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Kebabs and the competitive environment

Alaric Fairbanks this week makes our mouths water with the mention of some of his favorite local kebab stalls.  However, on a more serious note, Alaric is analyzing how street vendors of this relatively undifferentiated offering encounter many of the same problems faced by much bigger organizations in different markets around the world.

As almost anyone with a penchant for mutton and beer will tell you, one of the best things about living in Beijing, providing you don’t live right next to a stall (they can be quite smelly, and the lack of toilet facilities coupled with beer consumption of patrons can be problematic for neighbors), are chuanr, or kebabs.  Mutton, chicken hearts and tendons, washed down with a bottle or two of Yanjing beer are, for me at least, pretty much indispensable to life in China’s capital city.  But can this tell us anything about the business environment?  Interestingly, for me at least, this came up in a recent conversation I had whilst patronizing my favored stall.

This must be one of the toughest markets to be in, and in many ways can be seen as representative of the competitive environment in undifferentiated markets, especially in China.  Let us take, for example, a quick look at Porter’s Five Forces applied to this business model.

• The threat of new entrants: Obviously barriers to entry are low (an improvised barbeque is not a significant cost) and switching chuanr vendors is fairly easy. Similarly, adding to the product range, for example with ram’s penis, can be very easily copied by the competition.

• Supplier power: The raw material – mutton and other assorted parts – forms the substantial part of costs relative to total purchases, and there are almost no substitute inputs.  To make matters worse, these raw material costs have a huge impact on total cost.

• Threat of substitutes: Again a problem, as it’s not difficult for the customer to switch to ma la tang (numbing and spicy soup) or rou jiamo (a very distant cousin of the hamburger).

• Customer power: Price sensitivity of customers is pretty much a given in many markets in China, and chuanr are no exception.  Buyer information (in this case buyers know the going rate for the product as it is the same everywhere) leaves little room for incremental increases.  Backward integration by customers is, on the face of it, less of an issue as most of us will be pretty unwilling to invest in our own barbecuing equipment. Where there is a problem here, is when selling through a small restaurant, as there is little to prevent the ‘partner’ setting up their own stall.

• Rivalry or competitive intensity: Here we have a very fragmented market, almost entirely composed of sole traders.  Fixed costs are low, having a limited impact here on rivalry in some respects as they do not have a great role in the unit cost of chuanr; however, this does mean that entry barriers are low.  The nature of the raw material, mutton, does have an impact, as these perishable products must be sold immediately.  Fortunately, exit costs are low, as equipment is not highly specialized and no one is ‘forced’ to stay in the market.  This is also not a market that so far has lent itself to product differentiation or branding, thus almost commoditizing the market.

So what does this tell us?  Many of the markets we look at in China, and elsewhere, exhibit some of these characteristics, particularly in the areas of new entrants, substitutes, and low levels of differentiation.  There are, though, examples of companies growing or moving out of unattractive markets, and differentiating themselves from the competition in a seemingly commoditized market.  Equally, there are some examples of differentiated product and service, and expansion in the chuanr business: Xiao Li, arguably the best producer on Yong An Li East Street, has an embryonic brand, recently added a few plastic stools and a table to complement his offering, and has doubled his workforce with the addition of his charming sister.

Posted in Alaric Fairbanks, Competitor Analysis, Market Research China, SMEs, Thursday Night Insight |
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Economic storm in a teacup?

In a week of undoubted economic turmoil across the globe – and in particular for American and European markets – Alaric Fairbanks, General Manager of B2B International’s Beijing office, gives us a timely analysis of how things are shaping up in China.

Over the last few months and particularly days, many of the conversations I’ve had with friends and colleagues in the UK and Europe have, at some point, unsurprisingly centred around the seemingly never-ending series of crises affecting the major economies of the West: credit crunch, fuel prices, Northern Rock, Wall Street Crisis, I could go on.  So how do things seem in China? Is the pessimism that I sense being felt in the business community here?

Firstly, let’s have a very brief look at overall economic forecasts: this week the Asian Development Bank adjusted its forecast for economic growth in China in 2009 downwards, by 0.3%. There are a number of factors behind this, including, of course, decreased demand in export markets resulting in a reduced trade surplus, increased production costs, an increase in the value of the renminbi and rising commodity prices. Bear in mind, however, that this reduced growth forecast for next year still stands at 9.5%. A slowdown, maybe, but the economy is still developing at a rapid rate.

