Even though GDP has declined in many emerging markets since 2007, economies like China, India, and Brazil make attractive options for growing businesses. However, if you fail to understand your new market’s culture and business environment, you could find yourself beating a hasty retreat back to your country of origin.
Even great companies that have failed to understand emerging markets have come home with big debts and little to show for their efforts. You need to understand the business environment, the consumer culture, and the ways that leaders make decisions in other countries.
When You Don’t Study the Business Environment: Best Buy in China
The Apple Store in Shanghai sells more iPhones per square foot than any other Apple Store in the world, and Apple charges $30 more per iPhone in Shanghai than it charges in the U.S. Yet in 2011, electronics retailer Best Buy closed all nine of its branded stores in China, claiming that Chinese customers were “too cheap” and didn’t want to pay fair prices. However, many electronics retailers in China, including Apple, aren’t having problems getting consumers to pay fair prices.
Ultimately, Best Buy failed because it didn’t understand these three keys to China’s business environment:
1. Be neighborhood focused. Although many Chinese consumers own cars, traffic congestion and lack of parking drive many Chinese people like to shop near their homes. Best Buy built large stores and expected consumers to drive to them. Chinese customers went to neighborhood electronics stores instead.
2. Account for piracy. Electronics and software piracy are rampant in China. A local computer shop in China can underprice Best Buy because it installs pirated software. Chinese employers also pay lower salaries and provide fewer benefits. Best Buy couldn’t compete pricewise, and they offered products that Chinese consumers could buy elsewhere.
3. Promote exclusivity. The emerging upper class in China has become ripe for luxury retailers. Apple offers a unique set of products that aren’t sold in too many other stores, which gives upper-class consumers a feeling of status and exclusivity.
When You Don’t Appreciate the Culture: Starbucks in Australia
Australians are known for their devotion to drinking coffee, so the land down under seemed like the perfect place for Starbucks to expand. The company rapidly opened 81 stores throughout Australia, expecting a big welcome from Aussie customers. However, after racking up big debts and not much sales revenue, Starbucks shuttered 65 of those locations in 2008. Aussies spurned Starbucks standardized coffees and their restaurants’ fast food feel.
If Starbucks had studied the culture, they would have learned that Australians don’t want the same cup of coffee every day. They want a unique taste or social encounter with every cup that they drink. Starbucks tried to position itself as both a global and local store, but its locations didn’t offer unique coffees or experiences. As a result, Starbucks had to retreat, regroup, and rethink its Australia strategy.
The Lesson: Take Your Time Before Diving in Overseas
Before you start putting up your shingle overseas, follow these steps to better understand both the culture and the business environment:
- Understand the way that your market does business. Richard Lewis, a British linguist and author of “When Cultures Collide,” classifies countries reactive, linear-active, and multi-active when conducting business. Reactive countries value courtesy and respect, multi-actives value lively meetings (and don’t prioritize punctuality), and linear-active countries do one thing at a time, sticking to action plans and strict schedules. You can also check out Lewis’s ideas about how leadership works in other countries.
- Spend time in your target country. Johnnie Walker has had great success in Brazil, South Africa, and South Korea because it has put local teams on the ground to get a feel for the market’s zeitgeist. In Brazil, for example, to capitalize on local pride in Brazil’s economic growth, they created commercials depicting a mountain transforming into a giant and walking off-screen to the words, “The giant is no longer asleep.” As a result, 80 percent of Johnnie Walker’s growth in the past year has come from emerging markets.
Overseas expansion could be the key to growing your business, but you have to think about more than dollars and cents. You have to make sure that you understand the culture and how people like to do business overseas.