported me all the way.

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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.

Opsomming

China is een van die snel groeiende ekonomie in die wreld. Sedert sy aansluiting by die Wreld 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 effektiewe vorm 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 1.2 1.3 1.3.1 1.3.2 1.4 1.4.1 1.4.2 1.4.3 1.5 1.6 1.7 1.8 1.8.1 1.8.2 1.8.3 1.8.4 1.9 1.10 1.11 Introduction ........................................................................................................ 1 Literature review ................................................................................................ 1 Problem statement and demarcation ................................................................. 2 Problem statement ........................................................................................... 2 Demarcation of the study ................................................................................. 3 Clarification of key concepts .............................................................................. 3 Marketing strategies ......................................................................................... 3 Consumer electronics ...................................................................................... 4 Trade fairs ........................................................................................................ 4 Research objectives ........................................................................................... 4 Research proposition ......................................................................................... 5 Importance and benefits of the study ................................................................. 5 Research design and methodology .................................................................... 5 Sampling .......................................................................................................... 6 Data collection.................................................................................................. 7 Data analysis.................................................................................................... 7 Content analysis ............................................................................................... 8 Chapter outline................................................................................................... 8 Nature and form of results ................................................................................. 9 Conclusion ......................................................................................................... 9

CHAPTER 2: AIM OF THE LITERATURE REVIEW ......................................................... 10 2.1 2.2 2.3 Introduction ...................................................................................................... 10 The purpose of the critical review .................................................................... 10 The content of the literature review .................................................................. 11

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2.4 2.5

The structure of the review............................................................................... 11 Conclusion ....................................................................................................... 14

CHAPTER 3: LITERATURE REVIEW .............................................................................. 15 3.1 3.1.1 3.1.2 3.1.3 3.2 3.2.1 3.2.2 3.3 3.3.1 3.3.2 3.3.3 3.4 3.5 Local market strategy ....................................................................................... 15 Global business to consumer strategies ........................................................ 15 Asian business to consumer strategies .......................................................... 17 Chinese business to consumer strategies ...................................................... 21 Product specific strategy .................................................................................. 27 Business to consumer strategies in general ................................................... 27 Business to consumer strategies for consumer electronics ........................... 28 International mode of entry strategy ................................................................. 29 Generic mode of entry strategies ................................................................... 29 Mode of entry strategies for consumer electronics ......................................... 32 Mode of entry strategies for consumer electronics using trade fairs .............. 34 Differences in management and corporate structures in Asia and the West .... 38 Conclusion ....................................................................................................... 39

CHAPTER 4: RESEARCH RESULTS .............................................................................. 40 4.1 4.2 4.3 4.4 4.5 Introduction ...................................................................................................... 40 Local market specific B to C marketing strategies ........................................... 41 Product specific B to C marketing strategies.................................................... 44 International mode of entry .............................................................................. 45 Conclusion ....................................................................................................... 47

CHAPTER 5: CONCLUSION AND RECOMMENDATIONS FOR FUTURE RESEARCH 48 5.1 5.2 results 5.2.1 5.2.2 5.2.3 5.3 Introduction ...................................................................................................... 48 Linking the problem statement and research objectives with the research 48 Linking the problem statement with the research results ............................... 48 Linking the research objective the with the research results .......................... 48 Support for the research proposition .............................................................. 49 Conclusions on marketing strategies for consumer electronics in China using

trade fairs as entry points................................................................................................... 50 5.3.1 5.3.2 5.3.3 Local market strategy ..................................................................................... 50 Product specific strategy ................................................................................ 51 International mode of entry strategy ............................................................... 51

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5.4 5.4.1 5.5

Recommendations for future research ............................................................. 51 Quantifying the effectiveness of trade fairs versus other modes of entry ....... 52 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

List of figures
Figure 1.1: Three starting points for the study .................................................................... 2 Figure 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: B to G: CE: ICT: IT: MNC: MNE: LOF: ODM: OEM: PMP: R&D: Business to consumer Business to government Consumer electronics Information and communication technology Information technology Multi-national corporation Multi-national enterprise Liability of foreignness Original design manufacturer Original equipment manufacturer Personal media player Research and development

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 research results,

The study is based on a comprehensive literature review.

