Japan’s luxury shoppers move on

The Japanese consumer’s seemingly insatiable appetite for luxury goods has declined, so companies in this sector must rethink the way they compete.

AUGUST 2009 • Brian S. Salsberg

When it comes to luxury goods, Japan’s consumers are among the world’s biggest spenders. The country’s luxury market, worth $15 billion to $20 billion, is second in size only to that of the United States. Yet the “mass luxury”1 market is feeling unprecedented pressure. Sales are down sharply, luxury-goods companies have warned that they won’t meet their current growth and earnings targets, and dire headlines proclaim the market’s decline.
These challenges are hardly unique to Japan—the economic crisis has sapped consumer confidence globally and sparked a backlash against conspicuous consumption. Yet Japan is different: the current crisis has not only reduced the discretionary spending of consumers but also accelerated fundamental shifts in their attitudes and behavior. These changes are not temporary, and luxury players must adjust their strategies to succeed in a market that,
despite the current slowdown, will remain very large and attractive.

To help luxury companies better understand both the near- and longer-term outlook for Japan’s market, McKinsey surveyed more than 1,500 Japanese luxury consumers in March and April 2009.2 We also interviewed CEOs, presidents, and other senior officers at more than 20 luxury-goods and premium-brand companies, as well as the CEOs of three of Japan’s largest department store chains and a number of luxury hotels.

We found significant, long-lasting shifts in attitudes and behavior among Japanese luxury consumers. Luxury companies can no longer rely on a “brand as badge” mentality. They will have to fight harder (and against more and different competitors) for a share of consumers’ wallets. They will have to woo even loyal buyers in more personalized ways. Reliance on the traditional luxury-goods channels—department stores and company-owned
stores—has worked well in the past but will almost certainly damage the long-term health of luxury manufacturers.

Some luxury players understand these changes and are adjusting to them, but many still believe that everything will return to normal, whatever that means, once the downturn has passed. Those companies may be in for a surprise.

An appetite for luxury

Although the hypothesis is difficult to prove empirically, there is a consensus that Japan’s passion for luxury goods began in the 1970s, with a widely held belief among the country’s consumers that European products were of higher quality and more durable than local ones. This idea later evolved into an emotional and social attachment to luxury brands. Owning expensive European-made products became a badge of economic success and social acceptance.

In Japan, unlike many markets, luxury goods have typically signified a middle- rather than upper-class lifestyle. The most influential Japanese fashion magazines and department stores, which dictated the fashion sense of most members of Japan’s large middle class, touted luxury brands. Middle-class consumers skimped on other expenses, forgoing travel or expensive meals so they could buy designer handbags and apparel. As a result, the market for luxury goods boomed in the 1980s and continued to grow despite the economic ups and downs of the 1990s. A handful of the most popular brands benefited enormously. Today, Japan represents 10 to 20 percent of global luxury-goods sales, depending on how the market is defined (Exhibit 1).3 If Japan’s global travelers are included, the country has the world’s largest luxury-goods consumer base.

Who are typical Japanese luxury consumers? Disproportionately, women over the age of 35, because of the luxury-goods categories we included in our research: fashion apparel, leather goods, watches, jewelry, skin care, and cosmetics. The Japanese luxury-consumer base includes two large segments reflecting a demographic split: the traditional 45-yearsor-older segment (still responsible for a significant portion of luxury spending on many brands) and the generally trendier under-45 segment (with a number of subsegments based on factors such as income levels, sources of income, and job status). One important consumer segment for many luxury brands consists of single women aged 20 to 35 who hold full-time jobs but live with their parents and therefore have a substantial discretionary income.

The two primary sales channels for luxury goods in Japan are department stores (where luxury manufacturers typically have “shops in shops”) and stand-alone company-owned or -operated stores. Today, department stores generate about 55 to 60 percent of luxurygoods sales,5 and many major luxury players in Japan control virtually every aspect of their presence—not only owning the merchandise, but also using their own employees as salespeople.

The bubble bursts
Obviously, luxury-goods sales suffer during difficult economic times, but the global recession only partially explains the steep decline in Japan’s luxury market. After modest growth from 2001 to 2006, it contracted in mid-2006, recovered modestly in late 2007, and fell sharply in 2008 (Exhibit 2). Most of the expansion early in the decade apparently resulted from price increases rather than volume growth. Recent data show that retail sales of imported brands, including luxury ones, fell by 4.6 percent, to 846 billion yen ($8.8 billion) in 2007 and by an additional 4.9 percent in 2008, to 804 billion yen.

Our interviews indicate that year-to-date sales of fashion apparel and accessories are down by as much as 20 percent—and even more for some companies and categories, including high-end women’s apparel. Luxury-goods executives say the decline reflects falling foot traffic, as well as significantly lower average-transaction levels and percentages of browsers who actually buy something.

Three factors are responsible for this shift. Clearly, the financial crisis is the most recent and palpable. Earlier this year, consumer confidence in Japan fell to its lowest level since it was first tracked, in 1982. Japanese luxury buyers—younger consumers, in particular— say that they have significantly reduced their spending on luxury products over the past year. Luxury buyers with the lowest confidence levels cut spending on them by an average of 11 percent, and even the most optimistic spent slightly less on them after the recession began, in November 2008, than before it. Category by category, our survey results were generally consistent with market trends: watches and jewelry were hardest hit, followed by fashion apparel and leather goods. Skin care and cosmetics fell only modestly.

Confidence is slowly improving, and about 65 percent of the consumers surveyed expect to resume their luxury-spending patterns once the economic crisis has passed. Yet one-third of consumers in our survey declared they would “never spend the same way on luxury items.”

The second factor in the decline of luxury sales—the 2004–07 luxury-brand bubble—was fueled by newly rich bankers, traders, real-estate agents, and entrepreneurs, who poured their money into these goods, sparking a massive store expansion by companies that sold them. For a country with less than half the population of the United States, the number of luxury-goods stores in Japan is staggering: the British group Burberry has 75 stores in Japan and only 32 in the United States; France’s Hermès, 64 and 30; Italy’s Prada, 35 and 15; and the Italian jeweler Bulgari, 31 and 17, respectively.7 As the Japan CEO of a luxuryapparel manufacturer told us, “Over the past five or six years, we kept getting the push from headquarters to open more and more stores, irrespective of performance. Now our
mandate is to close a significant percentage of those stores.”

Finally, and most important from a long-term perspective, Japan’s channel trends, consumer attitudes, and behavior shifted during the past six to eight years. The financial crisis has accelerated this transformation, exposing four important changes that are contributing to the luxury-market downturn and will probably persist.

Greater individuality
Until recently, women in Japan gained much of their status and confidence from external badges, in the form of branded apparel, handbags, jewelry, and other accoutrements.

Conformity trumped individual expression. Today, Japanese women are much more confident about creating their own personal style. Luxury consumers, once predictable in their preferred brands, patterns, and browsing and shopping channels, are now beginning to mix the expensive with the cheap and to shop in a broader range of channels. In a December 2008 Nikkei survey, 86 percent of Japanese women agreed with the statement, “I mix and match my clothes according to my own tastes.”

A broader definition of luxury
Japanese luxury consumers today weigh the purchase of luxury goods against luxury experiences, such as a vacation, a meal at an expensive restaurant, or a day at a spa. Across demographic groups, almost half of the survey respondents said that they would rather spend money on such experiences than on luxury handbags, accessories, or apparel (Exhibit 3). The manager of a leading luxury hotel in Tokyo told us that the vast majority of his guests are Japanese, including many Tokyo residents: “A large part of our customer base is 35- to 55-year-old ladies with money, so we are going after the same wallets as the luxury manufacturers are.”

Meanwhile, luxury goods are losing their luster. Across demographic groups, one-third of all consumers—and as many as 43 percent of those 55 or older—agreed that “owning luxury goods is not as special as it used to be.” Only 32 percent of the respondents said they were “very” or “somewhat” interested in luxury products, compared with 51 percent in the same survey in 2004.

