• Read the attached case study
  • Question #1: Should Song push for the new ad campaign? Explain your rationale.
  • Question #2: What are the key situational factors to be considered in this decision?

Wei Song noticed the fashion models first, preening in their chiffon- and-lace gowns. STEPHEN MASON and JOSEPH SAIVACRUZ are professors of business practice at HKUST Business School. LP. STEVENSON is a manager of competitive intelligence at the Fung Group. This fictionalized case study is inspired by "Battling Giants for China's Luxury Consumer" from the HKUST Thompson Center for Business Case Studies They flanked the entrance to Shanguang Jewelers' flagship store on Nanjing Road. A vintage Eagle roadster was parked nearby; a dozen well- heeled men and women clustered around it. Song could see more people inside the store, sipping champagne. Many were trying on watches. "It's quite an event," Song said to his colleague, Pearl Zhang, who was standing next to him, across the street. "Yes," she replied. "If only it were ours." Song was a director at Rochat & Schmid, a 100-year-old Swiss maker of luxury timepieces, overseeing Greater China from his base in Shanghai. Pearl, his VP of marketing, had learned that their rival Berlinger was launching a line of gem-accented watches, which would be sold through Shanguang, China's biggest jewelry retailer. She'd persuaded him to do a bit of intelligence gathering with her. "I told you they'd make a splash," Pearl said. "Couture clothes, a classic car, and watches with your choice of diamonds, emeralds, or rubies around the face. Look at the customers--they're loving it. You asked what we could do to boost sales? The answer is something like this." "Well, unlike Berlinger, we're not owned by a conglomerate that has a fashion line, a winemaker, and a car company." Song replied, "Besides, we don't do diamond-encrusted anything. Berlinger's brand is splashy, so they do splashy promotions. R&S stands for subtle elegance." "And so we're stuck with subtle marketing? In this city? This country?" Pearl gestured toward the neon-lit road, then up at a billboard featuring a Hollywood actress. There has to be some license to adapt to local tastes. Geneva needs to understand that, especially given how much they depend on us to make their yearly numbers." CASE STUDY CLASSROOM NOTES Nason and Salvacruz teach the original case in leadership, negotiation, and marketing courses to highlight the cultural differences between Europe and China and the ferocity with which luxury brands compete for Chinese consumers, who, according to a 2016 Bain study, account for about 30% of worldwide spending in the category. ! Groups such as LVMH, Kering, and Richemont- which have portfolios of 30 to so brands across categories-have come to dominate the luxury industry Some high-end watchmakers, such as Titoni, have created designs exclusively for the Chinese market. Is such customization wise? "You know I've passed on your thoughts about adding new designs and rethinking how we market here. Every time I've had to address the same-store sales declines, I mention it. But you also know how Simon feels about bling." He was referring to R&S's strong- willed chief creative officer, Simon Carbonnier. "So," Song continued, "we'll need to think about more- innovative ways to generate buzz here." "I'm ready to show my ideas to you and Simon tomorrow," Pearl said. They were scheduled to present mock-ups for the Chinese New Year ad blitz to the CCO via teleconference the next day. "Still," she added, staring at the models, the car, and the crowded store. "I'm not sure I can compete with that." Thanks in part to an anticorruption drive that is deterring the "gifting" of watches to officials, high- end watch sales in China grew by just 3% from 2012 to 2015, Bain reports. you're sending enough people our way. I'm wondering if you would consider giving us more counter space, showing a wider variety of our watches- especially in the faster-growing cities." Gui Ying sat stone-faced for a minute. Song waited politely. "I think we have just the right amount of Rochat & Schmid now," she said. "Yes, sales are off, but the corruption crackdown and the sluggish economy are causing tastes to shift. People are trying to be less obvious about their wealth, so I can see your watches drawing many more customers going forward-maybe in a year or two? Of course, if you want to give me something new to work with a new slogan, new designs, even a celebrity endorser-I'm always willing to listen." In China, foreign watches are principally distributed through specialty stores and partnerships with local companies that market products in high-end department stores and malls. Though a watchmaker may be represented by several retailers within a region, retailers may carry the products of more than 50 watchmakers. How should that inform the way Song negotiates with Gul Ying? Data from UnionPay shows that at home and abroad, Chinese consumers spent $67 billion during the Chinese New Year celebration in 2017. L Luxury sales in China's second third-, and fourth-tier cities are rising and have, in some categories and places, even surpassed sales in first-tier cities. A GOOD NICHE? The following afternoon, Song was back at the Shanguang store, meeting with the retailer's CEO, Li Gui Ying. "I walked by the event here last night, and it looked like a great success." Song said. "You should have come in!"Gui Ying admonished. "That was the first, but we're doing them across the country-next in Hong Kong and Beijing, of course, but then Shenzhen, Guangzhou, Tianjin, Hangzhou, and Chengdu. Given the new government initiatives, we can't rely on the gifting market anymore. The only way to drive sales is to persuade customers, especially the middle class, that they deserve to splurge, even if the economy is slowing down." "Are you hoping for events from us, too? "We had impressive sales last night and the publicity was amazing. But events from Rochat & Schmid? No, nothing along the lines of what we did with Berlinger. You're in a good niche. When people come in looking for something less glitzy, we send them right to your watches." "But our sales with Shanguang are flat-even with your new locations, and our same-store figures in the big cities are all slightly down." Song said. "I know from your recent earnings report