• Given vigorous competition in OEM, an increasing number of Hong Kong companies have taken OBM, in addition to ODM, as an approach to strengthen their competitiveness.
  
  
• Hong Kong SMEs are well poised for branding, as many of them are strong at producing quality products with competitive prices. Hong Kong's status as a metropolis also helps.
  
  
• Yet branding is a long-term investment requiring continued inputs rather than a short-term operational tactic. Building or developing a successful brand inevitably calls for passion and commitment.
  
  
• Own brand development, instead of acquisition and licensing, is likely to be the most feasible option for SMEs, which can incubate their brands in pilot markets before extending to other markets receptive to new brands.

Many Hong Kong companies have benefited from the low-cost advantage of producing on the mainland. However, due to intense competition, many of them are operating on narrow profit margins on OEM basis. Therefore, an increasing number of Hong Kong companies have taken OBM, in addition to ODM, to enhance their competitiveness. Overall, the global market is lacking in strong Hong Kong brands because of the long tradition of OEM business for overseas buyers conducted by our SMEs.

Not surprisingly, most Hong Kong SMEs are more likely to succeed in developing their own brands than other options. Indeed, a brand represents a whole collection of attributes and properties associated with the product, covering the name, symbol, design, quality and its perceived value. In building or developing a successful brand, six important factors need to be taken into account, including market understanding, brand identity, brand image, brand differentiation, brand communication and brand management.

On the whole, there are three different ways to develop or build a brand. Besides building a brand from scratch, brand acquisition and brand licensing are the alternatives to own brand development. Companies need to analyse their own position, taking into consideration their own business portfolio, business strategy, management skills and capital availability in order to select the best approach to branding.

Evidently, Hong Kong SMEs are well positioned to develop their own brands. Hong Kong products are famous for their quality, design and value for money, and some of them may also have their own distribution and marketing channels. In addition, Hong Kong is a metropolis in Asia, with products made by Hong Kong well received in the region.

In any event, branding is a difficult task which requires long-term investment and commitment at the expense of short-term profitability. The company's management must ensure that the brand is marketed both externally and internally, with all staff of the company sharing the common goal of building a brand culture.

Given a lack of capital and expertise, own brand development is likely to be a more viable option for SMEs, which can incubate their brands in some small pilot markets, and then gradually expand the coverage to other potential markets, particularly emerging markets like the mainland, which are more receptive to new brands.

I. Why Branding?

Over the past few decades, many Hong Kong companies have benefited from the low-cost advantage of the mainland by shifting their factories across the boundary. But cut-throat competition in many industries has resulted in tremendous pressure on profit margins, as many Hong Kong companies are working on OEM basis with narrow profit margins. Amid keen competition, an increasing number of Hong Kong companies have taken OBM, in addition to ODM, as a strategy for enhancing their competitiveness.

Now consumers are placing increasing importance on brands. A well perceived brand is an identity that goes beyond recognition. Consumers are connected emotionally with the brand, creating appeal and loyalty. Provided that a brand can offer superior perceived value for customers, good market performance will follow. In order to maximise the profit margins, it is therefore critical for Hong Kong companies to have their own brand names in the market place. Indeed, branding can be an effective means for Hong Kong companies to differentiate their products from the indigenous Chinese products, which are largely perceived to have inferior quality.

By and large, the global market is lacking in strong Hong Kong brands due to the traditional practices of family-owned businesses. In the past, there was limited competition in overseas markets, and Hong Kong companies were able to adopt a pragmatic approach on product development and refining product quality. Not surprisingly, the older generation management of Hong Kong SMEs, which was also burdened by limited marketing skills and financial resources, might not recognise the importance of branding.

As it now stands, Hong Kong companies are stepping up their readiness for brand building and development. While branding is a relatively new strategy for Hong Kong companies, there are already a number of successful Hong Kong brands marketing in overseas markets, including Giordano, Esprit and VTech. Evidently, branding is a viable strategy not only for large companies, more and more SMEs are becoming active in building or developing their own brands.

