4. Special considerations for conducting business in China
4.2. Framework for strategy formulation and implementation
4.2. Framework for strategy formulation and implementation
As PWC puts it in its guide to conduct business in China, “While analyzing financial and operational data is key to any cost rationalization strategy, it is especially vital in China to consider the risks that lie beyond numbers. When performing due diligence or reviewing any other financial, it is important to consider the business infrastructure of the target Chinese company, including the corporate culture and internal control environment, business processes, information management systems, management style and relationship network with both internal and external stakeholders.”
An extensive evaluation of the environment and its stakeholders is mandatory. An example of it is the backlash of the Foxconn violation on employment law for Apple. As a result, the American company involved the non for profit organization Fair Labor Association to audit the manufacturing sites and revealed that 43% of the workers experienced work-related accidents, unfair wages or unpaid overtime. As Apple did not monitor the compliance practices of its supplier, it impacted the reputation and finance of the brand.
The central part of the framework selected to assess the environment is the industry playing field, consisting of all the institutionsxiv impacting the environment through delivering threats or opportunities. Indeed, they create the guidelines for behavior such as norms, values and laws.
As depicted in the model, two different strategy arise from the field: market strategy and non-market strategy.
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At first, the first arrow represents the regulatory pressure that impact the environment of the company and will determine its strategy. The third and second arrow is the response from companies to leverage public opinion, or normative institution to balance the regulative environment and restore the lost profitability. This model is especially useful to consider the importance of relationships in China. The second arrow uses strategies to reduce the threats of new regulation or maintain and lock the new opportunity. At the same time, established institutions are challenged to fit the new regulatory environment on arrow 4.
Following the neo-intuitional thinking, we support that the strategic choices are limited and supported by the existing institution in the field. In other word, regulative, cognitive and normative institutions will dictate the strategy of the company that will direct its effort toward market strategy (arrow 5) such as management style. New standards are created and the industry is auto-normed.
Figure 10 – Neo-institutional study of a business Source: Frankenberger (2006)
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influence, corruption through strategies such as dumping, cross subsidizing, and skimming. It is important to notice that these strategies are aimed to fight the new regulations, but this is indirectly. Indeed, companies doing such will expect to damage the beneficiaries of the new regulation in order to intensify the number of actors reclaiming the status quo. As an example, deregulations on quotas agreed by the World Trade Organization on agriculture led in the past to protective strategy that created a national demand (pull strategy). Another way to settle disputes is as well to file a complaint directly to international institutions such as the WTO.Defensive and aggressive strategies are often preferred for a simple reason: this is a costly process that requires disclosure of information. Thus, initiatives are often government backed such as the recent case of USB flash drive from Taiwan and the (unfair) anti-dumping policies in India9.
Political (non-market) strategies influence the environment and can be self-harming. They are signaling effect directed towards the government bodies. On the other hand, market strategy such as cost reduction, brand building, and diversification, can be preferred to bear with the new environment.
As top management will have to screen initiatives to be considered as a threat or an opportunity for their own company, they react by designing strategies to evolve in the new competitive landscape. According to research, pattern exist in such reactions were institutions will adjust
9 DISPUTE DS498 India — Anti-Dumping Duties on USB Flash Drives from the Separate Customs Territory of
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the structural context in case of threat or pursue autonomous strategy and promote innovativeness to benefit from an opportunity.
The degree of regulation influences the design of strategy were stability and transitive situation will result in different formation. Regulated industries react to change through non market strategies and creation whereas market strategies are preferred by unregulated market.
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Uncertainty of regulations in China impact the viability of information on four different axes:
growth, infrastructure, costs and compliance. As a result of this study, we will summarize best practices in these four categories.
Growth risks
Adapt the value proposition to the fragmented Chinese market and their customer behavior that may change according to governmental policies as demonstrated in the past. BestBuy explained its China’s failure by failing to adapt to local preferences of small, many and conveniently located stores.
Acknowledge the impact of the five-year plan with a focus on consumption and green economy. Monitor new political development and tailor the strategy to fit the new legal implication.
Assess the financial and ethical liability of all stakeholders through in depth audits. This is a capital part of expanding to china to avoid issues such as the ones face by Nike and child labor, or McDonald’s and expired meat10. Even though the relationship can be formal with contracts, there is still a need for a commitment for consistency, that comes with building a relationship with the operaor.