More and cheaper options
The proliferation of luxury and imported fashion brands in Japan has greatly intensified competition for the luxury consumer’s pocketbook. A walk through Tokyo’s trend-setting streets, such as Ginza or Omotesandō, proves the point: steps from the stores of Sweden’s H&M and Spain’s Zara (both offering trendy but relatively inexpensive fashions), Italy’s Diesel (enjoying significant growth in sales of $200 to $300 handbags), and Japan’s Uniqlo, you find more traditional luxury stores with merchandise at prices 10 to 20 times higher. Even sportswear makers now offer fashion-inspired higher-end apparel lines.

In short, while the number of Japanese consumers and their total spending on apparel and accessories have remained relatively flat for the past decade, that spending is now spread across many more brands and products. The mix includes some surprises. As the Japan CEO of a well-known luxury-apparel and -accessory company told us, “We even think of Apple, with its iPod and all of its accessories, as taking from the luxury wallet.”

Shrinking department store sales
As recently as a decade ago, Japan’s department stores not only monopolized the luxurygoods and fashion apparel market but also were the primary source for the latest fashion trends. In the past five to seven years, company-owned stores, factory outlets, and other formats have enjoyed strong growth. They now account for more than half of total sales for a number of major luxury brands.

Sales in department stores fell by about 3 percent annually from 2000 to 2006. From 2007 to 2009, their share of fashion apparel and accessory sales plunged by more than 15 percent, and the first three months of 2009 paint a similarly dismal picture. It isn’t clear if sales in department stores are a leading or lagging indicator for the luxury- goods sector. What is clear is that Japanese consumers aren’t flocking to department stores as they once did. This development presents a secondary threat to luxury manufacturers: department stores are looking further afield to stimulate sales. Uniqlo, for instance, recently agreed to open in department stores, expanding into the domain luxury-goods companies once dominated.

In this uncertain environment, what are luxury brands to do? We believe that the business model many of them rely on almost exclusively today—strong brand equity and continued patronage from a mix of wealthy consumers and mass-luxury buyers aspiring to wealth—isn’t sustainable. Luxury-goods companies must recognize that they cater to
specific consumers and should emphasize the notion of scarcity and exclusivity, perhaps by promoting their heritage and history, as well as the provenance and workmanship of their products.

Sales tactics can also foster consumer loyalty—crucial in an industry where the best customers account for 20 to 45 percent of sales. Supply can be reduced, for example, to generate a sense that consumers must act immediately or risk missing out on what’s available. Private sales, limited-time offers, and invitation-only events can nurture an
air of exclusivity. At the same time, however, companies must attend to the basics by focusing on the cost of goods sold. That might mean using the downturn as an opportunity to renegotiate contracts with suppliers and partners and to streamline labor costs, a significantly higher percentage of sales for luxury than for nonluxury companies.

One thing is fairly certain: recent structural changes in Japan’s luxury market don’t represent the end state. Companies must anticipate and respond to changes in consumer attitudes and behavior, as well as the evolution of channels and competitors. The flexibility to adjust brand positioning, product offerings, and distribution strategies will be essential.

Despite the current turmoil, Japan will certainly remain a large and important luxurygoods market. But it will also become a more contested one, with winners distinguished from losers by the ability to build loyalty among existing customers, to connect with and capture the next generation, and to operate efficiently and profitably.

When Should a Process Be Art, Not Science?

The movement to standardize processes has gone overboard. Some require an artist’s judgment—and should be managed accordingly.

MARCH 2009 • Harvard Business Review

The Idea in Practice

Hall and Johnson recommend these steps for managing your processes once you’ve determined which ones should be artistic:

Develop an infrastructure to support art

These practices can help:

• Create appropriate metrics. Artistic processes must rely on external measures of success. So continually expose artists to customer feedback.

Example:

At Steinway, piano voicers (who adjust completed pianos to perfect each instrument’s feel and sound) interact directly with professional pianists.

• Manage artistic and scientific processes separately. In a surgery center, repetitive work that can be standardized (such as high-volume hernia repair or Lasik corrective eye surgery) is managed separately from more complex inpatient surgery that requires individual judgment.

• Build effective training programs. Provide employee “artists” with experiences such as apprenticeship with a master, stories of outstanding customer service, and extended time with a customer. These experiences will help them develop an understanding of customers’ needs, the judgment required to act without perfect information, and the ability to learn from both good and bad outcomes.

• Tolerate failure. The variations characterizing artistic processes make it impossible to satisfy every customer on the first try. So institute extensive quality inspections to prevent failures from affecting customers. And systematically analyze failures to identify which ones could be prevented or minimized in the future.

PERIODICALLY REEVALUATE THE DIVISION BETWEEN ART AND SCIENCE

Regularly ask yourself:

•What new technologies can help make a science of art?

• Do my customers still value variation?

• How do the costs of art stack up against the benefits?

• What opportunities does art allow that science doesn’t?

Example:

MinuteClinic has hundreds of walk-in medical offices. It has lowered costs and improved quality of basic health care by developing decision-support software that leads nurse practitioners and physician assistants through a step-by-step process for diagnosing and treating common ailments (strep throat, bladder infection, conjunctivitis). MinuteClinic continually evaluates the line between art and science: Though it keeps exploring ways to enhance its software and related processes to treat additional diseases, it also gives its clinicians enough freedom in their interactions with patients to deliver a personal customer experience.

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When Should a Process Be Art, Not Science?

Can a successful European sales process be rolled out worldwide, or should regional teams be allowed to perform their individual magic? Does it make sense for a manufacturer to invest in developing and documenting a detailed process that complies with the latest ISO standards, or would more employee training and empowerment lead to higher quality? Can quality be improved by managing surgeons like nurses or auditors like mechanics? Executives in almost every industry face similar questions about how to handle their processes. There are some processes that naturally resist definition and standardization—that are more art than science. Helping executives understand which should not be standardized and how to manage artistic and scientific processes in tandem is the purpose of this article.

The idea that some processes should be allowed to vary flies in the face of the century-old movement toward standardization. Process standardization is taught to MBAs, embedded in Six Sigma programs, and practiced by managers and consultants worldwide. Thousands of manufacturing companies have achieved tremendous improvements in quality and efficiency by copying the Toyota Production System, which combines rigorous work standardization with approaches such as just-in time delivery of components and the use of visual controls to highlight deviations. Process standardization also has permeated nearly every service industry, generating impressive gains.

With success, though, has come overuse. Process standardization has been pushed too far, with little regard for where it does and does not make sense. We aim to rescue artistic processes from the tide of scientific standardization by offering a three-step approach to identifying and successfully integrating them into any business. We argue that artistic and scientific approaches need not be at odds but must be carefully harmonized.

What Is an Artistic Process?
What we call “art” is often described as “judgment-based work,” “craft work,” or When Should a Process Be Art, Not Science? harvard business review • march 2009 page 3 “professional work.” The common thread in such work is variability in the process, its inputs, and its outputs. Art is needed in changeable environments (for example, when raw materials aren’t uniform and therefore require a craftsperson’s adjustments) and when customers value distinctive or unique output (in other words, all customers don’t want the product or service to perform or be performed the same way).

If both of those conditions aren’t present, a mass or mass-customization process, not an artistic process, is the answer. If a firm is operating in a highly variable environment and produces variations in products or services that customers do not value, chances are it has nascent or broken processes. In those instances, a firm needs to learn how to bring the environment under control. (See the exhibit “The Process Matrix.”)

Let’s look in more detail at the conditions that favor artistic processes:

Highly variable environment. Scientific process management calls for blindly reducing variability. But sometimes variability cannot be avoided. Take the inconsistencies in the wood used in the soundboards of pianos. In other cases, the costs of decreasing variability outweigh the benefits—for instance, if doctors applied a cookbook approach to treating complex diseases. The traditional scientific approach to such situations is to try to tame the environment by imposing complex rules that spell out what to do in every possible circumstance. Not only does that reduce accountability but it often causes workers to switch to autopilot instead of trying to understand the specifics of each job.

