The cultural aspect of china’s business environment a case study of walmart

Walmart is one of the largest multinational retail corporations in the world, with its headquarters located in Bentonville, Arkansas, USA. It was founded in 1962 by Sam Walton, and since then, it has grown into a retail giant with over 10,500 stores in 24 countries. Walmart is known for its “Everyday Low Prices” strategy and its extensive product range, which includes groceries, electronics, clothing, household items, and more. Walmart has a strong presence in the United States, with more than 4,700 stores across the country. It is the largest private employer in the United States, providing jobs to over 1.5 million people. However, Walmarts growth is not limited to the United States; it has expanded its operations globally, with a particular focus on emerging markets. China, on the other hand, is the worlds most populous country, with a population of over 1.4 billion people. The Chinese market is attractive to multinational corporations due to its large population, fastgrowing middle class, and the countrys position as the worlds secondlargest economy. Chinas retail market has been growing rapidly over the past few decades, and it is expected to continue growing in the coming years. This growth has attracted many foreign companies, including Walmart.

FOREIGN TRADE UNIVERSITY SCHOOL OF ECONOMICS AND INTERNATIONAL BUSINESS

-000 -MIDTERM ASSIGNMENT Topic: The cultural aspect of China’s business

environment: A case study of Walmart

Group: Group

Subject: International Business

Class code: KDOE307

Lecturer: Ph.D Nguyen Hong Hanh

Hanoi, May 2022

Table of Content

Introduction 3

CHAPTER 1: CHINA’S BUSINESS ENVIRONMENT 4

1.1 Macro environment analysis - PESTEL model 4

1.1.1 Political and legal environment 4

1.1.2 Economic environment 4

1.1.3 Social environment 5

1.1.4 Technological environment 7

1.1.5 Environment 8

1.2 Micro environment analysis – Porter’s 5 Force model 10

1.2.1 Competitors 10

1.2.2 Threats of New Entry 10

1.2.3 Customer Power 10

1.2.4 Supplier Power 11

1.2.5 Threats of Substitutes 11

CHAPTER 2: CULTURAL ANALYSIS OF CHINA’S RETAIL MARKET 12

2.1 Overview of the retail industry in China 12

2.2 Overview of analysis dimensions in China (Hofstede model) 13

2.3 Cultural challenges faced by US Retail Companies in China 15

2.3.1 Language barriers 15

2.3.2 Different Consumption Culture 15

2.3.3 Cultural Differences in Communication and Marketing Strategies 17

2.3.4 Different Management Culture 17

CHAPTER 3: WALMART IN CHINA 18

3.1 Background information of Walmart's Entry into China 18

3.2 Problems encountered by Walmart in China 19

3.2.1 Differences in consumers’ preferences 19

3.2.2 Differences in consumption habits 20

3.2.3 Differences in attention to price 20

3.2.4 Differences in retailtainment preferences 21

3.3 Walmart’s cultural adaptation strategy in China 21

3.3.1 Successful adaptation 21

3.3.2 Ineffective adaptation 22

3.4 Lesson learned from Walmart 23

3.4.1 Identification of key lessons learned from Walmart in China 23

3.4.2 Discussion of how these lessons can be applied to other markets 24

CONCLUSIONS 26

REFERENCES 27

Walmart is one of the largest multinational retail corporations in the world, with itsheadquarters located in Bentonville, Arkansas, USA It was founded in 1962 by Sam Walton,and since then, it has grown into a retail giant with over 10,500 stores in 24 countries Walmart isknown for its “Everyday Low Prices” strategy and its extensive product range, which includesgroceries, electronics, clothing, household items, and more

Walmart has a strong presence in the United States, with more than 4,700 stores across thecountry It is the largest private employer in the United States, providing jobs to over 1.5 millionpeople However, Walmart's growth is not limited to the United States; it has expanded itsoperations globally, with a particular focus on emerging markets

China, on the other hand, is the world's most populous country, with a population of over1.4 billion people The Chinese market is attractive to multinational corporations due to its largepopulation, fast-growing middle class, and the country's position as the world's second-largesteconomy China's retail market has been growing rapidly over the past few decades, and it isexpected to continue growing in the coming years This growth has attracted many foreigncompanies, including Walmart

