The End of Cheap China?

In this week’s Business Surgery, Stephanie Teow assesses whether the appeal of China is on the wane or as strong as ever

I read with interest recently an article in The Economist which questioned the extent to which China can continue its position as a low-cost base of manufacturing in an era of rapid social and economic change:

“China is currently the world’s largest manufacturing power…China now accounts for a fifth of global manufacturing. Its factories have made so much, so cheaply that they have curbed inflation in many of its trading partners. But the era of cheap China may be drawing to a close.”

According to the article, many experts suggested that the cost to manufacture in China could soar twofold or even threefold by 2020, when it may be just as cheap to manufacture things in North America as in China. Our experience carrying out research across different markets in China indicates that costs in China have been rising for some time now, and the era of ‘cheap China’ has actually been at an end for a while. Rising labour costs and the growing costs of key raw materials, means that China’s previous competitive advantages as a location for manufacturing are gradually being eroded.

However, although it is likely that the future will see a growing proportion of China’s low cost manufacturing moving to other developing economies in the region (or even back to Western countries), it does not necessarily follow that most B2B manufacturing will suddenly up sticks and leave China in the immediate future. As this article notes, China has a number of key advantages as a manufacturing base which other countries in the region find very difficult to emulate, such as:

• The proximity of the booming Chinese market. No other country has so many new consumers clamouring for consumer goods.
• Although wages are rising, worker productivity in China is also rising. No other country in the region can match China’s worker productivity.
• A large labour force allows greater flexibility than other countries. This enables companies to respond quickly to changes in production requirements and urgent lead-times.
• China’s supply chain is ‘sophisticated and supple’. No other country has the well-developed supply chains that China has, and in terms of reliabilities and efficiencies in production, China remains the first choice for B2B manufacturers.

It is clear that China will remain the manufacturing location of choice for some time to come for manufacturers in most business-to-business markets. While rising costs in China will clearly make exporting from China more prohibitive in the future, it is increasingly the lure of the large Chinese domestic market that is attracting the attention of manufacturers.

Equally, the manufacturing complexity and technical expertise required for many b2b manufacturers, along with the importance of reliable supply chain infrastructure, means that for many companies China still represents the most viable manufacturing location. A growing cohort of business-to-business companies are now demanding market intelligence to better understand China less as a manufacturing base for export, and more as a dynamic marketplace of the future.

Posted in China, Economic Downturn, Global Research, Pricing Strategy, Stephanie Teow, The Business Surgery |
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What effect does emotion have on choosing a b2b supplier of goods and services?

In this week’s Business Surgery, Paul Hague looks at how we make decisions – and particularly how much of an influence a strong brand plays in the process.

At the heart of good marketing is persuasion. We shouldn’t be shy about the fact that we have a product or service that we want people to buy. However, marketing focuses on the customer and their needs whereas selling focuses on the seller and what they want to get rid of. In other words, marketing forces us to understand the world through the customers’ eyes.

One of the most difficult things when trying to see the world through our customers’ eyes is “how rational are our customers when they make their decisions?”

Malcolm Gladwell in his book Blink argues that we subconsciously make our minds up very quickly indeed – in fact in a blink. We might then spend a long time rationalising this decision and believing that it has been arrived at by conscious rather than subconscious thought.

The relevance of this to us in business-to-business marketing is that we are inclined to believe that business-to-business customers leave their emotions at home when they come to work and that all their decisions are rational. We know that this is not the case. Research consistently confirms that those companies that are best known to us (in other words they have a strong brand) are most likely to get the business. This is because familiarity is important in the blink test – we feel more comfortable with a supplier that we know even if we have never done business with them before.

The answer is therefore to build a brand, not only in terms of awareness but also to engage with the customer and build trust. For those of you who haven’t yet read Malcolm Gladwell’s book Blink, we strongly recommend it. Or watch his 30-minute discussion on the subject on YouTube

Questions arising from Gladwell’s work are:

• • Do we over analyse things? – Probably. Try to figure out the two or three things that really matter and not be distracted by the itsy bitsy teenie weenie things.
• • Should we be more of a scientist or more of an anthropologist when it comes to being a market researcher?– Both are important. However, we should always defer to the anthropologist as they understand human nature. Science may give us numbers without explanations.
• • What is it that causes us to frame the way we think and how can we recognise these “frames”?– Almost certainly we are programmed from a very young age. Look to the environment that the person has come from to understand the way they see the world.

