(China's River Piano and A Tale of Three Companies: The Survival Strategies of Sony, Hitachi and Canon)

I--_--------------------- ---.:ST:.:ARBUCKS'FORAYINTOTEA-ORIN KINGINDIA 313-186-1 that it would nothold anyequity. Theapplication wasrejected againinJune 2007 by the Department ofIndustrial Policy & Promotion (DIPP),whichsuggested thatStarbucks takethe 51 % FDI route rather thanthefranchisee route.

With itsapplication beingrejected forthe second timeandamid speculations thattheIndian government wouldfurther tighten franchisee regulations, Starbuckswithdrewitsapplication from the FIPB inJuly 2007, without givinganydate foritsIndian debut.AStarbuck, spokesperson said, "Starbucks CoffeeInternational, awholly-owned subsidiaryofStarbucks CoffeeCompany, notified theministry ofcommerce & industry andFIPS thatwedecided topostpone ourentry into India andofficially withdraw theapplication tooperate single-brand retailstores inthis country.

Starbucks isreviewing alloptions andevaluating howwecan proceed relatedtoour entry intoone of the fastest growing economies inthe world. Itispremature forustoannounce anynew dates.':" The company wasalso unsure abouttheinvolvement ofSharma andBiyani inits future plans.

N WITH THETATAS In January 2011, Starbucks tookasignificant stepandsigned anon-binding memorandum of understanding (MoU)withTata Coffee (asubsidiary ofTata Global Beverages Limited)(Tata), one among ofIndia's leading providers ofpremium Arabicacoffeebeans. TataGlobal Beverages was apart ofthe global TataGroup andtheworld's secondlargestteacompany. Itsbrands included TataTea,Tetley, Himalayan naturalmineral water,andEight 0'Clock Coffee. Tata Coffee, asubsidiary ofTata Global Beverages, wasAsia's largest coffeeplantation companyand the third largest exporter ofinstant coffeeinthe country, whichproduced morethan10,000 Metric Tonnes (MT)ofshade grown Arabica andRobusta coffeesatits 19 estates inSouth India.Itstwo Instant Coffee manufacturing facilitieshadacombined installedcapacityof6000 MT.Itexported green coffee tocountries inEurope, Asia,theMiddle East,andNorth America.

The MoV wassigned forsourcing androasting high-quality greencoffee beansinTara Coffee's facility inCoorg insouth India. Boththeparties alsoexplored thedevelopment ofStarbucks retail stores inIndia. Starbucks' Schultzsaid,"India isone ofthe most dynamic marketsinthe world with adiverse cultureandtremendous potential.ThisMoV isthe first stepinour entry toIndia.

We arefocused onexploring localsourcing androasting opportunities withthethousands ofcoffee farmers withintheTata ecosystem. Webelieve Indiacanbean important sourceforcoffee inthe domestic market.aswell asacross themany regions globally whereStarbucks hasoperanons.v'" After ayear ofsigning theMoU, Starbucks setupajoint venture withTataGlobal Beverages Ltd.

in January 2012.

Theagreement pavedtheway forStarbucks toset upcafes inIndia andforTata to sell Indian coffee globally. The 50/50 JVwas named TataStarbucks Limitedandwould own and operate Starbucks cafesbranded as'Starbucks Coffee-A Tata Alliance'. Thecompany planned toopen coffee retailstores across thecountry bythe end ofthe year, starting withstores in Delhi andMumbai. Inaseparate agreement, TataCoffee Limited agreedtoroast coffee and supply itto Tata Starbucks Limited.andtoexport toStarbucks CoffeeCompany.

The agreement pavedtheway forStarbucks toreach consumers inIndia. Thecompanies agreedto have anexpanded rangeofbeverage offerings forIndian consumers andjointly leverage assetsand innovation tooffer premium products. JohnCulver, president, StarbucksChinaandAsia Pacific, stated, "We're verypleased tohave found thebest partner forStarbucks inTara -acompany that shares somany ofthe same values forconducting businessinaway thatearns thetrust andrespect of our customers andpartners (employees). Welook forward tobringing theStarbucks Experience tocustomers inIndia byoff~rin~,~igh ~ualityara?ica coffee,handcrafted beverag~s, locally relevant food,andlegendary service.~Stating thebusiness advantages ofthe partnership, Howard Schultzsaid,"What Tatabrings isaunique perspective interms ofreal estate acquisition capabilities. theopportunity tointegrate Starbucks intoTajHotels, theability tobrin? fo?dfrom the Taj into Starbucks storesandthecapability thatweJust could notdoon our own Justtnterms of the infrastructure anddistribution."n 7 217 218 International BusinessStrategl~Y'- _ 313-186-1 The companies opinedthatthey shared common valuesofresponsible businessethicsanda commitment tocommunity. Tatahadbeen working toimprove theli~es ofc~ffee growing communities inthe state ofKamataka. Starbucks,throughaninitial financial commitment, would support Tate's'Swastha' _aschool forchildren withspecial needs(in partnership.

wi~htheCoorg Foundation) andaim toincrease itscapacity andoutreach intotherural communltle~ I.n.

th,e cof~ee growing regionofKarnataka, StarbucksandTate alsoplanned towork together on Intt,I8,tJves like promotion ofresponsible agronomypracticesandtraining forlocal farmers, .technl~lans, and agronomists 10 improve theircoffee-growing andmilling skillsandother cornmuruty projects, The twocompanies startedtheirventure withaninvestment of $80 million andproposed tostart their stores inAugust orSeptember of2012, In September, thecompany announced thatthe opening ofthe Starbucks storeshadbeen pushed backandtheir opening wouldcoincide withthe festive season, whichstarted inOctober. Whilethecompany didnot give anyreasons forthe delay, Saloni Nangia, president atTechnopak, said,"The storerollouts ofinternational chains usually taketime because theyinvolve alot ofgroundwork interms ofsourcing ingredients, menu design, andchoosing thefurniture forthe stores.

A lot ofeffort goesintoensuring thatstores areat par with international stendards.?" Analystsalsoopined thatthedelay might actually workin favor ofStar bucks asconsumer spendingwouldbeatits peak during thefestive season.

Finally onOctober 19,2012, Starbucks openeditsfirst store inIndia, inElphinstone Building, Horniman Circle,Mumbai. OnJanuary 24,2013, itexpanded itspresence toDelhi by opening 2 outlets, oneatIndira Gandhi International Airportandtheother atConnaught Place.In January 2012, Culver along with Tata Global Beverages vicechairman, R.K.

Krishnakumar, had announced theirplans toopen 50cafes bythe end of 2012 with aninvestment ofRs. 4billion, but had missed thetarget. Culver said:"From theStarbucks perspective, weare apublicly traded company. Wedonot release thosefigures publicly. Wedidnot dothose numbers specifically from a Starbucks perspecrive.?" AsofMarch 2013,Starbucks operatedfivestores inMumbai andfour in New Delhi.

INITIAL RESULTS When thespeculations ofStarbucks enteringIndiawereon,Shoba Narayan, anIndian columnist, wrote.

" 'D~cent.' co.!!eeloracom.m.itted southIndian coffeeconnoisseur suchasme involves along, very specific list:Ithas tobe piping hot;theloam mustbeontop; ithas tobe bubbly andthebubbles have tobe breaking down;itshould beserved inastainless-steel tumblerand'davara', whichis the Indian version 01 asaucer,' thecolor ofthe drink should notbeasdark ascocoa butnot too milky either; andtheamount 01 sugar should bejust enough totake outthebitternes; butwithout adding anysweetness tothe taste. That's whatIwould calldecent coffee. Mydad drinks fourcups 01 coffee aday andpays 10rupees percup athis neighborhood, no~namecafe.I pay 35rupees for a cup ofespresso atCafe Coffee Day.Itstill costs under adollar forthe I .

-r .... .mosexpensive cup OJ coffee In India. HowISStarbucks Somgtoget price-conscious Indianconsumers whothink they are coffee experts topay US$4/or atalt .Iatte? Lastly, itneeds tofigure Olltwhat theIndian consumer meanswhentheysay, All!want ISasimple cup 01 decent coffee'.,,26 However, whenStarbucks openeditsfirst store inOctober 2012India I . " ,gaveawarm we come to the brand. DUring theearly daysofIts openmg customers lineduptotak .

f h b ddh . 'ea Sip 0 te ran eot beverage. The lines stretched so.Iong that a 'one-in one-out' policy .I h h I· ,was Imp ernented Aftertwo mont S, te mes were gone, butnottheenthusiasm ofthe custome C ' . rs.ustomers tookhour long treks toreach thestores fromdifferent partsofthe city Apart f ff b hS bk .romcolee and snacks customers also augttar lIC stumblers; otherstookpictures ofthe cups SIbk' I '., F bkTh . •aruc sogo andthe mtenors to post onace 00.

eywere alsosmitten bythe taste ofth d. ' b 'h e d I h epro ucr, Formany Starbucks ecame t eprererre pace toave coffee andhang outwith fro ds:

d hev di '..

len s, an t ey did not mind paying 8 STARBUCK5'FORAYINTOTEA-DRINKING INDIA ___ +-..£.l~..1 313-186-1 extra forthe Star bucks experience. However,thereweresome whowere disappointed. Theyfelt that Starbucks hadnotpriced itsproducts competitively andthat theproducts wereveryexpensive.

Nemat Kaur~astudent, said, "It feels likeareasonable amount,but if you're goingtopay that every week, It would takeatoll onyou asastudem.''" Analysts opinedthattheresponse toStarbucks' arrivalinIndia marked therising consumer wave that was infatuated withbrands andthetransformation ofIndia fromafrugal population toan economic worldpower thatcould afford branded products andshell outtheextra bucks. Indiahad thousands ofcoffee shopsandsmall teavendors knownas ella; wallahs.

However, withrising incomes, theIndian consumers supportedboth-they consumed cupsoftea onthe street during the day andhung outatcoffee shopsinthe evenings. Commenting onthe out-of-home consumption trend inIndia andasteady shiftinconsumer preferences likecoffee becoming abeverage sipped nationwide, AvaniSaglani Davda,chiefexecutive ofTata Starbucks Ltd.,said"The sizeofthe Indian economy andtherate ofgrowth ofthe cafe sector, combined withrising spending power and shift inconsumer preferences presentatremendous opportunityforUS."28 Stating the preference ofthe country's youth,Roberio Oliveira Silva,headofthe London-based International Coffee Organization, said"Young peopleareturning toplaces likeStarbucks becausetheywant a trendy place10socialize andcantake their iPhones andconnect tothe free Wi_Fi."29 COMPETITION INTHE I.NOIAN CAFEMARKET In the Indian market, Srarbucks wouldhavetowithstand competition fromestablished playerslike CCD andBarista (whohadstarted almostoneand ahalf decades earlier)andhad now entered into newer territories withtheir cafes onhighways andlocations suchashospitals andcollege campuses bytrying outnew formats likekiosks andcoffee carts.These competitors had strengthened theirsupply chainsandrefined theirmenus, andoffered animproved experience to the Indian customers. Apartfromthese coffee chains, hundreds ofwestern-influenced stand-alone coffee shopshadmushroomed acrossthecountry (RefertoExhibit rv for Key competitors of Starbucks inIndia).

Starbucks wasalate entrant intothemarket, whereCCOhadthefirst mover advantage andwas a tough competitor interms ofmarket experience, numberofstores, andthereby numberof customers (RefertoExhibit Vfor Cafe competition inIndia). Therewasalso competition in terms ofpositioning. Starbuckspositioned itselfasa'third place' -aplace between officeand home where people feltcomfortable enoughtospend theirtime withfriends orrelatives, ortohave a business chatover amug ofsteaming coffeeandsnacks. Thecompetitors toopositioned themselves onthe same lines.Costa Coffee positioned itselfasa'fun place', Dunkin' Donuts positioned itselfasafood cafe, andCCD's themewas'sitdown' -which implied thateverything could beresolved onceyousatdown andmade thecafe your hangout spot.Pricing toowas a competing factor.Whilemostofthe cafes werepremium brandswithlittleprice difference, CCO's regular cafewaspromoted asan affordable brand.

