A STRATEGY FIX FOR MNCS
In recent years, the MNCs that once dominated the China market have begun to lose ground to Chinese competitors. What brought about this change?
MNCs typically adopt one of two strategies when they expand into China. Some pursue a global strategy that focuses on scale and efficiency. These companies centralize operations such as marketing and R&D. Others take a multi-domestic approach that focuses on responsiveness and localization, with decentralized local operations.
However, the mindsets behind the two strategies remain the same in that MNCs try to extend the business models and core competencies they have already established in developed countries to China. And in both cases, the MNC business model in China usually targets top-tier customers first. Then they have tried to take a “topdown” approach and leverage economies of scale so that the products or services become accessible to customers in lowerpriced markets.
And what has been the strategy of
Meanwhile, the problem for MNCs taking the top-down approach is that they often haven’t been able to make their product cheap and competitive enough to penetrate down into the larger market. Sooner or later, they hit a wall in the midtier market, beyond which they have no competitive advantage.
What is worse, in industries where MNCs used to have a competitive advantage, such as medical equipment, we’ve seen the emergence of Chinese companies. They’ve improved their manufacturing, design and marketing. They’ve become more competitive in higher-value areas that used to be dominated by MNCs.
Take the example of Band-Aid and [domestic bandage company] Yunnan Baiyao. Johnson & Johnson’s strategy is to have their salespeople dress in nice shirts and suits while staying in nice hotels. So what does Yunnan Baiyao do? It takes a more grassroots approach. In third-tier and fourth-tier cities, their salesmen go store by store to make sales. Johnson & Johnson failed to go the last mile and it has lost 15 percent market share to Yunnan Baiyao over the last three years. And its market share is continuously declining.
Taking this bottom-up approach, Chinese companies are acting as disruptors in many industries. Look at Huawei. It went from the countryside to major cities, and then to Southeast Asia, Africa and the Middle East. And it’s now penetrating the mainstream telecommunications market in North America and Europe. Huawei went from the bottom to the top.
What can multinational companies
do to remain competitive?
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