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.

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.

Product Specific Strategy Local Market Strategy

Mode of Entry

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 effective marketing 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:

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 market is defined as a fairly homogenous group of customers to whom a company wishes to appeal. Marketing mix is 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 strategy as 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.

1.4.2 Consumer electronics These are electronic products that are intended for everyday use in the office, home and recreation. The majority of consumer electronics will fulfil a specific practical purpose, but are not limited to products with practical uses. It may include aesthetical products with electronic components. 1.4.3 Trade fairs Exhibitions by manufacturers, suppliers and distributors to reach a large homogenous potential client base. The trade fair usually has a theme and is as such aimed at putting specific suppliers and customers in contact with one another. Trade fairs are typically held over three to five days in large exhibition halls. The trade fairs are mostly held in either large business hubs (like Guangzhou or Shenzhen) or in the hub of a certain manufacturing industry, for example the Guzhen Lighting Fair which is the hub of the Chinese lighting industry in the Zhongstan province.

1.5

Research objectives

The primary research objective is to provide insight into the components of a successful marketing strategy for consumer electronics in China. This involves researching a number of parameters that influence a successful marketing strategy in China. These parameters form the secondary objectives.

The secondary objectives are specific research into Chinese customs differences between Chinese and Western management styles effective booth design and efficient booth personnel cultural barriers to be overcome by Western exhibitors product positioning in the market.

This research will provide the new entrant to the Chinese market with new insights for a successful marketing strategy of consumer electronics.

1.6 P1: P2: P3:

Research proposition The strategy followed for the trade fair exhibits can be married with the overall company strategy. The new entrant to the market is to some extent unfamiliar with the Chinese market and customs. 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 design as 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).

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-probability samples, 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.

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.

1.8.4 Content analysis The technique of content analysis is widely used in literature reviews. It is a technique to record, interpret and make inferences from studying human communications (Neuendorf, 2005: 10). This communication could be books, academic papers, websites, even paintings. For the purpose of this research paper, the communications would be in most instances academic papers. transcripts of interviews. This technique is also used by researchers to analyse

Neuendorf (2005: 10) offers the following definition of content analysis:

"Content analysis is a summarizing quantitative analysis of messages that relies on the scientific method (including attention to objectivity, intersubjectivity, a priori design, reliability, validity, generalisability, replicability and hypothesis testing) and is not limited as to the types of variables that may be measured or the context in which the messages are created or presented."

The literature will be critically reviewed and data presented under the aforementioned categories. This is a meaningful way to summarise the vast amounts of existing research and identify potential gaps in existing research and propose topics for future research. 1.9 Chapter outline

Chapter 1 is the orientation. It includes the definitions and problem statements and the delimitation of the study area. Key concepts are clarified and the design and methodology of the research are discussed.

Chapter 2 will define the aim and direction of the literature review. This chapter will also include the approach by starting with a broad definition and narrowing it down to the essential question answered by the study.

Chapter 3 will provide a comprehensive literature review and forms the source of qualitative data for the study. The chapter is ordered to start with general marketing

strategies, then narrowing it down to Asian marketing strategies and then limiting it to consumer electronics and finally marketing strategies for consumer electronics by utilising trade fairs.

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. defined. All terms used throughout were

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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CHAPTER 2 AIM OF THE LITERATURE REVIEW

2.1 Introduction

The scope of the study is limited to a critical review of the literature that has been published on the subject. Published material on the subject will be surveyed and if

possible, current research too. Tranfiled, Denyer and Smart (2003: 208) refer to this process as mapping and assessing the existing intellectual territory.