The cafes alsocompeted throughlocalization andpersonalization interms ofthe look ofthe cafe and items served. CostaCoffee, forinstance, usedbright colors andlighting foritsinteriors andits menu contained morecolddrinks thanitsmenu inthe UK, which wasdominated byhot drinks.

Barista Lavazza stores,onthe other hand, retlected theItalian connection throughallthings Italian suchasart, culture, fashion, etc.Starbucks, whichfollowed personalization everywhereit went alsointroduced afew things thatreflected Indianness. Thestore interiors wereinspired by the culture ofdifferent partsofthe country. Interms offoods andbeverages, Starbucksretainedits classic signature itemssuc.hasch.ocolate"mufflns ~r.cooki.es ~rcakes. Ho.wever, atthe ~ame time, some Indian fooditems likeChicken TikkaPanini, EIRIChl MawaCroissant, TamarindPeanut Chicken Calzone MurgMakhni Pie,Mutton SeekhinRoomali Roti,andChai TeaLatte were introduced keepingthepalate ofthe local customer inmind.

9 220 International BusinessStrategy 313-186-1 Though Starbucks wasalate entrant, it made itspresence felteven wit~ .o~ly afew stores.

According toAnkur Bisen,vicepresident ofretail andconsumer productsdivisionatTechnop~k.

"Foreign brandssuchasaCosta Coffee oraStarbucks haveahuge pullandther~fore can~sily milk themarket basedontheir clear-cut positioning. But,asofnow, theretailers aren t too worried.?" Competitors inthe Indian market were,however, feelingthe~eat ofthe nC\,l/ entrant and were making moveslikepositioning themselvesbetter,expanding theirmenu. openmg more stores, increasing theirinvestments, etc.

LOOKING AHEAD India waspredominantly atea drinking nation,withcoffee ~oder~tely ~opular.onlyinso~e southern states.Pamela Boykoff atCNN said,"Most Indians stillbegin theirdaywith astearmng cup ofmilky, sweetchai,andit'sunclear whether theirtasteforcoffee will grow. PlusS~bucks' profit margins inIndia aresmaller: It'sselling itsproducts atasignificant discountsopnces are more inline with Indian standards.

IIII But Schultz, retorted, "Notanymore. Walkthestreets of India. There arcsomany coffee players doingpretty well.Thatgives usalot ofconfidence thatthe winds aregoing tobe atour back."n Someanalysts likeArvind Singhal atCNN toowere optimistic aboutStarbucks' chancesofsuccess inIndia andsaid, "Indian coffeemarket could double inthe next fiveyears, hauling inmore than$500 million. AndIndian consumers -hungry for clean, safeplaces toget together withfriends -may view Starbucks moreasahangout spot than apurveyor ofcoffee. Youcould beselling lemonade inStarbucks inindia andpeople would still come.?" The home grown brands like CCD andBarista pioneered thecafe concept inIndia inthe 1990s and paved theway forforeign coffeechainstojoin thebandwagon. Theyredefined thewhole coffee drinking experience forthe Indian consumer withinnovative productsandentered newer territories. Consumers toowere becoming moreopentoexperimenting withtheir choice of beverages andfoods. Caferetailing wasnotjust growing butevolving aswell. India's urbanization, growingyouthsegment, andtheir rising disposal incomesandtheir aspiration tobe part ofaglobal lifestyle andculture weredriving thischange. Likewise, industryexpertsbelieved that with theentry ofglobal heavyweights likeStarbucks andDunkin' Donuts,thesegment would mature overlime. However, theyopined thatitwould strengthen themarket withheavy investments, newofferings, andformats andhelp inthe broadening ofthe cafe market.

As the coffee shopindustry wasgrowing atarate of25% in India (adding 100million coffee drinkers infuture) andwith theencouraging responsethatStarbucks storeshadgalinthe country, the company plannedtoexpand tomore locations totap the vast potential ofthe Indian market.

John Culver, President, StarbucksCoffeeChinaandAsia Pacific, said,"We areexcited aboutthe great opportunities thatIndia presents to Starbucks.v" However,inaddition totough competition, the comp.any alsohadto~vercome otherpote~t roadblocks. Amajor challenge facedbyStarbucks was findmg. agood location atr.easonabl~ pnce.Withevery player targeting asimilar customer profile, havingthestore atthe right location wascrucial forthecompany. Andtherent-to-sales ratio inIndia \~asamong thehighest whencompared acrossglobal markets. Higherrentcosts and lower menupnces ~u~stremendous. pressureonthe company. Moreover, therewasaninvestment of around Rs.6-8 million thatwent intoeach outlet along withanine year leas Ad" . " -e.wrong eCISlon tn t~rms ofreal estat~ couldmeanhugelosses forthe company overtheIon term andhence it decided toteam upWith Tate. gterm andnence, The next challenge wasemploying thetalent poolandtraining them h' , E'" 1 asper te company s requirements. extensivetratrungladtobe imparted tothe employees to .

.. .. ensuresupenor customer expertence. Withevery player claiming tooffer aunique customer expe' dSk . nenceantaste, tarbuc s needed thebest team ateach ofItsoutlets. Coffeechainslike CCD adGI .

J nona ean'shadsetup 10 ..

_-~--------------- STARBUCKS'FORAYINTOTEA-ORINKING INOlA 221 313-186-1 their owntraining schools, but it was rough andariskier proposition forStar bucks as it had just made itsentry intothecountry. DiBella Coffee India,onthe other hand, brought itsown baristas and technicians fromAustralia toMumbai totrain itsstaff in-house onaweekly basis.

Cost management wasyetanother challenge faced by Starbucks, amidstascenario where it had to deliver a cafe experience ofthe best international standards.InIndia, everycustomer lookedfor value-fer-money offerings.Value-for-money pricingwasoneofthe three success factors-product quality, value-for-money pricing,andcustomer engagement -which Starbucks couldnotignore if it wanted toattract theIndian consumer. Inorder tosatisfy thisneed ofthe Indian consumer, Starbucks hadtohave acompetitively pricedlistofitems onitsmenu (Refer toExhibit VIfor the prices atStarbucks).

Summarizing themarket response andStarbucks' plans,Avani Davda, chiefexecutive ofTata Starbucks said,"Till now, wehave hadatremendous responsetoall our outlets inMumbai and Delhi. Wewill gowhere wefind customer demand.Weseealot ofpotential. It'sacountry ofover a billion people. Youcannot gaugehowmuch demand thereisand will be.,,)3 However, the company didnot reveal thedestinations orthe numbers ofthe stores thatitintended toopen in future. ButDavda said,"Surely, thesouthern Indianmarket isavery important regionandis known foritscoffee consumption (andproduction). We'lllookatall the opportunities whichcome our way.?" II 222 Internatlon_al_B_usin_e_ss_Strateg~y~ -_ 313-186-1 Exhibit I Starbucks PresenceAcrosstheGlobe Asia Europe North America • Bahrain (14) •Austria (12) • Aruba (3) • China (851) •Belgium (9) • Canada (1,324) • Hong Kong(129) •Bulgaria (4) • Curacao (I) • India (8) •Cyprus (9) • EI Salvador (4) • Indonesia (145) •Czech Republic (14)•Guatemala (2) • Japan (989) •Denmark (4) •Costa Rica(2) • Jordan (9) •Finland (2) •Mexico (377) • Kuwait (79) •France (82) •Puerto Rico(20) • Lebanon (18) •Germany (167) •The Bahamas (8) • Macau (9) •Greece (36) •United States(13,279) • Malaysia (141) •Hungary (7) • Oman (6) •Ireland (30) Oceania • Philippines (206) •Netherlands (28) • Qatar (12) •Norway (I) • Australia (25) • Saudi Arabi. (73) •Poland (33) • New Zealand (32) • Singapore (87) •Portugal (7) SouthAmerica • South Korea (556) •Romani. (9) •Argentina (64) • Taiwan (291) •Spain (80) •Brazil (78) • Thailand(171) •Sweden (3) •Chile (43) • Vietnam (I) •Switzerland (52) •Peru (55) • United ArabEmirates (III) •United Kingdom (806) .- ~ Transcontinental (Europe andAsia) Africa , ., ?

~ ....

• Turkey (179) •Egypt (27) 4, • Russia (63) •Morocco(4) .

~ "Data aso2013 if Source: "HowManyStarbucks areThere? ",1'WlVW,loxcel,comlsbu.x{aq,hlml 12 l--_------------------- --=.:5TARBUCK5·FORAYINTOTEA·DRINKING INDIA 313-186-1 Exhibit II Starbuck. FinancialInformation As ofand FortheFiscal Year Sep30, Oct 2, Oct 3, Sep27, Sep28, Ended 20t220112010 20092008 Results ofOperations Inmillions exceptpershare data Net revenues:

Company-operated stores $10,534.5 $9,632.4 $8,963.5 $8, 180.1 $8,771.9 Licensed stores 1,210.31,007.5 875.2 795.0 779.0 CPG. foodserv iceand other 1,554.71,060.5 868.7 799.5 832.

I Total netrevenues $13,299.5 $ 11,700.4 $ 10,707.4 $ 9,774.6 $ 10,383.0 Operating income $1,997.4 $1,728.5 $1,419.4 $5620 $503.9 Net earnings including 000- 1,384.71,248.0 9483 391.5 311.7 controlling interests Net earnings (loss)attributable 0.92.32.7 0.7(3.8) to non-controlling interests Net earnings attributable to 1,383.8 1,245.7 945.6 390.8 315.5 Starbuck.

EPS -diluted I.

79 1.62 1.24 0.52 0.43 Cash dividends declaredper 0.720.56 0.36 - ~ share Net cash provided by operating 1,750.3 1,612.4 1.704.91,389.0 1,258.7 activities Capital expenditures (additions 856.2 531.9 440.7 445.6 984.5 to property, plantand equipment) Balance Sheet Total assets $ 8,219.2 $ 7,360.4 $ 6,385.9 $5,576.8 $ 5,672.6 Short-term borrowings - - - - 713.0 Long-term debt(Including 549.6 549.5 549.4549.5 550.3 current portion) Shareholders' equity 5,109.0 4,384.9 3,674.73,045.7 2,490.9 Note: Starbucks fiscalyearendsonthe Sunday closesttoSeptember 30.Thejiscal yearelided 0" October 3, 2010 included 53 weeks withthe53rd week/ailing inthe fourth fiscalquarter.

Source: "Starbucks Corporation Fiscal2012Annual Report", hltp:llinvestor.starbucks.com, 2012 13 221 • 224 InternationalBusinessStrategy 313-186-1 R 'IVI Exhibit III f Coffee inChina (inbillions ofYuan) eta I aue 0 0 INSTANT COFFEE • FRESH COFFEE /II 8 /III ""' 6 ..

~I ..

4 -

'~i ....

II~ 2 ~I 0 '06 '08 '10 '12 '14 10 billion yuan=$1.60 billion "Data courtesy Euromonttor International Adapted from Laurie Burkitt, "Starbucks PlaystoLocal Chinese Tastes",hrrp:l/online, wsj.com. November 26,20/2 14 "~~iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiii"" _ ______________________ STARBUCKS'FORAYINTOTEA-DRINKING INDIA 225 - --__-+--==--4 313-186-1 Exhibit IV Key Competitors ofStarbuck' inIndia Cafe Coffee Day Cafe Coffee Day(CCD), adivision ofthe Amalgamated BeanCoffee Trading Company Ltd.

(ABCTCL), openeditsfirst store inBangalore in1996. By2013, ithad grown tobecome India's largest coffeeretailer, withexports toEurope andtheMiddle East.Ithad over 1.319 outlets in140 cities across 28 states." ceo offered everything relatedtocoffee including take-home products and equipment. Toattract customers, CCDhadalso revamped itsmenu, CeD stores onNational Highways servedIndianstaples like idlis (rice cakes), dosas (ricecrepes), pararuhas (flatbread), and biryani (vegetable rice)totravelers. CCDLounge customers wereallowed tocook uptheir own treats with ado-it-yourself menu.CCDfunctioned inthree formats -- lounges.

cafes, and kiosks. Thecompany hadplans toexpand itschain to2000 stores by2014.

38 Barista Lavazza Batista, thesecond largestIndiancoffeechain,wasestablished in2000. Itwas acquired by Italian coffeeproducts manufacturer Lavazzain2008 andcame tobe known asBarista Lavazza.