That was a conclusion reached in 2006 by executives at Ritz-Carlton, the hotel chain renowned for its high quality. After decades of demanding that employees strictly adhere to a 20-point list of customer service basics, the company’s management realized that the specified routines weren’t adequately addressing the widely ranging expectations of the luxury chain’s customers, who had become younger, more diverse, and more tech savvy, and often traveled with children and other family members. The company’s leaders also saw that expanding the list to address every possible situation that an employee might encounter would be futile. As a result, they shifted to a simpler 12-point set of values that allowed employees to use their judgment and improvise. Tightly defined process dictums (like “always carry a guest’s luggage,” “escort guests rather than point out directions to another area of the hotel,” and “use words like good morning, certainly, I’ll be happy to, and it’s my pleasure”) sometimes felt stuffy and out of place. Management replaced them with looser value statements (such as “I build strong relationships and create Ritz-Carlton guests for life” and “I am empowered to create unique, memorable, and personal experiences for our guests”). The change encouraged employees to sense customers’ needs and act accordingly. Customer satisfaction improved.

Output variation that creates customer value. In highly erratic environments, variation in outcomes is natural—and is frequently a good thing in customers’ eyes. Consider the Steinways played by the majority of the world’s concert pianists. Steinway & Sons knows that each of its concert grand pianos expresses a different “personality,” and the company promotes that as a positive—an indication of the richness of the materials and the craftsmanship that go into its products. Likewise, master winemakers know that their job is to make the most of the distinctive qualities of each year’s harvest.

Artistic processes are often required where no consistent definition of quality exists. (See the exhibit “Many Processes Are an Art.”) If customers value—or demand—uniqueness or variation, then it must be created by artists who devote considerable effort to understanding individual customer preferences. Artistic processes can capably and reliably produce innovative products and services that many scientific business processes cannot mimic. While a scripted greeting and forced smile at the front desk ensure a minimum level of service, a greeting crafted by an employee at the Ritz will pick up on verbal and nonverbal cues to fit that particular guest at that particular time and place.

A Process for Managing Art
Successfully developing and supporting art in an organization requires a three-step approach that is at odds with the standardization-focused training of many managers. Each step addresses a key question that managers must explore: Where will art add value? How should art be supported? How should artistic Joseph M. Hall (joseph.m.hall@tuck.dartmouth.edu) is a visiting associate professor of business administration and M. Eric Johnson (m.eric.johnson@tuck.dartmouth.edu) is a professor of operations management and the director of the Glassmeyer/McNamee Center for Digital Strategies at Dartmouth’s Tuck School of Business in Hanover, New Hampshire. When Should a Process Be Art, Not Science? harvard business review • march 2009 page 4 processes evolve? Our guidelines for answering these three questions are derived from our research and consulting experience.

Step 1: Identify what should and shouldn’t be art. Begin by taking a hard look at your processes, clearly identifying where art or science will add value for customers. Use the process matrix to assist you.

If a method or practice is still nascent, you’ll need to determine whether it should evolve toward a mass or an artistic process. Many managers wrongly discount or ignore the possibility that customers can be persuaded to value variations—a tendency that leads managers to choose the path to mass processes.

Even when a mass process is the right destination, moving too quickly down that path can be disastrous. If you don’t yet have a clear view of the causes and effects at work, you need artists, who can operate effectively in chaotic environments. Trying to standardize a nascent process before it’s truly understood will alienate key artistic staff—exactly the people you need to manage it during the interim and help you learn how to control it. Until you’ve reduced the process to a science, you should create an environment where artists can thrive.

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THE PROCESS MATRIX

This simple tool can help managers categorize processes and consider how they might or should change.

Mass processes are standardized processes that are geared to eliminate variations in output. They’re appropriate when the goal is completely consistent output for a narrow range of products or services. In such cases, all artistic discretion should be eliminated. Steel, cars, and consumer financial services are examples of industries where mass processes are widely applied.

Mass customization uses a scientific process to produce controlled variations in output. Assemble-to-order products like Dell’s personal computers and cars in BMW’s “Build Your Own” program fall into this category. While the number of possible combinations might be enormous (BMW claims more than 130 million configurations), output variability is limited to combinations of predefined components. In many cases, mass customization represents the best of both worlds: control and variation. But when customers demand true customization (“I want a pink computer with a fabric-covered chassis that complements my office”), it will fall short.

Nascent or broken processes can’t produce the consistent output that customers demand. Out-of-control processes are common when a product or process uses radically new materials, technology, or designs. In these situations, managers should consider whether controlling output variation is feasible or desirable. If variation can’t be controlled but customers can be persuaded to value it, an artistic process is the solution. If customers won’t tolerate variation, the focus should be on understanding its causes and creating a standard process. Boeing did this for its new 787 Dreamliner, the first commercial aircraft with a carbon composite airframe: The company conducted test runs to learn how to standardize the process for manufacturing fuselage sections.

Artistic processes leverage variability in the environment to create variations of products or services that customers value. They rely on the judgment and direct experience of craftspeople. Building Steinway pianos, serving passengers on flights, and developing radically new software applications are but a few of the processes that meet those criteria. Before choosing art, it’s critical to make sure that customers really value output variation. Some managers delude themselves into believing they need artistic output when the vast majority of customers really want a standard product.

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That said, managers must guard against preserving artistic processes that have outlived their usefulness. If the science has been mastered or if customers no longer value the variations, retaining artistic processes can allow competitors that embrace standardization and become more efficient to leap ahead of you.

Step 2: Develop an infrastructure to support art. This infrastructure has two purposes: to ensure that artists have freedom to practice and refine their art and to ensure that they create the maximum customer value. You should keep those goals in mind when figuring out how to measure artistic results, make art and science work together, train artists, and respond to inevitable failures.

Creating appropriate metrics. The simple, internally focused metrics for a scientific process, designed to make sure everyone executes it the same exact way, will not work for art. An artistic process has to rely on external measures of success. Artists need continual exposure to customer feedback, which prevents them from constructing their own idiosyncratic notion of quality.

Sometimes this feedback must come from a broad swath of customers. For example, medical professionals obviously have to work closely with all afflicted patients to diagnose and treat complex diseases—to obtain a complete picture of their symptoms and track their reactions to remedies. With other processes, including those used to produce Steinway’s high-end pianos, feedback from a select group of customers can suffice. At Steinway, piano voicers, who adjust completed pianos to perfect the feel and sound of the instrument, regularly interact directly with professional pianists, whom the company’s longtime president Bruce Stevens (now retired) called “Steinway’s biggest fans and its harshest critics.”

Getting art and science to work together. If businesses employ both artistic and scientific processes (the rule rather than the exception), managers should work to separate them and then carefully manage the areas where they intersect. To begin, managers must evaluate whether one process is being asked to perform both art and science. If it is, it should be divided. Consider sales. It often pays to use a standard process for low-risk, low-reward sales efforts but to assign sales artists who thrive in an uncertain environment to tackle high-risk, high-reward efforts. Given the differences in the sales approaches as well as the compensation schemes that each requires, integrating the two can be counterproductive and sometimes disastrous. Similarly, in an ambulatory surgery center, separating repetitive work that can be standardized, such as a high-volume hernia repair or Lasik corrective eye surgery, from variable in-patient surgery that requires more art will lower costs and improve outcomes. If demand for either the artistic or the standardized process isn’t high enough to make segregating them economical, it’s often best to exit one of the businesses.

Managers should also separate any artistic process from support processes that can be standardized. It’s crucial that the latter not be treated as art; rather they must be organized and operated to provide a stable platform for the artist. (See the exhibit “Science as a Platform for Art.”)

