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Competing efficiently and effectively in China

By Emeritus Professor Daniel R. Denison, Stewart Hamilton, Emeritus Professor Jean-Pierre Lehmann, Ishtiaq Pasha Mahmood and Professor Howard H. Yu
with Michelle Noguchi
Contributor: Ann Zhang

More than 30 participants gathered at a Discovery Event to share IMD’s latest research and perspectives on doing business in China. Participants included representatives from a variety of industries, ranging from finance to pharmaceutical, and a number of companies, ranging from small businesses just entering the Chinese market to multinationals with years of experience and thousands of employees. The event highlighted the opportunities and challenges of doing business in the dynamic setting of China and the associated social-politicaleconomic complexities, and concluded with an insightful discussion on the “ins and outs” of working with Chinese counterparts.

Corporate culture in Chinese organizations

Differences in corporate culture do not only stem from geography, nationality, language or culture; corporate culture starts with the organization itself – its structure and its own unique characteristics. Professor Denison highlighted both the cultural similarities and differences between countries and emphasized the universality of difference at the firm level, stressing that China is no exception.
In organizational culture data, cross-cultural differences between countries are not significant. However, there is a huge difference between organizations.

This has been demonstrated through surveys of almost 12,000 companies around the world, including 150 Chinese enterprises. Professor Denison and colleagues have studied the links between organizational culture and business performance, and specifically what makes some organizations perform better than others. They developed a model that characterizes culture at the firm level and helps companies to diagnose cultural problems in their own organizations.1 

The model represents four basic culture traits – mission, adaptability, involvement and consistency – and illustrates the contrast between internal focus and external focus, and between stability and flexibility. For example, a company’s mission and adaptability are reflected in its external focus, and its involvement and consistency in its internal focus. Its involvement and adaptability show traits related to its capacity to change, while consistency and mission are more likely to reflect its tendency to remain stable. At the core of this model are underlying beliefs and assumptions. While these are not necessarily measurable, they are central to the organization’s behaviors and actions. If a company does not understand itself, it will struggle when faced with a change or challenge such as a new competitor.

In China, the differences are most notable when comparing different types of organizations: state, private, entrepreneurial, Western. All of these types share some similar culture traits, but not the same traits. Studies in more than 50 countries, including China, have shown a lot of similarity in the change process within companies, for example.

Going beyond the research and looking at country-specific influencers, Professor Denison highlighted three well-known, but frequently not well-understood, elements essential to a manager’s success in China: the importance of face, protecting your intellectual property and the influence of the Communist Party.

Dealing with the Chinese government

In response to participants’ expressed desire to gain a better understanding of the government’s role and “the seemingly invisible hand” it has in business, Professor Mahmood took the floor. He highlighted how the Chinese government – renowned for its unique political and economic grayness – can sometimes act as a facilitator of businesses and sometimes as a competitor. China limits private enterprises to “strategic” industries such as machinery, automobile and chemicals.
He observed that according to the third clause of the preamble to the Constitution, the leadership of the Communist party of China is central to its socialist modernization. “Under […] the guidance of Marxism-Leninism and Mao Zedong Thought, the Chinese people of all nationalities will continue to adhere to the people's democratic dictatorship and follow the socialist road, steadily improve socialist institutions, develop socialist democracy, improve the socialist legal system and work hard and self-reliantly to modernize industry, agriculture, national defense and science and technology step by step to turn China into a socialist country with a high level of culture and democracy.” In China’s state/government structure, “the Party” is not a physical entity represented like the legislature or judiciary. It is embedded in the public and private sectors and is not merely present, it is an authority acting in parallel.

Making the distinction between state-owned and private enterprises, Professor Mahmood indicated that the role of the enterprise and the role of the state are also at odds when economic prosperity comes in the absence of political openness. He emphasized not just the role of the central government but also the consequence of the local. He cited Hyundai, the South Korean car manufacturer, as an example of “becoming an insider”: Once it received the government’s approval, Hyundai built its factory in China in six months, a process that normally requires two to three years. It attributed its fast entry to under-standing policymaking procedures in China in order to prepare itself for the changes ahead of its competitors.  