Barista Lavazza, by2013. operated morethan318 39 outlets andoffered menuitemslike espresso, lattes,cappuccino, andvarious pastries, in addition tobasic coffee.

Costa Coffee Costa Coffee wasaBritish coffeeretailer whichentered intoIndia in2005, franchised by Devyani International RJCorp. inIndia.

It was thefirst international coffeechaintostart operations inIndia. Asof2013, itwas predominantly operatinginthe north, east,andwestern parts ofIndia with95stores ofwhich 12 40 were located inBangalore (SouthIndia).Inspite of its late entry, CostaCoffee claimed thehighest average realization percustomer. Theretailer was aiming tobecome amass market player.

It planned toopen newchannels suchasoutlets in airports, multiplexes, etc.,inorder tomaximize itsconsumer touchpoints topenetrate deeper into themarket.

It was also opening storeswithanincreased averageareaof1300 sq ft to accommodate morecustomer footfall.Besides, itwas adopting location-specific branding strategies todrive footfall andwas allowing localstore managers todesign theirownbrand strategies. Theaverage ageofitscustomer was25-28 years, butCosta Coffee aimedtoreduce it further bybuilding strongpropositions forayounger audience. Ithad also launched aFacebook page atthe beginning of20 II.

Dunkin' Donuts In February, 2011,Dunkin' Donutsentered intoafranchise agreement withnorth India-based Jubilant Foodworks, (whichalsomanaged theDomino's pizzachain inIndia) andopened its first store inMay 2012 inNew Delhi. Dunkin' Donutsearnedaunique position globally for pairing coffeewithdonuts andbagels. Itbanked onfood tocapture ashare inthe Indian coffee market. AjayKaul (Kaul), Jubilant's CEO,opined [hatDunkin' wouldgradually expandits westernized menutoinclude indianfareandhadplans tolook atall formats forthe new stores, including 100to150 square-foot kiosks.Thetarget wastoopen 30outlets inthree years and increase to100 inthe next fiveyears." Gloria Jean Gloria Jean'sCoffees, wasanAustralian-owned globalspecially coffeecompany. In2008, it collaborated withaDubai-based retailgroup, theLandmark Group,andopened itsfirst cafe in India. By2013, thechain wasoperating 15outlets acrossNewDelhi, Mumbai, Bangalore, Hyderabad, Chennai,andPune. However, GloriaJean's regional general.manager: T~nyWhile, planned toincrease thatnumber to25 bythe end ofth~ year, andt~en increase Iteightfold to 200 by2014. Forthefirst time, thecompany wassourcing androasting coffeebeansoutside of Sydney; inthis case, inIndia itself.

15 226 International BusinessStrategy 313-186-1 Javagreen Javagreen, anIndian chainwithamix ofstore instore formats ~dindepe~ldenl outlets,w~s started by the Reliance Groupin2003 asjust anadd-on service ~t.

Reh~l1ce Infoc?mm, S WebWorld stores.",As of2013, Javagreen wasoperational across10cities with90 loca~lons In in Lucknow, NewDelhi, Chennai, Bangalore, Hyderabad, Kochi,Ahmedabad, Murnbai,Pu~e.

and Kojkara." It opened storesinlocales likecolleges andoffice campuses thathadacaptive audience. Inexchange forfree space andelectricity, thei~stitutions dem~ndeda10% to20% discount onallofJava Green's offerings. Thecompany aimedatgeneranng volumesforJava Green andalso tobring insubscribers forReliance Telecom.

The Chocolate Room Two Indian Techles asmaster franchisees broughtAustralia's TheChocolate Room (TeR), to the Indian coffee market in2007. TCRhad40outlets by20IIand aimed toadd 10more by 2012 44, comprising standaloneshopsandkiosks inmalls.

Cafe Mocha Cafe Mocha opened itsfirst store in Mumbai inDecember 200I.With 19operational outlets across thecountry anditsown central kitchen, Mochahasdeveloped areputation forproviding a unique menualongwithaMediterranean lookcatering tothe younger generation.

Others There wereother coffee chains thatoperated inthe Indian market likeBrewberrys Cafe, which opened in2008 inVadodara, Gujarat,andhad27stores across Indiaby2013. BlueFoods, the master franchisee ofthe US-based coffeechainCoffee Bean & Tea Leaf, launched 16stores in India. CafePascucci wasanItalian coffeebrandwhich entered Indiawiththelaunch ofitsoutlet in Bangalore. MadhuraBeverages wastheexclusive masterfranchisee forthis brand inIndia and planned toset up60 outlets acrossthecountry. DiBella Coffee IndiawasanAustralian coffee manufacturing company,whichopened achain ofcoffee shopsinMumbai and Hyderabad. Thechain operated 12outlets acrossthetwo cities. Coffee NUwas achain thatwas started in2008 inBangalore andby2013 hadapresence in35 locations acrossIndia.Hindustan Unilever alsoextended itsonly coffee brandBRUtoacafe chain, theBRU World Cafeandhad six outlets acrossMumbai. Anothercoffeechainnamed CuppaJoe,wasanindependent cafe launched byUmbrella Hospitality inApril 2012inMumbai. Allthese smaller coffeechains were exploring thepossibility ofexpanding toother areas inIndia.

Compiled fromvanous sources.

16 .. ..:~~~iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiii ...._ II ------."J---_------------------ -..:s~T::AR:':B~U::CK~S:.."F~O~RA~Y~IN~T~O~T::EA~-~DR:tIIN~K~IN:':G~IN~D~IA~_J- ...

2~2~7!....J Exhibit V Car. Competition inIndia (afe(offet Day (Indlil) 1••••••••••••••••••••••••••••• B,M'ltt,I,1 J••••••• ns (o~taCOflet' IUKI_ 100 Mochallndl3) lB Coffee Bean &.

Tea l~af 17 (Callfomia) GloriaJean'.IAuSlralial 17 Dunkin Donuts 5 lMas5athu$tUsj Starbuck.

, r------ ..., Note: Number ofStores asofSeptember 2012;hcept starbucks which were opened inthe beginnins inOCtober 2012 Adapted from:Mellisa Allison, "Starbucks brewsfollowing inIndia where teaissupreme ", http://seattlelimes.com, January 27, 20/3 ExhibitVI Comparison ofStar bucks' PricesinUS and India Average Income(inU5$) In~:

f 1,490 48,429 Starbucks Prices Murg (chicken) tikkapanint 2 .• · • chicken sausage, eggwhite wrap ~ 3.25 'C Char-grilled potatoandpepper 2,42 c • ~ vegSie,egg andMonterey Jack 3.45 t:

E 1.67 , ::; Blueberry 1.95 • 3.35 E CaramelFrappucdno 4.25 ~ , BrewedCoffee 1.95 c • 1.95 ::; 2.51 Cappuccino 3.35 Note:

Average Incomeisamean, computed by dividing GOP by population All drinks 16ounces; andallprices before taxes(inU5$) Adapted from:Mellisa Allison, "Starbucks brewsfollowing inIndia where teaissupreme ", http://seatt/etimes.com, January 27, 2013 17 313-186-1 1,350 228 International BusinessStrategy 313-186-1 End Notes:

" " " Anushree Bhattacharya, "Pouroutthecoffee", www.flnancialexpress.com, March5,2013 Megha Bahree, "Starbucks WillOpen Cafes in India", http://online.wsj.com, January31,2012 "India's coffeemarket competition isferocious: HowardSchultz, Starbucks", hnp:l/anicJes.economictimes.indistimes,com, October25,2012 "How ManyStarbucks areThere?", http://www.loxceLcom/sbux-faq.hlml "Starbucks Corporation Fiscal2012Annual Report", http://investor.slorbucks.com, 2012 "The Globalization ofStar bucks andltsEffect OntheWorld", hnp:/Isiulaw.typepad.com, September28,2011 Laurie Burkitt, "Starbucks PlaystoLocal Chinese Tastes", hltpJlonline.wsj.com, November26,2012 Ibid.

"ColTee outputin2013-14 likelytobe same aslast year's", hup:llanicles,economictimes.indiatimes.com, May30, 2013.

Neena Raiand Debi Nayak, "India's TestelorCoffee toAffect BeanPrices", hllpJlonline .w 'Sj.com,March 17,2013 "Capturing India'sPercolating CoffeeMarket", hup:/lknowledge.whanon.upenn.edu, July1,2011 A Basu Majumdar, etal., "Tea Statistics- GlobalScenario", www.teaboard.gov.in,January2012 varun Jain,"Tea Time", www.waghbakritea.com.March-ApriI2012 "Starbucks toopen outlets inmore Indian cities", http://timesofindia.indiatimes.com, April7,2013 "Capturing India'sPercolating CoffeeMarket", httpJlknowledge.whllnon.upenn.edu,July 1,2011 [bid.

Diwash Gaherre], "TheBusiness ofCoffee ChainsinIndia", http://zeenews.india.com,2013 Neena Rajand Debi Nayak, "Coffee CultureCatches oninIndia", www.business ....'itboutbcrders.corn, March27,2013 Ibid.

"Unsure Starbucks defersIndiaentry", http://anicles,economictimes.indiatimes.com,July21, 2007 "Starbucks, TetaCoffee signpactforcollaboration", www.thehtnducom.January 13,2011 "Tala Global Beverages and Srarbucks FormJointVenture toOpen Starbucks Caresacross India", http://news.starbucks.com,January30,2012 "India's coffeemarket competition isferocious: HowardSchultz, Starbucks", http://articles.economictimes.indiatimes,com,October 25,2012 Rumman Ahmed,"Starbucks DelaysIndiaEntry", http://blogs.wsj,com,September 13,2012 Sujey Medhe, "Srarbucks OpensStoreinDelhi", www.lhehindu.com.February6.2013 Shobe Narayan, "Srarbucks HastoWake Upand Smell theCoffee inIndia", www.thenational.ae. February5,2012 Ankush Arora, "Starbucks inIndia: TasteTrumps PriceasFans Rush In",http://blogs.reutcrs.com,ApriI4,2013 Neena Rai and Debi Nayak, "Coffee CultureCatches oninIndia", wv.w.businesSwithoutborders.com, March27,2013 Ibid, Anushree Bhattacharya, "Pouroutthecoffee", www.financialexpress.com. March5,2013 "Can Starbucks make it in lndia?", http://theweek.com,OctoberI9,2012 "India's cofTeemarket competition isferocious: HowardSchultz, Starbucks'' hltp;//articles.economictimes.indiatimes.com, October25,2012 ' "Can Starbucks makeitin India?", http://theweek.com, October19,2012 Anu Barana, "Indeed, ALot Can Happen OverCoffee!", www.indiahospilalityreview.com. February12,2012 "Coffee giantStarbucks 10open outlets inmore Indian cities", http://indiatoday.intoday.in, April7,2013 Ibid.

Diwash Gahatraj, "TheBusiness ofCoffee Chains inIndia", http://zeenews.india.com,2013 Ibid.

Anushree Bhattacharya, "Pouroutthecoffee", www.financialexpress.com. March5,2013 "India -Coffee Annual 2013",http://gain.fas,usdrl,gov, May16,2013 "Jubilant FoodWorks toopen 100Dunkin' DonutsoutletsinInd',.

hup:l/articles.economictimes.indiatimes,corn, July25,2012 in5years", Anuj Byotra, "Coffee withReliance: JavaGreen," BII~iness World, December 200l www.java-green.comlabout.htm "Capturing India'sPercolating CoffeeMarket", hltp:llknowledge.wharton.upenn.edu, July1,201 I 10 " u II " u " zo " " " " " " " " " 30 ra n " " as " " " '" " " " ~ 18 .. ________ TI_-------------~T:.:he~T~a:k::e:::OV:e'.'.r~O:.:f A:"r::Ce~l~or~b~y~M~i~tt:.I~S~te~e~I:~C~h:.n~g~e~i~n:.~M~.~tu~r~e~G~IO~b'_'.~II~n~d':us~t~ry~(~B)~-~ln~d~u~s~tr~la~1 s~t::ra~te~g~y~JL...4~2....J INSEAD INS322 --~y~-- The Business School for theWorld~ TheTakeover ofArcelor by Mittal Steel:

Change inaMature Global Industry (B) Industrial Strategy 04/2014-5412 The case waswritten by Martin flash,Managing DirectorofMega Associates, with thehelp ofProfessor Jonathan Story, Emeritus Professor ofInternational PoliticalEconomy, INSEAD,Fontainebleau, France;andProfessor James Burnham, MurrinProfessor inGlobal Competitiveness, DonahueGraduate SchoolofBusiness, Duquesne University, Pittsburgh, Pennsylvania, USA.Thecase used published sources.