II. ABC for Brand Building and Development

Brand building and development are far more than sticking a visual logo on the product and spending money on advertising. A brand represents a whole collection of attributes and properties associated with the product, covering the name, symbol, design, quality and its perceived value. Branding is a two-way development. A brand offers companies' prestige, identification and quality assurance to the customers. On the other hand, the brand reverberates emotion, impression, appeal and loyalty from the customers to the company. In building or developing a successful brand, six factors are crucial, as illustrated below:

(i) Understanding of the Market

Branding is a business which most Hong Kong companies are not familiar with. Brand building and development are strongly related to how well a company understands consumers, markets and upcoming trends, and how effectively it responds to them. A successful brand arises from the synergy between the company's brand vision, and how well the brand resonates with the target customers, who are strongly influenced by the surrounding society and its norms, beliefs, cultures and many other intricacies. To start the branding process, therefore, comprehensive market study and research are necessary to ascertain customer needs, preferences and behaviour. In addition, the company needs to evaluate its marketing channels or distribution network in the targeted markets. These studies may take months or years before starting the branding process.

(ii) Brand Identity

With a thorough understanding of the market, the intended brand identity can be established. Brand identity describes the company's strategic intention for the brand, its uniqueness, meaning and values, and how the brand aims to be positioned in the marketplace. It projects how the company wants the brand to be perceived by customers and stakeholders. The identity of a brand serves two main purposes. Internally, the identity guides all the strategic decisions regarding the brand, such as the communication, marketing, brand extension, and association and partnering decisions. Externally, it provides customers with a clear sense of what the brand stands for, its essence, promises and personality.

If the brand is a new or late entrant to the market, or its position is behind that of other competitors, then its strategy may aim for achievement of uniqueness and superiority with respect to the competitors. Its aim will be to convince the target consumers that it is not only as good as the existing brands, but even better. In this situation, the company may have to concentrate on strategies based on features, benefits, value for money and usage to manage consumer perception, with a view to creating or re-forming the quality image of its brand. On the other hand, as an established brand, the company may want its brand to be an undisputed leader, the preferred choice or the trendsetter. In a case like this, its strategy should be based on the emotional and aspirational associations of the brand.

When developing the brand identity, the position that the brand occupies in a market should be determined. Brand positioning is all about perception of the brand. The company should decide on the brand positioning based on the market segment that it is targeting, customer dynamics and the competitors' position in the market. All brands strive to occupy a unique position in their customers' minds. Brand positioning enables customers to make an easier assessment of their wants and needs, and it helps them to minimise their risks when selecting the brand. In essence, a successful brand must have a clear positioning.

(iii) Brand Image

While brand identity depicts the company's strategic intention for the brand, brand image refers to how the customers and stakeholders discern the message, emotion and feeling of the brand. In today's market, most companies provide similar products and services. When all basic qualifying factors are in place, and consumers are considering all the available options, brand image becomes fundamental to the decision. A successful brand should be able to covey consumer expectations and carry perceived benefits to consumers. There are two components in creating brand image, which are visual identity and verbal identity.

Visual identity comprises the graphic components that together provide a system for identifying and representing a brand. There are four basic elements of brand's visual identity, which include logos, symbols, colours and typefaces. On the other hand, verbal identity aims to make the brand's image clear through words and language. There are five basic elements of verbal identity, namely the name of the brand, a naming system for products' sub-brands and groups, a strapline, the tone of voice principles, and the use of stories.

(iv) Brand Differentiation

Brands provide consumers with a means of choice. The brand names make it easier to differentiate one product from another. Over the years, the power of consumers in terms of knowledge and rights has risen, while the broadening range of brands facilitates the freedom of choice. In general, customers have better knowledge of branded products. As such, they are able to choose easily from among branded products than unbranded, unfamiliar and similar offerings.

To differentiate a brand from the ones which already exist in the market is a critical component of the branding process. Strong brands add value, which makes them stand out from their competitors. Nowadays, brands are evolving faster than ever before. Increased technical capability has increased competitors' ability to imitate one another, and the proliferation of media vehicles makes long-lasting differentiation on basic product grounds increasingly difficult. Products need to have innovative ideas and original designs in order to succeed in the market. But it may involve many trial and error processes, and the key to success is to never give up easily.