Even six or seven years before it ventured into China, Hyundai had had developed a pool of talented expatriate managers for future operations in China. These managers learned Chinese, and some were sent to study at major local universities, where they made connections with important stakeholders in Chinese society.

China’s investment model is also unique – saving vs. spending. Household wealth is managed by state-owned banks, with the government backing its own corporations. The notion of state capitalism, however, varies significantly across the country due to local law, subsidy levels and access to credit.

While Beijing and Shanghai have clearly prospered under this model and for a time this equation brought significant and positive growth, China’s model now needs to change to concentrate on consumption not savings. Given the projected and exponential growth in China’s urban population (more than 500 million in less than 20 years), could this present an opportunity or will it be a problem?

Times and values in China’s global paradigm

The International Monetary Fund’s description of China’s “triumphant trajectory” captures the fact that during its 30 years of reform, China’s GDP has doubled every seven and a half years. However, as Professor Lehmann cautioned, although this is impressive – both in speed and in growth – it was relatively easy since the nation added capital first and then followed with labor.

China now faces its most daunting period, moving from a low- to a middle-income base. Many countries, like Brazil for example, have got “stuck” here. This is often described as the “middle income trap.”

China is well aware of this potential pitfall and is shifting gear from a low-value to a high-value economy through its 12th Five-Year Plan (2011–2015). The plan strives to achieve balanced growth emphasizing social harmony and sustainable development and has the following goals:

  • Slowing growth
  • Increasing domestic consumption
  • Boosting “strategic emerging industries” 
  • Investing in environmental protection and energy conservation.

Even though the overall picture is encouraging, Professor Lehmann remains anxious about China’s ability to reform and succeed. Is it possible to have an open economic system with a closed political system? China will change and move toward pluralism, but it will be a bit of a rollercoaster ride. There are two scenarios of what China might be like in 10 years’ time: 1) if it repeats its past mistakes, and 2) if it learns from its mistakes and becomes a global leader. Corporate culture can both help and hinder this process. 

From imitation to innovation

For his part, Professor Yu optimistically anticipates China’s change-up and believes it has the ability to strike the right strategic balance through government, industry and regions. He explained the evolution of the Chinese business model from imitator to innovator through product commoditization and showed how modularity2 drives commoditization. Modularity has enabled Chinese firms to increase their profitability and move up the value chain, giving them the opportunity to have their own brand.

Some industries have evolved from manufacturing-only businesses to service-based drivers of growth for Chinese enterprises. Suntech, the world’s largest manufacturer of solar panels, is one such example.

In five years, solar panel imports from China into the US grew from about $200 million to over $2.5 billion. By 2011, Chinese companies had 47% market share for solar panel installations, compared with 29% for US companies.

However, as Professer Yu pointed out, there are vast differences across industries and “managers must be able to recognize the basic patterns of their own sectors… and not blindly follow others.”

Dealing with Chinese counterparts

In their session, Professor Hamilton and Ann Zhang addressed some of the concerns that participants had voiced about understanding counterparts, especially in joint venture situations where roles and responsibilities are not clearly mapped. Doing business successfully in China, like anywhere else in the world, requires investment – in time, listening and learning.

The main message was that Westerners should adjust their mindset and perspective and not just consider the negative images that news media tend to portray. “Like any country in the world, China has its problems and it is not an easy place to do business.”34

Ann Zhang concluded by explaining that to succeed, you must “win hearts in China.” To do this, you must open your mind, your heart and your door; build trust; respect your counterparts, compromise; seek and stay on common ground. All of which bring us full circle back to Professor Denison’s opening premise and that corporate culture in China is not specific to China and is no different from anywhere else.

 

1  Leading Culture Change in Global Organizations: Aligning Culture and Strategy

2 Modular products are made up of components that are able to connect, interact and exchange resources through a standardized interface. 

3  Doing Business with China: Avoiding the Pitfalls

4 Hamilton, Stewart, and Jinxuan Zhang. Danone and Wahaha: A Bitter-Sweet Partnership. IMD case no. IMD-3-1949, 2008. 

 

 

Discovery Events are exclusively available to members of IMD's Corporate Learning Network. To find out more, go to www.imd.org/cln.

 

insights@IMD No.15
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