Diversification is a form of innovation. It can be related-producing products in a field in which you know or unrelated which is the reverse of the latter. It is defined in Ansoffs matrix as high risk compared to a lower yet still medium risk of market development. This is a strategy in which companies market their existing products but in a completely new market. Both can potentially lead to high profitability if successful. In China, these are the main two entry strategies that have shown to have a satisfactory success rate in helping to crack the Chinese market.
Market development is a strategy that must be supported by incredible in depth market analysis. Knowledge and appropriate handling of information is vital in succeeding. A piece of advice that was realised too little too late by Revlon; their brand was completely inappropriate and out-of-place in the Chinese market. A common mistake amongst multi-nationals has recently been highlighted as “selling the same products and assortments and expecting the Chinese consumer to find it relevant. The key is to focus on local market research and be sensitive to local beauty issue,” a mistake that Revlon had subjected itself to.
This has led to the quick and disappointing exit of Revlon from China, but however has laid the path for other multinationals in knowing how to avoid being forced into exiting from the market. In this case, Revlon perhaps should have adapted a strategy of diversification, particularly focusing on localisation, in order to satisfy consumer needs and wants, enabling it to effectively penetrate the Chinese market, saving costs and increase the opportunity for huge growth. On the other hand, this example should not deter potential multi-nationals from pursuing a market development strategy. The world famous brand, Nike, has successfully transitioned the same products into China without a hitch.
The brand is increasingly popular in the Chinese market, to all market segments not just the supposed “younger generation.” This is heavily based on the fact that the desire for Western brands in China is increasing. This has also been particularly effective for IKEA, its decorative layout of western show rooms has successfully overcome the Chinese hatred of DIY, simply because the furniture would give common Chinese homes a “taste of the west.”
This is where Home Depot went wrong, the lack of western culture encourages Chinese consumers to steer clear of the shop and only emphasised further the dislike of “Do it yourself.” This suggests that those whose products target and fulfil the needs of the average Chinese customer are likely to thrive with a market development strategy, those products that do not and have only particularly been successful in other markets, are likely to be advised to follow a diversification strategy in order to create a product that is more “western-ised” or fulfils other aspects of Chinese tastes, attitudes or more importantly their culture.
Despite both failure and success in market development, diversification is a strategy that should be considered highly. Over time, multi nationals have targeted China with the same versions of their own products and have quickly exited the market. The cost of changing a product has deterred many businesses; however investing in this is a key factor of succeeding in the Chinese market. KFC is an important example of how diversification is more effective than market development.
Chinese culture means that food tastes are extremely different, and despite the rise in desire for Western products, food is not as favourable as the high class brands such as Burberry and Nike. KFC researched Chinese markets and found that tastes changed significantly between different cities such as Shanghai and Beijing. In knowing this, KFC developed a variety on their menu to cater for all tastes despite the locations.
This strategy has made KFC huge financial success and therefore the ability to expand more than … outlets across China. This strategy of diversification has also enabled Starbucks to crack the market. Again reliance on the Western image has contributed to making it a success, however its introduced the “coffee” approach to a tea drinking culture slowly, by introducing firstly teas with herb and fruit infusions which enabled them to attract a consumer base, before starting to introduce “mainstream” coffee drinks such as Frappuccino’s.
This is arguably, a strategy of both diversification-tea infusions and market development-introducing its coffee based goods. However, without the initial use of diversification, it is fair to say that the consumer base may not have been attracted if the only thing used to attract them was coffee in a tea drinking nation. On the other hand, diversification has not always been successful, as McDonalds discovered when localising its products in China backfired greatly, when its fish wraps failed to cater for the tastes of China, it left the Chinese market hurriedly, which in turn reduced the competition of fast food restaurants, giving KFC a competitive advantage.
In conclusion both strategies have had their fair share of successes and failures within the Chinese market. Neither strategy is better than the other; it simply depends on the Chinese desire for a company’s product, the nature and type of their product/company and how effectively they are targeting their market segments needs. Alternatively, there other strategies that could be useful, for example, P&G took a completely unique market strategy and first began to advertise before it had even entered the market.
This created high brand awareness, even more so over the fact it is a well-known brand, even in China, it was P&G’s idea of ‘testing the water’ before entering on a large scale. This quickly built up market interest and so when P&G finally did enter the market, it gained market share extremely quickly which has resulted in china becoming its second largest market.