Globalization has ensured that international borders are heavily relaxed so large and profitable domestic firms from one nation can pursue business interests in other nations without compromising domestic business interests. Several large multinational firms conduct business in several nations and this has become normality in today’s world. It should be noted that large market share of the respective market and large profits are usually strong motives for large firms to pursue business in other nations.
Culture is a complex, multidimensional concept that is crucial to conducting global business. It is a learned, shared, interrelated set of principals that bind members of a certain society. These principals, beliefs, symbols and so on are often embedded into the fibre of that area and amongst certain people, so you could suggest that business must be pragmatic and adopt a polycentric approach in order to fit in as opposed to trying to dictate or impose itself on that culture, especially during the preliminaries of entering a new market. Regardless of firm size, experience, or product or service, cultural implications have a huge impact on longevity and reception to a new brand and failure to understand will almost certainly lead to an exit.
TESCO is the largest supermarket in the UK and they had to pull out of the US market due to “disappointing” performance levels. From 2007 to 2013 TESCO had operated under the brand name of Fresh & Easy. They decided to close some 199 stores across the US. This was also the case for Wal Mart, whose attempts to penetrate the German market ended woefully back in 2006. No matter the size of the firm, or profit levels, a concise and accurate understanding of the cultural differences of the market one wishes to enter is fundamental when conducting global business. TESCO and Wal Mart’s failure to recognise this has led to their respective exits.
Wal Mart is the largest supermarket in the US, when they wanted to expand into the UK they acquired the well-established firm ASDA. ASDA is still one of the largest supermarkets in the UK and business has been a moderate success. However, Wal Mart’s attempts to enter the German market proved that their myopic and frankly arrogant approach demonstrates that large profits in one market do not always translate to another market. Despite huge levels of revenue and profit, global business cannot function if one domestic firm tries to impose its values onto another culture. It is simply not compatible. Even though Wal Mart has stores in Argentina, Brazil, Mexico, China, Japan, Canada and Puerto Rico, their failure to break into the Europe’s largest economy will have damaged morale amongst senior members of their board.
Acquisitions provide several benefits and the ASDA case proves this, but When Wal Mart tried the same approach in Germany it impeded rather than aided their business. They purchased two second-tier stores, Interspar and Wertkauf. Both of these stores were mainly located in poorer areas and were geographically dispersed, it made business far from easy.
They arrived in Germany in 1997 and established firms such as Lidl, Metro and Aldi already posed a threat, but their board members assumed that their high profits would be sufficient and they could simply expand and take their competitors market share, consumers were loyal to their competitors however. They also tried to import many American traits into the German market and it was not understood. An example of this was 24/7 and Sunday shopping, although ASDA was the first to adopt the 24/7 model, culturally, the UK and the US are extremely similar, so the UK’s acceptance of this came as no surprise, in Germany however it was not the case. It was tremendously unpopular and highlighted a waste in resources.
Culturally German consumers prefer to bag their own goods, a simple study of behavioural traits prior to entering the market would have identified this, but their insistence on bagging their customer’s goods had an adverse effect, often putting people off their stores. Also, when Wal Mart managers insisted that their staff should smile at the customer again this put off many customers. And again, simple preliminary market research would have alerted them to this. According to Peng (2009) they left the German market with just 2% of the overall market share.
Wal Mart also hired an American to head their operations in Germany. Speaking English was a requirement and it damaged morale amongst senior members of the workforce. Productivity suffered as a direct result of the low morale.
Blockbuster Videos also ventured to foreign markets, they entered the Japanese market in the early 1990s and hired several Japanese senior managers to oversee the transition of the new venture. This enabled business to be cohesive and allowed their American counterparts to learn about the new market, Wal Mart’s approach was clearly wrong, one of several mistakes they made and highlights the need for a true understanding of cultural differences.
Despite having monopoly power in the UK TESCO could not gain any significant market share in the largest single market in the world.
According to BBC, Ajay Bhalla, professor of global innovation management at Cass Business School, said that at the root of Tesco’s US problems was a failure to understand that the US retail landscape is different from the UK’s.
“The falling star of Tesco in the US is a harsh reminder that scale [economies of scale] is not the recipe for sustainable value creation. For years, Tesco managers paid attention to perfecting the mix of supplier driven cost efficiencies with low prices.
Tesco’s exit from the US is a reminder for managers of the dangers of going blindly for scale and cost leaders, the wheels of which are difficult to reverse if you need to change course to becoming a retailer known for first-class customer experience.”
Understanding and appreciating cultural differences is critical to conducting global business. Without a sound understanding of the new market any firm, regardless of size, product or experience will find it almost impossible to conduct business in that market, hence knowing how deal with potential cultural barriers will alleviate several problems and ensure business can go on.
7 thoughts on “Understanding cultural differences is critical to global business.”
I could not agree more with this article. When you want to expand to another country, you should always study the local culture and then decide whether your expansion is even feasible. Let’s take the bright idea of opening Taco Bell in Mexico. Seriously? And it did happen a few years ago. Not a successful scheme. Watch the link:
Another great example was the original Disney venture in Paris. Without local talent to lead, the financial woes of the company were large and unexpected. French managers who understood Europeans, and even the name of the park had to be changed from EuroDisney to Disneyland Paris. Just watch this link:
Click to access Euro%20Disney.pdf
Hi Monica. Great comment, I heard about Disneyland Paris and it just goes to show how important it is to understand the market you are trying to penetrate.
Can u tell me the reference of text? I want to use in essay but it is hard to find….
You can reference “The Conscience Blog” as I researched everything written down myself. My full name is Iyobosa Igbinoba.
Just out interest, what is your essay about? Thanks.
hey, i’m currently writing a dissertations comparing the cultural gap between Tesco and Asda and i was wondering if you could give me the full reference for the Peng 2009 article, also great article i had no idea about the severity of the wal-mart german failure
Hi Jordan, Global Business, International Edition is the name of the book, it was published in 2010 South Western is the publisher.
And thank you for your kind words, glad you enjoyed the read.
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