It is intended tobe used asabasis forclass discussion ratherthantoillustrate eithereffective orineffective handlingofan administrative situation.

Additional materialaboutINSEAD casestudies (e.g.,videos, spreadsheets, links)canbeaccessed at cases.insead.edu.

No PART OFTHIS PUBLICATION MAYBECOPIED, STORED,TRANSMrrrED, REPRODUCEDORDISTRiBUTED IN ANYFORM ORMEDIUM WHATSOEVER WITHOUTTHEPERMISSION OFTHE COPYRIGHT OWNER. ____----------------------~C:.:H~IN~A~.S~P~EA~R~L~R~IV~E~R~PIANO: TUNINGINTOTHEGLOBAL MARKET 251 314-093-1 ICMR las Center 1G/Management J!elGCIrch wW-wJCrl'iilndlo o-rg ISS Center torManagement Research China's PearlRiverPiano -Tuning intotheGlobal Market This case waswritten byNamratha V Prasad, under thedirection ofG VMuralldhoro, ISS Hyderabad. Itwas compiled frompublished sources,andisintended tobe used asabasis for class discussion ratherthantoillustrate eithereffective orineffective handlingofamanagement situation.

1+1781 :U9S884 f +1 78\ lnS885 , InkI~htcl:l«tntrw.orll Alii 01 tlw!

M>flcl I ..... fO)1l).t150'J10) , +4oIfO)11J.415111S • Inf.lltuttctn~.(IfV r 314-093-1 252 ICMR lIS ClUtter lorManogamllnt RIU'Olch Wi" Iciilifn(llo o,g China's PearlRiver Piano-Tuning intotheGlobal Market "Our success inWestern markets, thecradle a/thepiano's history,isthe only true testimony 10the high quality ofour products. ,,/ - Tong ZhiCheng, Former CEOof Guangzhou PearlRiver PianoGroup Ltd.,in2009.

"In thehistory 0/ mankind thereprobably 1I0S11 't been fS good anentry-level plano. (Pearl River}...

doesn 'Iplan onbeing second-best.

lJ.

- Robert Witmeyer, OwnerofSan Jose Piano Company'\ in2002.

INTRODUCTION In January 2013,China-based OuangzhouPearlRiver Piano Oroup Ltd.(PROP), theworld's largest pianomanufacturer, introducedthe 'Kayserburg Artist' brandofpianos atthe National Association ofMusic Merchants (NAMMt convention inLos Angeles, US.After thelaunch, the pianos weredistributed acrossthe US through PROP's dealernetwork, thelargest network for a piano company inthe US.

PROP wasthemarket leaderinthe American massmarket forpianos (See Exhibit Ifor anOverview ofthe Global PianoMarket).

Withthe Kayserburg brand,PROP intended tocreate aplace foritself inthe higher endofthe market, thereby havingapresence across theentire US piano market.

PROP, aChinese state-owned enterprise,wasfounded in 1956. In its early days. thecompany used a mix of German production methodsandindigenollsly developedtechniques toproduce pianos using imported components. TheChinese Economic Reforms' inthe late 1970s gaveamajor boost to piano salesinChina. Thisenabled PROPtobuild upitsproduction capabilitytocater tothe growing demandforpianos inthe domestic market.

Under theleadership ofTong ZhiCheng (Tong), whobecame theCEO ofPROP in1992, the company beganfocusing oninternational markets.Inorder tocreate animpact in the foreign markets, Tongundertook measurestoenhance thequality of the pianos. Overtheyears, PROP invested heavilyinthe implementation ofautomation technologies andnew production methods.

Tong alsobrought inseveral international pianoconsultants toadvise PROP onmethods to improve itsproduction processes.

I Ding Weniei, "TIleReturn ofthe King," ww\v.bjreview.com.cn, May15,2009.

2 Kerry A.

Dolan andQuentin Hardy,"TheChallenge fromChina," www.forbes.com. Mayl3,2002.

J San Jose Piano Company isaprivately heldpiano rental andleasing company in San Jose CA.

It was established in1975 andhadannual revenues ofaround US$ 500,000, asof20 12. • 4 The National Associati.on ofMusic Merchants (NAMM)started in 1901 isthe world's largestmusic products tradeShow.

It IS held annually In the month ofJanuary inCalifornia.

US.

s 'Chinese Economic Reform'beganin1978 afterrefo~mists withintheCommunist PartyofChina (CPC), led byDen~ X180Plng, opened.upthe eoul1tr~ toforeign Investment andbrought inprivatization ofstate- run enterprises, From1978until2013, theChinese economy grewalmost 9.5%eachyear.

2 ___--------------------......:C~H~IN~A~'S~PE~A~R::L R~IV~ERPIANO, TUNING INTOTHEGLOBAL MARKET 314-093-1 In 1995, inabid togain management ti'.

d '. " ..

experIse In producing pianos ofglobal quality, thecompany subsidi Int?

ajomt venture withYamaha Corporation'' (Yamaha).In1999 PROP setupasales SU 51lary In the US In2000 withh", I .' ,I t e mtenuon ofadding brandvalueandcreating afoothold in the European planomarkets, it acquired Germany based'Ritmuller PianoCompany' (RitmuIJer).

By 2000, PROP wasamarket leaderinthe Chinese pianomarket with amarket shareofmore than 60% ~nda50% l~arket shareinthe Chinese exportmarket. Moreover, it held 5%ofthe market share In l.he US plano market.

By 2002, PROP became theleading manufacturer ofpianos inthe w~rld, withanoutput of71,000 unitsperannum. In2002, global pianoproduction was700000 unl~.

t 3 However, bythe mid-2000s theglobal market forpianos hadshrunk dueto a fall ininterest in learnin.g and~wning pianos.Thecompany thenrefocused itsefforts oncreating aplace foritself in the Chmese planomarket thatstillhadroom forgrowth, especially inthe higher endofthe market.

In 2007, thecompany introduced the Kayserburg brandofpianos, targeted atprofessional piano players. Overaperiod oftime, thesuccess ofthe Kayserburg brandinChina contributed toall increase inthe company's salesandprofits.

As oflOl3, PROP held28% ofthe market shareinthe Chinese pianomarket, 18%ofthe market share inthe American pianomarket, and15% ofthe market shareinthe European market." The company soughttofurther increase production ofpianos through capitalinvestment.

BACKGROUND NOTE In the 18905, afew Germany-based pianomanufacturers constructedfactoriesinChina to produce European pianosforthe locals. Inthe 1950s, theChinese government nationalized thesefactories that hadstill been producing pianosusingGerman production methods.

In 1956, sixsmall pianorepair shopsmerged together toform 'Pearl RiverPiano Company' (PRPC) inGuangzhou, China (SeeExhibit I!

lor Timeline 0/ the Company), Thecombined entity was made astate-owned enterprise,accountable tothe Guangzhou municipalgovernment. Located in the northern regionofthe Pearl River delta,Guangzhou wasanimportant tradingcenter,key port, andcapital cityofthe Guandong province.

The company primarilyundertook repairand rebuilding workonpianos for a small market. The company's techniciansthentried producing a piano. Afterthey successfully developed a piano model whichwaspurchased byacustomer inHong Kong, thecompany tookuppiano production in earnest. Thepianos weresoldunder thebrand I Pearl River'.

In the first year of operations, thecompany's 100employees producedaround13pi.anos. Thiswas quite anoteworthy achievement consideringthatthere washardly .an~ot~er Chll1~se ~ompany producing pianosatthat lime. Inits early years, thecompany built Uspianos usmgImpor~ed components thatincluded plates,actions, ke~boards, andolh~r hardw,are. fromoverseas compon.les However, thecompany's inexperience inplano manufactur~ng andItsImproper .wood.seasom~g practices meantthatthe early piano models ~eve~o~ed byItwere flawed both JI1 design andIn quality. Thecompany producedaboutfour upright pianos a month.

6 Y ah C ' f nded in 1887 is a Japan-based multinational corporationofferingawide range am aorporanon, Oll '..

I'Id f d d'vhich includes musicalInstruments, eectroucs, mororcyces,an power sports o pro ucts anservrces;v J equipment.

7 www.pearlriverpiano.cn .. ., ,.• e ' I '01' configurations namely theUpright Planoandthe Grand Plano.

The Modern pianoslavetwomej ','.

fr drri ,1 . ,'I IId'Vertical Piano'iscompact and Its ame ansnngs are vertrcai.

'Upright Planoaso ca e I I I till 254 International BusinessStrategy 314·093·1 During the19605 and19705, MaoZedong'i's CulturalRevolution" lefttheChinese waryofeither owning apiano orlearning toplay it, as this was believed tobe asymbol ofthe ext~ava~ant Western lifestyle. Thisscenario adversely affectedtheprospects ofthe company, causing It to maintain lowproduction levels.Uptillthe mid-1970s, thecompany produced .Iessthan 1,000 pianos eachyear. Speaking aboutthatera,Tong said,"Wedidn't have~ostop m~klllg thembutwe can't havesoldmore thanahundred orsoayear back then. Learning the plano wasfrowned upon.':" After China brought ineconomic reformsinthe late 19705, thecompa~y experienced 8 spike, in sales. TheChinese government's largescale planning programs alongwitharelaxed exportpolicy resulted inrising incomes thatdispelled povertyandimproved thestandard ofliving ofthe people.

The one-child policy"thatwasbrought inas apart ofthe reforms, encouraged parentsinChina to invest significant resourcesinthe academic, cultural,andpersonality development oftheir only child. Speaking onthis issue, Tongsaid,"It'snotjust indeveloped areas.People liketospend money ontheir children toimprove theireducational level.It'sacultural investment.':" Alarge number ofparents believed thatpiano lessons wereagood way to raise acultivated anddisciplined child andthey went infor the purchase ofapiano. Thetotal annual salesofpianos inChina grew from 20,000 inthe early 19805 to60,000 by1992.

In 1987, thecompany wasgranted permission toexport itsproducts, anditbegan hunting for partners andmarkets abroad. Thesame year,thecompany beganoperations atits new five-storied factory inGuangdong whichwasspread overatotal space ofone million squarefeet.The company wasrenamed 'PearlRiverPiano Industrial Corporation' (PRPIC).In1988, thecompany implemented 'TotalQuality Management'!" (TQM).Between 1985and1995, theproduction capacity ofthe company increased byalmost fivetimes, reaching 4,000unitsamonth.

In 1992, Tong became theChief Executive Officer(CEO)ofPRPIC. Hehad joined thecompany in 1959 asapiano tuner. Overtheyears, hehad risen through theranks having heldvarious manufacturing andsales positions.

Tong wasdisappointed that 'Pearl River' pianos wereperceived tobe oflow quality andthat this was thereason forthe very lowexports. Moreover, eveninthe Chinese domestic market,the company wasnotearning muchwhencompared toforeign pianomakers, asits pianos werepriced low. Atinternational events,wherethecompany showcased itspianos, peoplewouldcomeand play thepianos butleave without buyingthem.Speaking abouttheissue, Tong latersaid. "Fifteen years ago,dealers wouldcometothe NAMM (National Association ofMusic Merchants) show,sit down andplay ourpianos, andthen leave. Rather thancontinue inour ways, wetook these criticisms toheart andsetout tobuild apiano thatcould compete withother finepianos ofthe world.':" Hespecified aclear goalforthecompany: Toproduce highquality pianosthatcould compete effectively inthe global space.

9 Mao Zedong, bornin1945, wasa communist wholater founded thePeople's Republic ofChina. He formulated thepolitical theoryofMaoism, whereinemphasis wasplaced onthe uplift ofthe peasant class.