The reviewed literature needs to be organised and the findings presented orderly and summarised to enable a marketer to take an informed decision on the marketing strategy and mix for consumer electronics in the Asian market by utilising trade fairs. 2.2 The purpose of the critical review

The critical review will give us insight into existing research and findings on the topic. The purpose of this study is to filter through the existing findings and present results orderly and summarised.

Saunders, et al. (2007: 57) describe two approaches to a literature review: deductive approach inductive approach

The deductive approach identifies theories and ideas from the literature and is subsequently tested using data. The inductive approach is the development of theories from data and then relating it to the literature.

Data gathering is beyond the scope of this study and therefore the main purpose of this study is to summarise and present existing research orderly and make recommendations for an effective marketing strategy for consumer electronics utilising Chinese trade fairs.

Saunders, et al. (2007: 57) list a number of purposes of a critical literature review. Apart from the main aim of this study, it will also identify research possibilities that have been overlooked identify recommendations for further research

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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 to expand 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.

Product Specific Strategy

International Mode of Entry

Local Market Strategy

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 International mode of entry.

13 All three of the above are then funnelled from a wide generic approach down to the specific questions that need to be answered. In this manner the three pillars of the

strategy are critically reviewed individually while keeping the end purpose, which is a very focussed subset of the above, in mind.

Figures 2.2 to 2.4 are a representation of the funnel approach in order to reach an effective marketing strategy for consumer electronics in China using trade fairs as entry point. The researcher subdivided the three themes from Figure 2.1 into further sub-

sections.
Market Entry Strategy

Global

Asian Chinese

Figure 2.2: The local market strategy

B to C Marketing Strategy

Generic

Consumer Electronics

Figure 2.3: The product specific strategy

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International Mode of Entry

Generic

Electronics Using trade fairs

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 strategies for 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.

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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).

Firm
Chance

strategy, structure and rivalry

Factor Conditions

Demand Conditions

Related and supporting industries Figure 3.1: The determinants of national competitive advantage Source: Porter, 1990: 127.
Government

16 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 will be 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 multinational 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 China added to WTO in 2001 Top destination for FDI in developing world Broad manufacturing base Availability of skilled labour Inexpensive labour Weaknesses Underdeveloped financial sectors and primary markets Underdeveloped infrastructure Relatively low levels of disposable income Political instability Poor protection of intellectual property Corruption Poor regulatory systems Low literacy levels Labour inflexibilities Threats Unfocused, unbalanced development Political instability

Opportunities Domination in manufacturing Domination in outsourced services Benefit from technology transfers Growth in wealth and employment levels Developing service industry

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 new entrant 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 and protects 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 as provincial 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 manufacturers. Governments resolve to police copyright infringements. continuation of preferential treatment of local equipment

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 preassembled 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 an effort 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.

21

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.

22

(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 Chinese individuals 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 managers will 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.

23

(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.

24

3.1.3.1 Liability of foreignness As mentioned earlier in paragraph 3.1.1.2, liability of foreignness (LOF) plays a paramount role in a firms market entry strategy into a foreign market. Chen, et al., (2006: 640-642) argue that not all firms face the same LOF. They highlight four different market entry strategies: Market seeking strategy Resource seeking strategy Control oriented strategies Utilising capital/labour competitive advantages.

Often the primary strategy for an MNE entering a new market is a market seeking strategy (Chen, et al., 2006: 640, quoting Chudnovsky and Lopes, 2004: 639), i.e. the reason for entering the new market is to expand the firms operations. Chudnovsky and Lopes

(2004: 639) argue that the market seeking investments are aimed at exploiting the host countrys market and are motivated by the size and growth potential of the host market. Investors from a low LOF country will face significantly less obstacles in entering the market due to the close proximity, cultural similarity and familiarity with the host countrys operating environment. For example, an investor from Hong Kong or Macau would have a much lower liability of foreignness just due to the proximity and cultural similarities in China, than an investor from the United States.