For more information on building a strong brand, click here.

Posted in B2B Marketing, Branding, Paul Hague, The Business Surgery |
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B2B International gauges business sentiment on both sides of the Atlantic

B2B International has done for itself what it does for others – conducted market research to ask clients and prospective clients what marketing concerns/interests they have and what challenges they expect their business to face in the year ahead. The response is an overview of the prevailing mood in Europe and America and a snapshot of business people’s views of the marketplace.

The research surveyed 270 business professionals from large organisations, most of which appear in the Forbes Global 2000; a third in North America in December and the remainder in Europe in January, and confirms that brand is definitely the essence of a company. Key challenges are developing brand identity, and communicating to existing and potential customers with a compelling customer value proposition supported by a strong brand.

Gaining a competitive advantage (63% Europe; 49% US), and retaining customers and extracting maximum value out of them (58% Europe; 47% US) are the two main requirements for companies – on both sides of the Atlantic – to address over the coming year.

Asked if they could wave a magic wand that would solve any challenges their organisation currently faces, most respondents want to better understand their customers and their markets. Many also voice frustrations with internal factors – including investment, communications, CRM systems and inefficiencies with other internal processes, while a significant number are seeking ways to develop their business and brand by identifying solutions around four key questions: who (target customers), where (optimum markets), what (improved and differentiated products/services), and how (fastest and most effective route to market).

Businesses constantly look to grow, even in today’s harsh economic environment, and do this through product development, entering new markets, expanding in existing markets or moving ahead of the competition. Given this fact, it was interesting to note that the three main types of market research considered by companies are: market assessment, needs analysis & segmentation, and customer satisfaction.

Over £1,200 was raised for worthy causes through this online survey, with B2B International making a donation to charity for each completed questionnaire.

Posted in B2B News, Branding, Customer Satisfaction |
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Putting the Customer at the Heart of the Business

In a special Business Surgery, Carol-Ann Morgan discusses why Greg Smiths letter published in the New York Times (“Why I Am Leaving Goldman Sachs” – NY Times – 14.3.12 ) should serve as a warning shot across the boughs for any company which considers its customers or clients only in revenue generation terms.

I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist”

A simple fact that is easy to forget amid the pressures of business success; but forget this at your peril.

Some key facts which provide ample justification for a customer centric business approach:

• Two thirds of customers say a positive customer experience caused them to spend more
• 8 out of 10 customers would pay up to 25% more for a superior customer service
• Three quarters of those who switch suppliers/brands relate this to a poor customer experience and service
• More than half of those who recommend a company, make this based on the customer experience rather than other factors such as price or product
• Almost all of those who have had a bad customer experience tell others about it; mainly to warn them off or stop them buying from the supplier

Customer centricity tends to fall in and out of fashion, but it is now most definitely “in”. Customer Experience Management is, in fact, the new buzz phrase. Savvy companies are delving further into the customer experience; placing it at the heart of all they do. With this there has been a flourish of tools, techniques, processes and people who are there to offer their services.

Bernd Schmitt’s book “Customer Experience Management: A Revolutionary Approach to Connecting with your Customers” makes a very interesting read indeed, from the perspective of a professional and as a customer myself. The stages he takes you through cause you to examine your own customer experiences from the on-going relationships, eg with banks and utility companies to the regular, occasional or “one off” retail experiences with the likes of Tesco, John Lewis and Hobbs.

Schmitt, essentially advocates a paradigm shift from the traditional functional – transactional approaches to marketing (citing Kotler’s work), towards one which takes account of the “experience” of being a customer, from cradle to grave (however long that might be). He argues a need to take the customer seriously; to recognise customers as assets of a business, without whom the company would not exist and worthy of boardroom consideration and respect.
His model advocates putting the customer at the heart of everything the organisation does; strategically managing a customer’s entire experience with a product or company. He suggests that in doing so, this will involve becoming more process, rather than outcome, oriented; a shift towards building relationships rather than focusing only on recording transactions, and establishing ways in which the company can connect with the customer at every touch point. Inevitably, this comes from the top. It requires a cultural shift and a close examination and analysis of everything which impacts on the customer experience.

