Archive for the ‘International Business’ Category

#104 No risk no fun?

Thursday, October 30th, 2014

indiaAt the end of last month, Indian Prime Minister Modi traveled to the United States to lure US companies back to India to invest. According to the Wall Street Journal, just four years ago, the US investment stock in India amounted to approximately $1.9 billion, and now four years later it is only around $800 million. PM Modi tried to assure the likes of Boeing, IBM, GE, Citigroup or PepsiCo that he is cutting through all red tape and making sure that foreign investments are safe in India. The reality, however, tells a different story. The second largest cell phone company in India, Vodafone, has been battling the Indian government in arbitration courts over the imposition of retro-active taxes. Before entering India, Vodafone was promised tax breaks by the government, but after the check cleared, parliament instituted a new law that required Vodafone to pay taxes AND back taxes. Amazon is stuck in limbo, too. When Amazon entered it was fairly certain that as an online platform it would not be subject to retail regulations, but now it seems it will. WalMart, which had announced lofty plans for the Indian market not too long ago, has also put India on the back burner, and only operates wholesale stores there under a joint venture agreement. In most Western countries, the law is the law. In some countries, however, there are no laws or there are sometimes even contradictory laws. And in yet other countries, laws are either changing constantly or they are subject to interpretation. It seems as if some cultures have laws to make their lives easier and more predictable, while other cultures have laws to because … well … why … I mean….! The lesson is that companies need to pay close attention not only to differences in the law, but also to differences in how law is applied and practiced.

#103 A tale of two companies in China – Hermes and McDonald’s

Friday, October 24th, 2014

shangxiaMost of the time, it catches my eye when companies fail internationally. This focus on failure may be the result of my academic training, and it may have something to do with my cultural roots. However, every once in a while I am really intrigued, even fascinated, by how smart some companies are. Hermes International SCA has developed a completely new brand for the Chinese market, Shang Xia. As the Wall Street Journal recently reported, Hermes has now spent several years to build the brand and isn’t expecting to break even before 2016. They understand that Western luxury brands will not continue to harvest the benefits of newly gained affluence in China forever. With the growth in the segment slowing down – from 20 % annually to about 2 % this year – the high demand for foreign brands will eventually cease. Chinese consumers are becoming ever more discerning and new brands, and more and more local brands, will succeed. Hermes has recognized this many years ago and made the right decision by building a strong local luxury brand. McDonalds (and yes, I admit, they compete in quite a different industry), however, is experiencing rapid declines in China for the exact same reasons. Competition from newer entrants is intense, and more and more Chinese alternatives eat into their market share. The time when being “foreign” or “American” was enough to drive purchase decisions will soon be over, and companies worldwide are well advised to adapt their China strategies.

And, by the way, I just realized that I ended up talking about failure again, after all.

#102 Groupon in Romania and China

Monday, September 29th, 2014

GrouponI had been thinking about the Groupon model and its appeal in various countries for quite while when a Google alert recently hit my inbox – Groupon was to shut down its service in Romania. At the beginning of September 2014, Groupon pulled the plug on this market of just under 100,000 square miles and around 20 million population. Groupon simply stated that it never gained traction and failed to attract critical mass. Spoiled by impressive global growth of 23.5% globally and 42.3% YTD growth in its Europe, Middle East and Africa regions from 2013 to 2014, this acknowledgement of failure must have come hard to executives. So far, they have not not commented on the reasons for the failure, so all that can be said are wild guesses. What is known is that Groupon entered Romania in 2010 through the acquisition of local competitor CityDeal, a move that had spurred the emergence of smaller local deal sites – around 100 in 2012. Besides the competitive environment, another factor may have been that Romania is still a country where the digital divide continues to exist. The ultimate clue with regards to the reasons for the Romanian failure may lie in a far more distant and much larger market – in China. Groupon has had its fair share of difficulties in the Middle Kingdom: poaching of employees through high salaries didn’t show the results Groupon needed, the bid to take over local competitor Lashou had failed, aggressive commission tactics were rejected by vendors, and the practice to staff even remote regional markets with foreign managers who lacked both the knowledge and the “guanxi” didn’t go down well with the Chinese market. After years of trying in China, Groupon has decided earlier in 2014 to exit that lucrative market. Is it too far-fetched to assume that it’s been a similar lack of appreciation for local differences in the market has been the reason for the Romanian exit?

