Research Project - How do Cultural Differences between China and Western Countries Affect International Business Relations - A Case Study of Tesco and Walmart PDF

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How do the cultural differences between China, the UK and the US - an analysis...

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Submitted in part fulfilment of a Bachelor of Arts in Business Management at Nottingham Trent University

How Do Cultural Differences Affect Failed International Retail Joint Ventures In China? A Case Study Of Tesco & Walmart Word Count 7521

Andrew Dawson N0494066

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Contents Declaration........................................................................................................................................2 Abstract..............................................................................................................................................3 1.

Introduction...........................................................................................................................4

2.

Review of Literature...........................................................................................................6

2.1 The Main Cultural Differences and the Effect They Have on International Joint Ventures..................................................................................................................................7 2.2 Implications for International Joint Ventures due to these Cultural Differences......................................................................................................................................13 2.3

The Importance of Intercultural Training.................................................................15

3.

Research Methodology....................................................................................................17

3.1

Limitations...........................................................................................................................19

4.

Case Study..........................................................................................................................20

4.1

Tesco and Walmart...........................................................................................................20

4.1.1

A Case Study of Tesco.................................................................................................20

4.1.2

A Case Study of Walmart...........................................................................................22

4.1.3

Primary Research Findings........................................................................................24

5.

Analysis of Literature and Research...........................................................................25

5.1

Customers............................................................................................................................25

5.2

Management.......................................................................................................................26

5.3

Intercultural Training.......................................................................................................27

6.

Conclusion............................................................................................................................28

7.

References...........................................................................................................................30

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Declaration I declare that I have personally prepared this article and that it has not in whole or in part been submitted for any other degree or qualification. Nor has it appeared in whole or in part in any textbook, journal or any other document previously published or produced for any purpose. The work described here is my own, carried out personally unless otherwise stated. All sources of information, including quotations are acknowledged by means of reference.

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Abstract This paper has been conducted to understand the importance of culture for International Joint Ventures looking to enter the Chinese market. The aim of the paper is to identify the main cultural theories and analyse and explain how they affect: 

Local Chinese Customers



Local Chinese Management



Intercultural training

This analysis is based on the theoretical foundations of Hofstede as well as the Globe Study. The main aspects of these studies are examined and applied to China, the UK and the U.S. to identify the main cultural differences observed. An analysis of intercultural training and

its

importance is then carried out using theory developed by Daniel Landis. The research carried out in this report involves two case studies on Tesco and Walmart, and their attempts at entering China through an IJV. Dr. Prof. Jonas Polfuß will provide primary research about how intercultural training could have been utilised in these cases. The paper will conclude by identifying and analysing how Tesco and Walmart could have dealt with the issues experienced using intercultural training; this will be done through bringing in theory and literature from the earlier literature review section.

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1. Introduction According to Geert Hofstede (2011), the world-renowned researcher in the field of intercultural communication, culture can be defined as ‘the collective programming of the spirit, the members of a group or a category

of

people

different

from

one

another’.

Bergemann

and

Sourisseaux (2003) believe that culture can be described as ‘universal for a society and organisations within it through the providing of a guidance system that is formed from specific symbols (such as body language), as well influencing the perceived thoughts, values and actions of all those within that culture’. This research paper will critically analyse the intercultural differences between China, the UK and the U.S. Furthermore, it will examine the problems that can arise when companies from one culture interact with another. In particular, this will be demonstrated by an analysis of Tesco and Walmart and their failed attempts at entering the Chinese market through an international retail joint venture (IJV). The following two research questions will guide this analysis: 

How have the differences in culture between China, the UK and the U.S. influenced the failure of Tesco and Walmart?



How

can intercultural

training be

implemented

to overcome

problems arising from these differences in culture? The review of literature will identify the main cultural differences between China, UK and the U.S. and the effect that this has had on IJVs such as Tesco and Walmart. This will be supported by literature from Geert Hofstede (2011) and his cultural dimensions, as well as by Richard House et al’s (2004) Globe Study. It will then identify the challenges IJVs face in China due to the cultural differences between China, the UK and the U.S. This position will be supported predominantly by literature from Quer et al (2014) and Yan and Duan (2003). The literature review will then identify the importance of intercultural training for IJVs when looking to move into 4