10 The Cultural Revolut!oll lasted.from 1966t.il!Mao Zedong's deathin1976, During thisperiod, people who showed bourgeois tendencies werepunished bygroups ofyoung people, whocalled themselves the 'Red Guards'. Chinaplunged intoaperiod ofchaos, whichresulted inthe deaths ofmillions ofpeople.

II "Piano MakerTunesintoChina's GrO\..'ing Middle Class," www.chinadaily.com.cn. JUly2,2004.

12 The One-child policyintroduced in1979 allowed acouple tohave onlyonechild. Thepolicy was implemented toalleviate thesocial, economic, andenvironmental problemsthatwere plaguing China.

13 "Piano Maker's KeytoSuccess," hLtp:/lapp1.chinadaily.com.cn, July8,2004.

I~ Total Quality Management a:QM)isan.organization·~de approachtomanagement thatseeks to Improve theproducts andservices byconlUlLJously refiningtheproduction processafterreceiving the right feedback. I' IS "Inside PearlRiver PiWlO," \\lww.highbeam.com, FebruaryI,200 I.

4 __-----~------- _=C~H~IN~A~'S~PE~A~R:.'LR~IV~E~RPIANO: TUNING INTOTHEGLOBAL MARKET --- ----- 314-093-1 ENHANCING TECHNOLOGY To improve thequality ofits pi I'RPIC . .. .

ianos, Investedheavily In technology andInvited piano experts fromaround theworld toguide it in its production processes.Overthenext several years the company spentRMS 16 500million tomodernize itsproduction equipmentandtechnology:

One ofth~ first ,experts tobe brought infor consultation wasBud Correy (Correy). A manu:ac~unng engmeer,~orreyhadbeen involved previously indesigning thepiano plants at America ~Rudolph Wurhtzer Company", Hehad been actively involved inquality control and was considered tobe the foremost expertinthat field. Heworked almost10years with PRPIC to help streamline itsproduction processes.

At that time, PRPIC wasproducing pianosthrough ahand machined manufacturing processthat was labor intensive. Correy advised thecompany toinvest inautomation, Hereasoned thatthe new t.echno~ogy wouldimprove thecompany's finishedproduct, enabling itto compete more effectively 111 Western markets,Thelowlabor ratesinChina werethemain reason Chinese companies didnottake upautomated production processes.However,withTong specifying that his main goalwastoimprove thequality ofthe company's pianosandnotcost savings, the company didnothesitate tomake therequired investments. Speakingaboutthetechnology implementation atPRPIC overtheyears, Tongsaid,"Wearenot looking for the most cost- effective solutionaswe improve ourpiano operations. Rather,weare always lookin~ forthe best solution. And,inmany casesthatrequires a very large investment in new machinery." 8 Consequently, PRPICinvested inCNC I9 machines fromGermany, Italy, and theUS. These machines wereutilized incutting keys,hammers, and other important components. Thecompany also air-conditioned itskey and action department tofacilitate controlofhumidity levelsand prevent warping ofthe wood parts, Correy wascredited withrevamping andautomating thefinal assembly line,soundboard and back departments too,Speaking aboutCorrey, Tongsaid,"He systematically lookedatevery areaofproduction andfigured outhow tomake them better.':" In 1993, twoGerman expertswerebrought into help refurbish thequality ofthe tuning process.

The resultant changeshelpedenhance thequality ofthe pianos andenabled thecompany toraise the price ofitspianos by 10%, Later, Tonginvited sevenexpatriates fromGermany andtheUS as consultants andadvisors toguide PRPIC's technicians andworkers onthe piano manufacturing process, Onthe advice o~ th~ experts, thecompany a,cquired a ~e\V cabinet finishin fl process.Th2~ Italian-built polyesterfinishingsystemnotonly applied thefinish, butalso sanded andbuffed the piano togive itasmooth, glossyshine.PRPIC shelled outlarge amounts ofmoney forthese foreign experts, eachofwhom charged almostUS$3,000 perday -more thandouble thethen annual income ofthe average Chinese staff.

However, thecompany didnotcompletely eschewmanual processes: Tongbelieved thatthere ~as a need formanual workincertain production processestohave afinished productofbeuer quality.

Even though thecompany hadtwo computerized labstotest thefinal products, Tongtrained upto 16 The Renminbi (RMB) isthe official currency oftile People's Republic ofChina, lt is also known asthe Yuan.

IRMB = O.

t 6 (USD)(Average rate lor2013).

17 Rudolph Wurlitzer Companyfounded in 1853 was a US~b~sed com~anyrnat.produced V~riOliS stringed instruments, electricpianosandJukeboxes, lt was later acquired byGIbson GUitar Corporation.

19 'S I' thD·str,·hution Channel at Steinway & Sons," http://digitalstrategies,lUck.darl1110uth.edu, , trengt lenmg .e I February 15,2007.

19 CNC orComputer Numerical Control is used in machine toolsto automate theprocess through computer control. ') 20 ., til "Right Methods" "\V\.vw.englandpiano.com, December _006.

"lnvesnng 111 e I, .

21 ..

1 Iolishing orsmoothing with sandpaper oramechanical sander, Sanding IS uie process 0 P " 22 Buffing isthe process ofpolishing orshining withapiece ofsoft material.

5 255 256 International BusinessStrategy 314-093-1 100 skilled technicians totest and adjust theproduct. Healso believed thatmanual sanding was better forgiving abrilliant finishtothe pianos. Hetherefore ensuredthatworkers usedhand tools and sandpaper toeliminate imperfections fromtherough casting.

Even though PRPIC paidafraction ofwhat itscounterparts inthe USand Japan paid, it ";85 considered tobe agood employer. Itprovided severalbenefits toits emp~oyees, apart:frompaying wages of US$ 1 per hour fora45-hour week.Itprovided freetransportation throughItsflee~ of40 buses andfree lunch, offered medical compensation, anddeposited. afixed a!nount mt?a government supervisedpensionplan.Moreover, employees hadtheoption of paying anominal amount tostay incompany providedhousing.

While pianos wereacommon household iteminthe US and Europe, theyhadalways been considered aluxury inChina. Tongbelieved thatunderstanding thepiano culture wouldenable the company tobuild world classpianos. Heencouraged PRPIC'smanagers tolearn thepiano, while he himself' wasanoutstanding pianist.Headded, "Youmustremember thatthepiano wastruly a foreign objecttothe Chinese people.

It was notasituation likeyou hadinEurope wherepeople had been making pianossince1700." 23 PRPIC alsobenefited fromthewide availability ofraw materials forpiano making inChina. This gave thecompany acompetitive advantageoverKorean andJapanese pianomanufacturers. Forall the components, exceptforthesoundboard, Chinahaddomestic sourcesforthe wood. However, PRPIC, liketherest ofthe world wasdependant onSitka spruce" fromNorth America forits soundboards, In collaboration with'Guangzhou EnergyResearch Institute'ofthe 'Chinese Academy of Sciences', PRPIClaunched aproject tobetter understand thescience involved indrying timber.

This knowledge wasneeded toenhance timberprocessing thatultimately determined thequality of a piano. Eventually, thecompany developed aproprietary technologythatwas used todevelop computer controlled kilns,which improved thetimber quality. Inthe company's ownlumber yards, spruce, pine,maple, andChinese walnutwoodwerecarefully processed andthen dried in computer controlled kilns.Inorder toensure consistent conditions, PRPICintroduced climate control foritsentire production process.

JOINT VENTURE WITHYAMAHA In 1995, PRPIC entered intoa US$ 10million, 20-yearjointventure agreement withYamaha. The lV was called 'Guangzhou YamahaPearlRiver Piano Inc.'A200,000 squarefootfacility was established inGuangzhou as part ofthe Jv.

Thefacility wasactually anassembly unitthatbuilt three models ofupright pianosusingacombination ofparts frombothYamaha andPRPIC.

The facility employed 250 people andhadthecapacity tobuild 9,000 upright pianosinayear. While PRPIC wouldget40% ofthe output, therest was forYamaha.

Through this Jv, PRPIC lear~tmanagement techniques,manufacturing expertise,andknowledge fro~ an~xpeflenced competlto~..

On theother hand, Yamaha achieved accesstothe growing Chinese planomarket andtheability tomanufacture export-quality pianosatcompetitive prices.

From 1996, Tong initiated severalstepstopromote the'Pearl River'brandas a Chinese national brand. Thecompany builtawide salesanddistribution networkinChina andwas thefirst Chinese company tohave anationwide distribution network.Tongstrove tobuild alliances with distributors andmusical schoolsandcolleges inabid topromote pianos.Hebuilt upclose relationships withfamous pianists andrequest~d themtoplay on'Pearl River'pianos attheir concerts. Thecompany alsosponsored severalpianoconcerts andcompetitions.

23 "Investing in the "Right Methods"," \\IWW.englandpiano.com, December2006.

24 ~ilk? spruce, a.native of.Nort~ America, is~I~ge coniferous evergreentreegrowing almost100mtall.

It IS WIdely used III producing pianos, harps,viol IDS, and guitars, duetoits high strength-to-weight ratioand the presence ofregular, knot-free ringsthatmake itan excellent conductor ofsound.

6 CHINA'SPEARLRIVERPIANO: TUNING INTOTHEGLOBAL MARKET 314-093-1 In late 1997, theChinese governm tkdPRP ow d icat: enase re to take over several smaller loss-making state- ne musrca instrument manufa t Th ', • <:: •.' curers. enew entity consisting ofa guitar factory a percussion rectoryanda violin facto bIId ' ' Ltd RGP" ..

ry ~ame toec.a e the Guangzhou PearlRiver Piano Group : .(p ).

Over aperiod ofume, Investment In organization andproductivity helpedthese ennues toreturn toprofits Spk' he i , f ili . .

ealog on t eIssue, Tonglatersaid "Most of these companies were the trig badly In the mid-90s andlosing alot ofmoney. Inlate 1997, thegovernment decidedthat y sh~~ld become partofthe Pearl River Group sincewehad such astrong recordof profitability. Wearepr~u? thattheworkers in these factories are making almostthreelimes as much aswhen theyfirstjoined thePearl River Oroup.?" In 1998" PRPG became thefirst Chinese pianocompany toobtain theISO 9001" quality cert~ficat~on.

In ascenar~o thatwas rare foreven a US-based company, PRPG received the certification notonly forItscomplete lineofgrand andupright pianosbutalso foritsparts and components. Tongadded, "Likeacertified financial auditthatverifies theassets andliabilities ofa corporation, an ISO 9001 certification verifiesthat a company maintains anddocuments the highest qualitystandards.?" MAKING INTERNATIONAL FORAYS The Chinese pianomarket hadbecome overcrowded bythe late 1990s. Theentry ofhundreds of private companies offeringlowpriced andlowquality products drastically increasedthe competitive pressureonPRPG. Tongthentrained hissights oninternational markets,especially the US. Tong said,"As[foreign companies] cometoChina, wenot only need thedomestic market, we also need theinternational merket.?" In the late I 980s, PRPG hadrelied onUS-based importerstosell itspianos. However, the company failedtofind amarket foritspianos inthe US, mainly duetothe perception thatChinese products wereoflow quality. Moreover, ithad tried tofind aUS-based pianobuilder asapartner, but was unsuccessful illfinding apartner whowould notlook upon itas acompetitor.

Tong thendecided todirectly sell 'Pearl River' pianos inthe USmarket andtarget themass market. In1999, thecompany setupitsUS~based salessubsidiary, 'PRPGAmerica, Ltd.' (commonly referredtoas 'Pearl RiverUSA') inOntario, California. TheOntario centerhada showroom andadistribution center.

Tong wasconfident thatdirect selling wouldenable PRPGtocarve aniche foritself in the mature piano market ofthe US. Hebelieved thatthelow labor costinvolved inmaking' PearlRiver' pianos wouldprovetobe astrong competitive advantage.Makingpianosinthe USwas acostly affair. Thecost wassixorseven timesmorethanthatofmanufacturing inChina duetothe high labor costsinvolved insome ofthe manual processes inherentinpiano production. Tongbelieved that hecould takeadvantage ofthe low labor costinChina toproduce highquality pianosatlower prices andoffer them inthe USmarket. PRPGsolditspianos fromUS$ 2,000-4,000, withan extremely thinprofit margin.