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MANY PROCESSES ARE AN ART

A wide range of processes lend themselves to artistic approaches, which produce unique or tailored results. Here’s a sampling:

Leadership training. Developing decisionmaking capabilities and self-awareness in individuals takes time and one-on-one coaching.

Auditing. Applying the broad principles of new international reporting standards requires understanding the implications for each firm and using judgment to determine the right response.

Hedge fund management. While computer models can spit out risk estimates, making final bets often entails personal calls.

Customer service. Satisfying individual customers might require frontline employees to go “off script” and do what they feel is best.

Software development. Writing code for a new application often involves iterating with customers to learn how to refine the program to address their needs, as well as decisions on which corners can be cut.

Account relationship management. Keeping valued customers happy often means adding a touch of tailored service to standard offerings.

Business development. Spotting new opportunities and envisioning how the business could exploit them can’t be reduced to a formula.

Industrial design. Integrating the customer’s needs with a compelling design takes imagination and experience.

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Top salespeople, for instance, rely on customer relationship management systems to provide basic, consistent information to tailor pitches to individual customers. Any missing or incorrect information weakens the salespeople’s ability to execute and clouds the feedback loop that allows them and their managers to judge their performance. Similarly, Steinway’s voicers require consistent strings, hammers, and action assemblies (the mechanisms that connect the keys to the hammers that strike the strings). Without such standard components, the challenge of perfecting the feel and sound of instruments for individual professional pianists would be far more difficult.

Building an effective training program. Artists, of course, must learn the skills of their trade. They often have to undergo a formal apprenticeship or informal mentoring and a probationary period during which their freedom is curtailed. They might even have to pass a formal exam to be certified.

But whether the artists are insurance claims adjusters, civil engineers, or software architects, their training entails more than just mastering new skills. It also involves developing an understanding of customer needs, the judgment required to act without perfect information, and the ability and willingness to learn from both good and bad outcomes. Often organizations with artistic processes have a strong culture that guides artistic judgment. Steinway wants its voicers to identify with world-class concert pianists—to understand the tension they feel onstage when they’re playing before a breathless crowd and how they depend on their pianos to deliver.

Companies can employ a variety of methods to instill their culture in new artists. One we’ve already mentioned: an apprenticeship with a master. Another is storytelling. Ritz-Carlton regularly shares stories of outstanding customer service to inspire its frontline employees. Yet another powerful tool is the “ride-along”: having an apprentice spend an extended period of time with a customer.

All in all, turning a novice into a master may take considerable time. Steinway voicers spend one to three years in training before working independently. At the Ritz, receptionists, bellhops, and restaurant waiters receive four to five weeks of formal training during their first year. Frontline Ritz employees—new hires and veterans—meet for 15 minutes each day to share stories of how they wowed guests and discuss ways to improve customer service.

Tolerating failure. The variations that are the hallmark of artistic processes make it impossible to satisfy every customer on the first try. This reality means that a company may have to institute extensive quality inspections to prevent failures from affecting customers. It also may have to develop approaches to recover quickly when they occur. Ritz-Carlton, for example, empowers frontline employees to spend up to $2,000 to fix a customer’s problem.

Just because some amount of failure is inevitable doesn’t mean that failures should be passively accepted. To the contrary, they must become learning opportunities—both for the artists and for the managers who shepherd the process. Failures should be systematically reviewed with the aim of identifying which ones could be prevented or minimized in the future (for example, by strengthening a standard support process, spotting them earlier, and improving recovery responses).

If you get to the point where failures are rare, it means that the process has become predictable and can be turned into a science.

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SCIENCE AS A PLATFORM FOR ART

The creation of many products and services involves both artistic and scientific processes. In such cases, the output of the scientific processes should provide a stable platform on which artists can then apply their craft. The two kinds of processes need to be separated, however, because they have different goals and metrics of success.
Consider how Steinway & Sons produces concert pianos:

Art

Perfecting the sound and feel of the pianos is an art that requires the judgment of  skilled craftspeople—such as the voicers who customize the instruments for individual professional pianists.

Science
Many components of pianos can be standardized. Making them uniform—through scientific manufacturing processes—minimizes the complexity that the voicers have to contend with.

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Step 3: Periodically reevaluate the division between art and science. Changing customer needs and new technologies can alter the landscape in ways that make art more or less desirable. Managers must regularly ask themselves: What new technologies can help make a science of art? Do my customers value variation? How do the costs of art stack up against the benefits? What opportunities does art allow that science doesn’t?

Diverging customer demands drove Ritz-Carlton to shift toward art, while advances in computer-controlled machine tools for making components prompted Steinway to move in the opposite direction. In health care, some organizations have flourished by replacing artistic diagnostic processes with technology. At its hundreds of walk-in medical clinics, MinuteClinic employs homegrown decisionsupport software that leads nurse practitioners and physician assistants through a step-by-step process for diagnosing and treating common ailments such as strep throat, bladder infection, and pinkeye. MinuteClinic continually evaluates the line between art and science: While it relentlessly explores how it might enhance the software and related processes to treat additional diseases, it strives to make sure that its clinicians have enough freedom in their interactions with patients to deliver a personal customer experience.

Sometimes the line between art and science shifts simply because of a realization that art produces better results. This is now occurring in the U.S. accounting profession, where the largely rules-based Generally Accepted Accounting Principles are making way for the International Financial Reporting Standards, a simpler set of principles that allow managers and auditors to exercise more judgment. Although a desire to harmonize the standards of different countries is one reason for the shift, another is the growing view that promoting judgment and accountability in accountants and legal professionals will lead to better reporting outcomes than rote adherence to rules does.

When evaluating the division between art and science, managers must be wary of “art diffusion”: unwittingly extending artistic freedom to people who surround and support artists. While the heart surgeon might need artistic freedom, those involved in preoperative patient preparation should strive for consistency so that the patient reaches the operating room in a known, stable state. If best practice can be defined and documented in advance, there is little value, and possibly much danger, in allowing the exercise of art.

In spite of the variability-quashing tendencies of modern process management, we believe that both art and science have important roles to play in many business processes. Art allows for a flexibility, creativity, and dynamism that a purely scientific approach cannot replicate. Well-implemented and managed artistic approaches can also create differentiation that cannot easily be copied, commoditized, or outsourced. For decades, the process management pendulum has been swinging toward the standardization and control of science. It’s time to recognize the limits of such processes and consider where artistic freedom should be restored or preserved.

Unlocking the potential of frontline managers

Instead of administrative work and meetings, they should focus on coaching their employees and on constantly improving quality.

AUGUST 2009 • Aaron De Smet, Monica McGurk, and Marc Vinson

A retail manager responsible for more than $80 million in annual revenue, an airline manager who oversees a yearly passenger volume worth more than $160 million, a banking manager who deals with upward of seven million questions from customers a year. These aren’t executives at a corporate headquarters; they are the hidden—yet crucial—managers of frontline employees.

Found in almost any company, such managers are particularly important in industries with distributed networks of sites and employees. These industries—for instance, infrastructure, travel and logistics, manufacturing, health care, and retailing (including food service and retail banking)—make up more than half of the global economy. Their district or area managers, store managers, site or plant managers, and line supervisors direct as much as two-thirds of the workforce and are responsible for the part of the company that typically defines the customer experience. Yet most of the time, these managers operate as cogs in a system, with limited flexibility in decision making and little room for creativity.

In a majority of the companies we’ve encountered, the frontline managers’ role is merely to oversee a limited number of direct reports, often in a “span breaking” capacity, relaying information from executives to workers.¹ Such managers keep an eye on things, enforce plans and policies, report operational results, and quickly escalate issues or problems. In other words, a frontline manager is meant to communicate decisions, not to make them; to ensure compliance with policies, not to use judgment or discretion (and certainly not to develop policies); and to oversee the implementation of improvements, not to contribute ideas or even implement improvements (workers do that).

