#103 A tale of two companies in China – Hermes and McDonald’s
Most 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.
November 7, 2014 @ 11:20 am
This example points out that is essential for companies to deal with cultural differences. Nowadays, it is not enough to be ‘foreign’ and ‘American’. These companies have reacted in the right way towards processing in the Chinese market. Now I am going to analyse this situations with Hofstede’s dimensions. Furthermore, I would like to compare France and China in terms of Hermes and USA and China in terms of McDonalds.
Firstly, let us start with France and China (Hermes Int. & Shang Xia).
Power Distance: France 68 & China 80
Individualism: France 71 & China 20
Masculinity: France 43 and China 66
Uncertainty Avoidance: France 86 and China 30
Due to the fact, that Chinese people are very collectivistic Hermes was very brave to enter the Chinese market. They are selling luxury goods such as jewellery, watches, accessories, clothes, and many more with no Chinese background. These goods are more interesting for individualistic cultures such as France or USA. But now they have adapted their product and promotion in the Chinese market.
As we can see entering the market has not worked for them and they decided to build their own local brand in China with tailor-made Chinese products such as Chinese clothes, tea ware, home ware; that are things which are products for collectivistic countries. Due to the high Power Distance and Masculinity the exclusivity of the products and the Chinese background of the products will catch on and gain higher market share. In addition to this I am wondering, because the Chinese and France cultures are very different and as a result of this Hermes should have proceeded the market from the beginning like this. Maybe the higher Power Distance in France explains the lack of creativity in entering this market and also the high Uncertainty Avoidance can be crucial for the lack of Innovation. But finally they made it and we will see how the new strategy will arrive in China. To summarize, this case points out the necessity of adapting strategies for entering foreign markets with high cultural differences.
Secondly, I would like to compare USA and China (McDonalds).
Power Distance: USA 40 & China 80
Individualism: USA 91 & China 20
Masculinity: USA 62 and China 66
Uncertainty Avoidance: USA 46 and China 30
McDonalds and also other fast food chains are very creative and innovative in proceeding in foreign markets. The high Individualism and low Uncertainty Avoidance highlights reasons for that. They are more willing to take risk in entering foreign markets and therefore they also consider the circumstance, in this case in China. They made a step forward in deciding to offer local products in China. Now McDonald’s product range in China is very different to the US market. Despite they wanted to have the same product range and quality worldwide they decided to adapt the products in China, for instance they offer rice dishes or duck meat. Certainly reasons for that will be gaining market share and especially being competitive in local markets. Otherwise, the low Power Distance and low Uncertainty Avoidance led to this decisions.
There are also different strategies in communicating with China and its High Collectivistic culture. They decided to focus on long-lasting relationships and family. Not anymore food and its quality is in the background.
To conclude, I think there great differences in doing business in China, USA and France. Nowadays circumstance such as globalisation means to do business in foreign markets with focusing on the culture; the different results regarding Hofstede’s dimensions will help in that case. In addition to this, global companies should concentrate on cultural strategy instead of raising profit or market share. Finally, I would like to end with a quote of an antique Greek philosopher, Plat:
“A good decision is based on knowledge and not on numbers.”
Sources:
http://geert-hofstede.com/united-states.html
http://geert-hofstede.com/china.html
http://geert-hofstede.com/france.html
November 8, 2014 @ 3:01 pm
I think Hermes did a pretty good job in developing Shang Xia. They were aware of the Chinese culture and its specialities. They also included the Asian style in their new brand and formed the products to meet that style.
Mc Donalds on the contrary did not consider the cultural differences and therefore experienced rapid declines in China.
In order to build up a successful brand for another country it is important to know the cultural differences. In my post I want to explain that with the Individualism-Collectivism approach, which is one of the five cultural dimensions in Hofstede’s framework to understand cross-cultural differences.
People in high individualistic countries want to be seen as individuals and want to stand out of the crowd. Therefore, they want to have products designed “just for them”. For that reason companies have to offer a wide range of different product, in different colours, with different quality and different features. I think that is why Nike’s campaign Nike ID, where you can design your own shoe is working so well in high individualistic countries.
In contrast in more collectivistic countries like China people want to be seen as a group. Therefore, they want to use similar products and wear similar clothes as the other group members, because they do not want to stand out of the group. This behaviour has to be regarded when setting up a marketing plan for these countries and that is the reason why companies should not offer too many different versions of their products in high collectivistic countries. Moreover, companies have to communicate other values than in high individualistic countries.
I think Hermes did a great job with Shang Xia in China as they offer not too much different versions of the products. They also adapted the design of their products to the Asian style so that the products do not stand out of the Asian market.
November 17, 2014 @ 11:14 pm
The ongoing failure of the Americans and the unusual action of the proud and patriotic French!
