The conundrum.
In my personal experience managing Strategic Marketing at one of the largest global electric and electronics engineering and manufacturing companies and doing the same at two services oriented companies, segmenting the Chinese market in a meaningful yet conclusive manner is always easier said than done.
No matter what products and services your company sells, nor whether they are primarily sold directly or indirectly to customers, the questions are always the same:
- Is the Chinese market to be divided into cities, provinces or (arbitrarily defined) regions?
- How to determine the ranking in importance of each geographic division of the country to the business?
- How to effectively cover these geographies with the organization?
- How to avoid cannibalization between the direct sales force and/or between the indirect sales channels in the geographies?
- How to reach the customers and distribute products and services efficiently with supply chain and after-sales service, so that the company can uphold the value proposition it promises, to all customers?
- What benefits can the company provide to its sales and distribution partners to entice them to sell the company’s products and services, rather than the competitors’?
- How to measure the actual performance of the chosen geographic markets, direct sales force and indirect sales channels in comparison to the potential of these markets and channels?
Certainly the ability to cover the Chinese market holistically depends to a great extent on your current organizational size and your company’s ability to reach beyond its current locations. Nevertheless, with the recent developments of the Central and Western China economic hubs and advances of third party logistics providers and online channels, also small- and medium-size companies may nowadays have the possibility to reach potential markets that lie far beyond the coastal areas.
On the other hand, in my experience advising both small and large enterprises, even companies that already have a considerable reach in China and have been here for a decade or more, sometimes have surprisingly failed to develop their presence in – for their particular products and services – very highly positioned geographic markets in terms of revenue potential.
I therefore advise to most companies with products and services that are not necessarily confined to local distribution, to begin the task of segmenting China, by starting with the factor that usually matters most for all sales and profit oriented organizations: the customer; using the most natural geographic division: the provinces and municipalities on province level; and thereby asking these questions:
- How many potential customers are there in each province?
- What is their annual spend on the type, or similar types of products and services the company sells?
- What is their annual purchase in units or frequency on our type, or similar types of products and services?
- How widely spread apart are these potential customer?
- What technology, level of service or brands are they purchasing at the moment, is a trend in shifts of preference of technology, level of service or brands observable?
- How do they purchase the products or services? How are the products/services usually delivered to them?
- Are there potential customers that do not yet purchase the type, or similar types of products and services the company sells, but who may, if they knew about the company’s offering?
The above analysis informs three important input factors for your market segmentation, which can be summarized in a table as shown in Figure 1:
- A ranking of all Chinese provinces in terms of potential Total Market Volume (TM)
- A determination of average price expectation of customers in each Chinese province, which can be used as one input to determine the Total Accessible Market (TAM)
- An insight of the typical purchase behavior in each Chinese province
- An insight of what could be the Total Target Market (TTM) for the company
Figure 1 – Market Size Analysis by Chinese provinces and municipalities on province level
As briefly mentioned above, this first analysis may already present some surprises to you, as it has done for other – seemingly well established – companies in China before, such as the previous neglect of provinces with unknown but abundant sales opportunities, or over-serving of provinces with a – relatively speaking – small actual market opportunity.
Matching opportunity with capability.
Seeing the opportunity is the one thing. Being able to benefit from it, is the other. At this point it is advisable to detail the analysis in two directions:
- What is the attractiveness of each China provincial market?
- What is the level of our organizational capability to serve each provincial market?
Figure 2 shows a diagram used by many global players to frequently analyze their geographic markets, customer industry segments and products/services in comparison to their organizational capability.
Figure 2 - Market Attractiveness Analysis – Concept and Sample
The Market Attractiveness Analysis thereby forces you to look deeper into the actual market opportunity, beyond just the market size, asking questions about such factors, including: market growth, profitability, is moving into the market complementary to your portfolio, does it have implications on your brand image, does it follow your customer demand, etc. and Organizational Capability meanwhile makes you look into your relative market share compared to your competitors, your technological capability, your current sales and distribution capability, your current brand image, etc.