This system makes companies less productive, less agile, and less profitable, our experience shows. Change is possible, however. At companies that have successfully empowered their frontline managers, the resulting flexibility and productivity generate strong financial returns. One convenience store retailer, for example, reduced hours worked by 19 to 25 percent while increasing sales by almost 10 percent. It achieved this result by halving the time store managers spent on administration; restructuring their work (and that of their employees) to focus on the areas most relevant to customers, such as the cleanliness of stores and upselling efforts at the cash register; and creating easy-to-understand performance metrics that managers now had enough time to coach employees on daily.

The key is a shift to frontline managers who have the time—and the ability—to address the unique circumstances of their specific stores, plants, or mines; to foresee trouble and stem it before it begins; and to encourage workers to seek out opportunities for self-improvement. In difficult economic times, making employees more productive is even more crucial than it is ordinarily.

The reality of the front line

To unlock a team’s abilities, a manager at any level must spend a significant amount of time on two activities: helping the team understand the company’s direction and its implications for team members and coaching for performance. Little of either occurs on the front line today. Across industries, frontline managers spend 30 to 60 percent of their time on administrative work and meetings, and 10 to 50 percent on nonmanagerial tasks (traveling, participating in training, taking breaks, conducting special projects, or undertaking direct customer service or sales themselves). They spend only 10 to 40 percent actually managing frontline employees by, for example, coaching them directly.

Even then, managers often aren’t truly coaching the front line. Our survey of retail district managers, for example, showed that much of the time they spend on frontline employees actually involved auditing for compliance with standards or solving immediate problems. At some companies we surveyed, district managers devote just 4 to 10 percent of their time—as little as 10 minutes a day—to coaching teams. To put the point another way, a district manager in retailing may spend as little as one hour a month developing people in the more junior but critical role of store manager.

In our experience, neither companies nor their frontline managers typically expect more. One area manager at a specialty retailer with thousands of outlets said, “Coaching? A good store manager should just know what to do—that’s what we hire them for.” A store manager in a global convenience retailer told us, “There are just good stores and bad stores—there’s very little we can do to change that.” Another store manager, in a North American electronics retailer, said, “They told me, ‘We don’t pay you to think; we pay you to execute.’”

These shortcomings are rooted in the early days of the industrial revolution, when manufacturing work was broken down into highly specialized, repetitive, and easily observed tasks. No one worker created a whole shoe, for example; each hammered his nail in the same spot and the same way every time, maximizing effectiveness and efficiency. Employees didn’t necessarily know anything about the overall job in which they participated, so supervisors (usually people good at the work itself) were employed to enforce detailed standards and policies—essentially, serving as span breakers between workers and policy makers. Many manufacturing companies still use this approach, because it can deliver high-quality results on the front line, at least in the short term. In many service industries, the same approach has taken hold in order to provide all customers in all locations with a consistent experience.

Although attention to execution is important, an exclusive focus on it can have insidious long-term effects. Such a preoccupation leaves no time for efforts to deal with new demands (say, higher production or quality), let alone for looking at the big picture. The result is a working environment with little flexibility, little encouragement to make improvements, and an increased risk of low morale among both workers and their managers—all at high cost to companies.

The effects of poor frontline management may be particularly damaging at service companies, where researchers have consistently detected a causal relationship between the attitudes and behavior of customer-facing employees, on the one had, and the customers’ perceptions of service quality, on the other. In service industries, research has found that three factors drive performance: the work climate; the ways teams act together and things are done; and the engagement, commitment, and satisfaction of employees. Leadership—in particular, the quality of supervision and the nature of the relationships between supervisors and their teams—is crucial to performance in each of these areas.² Clearly, the typical work patterns and attitudes of frontline managers are not conducive to good results.

At a North American medical-products distributor, for example, one supervisor reflected that the company “is like California—forest fires breaking out everywhere and no plan to stop them. A lot of crisis-to-crisis situations with no plan. We’ve been in this mode for so long, we don’t know how to stop and plan, although that’s what we desperately need to do. I wish I knew how to intervene.” Because frontline managers were so busy jumping in to solve problems, they had no time to step back and look at longer-term performance trends or to identify—and try to head off—emerging performance issues. It’s therefore no wonder that the company’s performance had begun to decline: inventories were increasing and errors in shipments became more frequent. Companies can also get into frontline trouble if they fail to maintain well-managed operations (see sidebar, “The danger of complacency”).

The danger of complacency

Even when companies get frontline management right, it can be easy for them to lose sight of their gains. Consider, for example, the experience of a chemical manufacturer where shift supervisors didn’t need to spend time on simple, immediate problems, because workers could solve those themselves. Instead, these managers focused on more complex, longer-term improvements: eliminating defects, understanding the fundamental causes of operational problems, and coaching and mentoring operators and mechanics.

From the outside, the shift supervisors didn’t seem to be contributing much, so during a cost reduction effort, the company implemented self-managed teams. Although the reduced costs initially seemed beneficial, over time discipline slipped, new hires were chosen and trained less rigorously, long-term issues were no longer addressed systematically, and the self-managed teams became less reliable. In other words, they could manage the work day by day but not in the long term.

As a result, about five years after the role of shift supervisor was eliminated, the company’s capabilities began a steep slide: the structural integrity and safety of plants fell, costs went up dramatically, and reliability plummeted. It took the company another five years to dig itself out of the hole. Some of its businesses shut down completely, in part as a result of global economic conditions, but also because the high cost of restoring its efficiency and reliability made it less competitive.

Time better spent

At best-practice companies, frontline managers allocate 60 to 70 percent of their time to the floor, much of it in high-quality individual coaching. Such companies also empower their managers to make decisions and act on opportunities. The bottom-line benefit is significant, but to obtain it companies must fundamentally redefine what they expect from frontline managers and redesign the work that those managers and their subordinates do. The examples below explain how two companies in different circumstances and industries made such changes.

Manufacturing and the front line

Sometimes a corporate crisis drives frontline changes. A global equipment manufacturer, for example, was facing backlogs, capacity constraints, and quality and profitability issues in its core vehicle assembly business. The company’s senior leaders concluded that they would have to change operations at five plants by running two shifts rather than three while also raising production levels and quality. “Substantial” results would be needed in no more than seven weeks. Frontline managers were to have a critical role in the changeover—indeed, it couldn’t succeed unless they adopted a new way of working.

To communicate the importance of the changes being introduced, senior leaders, among other things, ordered vice presidents to spend full days in vehicle assembly stations and sent the company’s director of operations to participate in daily shift start-up meetings at each plant.³

Meanwhile, the jobs of frontline managers changed. They were to spend more time in active roles: critical processes and workflows were redesigned according to lean principles,⁴ and the managers played the principal part in implementing these changes. Administrative activities, such as writing reports to plant managers and gathering data to prepare for site visits from regional managers, were eliminated. Innovations spouted—boards posted on factory floors, for example, were continuously updated with performance information, such as hour-by-hour tracking of lost time, as well as long-term problems and the solutions found for them. End-of-shift reports let each shift know exactly what the previous one had accomplished. Weekly reports informed workers about the five most important defects to correct and the five most important actions needed to improve performance. A typical manager’s span of control fell to 12 to 15, from 20 to 30.

Such changes freed managers to spend more time providing on-the-floor coaching and helping teams solve immediate problems. Managers received on-the-job training in lean technical skills as well as in coaching, team building, and problem solving. They also moved their desks from offices to the shop floor and spent at least five hours a day there, literally putting themselves in the middle of the transformation.

As a result, managers and workers identified and implemented other improvements—for example, making parts more available, with fewer defects, and routing materials more efficiently—so that lost production and the need for rework fell. Overall, though the transformation took ten weeks rather than seven, the initial targets were exceeded. Across the five plants, the number of completed vehicles rose by 40 percent a month—despite the elimination of a shift—and quality by 80 percent. Worker hours fell by 40 percent.

