Fresh thinking for decision makers

How multinational companies can access the mid-segment in China with an effective dual-brand strategy built up by a matching product offering and value chain.

ASSET MANAGEMENT:

DUAL-BRAND STRATEGIES

FOR CHINA'S INDUSTRIAL MARKETSFor many years, established

multinationals and local players

in the industrial sector in China

and other emerging countries

operated in entirely different

market segments. Now, however,

things are changing. Growing

mid-end segments are creating

a new battleground where

multinationals and local players

meet face-to-face.

To compete in these new

market segments, one option

for multinationals is to develop

a second brand. To do so,

however, they must meet certain

preconditions, including selecting

the right brand architecture

and making the correct tactical

choices with regard to product

offerings and value chains. We

discuss how companies can

develop an effective dual-brand

strategy to maximize the new

opportunities.

BR

AND

1B

RAN

D 2

The challenge

China's industrial sector has experienced strong growth in recent years. Today, it is one of

the world's leading markets for industrial goods of all types. Unlike in many mature markets,

so called "stacked markets" emerge in which customers form clearly separated segments.

In these markets, established multinationals compete with each other and emerging local

companies compete with each other, but there is little competition between the two.

However, this clear cut state of the industry is changing. The mid-end segment of the Chinese

market is growing faster than the high-end and low-end segments. The rise of the "new middle"

calls into question both the traditional purely high-end strategy of established multinationals

and the purely low-end strategy of local players.

Established multinationals are typically strong in high-end segments. Yet, increasingly they

are realizing that the low- and mid-end market segments promise the strongest growth

in China. They are beginning to operate across two or more segmentsin sectors such as

mechanical engineering or heavy machinery, say. Local companies, by contrast, tend to

specialize in the low-end market segments. As they gain experience, they are gradually

migrating up toward higher-end segments.

High-end

High-end

Mid-end

Low-end

Traditional focus areas New focus areas

High-end

High Mid-end

Low-end

Low Mid-end

ESTABLISHED PLAYERS EMERGING PLAYERS

MARKET

SEGMENT

INDUSTRY PLAYERS

Dual-brand strategies

3

Established multinationals face a number of risks and opportunities that arise from the

stacked markets phenomenon and the growth of mid-end segments. They must find

satisfactory answers to the following three key questions:

Should companies try to compete outside their traditional segment? Stacked

markets and the rise of mid-end segments raise the question of whether

multinationals should try to compete outside their traditional segment. Companies

expanding their operations beyond the scope of their traditional segment find both

growth opportunities and potential challenges. What is the best way for them to

move ahead: expanding into new segments or focusing on the home segment?

Which brand architecture is best? Companies that decide to target new market

segments may need a new brand. An existing premium brand is not always

successful when addressing mid-end market segments, and there is real danger

of brand dilution and cannibalization. Companies must examine their options

regarding brand architecture and decide whether to add specific product lines to

their existing brand (i.e. a single-brand strategy) or to introduce an additional brand

that addresses the new market segments (i.e. a dual-brand strategy). Both options

should be carefully considered.

What are the right choices with regard to product offerings and value chains?

A company that adopts a dual-brand strategy has various options regarding their

product offering and how their value chain is organized. Several questions require

consideration. How should companies differentiate the mid-end product offering

from that of the premium segment? Should the new brand be integrated into the

existing value chain or should there be a new, separate value chain?

We examine each of these questions in detail below and suggest some effective answers that

will help companies determine the best path to success.

4

Question 1Should companies try to compete outside their traditional

segment?

In stacked markets, customers form clearly separated segments, each with its own

requirements. The first question multinationals must ask themselves is whether or not the

markets in their industries are truly stacked. Do they consist of different customer groups that

need to be treated differently? Are the different customer groups big enoughand therefore

relevant enoughto justify such individual treatment? On this issue, opinions often differ

between local managers and the company directors back at headquarters. It takes often a long time before either they agree or sufficient facts are collected to prove one point of view or

the other.

If it is agreed that different customer groups do indeed exist and are worth addressing

separately, the company may choose to enter the new segment for one of two reasons: growth

or defense.

The rise of low- and mid-end market segments creates new growth opportunities for

multinationals. A recent Roland Berger study on future trends in certain machine-building

industries estimated that by 2015, the low- and mid-end market segments for stationary

discrete manufacturing machines will be two and a half times as large as the high-end

segment. With the right strategy, multinationals can access these segments and tap into a

fast-growing source of revenue and profit.