Walmart has shown a keen interest in the Chinese market, which is the largest consumermarket in the world with a population of over 1.4 billion people Walmart's entry into China wasnot an easy one, as the Chinese market is vastly different from the American market Walmarthad to adapt to China's unique culture, consumer behavior, and business environment to succeed.Despite the challenges, Walmart has made significant strides in the Chinese market.Today, it operates over 400 stores in China, making it one of the largest foreign retailers in thecountry Walmart has also made efforts to source products from China, which has helped it toreduce its costs and improve its profit margins

Walmart's entry into the Chinese market is a fascinating case study for anyone interested

in international business It highlights the importance of cultural adaptation, market research, andstrategic planning when entering a new market In this essay, we will examine Walmart's entryinto China, the challenges it faced, and the strategies it used to succeed in this complex anddynamic market

The Communist Party of China, also called the Chinese Communist Party, dominates thenational government Since 1949, China has been completely a communist country Theglobal economy has, however, compelled the Chinese government to adopt increasinglycapitalist economic policies Also, Confucianism - a major system of thought in Chinaexisting for over 2,500 years, concerned with the principles of good conduct, practicalwisdom, proper social relationships - originated from China, and has still affected China's

CHAPTER 1: CHINA’S BUSINESS ENVIRONMENT

1.1 Macro environment analysis - PESTEL model

1.1.1 Political and legal environment

- China's legal system is heavily influenced by Confucianism and the government As

China is a one-party socialist republic with a centralized political system and the political system

political system

- There are strict regulations and restrictions on foreign businesses To operate a business

within China, foreign investors must incorporate a foreign-invested enterprise (FIE) inChina and obtain a business license for it, issued by the local government Theincorporation of an FIE must be reported to or be approved by and registered with theChinese authorities, including the State Administration for Market Regulation (SAMR),Ministry of Commerce (MOC), other local authorities (for example, tax authorities andforeign exchange authorities) Therefore, foreign businesses operating in China mustcomply with a complex and ever-changing set of regulations and laws

- To deal with conflict between home and abroad, China has gradually integrated into thepattern of international economics, and has been committed to building a harmonioussociety and enhancing the capacity of sustainable development China pays moreattention to guide the enterprises to focus on workers, consumers, communities,environments and other stakeholders, and to advocate enterprises to fulfill the socialresponsibility

1.1.2 Economic environment

in China is a single-party system, China has been deeply dependent on the government

- China is the world's second-largest economy with a rapidly growing middle class GDP

growth of China has an average of over 9 percent per year, and more than 800 millionpeople have lifted themselves out of poverty since China began to open up and reform its

economy in 1978 Over the same period, there have also been significant improvements

in access to education, health and other services, leading to China becoming one of thestrongest economies in the world China’s high growth based on low-cost manufacturing,investment and exports has largely reached its limits and has led to social, economic andenvironmental imbalances Besides, China’s middle class is booming as in 2000, about3% of China's population was categorized as middle class By 2018, more than half ofChina's population — 707 million people — had entered the country's middle-incomebracket, according to the Center for Strategic and International Studies (The middle class

is defined as those spending between $10 and $50 a day)

- There is a high demand for foreign goods and services in China As domestic

consumption in China and the access to international brands is rapidly growing to meetthis demand, China has gradually become a key growth engine of the global consumermarket Due to a common belief that imports are hard to counterfeit and tend to havehigher quality Chinese consumers prefer to buy imported goods, especially for somespecific products such as food, cosmetics and baby products (In the past, tainted Chinesebaby formula resulted in some infants’ death) Chinese demand is also high becauseWestern products are perceived as having higher quality Chinese brands have had a lot

of negative PR for the last few years It leads to the fact that even now when Chineseproducers have improved, the damaged reputation remains

- China has a unique business culture that prioritizes relationships and connections, also known as guanxi Every business transaction in the Chinese market begins with a

personal relationship between the parties involved In Chinese business culture, this is

referred to as Guanxi This refers to the social networks, linkages, and powerful

connections that constitute the basis of any formal or business interaction It plays a hugerole in business interactions in China and is often a necessary element for creatingopportunities that would have not been available otherwise

1.1.3 Social environment

- Chinese culture is based on Confucianism Confucianism is a philosophy that originated

in China during the Spring and Autumn period in the 6th - 5th century BCE There are 4core elements in Confucianism: Moral Person (Junzi), Human Morality (Ren, Yi and Li),Relationship (Guanxi) and Face (Mianzi) Confucianism emphasizes collectivism,

hierarchy, the importance of education, family values, social harmony, and respect forauthority Confucianism has greatly influenced Chinese culture and hence not onlyChinese modern life but also the business environment even today For example, inTaobao, a Chinese online shopping platform launched in 2003, organizational culture hasplayed an important part in its success Each employee received a nickname based on acharacter from one of Master Jing's novels on the day they were hired by Taobao Fromthen, everyone will call them by their martial art monikers By doing this, Taobaoembodies the harmonious spirit of Confucianism: In employees' eyes, they are sisters orbrothers so the amount of conflict and misunderstanding tends to be minimal The samemethod was applied with Sinyi The company concentrates on the rewards for teamperformance, showing care about the strong connection between individual's contributionand team's achievement.