The answers to the Market Attractiveness Analysis are profoundly valuable for your company’s business strategy determination. They can range from choosing not to address/enter a certain market (not attractive, not capable), to absolutely address/enter a market segment (attractive and capable) to the definition of strategic actions, such as concentrating on certain niches or increasing a market’s attractiveness (not attractive but capable), or increasing your company’s organizational capability (attractive, not capable).
Short-, mid- and long-term orientation – (Re-)focus.
Aided by the visualization provided by the Market Attractiveness Analysis, your company can make quick decisions on which markets to focus in the short-term, which markets to develop in the mid-term and which markets to keep an eye on and prepare for in the long-term.
At this stage the company can begin to plan its market approach as well as sales channel determinations based on a very solid opportunity analysis. As a way to efficiently address the Chinese market, it may be advisable to group the selected provinces into geographic regions.
Figure 3 – Regional Clusters
Again the Market Attractiveness vs. Organizational Capability approach can be utilized by your organization to determine, which geographic regions are most attractive, and most attainable for your company in the short-, medium- and long-term, ensuring that you focus your forces to the most attractive and lowest hanging fruits, while staying abreast of your organizational development needs to be prepared for sustainable growth.
Plan your approach.
Having determined the geographies one wants to address, I have come to appreciate the model of “Five Major Elements of Strategy”, first introduced by Hambrick and Frederickson in 2001 as way to define your company’s particular strategy toward establishing and growing one’s position in any market.
The model, depicted in Figure 4, begins with the category Arenas, which you have been able to designate by way of the aforementioned geographic segmentation steps. Thereafter the framework considers the key factors for business development: Vehicles – how will you get there? Will you develop your own products and services? Will you form Joint-Ventures or partnerships? Will you license your products, services, IP? Will you undertake acquisitions? Differentiators – how will you win? Is it your brand image? Will you customize to meet the Chinese customers’ particular needs? Is it the price, or style of your product? Will you stand out by offering a particular quality or reliability aspect? Staging – what will your speed and sequence of events be? Do you focus on rapid market coverage, or another set of initiatives? Economic logic – how will you attain your returns? Are you building scale for market coverage and cost efficiency? Are you offering a premium product for a premium price? How do you justify your price position?
Figure 4 – Five Major Elements of Strategy
My advice to any business is to only begin making determinations about the appropriate sales and distribution channels for the geographic markets in China, industry and product segments, after the aforementioned steps have been completed – even if the global/corporate business strategy dictates the sales approach. Not seldom have I experienced the situation of lagging sales performance in China, as the company stuck to the “way we have always done it” – or the company’s inability to adapt to the customer purchase behavior, because “it is not the way we do it”.
The secret to selling effectively and successfully in China is to learn about its market make-up, industrial structures, common purchase behavior and underlying/consequential sales channels. There is nothing against introducing a new, proven or better way of doing business as perhaps developed in your home economy – yet, for short- and medium-term success – and thereby effective positioning for future, sustainable success, adaptation to the local reality is key.
The conundrum of cannibalization.
Once the Chinese market is divided in geographic segments the challenge of effectively covering the individual markets becomes a question faced by most companies. Perhaps the abundance of customers and sales opportunities in one region requires the establishment of a sizeable sales, technical support and service team, while other regions, equally enticing in terms of revenue potential, yet with vast distance to bridge, may require the establishment of strong sales partners – maybe in tie with a direct sales force.
While for understanding of the market and keeping control over it a somewhat arbitrarily defined regional segmentation is profoundly important, sales partners, and often also the direct sales force are not easily confined by such invisible boundaries, and so, your company may also face the potentially harmful issue of cannibalization between sales partners and direct sales force.