America is no longer seen as a role model when it comes to market expansion. Indeed America once had a reputation of taking over all countries and to westernize the world. Nevertheless, the Chinese market and their confidence has grown over the last years dramatically. Now the West is the ‘outsider’ while the East is on its best way to become the new leader in style, food, clothes and much more. The American rest on their laurels and miss significant cultural differences to respect.
Asia has a strong history in its culture which still remains today when doing business. Especially China is high in power distance. Decision making is centralized in the hands of one dominant family member and most businesses are family-owned. However, this is just one detail of all management styles, philosophies and problems which obviously differ the East from the West.
All in all, ignorance of cultural differences only lead to failures and unfortunately America / Mc Donald’s is the new role model of failure now. When designing their marketing strategies, they may have not considered the fact that the Chinese culture is high in collectivism while the U.S are highly individualistic and short-term oriented. It is essential to adapt marketing strategies on cultural attitudes and the target group’s needs.
I am really impressed by the step Hermes, the French, took. Hermes is a world known brand which was built up with hard work over decades and truly has a good reputation overall. It stands for prestige and luxury. However, it surprises that this exotic brand has cultural issues to deal with. What I try to say is that nothing more is authentic than a fashion brand from France; a country that is known as land of fashion.
However, the French culture has more in common with Asia than with the U.S. Like China, also France is higher in collectivism and long-term oriented. Moreover, they both have a larger power distance with a weak uncertainty avoidance.
The similarity of these cultures may be a reason why Hermes has been sensitive. Hermes shows respect to cultural aspects and waives its history to create a brand which is clearly tailored to the Asian market and to the target group’s needs. That is courageous!
November 22, 2014 @ 11:28 am
As you can see from this example it is crucial for international brands to consider cultural differences. Countries all over the world differ in their lifestyles, values, traditions, governments and many other fields. In my opinion Hofstede’s four dimensions (power distance, individualism, masculinity and uncertainty avoidance) show the main differences between countries. As you can see on http://geert-hofstede.com/china.html in China these looks like the following: power distance: 80, individualism: 20, masculinity: 66 and uncertainty avoidance: 30. When you compare these dimensions to those from other countries, it is clear to see that as an international brand you have to create different strategies for different countries.
In my opinion, Hermes made the right decision to create a tailor-made new brand (Shang Xia) for China. They considered the cultural differences and formed their products to the Chinese values. As you can see from the Hofstede’s dimension power distance, success, achievements in life and completion is very important for the Chinese. In this case the Chines like to spend money for prestige products.
Furthermore the low score of individualism (20) shows that the Chinese people do not want to stand out from the crowd. They want to be a part of the whole group. In more collectivistic countries like China, they don’t want products, which are made “just for them”, they prefer for examples clothes, which look similar to the clothes from their fellows. Because of this reason, Hermes made the right choice to adapt their products and create a new own brand for the Chinese market.
Primarily McDonald’s want to sell the same products all over the world, but they soon recognized that this strategy will not success. Nowadays McDonald’s do offer different product ranges in different countries. For example in China they still offer their standard products, but do adapt them with cultural specific products, like for example rise dishes and duck meat. Further in India for example, they offer, additionally to their standard products, dishes with curry and typical Indian spices and ingredients. This cultural specific market strategies, do definitely promise success.
To sum up this post, in order to implement a brand in a country successfully, it is essential to consider the cultural differences of each culture. Therefore international companies and brands should create specific cultural strategies.
November 30, 2014 @ 10:01 pm
As it is mentioned in the blog post above, western brands have to understand, that they will not continue to harvest the benefits of China’s affluence forever. The high demand for foreign brands will eventually cease. This is going hand in hand with ever more dicerning chinese consumers. When entering the chinese market, this changes as well as cultural differences have to be noticed.
Hermes did business totally right, when putting a new twist on selling upscale brands. Instead of marketing western luxury products to Chinese, they market Chinese products to western consumers. „Luxury goods made in China“ may sounds contriversal. China has still to deal with image problems after years of mass-market, low-end production and scandals over poor quality. Despite that, in the past Chinese business leaders started reviving and marketing their centuries of know-how in an effort to create a new generation of luxury brands. So Hermes did, when launching Shang Xia.
Shang Xia represents a new approach by a European luxury company to breathe life into the once-heady Chinese luxury-goods market and ist chinese crafts (especially porcelain, cashmere felt and furniture) that were nearly destroyed by China’s cultural revolution. Hermes is trying to make the brake through into the crowded European luxury goods market.
Hermès has given Shang Xia creative freedom and the necessary time to build the brand in a sound, consistent way. While expanding in China, they were building ist legitimacy and status abroad with a careful step-by-step approach. Hermes tested European’s appetite for its young chinese brand, when opening it’s first shop in Paris nearly from a Hermes boutique, to test demand among non-Chinese customers for its handcrafted products. They are expecting this would help lifting its profile among European buyers, as well as the legions of Chinese tourists. This act can be seen as a key link in the brand’s development and coverage before extending the market strategy.