Tong wasalso attracted tothe U~piano .mark~t because itwas theworld'.s biggest~arketand American customers displayedanInterest mtrymg out~ew brands thatprOVide? valuefo~money.

Moreover, therewerenoimport restrictions inthe USplano market because orIts small sizewhen compared toother industries.

2' "Investing in the "Right Methods"," www.englandpiano.com. Dece~lber2006... ..

26 ISO 900Iis part oftile series ofstandards published bythe Internatl~nal Ordganl~tlO.n d rorS~andardlZatlOn (1 ) If ctive quality assurance systemformanufacturing anservice III usmes.

SO to ensure anee 27 "I inain th"Right Methods"," www.englandpiano.com. December2006.

nvestmg me' " Id Q tin Hardy "TheChallenge fromChina," www.forbes.com, May13,2002.

Kerry A.

Do an an uen I , 7 257 258 International BusinessStrategy ----------------- 314-093-1 Taking cognizance ofthe limited internati,onal ma~~~e(~~~)~~C~~~I~C~h~fs~:s~~~ ~~~ a;:s t~~ importance ofthe USmarket, Tongrec~ulted .AI lC US' .d stry Rich recruited localstaff American whohadlong years ofexperience In the plano In u', .'.

. ti f .n d American salespeople Speaking aboutthe Issue ofhiring localstaff, ccnsrs tng 0 expene ce '., di t lbuti h Rich said,"Any company that'scomefromAsiaandtried tomanage Its own IS n unon as failed.,,29 The strategy touse people withknowledge ofthe American piano~arket coupled. with~noffering of low cost buthigh quality pianospaidoff.Withi,n twoyears, Richsucce~ded IJl g:ttl~,g a,lmost one-third ofthe specialized retailpiano dealers In the UStocarry the ~eQ1:1 ~lveJ pla~os.

Speaking aboutthelong term goals ofPROP, Tongsaid,"Our biggest mO,t,vat,on In the United States (US)rightnowisto allow customers [Q know usand bring home ourpianos. Themoney can be made gradually.

,,)0 BUlLDING BRANDPOWER In 2000, PRPG acquired Rirmuller withitsbrand license andpiano manufactu~ing technologr- Founded in1795 byWilhehm RitmulJer, thecompany wasoneofthe first p,lanos ~aker.s m Germany andtheworld. Ritmuller hadthereputation ofbeing o.neofth~ most mnovauve 'plano makers inthe world, havingdeveloped thedouble soundboard 10 the plano thalresulted In the "Euro Sound" adistinctively warmandrich lone.

However, RitmuJlerhadceased production in 1977.

Ritmuller's styleofsmall-scale handcraft- based pianomaking couldnotcontinue in a world where pianos wereproduced on a mass scaleat low costs.

A piano consisted of8,000 components, itsproduction processinvolved 300steps, and it took 200man hours ofskilled labortoproduce. BeforePRPGandothers cameintothepicture with their mass production methods,60%ofpianos andalmost 80%ofhigh endpianos were produced completely byhand. Automation cutdown onthe time andeffort involved inproduction.

The acquisition ofRitmuller wasundertaken byPRPG toboost itsinternational imageandget a foothold inthe European pianomarket. PRPGplanned toproduce new Ritmuller pianosina special division atits Guangzhou factory.Thepianos weretobe based onthe scale designs of Ritmuller pianosthathadbeen successful inthe past.

In abid tomaintain theunique brandimage of the Ritmuller, PRPOusedonlythefinest materials intheir production.

PRPG latermarketed the Ritmuller acrosstheworld, including inthe US.

Soon after, PROP acquired theresearch & development centerofanother Germany-based piano manufacturing company, Rudisbeimer.

Thisacquisition notonly provided itwith advanced piano production teehnology, but~Iso helped itgarner 40%ofthe USuprijjht pianomarket. PRGPalso tied upwith US·based furnituremanufacturer, HermanMiller,Inc.inorder todevelop pianos that would complement theinteriors ofmodern homes.

As of2000, PROP hadmore than200sales unitsinChina.

It was amarket leaderinthe Chinese Piano market withamarket shareofmore than60% anda50% market shareinthe Chinese export market. Though thecompany produced variouskindsofmusical instruments thepiano remained its key product. ' By 2?01, PRP,O's marketsha~einthe US, th.ough only5%, was growing fast.Thevastportion of l~e pianos which PROP sol~Inboth domestic aswell asinternational marketswasuprights, Ina bid.

~o I.ncrease thepro~uctlon of grand pian.o~, PROPconstructed a500,000 squarefootnew facility In Guangdong WIthaproduction capablluy of30,000 grandpianos peryear.

29 Russell Flannery, "Piano Man,"ww\v.forbes,com, May 13,2002.

30 Russell Flannery, "PianoMan,"www.forbes.com.

May 13,2002.

31 Herman Miller, Inc.founded in1905 is a US-based producer ofhomefurnihi d ffi fumit II h .

f d .. furni I'IS tngs an 0 ce rruore.

as areputation 0 esrgntng rrutureconsidered to be modernist and has dd I fumit pieces thatarcconsidered icons of industrial design.

pro uce severe lure 8 _-------------- -'C:':H~IN~A'::'S:.':P:':EA~RLRIVERPIANO: TUNING INTOTHEGLOBAL MARKET 314-093-1 In 2001, PROP brought inDavid R.Campbell (Campbell), aveteran pianomanufacturer with deca?es ofexpefJ~nce atseveral leading piano-producing companiesas'Director ofTechnical Services'. Tongsaid"Dave CabII Id ibl '. ..

. '. mpecou POSSI yhave more experience andunderstanding of the p~ano manufacturing processthananyother person inthe world today. Hehas been hired to help m~rease OUf quality standards, improve OUf production methods,andhelp with theorderly eXpanSl?" ofgrand planocapacity.v? Campbellsuggested 22points ofimprovement inthe production processofPROP's grandpianos, whichthecompany implemented insix months.

By 2002, P~GP hadcornered 10%ofthe US piano market andby2003; ithad managed 10 cut prices by IOYo.

In2002, PRPG overtook Yamahatobecome theworld's largestpianomaker with an annual outputof71,000 pianos. In2003, thecompany attainedtheproduction capabilityof 100,000 pianos.In2003, Music Trades rnagazine" namedTongitsmusic equipment manufacturing "Personofthe Year".

In 2004, thecompany openeditsfirst European officeinMunich, where it undertook design, research, anddevelopment activities.InApril 2005, PRPG wascontracted toproduce thelower- priced 'Essex' lineofpianos forthe world's mostrenowned pianomaking company, Steinway & Sons" (Steinway). PRPGconsidered thistobe anendorsement ofthe quality ofits pianos.

REV AMPlNG THEOFFERING Over thenext fewyears, therewasagradual fallindemand forlow-end pianos.Thekeyreasons were market saturation andadecline ininterest inpiano playing amongyoungpeople. By 2005, global pianoproduction fellfrom 700,000 in2002 to400,000, In 2007, Huang Weilin(Weilin) succeeded Tongtobecome theCEO ofPRPG. Considering the changed marketconditions, heshifted thefocus ofthe company toexpanding Chinesedomestic sales andincreasing thecompany's presenceinemerging markets.Speaking abouttheChinese market, Weilinsaid,"Compared withmajor developed countrieswhere about20 to 30 alit of every 100 households alreadyhaveapiano, Chinahasahuge market potential, especially when factors suchasurbanization andincreasing familyinvestment ineducation aretaken into consideration.":" The company's marketsharehadfallen inthe Chinese pianomarket andin2007. itwas just aroUl~d 25%.

Thelowendofthe Chinese pianomarket, wherePRPG earned wafer thin profits wasstill highly competitive withthepresence ofalmost 140 competitors. Moreover,theprofits werebeing further squeezed byrising laborcosts.

Weilin thendecided to target thehigh-end segmentinChina, wherein therewasgreater brand recognition andthepossibility ofhigher returns. In2007, Weilinrecruited. LotharT~omma (a famous Swisspianodesigner), asheadofPRPG's designteam.Heal~o appointed a SWISS ma~ter duct! .Stephen Mohler(Mohler) Bothofthem weregrven thetask ofdeveloping pro ucuon engIneer .

and crafting anew line of pianos.

J2 'H'V t Campbell toRaise Quality Standards," www.higbbeam.com, SeptemberI, "Pearl River Ireseeran 2001. ,dI in th 'Id 33 Music Trades magazine foundedin 1890 isan American magazine t~rgelt.eatpeop e 10 e musrca rrae , d' 1'I s d,'stributors andmanufacturers of music amstruments.

who include music re al er " .'.

34 .

d d i 1853 is 8 handmade piano manufacturing company With a global reputation Steinway & SOliS foun~,~ tions inpianos 11 has offices andfactories in the US and Germany.

Its for high qualit~ andvancod o 11~venI.oldthrou~ dealers and showrooms acrosstheworld. Theprice of annual production of 3,0 pianos ISS its pianos ranges fromUS!60,000-100,000.

3j. .

"Th n ofthe King" www.bjreview.com.cn.

May15,2009.

Dmg Wenlei, e kemrn , 9 259 II i :

260 --------- 314-093-1 Later, "afactory withinafactory" wascreated by Mohler atPROP's Guangzhou :acili,ty ~o d th 'Mhler also personally selectedthecraftsmen whowould assisthim 10 pro uce enew pianos. a ..

building thepianos, whichweremade inthe European guildsystem (where eachInstrument was built by ateam ofindividuals fromstarttofinish).

In 2007, the'Kayserburg' brandtargeted atprofessional pianoplayers (thehigh endofthe market), waslaunched. The 'Kayserburg' pianoshadthesame production lm~asthat 0; Steinway's Essexbrandandwere builtusing imported components. Moreover,the K~serbllrg applied certaintechnologies thathadbeen developed inChina, whichincluded chorddisharmony coefficient designtheory, soundboard vibrationmodeanalysis technology, andmaple-rosewood bending structure bridgedesign.

In China, the'Kayserburg' pianoswerepriced between 20,000and60,000 Yuan(US$2,000 - US$ 8,000), Speaking aboutthe 'Kayserburg' brand, Liu Bo,atuner atBeijing-based retailer Jiangjie PianoCityCo.Ltd. said, "Pearl RiverPiano's Kayserburg brandhasdone agood jobasa toddler atthe high end.Butthebrand hastocatch upwith theworld's eminent high-end brands such as Steinway inorder tobe aselect choice inthe concert piano market.':" In July 2007, PROP wasawarded theISO 14001 forenvironmcntal compliance,In2008, thc company soldabout 3,000 pianos underthe' Kayserburg' primarily to customers inChina, apart from customers inSingapore, HongKong, andMacau. Itssales from emerging marketsroseby 25%, mainly duetothe new brand.

In 2008, atthe peak ofthe global financial crisis,whileChina's pianoexports fellbymore than 70%, PRGP's salesrevenues roseby9% and profits grewby18%. Anindependent researchreport published in2008, mentioned thatPROP wasthelone Chinese pianomanufacturer thathad adopted thestrategy ofself-branding inwestern pianomarkets, apartfromexporting asan OEM supplier usingitsown name.

By 2009, thanks to Weilin's marketing expertise,PRPGposted animpressive increase in sales and profits, Asof2009, the Chinese peoplepurchased halfofthe pianos produced inthe world, The company soldalmost 83%ofitspianos inChina. By2009, PRPG wastheundisputed market leader inthe lower endmarket of the upright pianosegment inthe US.

Itsmarket share in the US piano market was15%, while itsshare ?fthe USupright pianomarket was40%.

OUTLOOK As of20 13, PROP wasthelargest producer ofpianos inthe world, Ithad thecapacity toproduce 100,000 pranos atIts factory thatoccupied 1.3 million square feet andstood seven stories tall.

Almost 80%ofthe company's pianosweresold in China. Asof2013, China was notonly the largest market fornew pianos, but was alsotheone that had a healthy growth rate.Apart from pianos, the company producedviolins,guitars,anddrums. Itwas also oneofthe world's largest guitar andviolin manufacturers.