- There is a strong focus on building relationships and trust through networking and

personal connections Guanxi, or developing close personal ties with those from whom

one might anticipate (and who demand in return) particular favors and services, is aguiding principle in Chinese culture Family is the most important, but close friends,classmates, and neighbors can also be included in the inner circle For a relationship toform, it is necessary to have both a solid professional reputation (trust from the head) and

a personal connection (trust from the heart) Chinese relationships take time to build,which is why your Chinese business partners choose to keep some information from you

or communicate with you nonverbally

- Business etiquette and protocol are crucial in China, including exchanging gifts, using proper titles and forms of address, and respecting hierarchies In China, business

requires personal relationships and trust; Therefore, it is important to make a goodimpression by being modest, patient, and polite, respecting the elders and people inhigher ranking positions Besides, Chinese business etiquettes are significant to focus on,such as meeting etiquette, chatting etiquette, dining etiquette, seating etiquette at aChinese dinner and gifts etiquette

- The concept of “one for all, all for one” advocated by Wal-Mart is adapted to thetraditional culture of China Chinese culture is influenced by Confucian cultureprofoundly, it pays attention to interpersonal relationships which have been applied

to the political and

economic fields Additionally, Chinese people emphasize “love”, follow “righteousness”,and perform social responsibilities and obligations clearly and actively.

- The government has implemented policies to promote innovation and development of the technology sector The government has prioritized the development of its domestic

information and communications technology (ICT) sector In recent years, nationalsecurity has become an increasingly important consideration for ICT, serving asjustification in industrial policy to phase out foreign technology in favor of domesticalternatives In December 2021, China’s Central Commission for Cybersecurity andInformatization issued the 14th Five-Year Plan for National Informatization, a lengthydocument addressing a very wide range of policy and development goals for 2021–2025

In 2021, the digital economy reached US$7.1 trillion (RMB 47.94 trillion), rankingsecond after the United States

- The Chinese population is highly connected to technology, particularly through the use

of mobile devices and social media According to a report by DataReportal, there were

930.8 million social media users in China in January 2021 The number of social mediausers in China increased by 110 million (+13%) between 2020 and 2021 The number ofsocial media users in China was equivalent to 64.6% of the total population in January

2021 As for mobile devices, China has the world’s largest smartphone market with morethan 900 million active smartphone users as of January 2022 The most popular socialmedia platforms in China are WeChat, Sina Weibo, Douyin (TikTok), and Kuaishou

Figure: Share of internet users of the leading social media in China as of 3rd

quarter 2022 (Source : Statista)

any countries in the world, including methane, carbon dioxide and nitrous oxide

According to Climate Watch, China surpassed the United States as the top emitter in 2005

Source: Global Carbon Project

- The government has implemented policies to address environmental issues and promote sustainable development These policies require environmental permits for specific

matters, including environmental impact assessments for construction projects, pollutantdischarge, operation and disposal of solid waste and hazardous waste and radioactiveactivities, such as Environmental Impact Assessment Law (2018), Law on Prevention andControl of Solid Waste Pollution (2020), Marine Environmental Protection Law (2017),Environmental Protection Tax Law (2018), Law on Promotion of Sustainable Economy(2019)

- Increasing awareness of environmental issues among Chinese consumers is driving demand for sustainable products and services According to one survey, 66% of all

respondents, and 75% of millennial respondents, said they consider the protection aspect when making a purchase Consumers in China express a desire for eco-friendly goods to the extent of 41% And as social media channels continue to burgeon,the voice of younger generations will only increase the demand for sustainability With

environmental-customers switching products or services when a company violates their values, there arewithout doubt growing market opportunities for companies willing and ready to respond,

especially those offering eco-friendly products or speaking up against weakening ofenvironmental protection.

