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- Published: Monday, 30 May 2016 11:49
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The Chinese consumers have become more demanding as well as pragmatic than ever before with their horizons expanding beyond the basic product features. Besides, their willingness to pay a premium for better value and quality has made them spend more time researching and exploring products nuances (Atsmon, Dixit, Magni, & St-Maurice, 2010). The Chinese consumer is a brand conscious but focuses more on the value making the brand loyalty a secondary point of concern. For example if they need to order from a writing service they check out the list of the best writing services.
Entry into the Chinese Market
Given the above description of the Chinese consumers’ behaviour, it remains prudent for companies planning to enter this market to perform the necessary strategic analysis and always take a strategic direction. Having such a market means that an entity must chart a plan on how it will manage to make the consumers like its brands, gain a competitive advantage, sustain the business, and increase its profitability. This paper uses the Porter’s Five Forces Model and the strategic choice of competitive analysis to help the companies wishing to enter the Chinese consumer market on what it means to them and how they should get prepared.
Porter’s Five Forces
The Porter’s Model remains critical and very useful in conducting a competitive analysis using its framework of five forces that are believed to be shaping markets, industries, and the competition. Indiatsy, Mucheru, Mandere, Bichanga, and Gongera (2014, p. 77) noted that the intensity of these forces should be monitored since they greatly affect the expected profitability level in an industry and influences the decisions on whether to enter it.
The bargaining power of customers is the first force proposed by Porter to indicate the relationship between an entity and its buyers. The buyers seem powerful when they are small in number and concentrated or when they are many but substitute products exist, especially where the switching costs are minimal (Haapalainen & Skog, 2011, p. 11).
The Booz & Company, and the American Chamber of Commerce in Shanghai (2013, p. 4) report on how the local and multinational companies went about winning in the transitional China, the two groups found that the changing behaviour of the Chinese buyers was a significant driver for the changes being experienced in that market. Consumers are affluent, more technologically savvy, have more purchasing options now than ever before, not price sensitive, and are always willing to extra for quality and features as well as the products integrity they seek, an issue that might improve on their loyalty to the brands they trust and know (Booz & Company; American Chamber of Commerce in Shanghai, 2013, p. 4). Booz& Co. and the American Chamber of Commerce in Shanghai (2012, p. 4) study on the Chinese consumers trend reported that this market had changed from the price-driven market to a greater value, integrity and quality seeking market.
The second force comes from the availability of substitutes which can fulfil the same purposes. According to Haapalainen and Skog (2011, p. 10), substitutes influence the products’ price elasticity since these substitutes make the demand to become more elastic. Atsmon, Dixit, Magni, and St-Maurice (2010) note that, “The Chinese buyers prioritise purchases across several product categories by trading off among them.” It is important that companies appreciate that the Chinese buyers are value seekers, and they search for the best deals that would make them realise value for their money (Wang, 2012).
The lack of a brand loyalty by the Chinese customers should make corporations wary of how to ensure that their products remain strong and liked by customers. For instance, a study by the BCG to establish the brand loyalty of the car owners in the China interviewed 2,400 interviewees. 85% of the respondents owning the least expensive vehicles stated that they would change their car brands when making the next purchase, 70% of the mid-priced cars’ owners said they intend to switch brands (Gerrits, Zhang, Klotz, Xu, & Xie, 2014).
The third force is the suppliers’ bargaining power and is concerned with the relationship that subsists between an entity and its suppliers. They may pressurize an industry through variables such as quality reductions or price increments (Indiatsy, Mucheru, Mandere, Bichanga, & Gongera, 2014, p. 78). In the Chinese case, an entity must ensure that it conducts a good research to establish the consumption behaviour of buyers, and then identify those suppliers that offer a wide range of items to ensure that they must make sales on some brands.
The fourth force is the entry barriers and describes how easy and quickly an entity can enter a market and increase the competition amongst the existing companies. Companies wishing to enter China have several ways and include: exporting, licensing and franchising, selling online, having a representative office, or through investing (EU SME Centre, n.d, pp. 2-27). However, investors face restrictions and the common ones include the government policies and regulations, patents, tariffs and quotas. For instance, figure 1 below shows the restrictions on products that foreign retailers trade in.
The fifth industry force is the rivalry among competitors. Companies joining the Chinese market should appreciate that there exists competitors who offer the same line and range of products as they plan to do. They should understand that a customer will always switch to the competitors whenever the brands they are offering fail to please them. In the car business, for instance, Gerrits, Zhang, Klotz, Xu, and Xie (2014) advices that the best starting point is having an understanding of the target customers’ needs and perform objective health checks so as to establish how well one’s brands are satisfying the customers. Such a move would help an organisation to keep its customers and also lure customers from its competitors.
Generic Strategies/ Strategic Choice
Given the five forces discussed above, Porter developed some strategies to be used by an organisation depending on the force at play.
Cost leadership strategy that entails the production of services or products at the least price in the industry (Oxford Learning Lab Ltd, 2015). Companies joining the Chinese market can adopt this technique, though it may not be the best since the buyers are always willing to pay a premium for brands they value and trust (Frog, 2013; Wang, 2012).
Differentiation strategy - a technique through which an entity designs its products with unique features and qualities making the buyers perceive them as superior that those of competitors (Oxford Learning Lab Ltd, 2015). As noted by Booz & Company and the American Chamber of Commerce in Shanghai (2013, p. 6) companies in China use value as the differentiator. Therefore, companies joining this market should focus on offering unique brands.
Focus strategy – Oxford Learning Lab Ltd (2015) notes that this is the strategy where an entity does niche marketing and focuses on a given segment with an aim of offering products to it. This strategy can be adopted by companies wishing to enter the Chinese market, since such a focus might help them in getting dedicated to a given market segment and earn a brand loyalty.
The nature and behaviour of the Chine consumer will eventually weed the weaker brands out of the market while the stronger ones will flourish. Companies that need to survive in this market should focus on front loaded ventures in developing differentiating brand values that will meet consumers’ needs. Companies must also plan their brands bearing in mind that some market segments will mature rapidly and customers might become loyal.