In my point of view Hermes did a pretty good job. First of all they became aware of changing market conditions in China and started backing the growth potential of Chinese labels. Furthermore, they were spending a lot of time for research and building up the brand. So they did it the right way when processing in Chinese markets. While Hermes is willing to adapt its China strategy concerning market situation and intercultural aspects, Mc Donalds is despite of experiencing rapid declines still following its initial strategy. Mc Donalds as well as other Western brands should follow this example.
November 13, 2015 @ 11:30 am
From my point of view, McDonald’s as well as Hermes illustrate very clearly, how crucial it is to adapt to cultural differences in order to succeed in tapping into a new market. In this case, Hermes obviously serves as a role model, whereas McDonald’s unfortunately seems to have missed the boat.
To start with, French are used to clear plans and structure so as to avoid running a risk, what relates to their high uncertainty avoidance. This might have led to some thorough market research, which exposed that it is no longer enough for the Chinese market to be “foreign” and that Chinese people prefer local brands. Therefore, they developed an all-new, local brand for China called “Shang Xia“. Furthermore, the individualistic French, who strive for innovations and being conspicuous, found out that they had to adjust their products to the collectivistic Chinese, who want to be seen as part of the group and absolutely do not want to stand out of the crowd. Additionally, the Hermes products designed for the feminine society in France needed to be accommodated to the more masculine society in China, whereas those responsible at Hermes already had a feeling for the Chinese affection for luxury products relating to the power distance index.
To sum up, one could say that Hermes was really brave to enter a collectivist country with status symbols, e.g. accessories, and was, due to diligent market research, actually prosperous.
On the other hand, McDonald’s should have really taken adaptation to the Chinese culture into account, especially because of great differences in power distance and individualism. Americans rank extremely high in individualism and rather low in power distance. As opposed to this, the Chinese rank low in individualism and high in power distance, what distinctly shows the demand for action, when entering the Chinese market. As mentioned in blog #108, it is uncommon for the first company to overcome cultural hurdles and therefore McDonald’s opened the door for competitors. It invested time and resources in “creating” love for fast food within the Chinese population and now companies like Xiabu Xiabu reap the benefits and, in addition, cater better to local taste just because McDonald’s might have acted all too fast. This might have resulted out of low uncertainty avoidance and the American trial-and-error mentality. But apart from that, the low power distance in America could have led to a long duration of planning and deciding, when merely each employee’s opinion is considered.
All in all it can be stated that adjustment to varied cultures should never be left out when tapping into a new market, particularly if the country differs (highly) from the home market’s culture and the dimensions of Hofstede can furnish an extremely helpful approach to this issue.
November 26, 2015 @ 4:02 pm
First of all I think it´s very interesting that western brands such as Hermes or McDonalds start to fail in China, as I have never come across this fact before. Hermes, as a big luxury brand in our society has the benefit of being known as an “institution“. Here, in our western society, they stand for luxury, quality and status. They are even used in popular Hollywood productions like „the devil wears prada“ because they are so well known and stand for the attributes mentioned above.
I knew that western luxury brand have been very successful in China, and I think it´s very interesting that China is now, because oft he mentioned slower growth in the luxury segment, no longer seen as just a big market that loves western lifestyle. The Chinese culture and economy, as every culture, is a developing one. As they get more modern (in our definition of the term) and young people have a self-determined lifestyle, it´s time for companies like Hermes or McDonalds to rethink the whole concept of China as a market. In my opinion, it´s very clever of Hermes to work on a new luxury brand as the segment is still growing. 2% in China are still way more than 2% in one of our small European countries. They will be one of the first ones to do this I guess, and gain the advantage of experience by doing so. I expect Shang Xia to be a very successful luxury brand, and I guess Hermes does too, otherwise they wouldn’t be investing so many years.
As I´m thinking about this, it came to my mind that Hermes and McDonalds won´t be the only ones thinking about new brand-strategies for the Chinese market, and there will be exciting new strategies to observe.
Looking at Hofstedes Dimensions for China (http://geert-hofstede.com/china.html) I think it´s interesting that luxury brands even have a history of success in China. China is very low on the Individualism and Indulgence ratings – In my opinion, this are indicators that luxury items shouldn´t be valued that much. If a Chinese person doesn´t think very Individualistic, why should they strive for luxury, which is after all just a prestigious item for the individual? The same applies to Indulgence. “People with this orientation have the perception that their actions are restrained by social norms and feel that indulging themselves is somewhat wrong.“ (http://geert-hofstede.com/china.html) In my opinion, this doesn´t fit with the success of luxury brands.