Xing Zong is a fourth year graduate student in physics at Duke University and a member of the Duke University Chinese Students and Scholar Association (DCSSA). He recently interviewed marketing professor David Schmittlein, deputy dean of the Wharton School, who is an expert on marketing research methods, models for marketing decisions, advertising and new product development, among other topics. Schmittlein spoke about customer loyalty, innovation, building a global brand and the role of Chinese state owned enterprises. A version of this interview appeared recently in People’s Daily Online.

Schmittlein has consulted widely for major corporations, including American Express, Lockheed Martin and AT&T. He has helped them design and analyze market research information for measuring customer perceptions and preferences and assessing the impact of marketing decisions. Most recently, his research used information on the history of individual customer purchase patterns to identify active and inactive customers, assess future sales potential, develop customer specific efforts and analyze new product success.

Xing Zong: You mentioned that the loyalty of a consumer changes day by day, and not year by year, in today’s Internet age. So what is your suggestion for Chinese companies trying to retain their customers?

Schmittlein: The answer to this is both quite simple and extremely difficult. The company needs to continue to innovate, and to continue to excel at understanding the evolving needs and wishes of its key customer segments. This is, in principle, what all firms say they do. But in practice, the desire for steady earnings growth quarter by quarter, the desire of managers to pursue “efficiency” in operations, and the inclination of the firm’s leadership to assume that because it knew what customers wanted last year (or five years ago), it intuitively knows what customers will want next – all these are enemies of significant innovation. Companies that are successful in re-creating the loyalty of their customers understand these barriers to innovation and put in place explicit processes and reward systems to counteract them.

Innovation is not only expensive; it is also frustrating. It feels often like the organization is ceding too much control to the whims of customers, and that what customers say they want is neither reliable nor affordable. That is why, in market research, it is important not only to ask customers what they want, but also what they are willing to pay for. In addition, innovation is risky, and organizations, especially large and successful organizations, are often among those least inclined to take big risks, in part because they feel they have so much to lose. And the losses in innovation occur not just when innovations fail; they also happen when innovations succeed. When one new product replaces an older product at a company, what happens to the managers of the formerly-successful product? Do they still have a place of prominence in the company; indeed, do they have any place at all?

Because of these challenges, one sometimes wonders how any innovation happens at all in large companies.

Xing Zong: Many Chinese companies aspire to be global players, and building a global brand will be a key issue facing them. If you are asked to compile a to-do list, what would be the top five items on the agenda?

Schmittlein: Well, let me suggest three questions that a Chinese company must answer successfully, and then three steps the company must take.

Question #1: Why does the company wish to build a global brand? The answer to this is not as obvious as it may seem, and the company needs to be specific about what it really wishes to accomplish globally. Does it want to control its own destiny with customers? Or more readily attract the attention of key suppliers? Is it willing to become an icon not only to customers and distributors, but also to consumer groups, trade unions and governments worldwide? Does the company see a need to have consistency in its image across the world? If so, why? How much consistency? Will its products really be consistent worldwide? Will they be used in the same ways in different countries? Is the benefit of a global brand related to the desire for instant name recognition for global new product introduction and distribution, or is it more related to sustaining a price premium for products based on a perception of value associated with the company name?

Question #2: What kind of global brand does the company wish to build? Some such brands are primarily aimed at loyalty from distributors and basic familiarity with customers (e.g. Mitsubishi). Some intend to create a perception that the company offers something distinct and valuable (British Airways). Some intend to suggest that the company is closely associated with some type of consumer group (e.g. older people, female homemakers, etc.) or with some specific kind of lifestyle (Nike). Some wish the name to stand for technological prowess or commitment to innovation (Boeing) and some to a certain sense of style (Swatch watches).

So, the company needs to know what it actually wants the name to indicate — in short, what will be “consistent” across countries, and what will be allowed to vary to meet the needs of the local market. For instance, in Japan, the convenience food chain Kentucky Fried Chicken uses the popular figure of a specific person, “Colonel Sanders,” and has marketed the foods as associated with “aristocratic elegance.” But in the United States, while the company again uses the image of Colonel Sanders as a recognizable icon, the brand stands for fun food for the whole family at a very affordable price. This is a “global brand” that is standardized in certain respects, but customized in others. For some Chinese firms, the goal seems to be establishing basic familiarity, perhaps with some basic reliability as well, and that is fine for establishing the brand with distributors, and putting it perhaps into a “consideration set” by consumers; i.e. a set of products the customer will consider and evaluate in a purchase decision. But it is unlikely to be sufficient in itself to create much customer loyalty.