Taking into account this backdrop, how are things on the ground? Recently we conducted the first British Business Climate Survey for China with the British Chamber of Commerce. 17% of members were represented, ranging from large multi-nationals with years of experience in this market to newly established branches of SMEs. Whilst there were some issues, such as a lack of transparency, regulation and availability of appropriately skilled staff, the overall outlook was extremely positive, with over 80% being somewhat or very positive about both the business environment and their own companies’ performance in both the short and medium term. Possibly the strongest indication of this is that 54% of respondents stated that they will definitely invest further in China within the next three years.

It could be that those running Western businesses in China are all natural optimists: how else could you cope with the ambiguities, constant change and minor frustrations that confront us every day? I don’t think this is the case, however. You may say, come on then, can you come up with any other evidence that this apparent optimism is justified?

Well, yes I think I can: exports from the UK in the first eight months of this year stood at over £1.6 billion, which is a 50% increase on the same period last year (UK Office of National Statistics). All this in a market that has been the UK’s fastest growing export market since 2002. For us in the service industry, we can point to the fact that services exports to China are in the UK’s favour, at around £1.5 billion last year. The confidence is also borne out by the amount of British investment in China, which stands at over £7 billion, making the UK the largest single investor from the EU in China.

It is worth pointing out, however, that not all business shares the confidence, with those involved in export and sourcing already feeling the pinch. This also applies to domestic, particularly in lower value-added industries such as textiles, which are already operating on wafer thin margins, and certainly feeling the downturn in their existing markets, and there are reports of factory closures, especially in Guangdong and Zhejiang. And I am not saying that no other companies here will face problems; some undoubtedly will.

In general, however, I think – as I hope I have shown – the economy, although not without its pitfalls, is worthy of the confidence shown. And B2B International? – Well put us with the 54% of UK companies I pointed to earlier, as we are moving to bigger and better premises before the year end.

Posted in Alaric Fairbanks, China, Credit Crunch, Market Intelligence, Market Research China, Recession, Thursday Night Insight |
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What To Look For In An Industrial Research Agency

In his latest Thursday Night Insight blog feature, Alaric Fairbanks talks about the ways in which business-to-business market research agencies can prove their credentials for even the most highly specific and niche market research requests.

In our Asian operations, perhaps unsurprisingly given the rapidly industrialising nature of the major markets here and the strength of manufacturing, the bulk of work and enquiries are in the field of industrial research. Put more crudely, this involves “investigating an aspect of a market for something used to producing something else”.

Broadly speaking, this can be divided into three areas:

• Raw materials
• Components
• Equipment and machinery

Obviously this can cover a huge range of industries and products, which can cause problems for buyers of market research in these industries. Understandably, the research buyer would like to be reassured that the external agency chosen has experience in the market in question, as well as in the relevant geographical areas and with appropriate methodologies. This is relatively straightforward with broad industry categories, for example pharmaceuticals. Things get more complex, however, when the buyer would like to be reassured of experience within their particular niche. To take the pharmaceuticals example further, the next question, may be: “how about biopharm?”

Again, outlining experience in this area may be no problem for most specialist b2b agencies, but what if this is followed by; “have you covered chromatography products for the purification of monoclonal antibodies in China?” Even the most experienced agency will find it difficult to claim direct experience in such a highly specialised field; indeed, it is unlikely that the buyer will find any agency that has conducted exactly this research before.

So, what should a buyer be looking for in selecting an external agency for this project and what can the agency do to facilitate this decision? The general characteristics of industrial and manufacturing markets, together with their implications, should give us some indication of the type of experience a buyer should be looking for.

The customer numbers, and thus the number of potential respondents, will be much smaller than in consumer markets. This is especially true of highly specialised markets. For the research buyer, the key issue here will be the ability of the agency to recruit respondents from a very limited sample pool.