In my experience as strategic marketer I recommend three approaches to mitigate the risks of cannibalization:
- Assign clear customer targets to sales partner and direct sales force, be it (if possible), geographies, industries, specific customer groups, product or services types
- Closely control the sales performance of sales partners and direct sales force within the boundaries of the aforementioned targets – too often I have seen the effects of overeager revenue drive – fueled by the strong economic growth of China – allowing sales channels to step out of their boundaries to generate revenue wherever possible – to the detriment of the overall system
- Actually allow some level of cannibalization – competition fuels effectiveness, doesn’t it?
Support, support, support.
I have observed more often than not that industrial and services based companies are rather strongly setup in China in terms of their sales force, indirect sales partners, technical sales and service support, covering the regions they believe are key for their business, yet, surprisingly still trust on a relatively small, often centrally based marketing troupe.
The effects are often incomprehensible lack of sales performance, but are frequently only realized by the management – too late – through sales representatives and sales partner satisfaction surveys or outright complaints by them, such as, lack of sufficient or outdated marketing materials and product documentation, lack of brand presence in the market, lack of sufficient technical and product features training and knowledge transfer to existing and potential customers, lack of frequent physical sales support to sales partners in remote regions.
Often it may be assumed that by entering into clearly defined sales partnerships with distributors and re-sellers, who may already have a sizable customer base, that this may – more or less automatically – result in actual revenue generation. The reality however is often the complete opposite. Without sufficient and complete marketing material, actual brand identity in the market and foremost without training of both the sales partners and existing/potential customers, the sales partner’s sales representatives may not feel well equipped enough to represent your product – the truth of the matter here is that sales representatives sustain their lives from selling, and so they will rather sell what is the easiest and present promises of the highest return to them, rather than selling your product, never mind whether your product or service is actually the better alternative for the customer.
Effective Performance Management in China – micro-management is necessary (unfortunately).
If you ask managers with more than a decade or two of hands-on China experience what the secret to success in China is, unanimously you will find that “micro-management” is within the top 3 answers.
While mature industry purchasing processes, clearly defined supply and value chains, equally mature sales channels, etc. may allow a company in Western developed markets to establish its revenue to generate within these clear structures and may thus be able to trust in a positive outcome, doing so in China may lead to surprisingly discouraging results.
After revamping a sales force from a previously loose setup consisting of a vast number of vaguely assigned sales agents with only quarterly performance reviews, to one that is closely managed with clearly assigned customer development targets – both for sales partners and direct sales force, with monthly reviews of the corresponding customer development results, I have experienced first-hand the benefits of such tedious, but highly effective performance management approach.
Micro-management results certainly in some short-term resistance, but just within a few months of non-relenting, monthly reviews – and armed with the positive revenue development impact it generates – every element of the sales force will gladly stay within this high performance management structure.
Just don’t give up, or it will all fall apart again, quickly.
Both for sales partners and direct sales force I recommend a set of targets that are complementary to each other and ensuring that those targets are SMART: specific, measurable, achievable, relevant, time-bound. Examples of such targets are shown in Figure 5.
Figure 5 – Sample Sales Targets
It is thereby advisable that in regards to specific customers, customer clusters and the like, these are clearly named and listed in mutually confirmed target agreements with sales partners and direct sales representatives and singularly (meaning: one by one) addressed during the monthly performance reviews.
Conclusion – perform the steps for sustainable results.
China remains an economy with strong economic growth and abundant sales opportunities. The development of the Central/Western economic hubs, increasing consciousness of Chinese buyers in regards to quality and total lifetime value of purchased products and services – or total cost of ownership of the same – and increasing modernization in most if not all industries continue to fuel these opportunities.
Yet the regional and local diversities are not diminishing and the complexities of doing business in China remain – complex.
Therefore, your company will only succeed if it understands the market well, divides your customers in segments that are meaningful for your products, services and organizational capability and consequentially, if it develops strong sales channels that are clearly targeted and aligned toward these segments.
Support and (micro-) manage your direct sales force and indirect sales partners and control their actual performance tightly and your company with its supreme products and services will surely capture and grow a significant market share in China, too.
Michael Adick | MBA
Managing Director | Articulate Ltd.