Question #3: What about the company is really unique — or distinct from key global competitors — and demonstrably true? Successful global brands do not so much invent an image for themselves, separate from the ethos and values of the company. Rather, they translate the company’s distinct commitments, its unique history, and its particular dominant capabilities into a simple summary that people can readily understand, and whose values they can readily appreciate worldwide.

Now, for the three action steps:

Action #1: Get control of the means to create an image globally. This may not be easy or inexpensive. It relates to the consistency of product design, packaging, distribution and brand labeling worldwide. It also relates to control of the marketing activity worldwide, establishing the means (e.g. working with a global communications/advertising company) to ensure the needed type and degree of consistency in brand message, logo and image in multiple countries. This usually involves creating some expanded/mandated coordination of communication programs across the company’s divisions (product line divisions or regional divisions or both), and sometimes greater exercise of control by a central corporate office.

Action #2: Be sure that the global brand’s key elements represent the foundation of all the company’s activity, rather than a veneer that is painted on after the products and services are created and packaged. If there is an element of distinctive competence or style, or association with some user group or lifestyle, it is important to put processes in place to ensure that this key characteristic that is claimed for the firm is truly present in its products and services, and indeed throughout the entire set of the company’s operations. These include its financial operations, management of its suppliers, government relations and so on.

Action #3: Establish measurable goals for global branding and a timeline for assessing progress. Too many firms claim a global brand image but do not commit themselves to observable outcomes and to measuring and rewarding progress toward those outcomes. Often this will include measuring brand awareness, interest and brand associations held by various segments of potential customers in various geographic markets. Compensation of both regional managers and also those in advertising/promotion and product design should all be influenced directly by progress toward the goal of establishing the key elements of the global brand image.

Xing Zong: Chinese products in the U.S. market always give people the same impression: cheap and reliable. Is there any way Chinese companies can make luxurious, higher-priced and more sophisticated products?

Schmittlein: Sure. In part, this consists of a commitment to spending on research and development, and retaining sufficient earnings for this investment. China has lagged in this respect but there is reason to be optimistic going forward. Also, the firm must have confidence in the creativity of its product designers, market researchers and basic research teams. This will take some time as well, but the success of a few initial Chinese firms will surely embolden other firms to see that this is possible and that the benefits to be realized over the medium and long term are great.

Some higher-priced, complex products are essentially technology based, and sufficient basic investment in scientific research (or licensing of innovative technology) can provide a direct basis for Chinese firms to build high-priced products and demonstrate their technological novelty and superiority via the usual objective standards of such performance — speed, throughput, reliability, durability and so on.

But some more sophisticated products establish their value more on elements of style, fashion or lifestyle association. Here, it will be interesting to see how Chinese firms approach such markets. They could try to conform to a vague “international,” often European standard of “style,” though this is unlikely to sustain a price premium or price parity with competitors from other countries. Instead, it would be fascinating to see Chinese firms begin to incorporate elements of Chinese culture and values directly into products that are sold based on style, such as fashion, apparel and beverages.

There are, of course, numerous examples of firms in multiple countries that have created a brand image based on an association with certain aspects of a country’s culture, and have essentially marketed that aspect of culture to the world. One thinks of Mikimoto (a distinctly Japanese simplicity and elegance), Foster’s beer (Australian rugged independence) or Patek Philippe watches (Swiss attention to detail). Of course in many cases, these brand images may be based not so much on accurate descriptions of a country, but cultural stereotypes that are widely perceived in other countries and that happen to be convenient for the company’s branding purposes.

Xing Zong: The Internet has made the world flat. But the fact is that Internet giants like Google, Yahoo and Ebay have been defeated by Chinese domestic Internet companies. So the irony is that in this IT industry where people more easily embrace globalization, they still choose domestic brands. What do you think?

