In our last post, we looked at how Disney got creative in its China market entry. In this post, we’ll continue to look at how Disney fared over the first 5 years and what this can teach your business about preparing for operations in China.
Building the Plane While It’s Flying
A common mantra that was repeated at Disney English was that “we’re building the plane as we’re flying it”. This is the reality for most start-ups and Disney English definitely operated as a start-up, just one with a lot of financial backing from the parent company.
Even with huge resources at its disposal, Disney was woefully unprepared for the realities of doing business in China. After expanding to over 40 centers in 12 cities in just the first 4 years, Disney closed 11 of them within the next year. Sales were down and customer retention had become a hot button issue. What were some of the reasons for this backward slide?
Growth Eats Cash Flow for Breakfast
This is true for any start-up, in China or otherwise. Once a company starts to grow, and grow like Disney did by doubling in size every year, there is a huge cost in terms of expense, building infrastructure, hiring, training, and operational complexity.
Due to a huge number of consumers being located in very dense areas, successful businesses can take off very quickly. Is your business prepared to handle such growth? It may be smarter to actually take the time to finish building the plane before launching again. Otherwise you may find yourself with major cash flow issues, laying off employees, or closing down parts of your operation.
You Must Hire for Ethics
One thing Disney was not at all prepared for was the common trait of Chinese managers to game the system for their own profit. While this is common in almost any organization that institutes strong commission and bonus structures, the problems created by such systems are amplified in China where, culturally, it’s assumed you’ll game the system in order to line your own pockets. This is even built into some Chinese employers who will pay lower salaries knowing that their employees will be making additional compensation in other ways.
Just a few examples:
- One center manager had a cousin working as a sales rep at another center that was very close by. The sales rep would tell the potential customer not to purchase at their center as they could get a discount at the center down the road. Upon leaving, the cousin would call the center manager with the customer’s info. The center manager would then proceed to call that customer, offer them a discount, and steal the sale. Of course, the cousin was getting a nice kick back from this as well.
- Numerous sales managers offered outrageous discounts to customers such as buy one get one free for a year, unlimited contract lengths, and large discounts, all unauthorized by the company and not allowed in the system. Sales managers would be caught with extensive offline notes of what customers were guaranteed what and elaborate systems were put in place to continue to hide customers that were no longer officially in the system, but receiving some kind of free classes.
- Center managers would deliberately try to avoid teachers of color, lie about countries of origin, or even ask teachers to lie about their origins in order to make sales as many Chinese customers invariably preferred young, white teachers of European decent. This was strongly against Disney values, but, without oversight, went unchecked in some locations.
Not surprisingly, these actions had tremendous impact on employee relations and moral as well as customer retention.
Government bribes and kickbacks are the norm and trying to do things the legal way will almost always take longer. As many government districts operate quite independently and sometimes even have their own unique legalities, every time the business enters a new area, they must start over. Every time Disney entered a new city or region, there would be massive delays as government relationships had to be built anew and officials would constantly hem and haw, waiting for bribes, before ever actually moving the legal paperwork forward. The farther ones move from the big international cities, where they are familiar with dealing with foreign companies that actually follow the law, the harder this becomes.
The government can also change the law on a whim. In Chengdu, Disney had just finished building a new center on the sixth floor of a building when, without notice, the government issued a regulation that all schools and training centers for children must be built below that level for reasons of safety during earthquakes. No grandfathering was allowed and Disney was forced to tear down and rebuild the center before opening, all on its own dime.
Learning from Others
It’s important not just to look at what has made companies successful in China, but also what mistakes they have made, so that your business may learn from both as it enters the China market. Take the time to get established, you’re in a completely new market and flying by the seat of your pants may have worked in the US, where you know how the game is played, but it can quickly be your downfall in China.
Gaining an understanding of Chinese business culture, especially as it relates to how your employees will operate on the front-lines, will prove invaluable. Always hire for ethics first in China and then train for the role.
Finally, make sure you have planned and budgeted for all the extra time it will take to expand as you deal with various government bodies and officials. Building relationships will always be the best way to go, but this takes time.
No one ever said entering the China market was easy, but if you prepare well and learn from others, you can be equally or more successful than those who have gone before, and the rewards are certainly worth it.
Casey W. Xiao-Morris is a veteran China Business Consultant at Leverage China, LLC., helping her clients succeed in the Chinese marketplace. Casey can be reached at cxmorris@LeverageChina.com.