#100 Media Markt Exits China

Friday, February 28th, 2014

mediamarkt-chinaAfter only three years in China, German electronics retail giant Media Markt in 2013 joined the list of companies that have left China after years of trying, including US-based companies Best Buy and Home Depot. Not too long ago, the store, owned by Metro-group had lofty plans of 100 and more stores. In 2014 it’s a distant memory at best.

According to some analysts, the Metro-group owned chain simply didn’t understand the mechanics of the very competitive Chinese market. Some even say that they didn’t know why they were in China in the first place. What was it that went wrong. First, Media Markt didn’t understand how price-sensitive Chinese consumers are. While Media Markt focused on the consumer experience, Chinese consumers were using its stores as showrooms before buying the products they wanted online or at another retailer. In addition, other retailers, such as local competitors Gome or Suning kept their cost down by setting up shop in less fancy locations than Media Markt. Chinese competitors usually also sub-let space to brand manufacturers who bear the bulk of the risk. Media Markt’s flagship store, however, not only was fully self-operated, but also  occupied too much space on one of the most expensive retail streets in China. That amounted to cost pressures and brought Media Markt’s (necessary) nationwide expansion to a screeching halt. While Suning had built 1,700 stores all over China, Media Markt had only 7. This resulted in a situation where Media Markt only made about 5 % of local Chinese competitor Suning’s revenues. As a result – according to the Financial Times – the group didn’t want to invest the several hundreds million Euros annually needed to establish a significant Chinese operation. Media Markt wanted to build a famous brand for its store, in a market where consumers are looking more towards products as brands.

#99 Global Price Discrimination Still Works

Saturday, December 7th, 2013

bmw chinaIn the past few months, U.S. federal prosecutors have cracked down on shipments of high end cars to China. Dozens of luxury vehicles at U.S. ports and millions of dollars in U.S. bank accounts have been seized. What had happened? Are U.S. car manufacturers no longer interested in the Chinese market? Not at all! The seized cars were mostly BMWs that were purchased by straw men and their “employers”in the U.S.  for resale on the grey market in China. With a sticker price for a BMW X5 xDrive 35i of around $56,000 in the U.S. and around $153,000 in China - almost three times as much – there’s a huge potential for profitable wheeling and dealing between the two countries. Driven by their need for status and prestige, Chinese consumers are willing to pay the price for a foreign luxury car, and BMW and other manufacturers naturally want it all for themselves, and so they have taken legal action. All legal aspects aside, what’s interesting is that this is a perfect case of global price discrimination / differentiation – volume positioning in the U.S. and premium positioning in China. Based on the cultural conditions in the local environment, global companies are leveraging these price differentials to their advantage and – as has been shown in this case – are trying to protect this advantage as long as possible.

#98 Someone seems to get it right in China

Thursday, November 14th, 2013

H&MIn the past, H&M may not always have met analyst’s expectations, it may have taken some heat over the use of Photoshop in some ads, it has been criticized over unfair labor practices, but from this blog’s angle, the Swedish multinational seems to be doing things right in international markets. Considering high profile retail failures such as The Gap’s in Germany, Fresh & Easy’s in the U.S. or WalMart’s in Korea, H&M has been navigating foreign waters without major blunders so far. One of the markets where H&M is very active and expanding is China – a market in which many foreign entrants fail. While H&M did have some run-ins with authorities in China over product quality – excessive PH levels, weak crack resistance, and lower fiber content than claimed, it has all been very contained and hasn’t hurt them. In September 2013, after a year of rapid growth and expansion, H&M opened it’s 3,000th store globally in China where it currently has 170 stores. While this puts H&M behind Inditex’s Zara’s 400 plus stores in China, H&M has ambitious plans for future expansion in the Middle Kingdom. Analysts say that H&M is filling a mid-range gap between sports apparel and high-end luxury clothes in China. By bringing affordable clothes to the market they are catering to the needs of younger Chinese consumers who want Western style shopping experiences and clothes that provide some degree of status that an established global brand conveys.

#97 Ooops, they did it again….

