Cultural distance in international Business

Cultural distance in international Business

 

Table of Contents

Introduction. 3

Part 1. 3

Role of cultural distance. 3

Part 2. 6

Home Depot failure in China. 6

Recommendations. 8

Conclusion. 8

 

 

 

 

Introduction

The expansion into the international markets becomes inevitable when a business organization dominates its local market. The process of internationalization is based on a lot of risks. Culture is one of the major sources of risk for international businesses (Park, Han & Joon, 2018). Few businesses have failed in their new markets besides having immense successes in their home countries due to factors related to culture. For instance, companies that deal with foodstuffs may find it difficult to break into new markets because different foods are related to different cultures.

In some cases, a business organization may offer products that are contrary to the country’s cultural values in question. The company is then faced with promoting the product and the practices that are associated with its use. Another consideration is that culture influences communication between a business organization and its potential customers (Park, Han & Joon, 2018). Many organizations have been caught in reputation-damaging controversies due to misunderstandings of the cultures that they are operating in. In some cases, organizations may put up offensive advertising campaigns in the quest of capturing the attention of their targeted markets. Understanding the culture of a people also enables business organizations to design their products in ways that are relatable to the given culture.

The following discussion examines the role that cultural distance plays in the international business scene. In the discussion, different risks that emerge from a cultural distance are discussed. The discussion also presents a business organization that failed in the international business scene due to cultural distance. Strategies that can also help businesses to navigate the cultural distance risks are also discussed.

Part 1

Role of cultural distance

Experts have defined cultural distance as the differences in the characteristics and practices of different cultural groups (Pesch & Bouncken, 2017). Different groups of people living near each other are known to develop similar cultural practices that are likely to influence the decisions of businesses that operate in that particular culture.

Cultural distance plays a major role in international BusinessBusiness. One of the roles that cultural distance plays is that it helps establish human resource policies (Pesch & Bouncken, 2017). Different cultures have a different views on organizational power structures. Some societies have a high-power distance index where there is proper recognition of the organizational structures in place and the people that have been put in place (Pesch & Bouncken, 2017). There is a low power distance index in other cultures whereby the people in the culture may not have high regard for the organizational structures in place. Different leadership styles are required in different cultures. Organizations must therefore come up with ways to ensure that the human resource and the leadership decisions fit the organization’s cultures. One of the strategies that organizations have used has been choosing leaders from those cultures and giving them a degree of autonomy since they understand the cultures better. However, the organization has to find a balance whereby the leadership styles and practices adapted have to be in line with the organization’s code of ethics.

Cultural distance also plays a role when negotiating with international partners to help a business organization get into a particular market (Beugelsdijk et al., 2017). Different cultures have different approaches to negotiations which in turn affects how businesses from those cultures view negotiations. In some cultures, negotiations are a matter of a win-lose situation, while in others, a win-win situation in negotiation is highly regarded (Beugelsdijk et al., 2017). Understanding the cultural approach to negotiations can help a business prepare adequately when engaging businesses from particular cultures. For instance, when a culture values a win-win situation, a business organization can look for areas where both parties will gain and work on maximizing those areas in their agreements (Beugelsdijk et al., 2017). In cultures where business organizations view negotiations as a win-lose situation, an organization can develop a strategy that will enable their negotiating partners to feel that they have won without losing much in the process.

The degree of formality varies from culture to culture. In some cultures, businesses are carried out informal settings with a lot of bureaucracy being followed (Quer, Claver & Rienda, 2012). People may prefer working with partners in other cultures that they have established relationships, even in informal settings. Without understanding the degree of formality valued by a given culture, a business organization may risk being misunderstood. For instance, in cultures where there is a high degree of formality, a business may come out as not being serious if they approach negotiations and other kinds of meetings with informality (Quer, Claver & Rienda, 2012). There is also a risk of a business coming out as pretentious when they involve a lot of formality in cultures where relationships are valued first before establishing a business relationship. Understanding this aspect of culture may be essential, especially where the business organization targets other businesses as their main customers. Knowing how to appeal to a customer plays a major role in acquiring the customers.

Communication is another major aspect of cultural distance. Communication determines how an organization relates to its new market (Twose, 2019). Due to the aspect of communication, among other factors, an organization has shown preference to the other types of distances such as economic and geographical distances compared to cultural distances. Communication determines how an organization markets its products in the new culture. Lack of proper understanding of the culture may result in organizations spending money on adverts and other forms of marketing campaigns without ever connecting with the people of the cultures. Some cultures are more explicit compared to others (Twose, 2019). Understanding the culture also helps organizations to avoid reputation-damaging controversies whereby they use terms in the language that are offensive in the culture. Organizations such as coca-cola have found themselves in such controversies whereby they used terms in the language of the targeted audiences that have different meanings than what they had intended. Making a product resonate with the people of a culture depends on how an organization can use the language of the culture to communicate its value to the people of the culture. Communication may also play a part in terms of partners. Lack of proper communication within an organization due to language barriers may hinder the maximization of performance in the chosen market.