A second primary goal of MNE expansion could be a resource seeking strategy, i.e. to capitalise on the resources of the host country (Chen, et al., 2006: 641). The investing company will seek the advantage of the lower labour costs and raw material. Again close proximity to the host facilities and familiarity with the local cultures and laws will result in countries like Hong Kong, Macau and Singapore to have a lower LOF than for example a Western firm entering the Chinese market in a resource seeking strategy.

Control orientated strategies are described by Chen, et al. (2006: 641) as a strategy where an MNE maintains decision authority over foreign operations. If the parent country and the host country have vastly different laws and operating cultures, the liability of foreignness will be much higher for a Western firm entering the Chinese market than a firm familiar with the culture, the company culture and the laws of the host country. Again the

examples of Hong Kong, Macau and Singapore serve as good examples of an investor

25

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 competitive advantage 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: 126). 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 guanxi on doing business in China A number of translations and definitions of guanxi exist in the literature. In the very Fan

simplest definition, guanxi refers to a special relationship between two persons. (2002: 543-561) classifies a guanxi base 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.

26

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 normal relationships.

Fan (2002: 543-561) makes an important definition that guanxi could be classified into three categories, that of Family guanxi Helper guanxi Business guanxi.

Fan (2002: 543-561) defines business guanxi as the process of finding business solutions through personal connections.

Two types of business guanxi can 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 guanxi relationships are of the latter part and most literature on guanxi deals 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 guanxi accounted 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 guanxi relationships 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

27

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 guanxi relationship.

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 are the 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.

28

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 certain aspects. 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

29

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 critical factors 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 mediumend. 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

30

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 the value 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 you

competitive 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) (ii) (iii) An imperfection in the product market Imperfections in the factor or input market 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) (ii) (iii) The choice of a target market/product The objectives and goals of the target market 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:

31 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 or pragmatic rules). (iii) Selection which considers some strategy rule(s) and involves systematic

(i)

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 factors Host-market factors Home market factors.

Koch (2001: 68) expands on the above by including Cultural factors Global industry structure Global corporate objectives Relational 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 composed of three stages: Screening Identification (in-depth screening) Selection.

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Table 3.2: Stages of market selection process Stage 1 Cavusgil (1985) Johansson (1997) Kumar (1994) Root (1994) Screening Country identification Screening Preliminary screening Source: Koch, 2001: 67. Stage 2 Identification Preliminary screening Identification In-depth screening Stage 3 Selection In-depth screening Selection Final selection Final screening Stage 4

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 technology companies 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 of product 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 in the 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) (ii) (iii) Shorter lead time in the product development process. Lower costs in product manufacture. 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. aggressiveness of the competitors response.

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

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) (ii) (iii) Identifying prospects Servicing current accounts 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

Booth personnel resources

Trade show marketing processes

Achievement of trade show goals Sales goals Non-sales goals

Customer-linking capabilities

Pre-show promotion At-show selling

Managerial capabilities

Post-show follow-up

Partnering capabilities

Figure 3.2: A theoretical model of antecedents and performance of trade show processes Exhibit resources Source: Ling-yee, 2008: 37.

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.

