Made in China: The Mengniu Phenomenon

ON THE STRENGTH OF A DIFFERENTIATION STRATEGY THAT EMPHASIZES QUALITY OVER PRICE, A CHINESE DAIRY CONGLOMERATE HAS VAULTED ITSELF INTO THE RANKS OF THE WORLD'S LARGEST COMPANIES IN LESS THAN A GENERATION. SOME OF ITS INNOVATIONS--NOT JUST IN HOW IT EARNS REVENUE BUT IN HOW IT TREATS EMPLOYEES AND THE ENVIRONMENT--HAVE EXECUTIVES IN OTHER COUNTRIES TAKING NOTICE. THE COMPANY'S RAPID GROWTH, WHICH HAS BEEN MARKED BY GREAT SUCCESSES AND SOME GLARING MISTAKES, SERVES AS AN INSTRUCTIVE TALE FOR MANAGEMENT ACCOUNTANTS AND OTHER FINANCIAL PROFESSIONALS FACED WITH A RAPIDLY EXPANDING BUSINESS MODEL. The Made in label often conjures up images of faulty drywall, defective tires, toys encrusted with lead paint, and tainted infant formula. Products come at a low price and an even lower level of quality--often result of companies taking ruthless measures to minimize costs. In these situations, workers earn pennies in facilities that not only harm them but also environment. Factories pump out products using obsolete manufacturing equipment. Executives promote outdated management practices and employ few, if any, marketing tactics. One Chinese company, however, has taken opposite approach. Instead of being purely cost-driven, Inner Mongolia Mengniu Dairy Co., Ltd. (Mengniu Dairy Group or simply Mengniu) has adopted what management consultant Michael Porter would coin a (1) Porter defines a company with a differentiation strategy as one that: selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs. It is rewarded for its uniqueness with a premium price ... Differentiation can be based on product itself, delivery system by which it is sold, marketing approach, and a broad range of other factors. Mengniu Dairy has done just that and has been wildly successful--all in about 13 years. Its growing pains--and there have been many--can offer lessons to executives of other global companies, as well as management accountants and other financial professionals, who may be embarking on a similar roller-coaster ride of rapid expansion. A DECADE-LONG GROWTH SPURT The Mengniu Dairy was founded in 1999 and set out to gain significant market share through a differentiation strategy. When Mengniu began, it first wanted to be leading dairy brand in Inner Mongolia. This was an ambitious goal since, based on local government statistics, it was ranked near bottom of all Chinese dairy companies. After three years, however, Mengniu had reached its goal of being first in Inner Mongolia and pursued a second goal: to be leading dairy brand in China. It did not take long. A year later, in 2003, Mengniu's liquid milk sales ranked first in China, and, by 2005, its ice cream sales were tops. According to Nielsen statistics, by 2009 Mengniu had captured more than 38% of China's market share for dairy products and ranked first in China with respect to milk, yogurt, and ice cream production. Moreover, its liquid milk consistently ranks No. 1 in consumer satisfaction. (High customer satisfaction is an important measure for firms employing a differentiation strategy.) The company currently employs 30,000 people, holds total assets of [yen]8 billion, and produces five million metric tons of dairy products per year. (At time this article was written, $1 in U.S. currency equaled approximately 6.83 [yen] Chinese.) Mengniu is also largest Chinese dairy exporter, sending its products to countries as far away as United States and Canada. By end of 2007, sales had exceeded 21.3 [yen] billion, making it first Chinese dairy company to exceed 20 [yen] billion in sales. Profits have reached more than 1 [yen] billion. In fact, Chinese media have coined Mengniu's rapid growth as the Mengniu Phenomenon, illustrated in Figure 1. …

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