expansion into China: recommendations for philosophy and final reflections
expansion into China:There exists few companies in the Phoenix area that are quite as unique,imaginative and wholesome as philosophy. Founded on the aspiration to"bridge the gap between what was offered in doctors offices and retail,"philosophy features products like "shower forthe cure" and "hope in a jar," reflecting itscharitable and inspirational characteristics .Using all lower case letters, and classic retrostyle pictures of children, philosophysymbolizes the simple things in life . Itwould come to no surprise that such a company, based on strong moralvalues and quality products boasting excellent consumer satisfaction, mighthave its eye on growth and globalization. China, with its booming economyand increasingly connected consumers, might be just the place to stagephilosophys expansion into the global market.
the business environmenteconomyChina is the worlds third largest economy and is predicted to takeover Japanin a number of years . When it comes to foreign direct investment, Chinahas the second highest inflow in the world and fifth highest outflow. Specificto the cosmetic industry, China has become thesecond largest cosmetic market in Asia and eighthlargest in the world . If philosophy were toenter China, it would be competing with over4,000 manufacturers, including over 1,200multinationals and at least 400 state-owned enterprises . Although thereare many domestic firms competing in Chinas cosmetic industry,multinationals claim 80% of the market share . With such a competitivemarket, companies need to be able to differentiate their products andconnect with the consumers, and having timely market information is key.Although the Chinese cosmetic market is already large on a worldwide scale,the economic growth in China has increased not only the populationsincome, it has increased awareness of their appearance, and is expected tocontinue in this trend. For this reason, the cosmetic market has largergrowth potential than many other industries in China . So, not only will it
grow steadily with Chinas growth, the cosmetic market has yet to see itsconsuming potential fully released.Large, multinational companies benefit from their advantages in quality andflexibility in capital spending, and currently dominate the market share.However, local firms competing on price and utilizing their thoroughunderstanding of the culture and complicated marketing channels cannot beoverlooked . Future success may rely more and more on a deeperunderstanding of the Chinese market and market segmentation, and less onadvertising spend.cultureCosmetic companies in China are inevitably differentthan those in America. One factor is that Chinesewomen prefer skin whitening effects in their cosmetics,while Westerners tend to favor the tanned skin look .In this regard, philosophys gentle formulations would fulfill the preferencesof the Chinese people with few, if any, modifications.Chinese consumers, like a growing number of Westerners, prefer naturalingredients to be used in their cosmetics . For this reason, Chinas
consumers are likely to embrace philosophys results-driven, medically-based, "good-for-skin" products.Aside from the products, philosophys company culture would pique theinterests of Chinese consumers and workforce. Symbolism and subtlety arevalues the Chinese people have, and these come through in various places,including companies they own and operate. The lower-case lettering andsweet pictures of children used by philosophy symbolize the simple pleasuresin life; they inspire better days and the belief in miracles and beauty ineveryone .The philosophy, and products, of philosophy seem to be “China-compatible”because the products are subtle, use healthy ingredients, and appeal to thecultural love of symbolism. One additional aspect philosophy could benefitfrom would be products and manufacturing processes in line with traditionalChinese medicine. Traditional Chinese medicine and herbal medicine havebeen prevalent in the Chinese culture for thousands of years, and is makinga comeback in recent times as an alternative to Western science andmedicine.
lawsSince China opened its doors to international commerce in1978, the country has steadily promoted reform andwelcomed foreign investment. In 2001, China entered theWorld Trade Organization, and in doing so, reduced its import tariffs, furtherencouraging multinational firms to do business in China. Chinas tax policywas adjusted in 2006 to levy higher taxes on energy consuming productsand luxury products, and remove consumption tax on daily necessities suchas shampoo and bath lotion. The tax for some premium cosmetics wasincreased to 30% (from the original 8%) . This was aimed at boostingthe development of China by favoring the low and mid-range cosmeticcompanies. Although the higher consumption tax on premium cosmeticscauses the prices to increase, target consumers of high-end cosmetics areless price-sensitive and thus the tax is not expected to significantly reducedemand for such products.One obstacle philosophy will have to overcome is in certifications of importedcosmetics. Specifically, they would be required to obtain a certification fromthe Ministry of Health and another from the General Administration ofQuality Supervision, Inspection and Quarantine. The two issuingdepartments do not consult each other on certification standards, so a
product can pass in one department and not in the other . With all theredundant and ill-defined regulations, the process can easily take over sixmonths. Partnering with a Chinese company or developing goodrelationships in China may help to overcome these hurdles.the state of the industryThe most successful companies in theChinese cosmetic market aremultinationals, including L’Oreal, P&G,Shiseido, and Estee Lauder . Whilesome local companies, such as ShanghaiJiahua United Co. and Jiangsu LongliqiGroup, are holding their own in the market, China has yet to contribute acosmetic company with a global reach . Only recently, a cosmetic brandin Jiangsu Province, Xiefuchun, entered into an agreement with Wal-mart.The 179-year-old brand hopes to sell its products in around 150 malls.Growth can be seen in another cosmetic manufacturer, 147- year-oldKongfengchun, based in Zhejiang Province, as it has opened over 70 storessince 2008 . In Beijing, Miqi is now finding success in its homeland afterenjoying a strong export market in Japan for some time . With such avast consumer base and low per capita consumption of cosmetics, thecosmetic market in China has plenty of room to grow, and is expected to
grow faster than the Chinese economy as a whole. Other influences willaccelerate this growth, such as increasing influence of the western world,rising purchasing power and an escalating consumerism culture. Ifphilosophy wants to capitalize on this growth, this is the time to get in,before the market explodes.potential partnershipsShanghai Jiahua United Co. is the leadingdomestic cosmetic company in China, and "isconsidered to be the only local cosmeticcompany that can compete withmultinationals." General manager Jiannin Quattributed the companys success to strongmarket segmentation. Shanghai Jiahua’s well-known brand "Baicaoji" makes claim that itpractices traditional Chinese medicine and usesingredients based in herbal medicine . The functional cosmetic line, withfunctions such as repair, cure, maintenance, care and isolation, fit well withphilosophys line of products. It would be easy to see a line extension inphilosophys future to include products based in the principles of herbal andtraditional Chinese medicine.