Multinationals may also choose to enter new segments for defense purposes. Local

companies are often active in low- to mid-end market segments and can use the growth they

experience there to build up their resources and capabilities. This can help them improve their

products and level of professionalism, ultimately preparing them for an attack on high-end

market segments. Multinationals can prevent this from happening by attacking local players

in their home territory early on, an important defensive move in ensuring their own long-term

success.

If a company decides to compete in new market segments, the identity of its brand is often

called into question, which leads to the second question...

Grow Defend

Dual-brand strategies

Read more on the "new middle"

Published by Roland Berger, 2012

5

Enter to...

Question 2Which brand architecture is best?

Upon entering a new market segment, companies face a number of questions. Can they reach

the new customer segment with an established premium brand? If they start selling mid-

end products under old brands, do they risk diluting brand image? Should they introduce an

additional brand to avoid these conflicts? If they do, what is the risk of one brand cannibalizing

the other?

In practice, multinationals opt for one of two strategies: a single-brand strategy or a dual-

brand strategy. Each of these strategies further subdivides into two options. In order to define

the right product offerings and set up a tailored value chain, companies must be clear about

which brand architecture they are using. Executives need to clearly choose one of the options

and avoid being vague in their communications to the organization.

Single-brand options Dual-brand options

Brand

architectures

1. Pure single-brand

strategy

2. Single-brand strategy

with multiple product

lines

6

1. Two brands in a

brand family

2. Two standalone

brands

Dual-brand strategies

In a pure single-brand strategy, the company uses its existing brand without

differentiation, either because it believes that there is in fact only one customer

segment or because it only considers one customer segment to be relevant.

For example, high-end niche players often follow this strategy. Potentially, the

company also develops mid-end products that it sells under the existing brand.

Companies opting for a single-brand strategy with multiple product lines use

their existing brand structure but introduce different product lines under the

same brand. These product lines can be specifically targeted at different market

segments. The company thus establishes a clear connection to the brand while

tailoring each product line to the needs of a specific customer segment.

In a strategy of two brands in a brand family, companies target an additional

brand (or sub-brand) toward the low- and mid-end market segments while

emphasizing that this brand belongs to the company's main brand. Typical

formulations include "a brand of Company X" and "a member of the Company X

family."

A fourth option is to have a completely independent brand for the new market

segment, resulting in a strategy of two standalone brands. The company

developsor in some cases acquiresa new brand that is unrelated to its main

brand. Customers are generally unaware that the two brands belong to the same

company.

When deciding on a brand architecture, multinationals should consider a range of different

factors. Four criteria that are often highlighted are brand dilution and cannibalization, required

investment and effort, time to market awareness, and the match with segment requirements.

1. Brand dilution/ cannibalization

3. Time to market awareness

KION opts for this approach with its family brand "Baoli"

Caterpillar pursues this strategy with its Chinese brand "SEM"

Bosch Power Tools targets the Chinese mid-market with their "T-Edition"

2. Required investment and effort

4. Match with segment requirements

7

Sumitomo Demag targets the high- and mid-market with the same brand1.

2.

3.

4.

In industries where customer segments differ only marginally, the danger of brand dilution

and cannibalization is high. Choosing a pure single-brand strategy or a single-brand strategy

with multiple product lines is risky. Customers can easily become confused about the value

propositions of the different product lines, perceiving premium lines as less valuable and

switching to cheaper onesa process of brand cannibalization. The negative image of

cheaper products can also be transferred upwards to more expensive onesa process of

brand dilution.

Of course, pure single-brand strategies require less investment and effort than other options.

Introducing a new, additional brand to the market can be costly and involves a great deal of

managerial effort, irrespective of whether the new brand is developed organically or acquired.

The time required for market awareness to be achieved is an important criterion for deciding

brand architecture. Single-brand strategies, of course, do not require companies to face the

problem of building market awareness, as the brand is already established. Companies using

dual-brand strategies can use acquisitions to shorten the often lengthy process of building a

market awareness.