Retailing and the front line

Changing the mind-sets and capabilities of individual frontline managers can be the hardest part. In our experience, many of them see limits to how much they can accomplish; some also recognize the need to restructure their roles but nonetheless fear change. At times, before the job of coaching can begin, companies must address more insidious mind-sets—such as a belief that employees can’t learn, their negative attitudes toward customers, or a lack of confidence that frontline managers can influence performance.

The first step is to help frontline managers understand the need for change and how it could make things better. At the convenience store retailer mentioned earlier, for example, an analysis revealed that store managers spent, on average, 61 percent of their time on administration and that they struggled with poorly defined processes for interacting with customers. In addition, these managers felt that they had no control over key performance drivers (such as sales in important product categories), lacked simple tools to monitor daily performance, and had inadequate leadership and coaching skills. They were also tired of “flavor of the month” corporate-improvement initiatives that dictated more work without addressing the fundamental causes of problems.

To give store managers a sense of what could be, this company showed some groups of managers a radically different model store. There, work processes such as stocking took much less time than it did in the company’s ordinary stores, because similar products were grouped together, and high-volume stock was stored in a common and much more accessible location. Cleaning was easier because the layout had been improved, employees had the equipment and supplies to clean more frequently and quickly, and an if-it’s-simple-clean-it-now policy had been introduced. Such steps created a more attractive store environment, simplified the work of employees, freed them to interact with customers, and reduced the amount of time managers had to spend dealing with problems in these areas.

Managers also gained time in other ways: for example, they no longer had to complete long weekly sales reports, respond to corporate directives that arrived at unexpected times, and accommodate too-frequent visits by district or regional sales managers. Streamlined sales reporting captured fewer but more essential indicators, such as the volume of sales in key product categories. All visits from district or regional managers were scheduled in advance and followed a predetermined and performance-focused agenda.

As a result, the time store managers spent on administration fell by nearly half, so they could devote 60 to 70 percent of their days to activities such as coaching workers and interacting with customers. These managers spent more time on the sales floor with individual employees and regularly discussed store strategies and performance metrics with them. The discussions took advantage of a new performance scorecard with just a few key metrics, such as the number of customers greeted during peak hours, success rates on “suggestive selling” at checkout, and immediate follow-up with customers to gauge their satisfaction. Because the stores stayed open 24 hours a day, managers weren’t always present. They therefore engaged all employees in regular problem-solving sessions to create a better selling and service environment in the stores—for example, by ensuring that more employees would be available at critical times of the week.

Furthermore, managers could now adapt the company’s general operating model by deciding how many (and which) employees would be present in stores at any given time.

This vision of a well-run store, contrasting starkly with the stores of the managers who visited it, overcame their fears. Once frontline managers have accepted the need for change, however, they must learn the new ways of working required by the demands of their redefined roles. At the convenience store retailer, training sessions and trial-and-error fieldwork helped the managers develop the needed capabilities quickly. Some of these skills were technical, focused on managing more effective processes and revised daily routines, as well as keeping track of the simplified store performance scorecards. Other forms of training enhanced the managers’ interpersonal skills, such as how to engage and empower subordinates; to have regular, constructive conversations about performance; and how to provide feedback and coaching.

Managers were also made aware of the negative mind-sets (such as, “I am just another associate when I go on the store floor,” and “My job is to make sure that tasks get done”) that made it harder to develop the right skills and capabilities. They learned how to counter these mind-sets and to adopt more positive ones (for instance, “I regularly provide my employees with constructive feedback and tips,” and “My job is to ensure that tasks are complete and that customers are served as well”), which promote more appropriate behavior and better performance. When the company rolled out the program broadly, the results were impressive: productivity rose by 51 percent in one region and by 65 percent in another.⁵

Companies that succeed in redefining the job of the frontline manager can improve their performance remarkably. Successful approaches can be applied across many industries. A mining company that implemented such a program enjoyed a 10 percent increase in tonnage per frontline employee. A bank branch found that cross-selling went up by 24 percent within a year. Total sales at a department store rose 2 percent in one six-month period.

The key is to help frontline managers become true leaders, with the time, the skills, and the desire to help workers understand the company’s direction and its implications for themselves, as well as to coach them individually. Such mangers should have enough time to think ahead, to uncover and solve long-term problems, and to plan for potential new demands.

A nursing supervisor at a European hospital that empowered its nurses offered perhaps the clearest description of the way frontline leaders ought to think—a description that couldn’t be more different from the role of traditional frontline managers: “I am a valued member of this team, who has responsibility to make sure my ward nurses have the right coaching to improve patient service while contributing to the overall functioning of our ward—for the first time, I feel as important as a doctor or an administrator in the success of this institution.” That kind of frontline leader can consistently help employees to enhance their impact on an organization’s work.

Unlocking the potential of frontline managers

Marketing & Sales Practice Understanding China’s Wealthy

Yuval Atsom & Vinay Dixit :: Published July 2009

“China will soon be home to the world’s fourth-largest population of wealthy households. Companies that hope to reach them must understand how they differ from their counterparts elsewhere, from other Chinese consumers, and from one another.”

Talking about wealthy consumers in China may seem odd during the middle of a global economic crisis. Yet for many companies around the world, wealthy Chinese represent a rare opportunity in an otherwise dismal picture.

Despite the global downturn, the number of wealthy households in China continues to grow. By 2015, the country will hold the world’s fourth-largest concentration of wealthy people. Companies that better understand the factors behind their purchases could steal a march on the competition. Our research shows that their behavior is very different from that of their counterparts in other countries and of consumers in other income classes inside China. Indeed, the pool of luxury consumers has become large enough to form distinct segments, each with its own behavior and needs.

Our work included face-to-face interviews in 16 cities with 1,750 wealthy Chinese consumers—people in households earning more than $36,500 annually, which gives them the spending power of a US household making roughly $100,000 a year. These wealthy Chinese households, with an average annual income of about $80,000, represented the top 1 percent of earners in China’s cities. We supplemented the interviews with home visits by our researchers, who also accompanied many respondents on shopping trips. In addition, we talked with brand managers and marketing specialists in China who serve this sector, visited luxury brand stores, and conducted exit interviews there.

To succeed, marketers selling luxury brands or the premium end of mainstream brands must understand what makes these consumers pick one over another. Indeed, they vary sharply in their preferences: for example, some wealthy consumers in China are still looking for status labels, while others try not to display their wealth. Companies that fail to understand such distinctions could end up wasting millions in marketing dollars and missing big opportunities.

BIG – AND GETTING BETTER

Even in the downturn, China remains one of the world’s few growth markets, with GDP expected to expand by 6 to 8 percent in 2009, according to official and private estimates. The crisis has affected all of the country’s income levels, however, and data on reactions to it remain inconclusive because the situation is changing so rapidly. Anecdotal evidence, particularly discussions with luxury marketers serving China, suggests strongly that spending by wealthy Chinese is growing more slowly but hasn’t dropped overall. Indeed, in early 2009 there were tentative signs that growth rates might be edging up again.

The number of China’s wealthy households, which hit 1.6 million in 2008, will climb to more than 4.4 million by 2015, trailing only the United States, Japan, and the United Kingdom in sheer size (with definitions of wealth adjusted for purchasing-power parity). Even allowing for the current economic slowdown, the number of wealthy households in China is likely to expand at an annual rate of about 16 percent for the next five to seven years. In developed markets, by contrast, this group is expected to grow largely in line with GDP.

To illustrate how quickly marketers must move to keep pace with China’s wealthy consumers, about half of the Chinese who are wealthy today weren’t four years ago, and more than half of those who will be wealthy in five to six years aren’t today. Spending habits can change quickly when a market grows so explosively. Only a few years ago, for example, Chinese consumers purchased most of their luxury goods outside the country. Today, they make 60 percent of these purchases in mainland China.

In such a fast-growing market, companies can do much to shape the taste, spending habits, and loyalty of consumers in a wide range of industries—automotive, real estate, banking services, consumer electronics, and other luxury consumer goods and services, for example. Over half of the wealthy Chinese consumers who now buy luxury fashion goods started doing so in the past four years, and only a minority can name as many as three luxury brands in any category.