Schmitt’s 5 steps towards Customer Experience Management:

Greg Smith states clearly the linkage between the values of the firm, where it positions the customer and the degree of engagement he feels with it.

“Culture was always a vital part of Goldman Sachs’s success. … I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work”

Companies embarking on a journey of Customer Experience Management need to understand that it has to be a cultural shift across the organisation. It needs to be led by example, from the top, engaging employees in the movement to place the customer at the heart of how the company goes about its business.
Experience Based Differentiation (EBD) cannot be mastered overnight. It is a multiyear journey, involving all departments (including HR), requiring an “obsession” with customers, reinforcement of the brand at every customer interaction and a group effort to deliver outstanding customer experiences by treating this as competence rather than a function, celebrating and sharing rewards for this with the employees.

Posted in Carol Ann Morgan, Customer Relationship Management, Customer Retention, Customer Satisfaction, The Business Surgery |
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Risky M&A–Delighting Shareholders to the Detriment of Customers

In this week’s Business Surgery, Julia Cupman discusses the risk to customer satisfaction through badly managed M&A

The repercussions of the merger of United and Continental airlines are continually impacting on the B2B International team. Many of us here at B2B travel with Continental (sorry, “United Airlines”) domestically as well as across the Atlantic between our North American and European offices, and it is shocking how badly the company is managing the merger. Over the past six months alone, we have experienced canceled and delayed flights with inadequate notifications, call wait times exceeding one hour, uncomfortable flying conditions such as freezing cabin temperatures, and soaring prices.

Continental and United were among many companies in the post-recession period–including Microsoft and Skype, Sanofi-Aventis and Genzyme, and Intel and McAfee–that turned to M&A for growth, through investing the significant cash reserves they had built during the financial crisis. Both airline CEOs promised “improved profitability and sustainable long-term value for shareholders”, and the $3.17billion merger of the two companies propelled the new United to the top of the industry, with 21% of domestic capacity. The company has less competition and increased monopolistic power, and can therefore charge higher prices–music to the ears of shareholders.

However, as per our experience, delivering value to shareholders is not synonymous with an improved customer value proposition post-merger/acquisition. An article in McKinsey Quarterly points out that the more successful mergers and acquisitions create value, and do so through at least one of the following five archetypes:

• Improving the performance of the target company;

• Removing excess capacity from an industry;

• Creating market access for products;

• Acquiring skills or technologies more quickly or at lower cost than they could be built in-house;

• Picking winners early and helping them develop their businesses.

One could assume that United and Continental’s goal fell within the first of these archetypes, but over a year after the merger, the unified airline is failing to satisfy its customers on a range of critical success factors. Although the company has pleased shareholders in growing market share and achieving economies of scale, United runs the risk of decreasing customer satisfaction levels to the point that more and more passengers will start switching to other airlines.

Customers are often neglected while companies pursue M&A as the focus is inevitably on the huge changes occurring internally, from restructuring through to changes in IT infrastructures and brand rationalization. Not surprisingly, the internal chaos results in confusion in the marketplace and disgruntled customers. Indeed a BusinessWeek study reported a 50% reduction in satisfied customers, even two years after a merger. In the case of Continental, decreasing customer satisfaction is reflected in the customer satisfaction scores published by the American Customer Satisfaction Index. The company has never been at the level of South West Airlines, but since the merger with United, Continental’s customer satisfaction scores have plummeted.

As the North American economy stabilizes, more companies are considering M&A to grow. It is critical that these companies incorporate initiatives driving customer satisfaction and loyalty into their change management programs throughout the M&A process. Successful M&A is not just about investing in companies; it’s also about investing in customers.

Posted in Customer Retention, Customer Satisfaction, Julia Cupman, Mergers and Acquisitions, The Business Surgery |
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