A single-brand strategy will often cause problems in matching segment requirements,

however. In most cases, the original brand will have been around for quite some time and

brand perception will be well established. This leaves little room for companies to incorporate

new aspects into the brand that appeal to the newly targeted segments. New product lines

under a single brand also face this problem, albeit to a lesser extent. A two-brand strategy

offers the key advantage of flexibility; the new brand can be designed specifically to appeal to

new customer segments.

If a company chooses to introduce an additional brand to address new market segments, it

will need to define two key dimensions of the brand: its strategic purpose and its geographical

reach. In each case, the company should consider a number of factors.

Strategic purpose

Companies must ask themselves what the strategic purpose of a new brand is. Is its objective

to be profitable in the target segment in its own right, as a standalone brand? Or is profitability

a secondary goal, with the true objective being to attract new customers to the main brand, as

an escalator brand?

A standalone brand is independent from the main brand. It aims to successfully penetrate

the low- and mid-end market segment while generating significant revenue and profit in its

own right. Due to this specific purpose, it may have little or no connection to the original main

brand. Indeed, in some cases, any such connection to the main brand is carefully avoided.

Strong differentiation between the brands can also protect the main brand from potential

brand dilution.

8

The purpose of an escalator brand is to build up a customer base in lower market segments

and then convert these customers into purchasers of the main brand. Its purpose is thus up-

selling rather than market penetration. It is positioned as an entry point for new customers,

letting them experience the lower quality of the escalator brand while exposing them to the

advantages of the premium brand. Revenue and profit are not the primary focus of escalator

brands.

The forecasted development of the market is usually the main factor when determining the

strategic purpose of a brand. If the mid-end market segment is perceived as a temporary

phenomenona stepping stone on the way to market maturityan escalator brand is the

best choice. If, on the other hand, the mid-end market seems likely to retain its importance, a

standalone brand is preferable.

Geographical reach

The desired geographical reach of the brand is another important decision companies must

make. Is it supposed to be a local brand exclusively for the Chinese market, or should it take in

other emerging markets in Asia and around the globe? The brand architecture depends heavily

on the answer to this question.

Dual-brand strategies

Global Brand

Local Brand

Local Brand

9

10

Executives might choose to create a global brand when the market characteristics are highly

similar across different geographies in terms of customer needs. For example, Krones, a

German producer of bottling machines serves world-wide mid-end segments with its Kosme

brand (a former Italian-Austrian competitor acquired in the past). If the targeted mid-end

market is predominantly concentrated in one country or region, then a local brand is a better

choice. ABB, which serves high-end segments globally with its own brand, also competes

particularly in China with two local brands, Winmation and Winride, capturing the mid-end

segment.

Choosing the right brand architecture is essential for companies entering new segments, but

this alone does not guarantee success. Many companies struggle to make the right tactical

choices when implementing brand architecture in industrial markets, particularly with regard

to the product offering and value chain. In the worst-case scenario, they neglect these issues

entirely and simply let things take their own course. To avoid this trap, companies should pay

attention to the third question.

11

Question 3What are the right tactical choices with regard to product

offerings and value chains?

Two areas require particular attention when implementing brand architecture in industrial

markets in emerging economies. Companies often become distracted by tasks such as

designing the right logo and planning marketing activities. In fact, their real focus should lie in

defining their product offering and organizing their value chain.

Product offering

Reaching low- and mid-market segments can be tough for multinationals, regardless of

the strategic branding option they choose. Companies must tailor their product offerings

specifically to the requirements of the segments in questionboth the physical products

themselves and complementary offerings such as services, warranties, and parts. Products

in lower-end segments might need to provide lower functionality and quality. Often, they are

FRUGAL (Functional, Robust, User-friendly, Growing, Affordable, and Local) products. These

characteristics are important purchase-decision criteria for customers in the low- and mid-

end market segments. Products for lower-end segments may also offer limited services, a

shorter or no warranty, and a limited brand promise compared to those of the premium brand.

In a dual-brand strategy, a company needs to tailor their product offering to the needs of each

customer group individually. This also makes the differences easier to communicate.

Two common pitfalls exist with regard to product offering. Often, companies define the product

offerings for their low- and mid-end brands on the basis of a comparison with their high-end

brands. In other words, they have a high-end bias. The result is that the new brand's products

are simply cheaper versions of the premium products. They do not necessarily meet customer

requirements and may still be too expensive. In some cases, the needs of mid-end customers

remain completely undetected.

