Sample Analysis of Coca Cola’s Business Environment in China

Posted on: 23rd April 2020


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Executive Summary

This paper’s purpose was to analyze Coca Cola’s business environment in China and develop frameworks for managing employees. Based on this report, it is evident that the Chinese business environment faces several challenges, which may be in the form of political, social, environmental, and legal factors among others. Therefore, while operating in the Chinese business environment, it will be imperative for Coca Cola to develop strategies that can enable it to address these challenges. The paper also analyzed Coca Cola’s internationalization and growth strategy in China. According to this report, Coca Cola ventured into the Chinese market through different strategies. The main strategies that this firm used include joint ventures and low-cost strategy. Moreover, it increased its market share in the Chinese market through product differentiation. 

This paper further analyzed the host country’s cultural profile. It also analyzed the parent company’s cultural profile. Based on the analysis, it was determined that both the host and parent countries have different cultural practices and values. Such cultural practices and values are likely to assist expatriates to understand the local employees’ practices, behaviors, and attitudes. While venturing into the Chinese market, Coca Cola used the ethnocentric staffing policy. After establishing itself into the market, it adopted the use of polycentric and geocentric staffing policies. Coca Cola has also used different decision-making, motivational, and leadership systems to be effective in the Chinese business environment. Expatriate managers are likely to face a wide range of communication problems in the Chinese business environment. They can overcome such problems through preparation and training programs. Moreover, they may also face significant social responsibility and ethical issues while operating in the Chinese market.

Description of the Environment

The Communist Party has ruled China for several years. It has absolute power over the country’s cultural and economic institutions (Jayaraman 55). In China, the government has enacted several laws aimed at regulating business entities. Therefore, Coca Cola has faced several challenges in its attempt to comply with different regulations in the Chinese business environment. In the recent past, the Chinese government has urged businesses to adopt the e-commerce model in their operations. However, the drafting of legislation aimed at ensuring that companies adopt the e-commerce model is still at its infancy. Moreover, the issue of political freedom is a concern despite China’s stable political stability. 

In the host country, economic factors may also affect Coca Cola’s operations. China has recorded an immense growth in its GDP in the past decades. There is a possibility that the Chinese economy will surpass that of the U.S. in the coming decades. The increase in the Chinese GDP rate will further result in the rise of consumers’ purchasing power. The Coca Cola Company can leverage the rising consumers’ purchasing power to manufacture products that suit their clients’ needs. Compared to other western nations, China has a relatively lower labor cost. However, China’s high property prices and inflation rates might have detrimental impacts on Coca Cola’s operations. Apart from economic factors, legal factors can also have significant impacts on Coca Cola’s operations in the Chinese business environment. With the entry of China into the WTO, there has been the flexibility of some of the country’s business laws. Different Chinese laws regulate employment practices and business activities. For instance, the PRC Labor Law that China enacted in 1995 regulates labor disputes and standards. Moreover, the country has laws that regulate foreign businesses such as Coca Cola. 

Sociocultural factors have also had significant impacts on Coca Cola’s operations in China. China is one of the leading countries that has the highest population in the world. The fluctuation of age distribution and population growth is likely to alter the country’s cultural values and social trends. China has a different culture from that of the European nations (Jayaraman 57). Notably, in Chinese culture, leadership is regarded differently from the way it is viewed in the western nations. Therefore, it will be imperative for the expatriates working in China to adapt to the Chinese culture for them to be effective in their international assignments. While operating in China, the government requires both local and foreign firms to comply with different environmental laws. Several businesses in China have adopted the use of new and efficient production techniques. For Coca Cola to maintain its market share in the Chinese beverage industry, it has to adopt new production techniques. 

Background and Critical Analysis of Coca Cola’s Internationalization Strategy

High transaction cost is the primary challenge that several multinational corporations face in an attempt to expand their operations to other countries. Therefore, MNCs such as Coca Cola should develop effective strategies that can enable them to acquire a market share in foreign markets. With the ultimate purpose of increasing its global market share, Coca Cola decided to venture into different international markets. The Coca Cola Company developed strong relationships with state-owned corporations in China. It formed joint ventures with different enterprises in China. Whereas Coca Cola previously had to import certain raw materials for its production process, it decided to outsource some of its inputs from the local Chinese companies. The use of these inputs was aimed at ensuring that Coca Cola localized its operations in China. Coca Cola had the opportunity to reduce some of its products’ prices by manufacturing its products in China. It established several bottling plants in China and formed partnerships with different local companies. Consequently, Coca Cola was able to develop an efficient and low-cost distribution network for its products. 

