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.

DUAL-BRAND STRATEGIES
ASSET MANAGEMENT:
FOR CHINA'S INDUSTRIAL MARKETS

BRAND 2

BRAND 1

For 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.

Dual-brand strategies

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.

High-end

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.

Mid-end

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.

MARKET
SEGMENT

High-end
Low-end

INDUSTRY PLAYERS

ESTABLISHED PLAYERS

EMERGING PLAYERS

High-end

High Mid-end

Low Mid-end

Low-end

Traditional focus areas

New focus areas

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.

Dual-brand strategies

Should 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.

Question

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.

Read more on the "new middle"

Published by Roland Berger, 2012

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

Enter to...

Defend
5

Question

Which 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 midend 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 dualbrand 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

1. Pure single-brand
strategy
2. Single-brand strategy
with multiple product
lines

1. Two brands in a
brand family

Brand
architectures

2. Two standalone
brands

Dual-brand strategies

1.

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.

Sumitomo Demag targets the high- and

mid-market with the same brand

2.

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.

Bosch Power Tools targets the

Chinese mid-market with their "T-Edition"

3.

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."

KION opts for this approach with its

family brand "Baoli"

4.

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.

Caterpillar pursues this strategy

with its Chinese brand "SEM"

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

2. Required
investment and
effort

3. Time to market
awareness

4. Match with
segment
requirements
7

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

Dual-brand strategies

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 upselling 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.

Global Brand

Local Brand

Local Brand

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.

10

Dual-brand strategies

What 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 midend 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.

Question

Read more on FRUGAL product:

Published by Roland Berger, 2012

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.

DON'T

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.

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

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.

11

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 highend 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.

12

Dual-brand strategies

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

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.

14

Dual-brand strategies

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.

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

RBChina.Marketing@rolandberger.com

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