Another common trap into which companies fall is focusing on the product offerings of their

competitors. Analyzing competitors' strengths and basing one's own products on them is

frequently an unsuccessful approach. Instead, companies should focus directly on the needs

of customers in the new segments. Products based on competitors' products may not actually

be what the customer wants. Often, they will be worse than those offered by more experienced

competitors.

An intelligent way to create a mid-segment product offering is to use functional units or

modules. This approach reduces the required lead-time and enables economies-of-scale.

Differentiation of features and other measures is still required.

Read more on FRUGAL product:

Published by Roland Berger, 2012

DON'T

DON'T

focus on your own premium product features when designing the new brand/products

focus on competitors' products when designing the new brand/products

Dual-brand strategies

Value chain

When implementing a dual-brand strategy, companies must carefully rethink their value

chain. They need to decide whether the two brands can share a single value chain or should

have separate value chains. Within these two extremes, mixed solutions are also possible.

There are many potential synergies to be found in the value chain. However, the value chain

must reflect the market segments that are to be addressed and their specific requirements.

Thus, the mid-market segment might favor a different mix of sales channels from the high-

end market, inclining towards independent distributors rather than a centrally managed and

owned network, say. Sourcing, production, and distribution may all need to be tailored to a

lower cost setup. Companies should regard cost pollution from high- to mid-end products

as a real threat. Some companies even separate R&D for different product types to reflect

the lifecycle speeds of local competitors. This allows them to react more flexibly to market

requirements, since lengthy alignments with the quality systems of premium products and

standardized technology libraries can compromise reaction speeds. Although a shared value

chain can create cost synergies, mid-end products also risk suffering from "cost pollution" or

being treated as "stepchildren" by managers from a premium background.

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Only if both segments' requirements for certain value chain steps are the same should

synergies within the value chain be pursued (by sharing the same resources, etc.).

Complete value-chain integration involves all the steps of the value chain being shared

by both brands. This option requires relatively low effort to implement and low costs in

a situation of organic growth, as its leverages existing structures. It delivers significant

economies of scale. At the same time, the options for addressing different customer

requirements are limited. There is a risk of cost pollution from high-end to low- and mid-end

brands. Furthermore, the restrictions and obligations of the premium value chain may be

Dual-brand strategies

13

unnecessarily applied to low- and mid-end products, resulting in a slow, unresponsive value

chain for the low- and mid-end market.

Strict value-chain separation involves every step, from overhead to sales channels, being

individually designed for each brand. The brands are totally independent of each other. In

some cases, this will be the result of an acquisition of a local brand. The two value chains

will be adapted specifically to the individual needs of each brand, increasing the options for

specialization with regard to customer requirements. This approach avoids the potentially

negative influence of the more complex structure of the premium brand's value chain, but

comes at the cost of fewer synergies and greater complexity.

In practice, the degree to which products are similar limits the choice between integrating and

separating of the value chains. If the products of the premium brand and the low- and mid-end

brand are very different from each other, it makes little sense to share multiple steps in the

value chain. Indeed, a market that calls for high product specification usually does not allow

for a shared value chain. Fast-changing market conditions also require flexible value chains,

which are therefore likely to be separate rather than closely integrated.

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IF YOU HAVE ANY QUESTIONS,

PLEASE FEEL FREE TO CONTACT US:

Dr. Christian Neuner

Principal, Shanghai office, China

Christian.Neuner@rolandberger.com

Dr. Guido Hertel

Partner, Munich office, Germany

Guido.Hertel@rolandberger.com

Charles-Edouard Boue

Member of Global Executive Committee

Global Chief Operating Officer (COO)

President of Asia

Charles-Edouard.Bouee@rolandberger.com

KEY TAKE AWAY FOR EXECUTIVES

Stacked markets and the rapid growth of low- and mid-end market segments present

established multinationals with both genuine risks and exciting opportunities. Players must

choose between a single- and a dual-brand approach, carefully defining both the strategic

purpose and the geographical reach of their brand. If they opt for a dual-brand approach, they

must ensure their operations are aligned with their strategic goals with a close eye to the

design of the product offering and how the value chain is organized. By following the right

steps, companies can implement an effective strategy and maximize the new opportunities.

Dual-brand strategies

Roland Berger Strategy Consultants

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