Why Culture will kill your Business

Efficiency, Flexibility and Steady Learning are the Keys to Success

Culture has a significant impact on international business and can be a powerful factor for organizational success or failure. Companies that will succeed in future are the businesses that master cross-cultural relations to ultimately leverage production possibilities and seize international opportunities. To be convinced by my claim, the first thing a reader needs to know is that the list of the fastest growing GDPs is led by India, Vietnam and China; all emerging markets. While international business means exchanging goods and services across country borders, cross-cultural skill sets will determine competitive advantages and will become the core-assets of transnational enterprises. In this essay, a reader will gain a deeper understanding of how developing a globalist mindset will help managers ace international business, by applying efficiency, flexibility and steady learning. 

Defining culture leads to the observation that it consists of specific learned heterogenous behaviors that are socially accepted, attitudes and shared values that evolved over time, which is also referred to as cultural hybridization. A culture generally consists of seven major aspects, namely of social organization, religions, customs and traditions, arts and literature, forms of government, language, and economic systems. Whether it is a religious event like ramadan, which does not allow its people to eat during a specific period of time, whether its misunderstandings due to language barriers or implemented protectionism which hinders a company to enter a certain market; culture directly impacts international business. 

Specific applications of culture on business were done by the Business Model of Intercultural Analysis (BMIA), identifying major aspects of culture that affect international business. Cultural themes, such as the impact of Confucius on the Chinese Culture, affected values as trustworthiness, endurance and a non-verbal, high context communication. Group dynamics, meaning individualism vs collectivism, the trend of glocalization, indicating a global branding strategy that applies local specialization, process engineering and time orientation, particularly monochromic vs polychromic understanding of time, all influence international business. These variables are based on Hofstede´s cultural dimensions, originally developed in a cooperation with IBM between 1967 and 1973. Today, international managers can use the culture map in order to compare two or more different cultural variables with the help of his findings.

Governmental interference shapes the domestic market in China preventing Google from entering the Chinese market through censorship. Many analysts argue that even if Google was allowed to compete in this environment, it would not succeed, due to local competitors like Baidu, which provides their users access to pirated data. The Chinese culture is a highly complex one, which is why local companies will always have a competitive advantage over foreign companies caused by cultural understanding. Accordingly, R&D can be done more efficiently to serve customer needs, while tailoring the product / service to local market standards. Nevertheless, various tools, as the PEST(LE) analysis can help foreign companies to target foreign markets with a better understanding of cultural tastes, which is generally referred to as local adaptation. 

Business Failures caused by a Lack of Cross-Cultural Understanding

In business practice, one can find endless cases, in which cultural differences where the root of organizational failure: Groupon had to dismiss over 300 employees and closed down 13 outlets in China, since the management underestimated the collective purchasing behavior of Chinese customers. In addition to this, the Groupon management set local partners under extreme pressure, offering them only 10% of the total revenue, which was perceived as an insult. If the management would have known that the Chinese culture is highly collectivistic, while businesses try to build long-lasting relationships, they would have approached the market differently. When Walmart tried to enter the South Korean market, the management did not know that Koreans prefer small packaging and tend to buy in local stores rather than visiting big discounters. As a response to this, Walmart started the “Every Day Low Prices” campaign. While this strategy is likely to work in western countries, it was doomed to fail, since Koreans associate low prices with poor quality. Another example was the cooperation of General Electric with Plessey. The joint-venture was called GPT, which failed in France, since it reminded French customers of the phrase “J´ai pété”, translated to “I´ve farted”. Toyota faced equal problems introducing their model MR2, which had great success in other countries. Although in France, saying these letters sounds like “Merde”, which means “Shit”.

All business failures above were caused by a lack of local understanding based on culture and could have been prevented by proper research about the target market, which includes a profound understanding of the customers´ preferences. Ultimately, culture affects all different variables of the marketing mix: product, price, place and promotion. With these four, a manager can understand the broad level of specialization that needs to be done in order to enter a specific foreign market.

Cultural Understanding as a Competitive Advantage

By understanding the value of culture, a reader gains the insight that culture is omnipresent and cannot be separated from international business. Furthermore, it was proven that misunderstandings and wrong assumptions can hinder businesses from entering foreign markets, i.e. from gaining a comparative advantage and reaching economies of scale, in which culture is seen as a potential non-tariff barrier. An Accenture study in 2006 found that a company’s productivity can be increased by 30% by improving cross-cultural communication skills. Most executives indicated that cross-cultural misunderstanding mostly occurred due to communication styles and language barriers, as well as varying behaviors in conflicts and decision making processes. The result of this study does not only give an exact figure on how cultural misunderstandings can decrease a company’s output, but also shows that training can drastically improve the quality of communication that can be acquired by anyone.

Various strategies present themselves in order to successfully enter a foreign market. Ben & Jerrys entered the Japanese market by entering local cooperations and strategic alliances to gain a better understanding of local business practices and customers needs, as well potential political risks. Other possibilities include exporting, licensing, franchising, contract manufacturing, joint ventures and, in the case of failure, exits, each being a different organizational reaction to the same challenge of cultural differences and uncertainty. From a marketing perspective, the approaches above represent ways to target potential customers more efficiently. While this is not a secret, many companies struggle applying these strategies. Other cases include LEGO offering “Bonus Packs” in Japan, which was a great success in the US, while Japanese customers perceived this packaging as wasteful and not appealing.

While culture can be an external factor that make businesses fail, the Society for Human Resource Management (SHRM) found that 30% of all mergers fail due to differing company cultures, making it also an important internal success factor. One example was the merger of the German Daimler and the US American Chrysler, in which the German culture became too dominant so that the employee satisfaction in Chrysler dropped immediately. In order to prevent this unfavorable outcome, common company cultures have to be created, so that cultural diverse teams can work together while implementing the same values

Although cultural differences are significant, still some research indicated that globalization is a strategy that can work. Yet, the complexity and risks by entering new markets and the potential misunderstands strengthens the conclusion that a pure globalization often times does not succeed, being the source of the concept of glocalization, in which a global branding strategy is adjusted to local preferences. 

Why certain Managers are doomed to Fail in International Business

Concluding, local initiatives and the right decision making processes can be the key to success in international business. Managers have to comply to global standards while local specialization often times is needed to meet local needs. While earlier research indicated that entering markets with relatively similar characteristics reduce the risk of failure more recent insights show that flexibility is key. Managers who do not understand other cultural variables are doomed to fail in an international environment. Current trends of an expanding world population will further emphasize the need for cross-cultural communication, being cause and effect of cultural variables at the same time. Technological innovations as social media will boost this trend by reducing the needed time to spread news. This goes hand in hand with earlier results, which indicated that innovation has always formed culture. Today, relationships can be started online, reducing the perceived barriers between countries and even continents. Companies facing these international markets, formed by an online purchasing behavior have to develop special strategies to attract potential customers of Generation X & Y, as the major part of communication is being observed to be online. Without understanding the value of culture and the various fields it affects, international businesses are doomed to fail expanding internationally and cross-culturally.