PRGP managed al~rge workf~rce atasingle location. Ithad over 3,500 skilled technicians within a network of factories, foundries, lumberyards,andsaw mills. Ofits106 technicians, manyhad advanced degrees In ~reas suchasadhesives, metallurgy, orchemistry and the worked in its 90,000 squarefoottesting andengineering lab. Y PRGP exported itspianos tomore than 100 countries andregions Ithd dornesti d " ". .aa strong ornesuc an international sales organization and a Wide product servicenetwork Ith d h200 d I in Chi db idl .. .

amore t an ea ers 1I1 1I1a,ansusrJary comparues In the US, Europe, andMacau.

36 Ding Wcnlei, ''The Return or the King," www.bjreview.com.cn. May15,2009.

10 - _--------------- __-..:C::HI~NA'S PEARLRIVERPIANO: TUNING INTOTHEGLOBAL MARKET 261 --...

-- 314·093·1 In the USand Canada, PROPwasthefastest growing pianocompany withover 300dealers.

It was one ofthe small numbers offoreign manufacturers whoprovided aIO-year partandlabor factory limited warranty, apartfromoffering aUS-based technicalsupportteam.Thecompany's lowprice point wasconsidered itsmain competitive advantageinwestern markets. Speaking aboutChina- made pianos, Roberta Caradine, aBritish pianobuilder, said,"Inthelate eighties, thefirst Chinese pianos thatwesaw inthe West werereally bad.Butnow, forwhat theycost, they're notabad product. Thetrade priceisonly about £600-it's impossible tocompete with lhat.,,37 Despite thestrides made by PRGP inthe global pianomarket, ithad yel tomatch thequality of leading globalplayers. Speaking onthis issue, ananalyst said,"But despite the66years of technical knowledge andthecontinuous effortstoimprove addedvalue,thecompany's (PROP) products stillcannot matchtheworld's toppiano brands, suchasSteinway & Sons ofthe USand Bluthner" fromGermany, inquality,':" The main reason forthe inability ofChinese manufacturers tomatch thequality ofglobally eminent playerswassaidtobe the lack ofpersonnel todo proper 'tuning' -the final butcritical stage inthe manufacturing process.FangYang, ChiefExecutive OfficerofBluthner Plano (China) Gmbh", added,"Ifthe pianos weproduce inGuangzhou arehandled bythe Germans during thelast procedure, ourquality canalso match uptoGerman standards. However,one generation isnot enough forustocatch upwith Germans inpiano tuning."?' PROP brought inafresh infusion ofcapital tofurther funditsproducti,on expansionplans,OnMay 30,2012, PRGP went public onthe Shenzhen StockExchange, China.

By 2014, It expected to increase itsoutput to160,000 unitsperannum.

31 "F d Sil "wwwenforbusiness.com, 2009.

-a eto 1 ence,. ..Pianofortefabrik GmbHfounded in1853 isaGermany-based piano 38 Bluthner orJulIUS BlOthner .Iighl egarded in the piano market andis apreferred brandof manufacturing company.

gluthner IS11 Y r composers andartists.

"1Mh 30 2012 . "CI' Tunes"hnp:llusa,chmadal y,com.cn,arc,.

39 Y Y g and Chen Ymgqun, iangtng , .

2 ad ang an .

bidi ofBluthner setupin Guangzhou m early 201 ,It pr uces 40 Bluthner Piano(China) Gmbh ,IS~~~ t l l~i Itsannual output was expected to be 20,000 upright pianos the lrmler brand, thecompany stur a~ge , booming Chinesedomestic market.

targeted atthe ."ChaninTunes," http://usa.chinadaily.com.cn,March30,2012.

41 Yang Yang andChen Yingqun, gg II �1>tI i 262 International BusinessStrategy I:

Over For along time, theUSand Eur However, fromtheearly 2000s, f the demand forpianos inthese re China, India,Brazil, Russia, an consumer.

European (especially German)an until the1960s. During the19 emerged asthe strong players in and Korea caused themtolose th low cost countries suchasChi worldwide, outofwhich nearly f The piano market consisted ofthe • Low end:Atthe Jow end 0 2,000-8,000, Chinesepianop • Mid Market: Themid-price I I and South Korea (Young :

manufacturers inthis segment I · High End:Atthe high end the market wasdominated b i Grotrian, Bosendorfer, Schim From thelate 2000s, therewasa market segment. High-end piano low- andmid-priced pianostosu was cheaper, they • Set upfactories or • Formed alliances withcampa On the other hand, makers ofI associated withthehigh-end com I America" PianoMarket • Before 1850,Americans most • The Gilded Age(1850-1890) piano industry. By1890, US and 1928, sales ranged fromI • The American pianoindustry piano producers wereHallet a Ziedler, Hazelton, WilliamKI Wurlizer, Steck,Kimball inC · The year 1930 wasthelast gr by the 'Great Depression' cau began tobe imported fromcv L.

I 314-093-1 Exhibit I 'View ofGlobal PianoIndustry nies. ope hadbeen the'largest consumers' ofpianos inthe \~orl?

'ailing birthrates andtherise ofthe Internet ledtoadecline in gions. Global demand thenshifted toemerging marketssuchas d others. Asof 2013, China wastheworld's largestpiano d American pianoproducers ruledtheworld pianomarket, up 70s and 19805, Japanese andKorean pianomanufacturers the global pianomarket. However, therising wages inJapan eir cost advantage. Thisprompted pianoproduction toshift to na and Indonesia. Asof2012, 493,000 pianosweremade our-fifths weremanufactured inChina.

three segments:

f the piano market, wherein pianoswerepriced between US$ roducers weredominant.

was dominated byplayers fromJapan (Yamaha andKawai) Chang andSamick). Therewerealsoseveral European of the market, wherein pianoswerepriced overUS$ 100,000, Y American andEuropean pianoproducers, mainly,Steinway, mel, Bechstein, Seiler,andBluthner.

move bymost piano companies tooffer pianos inalmost every companies tooksteps todiversify theirproduct linestoinclude rvive inaglobal economy. Inparts ofthe world where labor ow- andmid-priced pianoswereusing partsandexpertise panies tocreate higher-priced models.

Iy imported theirpianos fromEuropean manufacturers.

, mar~ed byhigh economic growth,gaveaboost tothe US constituted halftheworld market forpianos. Between 1890 72,000 to364,000 peryear.

then b:c~me thebiggest inthe world. Theleading American nd DaVIS InBoston, J.

and C.Fischer inNew York, Strich and iabe, Baldwin, Weber,MasonandHamlin, DeckerandSons, hicago, and,finally, Steinway.

eat year forth Am' .

e encan plano. Thetough timesbrought in sed closure ofseveral American pianocompanies andpianos erseas.

Con/d." 12 261 CHINA'S PEARLRIVERPIANO, TUNING INTOTHEGLOBAL MARKET ~-1---=--'" 314-093-1 Contd.:

The Japanese "invasion" ofthe American pianomarket fromthe1960s onward was followed by awave o~pianos fr~mKorea inthe 19805 and'90s. Together, theseimports put most low-andmid-priced Americanmakersoutofbusiness.

Westerners' interest,in.playing thepiano declined overtheyears mainly duetothe popularity ofelectronic Instruments, theInternet, andarange ofother leisure activities.

As of2012, around 40,000newpianos weresoldinthe USannually under70different brand names, made by more than30companies inadozen countries.

The sales ofGrand pianos fellfrom 35,000 in2005 to12,000 in2012, amassive decline.

As of20 13, China-made pianosdominated themass market inthe USand conslituted more than athird ofall new pianos sold.

a According toanalysts, evenadecade ago, most China-made pianoswerejustbarely acceptable technically, andmusically undesirable.

a Over theyears, however, boththetechnical andmusical qualities werefound tohave improved significantly. Analystsobserved thatwhile someremained at the entry level, others rivaled theperformance ofmore expensive pianosfromother partsofthe world.

• As of 2013, therewereonlythree US-based pianoproducers. Stcinway and Baldwin produced luxuryinstruments thatfew could afford. Mason & Hamilin madeacomeback in the high-end market • Peter Stumpf, a US-based registered pianotechnician, feltthat thebiggest competitors for the high-end pianosweretheluxury pianos manufactured inthe 1950s and1960s thatwere still ingood condition andwere flooding theused piano market.

European PianoMarket The European pianomarket suffered fromthesame macro economic conditions asthe American market,therebyleadingtoashrinking marketforpianos.

Western Europe,especially Germany, washome tomost ofthe world's mostrespected piano builders suchas Grotrian, Bechstein, Hamburg Steinway, Fazioli, Bosendorfer, and Sauter. In recent times,newerbrands likeBorgato andFazioli emerged aspart ofawave of boutique, high-ticket pianos.

Analysts agreedthatGerman pianobuilding wasthe'best'. However, thepurchase priceof German pianoswassteep, making themunaffordable tomost buyers.

Since the1990s, adozen ormore high-end European pianomakers wereaggressively marketing theirpianos inthe US. However, thedisadvantageous Europeanexchangerate prevented themfrommaking majorinroads inthe American market.

Pianos fromEastern European, whichwereearlier competitively priced,seemed tohave lost out toChinese pianos,whichoffered betterquality. Therewereonlytwosignificant players left inEastern Europe, namely, EstoniaandPetrof • • • Japanese PianoMarket Japan wasprimarily apiano producing countyandwas home tothe two or the largest piano companies inthe world, namely, KawaiandYamaha.

Contd.; 13 i !, II " !

I I, I 264 International BusinessStrategy 314-093-1 Contd ...

• Asof20 13, Kawai produced morethan75% ofits pianos i~ Japa~. This nU,mber wa~much closer to25-50% forYamaha, whichproduced mostofits pianos In Indonesia andChina, Chinese PianoMarket • Inthe 1990s, risingwages inKorea andJapan caused muchofthe piano production inthose countries tomove toIndonesia andChina.

The economic emergence ofChina during the2000s enabled it to produce low-priced but low-quality pianosthatwere introduced globally.

In 2006, China overtook JapanandKorean tobecome thelargest pianoproducing country in the world.

Large pianomakers forthe North American marketwereBaldwin, PearlRiver, the government-owned factoriesinChina, Parsons Music(Hong Kong), Yamaha (Japan), Young Chang(Korea), and,fortheCanadian market,Kawai(Japan). Otherforeign-owned companies thatowned factories inChina orhad contracts withChinese manufacturers to make pianos forthe USmarket included AXL(Palatine brand),Bechstein (W.

Hoffmann Vision brand), BlUthner (IrmJerStudiobrand), Brodmann, Cunningham, Feurich, Heintzman, Perzina,SchulzePollmann, Wilh.Steinberg andSteinway & Sons.

From 2000onward, salesofpianos continued tobe robust inChina, increasing 20%yearon year. There wasarising demand forpianos produced inGermany andJapan.

The rising popularity ofthe piano inChina wasattributed tothe improvement inthe financial situationofmany Chinese inthe past 30years.

As of2013, China hadabout 5million children andyouth learning thepiano, andabout 80% ofthe pianos soldinChina eachyearwere forthem.

Compiled/rom VariousSources 14 CHINA'SPEARLRIVERPIANO: TUNING INTOTHEGLOBAL MARKET 265 -- 314-093-1 Exhibit II Pearl River PianoGroup Ltd.(PRGP) Particulars ned enterprise, founded art itsproducts w five-storied factoryhavingatotal space ofone million ty Management' ecutive Officer (CEO) lion, 20-year jointventure agreement withYamaha alter loss-making state-owned musical instrument lane company toobtain ISO9001 quality certification ubsidiary, 'PRPGAmerica, Ltd.' its brand license andpiano manufacturing technology n the Chinese Pianomarket withamarket shareofmore et share in the Chinese exportmarket me the world's largestpianomaker European officeinMunich, where it undertook design lent activities.

the lower-priced 'Essex'lineofpianos forthe world's ing company, Steinway & Sons ong asCEO argeted atprofessional pianoplayers (thehigh endofthe market leaderinthe lower endofthe USpiano market en Stock Exchange, China g Artist' brandofpianos inthe US 15 1!.....iI --.

.----------------- TimelineofGuangzhou Year 1956 PROP.aChinese state-ow 1987 Grantedpermission toexp 1987 Beganoperations atits ne square feet.