Different cultures also have a preference for different products. In some cases, an organization’s product may have a cultural significance in the culture of the local people. Such products are referred to as cultural products (Qin, Wang & Ramburuth, 2017). Companies competing against cultural products are likely to experience a disadvantage. In contrast, those dealing with cultural products are more likely to be more successful in the cultures that use their products. Cultural products may include clothes that are popular in a given culture or food preferred in that culture. Understanding the culture of a given market can help an organization adapt its products to the preference of the culture (Qin, Wang & Ramburuth, 2017). The organization has met resistance while trying to get into markets due to a lack of their products to appeal to the local cultures. One of the companies that experienced this kind of failure includes Kellogg’s when it first tried to get into Indian. The company’s products included those that had immense success in the American and European cultures. Due to their immense success in their current markets, Kellogg’s failed to adapt their products to fit the local culture, which results in a lot of failure in their first attempt in 1994. When the company adjusted its products to fit the local Indian cultures, it successfully reentered the market in1996. This shows how cultural understanding can go a long way in enhancing the success of a product.

The cultural distance can also lead to discrimination of products by the local constituents. It is not uncommon for a player in a given culture, such as leaders, to encourage the constituents of their culture to buy from their own (Qin, Wang & Ramburuth, 2017). For instance, some sections of American politicians had initiated campaigns encouraging Americans to buy only American products. Such campaigns are likely to disadvantage other international organizations that are looking to get into the given market. Organizations may adopt different strategies such as looking for local partners to avoid discrimination by the people of the given culture. Proper communication of value by an organization looking to enter into the new culture can also ensure that the organization counters the discrimination. When an organization can show people what value to be gained by choosing their product, they might forego their local products to gain the said advantages.

Different cultures also have different approaches towards BusinessBusiness, which informs the likely social policies of the country. For instance, in some cultures, such as the Scandinavian culture, social equality is one of the major considerations in their approach to Business (Twose, 2019). This may affect how people feel that a business should treat them. In such cultures, the BusinessBusiness must endeavor to treat all the people equally to appeal to the people of the culture. A business organization must also try to balance the gender roles in the company so that a particular gender does not feel discriminated against in the organization.

In contrast, other cultures, such as Japanese cultures, value the recognition of status. In such cultures, the people hold their leaders in high regard, and people in leadership positions may expect to be treated differently from the other workers in the organization. An organization has to take into consideration such factors when making policies regarding the organization. In some cases, organizations tend to make policies in their head offices and expect them to be implemented in all their subsidiaries without understanding the context that some local subsidiaries have to deal with.

Experts also argue that cultural distance can affect the performance of an organization in general (Beugelsdijk et al., 2017). This is because many complexes have to be dealt with in the cases where the market being considered is culturally distant from the culture of the market that the business organization is operating in. A lot of investment has to be made in the quest to understand the local culture (Beugelsdijk et al., 2017). This may involve hiring experts and learning local intricacies, which can be time-consuming. The risks that emerge from a cultural distance are also a major source of concern for many organizations. It is difficult to determine whether an organization understands a foreign culture to get into its market or not.

In some cases, an organization is introducing a new product into the market, and it is difficult to determine how the people in the local culture are likely to react to the product. Therefore, the uncertainties related to cultural distance can result in more risks and costs compared to the benefits to be gained from entering the market (Twose, 2019). Experts have examined different kinds of distances, such as economic, geographical, and economic distances. They have established that organizations may have a higher chance of survival and performance with the other kind of distances than cultural distances. For instance, organizations may prefer the costs associated with geographical distances such as travel expenses to cultural distance costs such as learning the language and the cultures’ preference without any form of assurance that proper understanding of the culture has been achieved.

Culture also influences the formation of institutions in a given country. On the other hand, an institution has an impact on the effectiveness with which a business organization carries its activities in the culture (Hutzschenreute,  Voll & Verbeke, 2011). For instance, in cultures where laws are highly respected both by the people and the government, there is more fairness in doing BusinessBusiness. On the other hand, when the legal institutions in national culture are not strong enough, a business organization may face unfair business practices such as counterfeiting of their products without the hope of getting justice when they seek legal protection. The institutions in a country may also determine the regulatory policies in the country, which in turn have an impact on the Business (Hutzschenreute,  Voll & Verbeke, 2011). Political stability is also dependent on the institutions that have been established in the culture and their effectiveness. Therefore, culture may also impact another type of risk that a business may have to face.