(v) Brand Communication

Brand communication, which plays a key role in building or developing a successful brand, is more than advertising the brand in different media and stimulating the sales of the product. It may do three things for a brand. First, brand communication provides information about the brand that the company is selling. Second, brand communication creates awareness, fame and familiarity of the product. Other things being equal, customers tend to choose the brand that they are more familiar with and recognise. As public rituals create shared meanings, people generally assume the brand is popular and has the endorsement of others. Third, brand communication creates distinctive patterns of associations and meanings that make the brand more attractive and saleable.

Nowadays, all elements of the promotional mix are required to develop and sustain consumer perception. Brand communication does not only provide relevant information to customers through mass media such as newspapers, televisions, magazines, direct mails and sales promotions of various sorts. The long-term effect on the strength of the brand also allows the brand to reinforce consumer perception, command price premium, and resist competition pressures.

(vi) Brand Management

Brand management is the application of marketing techniques to a specific product, product line or brand. It seeks to increase the product's perceived value to customers and thereby increase brand equity, which is the value of a brand, and is based on the extent to which the brand has high brand loyalty, name awareness, perceived quality and strong product associations. Effective brand management, comprising brand protection, brand maintenance and brand extension, is an essential element of brand development that helps a brand to stay ahead of its competitors.

Brand Protection

As mentioned, competitors' ability to imitate one another has increased. A company hence needs to protect the intangible assets of its brand by securing the intellectual property rights, including trade marks, patents and designs.

Brand Maintenance

Brands are among the most important assets that a business can own, and must remain relevant, contemporary and appealing to their customers. This means that sufficient investment must be made in advertising and marketing as well as in new product development. In some cases, repositioning may be required to change the market position of a brand to reflect a change in consumer tastes. This may happen when the original market of a brand has matured or gone into decline.

Brand Extension

Brand extension refers to the use of a successful brand name to launch a new or modified product. Brand extension saves the company the high cost of promoting a new brand, and leads to instant brand recognition of the new product. If the new product fails, however, it may also affect consumers' perception towards the other products carrying the same brand name.

III. Alternatives to Developing/Building Your Own Brands

In the main, there are three different ways to develop or build a brand. Apart from building a brand from scratch, brand acquisition and brand licensing are other approaches to own brand development. Yet each approach has its own pros and cons. Each company needs to examine its own position, taking into consideration its own business portfolio, business strategy, management skills and capital availability in order to choose the best approach to branding.

(i) Practice of Brand Acquisition

It is commonly known that brand acquisition is the fastest way for brand development. It is because the acquired brands are usually well known, and have established their own distribution channels and networks in the market. In most cases, the acquirers are required to buy all the assets of the acquired brands, including the factories, branch offices and distribution networks, while also taking over their staff. However, some acquired brands are less well known and the required capital is more manageable. These lower-tier brands, while not among the top notch, still possess their own history and image, which are important selling points for branded products. In addition, the design capability and distribution network of these less famous brands are other assets worth acquiring.

Brand acquisition is generally undertaken via investment banks. In some cases, the acquirers and the acquired brands may have prevailing working relations before acquisition (e.g. some acquirers were the subcontractors of the acquired brands), and the acquisitions are mostly initiated by the acquirers.

European brands are the primary targets for acquisition because of their history and reputation. Indeed, many traditional European brands are family owned businesses, and their descendents sometimes may choose to sell their brands when they split the family possessions. For luxury products such as watches and high fashion, European and American brandnames are preferred to Asian brands. But Japanese and Korean brands are also good choices, if the target markets are Asian countries. The headquarters and the production lines of the acquired companies usually remain in the foreign countries. By so doing, the acquired brands still project a "foreign brand" image to the customers.

Pros

The main advantage of brand acquisition is that the acquirers can quickly own the reputable brands without spending time on advertising and promotion, as most of the acquired brands are well known in the market.

The acquirers may be able to expand the acquired brands in a short period of time, as most acquired brands already have a group of existing customers and with a well defined market positioning. In addition, the acquirers can take advantage of the acquired brands' distribution networks to expand the market coverage of their own brands.

