Do Well and Do Good!

CSR, Corporate Social Responsibility, has been buzzing lately, as more and more companies consider the activity necessary, both from a reputational perspective and of course in the glossy pages prefacing their financial reports.  In fact, many companies set CSR up as a separate (non-profit) portfolio…where it hangs out in the corner office, bleeding money, like the Owner’s nephew that we just cannot get fired!

Yet, with opportunities opening up in emerging markets, particularly at the Bottom of the Pyramid, it would make sense to take some of that philanthropic spirit to the bottom line and link up the organizations goal of helping society with the overarching theme of creating value, for society and for the company.

Engaging in business in an ethical, not-for-profit manner in emerging markets today could well lead to relationships with loyal consumers steadily working their way up the pyramid tomorrow, enabling a lifecycle approach and securing customers for the long haul.  For instance, take Hindustan Unilever’s practice of delivering products in single use sachets.  While the packaging and low price point may well take margin below what is customary from a 16 ounce shampoo bottle, HUL is enabling access to quality-of-life improving products and engaging with customers who will reach again for HUL when they “move on up”.  General Electric’s Indian arm has supported local partnerships and financed a myriad of health, educational and innovation drives focused on bringing customers into contact with their unique, yet relatively low-cost equipment offerings customized to market needs.  GlaxoSmithKline, rather than giving drugs away, provides regulatory and technical support to local third-party production facilities such that product costs in the poorest markets can be substantially reduced.

The key is to link CSR efforts to the company’s business model and core competencies.  Instead of focusing on making money OR making the world a better place, companies should leverage their assets and talents to achieve both, resulting in synergistic relationships and better positioning to capture new customers and new sources of revenues.

Investors Welcome!

                In reading the June 30^th Economist article: Welcome, bienvenue, willkommen, I was struck by the inconsistent attitude of Americans in regard to Chinese investment domestically.  American companies are driven to grow into the Chinese market and gobble up every bit of revenue generated by the up and coming middle class and booming consumer markets created there.  The American people encourage this initiative through continued investment into the stock market and the practice of rewarding companies and executives only for rapid, immediate growth.  Given the mature status of most developed markets, making this kind of growth sustainable is predicated on continued advancement into emerging markets.  So of course, it seems more than a little hypocritical that the American public and political leaders are providing such a hostile environment for potential Chinese investors.  Isn’t this another typical case of the American practice of “do what I say, not what I do?”

                Right now China has lots of “disposable income”, and the likely activity when one is in such an enviable position is…drumroll please…to invest.  European nations, albeit in some cases begrudgingly, have taken the opportunity to “welcome” Chinese investors.  This stance allows for more than just an infusion of cash.  European companies get direct line access into the Chinese marketplace.  According to Sweden’s Volvo, recently purchased by Chinese car manufacturer Geely, China has become its “second home market.”  France’s Club Med, happy recipient of Chinese investment funds, is another success story from the article having opened its first resort in China.   For investors to be happy, the company invested in needs to prosper, so obviously it is in everyone’s best interest that the venture succeeds.  Chinese investors observe this rule just like everyone else. 

                The most often cited mode of failure for the China entrance model is lack of knowledge of Chinese market forces whether they be from consumer, political or local competitor pressures.  Why is it then, that the American government is assisting domestic firms in turning down a gift-wrapped opportunity to partner and collaboratively work out these issues with willing, cash-laden potential partners?  Sure, the Chinese are looking for technological and marketing expertise and as intelligent humans are using a common method of joint venture entry to access it.  How is this any different from American firms buying up or joining forces with those in China?

                With the world flattening more and more each day, it seems clear that a homogenous mix of business across the globe is the most likely future view.  The United States needs to take a step forward out of isolationism and start thinking of what we can learn from emerging markets and opportunities instead of hiding our heads in the sand and pretending that the only acceptable means of global expansion is FROM the United State, instead of TO it.

KFC: Finger Lickin’ Good…in the US?

With Yum! Brands driving international growth in the ballpark of 11% full year operating profit and pushing its KFC stores into over 110 counties and territories outside the US and China, it seems clear that the company has figured out how to play in the international restaurant arena.  With a stellar team and top-notch performance abroad, the company has become a standard of excellence for global expansion. 

                What is most curious is how the chicken flew the coop, so to speak, in the United States.  For Yum! overall, US same store sales grew only 1% for 2010, with KFC clearly dragging down the team (financial shared across KFC, Pizza Hut, Taco Bell).  KFC in the US represents just 3% of overall profits.  Compare this with KFC’s success internationally and you start to see a BIG disconnect.  So what’s really going on with the Colonel at home? 