Sunday, October 6th, 2013

Danone-LogoPeople who follow foreign companies in China are well aware of the challenges that Danone has had in that market over the last few years. We’ll never quite know why Danone’s joint venture relationship went sour (not good for a company dealing in dairy products…) but it may not be completely unfair to assume that it often takes two to make and two to break a relationship. The simplistic and official story is that Wahaha reneged on a deal to let Danone buy the majority stake in the joint venture, after which Danone filed for arbitration and then took legal action. It probably was right there when the real trouble started. In China, you don’t sue your partner before a court of law, you chit-chat it out. But there was definitely more to it, including the fact that the Chairman of Wahaha, Mr. Zong Qinghou didn’t exactly appreciate the tight shackles that Danone placed on him in all business decisions – not recognizing that China is a market that often calls for entrepreneurial approaches rather than the central control that French companies are known for.

But these are things past. More importantly, Danone seems to be in the middle of its next quagmire. Granted, it was unfounded allegations of contamination that caused their Dumex baby food division to recall baby formula on a large scale, but the allegations of price fixing in the same product market were very real and ended in a fine ordered by Chinese courts (a total of $ 110 mio including five other companies) and more negative press by the media which is just waiting for Danone to get more scrambled egg on its face.

Then, as the Wall Street Journal reported last week, Danone’s Nutrica unit, a division which specializes in medical nutrition, had to deal with allegations that it bribed more than 100 doctors at more than a dozen hospitals in Beijing. How much more does Danone want to work on the image of the ugly, imperialist company? If that’s their goal, they can stop, because they have succeeded! If not, they can stop, too, because it is time to embark on a focused campaign to restore their own image and that of Western companies in China in general. And if they don’t care about image (let alone about being a good corporate citizen), maybe Danone should simply look at their challenges in China from a bottom line perspective as sales are already declining.

#96 McDonald’s Not So Flat World of Ads

Saturday, March 9th, 2013

Ever since Thomas L. Friedman, Pulitzer Prize winning author, published “The World is Flat“, we have been listening to the mantra of the world becoming a completely level playing field for companies for many years now. Other authors such as Pankaj Ghemawat continue to remind us that we’re still quite far from a borderless world, and failures by both large, multinational companies and countless small- and medium sized enterprises are a great testimony to his position. Legal and administrative barriers continue to exist even in politically integrated areas such as the European Union, relevant economic differences between countries persist, and – probably most importantly – cultural differences are as a alive as they have ever been (as this blog tries to document). Looking at my collection of McDonald’s advertising from various countries, I was recently reminded again of two things: first, cultures are still having a strong influence over the marketing-mix; second, McDonald’s is doing a pretty good job at addressing these differences. Let’s have a look at this small selection of examples below. What we see on the first one is not surprising. We all know that religious beliefs make the marketing of beef burgers next to impossible in India; product adaptation becomes a necessity. McDonald’s has therefore added items such as the “Chicken Maharaja Mac” or the ”McAloo Tikki” to its Indian menu. So far so good. When it comes to promotion, the next example (second from the left) shows how McDonald’s is using a national celebrity athlete, basketball player Yao Bing, in its advertising in China. As is common in testimonial advertising McDonald’s tries to transfer the positive image associated with Yao Bing onto the McDonald’s brand. Being both collectivistic and highly status oriented, China very willingly accepts someone’s endorsement who is a source of national pride and has unparalleled athletic and commercial success. Doing this, McDonald’s is showing a lot of cultural intelligence. And now for a European example – Austria. As I have recently posted in a different context, Austria is a relatively risk-averse culture. As far as consumer behavior is concerned, this results in a preference for tested products, products that have third-party certifications, and traditional products that can be trusted. And which products could be trusted more than products of Austrian origin? McDonald’s has picked up on this and is very openly playing the country-of-origin trump card – 100 % beef from Austria, 100 % Austrian potatoes (second image from right), and using Austrian slang words that wouldn’t even been understood just a few miles across the border in Germany – “Pipifein” which means something like “Great” (first from the right). Well done, McDonald’s!

