Hong Kong Manufacturing SMEs: Preparing for the Future

99Central Governments, who set up research andtesting facilities.Differentiation StrategiesAnother means of dealing with cost increases is todifferentiate in order to gain some pricing flexibility.Approaches to differentiation include:• Improve product qualityCustomers often are willing to pay higherprices for demonstrably higher quality products.Depending on the industry, quality may bedefined by precision craftsmanship, speed,reliability, product life, fashion or design content,attractive appearance, image, incorporation ofmore advanced technologies, or customisation.The challenge is to provide higher quality thatthe customer values, can be achieved in a costeffective manner, and is difficult to imitate. SMEsoften have a hard time developing the capabilitiesto produce products with demonstrably higherquality than those of competitors. It is alsonecessary to find ways of demonstrating superiorquality to customers.• Improve services to customersImproving services to customers can includeproviding just in time inventory management forcustomers, providing design services, providingrapid turnaround and delivery, and providingreliable supply. To the extent that the firm candistinguish itself from its competitors, it may beable to obtain some pricing flexibility. The key isthat the SME view itself not just as producing aproduct, but as producing value for the customerthat could go well beyond the product itself andcould involve special delivery conditions, inventorymatching, designing, and other activities as well.• Move from OEM to ODM or OBM productionMoving from OEM to ODM or OBM productioncan allow manufacturing SMEs to distinguishthemselves and obtain better prices. However,ODM requires the firm to invest in designcapabilities and OBM production requires thefirm to invest in branding, marketing, anddistribution. This in turn requires substantialresources and capabilities that most Hong KongSMEs that started in OEM production do notpossess. To brand successfully, the companymust either have or bring on board people withthe appropriate marketing skills, must engage inconsumer research, and must develop a clear andconsistent message that is fully backed up by thequality of the product and the entire purchasingexperience of the consumer (including choice oflocations, types of outlets, packaging, displays,price points, and promotional material).• Tailor strategy to serve particular nichesBy definition, SMEs generally cannot supplyall types of customers. As a result, it is oftenbetter for SMEs to tailor their strategy to servingparticular niches, gaining distinctiveness andthe ability to differentiate by understanding andserving the needs of customers in the targetniches better than competitors. In order to carryout this strategy, the SME must develop a deepunderstanding of the niche, their precise needs,and cost effective ways of meeting those needswhile distinguishing itself from competitors.• Supply high value market segmentsHigh value niches, with customers that may beless price sensitive than the mass market, provideparticular opportunities for pricing flexibility,but requires a firm to develop the capabilities toserve these markets. The idea is that high valuesegments generally have buyers that do notpurchase on price alone. Appealing to customerswho want high performance, a specific image,exclusivity, special features, or other non-pricefeatures again requires products that meetthe relevant criteria and companies that cancommunicate their appeal clearly.