Another possible partner would be Jiangsu Longliqi Group, whose claim tofame is its channel construction. A survey of more than 20 villages with apopulation ranging between 100 and 1000 showed that about 50% of thestores sell Longliqis products .While its premium, high quality products will face heavy competition fromthe local, low-end companies, understanding the market channels andfurther channel construction in China will give philosophy a huge competitiveedge on the other multinationals. For this reason, partnering or entering ina mentoring relationship with one such firm would be pivotal in philosophyssuccess in China. In addition, such a partnership would enable philosophy todevelop products with herbal ingredients or based in traditional Chinesemedicine, appealing to even more of the local markets, and potentially toglobal markets as well.recommendationThe cosmetic market in China is poised to burst in the very near future, withhuge growth potential for all players. Furthermore, a company that canleverage its capital to spend on advertising will go far.Quality products in the high-end segment, aligned with thedesires of Chinese consumers, will also contribute to thesuccess of cosmetic companies. These factors will primarily
benefit multinational companies. However, a thorough understanding ofmarket segments and channel construction in China will be crucial to thesuccess of cosmetic companies in this highly-competitive market. Whilelocal companies are best suited to compete on price, this knowledge wouldbe of great benefit to a company competing in the high-end segment likephilosophy.The recommendation, then, is to enter China with a partnership or mentorrelationship that will help philosophy build the localized knowledge it needsto succeed. The products and company culture of philosophy, as weveseen, need to be tailored very little to fit the demands of Chineseconsumers, although a line extension to include traditional Chinese medicinemay also increase philosophys success.references "Economy of the Peoples Republic of China". Wikipedia.http://en.wikipedia.org/wiki/Economy_of_the_Peoples_Republic_of_China "Chinese Cosmetic Market Overview". 14 Nov 2006. Frost & Sullivan.http://www.frost.com/prod/servlet/market-insight-top.pag?Src=RSS&docid=86897413 "Essential and Illustrative Report on the Chinese Cosmetics Market out Now". 10 July2008. BusinessWire. http://www.businesswire.com/portal/site/home/permalink/?ndmViewId=news_view&newsId=20080710005508&newsLang=en “philosophy official site”. Accessed 7 May, 2010. http://www.philosophy.comPersonal Reflection
I believe it was Doug Cougle who said that when Americans come to China for the firsttime, they think they know everything; when they come a second time, they are ready towrite a book; and when they come a third time, they realize they dont know anything.This being my second visit to China, I must have skipped a step somewhere, because Ifound that I came back with more questions than answers. I attribute this to myexposure to the variety of educational resources; from the movies, books, classdiscussions and case studies, as well as my personal mentors. I think I was moreprepared to learn what it is I dont know than most visitors to China.While I thoroughly loved and enjoyed what I saw of Beijing, Suzhou and Shanghai, itseems as though each city has its own histories, traditions, dialects, flavors, perhapseven their own cultures. The four cities I have visited (Dengfeng being the other city Ivisited previously) in two visits to China barely represent the tip of the iceberg. Thereare so many booming cities, and each of them have their own culturally significanthistoric sites, stories and customs. It’s almost overwhelming how much there is to learnabout China, and this is just one aspect that I intend to focus on.Economy of ChinaWhether you look at the numbers, listen to the stories or visit the companies of China, itis clear that the economy is growing at a rapid pace. The real GDP growth rate hasbeen between 8% and 12% since 2000 (1). Doug Cougle at Intel cited that there were800 million residents of rural China and only 200 million were needed to maintain theagriculture business. So China is basically attempting to urbanize 600 million people.