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a country with a different culture. This will be supported by Daniel Landis’s (2004) five main categories of intercultural training as well literature from Kealey et al (2004) that will critique the use of this training. The research methodology section will then outline what research will be carried out in this paper. This will be in the form of two qualitative case studies that focus on Tesco and Walmart respectively. This will be supported by literature from Burns and Burns (2008) and Huang and Jia, (2015). who will provide an analysis of the advantages of a case study approach. The case study section will look to run two case studies: one for Tesco and one for Walmart, and will identify and analyse why they entered an IJV in China, and the problems they experienced with the consumers and with management. It will then analyse how intercultural training could have been implemented to reduce the gap between these problems. This will be supported through an interview with Prof. Dr. Jonas Polfuß, professor of Brand Management and marketing at the EBC university of applied sciences in Düsseldorf, Germany, and an expert in intercultural training design and implementation. The subsequent analysis will then examine the two case studies, relating back to the text in the literature review section. This section will look at the issues identified in regards to management and consumers, and will use the literature to support these research findings. It will then look at the existing literature about intercultural training and apply it to the case studies to identify if the failure of Tesco and Walmart could have been hypothetically prevented by the implementation of strategically designed intercultural training programme This paper will conclude by arguing that the failure of Tesco and Walmart was strongly linked to clashes in management style arising from cultural differences. It will also conclude that intercultural training could have 5

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perhaps mitigated these issues to such an extent that the joint venture could have operated successfully. This position will be supported by literature from Geert Hofstede and from my primary research from Prof. Dr. Jonas Polfuß.

2. Review of Literature Globalisation has fundamentally changed the international business world. Its breakdown of geographical boundaries has led to the need to work and communicate with people from different backgrounds and cultures. The scale of cultural differences, in terms of values, attitudes and beliefs, has presented significant challenges. Understanding and overcoming these challenges is recognised in both academic literature and in global companies as critical to achieve commercial success. Globalisation has provided companies with the means to venture into new markets

with

new

cultures

(Cukier

and

Middleton,

1996).

The

advancement in communication technology has allowed access to wider markets containing groups of people with different cultures and beliefs (Thuita, 2015). This increase of the phenomenon of globalisation has led to China becoming a very appealing market for investors. In 2014, China surpassed the U.S. as the world’s largest recipient of foreign direct investment (BBC News, 2015) It can be observed that most of the failures behind cross-national companies entering the Chinese market are due to the failure to address the cultural differences between China and Western countries (Guardian, 2007). The main theme behind these failures is that the main cultural barriers to entry were not considered enough. For example, if these companies had looked to employ a method of localisation that focused on appealing to what customers in China are after rather than a process of standardisation they may have been more successful (Chuang, 2011). 6

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2.1 The Main Cultural Differences and the Effect They Have on International Joint Ventures According to Schein, (2004) individuals that come from similar cultural backgrounds will have similar attitudes, values and beliefs in comparison to individuals from other cultural backgrounds; this means that these different

cultures

will

consist

of

factors

such

as

differences

in

management styles and attitudes. This highlights the need for Western businessmen and Chinese businessmen to be aware of the differences in culture that influence important factors such as management styles and practices when meeting to conduct international joint ventures or mergers (Kase, 2014). To understand the full complexity of organisational culture, several researchers

have

made

attempts

to

recognize

and

examine

the

components that make it up. One of the most important components of culture is that values that are shared and held by the individuals of an organization (Schein, 2004). However, Hofstede (2011) explains the organisational culture as something ‘like an onion’ that contains several layers and values that makes up the core of the organisational culture (see Appendix 1). Appendix 1: The onion chart of the manifestation of culture (Hofstede, 2011). Values Rituals Heroes Symbols

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Geert Hofstede’s (2014) cultural dimensions (see Appendix 2) provide an extremely popular and well used paradigm in the field of comparative cross-cultural management that can explore and highlight the main dimensions of culture that a country has (Minkov and Hofstede, 2012). These dimensions provide a framework in which the relevant dimensions can be ‘scored’ against each other country to country (Hofstede, 2014). Appendix 2: Cultural dimensions according to Geert Hofstede (2014) Cultural Dimensions Power Distance

Individualism versus Collectivism

Masculinity versus Femininity

Uncertainty Avoidance

Long Term Orientation

Definition The extent to which the less powerful members of organisations and institutions (like the family) accept that power is distributed unequally (Hofstede, 2014:5657). Individualism can be defined as a preference for a loosely-knit social framework in which individuals are expected to take care of only themselves and their immediate families (Hofstede, 2014:128134). Collectivism represents a preference for a tightly-knit framework in society in which individuals can expect their relatives or members of a particular group to look after them in exchange for unquestioning loyalty (Hofstede, 2014:128-134). Masculinity is defined as ‘a preference in society for achievement, heroism, assertiveness and material rewards for success.’ Its counterpart femininity represents ‘a preference for cooperation, modesty, caring for the weak and quality of life.’ (Hofstede, 2014:214-217). ‘A society's tolerance for ambiguity,’ in which people embrace or avert an event of something unexpected, unknown, or away from the status quo (Hofstede, 2014:214217). This dimension associates the connection of 8