There are likely to be multiple and contradictory members of the decision making unit, all of whom will have an impact on the decision and whose views will be of importance to the research buyer. The first issue here is identifying the key decision makers – often from roles as diverse as production, maintenance, purchasing, etc – and their roles in the process. These people are by no means easy to reach, and an agency should be able to demonstrate a track record of identifying and reaching these types of respondents.

Many aspects of the information required to reach meaningful conclusions will be of an extremely technical nature and, as we have seen, it will be very difficult for an agency to build up a high level of technical knowledge across a wide range of highly specialised industries. From the agency side, a general understanding, coupled with the ability to listen to and apply the knowledge of the buyer should be a prerequisite. This can be demonstrated by examples of working in other highly specialised areas in related industries. We would suggest that although specific technical expertise is highly unlikely, an industrial background and a certain amount of maturity are essential.

Most industries have their own technical language and vocabulary that will need to be used in any specific research project. This means that at the design stage, especially for discussion guides and questionnaires, this has to be right, as a difference in phraseology could lead to different results. Care must be taken to ensure that this is correct.

Checking and verifying the information obtained at an early stage is particularly important in this type of research. This goes beyond standard research practice of checking that the questionnaire is “working” to “is this information technically possible?” This means that there will have to be especially close liaison between client-side technical staff and the agency in the early stages. Similarly, the agency should be able to demonstrate experience of this way of working. In the analysis stages it will be important that the implications of the answers to detailed specific questions are understood by the agency in interpreting the data obtained.

In summary, whilst industrial research is an incredibly wide field, it is almost impossible to have expert knowledge of the most technical and specific markets, the high level commonalities of industrial markets require a common skill set, and choosing an agency that demonstrates a history of working on this broad type of subject, together with some relevant industry knowledge, should be the first point of contact for the potential industrial market research buyer.

More information about what makes industrial market research unique can be found our White Paper, B2B Marketing.

Posted in Alaric Fairbanks, Industrial Research, Market Research, Market Research China, Thursday Night Insight |
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Customer Service, Experience, Satisfaction and Delight

In his first Thursday Night Insight article, B2B International China general manager, Alaric Fairbanks, assesses the impact that differing expectation levels have on how satisfied customers will be with any product or service they receive.

When was the last time you were delighted by your experience as a customer? Will you get the same experience next time? If so, will you be merely satisfied rather than delighted?

In a post a few weeks ago my colleague, Matthew Harrison, talked about customer service in China, in particular in the restaurant trade. I have to agree that in Beijing this sector is outstanding, but when it comes to expressing my levels of satisfaction, myself, along with almost everyone I know, would expect this to be the norm, so outstanding food, good service and reasonable price, would, say on a scale of 1-5, get a 3. Prior to moving back to Beijing, a scale of 1-5 would barely have been enough to contain my levels of delight with what I now consider normal.

When looking at a single market, be it food in Beijing or Liquid Chromatography in Chinese research laboratories, the weight of experience and expectations is not a major issue, and indeed is useful benchmarking. If, however, as frequently occurs, we are asked to “find out how satisfied our customers are in Hong Kong, Mainland China, across Asia Pacific, etc” the differing levels of background noise from customers’ past experience and hence expectations can make such comparisons problematic.

On multi-country studies, it is quite common to find satisfaction levels in emerging markets for some products to appear higher than in mature markets. Does this mean that customers are easier to please than their “sophisticated” counterparts? Definitely not. Let’s go back to the restaurant industry in Beijing: these same customers, myself included, can be demanding, or stingy even, in their assessments; however, take me to a bank in Beijing, and if I have a wait of less than half an hour and am able to complete my transaction in one visit, I would leave feeling extremely satisfied. We certainly need to be aware of experience and the expectations or weighting that it brings to expressing satisfaction, and make sure that we are able to account for these in our findings.

Finally, even though we have to bear in mind what customers may have experienced previously in different markets, and this may help us gauge what will satisfy them, we cannot overlook local requirements. Recently we had a client producing some very expensive and technical equipment for the health care sector – probably the leader in terms of quality in their particular product range. Despite ranking very highly on all factors they considered important, they scored surprisingly low on overall satisfaction, simply because the technical manuals were only in English.

Posted in Alaric Fairbanks, Customer Satisfaction, Market Research China, Thursday Night Insight |
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