May 25th, 2008 Systems posted by dmerritts View Comments

Building Competitive Moats in China

Building competitive moats or walled garden around companies in countries without effective intellectual property rights (IPR) is difficult. This is especially true when the business deals with physical goods or services. China has an accurate reputation of being fairly IPR free. Chinese quickly copy anything successful without repercussion.

The first question of any new business entering China is: How are you going to overcome copy-cats? Building brand and exclusivity is not just enough. Quick growth and share capture is important. Otherwise, you’ve lost your much of your potential. But, it requires an extra level of thinking (and expense) to really fortify a new venture’s sustainable competitive advantage. This advice is only true if you’re trying to establish a franchise; that is, a sustainable business.

Build a Service Wrapper

If you’re trying to create or bring a simple product to China, you should re-consider a simple importation and dump strategy. When the product is successful in one city, other cities or region will quickly copy the product start selling it. The barriers to entry for copying your product is very low. To defend the early onslaught, you may consider building a service around your product concept to help elevate its position and increase the barrier to entry for product replication.

Country-Wide Product Exclusivity

Always seek exclusivity in product distribution. This is especially true when importing products produced some where else. A lot of companies will allow you to have regional distribution rights in one part of China. This creates added risk as other regional distributors may over take your territory either directly or indirectly. Products seem to move in China; either in counterfeit circles or through re-processing. One story told to me recently cited to me in China. A regional distributors happened to be selling significant product to a retailer. In turn, this retailer took the product and re-processed it. They removed about 50% of the product replacing it with salt or sugar. The retailer then re-sold the product into other regions to other retailers. This lead to a loss of exclusivity in other regions as the re-processed (seemingly identical) product is sold for 30% less. The lesson is: Don’t trust your other regional distributors to respect boundaries (directly or indirectly).

Process and Training Excellence

Build a service process that’s difficult to replicate. Spending time to train your employees will pay-off. Training your employees to execute within your service model will make it difficult for competitors to replicate. Training and process excellence leads to a better customer experience. This customer experience will create another barrier which competitors may not be able to replicate.

Compartmentalization

Employees are likely to steal from you. Especially, when your business becomes successful. There seems to be little angst about taking and sharing trade-secrets from employers in China. Recourse of such action is limited. Thus, this means that brain drain and loss prevention are key factors to building a successful business. A strategy to defend against this problem is to compartmentalize tasks, functions and documentation to employees. Moreover, systems should ensure that strict access is maintained to important and easily transferrable IP. Sure, this may make the operation less efficient, but it may end-up protecting IP in the medium-run (1-2 years).

Brand Stature

Establish your Brand early. Make certain that your packaging, delivery method or expertise is distinguishable. If you’re in a trust-related business, then you need to establish that you’re the expert in the field. Only your company is able to accomplish this b/c we control the smartest people, finite resources, etc. Establishing a strong Brand stature will enable you to become the de-facto expert in the space. Clearly, this requires extensive PR and third-party validation. However, without perceived expertise or something not easily to replicate – you will be marketing for your competitors.

Associated Branding

If you can create creditability, associate with it. Establishing early associations with creditable communities is critical to creating a sustainable competitive advantage. There are a finite number of associations available. And, only one firm is likely to get ‘real’ endorsements. So, the first one to get the endorsement is likely to carry it longer. Also, ensure you create co-branded programs; this will create an additional barrier of defense against competitors.

Go Big or Go Home (Seriously)

In China, replication of products or services occurs very quickly. Do not go to China with a modest growth story. Success is determined in China quickly. You either succeed or fail. So, if you think you’re going to succeed or want to, make sure you don’t let the copy-cats win first. Take market share quickly and aggressively.

All of these defenses create a stronger competitive advantage. An advantage that makes for a larger moat or taller wall around your new venture.

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