Cons

The major hurdle to brand acquisition is the enormous capital required. The cost involved may be millions of dollars, which is only feasible for large companies.

The transition of management is often problematic. It takes great effort and time to restructure and reorganise the operation of the acquired brands to fit in with the acquirers' business. Furthermore, the acquired brands may be in the doldrums or under restructuring during the acquisition, which may pose serious challenges to the acquirers. In general, it takes a few years to complete the transition process.

In addition to high costs, it is indeed difficult to find brands or identify product lines that will fit in with the acquirers' product portfolio. Therefore, brand acquisition may not always be a feasible strategy for Hong Kong SMEs.

(ii) Practice of Brand Licensing

In many cases, brand acquisition may not be feasible, because the price of buying famous brand names is often exorbitant. As an alternative to brand acquisition, brand licensing may be considered. Indeed, brand licensing is a partnership agreement between the licensors and the licensees. The licensed brands are usually fairly well known in the market with good reputation and image. The licensing period usually lasts for three to five years, and may be extended, and the royalties generally range from 3% - 12% of the wholesale prices. Sometimes, the licensees may also sell their own brands through the licensors' distribution networks to expand their market coverage or vice versa.

Pros

The cost of brand licensing is lower than brand acquisition. Therefore, it may be an alternative for Hong Kong companies which have limited capital, but still want to engage in brand business.

The licensors will provide the know-how to the licensees, and may even provide product designs, manufacturing techniques and advertising support. In this case, the licensees can take advantage of the licensors' skills and experience, and then apply to their own brand building.

Cons

The licensors maintain tight control over the licensing business. For example, before launching any advertising activities, a licensee has to get the approval from the licensor, which is time consuming and inflexible.

The licensees may not develop any subsidiary line or create new models using the licensed brandname. All product development of the licensed products has to be approved by the licensors.

If the licensed brands become successful, the licensors may not renew the contract, or include much stringent terms for renewal. Companies need to justify to themselves whether brand licensing is feasible in the long run.

(iii) Practice of Own Brand Development

Although companies can quickly run a brand business through brand acquisition or brand licensing, these strategies may not be feasible to Hong Kong SMEs with limited capital and management skills. Alternatively, own brand development may be more viable for SMEs, as the companies will have full control on brand development and they can develop the brand according to their own pace. As noted, own brand development is building a new brand from scratch, which usually takes a few years and incurs varying costs. Many Hong Kong companies are professional in producing high-quality products, because they are experienced in OEM or ODM for other branded companies. Some may also have their own distribution networks and marketing channels. In many cases, these are prerequisites for Hong Kong companies to nurture their own brands.

In the incubation stage, Hong Kong companies, sometimes taking advantage of their licensing business, to increase their exposure in the marketplace, may develop their brands in some small pilot markets like Hong Kong, or other cities that they are familiar with, particularly second- or third-tier cities on the mainland. After the brand becomes successful, the market coverage can be expanded. The emerging markets are favoured, particularly Asia and different cities on the Chinese mainland, as new brands may be more attractive to the customers there.

Pros

The major advantage of own brand development is that companies will have full control and flexibility of formulating its product development and marketing strategies. Depending on the financial resources available, the capital involved may vary case by case.

As brands become successful, the brand holders can further expand the market coverage as well as the product variety. The brand holders may even franchise out their brands to other companies for business expansion. Own brand development is a long-term investment, and the brand equity belongs to the brand holders.

Cons

It is time-consuming for own brand development, and the result is not guaranteed. In general, it takes at least three to five years for a company to develop its own brand in the incubation stage. Yet it may be even longer for SMEs which have limited management skills and financial resources. However, it is not guaranteed that the brand will ultimately become successful, and even if the brand becomes well known, it may take another few years to make a profit.

Indeed, brand building is more than just spending money on marketing and advertising. Companies need to define clear market positioning and the targeted consumer segment before building the brand. Although Hong Kong companies have expertise in OEM and ODM, they may not have the skills and knowledge of brand development.