that most of your points of sale seem to be doing OK despite the dip in luxury spending. I'm not sure CELEBRITY FLASH Song had to hustle back to the R&S China headquarters to make Pearl's 4 PM presentation. When he walked into the teleconference room, Simon was already up on the video screen. "Song, good to see you, my friend." "And you, Simon. How are you? "Very well, thank you. I'm unfortunately pressed for time today. The design team has a workshop starting at 10 our time. And then I'm meeting with Rolf." Song and Pearl exchanged glances. They often made bets about how long it would take Simon to mention his contact with Rochat & Schmid's CEO, Rolf Odermatt. "But you have my undivided attention for the next 30 minutes. Pearl, please go ahead." "Thanks, Simon. So I've worked with our team and our ad agency on two distinct directions." She clicked on her laptop, and a slide appeared on a second screen in the room. "The first will feel very familiar," she said, calling up a set of ads. "We run with our traditional "Mark every occasion' tagline but give it a feminine spin to highlight our new range of women's watches. Instead of a father giving his son a watch at graduation, we see a mother giving one to her daughter. Instead of a wife giving a husband a watch for his birthday, we see sisters surprising each other with matching watches. We update to a How does Song's geographic location-so far from headquarters-affect his ability to influence C-suite executives at Rochat & Schmid? "Value proposition" is a key concept in strategic marketing. Did Song's proposals adequately convey the unique benefits of R&S watches? By 2014 women accounted for more than half of Chinese luxury spending. up from 10% in 1995, according to Bain. However, in China men still dominate the luxury watch market by a ratio of 3.1, reports HKTDC Research. Among Chinese executives, silence is often a sign of disagreement, but a Swiss executive might be more Likely to interpret it as acceptance. When Deloitte asked 19- to 29-year-olds which marketing channel most influenced their decision to buy a watch, the top answer among Chinese consumers was brand ambassadors. Most luxury goods companies pay celebrity endorsers to wear their products and appear in their ads. What are the costs and benefits of such an approach? slightly more modern font, but the photography is still black-and-white." Pearl waited for a response from Simon. When she didn't get one, she pressed on. "The second would be a departure but a calculated one, also designed to appeal to women. Song, I know you're familiar with Changchang Gao. Simon, she's a Chinese singer and actress who recently switched from TV to films. She has 30 million followers on Weibo, many of them Millennials. When she releases a song, they download it. When she wears a dress, they buy it. I happen to be friendly with her agent, so I know she's open to one or two endorsement deals. I think she could be locked down at a reasonable rate if we gave her a three-year contract. I'd like to make her the face of a new slogan: "You deserve it." Pearl clicked and an image of Changchang appeared on-screen. She was walking down a busy street in a short red dress, flashing an irreverent smile and wearing three R&S watches on her right arm. Everyone else in the picture was looking at her. Song smiled. He liked it. Simon clearly did not. He was frowning. "Simon, I'd love your feedback," Pearl said carefully. There was a long pause. "I admire your creativity, but I've always found endorsement deals a bit lazy. And even if we did do celebrities, which we don't," Simon said, "she doesn't seem right for us. Too young, too flashy." "But, Simon, Chinese consumers are young, and they like flash," Pearl replied, "We'd love to offer them products that capture that, but without new watches, all we have is marketing." "Elegance always trumps excess with luxury buyers. We've talked about it before. These days the trend is toward inconspicuous consumption. It's starting to happen in China, too. That's why we're not changing our product designs now. We shouldn't change our marketing, either." Song decided to speak up. "I understand what you're saying, Simon, Certainly the anticorruption movement seems to be hurting the flashier brands. And maybe aesthetic preferences will change in a way that favors us. But will they change fast enough to deliver growth to our shareholders this year? As you know, if we lose ground in China, it affects the whole company. So maybe we need to shake things up." "I'm against it," Simon said. "Let's not lose track of what value Rochat & Schmid offers the market." Pearl chimed in. "Simon, I understand the importance of honoring our heritage and maintaining a consistent image worldwide, but as you've said yourself, China is a unique market. Our existing campaigns are beautiful and on brand, but in a crowded and stagnating market they're simply not working as well as we'd like." "And how do you know that this endorsement will work?" Simon asked. When Pearl didn't reply. Song spoke up again. "Simon, perhaps you and I can take some time to review these." "I don't think I need time on both, Simon replied, "but I'll send my notes on the first set in a few days." UP FOR A FIGHT? The next day Song had his weekly call with Rolf. They exchanged the usual pleasantries, then talked through the regional sales numbers. "What's this I hear about you and Pearl wanting to shake up your marketing?" Rolf asked. Song was taken aback; he didn't think Simon would have spoken to Rolf already. "Yes, we're considering a slightly new direction." "Simon thinks it's off-brand and could hurt our image," Rolf said. "Of course, he doesn't run the firm. I do." "Have you looked at Pearl's mock- ups? They're a departure, yes, but not too flashy." "Simon showed me. To be honest, the pretty girl, the red dress, the three watches-it does seem flashy to me. But you know China better than I do. Do you have the budget to do it?* "We wouldn't be asking for more than we're already allocated. Pearl says we'd get a better deal by signing a longer contract." "Unless it doesn't work. Then it's not a deal," Rolf replied. "Yes," Song admitted. "So do you want to fight Simon on this? Song had been asking himself that same question since the previous day. He hadn't realized he would need to answer it so soon