How to win in China's changing economy

Thursday, 24 March 2016

Recent headlines about China’s slowing growth and its efforts to contain stock market bubbles and devalue its currency seem to be cause for concern. Yet this only tells part of the story. The Chinese economy is undergoing a profound shift as it matures from export-led growth to higher-value activities and domestic consumption and services. The challenge is that China is no longer one vast emerging market, as it has been viewed in the past. Demand for products and services, along with growth itself, varies greatly across sectors, populations, and geographic regions.

The implications of this shift for companies are clear: increased competition, over-capacity, a decentralisation of demand, and increased heterogeneity in every market, not to mention the rising cost of manufacturing. The landscape has evolved, and so has the competition. Companies in China, both domestic and foreign, are facing a new era of complexity, in which they have to develop new markets and adapt to changing ones while also re-evaluating the supply chain itself.

Still, China’s markets can continue to be highly rewarding for companies that manage this successfully and develop a management strategy that is carefully customised for the company’s unique circumstances. That strategy should include an analysis of just how many products a company should sell in China and what types of products are optimal for which markets.  

We propose three guiding principles to help companies develop the right strategy and adapt to China’s new environment:

  1. Understand the market

This may seem obvious, but it is a critical first step. Companies need to understand the market requirements for complexity in terms of product features, product availability, and price. More important, companies also should strive to understand the premium the market is willing to pay on any of these variables. Making this type of assessment is especially important in a market that is evolving as rapidly as China’s.

  1. Determine participation choices and alignment to strategy

Complexity management is a strategic issue and should not be undertaken on an ad hoc basis or in functional silos. After the company defines and develops an understanding of the right level of complexity for the market, senior executives will need to make a set of decisions, primarily around which segments of the market are most important to them. For each segment, an appropriate service model should be defined. The combination of service models and market segment participation choices will essentially determine the required complexity. In order to achieve the right balance, a set of financial and strategic criteria should be used to evaluate the options.

  1. Pursue a holistic, end-to-end value chain approach

Once a clear understanding of market requirements and participation choices in each key market is obtained, along with alignment to the firm’s strategy, a thorough review and transformation of the company’s end-to-end value chain and operating model is required. This is a company-wide effort that encompasses every function accountable for delivering the company’s market value proposition, from the teams that conceptualise or deliver products to those that are responsible for measuring financial performance. This end-to-end approach should be focused on building value chains that are designed for specific purposes, rather than set up as work-arounds for existing solutions.

How is your business managing complexity? More on how domestic and multinational firms can adapt to China’s changing market can be found in this whitepaper.




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