1.2 Micro environment analysis – Porter’s 5 Force model

1.2.1 Competitors

- The rivalry is stiff Walmart is not the sole hypermarket in the retail industry ofChina The list of similar sizing retailers in China is long, namely, China ResourcesVanguard, RT Mart, etc

- In addition, the Chinese retail industry is made up of hundreds to thousands small

to medium-sized retailers Traditional markets, specialty stores, and recently,convenience stores and online purchasing platforms are competing with the bigenterprises 48% of Chinese groceries sales come from traditional trade - neighborhoodstores and market

1.2.2 Threats of New Entry

- Policies and Restrictions: The Chinese government has been encouraging theformation and operation of domestic enterprises Although they do not prohibit foreigncompanies to invest and do business in the country, the fact that China imposes newregulations and the pandemic clearly is putting pressure on foreign retailers who wish tohave a foot in this game

- Barriers to entry: In terms of regulations, they are low Almost anyone can open abusiness in China However, it is difficult to open and operate a bigger size enterpriselike a supermarket/hypermarket or chain store

- Economies of scale: the loose policies pave an easy path for firms to enter theretail industry of China Even if big supermarkets and hypermarkets in China obtaingreater economies of scale, it does not mean that entrants will get harder

- Brand Equity: larger-scale retailers still hold a better known name and reputationfor their products and services

1.2.3 Customer Power

- Bargaining power of customer: Customers are obliged to take the market price.Whilst most items on the retailing market are charged at common price point, larger scaleretailers can have a better pricing position

- Switching barrier for the demand side are high Customers can get access to a

market that has more than half a million providers selling them the same product, formerely different prices.

- Cultural factors: The Chinese still maintain the habit of buying fresh meat andvegetables for daily consumption The need to buy groceries every day makes themreluctant to travel far for goods This gives the advantage to traditional trade channelssuch as markets and neighborhood stores

1.2.4 Supplier Power

When it comes to the supplier’s power in the retail industry, it is without doubthypermarkets and supermarkets like Walmart, RT Mart, etc have the greatest edge Theypossess a bargaining power and giant network of suppliers on the market that can enablethem to offer significantly lower price to their customers With that being said, thenumber of similar-sizing enterprises is not small - so any hypermarkets and supermarketscan propose similar pricing

1.2.5 Threats of Substitutes

- Convenience stores: The rise of urbanization and newly emerging consumerlifestyles have led to the booming trend of China’s convenience stores market Thenumber of convenience stores was over 193 thousand at the end of 2021 Sales revenuegenerated by convenience stores in 2020 reached 271.6 billion yuan, showing a sixpercent annual increase What makes it become a worthy threat to hypermarkets,specifically Walmart is that convenience stores offer a wide range of goods and servicesthat is served in any supermarket and hypermarket But they are placed at locationsallowing people to get access to within a 5-minute walk

- Online shopping: big retailers were once the sole suppliers that can offer goods atthe prices below the market average But now, e-commerce platforms and onlineshopping apps such as Dmall, Womai, etc offer a larger range of products at acompelling price point Buyers can even receive the purchased items at their front doorwithin 2 hours or less

CHAPTER 2: CULTURAL ANALYSIS OF CHINA’S RETAIL MARKET

2.1 Overview of the retail industry in China

The Chinese retail market is composed of many small to medium-sized retailers which isthe opposite to the big-box retailers domination in America In 2008, there were about 549,000retail enterprises in China, with an average of 15 employees per store Although the number ofchain stores drastically increases in recent years, local market access barriers are great obstacles

to cross-provincial retailers

The retail stores of China can be divided into 3 types:

- Traditional grocery stores and specialty stores: This type targets residents located within

300 meters Grocery and specialty stores’ sizes are relatively small at an average of 100meters square, and they focus on selling specific products (alcohol, beverages, snacks,tobacco, etc.) These stores offer both direct selling at the counter and self-service

- Convenience stores: They are mainly located in commercial zones, or places that are close

to public transport, major public routes, hospitals, education centers, offices, public areasand gas stations, etc With a small business scope, its target is to allow convenient access togoods

- customers only need a 5 minutes walk to the store Unlike traditional grocery stores andspeciality stores, convenience stores offer open displays of goods and services Customersself-select the goods they need and pay at the cashier One unique feature of conveniencestores is that their facilities are meant to serve instant food to their customers Theiroperating time is approximately 16 hours/day, some may operate 24 hours However,pricing is higher than the market's average

