It is common knowledge that having

It is common knowledge that having dominated the Triad region comprising of North America, Europe, and Japan for the better half of the last century, multinationals firms (MNCs)
Sources: Jacques Penhirin, ‘‘Understanding the Chinese Consumer,’’ McKinsey Quarterly, 2004 Special Edition, p. 46; ‘‘Scrambling To Bring Crest To The Masses In China,’’ Business Week, June 25, 2007, pp. 72-73; and ‘‘Emerging Markets Key to P&G Growth Plans,’’ Financial Times, June 25, 2008 turned their heads toward emerging economies like China, India, and other Asian economies, which are no longer just sources of cheap labor for MNC operations but are also large consumer bases. China, with the largest national population in the world, just became part of the World Trade Organization and therefore even more attractive to Western multinationals.
However, as MNCs are aware, doing business in China is not simple even though the economy is more open to foreign firms now than it has ever been. Local Chinese firms are growing rapidly and therefore pose a significant threat to foreign firms that are often unable to provide goods at competitive prices the way the local firms can. Today, more MNCs are finding success in the unique Chinese market than they used to. But they have learned the formula to success the hard way.
Take the example of American consumer products giant Proctor & Gamble (P&G) that first set up shop in China in 1998 through a joint venture with a local partner, Hutchison Whampoa. Eventually P&G bought out the remaining stake in the venture. P&G’s brands like Tide detergent, Crest toothpaste, and skin-care product Oil of Olay made their place in homes in over 75 different countries worldwide and P&G’s modus operandi included marketing its products as quality goods at profitable prices. When the company started selling its products in China, it soon discovered that its tried and tested global marketing strategy would not work the same way it had in other markets for a variety of reasons.
A developing market like China is characterized by huge disparity in income levels between the wealthy and the not so wealthy. Another glaring feature is the diversity in consumer needs based on whether it is a rural, urban, semi-urban area. These differences are further enhanced by the variety of outlets for sale of consumer goods ranging from large-scale foreign stores like French retailer Carrefour to local Chinese retailers and independent small stores. Therefore, for a company to succeed in China would mean offering a wide variety of products at reasonable prices. And succeed P&G did!
After entering the Chinese market, P&G soon figured out that selling its premium priced products would not help it achieve a significant market share let alone grant it the status of market leader, like many of its brands enjoyed in other foreign markets. Therefore, the company planned out a detailed marketing strategy specifically for the Chinese market. An important feature of strategic implementation was the three-tiered market system, whereby P&G divided the Chinese market up into three segments. According to Laurent Philippe, head of P&G’s Greater China region, ‘‘Because we aspire to leadership, we need to compete in more than the premium segment. We need to compete at least in the middle segment as well. In volume terms, you can segment our categories into three price tiers: the top tier is 15 percent of the volume in units, the middle tier is 30 percent, and the bottom tier is 55 percent. The split in value, or revenue, is a little bit different: it is 30 percent in premium, 40 percent in the mid-priced segment, and only 30 percent in the low-end segment. This segmentation, by the way, is not mechanical; it is consumer driven.’’ The main objective behind the company’s marketing efforts in China was to promote their global products sold in China as Chinese brands so that consumers could identify with these products. And this strategy proved to be important given that P&G’s competitors in the market include not only other foreign firms but also indigenous Chinese ones.
So, how did the company manage to successfully implement this strategy? Well, in the words of Philippe, ‘‘ You cannot just take a global technology and make it cheaper by simply removing or replacing certain ingredients. The cost gap is too big. So we are now using our research-and-development capabilities to create different value offerings superior to those of the local competitors but at an equal or even lower manufacturing cost. These products are designed from the outset to meet certain cost, and therefore pricing, targets.’’ P&G real¬ized that low-income consumers in China often purchase single serve packets of shampoo, detergent, etc. and it soon began offering some of its products in these sizes. The company is using local resources to achieve its goals. Research and development for the Chinese market is done in Beijing at the Beijing Technical Center and it makes use of local ingredients desired by consumers.
P&G is also sending its advance staff into as many out-of- the-way villages as it can to get a feel for what rural Chinese want to buy and how much they are willing to spend. Just as it has done for years in the cities, P&G’s teams of so-called customer research managers descend on villages, often moving in with families for a few days. They have discovered that while low prices surely help sales, it is equally important to develop products that follow cultural traditions. Urban Chinese are happy to pay more than $1 each for tubes of Crest toothpaste with exotic flavors such as Icy Mountain Spring and Morning Lotus Fragrance. However, those living in the countryside are apt to prefer 50-cent Crest Salt White, since many rural Chinese believe that salt whitens teeth. P&G applies similar segmenting strategies to its Olay moisturizing cream, Tide detergent, Rejoice shampoo, and Pampers diapers.
With more than $2.5 billion of annual sales, P&G has become the biggest consumer goods company in China today.
DISCUSSION QUESTIONS
1. How does China’s entry into WTO affect multinational firms’ outlook toward China and their future investment in the country?
2. What are the drawbacks of P&G’s strategy for the Chinese market?
3. What other marketing strategy could P&G have adopted for the Chinese market as an alternative to the tier system one?