IV. Asian Markets: Unique Opportunities for Hong Kong Companies

Apparently, consumers in Asia have become much more powerful amid rapid economic growth in the region, and this trend is expected to continue in the next few decades. Given better knowledge and greater curiosity, they have become more brand conscious, and are more choosy in making their buying decisions. Coupled with intensified competition in the region, Hong Kong companies should realise that investment in production is no longer sufficient to guarantee long-term profits, and the source of their prowess in the global market is branding. While branding is a relatively new concept to many Hong Kong companies, the fact is that Hong Kong and Hong Kong industries possess a number of distinctive edges which put them in an advantageous position to develop or build their own brands.

For one thing, Hong Kong products are known for their quality, design and value for money. Many Hong Kong companies are professional in producing high-quality products for international branded companies, and some of them may also have their own distribution networks and marketing channels, giving them an upper hand in nurturing their own brands. For another, Hong Kong is a metropolis in Asia, and is also the strategic control centre of a vast production network spanning the mainland and countries near and far. To be sure, products made by Hong Kong are well received in the region, and a few Hong Kong brands are in demand.

In particular, the booming mainland market holds special promise for Hong Kong brands. Spurred by rising living standards and the emergence of a middle class, mainland consumers show a good appetite for mid-range brands. But there are few brand leaders in many sectors, suggesting much room for Hong Kong brands to grow and thrive. In addition, the "Made by Hong Kong" label is preferred by mainland customers. According to the report "New Generation of Mainland Consumers" published by TDC in 2007, 63% of the mainland respondents commented that the design of Hong Kong-branded products is modern, trendy and innovative. Even recognising that the Hong Kong products are made in the mainland, 55% of the respondents agreed that Hong Kong brands have higher quality than mainland brands.

There is no wonder that branding has become a powerful marketing tool for Hong Kong companies. In an increasingly promising but competitive market in Asia, branding is the key to consumer loyalty, sustainable growth and long-term survival. The challenge for Hong Kong companies is to step in this largely uncharted business, and build/develop successful brands that call for passion and commitment.

V. Passion, Commitment and Success

Obviously, brand development is a difficult task. It is a corporate strategic issue rather than a short-term operational tactic. It is a long-term investment that requires continued input. To be successful, Hong Kong companies must embrace branding with passion.

Long-Term Commitment: The Tenet of Success

The centrepiece of successful branding is the commitment to invest in the brand over the long term. As it takes time to build consumer awareness, communicate the brand message and create customer loyalty, Hong Kong companies should make long-term investment in a brand at the expense of short-term profitability. Even when the brand has become successful, the company still needs to maintain and enhance the brand in order to achieve long-term success by staying ahead of its competitors.

Because of the need for long-term commitment, the management should set its mind whole-heartedly on branding. It must ensure that the brand is marketed not only externally but also internally, with all staff of the company sharing the common goal of building a brand culture. The whole company should understand its brand value and brand positioning, which all aspects of marketing and communication should reflect, as should the customer service provided by all company employees.

Own Brand Development: A Viable Option for SMEs

Although brand acquisition is a rapid way for brand development, it is not easy to find an appropriate brand to acquire, due to the limited number of brands which are available for acquisition, let alone the colossal costs that may incur. Whether the brands would fit in well with the company's product portfolio is another problem. The transition of business, which necessitates a high level of management expertise, is often problematic. Therefore, it may not be a good option for SMEs.

Brand licensing may be an alternative to brand acquisition. Since the licensors often provide the know-how to the licensees, the licensees can take advantage of the licensors' skills and experiences, and then apply to their own brand development. Hong Kong companies need to justify to themselves whether brand licensing is feasible in the long run, as the royalties are often quite high and the licensors have tight control on product development and marketing.

Own brand development is another viable alternative for Hong Kong companies, especially SMEs, which will have full control on product development and marketing. Given a lack of brand development expertise and financial resources, Hong Kong companies can incubate their brands in some small pilot markets. After becoming successful, the brands may be promoted in other potential markets, especially in emerging countries like the mainland, which are more receptive to new brands.

This new report is available at TDC's Retail Outlets. It can also be purchased through the TDC Bookshop section in the TDC's trade portal: info.hktdc.com.