He related this to building a city of Chicago every month for several years. That kind ofgrowth is difficult to comprehend, and the social implications are even more so.The visit to COFCO was eye-opening in many ways. One of the questions asked wasin regards to plans for exporting COFCOs wildly popular brand of wine, The Great Wall.From an American perspective, it seemed like a fair question to me, but Mr. Chiresponded that China was growing so rapidly, they couldnt even keep up with thegrowing demand for wine in China. He emphasized they first must be able to meet theChinese demand before considering exports. I got the same impression from FosunPharma; that if China is one of the largest markets in the world and growing, then thefocus is on China, and rightfully so. It was as if, to these companies, globalizationdoesnt mean multi-national; to globalize and grow is to be in China.Key LearningsOne big take away from this class is that Chinese companies are much more than aplace of work to their employees. Historically, we learned that the danwei, or workgroups, assigned living accommodations, and even had the right to approve or denymarriages and having children (2). While the new capitalist China has diverged fromthis tradition, with many young professionals buying their own homes now, Chinesepeople are still much more connected to their employers than in America. Bob Boyce,the owner of Blue Frog exemplified this when he talked about how, after contemplatingwhat to do about his high turnover rate, he developed a method of managing hisbusiness he called family style management. The keys to this management style were
a sense of belonging, discipline, opportunity and a place of home. His employeesneeded to feel valued in the organization, and they needed to know that there was roomto grow with it and within it. They also needed to have standard processes and rules toabide by, rules that were enforced. And because many of them were from rural cities,the company took a more involved approach to their personal lives by planning trips andevents to make them feel more at home. He said that the people they work with weretheir only friends in a lot of cases, and this was their new family and their home awayfrom home.A common theme in the company visits was that retaining talent, especially in the mid-or senior management level, is one of the biggest challenges companies in China face.This seems especially true of companies in the Suzhou Industrial Park; both Emersonand Honeywell speakers stated that their middle managers are often offered positionsfor two or three times their current pay. Ericcson, also, talked a lot about talentdevelopment. Intel noted that there was a gap between junior managers and peoplecapable of being senior managers, but that this problem was not limited to China.My CareerAs a relatively ambitious person, I had my education and the first few years of mycareer pretty well charted out early on. But beyond a few years after graduating with myMBA, my plans are not set in stone. Ive envisioned myself doing many things, fromrising up the corporate ladder in a big company, to starting my own supply chainconsulting firm, and even wilder dreams like creating a home furnishings design
company or developing a TV series on business concepts. I never seriously consideredpermanently moving to another country, but after this trip, I am inspired to do so. Thereare a lot of things to consider, and a lot of research for me to do, but this trip may verywell have changed the course of my career.Perhaps opening a supply chain consulting company in China would be moresuccessful than in the US, for example. Afterall, the market in China is nearly infinite,and the US market is already saturated with consulting companies. Whats more,Chinese companies are still developing and could greatly benefit from such services,whereas some consulting companies in America have given the industry a badreputation. This is one opportunity I may consider for my own career, recognizing,however, that more experience and studying Mandarin are pre-requisites for such apursuit.There is also something to be said about the sophisticated, modern tastes displayed incompanies like Li Ning and COFCO. I could do very well by developing my designbrand in China, bearing in mind the growing industries and modern architecture, and thegrowing population of Chinese with discretionary incomes.My Cultural IntelligenceAs I mentioned, I returned from this trip with more questions than answers, and I thinkthat exemplifies my increased awareness. That is not to say that I lack knowledgeabout the Chinese culture and other cultures; I feel I have learned a great deal about
both China and the world, but much of my education has been through books, films,articles and case studies. From my experiences in China, I have created a list of evenmore topics that I would like to read up on and learn more about. Also, it has becomevery apparent to me that, since China is growing so quickly, material can becomeoutdated faster than normal, so I recognize the importance of continuing to read andlearn about business and news in China.In terms of mindfulness and awareness, Ill be the first to admit that there are still times Iwas caught off-guard because I went into "auto-pilot", and was rudely awakened whenthings werent as I expected them. The concept of personal space is one such conceptIve made assumptions on. People in China seem to have a very different concept ofpersonal space, so it was easy for me to think they were being rude when they pressedagainst me in crowds. I dont know the background on this difference, but I suppose it’snot hard to understand that, with millions of people in several cities, and perhaps ascarcity of resources in rural areas, people are eager to get where they are going, andtheir concept of in-group and out-group makes them a little more indifferent to strangersthan westerners.Putting my knowledge and mindfulness to work, I believe Ive developed behaviors andskills to accommodate cultural differences, during this trip and previous trips to Asia.Learning the language would definitely help me fit in better, but even beyond thelanguage barrier, I have so much more room to grow.
References1 GDP growth in China 1952-2009. 27 Dec 2009.http://www.chinability.com/GDP.htm2 Seligman, Scott D. "Chinese Business Etiquette". 1999.