                The first likely excuse is the mature market in the United States.  Makes sense…fast food options abound and chicken isn’t exactly exotic.  Perhaps another contributor is the trend towards healthier food options currently gaining momentum in the US.  Or perhaps America is just plain tired of fried chicken.  Though they may sound plausible,  it is unlikely that any of these culprits are the true root cause for KFC’s lackluster US performance.  The proof?  Chick-Fil-A, a privately held enterprise whose products mirror KFC’s right down to the fried chicken and coleslaw has enjoyed a same store sales increase of 5.92% in 2010, and has been positively trending since its inception in 1967.

                So what does Chick-Fil-A know that KFC doesn’t?  Turns out, nothing.  KFC needs only to look to its screaming success in China and in true bottom-up fashion apply some of those lessons learned back in the land of its birth. 

                In its Chinese exploits, KFC has implemented an image of quality, cleanliness and safety.  Staff are immaculately presented, caring and helpful.  Customers are provided a high quality service experience in a pleasant atmosphere.  The menu is customized for local tastes, constantly refined and innovated around as well as geared towards healthy options.  KFC is highly visible in the local economy and gives back in obvious ways through childhood obesity prevention initiatives.

 Compare this with KFC’s domestic stores.  Cleanliness is lacking, décor is drab, the service experience is perfunctory and the main objective is to provide food as quickly as possible and shove the customer out the door.  There is nothing exciting, innovative or customer-centric about the experience.  To make matters worse, the stagnant US menu is essentially the same as it’s been for the past 20 years and healthy options are few, if not nonexistent. 

Yum! should take a cue from its success in China. It could start by cleaning up the U.S. KFC  stores and mandating exemplary customer service.  Employees should be sought based on their customer-centric attitude and service abilities.  They should be treated like valuable members of the community and encouraged to provide feedback and improvement suggestions.  The franchise environment offers a fantastic opportunity for real-time customer feedback which should be cultivated and utilized in decision making.  As in China, training opportunities should be made available with full-circle experiences required for all staff.  Next, as it has perfected in the Chinese market, Yum! needs to take the same hard look at what US consumers really want.  If it’s low prices, then innovate the menu and drive value communication through low-price offers, meal deals or repeat customer cards.  If the answer is the food experience, then again, innovate the menu and drive the theme of Southern Hospitality and Comfort food that has already made headway through such entities as Paula Dean.  KFC in China as well as Chick-Fil-A in the US have made headway in sales and leveling fixed costs by offering breakfast items for harried consumers.  Seems like an obvious winner to me.  Additionally, healthy options outside of the fried, bone-in “box” need to be developed alongside the “regular” and “extra crispy”.  KFC could further encourage growth by outreach programs centered around social progress while engaging the younger generation of Americans.       

                Yum! Brands has the tools required for a US turn-around.  It has accomplished this with its lagging Pizza Hut brand through product and pricing innovations.  Many similar options exist for KFC. 

Chinese Aisles

According to the May 19^th Economist Article, “All Eyes on Chinese Aisles”, no company currently servicing the booming Chinese retail market has or will emerge as a clear leader, or even key player.  Wal-Mart currently fights the retail battle with well-known international players such as Carrefour and Tesco, as well as successful local players like Wumart (clever name) and Shanghai Bailian.  Yet local and national chains alike remain lost in the scuffle of “Everyday Low Prices” with no indication of which will emerge as the prime location at which the rapidly growing Chinese economy will choose to shop.

While the current trends, or more appropriately lack thereof, in retail market leadership is clear, Wal-Mart seems to have half of the puzzle figured out.  With a little bit more focus on the correct balancing act of “glocalization”, Wal-Mart could indeed emerge as an industry leader in the exciting Chinese retail segment.

Although the Arkansas-based giant has been known to be a bit of a dud (in the author’s opinion) in some of its international exploits and has gotten a bad rap at home for some of its business practices, it has done a few things right in China which should be commended.  First, it took an experimental approach to market entry, trying out a number of different store formats, playing with different target customer segments and varying its merchandise mix.  This “fail-fast” approach helped Wal-Mart mitigate large scale mistakes as it expanded stores and continued investments.  Further, business risk was lowered by its entry mode choice as a joint venture with government-backed investment firms.

Wal-Mart displayed foresight in its human capital plan for China as well. Each store is managed by a local Chinese and early plans included development of management personnel with a 2-3 year growth forecast in mind.  By leveraging local talent, Wal-Mart has been able to quickly assimilate best practices and cultural preferences unique to the Chinese consumer.  Most surprising is Wal-Mart’s acquiescence to local labor relations, with relatively high wages (versus factory jobs), medical and retirement benefits and the notoriously non-union company’s tolerance of Chinese Union activity.