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versus Short Term Orientation

Indulgence versus Restraint

the past with the current and future actions/challenges. Societies who score low on this dimension, for example, prefer to maintain time-honoured traditions and norms while viewing societal change with suspicion (Hofstede, 2014:274-277). Indulgence stands for a society that allows relatively free gratification of basic and natural human drives related to enjoying life and having fun (Hofstede, 2014:288-291). Restraint stands for a society that suppresses gratification of needs and regulates it by means of strict social norms (Hofstede, 2014:288-291).

According to Hofstede (2014), China has a very high power distance between its employees in comparison to the UK and the U.S. (see appendices 3

and 4). This means that there is a difference in

management culture as in China, there is a strict adherence to a hierarchy, and more of an acceptance of inequality among employees in comparison to Western countries such as the UK and the U.S. (Irwin, 2011). In contrast, the low power distance that the UK and the U.S. has compared to China will mean that people in this workplace will generally tend to perceive people as more or less equal in the workplace, leading to less emphasis on differences in status and a more even distribution of power throughout the organisation (Ting-Toomey & Oetzel, 2002). Each culture has its own level of tolerance to inequality of power; however, it is almost inevitable that there will be a level of unequal power relationships in organisations in countries like China that place a heavy emphasis on ensuring that power is spread more towards those higher up in the organisational hierarchy (Carl et al, 2004). This is a factor that must be considered by Western countries looking to enter China as this difference in management style will likely lead to several conflicts in the contrasting styles of management. 9

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According to Hofstede (2011), China has a very low level of individualism compared to Western countries such as the UK and the U.S. (see appendices 3 and 4). This means that China is a highly collectivist society, meaning that people will act in the interest of groups they are a part of rather than in the interest of themselves (Luo and Yeh, 2012). According to Hofstede (2011), this means that individuals in China will generally have more of a commitment to personal relationships with work colleagues and family than the organisation they work for. This is highlighted by a study by Chen and Li (2005), who observed that the Chinese are less co-operative with foreigners and those who they perceive to be ‘out of their circle’ in comparison to people in UK and the U.S. who were found to co-operate just as well with foreigners as they did with locals. It is imperative that any organisation looking to enter the Chinese market takes this tight relationship between the Chinese into account. According to Hofstede (2011), China has less of an emphasis on indulgence than Western countries such as the UK and the U.S. (see appendices 3 and 4). This means that people in China have a higher level of cynicism and pessimism than the UK and the U.S. (Steele and Lynch, 2013). Per Huang and Jia (2015), Chinese shoppers are more focused on conforming to herd behaviours in regards to buying products than going out and seeking their own due to this high level of cynicism in the Chinese culture. It is argued that this level of cynicism leads into the Chinese system of ‘guanxi’, which in turn highlights the importance of brand loyalty and recognition. Guanxi is defined by Gu et al (2008) as the ‘closeness between individuals and their focus on developing relationships and brand loyalty’. Guanxi can be perceived as the biggest obstacle that organisations face when trying to enter China (Tian, 2016). This is because the high level of cynicism identified in Hofstede’s study of China translates to there being a high level of risk averseness manifested in the form of a high level of loyalty towards a specific product or brand, with a fear and unwillingness to change to another party (Opper et al, 2016).

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Fang Yang (2011), argues that while the guanxi circle isn’t completely closed to outsiders, it is a difficult circle for IJVs to penetrate due to Chinese people’s averseness to change. However, according to Fang Yang (2011son), the importance of guanxi to IJVs looking to enter into China has declined due to the fact that Chinese reform policies have reached an advanced stage, meaning that there may be a reduction in the individual emphasis on guanxi in the future. Despite its critical acclaim, there is a lot of literature that criticises Hofstede’s research. Jones (2007), describes cultural homogeneity as one of the most popular and relevant arguments against Hofstede’s model. The model ignores the fact that a country is made up of several different ethnic units, such as in China, where it has been found that there are about 56 ethnic minorities all with different values and beliefs (Mead and Andrews,

2009).

Søndergaard (1994)

also

argues that

Hofstede’s

research is not an accurate ...