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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 messages whereby 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 networked service 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 1. Short time horizons in decision making 2. The company is driven by profits and / or market share 3. Corporate direction determined by overall corporate vision and strategy 4. Highly structured 5. Wide ownership (institutions) 6. Professionally managed 7. More concentrated 8. Invest on the basis of research 9. Minority shareholders well treated 10. Dispersed decision making 11. Relatively small number of units/companies 12. Prefer accrual accounting 13. Lots of contracting out and buying in 14. Reliant on external funding 15. Services are very important 16. R&D-intensive 17. Participative management 18. Senior management is relatively aloof 19. Well-defined career ladder for staff 20. High priority given to transparency, auditing, and disclosure 21. Fringe benefits are generally a small part of total remuneration 22. Staff training is formal and structured 23. Employees tend to be promoted on the basis of their inherent productivity 24. Job descriptions are precise and employees are encouraged to use initiative 25. Staff initiative expected and rewarded Large Asian Firms 1. Long time horizons in decision making 2. The company is growth-driven 3. Corporate direction determined by opportunity 4. Often poorly structured 5. Narrow ownership (family) 6. Family managed 7. Highly diversified 8. Invest on the basis of connections 9. Minority shareholders abused 10. Centralized decision making 11. Large number of units/companies 12. Prefer cash accounting 13. High degree of vertical integration; lots of internal transactions 14. Prefer internal funding 15. Dislike services 16. Little or no R&D 17. Patriarchal management 18. Senior management is hands-on 19. Vague career ladder for staff 20. Low priority given to transparency, auditing, and disclosure 21. Fringe benefits are a high component of salary (remuneration is paternalistic) 22. Staff are trained informally and on the job 23. Employees tend to be promoted on the basis of their connections and perceived loyalty 24. 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 International mode of entry.

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 Introduction

One 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 friendjunior 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 relationships

contain 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

41

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 Chinese culture.

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).

Firm
Chance

strategy, structure and rivalry

Factor Conditions

Demand Conditions

Related and supporting industries Figure 4.1: The determinants of national competitive advantage Source: Porter, 1990: 127.
Government

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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 manufacturing cost 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 value chain 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). environment may erode a companys competitive advantage. The additional cost associated with doing foreign business and the MNEs unfamiliarity with the foreign

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 account these factors.

The role of guanxi has a definitive impact on the way that business is conducted in China. The various forms of guanxi was 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.

44

Fan (2002: 543-561) argues that most of the guanxi relationship in business concerns business to government guanxi and he concludes that almost all B to G guanxi is 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 six months, 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 of semiconductor products to the computer and peripheral industry often have stock returned to them which has become obsolete at the customer. The vendor is usually not compensated and has to carry the loss.

Looking at the fourth strategy and that of product leader in paragraph 3.2.1, leads us to conclude that the best strategy for a new entrant to the highly competitive consumer electronics market in China is to be a product leader. Offering a unique or innovative product will yield the highest chance at success. Couple this to a highly competitive price and the ability to deliver at short lead times will be the best possible approach for the new entrant.

A study from Fischer, et al., (2008: 3) is reviewed in paragraph 3.2.2. The researchers warned against the lure of moving from low-end to medium-end markets and the frequent failures of the companies that did follow that strategy. Medium and high-end product will face additional R&D costs and longer lead times, all translating into higher possibilities of failure. Focussing on the low-end market may well be the best strategy for a new entrant to the Chinese CE market.

4.4

International mode of entry

In paragraph 3.3.1.1 the common models for new market selection are summarised from a study by Koch (2001: 67): Screening Identification (in-depth screening) Selection. For the purpose of this research the foreign market has already been identified as China.

46 Cui and Liu (2000: 56) warn against the notion (and assumption) of a global consumer in paragraph 3.3.2. One should not assume that all customers aspire to the same quality in goods to enhance their quality of life. In paragraph 3.3.2 the importance of understanding your markets attitude towards a new and a Western product was highlighted from a study by Batra (1997: 97).

Gabrielsson, et al., (2006: 650-671) developed three product strategies for globalising companies. These strategies were evaluated in paragraph 3.3.2 and are repeated here: Localised product strategy Modified product strategy Standardised product strategy.

The disadvantages of the standardised product strategy would be the difference in expectation towards quality, price and product development cycles between Western and Chinese firms. The Western firm will put a higher premium on quality, whereas price and secondary to that short development cycles are the important attributes for a consumer electronic component in China.

The localised or modified product strategy will be the most suitable to the Chinese environment where the MNE can capitalise on both a generic platform and tailor the quality-lead time mix for the Chinese market.