In some cases, cultural values in a given population may impact the tendency of people within that culture to engage in violence. For instance, in many religions, which are components of culture, peace is encouraged, and this may help reduce instances of political instability since everybody is in pursuit of peace. This provides a suitable environment where a business organization can establish its operations.

Part 2

Home Depot failure in China

One of the companies that have experienced failure due to cultural distance is Home depot in the Chinese market. Home depot was established in 1978, and it has grown to become one of the top retailers in home improvement facilities in the world (Gao, 2013). Home depot is the fourth largest retailer of home improvement equipment in the United States of America and the largest in the world. The company entered the Chinese market in 2006 but closed all its stores by 2012. Cultural differences between the American people and the Chinese people have been cited as the main reason why the company failed.

During its entry into the Chinese market, the company bought twelve stores from local retailers. The company had operated successfully in the American suburbs, where it helps the middle class of the country to improve their home. The company’s model is doing it yourself where their clients carry out the work of improving their homes with the improvement materials provided by the company (Gao, 2013). The company has large big-box stores all around the countries that it operates in. The main consumers targeted by the company are the middle class, who may view home improvement activities as hobbies in their free time. Due to its success with the American middle class, it saw an opportunity with the growing Chinese middle class. The company estimated that the preferences of the Chinese middle class would mirror the American one, such as carrying out home improvement activities for leisure (Gao, 2013). The company did not do enough research regarding the Chinese market to spot some of the potential differences that may exist between the two cultures.

One of the cultural differences between American and Chinese cultures is the level of individualism in the cultures. American culture is more individualistic, whereby individuals try to be independent of the social groups around them as possible (Zheng, 2017). This individualistic characteristic has an impact on the consumption choices of the people in the culture. For instance, the American people are more likely to accept self-developed equipment since they are unique and helps to set them apart from the rest of the group (Burkitt, 2012). On the other hand, the Chinese culture is more dependent on the whole group with a low level of individualism. The group dependence tends to make the Chinese people prefer products that the whole group has approved. Individualistic behavior, such as developing one’s product for use, is counter to the characteristic of the culture (Zheng, 2017). Therefore, the model of the company did not take into consideration this cultural difference. The company went ahead and established the home improvement model that had it had used with the American culture. However, the do-it-yourself model did not resonate with the Chinese middle-class besides the population exhibiting some similarities with the American middle class, especially economically.

The company also failed to observe that besides the seemingly similar economic situation, the American middle class had a higher purchasing power than the Chinese middle class (Verardi, 2017). The company failed to adapt its products to fit the local conditions in the country. The standardization of both the products and the product’s price across all cultures has been a major source of failure for multinational organizations across the world. Chinese middle class prefers cheaper commodities than their American counterparts, and hence selling the products for both cultures is likely to cause failure. Other organizations such as IKEA had recognized this fact. They had already adapted their products to the country’s culture and the Chinese’s purchasing capability. This gave IKEA a competitive advantage against other multinational corporations entering the Chinese market, such as Home Depot.

Another difference in the cultures that Home Depot failed to consider was that, unlike American culture, the Chinese culture had many subcultures with different consumption needs (Bhasin, 2012). The uniformity in the American culture makes it possible for businesses to establish uniform business models since ninety-five percent of the country’s population are likely to have the same needs. However, there are variations in needs with the Chinese culture. For instance, the southern part of China prefers marble due to the climatic conditions in the area. In contrast, those in the northern part of the country buy a lot of carpeting and wooden flooring material since the country’s conditions create the need for such material. The uniform treatment of the market for Home Depot was another major source of failure for the organization.

The institutional factor in the Chinese culture also played a part in the company’s failure (Bhasin, 2012). Unlike the American business environment, whereby there are clear business rules, the Chinese market presents a blind spot for Home Depot. Many organizations that want to open subsidiaries in the country have to establish a good relationship with various officials in the country to operate safely. The business rules in the country are more prone to changes, and the officials in charge can influence them to the disadvantage of business organizations that have not created a good relationship with them.

Recommendations

One of the recommendations for a business that is looking to go international is that they should study the culture of their target markets to understand it correctly. After understanding the cultural differences between the current market and the target market, an organization should adapt its products to fit into the new market (Zheng, 2017). This may include coming up with the necessary adjustments in the product to meet the needs of the targeted audience. For instance, a business organization that deals with food can develop a new recipe that adapts its products to the eating culture of its target market. The organization’s adaptation to its target culture should also happen with the business model of the BusinessBusiness—different cultures in the world call for different business models. For instance, in the American and most western cultures, uniformity of products can be adopted in the business model since it’s cheaper to produce uniform products. The needs of most of the people in the culture are uniform. However, in Asian cultures, business organizations may need to constantly adjust their business models to respond to different cultures’ subcultures.