Apart from localizing its production process, Coca Cola also increased the number of products it offered in the Chinese market. Currently, Coca Cola sells more than 20 products in the Chinese market. Furthermore, it reduced the prices of some of its products in a bid to gain a large market share in the Chinese market. Compared to its competitors’ product prices, Coca Cola’s products cost slightly less. Notably, Coca Cola has used cost leadership and the differentiation strategy to expand its operations in the Chinese market. It has differentiated its products from that of its competitors in the Chinese market (Banutu-Gomez 156). Cost leadership has played an essential role in enabling Coca Cola to be a low-cost producer in the Chinese beverage industry. Several consumers in the Chinese market prefer to consume low-cost beverages. Coca Cola has established itself as a beverage company that specializes in the production of low-cost beverages in China. It has also focused on the provision of quality products to consumers in the Chinese market. 

Based on Coca Cola’s financial performance, it is evident that the firm has succeeded in its operations in the Chinese beverage industry. Apart from its international growth strategies, Coca Cola’s high-performance levels in China can be attributed to its acquisition of Costa Coffee in 2018 (Mourdoukoutas para. 2). Its financial performance in China can further stem from its provision of healthy products. 

Cultural Profile

The Coca Cola Company has its headquarters in Atlanta in the United States. The host nation, in this case, is China. Therefore, in this section, there will be an analysis of the U.S.’s and China’s cultural profiles. In the U.S., the primary language used by the locals is American English. Other common languages include French, German, and Spanish among others. In this region, the dominant religion is Christianity. It is a culturally diverse nation owing to its high population. The U.S. has a high population that consists of persons from different cultural backgrounds. American culture has influenced different practices in various regions of the world. Asians, African-Americans, and Native Americans have further influenced American culture. Notably, in this country, climate, occupation, and social status are likely to influence people’s clothing styles. 

Compared to other countries, U.S. greetings tend to be informal. The informal greetings show that all persons are equal. In business situations, a common practice is the shaking of hands after introduction. Moreover, in American culture, business executives should maintain eye contact with other professionals. During these meetings, there is the exchange of business cards. Such cards are viewed as the greatest source of information for both the present and future interactions. In the U.S., business meetings are based on individual companies. Americans engage in business meetings when they receive good services and deals from companies. Therefore, local and foreign businesses operating in the U.S. should strive to provide their consumers with goods deals and services. It is also important for executives and managers to be on time for business meetings. Business executives and managers who arrive late for such meetings are considered disrespectful and rude. Another management practice that tends to be common in the U.S. is the delegation of duties. While delegating duties, managers should ensure that they give employees clear guidelines and responsibilities. 

Conversely, in China, the Communist Party, which is the main political ruler in the country, is an atheist. However, in the recent past, the party has started to be tolerant of citizens’ religious ideologies. Consequently, there are five religions in China, which include Protestantism, Catholicism, Islam, Taoism, and Buddhism. The government has illegalized any other religion apart from these five. In certain instances, some traditional forms of religion are practiced in this country. Seven dominant Chinese language dialects are spoken in this country. The primary Chinese dialect that is spoken by a majority of individuals in this country is Mandarin. Other Chinese dialects include Gan, Hakka, Min, Xiang, Yue, and Wu. There are significant differences in these Chinese dialects. Pŭtōnghuà is China’s official language. However, several Chinese citizens are fluent in English. 

Ethnic diversity and geographical locations influence the type of food consumed in this country. Rice is the Chinese’ major food source. In China, several individuals do not consume meat products. Many Chinese citizens have high regards for family relationships. Cultural values in this country are based on Confucianism. They stress honor, filial piety, loyalty, sincerity, and duty. In Chinese society, the face concept translates into respect, reputation, and honor. It is unethical in the Chinese culture for people to engage in activities that can cause public embarrassment. In structured meetings, silence is at times valuable in the Chinese culture. Notably, Chinese culture does not permit public disagreements among individuals. Within the home environment, the men had authority over the female gender. 

In Chinese culture, there is a cultural rule that the oldest people should be greeted first. It is a sign of goodwill and respect. The most prevalent form of greeting visitors is handshakes. The other cultural practice is that several individuals in China face the ground when greeting elders and visitors. It is imperative to use people’s surname and an honorific title while greeting them. It is disrespectful to look into another person’s eyes during a conversation. 