- Supermarkets and Hypermarkets: Located in residential areas and close to important

transport routes that have low rental costs, they offer a large range of goods and servicesthat are low cost They target customers who live within 2 kilometers range Each store’ssize is about 300 - 500 meters square, and they offer additional selection of their exclusivemerchandise They have a similar selling method to convenience stores - open displays ofgoods and services

- In recent years, China also witnessed the booming trend of e-commerce and thedevelopment of unique retail methods - brick-and-mortar (direct-to-store sales) ordering via

applications and fast home delivery to meet the increasing demand for fresh productsand convenient

shopping New retail stores now follow the traditional brick-and-mortar model withupgrades that allow customers to pay via applications, order remotely and deliver goods totheir homes within half to 2 hours.

2.2 Overview of analysis dimensions in China (Hofstede model)

To analyze Chinese culture, our team decides to use the Hofstede model with 6dimensions, including power distance, individualism, masculinity, uncertainty avoidance, long-term orientation and indulgence as the graph below :

Figure : Hofstede analysis of Chinese culture

( Source : Hofstede Insights)

- Power distance

The graph shows that the power distance index (PDI) of China is 80, which is among thecountries that have high rankings like Russia or Philippines China is a society that believesinequalities amongst people are acceptable The subordinate-superior relationship tends to bepolarized and there is no defense against power abuse by superiors Individuals areinfluenced by formal authority and sanctions and are in general optimistic about people’scapacity for leadership and initiative People should not have aspirations beyond their rank

- Individualism and Collectivism

At a score of 20, China is a highly collectivist culture where people act in the interests ofthe group, not necessarily of themselves In-group considerations affect hiring andpromotions

with closer in-groups are getting preferential treatment However, employee commitment tothe organization is low, whereas relationships with colleagues are cooperative for in-groups;they are cold or even hostile to out-groups.

- Masculinity/Femininity

At an index of 66, China is a Masculine society – success oriented and driven The desire

to achieve success is apparent in the willingness of many Chinese individuals to prioritizework over family and leisure Service workers will continue to work late into the night, andleisure time is considered less important Migrant workers who move to cities for betteremployment opportunities will often leave their families in distant regions Another example

is that Chinese students put great emphasis on their exam scores and ranking, which are seen

as crucial factors in determining their success or failure

- Uncertainty avoidance

At a scale of 30, China has a low score on Uncertainty avoidance, which means that truthmay be relative though in the immediate social circles and there is concern for truth withcapital and rules abound Nonetheless, adherence to laws and rules may be flexible to suit theactual situation and pragmatism is a fact of life The Chinese are comfortable with ambiguity;the Chinese language is full of ambiguous meanings that can be difficult for Western people

to follow Chinese are adaptable and entrepreneurial

- Long-term orientation

With a score of 87 in this dimension, Chinese culture is highly pragmatic Such societiesprioritize practical considerations, recognizing the influence that context, situation, and timemay have on the truth They demonstrate an aptitude for adapting established customs tochanging circumstances, possess a keen inclination to save and invest, exhibit thriftiness, andshow persistent determination in attaining desired outcomes

- Indulgence

For China, it is categorized as a restrained society with a low score of 24 in thisdimension Cultures with low scores here typically exhibit a tendency towards cynicismand pessimism In contrast to indulgent societies, restrained societies tend to place lessemphasis on leisure activities and actively curb the gratification of their desires.Individuals with this mindset recognize that their behavior is shaped by prevailing socialnorms and may feel that giving in to their desires is morally questionable

2.3 Cultural challenges faced by US Retail Companies in China

Operating in China comes with a special set of cultural difficulties that can make itchallenging for US retailers to be successful in this market In this following part, the researchgroup will delve into the cultural challenges encountered by US retail firms in China

2.3.1 Language barriers

The language barrier poses challenges for US retail companies entering the Chinesemarket China has its own unique political, traditional, and business cultures, and the Chinesewriting system can be complex and time-consuming to learn Moreover, many Chineseconsumers do not have fluent English skills, necessitating communication in Chinese US retailcompanies must translate their marketing materials and product information to cater to localcustomers However, relying solely on translation tools can still result in misunderstandings due

The Way of Shopping

US retailers face challenges in understanding and adapting to the distinct shopping habits

of Chinese consumers Americans approach shopping as a task with a specific purpose, whileChinese consumers view it as a recreational activity, often exploring stores without a predefinedshopping list This divergence in behavior makes it difficult for US retailers to anticipateconsumer preferences and predict successful products