The above strategy leads to the notion of re-innovation reviewed in paragraph 3.3.2 from a study by Cheng and Shiu (2007: 174-189). Re-innovation leads to (amongst others): Shorter lead times in the product development process Lower product manufacturing costs Better product timing.

The advantages of using trade fairs as mode of entry into the Chinese CE market have been studied in paragraph 3.3.3.

Using trade fairs as modes of entry, holds the advantages of Delivering your message to a large number of qualified interested people

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Introduction of new products to a large number of people Uncovering potential customers Enhancing goodwill Gaining free publicity.

If one assumes that the new entrant to the Chinese market is unfamiliar with the local market and finds it difficult to make contact with the decision makers within the design companies, the trade fair offers an effective medium for introducing and promoting your product to an interested audience.

Paragraph 3.3.3 showed that the new entrant will need to compete with local competition that will have established networks, both in business and government. The trade fair will introduce the seller to the buyer directly and yield an effective mode of first contact in an otherwise difficult business set-up. Not only does the new entrant face all the normal barriers to entry, but should the new entrant be from a foreign county he faces the additional costs of doing business in a foreign country. Should the foreign entrant be from a Western background, additional barriers are faced when he is not familiar with Chinese cultures and protocol.

4.5

Conclusion

This section presented the findings from the literature review in an orderly and summarised way. It is clear that the trade fair can be one of the most effective ways for entering the Chinese consumer electronics market. The trade fairs are an age old tradition and way of trade in China and still remain an effective way for suppliers meeting with old customer and displaying their offering to new potential customers.

The foreign entrant to the market however needs to have a clear strategy on entering the market be familiar with all the advantages and disadvantages the Chinese market offers know how to utilise the trade fair to achieve his goals.

Chapter 5 will conclude the study and make recommendations for future research.

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CHAPTER 5 CONCLUSION AND RECOMMENDATIONS FOR FUTURE RESEARCH

5.1 Introduction This chapter will conclude and make

Chapter 4 presented the research results. recommendations for future research. 5.2

Linking the problem statement and research objectives with the research results

5.2.1 Linking the problem statement with the research results In paragraph 1.3.1 the problem statement was posed as how does the supplier of consumer electronics as a new entrant to the market, employ the numerous trade fairs in China to penetrate a vast untapped consumer base?.

Three themes were used to guide the researcher: Local market strategy Product specific strategy International mode of entry strategy.

The results from the three themes were presented in paragraphs 3.1 to 3.3. and effectively answer the problem statement by giving clear guidance to the new entrant to the Chinese market on how to utilise the trade fair as effective medium for entry. The research further highlights typical areas of both danger and advantage for the new entrant (often of Western origin) into the Chinese market.

5.2.2 Linking the research objective the with the research results The research objective (as stated in paragraph 1.5) was to provide insight into the components of a successful marketing strategy for consumer electronics in China. The research highlighted what in the researchers opinion are the important components for a successful market entry. Certainly no silver-bullet strategy exists as every new entrant has its own special company dynamics, personalities, budgets and very importantly: the offering. Depending on the dynamics of the company and the product,

49

the market entry strategy will differ for each new entrant.

The research however

highlighted a number of pitfalls, common differences between Western and Chinese business cultures and success factors for a new entrant to the Chinese market.

Research also focussed on the advantages of the trade fair and how to use it effectively to reach a very large interested audience at a relatively low cost.

The secondary objectives of Chinese customs differences between Chinese and Western management styles effective booth design and efficient booth personnel cultural barriers to be overcome by Western exhibitors product positioning in the market were also addressed by the research.

5.2.3 Support for the research proposition The research proposition was posed in paragraph 1.6.

Proposition 1 states that the strategy for the trade fair can be married with the overall company strategy. From the research the researcher concludes that the strategy for the trade fair can easily be married with the company strategy. The fact that the trade fair is utilised as advertising medium and medium for meeting with old and new customers, will in most cases be essential in all marketing strategies. Using the trade fair should only

require a small amount of tailoring to the company strategy.