Schmittlein: Service businesses, such as the management of Internet based information and shopping, are typically more complex to internationalize. The very objective of Internet-based activity — to become as “high touch” as possible, using detailed recognition of the specific norms and customs of a particular audience — provides companies with richly textured local knowledge a distinct advantage, at least for a time. However, over time, one sometimes sees a degree of standardization in the approach to services across countries, making it easier for non-domestic firms to enter a market. Further, the growth in the economic value of the China market makes it more appealing for non-domestic firms to develop, or acquire, the expertise needed to invest heavily in succeeding in that market.

Finally, there are significant advantages to scale in web-based businesses, in selling sponsorships and related advertising/promotional access to large global firms, in managing web-based operations (e.g. customer-specific marketing) and in some technical Internet-management issues. We have seen all these effects in financial services and advertising services, as local dominance has increasingly given way to the benefits of service provision by large global firms.

So, while it is natural for local firms in reasonably large markets to build on their local expertise in a new and growing market, over time there will be advantages to achieving scale economies. This can, of course, occur through collaborative agreements between “local” firms, or though mergers, acquisitions, or direct market entry and investment.

Xing Zong: The marketing guru [Philip] Kotler once said that the Chinese seem less inclined to build huge scale businesses and, instead, have their hands in several smaller businesses. What is your comment on that?

Schmittlein: Although I like and respect Dr. Kotler, I would prefer not to comment directly on his views, since I am sure they were meant to apply to particular Chinese companies at a particular point in time. I would like to offer, however, three thoughts on the size of Chinese businesses that relate to the definition of Chinese firms, the reasons why size was limited in the past, and how some of those constraints are changing now and in the future.

First, in considering this question of size, it is important to note the role and relevance of Chinese state owned enterprises (SOEs). As you know, some of these are very large and important, though one might consider their size to be a reflection of government policy rather than how Chinese entrepreneurs would have caused these sectors to self-organize. Also, the prominence of SOEs varies greatly across the provinces in China, and the extent of state control exercised over the SOE also tends to vary by province. The future of SOEs in Chinese business, both domestically and globally, is a very interesting question, even as some business leaders and management scholars tend to think of them separately from the rest of Chinese firms. I would suggest that the question of whether China does or does not build huge businesses depends in part on how one accounts for the SOEs.

Second, there are several factors that seem to have limited the size of Chinese firms in the past 25 years. I should acknowledge that others have commented on this issue, and I believe one of the most thoughtful has been my esteemed Wharton colleague, Professor Marshall Meyer. His observations can be found in published journals and on Wharton’s knowledge website, Knowledge at Wharton, and he has influenced my own thinking on this matter. One set of factors has been the difficulty of serving the entire domestic (China) market with one firm. In many sectors, the historically limited infrastructure for communication and transportation, and the limits on labor mobility geographically, have hindered the growth of firms within China.

Further, the limited access to capital for expansion and acquisition has been a hindrance, both because the Chinese financial institutions were still in a relatively early stage of development, and because of the limits on access to foreign capital (by law and by inclination of foreign investors and lenders). It has been suggested that another reason for limiting the size of firms has been the desire some years ago not to stand out too distinctly within the Chinese social, legal and political environment.

Finally, the desire in Chinese firms for a certain kind of consensus-building in management decisions (even in the face of a hierarchy of knowledge and respect) has been seen as perhaps adding a complexity to very large organizations. While one consequence of these historical conditions has been the limited size of Chinese firms, one can suggest that another consequence has been the parent-subsidiary model of governance with interlocking boards and management leadership. In such structures, it has been suggested that many of the benefits of small firms are achieved, while preserving some capability to act as a “large firm” when a business opportunity or threat may dictate such a need. Again, my colleague Professor Meyer has investigated such issues of effective organization in Chinese firms in detail, and I would refer the interested reader to his work on this topic.

Third, it is apparent that the near future brings change in all the factors just listed, except perhaps the Chinese style of organizational decision making. In addition, China’s strength in certain industries has led to opportunities for global expansion that create pressure to grow larger organizations. The basis for this growth in size has been building for several years now. Indeed, between 2000 and 2003, the number of Chinese firms with revenues exceeding 5 billion Rmb more than tripled. So, I expect China to be the home of companies that are significantly larger than in the past. With respect to market expansion, the key issues are global market entry, branding and strategic alliances. With respect to organizational control, the key issues are decision authority and the centralization or decentralization of organizational control.