1988 Implemented 'TotalQuali 1992 Tongbecame theChief Ex 1995 EnteredintoaUS$IO mil 1997 Tookoverseveral sm manufacturers 1998 Becamethefirst Chinese p 1999 SetupitsUS-based saless 2000 Acqu~edRitmuller, with 2000 Becameamarket leader i than 60% anda50% mark 2002 OvertookYamahatobeco 2004 Company openeditsfirst and research anddevelopn 2005 Won contract toproduce most renowned pianomak 2007 HuangWeilinsucceeded T 2007 The 'Kayserburg' brand, l market), waslaunched 2009 Emergedasthe undisputed 2012 Wentpublic onthe Shenzh 20 I3 Introduced the'Kayserbur Compiled/rom VariousSources 266 International BusinessStrategy ::------ ---------- 314·093·1 Suggested ReadingsandReferences:

"Make NoMistake, They'reComing forOur Jobs," http://the-mound-of- sound.blogspot.in, January13,20i4.

Wieland Wagner,"BrandExpansion: China'sRacetoConquer WorldMarkets," www.spiegel.de, January 08,2014.

Nirmalya Kumar,"Brand Invasion," www.rhemarketer.co.uk Zrlld.

"Major Challenges, MinorSuccesses," www.econcmist.com, December7,2013.

Ni Tao, "How Chinese BrandsOvercome ObstaclesandBecome Global;' www.shanghaidaily.com, October21,2013.

Sun Ye,"Piano ManAlways inTune," http://usa.chinadaily.com.cn, September10,2013.

"Hare VsTortoise: HowChinese BrandsAreTrying toGo Global," www.fox.temple.edu,July21,20Il "Schum peter:TheEmerging-Brand Battle,"https:llglobalconnections.hsbc.com, June 25,2013. .

"Global andChina PianoIndustry 2013," www.prweb.corn, Juiy21,2013.

Nirmalya Kumar,"CanYouName aChinese Brand?" www.hufflngtonpost.com, June 20,2013.

Nirrnalya Kumar, "Can theNext Samsung ComefromChina," hrtp.Zbsr.londcn.edu, June 10,2013.

Antonia Oprita,"TheWorld WillBeManufacturing forChina," www.emergingmarkets.org, May30,20 Il "China's PianoManufacturing TechnologyReachesEuropean (International) Level," www.redorbil.eom,July n,2012.

"Guide tothe Piano World: PartTwo byKendall RossBean," www.pianofinders.com, May 29,2012.

"Pearl RiverPiano: Building aChinese Brandforthe Global Market," http://knowiedge.ckgsb.edu.en, August28,2010.

Claire Zhong andEnrico Lanzavecchia, "KeyDrivers andSuccess FactorsforChinese Companies GoingAbroad," www.valuepartners.com. 2009.

"Country OfOrigin, Branding StrategyAndInternationalization: TheCase Of Chinese PianoCompanies," www.academia.edu, August3,2008.

Petroc Trelawny, "China'sPianoFever," www.spectator.co.uk, June4,2008.

Govindraj Ethiraj,"Merger onthe Orient-Express," www.business.standard.com.

December 25,2007.

Jan-Benedict E.M.Steenkamp, "TheNewCompetition: BrandsfromEmerging Markets," www.world.financialreview.com. 2007.

Kunal Kumar Kundu, "MoveOver,Fortune 500,"http://atimcs.com, August5,2006.

T.K.Maloy, "FromPearlRiver toYou," www.upi.com. September 3D, 2003.

"Made InChina: CanChina BuildAnApple OrIkea?" www.cnbc comAugust 19 2003. .., , I.

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28. www.pearlriverusa.com www.ritrnullerusa.com www.pianoworld.com www.pearlriver-europe.de www.namm.org 16 __------------.:.A~T ---- ----- ATale ofThree Compa A History ofthe Japanes Case study This case waswritten byDavidT Is intended tobe used asthe ba handling ofamanagement situa e 2013, Sophia University.

No part ofthis publication may medium whatsoever withoutthe e thecase forlearn ~ ALE OFTHREE COMPANIES' T . HE SURVI~L STRATEGIES OFSONY, HITACHI ANDCANON 167 313-134-1 I nies: TheSurvival Strategies ofSony, Hitachi, andCanon e Electronics Industry r~ppo!ini, und~rthe~irectjon ofProf. Parissa Haghirian, SophiaUniversity. It SIS forclass diSCUSSIon rather than toIllustrate eithereffective or ineffective tion. Thecase wascompiled frompublished sources.

be copied, stored,transmitted. reproducedordistributed inany form or permission ofthe copyright owner.

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1011234151115 f'flnteclln UKInC USA • Kchu...-cdu:om • Kl;hf«<:h,corn W. 01'" I I, I , ....

-=2~6:::8:.....+~ln:::ternationaf BusinessStrategy -------~-- 313-134-1 A Tale ofThree Companies: TheSurvival Strategies of Sony, Hitachi, andCanon A History ofthe Japanese Electronics Industry After World WarII,Japan wasstilldeveloping economically andnobody could have predicted theeconomic successthatthecountry wouldgoon toachieve.

A major player inthis process ofdevelopment wasJapan's electronics industry.

After thewar, many firmswere created inthe field oftechnology, andthey started todevelop consumer electronics products.Theyquickly became large exporters, beatingtheirforeign competitors withhardware breakthroughs and high-quality products.Theyhavebeenresponsible forhuge advances concerning suchthings aslasers, diodes, screens, andsemiconductors. By driving downtheirmanufacturing coststhanks tocheap labor,andcopying the designs ofWestern products, thesecompanies overpowered theUSconsumer electronics industry.

By 1985, Japan wasexporting morecolortelevisions thantheUS. The Japanese companies pushedthelimits oftechnological developmentbycreating themost advanced productswhilemoving themanufacture ofbasic components to developing countries.Inthe late 1990s, thedemand forelectronic gadgetswas very high. TheInternet andpersonal computer usewere exploding alloverthe world. Thistrend, combined withadepreciating yen,sawJapanese firmsearning fortunes. Thus,Japan became theworld hubofhigh-tech electronics.

The Japanese Management System Iii Thesuccess ofthese electronics companieswasbased ontraditional Japanese management practices,whichdiffergreatly fromWestern business approaches.

The main objectives ofJapanese firmsarestability andcooperation. Japanese corporations alsohave astrong focusonprocesses andprocedures, which should beperformed ascarefully aspossible. Thisideaisbased onthe traditional samuraicodeofBushido, inwhich performing one'staskatthe highest levelisconsidered avirtue.

The principle thatprocesses mustbeperformed withgreat careandpatience was very useful forJapanese firmsduring theperiod ofrapid economic development. SincemanyJapanese firmswere onlyjuststarting outin manufacturing, theyhadtheopportunity toimprove andperfect operation and production processes.

In Japanese, theterm "manufacturing" translatesasmonozukuri, literally"making things." ManyJapanese corporations, forexample Toyota,havebecome world leaders incost-effective andhigh-quality production.Thisdedication toprocess 2 _------------:A~T~AlE OfTHREE COMPANIES: THESURVIVAL STRATEGIES OfSONY, HITACHI ANDCANON ______ _-!-.....lIlML....1 313-134-1 has also helped Japan's elet.fi c rorncs trrns tocreate outstanding productsthatare often theworld's thinnest andsmallest.

Monozukuri isasource ofnational prideandthespirit ofcraftsmanship isheld responsible forthe post-war successoflarge Japanese firmssuchasPanasonic and Sony (Wakabayashi, 2010).However, manyJapanese corporations are thought tofocus toomuch onproducing thebest quality, andarecriticized for losing trackofconsumers' wishesasregards newerdesigns andinnovative products.

Another aspectofJapanese humanresource management islifetime employment. Japanesepeopleemployed underthissystem enteralife of dedicated servicetoone company, andjobtransfers areneither socially acceptable nordesirable. ManyJapanese believethatthisapproach isalso responsible forthe impressive riseofJapanese firmsasworld-class competitors (Kambayashi andKato, 2008). Forexample, allworkers startbysolving problems atagrass-roots level,which provides themwithuseful basic knowledge, andtheinvolvement ofemployees inthe company issubsequently boosted viaspecific training. Thisphilosophy alsoencourages information- sharing between differentgenerations andhierarchical levels;butlifetime employment isby nomeans anunmixed blessingforfirms (Tabushi, 2009).

Lifetime employment hasalso resulted inanother aspectofJapanese corporate culture: seniority-based wages.Asthe name suggests, thesalary ofworkers increases onthe basis ofage and notmerit. Unfortunately, however,thissystem does notreward employees whoperform better,andinaworld where emerging countries arebecoming veryaggressive, thisisacompetitive disadvantage.

Reform herecould enhance thecompetitiveness ofJapanese firms(Endo, 2006).

A central pillarofthe Japanese economyandperhaps itsmost defining characteristic isthe keiretsu structure ofmany manufacturing firms.Keiretsu is the term foraconglomerate orfinancial group.Traditionally, keiretsuare vertically organized, consistingofmany smallandmedium-sized businessesthat come together toform oneunified company. Thefirms areoften centered around a large bank.

Keiretsu havebeenakey element ofJapan's rapidindustrial development and transformation sincetheearly 1950s (Calder, 1993).Akeiretsu consists ofaset of companies withinterlocking businessrelationships andshare holdings. The companies eachownasmall portion ofthe shares. Theresult ISthe creation ofa h econglomerate thatgrows slowly, andbytaking fewrisks. Itsstructure protects themembers fromforeign takeover andmarket fluctuation; sincethey have tiedtheir fates together, whenstocks forone company Inthe group grow, they willallgrow, andwhen losses areincurred, theycanbespilt between allthe 3 j' L.-=2:.::7..;O...

-+__ ln_te_rnal~tio~n~al~B~US~in~e==SS-:St~ra~te~g~ y _ 313-134-1 members. However,suchstructures arevery static andareslow toreact ina crisis (Howard, 2002).

Another important factorinthe rapid economic development ofJapan andits electronic firmsisthe Japanese workethic andfocus onachievement. Oneof the highest virtuesisthat ofdoing one'sbest,persisting, andw.orking hard..

Ganbaru isan active process whereinoneworks hardinpursuit ofagoal, strives to overcome difficultiesthatmight arise,andtakes ondifficult taskseventhough they might bearduous.

It also embodies thephilosophy oftransforming one's future andstatus byone's ownefforts, regardless ofpersonal background.

The Present Japanese Electronics Industry Since thestart ofthe 21" century, manyJapanese electronics companies have struggled withfinancial problems. Foreigncompanies fromSouth Korea and Taiwan arecapable ofimproving theirproducts morequickly andareable to manufacture moreuser-friendly goods.Thanks toamore effective marketing strategy, theynowlead inmany sectors, including Japan'sformerfiefdoms of TVs andcomputers. In2009, afterthefinancial crisis,Samsung Electronics had an operating profittwice aslarge asthe combined profitofnine ofJapan's largest consumer electronics companies.

Sharp isagood example ofthis decline. Thecompany thatinvented LCD technology announced recordlossesfor2012, andthechairman expressed severe doubtsaboutthesurvival ofthe company. SimilarlyRenesas, the Japanese manufacturer ofsemiconductors, willhave tobe bailed outbythe Japanese government toavoid bankruptcy. FinallyNintendo, thelegendary videogames company,announced thefirst loss inits history in2012.

Much inkhas been spilled inthe attempt toexplain thisdecline. Japanese managers areinclined toblame thestrong yen,which makes itmore difficult to export goods. Thisisaproblem thatdoes notaffect Korean firms,which have fewer problems withastrong currency. Theycanmanufacture productsalmost as well astheir Japanese counterparts, butatamuch lowerprice. Other factors such asthe FUkushima disaster,andtheflood inThailand, wheremany Japanese factoriesarelocated, arealso considered factorsinthe decline. More recently, territorial tensionswithChina ledtoaboycott ofJapanese productsthat affected theturnover ofmany electronics firms.

Despite thisdeterioration, in2013 Japan isstill apillar inthe field oftechnology.

Japanese companies nolonger dominate thesector asthey didbefore, butsome remain significant playersinthe electronics industry.Theseinolude Hitachi Sony, Nikon, Canon, NEC,Nintendo, Panasonic, Olympus,Sharp, Toshiba, and many others. Itwould betoo simplistic tosay that these companies, withtheir 4