Proposition 2 states that the new entrant will be unfamiliar with the Chinese market and customs. By definition a new entrant will be unfamiliar with the new market he is entering. The research also spent time on the evaluation of differences in culture between Western and Chinese cultures. It was shown in Table 3.3 that great differences exist between these two cultures.

Proposition 3 stated that the new entrant will have the financial and logistical means to attend and exhibit at a trade fair in China. It was shown throughout the text that the trade

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fair offers one of the most cost efficient ways to reach a very large and interested audience. Naturally the logistical and financial means will differ for each individual case, but is was concluded that the trade fair is a very attractive medium to advertise and promote a product in China.

5.3

Conclusions on marketing strategies for consumer electronics in China using trade fairs as entry points

In order to be successful in the Chinese market it is important to have an understanding of doing business in China. This includes having an understanding of the local cultures and interaction between people which may be vastly different to Western paradigms.

With a solid understanding of Chinese culture and the determinants of national competitive advantage (Porter, 1990: 71-130) the new entrant faces a much better chance at success. These include the firm strategy, structure and rivalry, demand conditions, supporting industries, factor conditions, the role of government and the role of chance.

The market entry strategy comprises three pillars: Local market strategy Product strategy International mode of entry strategy.

The study starts broad on each of the above topics and funnels down into a successful marketing strategy for consumer electronics in China using trade fairs as entry point.

5.3.1 Local market strategy China offers effective related and supporting industries and the marketing strategy should be tailored to capitalise on this potential competitive advantage. Presently a great demand for consumer electronics exists in China and makes it a lucrative market to enter. The relatively low cost of labour and manufacturing yields and opportunity to manufacture inside China help to provide a competitive advantage.

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Domestic rivalry, piracy and the role of government are factors to be aware of and potential disadvantages to be taken into account when crafting the new entry strategy.

5.3.2 Product specific strategy It is concluded that a strategy of product leader may lead to the greatest chance of success. Three other strategies, that of distribution giant, innovation superstar and

customer lover were evaluated. Against the local market conditions it was concluded that following a strategy of product leader is the best suited for the new entrant to the Chinese consumer electronics market.

5.3.3 International mode of entry strategy It is concluded that a localised or modified product strategy is the most suitable to the Chinese environment where the new entrant can capitalise on both a generic platform and tailor the quality vs. lead-time mix of the consumer electronic part for the Chinese market.

Utilising the trade fair method of entry yields the advantages of delivering your message to a large number of qualified and interested people. It is an effective way for the new entrant to introduce his product to a large number of people and uncovering potential customers.

By definition the new entrant to the market does not have established business connections and the trade fairs are an effective way to reach the correct people within the organisation which may prove very difficult otherwise if you do not have established connections.

5.4

Recommendations for future research

Further research is proposed on the topic. The present study was limited to a literature review and a quantitative study could complement the results of this study.

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5.4.1 Quantifying the effectiveness of trade fairs versus other modes of entry The new entrant to the Chinese market has a number of options in choosing the mode of entry. The trade fair is a relatively inexpensive medium for advertising your product and at the same time having real time interaction for active selling and promoting your product and answer questions. It remains to be quantified how effective the trade fair method is.

The effectiveness will depend on a number of factors, for example Choosing the best trade fairs for your particular product Having effective booth personnel Having an effective booth design.

This particular topic should be expanded into a quantitative study.

Data should be

gathered from trade fairs where both exhibitors and visitors can be interviewed and questioned.

Statistics should be freely available on the number of visitors and exhibitors to the trade fairs. From sampling at the trade fairs, inferences can be made into the effectiveness of utilising the trade as mode of entry and reaching the key audience.

5.5

Conclusion

The study and findings are based around a literature review on various aspects of marketing and entry into new markets. The study identified critical success factors for the new entrant to the Chinese consumer electronics market, as well as identified barriers to entry.

A quantitative study with comprehensive data analysis is proposed to augment this study.

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