As expected, a disproportionate number of China’s wealthy households currently live in its biggest and most developed cities, in the east and central south regions. China’s four richest cities—Shanghai, Beijing, Guangzhou, and Shenzhen—account for about 30 percent of all wealthy consumers; the top ten cities are home to some 50 percent of them. (By comparison, the top ten cities in the United States are home to only about 25 percent of its wealthy consumers.) But this concentration is changing.

Our research indicates that over the next five to seven years, three-quarters of the growth in the number of China’s wealthy consumers will occur outside the largest metropolises (Exhibit 1: please download pdf to view). Indeed, much of the growth will occur in the smaller second-tier cities, bringing them on par with the larger second-tier ones. The wealthy class will grow even in the next rung of cities, the third tier. Because many of these new wealthy will be entrepreneurs and other people with strong ties to the places where they live, we expect little migration to the largest cities as incomes rise.

This shift must force a change in approach for those marketers in China who still focus on Shanghai and Beijing, where competition is fiercest. Companies hoping to seize the full opportunity of the country’s growing number of wealthy households can’t overlook China’s smaller cities, as they often do today. Some of the biggest names in luxury goods have several retail outlets in Beijing, for instance, but are absent in places like Chengdu or Wenzhou, even though Chengdu has more wealthy consumers than Detroit, and Wenzhou has as many as Atlanta, where luxury outlets abound.

CHINA’S WEALTHY ARE DIFFERENT

How best to target China’s wealthy consumers? If they decide to buy a watch or a leather bag, will they want a genuine high-end brand or be content with a look-alike? When the time comes to buy a car, are they more impressed by the endorsement of a young, glitzy celebrity or of an older, more sophisticated one? Are they more likely to buy a mobile phone deliberately positioned as a luxury brand?

Such questions weigh on the minds of marketers trying to reap profits from China’s wealthy consumers. For companies selling luxury brands in other markets, particularly developed ones, the key issue is how the rich in China differ from their counterparts elsewhere. Companies already catering to the mainstream in China and hoping to stretch their brands to the premium market must primarily understand how the country’s wealthy differ from other domestic income groups.

Our research shows that these differences abound. They will be critical for any brand targeted at wealthy Chinese.

DIFFERENT FROM THEIR GLOBAL PEERS

One of the clearest factors distinguishing China’s wealthy consumers from their foreign counterparts is their youth: some 80 percent are under 45 years of age, compared with 30 percent in the United States and 19 percent in Japan. Because they are newer to the consumer market and to wealth, they are less knowledgeable about luxury brands. In addition, China’s wealthy value the functional benefits of any particular purchase (the quality, material, design, or craftsmanship, for instance) more than wealthy consumers elsewhere do. The emotional benefits of a purchase—what it says about its owner’s taste, for example—count, but for the moment they matter less than they do for consumers in developed markets.

Such differences have clear marketing implications. To capture younger consumers, for example, Lancôme emphasizes the importance of taking early action to prevent manifestations of aging when the company promotes its range of anti-aging skin care products in China. That approach significantly lifted sales among younger consumers, helping to make Lancôme the largest luxury cosmetics and skin care brand in the country. The manufacturer of the luxury cognac Louis XIII countered its low brand awareness by replacing its traditional ads, featuring luxury images such as pianos, horses, and yachts, with simpler ads that often focus solely on the bottle and packaging. Other brands acknowledge the Chinese consumer’s appreciation of functional benefits by emphasizing product quality. When the Italian fashion brand Ermenegildo Zegna, for example, opens stores in China, it conducts demonstrations of how its ties are made in order to emphasize the craftsmanship.

But there is also danger in radically changing a brand’s global positioning for the Chinese market. When the Swiss watchmaker Longines first came to China, in the 1980s, it launched a special, brasher product line meant to appeal to the country’s wealthy consumers. This line failed. The company’s vice president of marketing for China, Li Li, later explained that Chinese consumers felt suspicious when they discovered that Longines products offered in other countries were drastically different. In 1994, the company repositioned itself in China as a classic, elegant brand, in line with its global positioning, and today China is its largest market.

DIFFERENT FROM OTHER CHINESE

Our research also shows that wealthy Chinese are very different from the country’s other consumers. The gap in attitudes and behavior is particularly stark when we compare them with the mainstream: for example, 52 percent of wealthy consumers said that they trusted foreign brands, compared with only 11 percent of mainstream ones. The wealthy also are more willing to try new technology, more amenable to borrowing, and more likely to have difficulty maintaining a satisfactory work–life balance.

Like Chinese consumers in general, the wealthy watch a lot of television: 77 percent of them—the highest percentage among all the activities cited. What’s more, they spend a good deal more time surfing the Internet than do members of other income groups. Such differences in leisure behavior are important to help marketers design the right media mix for reaching these consumers. Wealthy people also spend more time than others do outside their homes, engaging in sports, visiting health spas, and drinking and dining out. Indeed, the wealthy spend 17 percent of their household income dining out (compared with 7 percent for mainstream consumers) and 10 percent on leisure and entertainment (compared with 3 percent for the mainstream).

Such behavior not only confirms that television remains an important medium for reaching wealthy consumers but also suggests that Internet ads, blogs, and other online channels could have a greater impact on them than on other consumers. Companies should also bear in mind the amount of time that the wealthy spend outside their homes. Some premium whiskies, for example, hold marketing events in bars and clubs frequented by the wealthy, but more brands could take advantage of such opportunities. A wider range of sports sponsorships, beyond a focus on activities traditionally embraced by the wealthy, such as golf, could also help companies reach wealthy consumers. The watch maker Omega, for example, has been the leading sponsor of the Shanghai Golden Grand Prix.

TARGETING THE RIGHT WEALTHY

China’s wealthy consumers differ not only from their global peers and from other Chinese consumers but also from one another: as this attractive group has grown and continues to grow, stark differences have appeared within it. Marketers must understand them to take full advantage of the growth of these segments.

Easily obtained demographic information—age, gender, and income, for instance—offers little help in separating China’s wealthy into segments with differing attitudes toward, say, borrowing, fashion, or obvious displays of wealth. Wealthy Chinese may generally be younger than their global counterparts, for example, but their attitudes are shaped less by age than by other differences. The one exception to the relative unimportance of standard demographic data was location. Rather surprisingly, wealthy consumers living in the four largest cities have more conservative attitudes toward saving and are more focused on family than their peers in smaller cities. Less surprisingly, they are more trusting of foreign brands.

More meaningful differences emerged when we considered what respondents said about their needs—the need to feel unique, for example, or to feel financially secure. This needs-based analysis uncovered seven distinct segments among China’s wealthy consumers (Exhibit 2: please download pdf to view).

Consumers in the Luxuriant segment, for example, are among the country’s wealthiest people, passionate about luxury. They never settle for less than the best and gravitate toward high-end, high-fashion brands, such as Hermès and Chanel. These consumers are a brand’s best friend, buying frequently and talking with friends about their purchases. They avoid the brash—opting instead for understated, sophisticated chic—and are seen as trend setters. Although they work hard, they find time to socialize, travel, and be with their families and to visit gyms and health spas.

Compare this segment with the Demanding one: self-made men and women who have more money than they need and are satisfied with their success, although they still work hard. They don’t have a taste for luxury goods, especially fashion; rarely buy the very best; often content themselves with look-alikes; and make an effort to compare prices before buying, even at prices they can easily afford. When they do splurge, they like something flashy that sets them apart. In general, though, they settle for products that are more functional, less showy, such as televisions and sound systems.

A company must also understand how the different segments relate to one another and craft strategies appealing to several of them to gain the greatest benefit from its efforts. Companies in most industries would gain, for example, from analyzing each segment according to the willingness of its members to pay a premium for what they regard as the best and their desire to flaunt their purchases, a characteristic we call “showiness.” Such an analysis, which groups the seven segments into four clusters (Exhibit 3: please download pdf to view), suggests, for example, that Chinese consumers in the two wealthiest are willing to pay a premium for what they regard as the best but that people in one cluster are more interested in showing off their purchases than people in the other.