Another recommendation for an organization is to study how to communicate with the people in their target market effectively (Twose, 2019). This may involve learning their languages and various intricacies in the way they communicate. This helps the company not only to be able to be more relatable to the people and communicate its value to the people within the culture but also to avoid controversies that may come from misinterpreting the language of the target audience. This helps to grow the organization’s brand in the culture and reduces reputational damage in the culture.

Organizations can also utilize cultural diversity that is associated with cultural distances for their advantage. It has been shown that diversity within an organization help in the general performance of an organization (Chua, Roth & Lemoine, 2015). Organizations that encourage different points of view within their premises are likely to have a more diverse decision-making process, which is likely to improve the quality of decisions made by the organization. Differences in culture are among the main sources of the diversity of thought in business organizations that are willing to embrace the concept. Therefore, business organizations can use cultural differences due to enhance diversity and therefore improve their performance.

Conclusion

Cultural distance refers to the differences in the cultural characteristics of different groups of people. Cultural distance impacts the process of establishing a business subsidiary in the new market. For instance, a business seeking expansion must learn the language of its new market to communicate effectively. Cultural distances may also impact the way negotiations are held since different cultures approach negotiations in different ways. The cultures also may play a role in the consumer tendencies since people may prefer cultural products or products that have been made in the locality. One of the organizations that failed due to cultural distance is Home Depot in China. The organization’s business model failed to address the cultural needs of the country, adopting the business model that had worked in the USA. Proper understanding of culture helps an organization to communicate effectively with the culture and avoid controversies. Diversity is also established due to cultural differences.

 

 

 

References‌

Beugelsdijk, S., Kostova, T., Kunst, V.E., Spadafora, E. and van Essen, M. (2017). Cultural Distance and Firm Internationalization: A Meta-Analytical Review and Theoretical Implications. Journal of Management, [online] 44(1), pp.89–130. Available at: https://journals.sagepub.com/doi/full/10.1177/0149206317729027 [Accessed 18 May 2021].

Beugelsdijk, S., Kostova, T., Kunst, V.E., Spadafora, E. and Van Essen, M., 2018. Cultural distance and firm internationalization: A meta-analytical review and theoretical implications. Journal of Management, 44(1), pp.89-130.

Bhasin, K., 2012. Why IKEA took China by storm, while home depot failed miserably. Retrieved on November 3, p.2014.

Burkitt, L., 2012. Home Depot Learns Chinese Prefer Do-It-for-Me. The Wall Street Journal.

Chua, R.Y., Roth, Y. and Lemoine, J.F., 2015. The impact of culture on creativity: How cultural tightness and cultural distance affect global innovation crowdsourcing work. Administrative Science Quarterly, 60(2), pp.189-227.

Gao, M.H. (2013). Culture Determines Business Models: Analyzing Home Depot’s Failure Case in China for International Retailers from a Communication Perspective. Thunderbird International Business Review, [online] 55(2), pp.173–191. Available at: https://digitalcommons.kennesaw.edu/cgi/viewcontent.cgi?article=3669&context=facpubs.

Hutzschenreuter, T., Voll, J.C. and Verbeke, A., 2011. The impact of added cultural distance and cultural diversity on international expansion patterns: A Penrosean perspective. Journal of Management Studies, 48(2), pp.305-329.

Park, H., Han, K. and Joon, W., 2018. The impact of cultural distance on the performance of foreign subsidiaries: evidence from the Korean market. Organizations and Markets in Emerging Economies, 9(1), pp.123-134.

Pesch, R. and Bouncken, R.B., 2017. The double-edged sword of cultural distance in international alliances. Cross-Cultural & Strategic Management.

Qin, C., Wang, Y. and Ramburuth, P., 2017. The impact of knowledge transfer on MNC subsidiary performance: does cultural distance matter?. Knowledge Management Research & Practice, 15(1), pp.78-89.

Quer, D., Claver, E. and Rienda, L., 2012. Political risk, cultural distance, and outward foreign direct investment: Empirical evidence from large Chinese firms. Asia Pacific Journal of Management, 29(4), pp.1089-1104.

Twose, R. (2019). How does culture affect international BusinessBusiness? | Language Insight. [online] Language Insight. Available at: https://www.languageinsight.com/blog/2019/how-does-culture-affect-international-business/ [Accessed 18 May 2021].

Verardi, V., 2017. The importance of cross-cultural management: IKEA’s success and home depot’s failure in China.

Zheng, S., 2017. The Failure of Home Depot in China-A Case Study. Business and Management Studies, 3(4), pp.54-58.

 

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