Wal-Mart stores in China are well-lit, relatively well laid out, safe and clean; a stark contrast to the shabby décor, lack of aesthetic elements and lack of food safety precautions prevalent at the Wumart stores and other local vendors.   

The customer service experience is high by local standards, however distinctly American with Employee of the Month displays, English and Chinese characters on signage and American Names on badges.

So with all of this localized knowledge, trained management in the pipeline, positive atmosphere and quality service, why is the company stuck at only around 6% of retail market share?

I believe the answer lies in Wal-Mart’s “straddling the fence” a bit too much in its glocalization behavior, resulting in what I call “glo-confusion.”  Is Wal-Mart an American entity operating in China? Or an integrated Chinese retailer with American roots?  No one, most of all Wal-Mart, seems to know.

Let’s think about what Wal-Mart does REALLY well…distribution.  Solidly building and leveraging this capability in China with local products and suppliers would allow it to not only have the right products at the right time in China, but could also be used to augment its home-base operations with new suppliers of low-cost merchandise.  Also, Wal-Mart could take the UPS approach and utilize its strengths and spare capacity as a value-added service to others in the Chinese market – an opportunity to not only build strategic alliances, but also indirectly market the brand.  Think of Wal-Mart branded vehicles delivering valued services to regional entities and augmenting profitability at the same time.

Next, we need to think about what value proposition Wal-Mart is delivering.  In the US, the experience is focused on low prices, decent selection and the one-stop shopping approach, “buy bulk”.  In China, consumers are looking for something different.  They tend to shop more frequently (versus the once weekly trek, braving the inevitable crowds of time-crunched families to “stock up”, common to US consumers.)  They want either dirt cheap functionality OR competitive prices at a (very) slight premium for perceived quality and an EXPERIENCE – called Retailtainment in the industry.  Given Wal-Mart’s reach and scope combined with a low cost labor force and fierce price competition, the latter seems the more appropriate differentiation approach in China.  For example, instead of presenting hangers of clothes, Wal-Mart could include customers in a fashion show highlighting local and international styles.  Food and beverage displays could be integrated into sampling and/or learning opportunities.  Opportunities for relaxation, i.e. book lounges and coffee shops a la Starbucks as well as adjacent services such as pharmacy, medical and banking services could be integrated into the store’s offering enticing customers to return again and again. 

Last in our Wal-Mart opportunities list is the possibility of encouraging the Chinese consumers’ habits of small, high frequency purchase occasions.  By scaling stores down slightly and offering smaller size/quantity items of equivalent variety, the organization could save on high cost retail space, entice consumers into more frequent interactions and court members at lower income levels into a relationship.  In this way, the retailer can firmly entrench itself into the life of the Chinese consumer and profitably ride the wave of incredible growth set to catapult China into the fastest-growing and one day largest retail market in the world. 

      

  

Developing Drugs in Emerging Markets

While any number of reasons may represent the actual impetus for such a change, the large drug companies are increasingly shifting their focus towards emerging markets and economies for the location of their drug trials.  The reasons are varied and depend greatly on who you ask.  Decreased costs, increased reach and an increasingly homogenized global disease profile rank high on the list.  The objections against the trend are numerous as well, including decreased control, increased patient risk, little to no disclosure, however these risks may be mitigated by the ICH and GCP standards.  Regardless of the ethical concerns, the trend towards globalization of clinical trials is clear. 
While an entire post could revolve around the ethical concerns, what I find fascinating are the parallels between a company's selection process of an emerging market in which to launch a new business venture (according to HBP - Fundamentals of Global Strategy) and a drug company's selection of an emerging market populace for clinical trials.  According to HBP, the key factors in selecting global markets are: a) market size and growth rate, b) a country's instutional context, c) competitive environment and d) cultural, geographic, economic and administrative distance.
The first and primary indicator of clinical trial acceptability is the similarity in country demographics (a,d), not only in disease state and prevalence, but also in regards to hospital administration, language, and access to medically and scientifically astute individuals.  Next is the regulatory environment situation (b), as this factors heavily in time to market and import/export issues regarding drug, blood and biological samples.
As is the case in the market entry strategy involving identification and engagement of a strategic alliance/joint venture, selection of a local development partner is key to the parent company's sucess.  Again, required drug trial partner capabilities correpond closely with those suggested by HBP as necessary to global growth: local expertise/knowledge (c), laboratory access (c), regulatory knowledge (b) and a common technology platform (c).  It is fascinating how the tools and principles necessary for intelligent and productive global expansion are relatively universal no matter the end goal, market or players involved.