Together, the two largest clusters account for about 70 percent of the total wealth held by China’s wealthy consumers. This degree of economic importance means that these two will probably be the primary targets for many brands. Digging further, companies should also understand how the relative weight of each cluster varies among regions and among cities of different sizes and even within individual cities. For example, the cluster composed solely of Demanding consumers is much less important in the largest cities, where they account for about 10 percent of the wealth held by wealthy families, than in other cities, where they account for about 17 percent of it.

The weight of the clusters will change over time. Companies that want to build an early brand advantage will need to consider investing in segments that are relatively small today but will grow in importance. Over the next five to seven years, the fastest-growing cluster, for example, will consist of Climbers and Down-to-earth consumers, who live mostly in the fast-growing cities outside the big four.

For many brands, a better understanding of these clusters can lead to more effective marketing spending. Advertising, for instance, can be targeted at a number of segments within a cluster, because they share important attributes. Consumers in the Enthusiast and Flashy segments both tend to be willing to pay for the best and enjoy showing off what they buy. For them, brands matter and should be noticed; logos and marketing generally ought to be bold. And because these consumers are very attached to their favorite labels, brand extensions across consumer categories could pay off. Their intense brand knowledge makes them challenging customers, however: they insist on the latest products and styles and expect salespeople to reflect the brand image in appearance and behavior.

BMW, for example, has a brand position that would appeal to this cluster. The German carmaker offers its full line of products (with design changes catering to wealthy Chinese) and advertises them across a range of channels, such as glossy magazines, television, and the Internet, to create wide brand awareness. Annual BMW Experience Days rotating from city to city offer groups of buyers a first look at the coming year’s models, giving these customers a luxurious experience, along with an opportunity to test-drive the new cars.

Consumers in a separate cluster comprising the Luxuriant and Urbane segments, though also willing to pay more for the brands they prefer, are far less interested in showing off. They want the latest and the best from brands they like and are more loyal. Yet they place greater importance on the attributes of a product or service than on the glamour of brands. Companies serving the cluster should offer a strong product line and excellent service, but for these customers the product must be less conspicuous and the marketing more subtle. VIP programs and special marketing events, such as previews of new seasonal lines for only a few customers at a time, rather than large events, can be effective. Celebrities endorsing such brands should reflect their sophistication, and overexposure to them could be harmful. In China, the watchmaker Patek Philippe’s strategy would appeal to these consumers: for example, the company’s two flagship stores in mainland China are at locations (one of them the historic former US embassy) that exude a sense of heritage and tradition.

The rapid growth in the number of China’s wealthy consumers makes them targets for any luxury and premium brand. But that’s no secret, and many companies are setting their sights on this attractive group. To maximize the value of their marketing efforts and to create a lasting relationship with customers, they must understand how these consumers differ from wealthy households in other markets, from other Chinese consumers, and from one another. Only then can companies win the trust and loyalty of China’s wealthy and play a role in shaping their evolving tastes and buying behavior.

Related articles: “What’s new with the Chinese consumer,” “Meeting the challenges of China’s growing cities,” “Building brands in China”

Yuval Atsmon is an associate principal in McKinsey’s Shanghai office, where Vinay Dixit leads McKinsey’s Insights China.

UnderstandingChina’sWealthy

Talent Management Perspectives

Published April 2009

Talent Is Worthless; Performance Is Priceless

Stephen Blakesley

During the past 20 years, executives, consultants and educators have had a lot to say about how to discover, develop and keep talent. Discovering, developing or retaining talented people is of little value, however, unless the talent manager can engage them to perform at high levels.

People with talent fail at an alarming rate within organizations. According to Robert Kelley and Janet Caplan, researchers who studied workers at the once prestigious Bell Labs in the late 1980s and early 1990s, most talented hires wind up as average or below-average performers.

Kelley and Caplan found that at Bell Labs and its competitors, 85 to 90 percent of the extremely talented people hired never rose beyond average when it came to productivity. They also found that 10 to 15 percent of hires who rose to “star performance” status were eight times more productive than the average or mediocre performers.

Let’s say you are responsible for the results of an organization employing 100 people. If your organization is average, seven of those people are star performers, 83 are average and 10 are slackers. Now let’s say, you encounter an economic climate that prohibits hiring and compels you to do better with what you have. What would be your strategy?

There are very talented people masquerading as average or mediocre performers. If you could convert just one mediocre performer to star status, the value of that conversion, according to the Bell Labs study, would be equivalent to adding seven average performers to the workforce at no additional cost to the organization.

To uncover why talented people underperform, begin with a simple premise: It is human nature to want to do well, to want to be the best you can be. Thus, if the talent manager “dangled the bait” of being a star performer in front of talented employees, some would take it.

Many talented employees don’t become stars because they don’t know how, or they have no real idea of what a star performer looks like in terms of achievements and accomplishments. If talent managers can address those two issues, they have a greater chance of catching a star.

When crafting a plan to address those issues, there are two possible applications. One would be as part of an on-boarding program or process for new employees, and the other is as remedial training and education of the existing workforce. Time spent educating talented people on how they can leverage their special abilities to become even more than they imagined promises an ROI beyond expectations. Lethargic and apathetic employees come alive, and people once without direction, move with more certainty toward a goal of superior performance. Essentially, the talent manager can teach a star how to become one.

Define Star Performance
Companies can improve their success in developing star performers by taking two actions. One, define star performance, and two, identify work strategies consistent among star performers and absent among mediocre workers.

Many organizations have not defined superior performance. Those that have not tend to be average performers in the marketplace. Companies that want to outpace the competition should commit to defining star performance, not just for one job but for all the key positions in the organization.

Many companies use something similar to a performance-based job description to define essential job tasks, minimum expectations and breakthrough outcomes in the job. A star performer will consistently achieve the break through outcomes.

How Do Star Performers Work?
The key to converting average or mediocre people to star status lies, first, in determining their competencies and, second, in coaching them in the application of those competencies. The Bell Lab study identified nine strategies star performers use to get their work done. They are as follows:

• Taking initiative: Star performers don’t just inform someone of an error, they correct the error. The mediocre don’t.
• Networking: Star performers anticipate their needs and solicit outside input prior to beginning a project. The mediocre wait until there’s a need and then look for help.
• Self-management: Stars know that self-management goes beyond time management and includes management of effort and knowledge. The mediocre feel time management is all that’s needed.
• Teamwork effectiveness: Star performers are comfortable being followers or leaders. The mediocre tend to push too hard for leadership roles.
• Leadership: Star performers know small leadership roles are as important as bigger, more visible ones. The mediocre often are disappointed with smaller, less viable leadership assignments and, as a result, perform at a level expressing their displeasure.
• Followership: Star performers are aware of the value of following, as well as leading, and understand the need to contribute to the leader and the team’s performance. The mediocre often are difficult in a team setting and more focused on getting individual credit.
• Perspective: Superior performers understand how their immediate work fits into the “big picture.” The star performer is invested in taking on other viewpoints, such as those of the customer, manager or other team members. The mediocre often see a world defined by the length of their reach. They tend to have difficulty accepting others’ thoughts and ideas.
• Show-and-tell: Star performers are master presenters. The mediocre are PowerPoint specialists.
• Organizational savvy: Star performers understand how they contribute to the overall performance of the organization and are capable of navigating through an organization’s competing interests. The mediocre often are perplexed with organization politics and hide behind the mantra of not being a “political person.”

Understanding these strategies and defining them for the workforce is a powerful tool and is necessary to convert mediocre workers into star performers. It is not easy, but it is worth it. In these difficult times, adding the equivalent of seven average performers to the workforce by converting just one to star status is a strategy that addresses the pressing need to do more with less.

Talent Management Perspectives