Managing the Size of Your China Business: Roll-ups and Tie-ups
There will soon come a time when courageous China entrepreneurs huddle around a map with blue pins that represent new openings and red pins showing planned new opening. But not today. Today we are thinking about staying the same size – or about getting smaller. Lots of people should be thinking about the most orderly way to get smaller – maybe 25 – 50% smaller for the few quarters.
Let’s talk about 3 ways for managing the size and scope of your China business when it’s not expanding.
Let’s say you run a business in Shanghai and you are considering ways to cut back on operating expenses. You’ve done the easy stuff, but your sales are collapsing even faster and you need to perform some surgery. What are your options?
1. The tie-up. An informal agreement with a related business to work share costs, swap services or cooperate in some other way. Marketing tie-ups are common – two non-competing businesses share fees to advertise to the same target market. Some firms split costs on materials or expenses, others swap services. The idea here is that it is a NON-BINDING, informal arrangement. Don’t make things unnecessarily complex by exploring another joint venture. The good news is that the right tie-ups can really stretch your expenses and help maintain a marketing presence. The downside is that building and maintaining this kind of network is easier for some people than others. If you’ve been in town forever and lots of other businesses like & trust you, this is a no brainer. Just make it systematic and know when to walk away. If, however, you’ve burned lots of people in the past than this is no time to try to gain their trust. Not worth the effort.
2. The roll-up. In China’s notoriously fragmented market, recessions are ‘roll-up’ season. The goal of a roll-up is to buy up or burn out all the small players in similar businesses that are serving essentially the same market. Let’s take commercial printers as an example. XYZ Inc. is a medium-sized printing business in Shanghai that decides to adapt a roll-up strategy. XYZ begins buying up competitors and re-branding them. Those it can’t make money on it shuts down, diverting useful resources to other XYZ locations. It’s size and buying power allow it to market and purchase more effectively, driving competitors into danger of failing. It can then buy those weakened competitors at more favorable terms. The roll-up is a time-tested strategy that works if you have capital, good systems and understand your target market.
3. Getting rolled up. Some of us won’t be doing the rolling – we’ll be getting rolled. What do you do if you are in a weak position at the start of a long recession? Scaling down may help – but specializing and seizing on good niches early will help even more. This is especially true if you are a sales-oriented operation in the B2B market. If you are a generalist with a roomful of guys manning phones or over-working tired 3rd party databases, you are not going to have much leverage when negotiating with large, aggressive competitors. But if you have specialized products, services or market channels, you stand a much better chance of getting attractive terms when the Death Star pulls into town. Any business model that gives you access to a key, discrete, measurable demographic is powerful.