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#95 Management, Austrian-Style

Tuesday, February 19th, 2013
austriaOver the past few years I have often been asked what the main differences in the workplace culture between my native Austria and the United States are. I still don’t have the perfect reply, but here are some observations. First and foremost, Austrians have a dislike for authority, particularly in the workplace. Austrians are well educated, they take pride in their work, and they think highly of their own skills. Therefore, they don’t like to be micro-managed – in Austria’s workplace, everybody is supposed to know what to do, how to do it and when to do it, and everyone wants to exercise that right. Viewed through a positive lens, this means that in most cases, Austrians don’t need anybody to breathe down their necks and can largely be left alone with a set of broad objectives in mind. When a supervisor becomes too directive, then employees will get frustrated. Unfortunately, and this brings me to my second point, disagreement with one’s superior is often not expressed openly in Austria. If managers don’t pick up on their employees’ dissatisfaction, the workplace could easily turn into a place that breeds a toxic culture of complaining and gossiping. And once that has happened, it’s hard to turn back the clock in any culture. The issue of not voicing one’s own feelings points to another important trait – Austrians’ need for consensus and (often false) harmony. In Austria, people don’t like to be direct. We often avoid speaking our honest opinion for the fear of being impolite (or maybe the fear of making a fool of ourselves). This is even reflected in Austrian’s use of German (or English…) as we tend to use a lot of passive voice, conjunctives, and the like. On the upside, this means that sticky situations that carry the potential for conflict are often resolved around conference tables rather than taken to the street. As a result (among others), Austria has one of the lowest numbers of labor strikes in the world – measured in minutes only. My next observation has to do with change. Change comes in many forms – for instance in the form of the introduction of a new management process, the adoption of a new software package, the hiring of a new (god forbid, foreign) manager from outside, or the simple disruption of daily routines, to name but a few. The negative attitude against such developments is easily explained through Austrians’ risk averseness. In Austria, children are brought up on children’s stories and proverbs that are sown with the same patterns all over: obedience and conformity pays, while rebellion and individualism are punishable. This certainly plays into the hands of those seeking group think and stability, but it doesn’t work well for those who want to reward individual initiative. Individual initiative is often suspicious to Austrians – not necessarily because we wouldn’t enjoy the rewards, but more importantly, because we don’t like to stand out and we don’t want to bear individual responsibility when things go wrong. When problems arise, mistakes are made, or failure occurs, responsibility is often and foremost believed to be “systemic” rather than individual. And finally, Austria is a land of traditional values. It is still a society that is dominated by masculine orientations in which men are engineers and women nurses and, unfortunately, where there is no gender equality in the workplace. It’s hard to find women in top positions in Austria, and women with equal qualifications earn about one third less of what men would earn in the same positions. Like in most countries, there is a divide between urban and rural areas, but by and large, men rule. The upside is that while Austrians like to keep work separate from their private lives, they are very performance- and goal-oriented.

I’m certain I have missed a ton of helpful observations, and I’ll keep working on the topic. In a future blogpost, I will also address how foreign managers can adapt their practices in order to succeed in Austria’s cultural environment.

#93 Global retail: size doesn’t matter, or does it?

Wednesday, December 12th, 2012

fresh-n-easyYes, the British are leaving the United States – again. After a $1.6 billion investment, British supermarket giant Tesco announced that it may be selling it’s US “Fresh and Easy” chain. Clearly, corporate PR speak for “we are pulling out of the United States altogether”. What has happened to Tesco, which successfully operates more than 6,000 stores worldwide? On the surface, the promises of convenience and tasty, freshly prepared food sounded great, but what US customers experienced was less “Fresh and Easy” and more “Small and Strange”. In the eyes of American consumers, the stores had a limited product range (terrible for a country where the pet food aisles are often better stocked than entire supermarkets in Europe), a selection that was uniform irrespective of the neighborhood of the store (watercress salad in South Los Angeles…), unfamiliar British fare instead of the ubiquitous American brands (Marmite, seriously?), too much packaging (in a country where we want our sandwiches on sourdough, toasted on one side with non-fat mayonnaise and chopped tomato – not sliced – Dijon on the upper half, and Pepper Jack, not Swiss), and – worst of all – it made customers do their own check out!

So, it’s really the old story of standardization versus adaptation and finding the right balance between protecting the efficiencies of a proven business model and adapting it to the environment of the target market. Yes, there is a tremendous amount of change in the supermarket landscape in the US that invites new concepts and experimentation, but you certainly can’t just bomb drop an entirely new concept into a market that is as competitive as, for instance the Southern Californian. You need to get the word out, listen to consumers, and slowly educate them, instead of alienating. But then again, if the entire economics of a business model are built around a standardized approach, then the only choice a company has is simply not to enter a culturally distant market. Or leave, several years and $1.6 billion later. Even if you’re a huge company such as Tesco.