The Rationale for the Staffing Policy

When venturing into the Chinese beverage industry, Coca Cola used an ethnocentric staffing policy. Through this policy, Coca Cola filled its key managerial positions with employees from the parent country. In most cases, several multinational countries prefer to use employees from its headquarters due to the perception that the host country may not have qualified and skilled personnel (Gupta 43). The other reason why Coca Cola relied on personnel from its parent country is that it had the primary intention of maintaining good control, coordination, and communication links with its corporate headquarters. Since Coca Cola was at its early internationalization stages, the use of ethnocentric staffing policy was necessary to reduce anticipated risks. Therefore, the ethnocentric approach was essential to Coca Cola as it enabled it to use competent and qualified employees in its Chinese operations. 

While establishing its operations in the Chinese market, Coca Cola then transitioned from ethnocentric to polycentric staffing policy. Based on the polycentric approach, Coca Cola hired local personnel to manage its subsidiaries in the Chinese beverage industry. The local nationals who manage the Chinese subsidiaries are rarely promoted to positions at the parent country’s headquarters. The employment of the local personnel assists multinational corporations to overcome language barriers in the host country (Gupta 44). The other advantage of the polycentric policy is that it eliminates challenges associated with the expatriates’ adjustments to local cultures. Moreover, the polycentric approach enables MNCs such as Coca Cola to reduce costs correlated with cultural awareness training programs. In sensitive political scenarios, the employment of local managers allows MNCs to assume a low profile. 

Currently, Coca Cola uses the geocentric staffing approach in its international operations. The geocentric approach enables MNCs to assume a global approach to its international operations (Gupta 44). Through this approach, the Coca Cola Company appoints its managers based on their skills, competencies, and qualifications regardless of their cultural backgrounds and nationality. The Coca Cola Company does not have a tradition that dictates that it has to hire local managers in its subsidiaries. The geocentric staffing policy provides MNCs with the opportunity to form an international executive team. However, some governments require that MNCs employ a given percentage of local employees. Consequently, these governments may implement immigration controls in an attempt to prevent the entry of expatriates into their countries. The other limitation of the geocentric approach is that MNCs may incur high costs in relocating and training the expatriates. 

Coca Cola should use both polycentric and geocentric approaches for its staffing decisions. It should hire local personnel from the host country to fill middle- and low-level positions within the organization. Conversely, it should use the geocentric approach to fill managerial and high-level positions in its foreign subsidiaries. 

Leadership, Decision-making, and Motivational systems

In China, the Coca Cola Company has its local leaders. Coca Cola’s subsidiary in China has its president and a host of local leaders who engage in the decision-making process. However, these leaders report to the company’s senior leadership that has its headquarters in Georgia. A vertical hierarchy has been used to control Coca Cola. Based on this hierarchical structure, the upper management has the sole responsibility of decision-making. However, line managers in China and other subsidiaries are tasked with the crucial mandate of formulating policies that influence daily and routine operations. Notably, the company’s head office is responsible for providing the firm with the necessary support and overall direction. In this organization, the Executive Committee influences fundamental strategic decisions. There is the centralization of the decision-making process in China and other subsidiaries. The top-level managers do not consult the low-level employees during the decision-making process. The middle-level managers have to obtain permission from the high-level managers before engaging in the decision-making process. Some of the decisions that the top-level managers undertake include the package positioning, distribution, price reductions, advertisements, and trade discounts among others. 

Coca Cola uses Herzberg’s Motivation-Hygiene System to motivate its employees. Based on this system, the firm understands that certain factors can cause job satisfaction while others cause dissatisfaction among employees. Intrinsic factors play an essential role in increasing employee motivation while the absence of extrinsic factors tend to result in dissent among workers. In this case, the intrinsic factors may include growth potential, recognition, challenging work, and other emotional needs. Conversely, extrinsic factors include fringe benefits, salary, job security, and status within the organization. Coca Cola also understands that its success and productivity in the Chinese beverage market depends on its ability to ensure its employees’ safety. It has integrated the safety management system to promote employees’ safety and stability. The safety management system integrates loss prevention, environment, and occupational quality and safety within a single framework. Consequently, the Coca Cola Company has employees who engage in the firm’s operations without worrying about the issues of occupational quality and safety. 

Communication Problems

In China, expatriate managers may face several communication problems due to language barriers. In the U.S., the managers’ working language is American English. However, in China, the main language spoken by several citizens is the Mandarin Chinese dialect. Therefore, the language barrier is the most common problem that expatriates face while working in foreign nations. Several MNCs ignore language training, which is a significant component of the expatriates’ preparation process. Mandarin is one of the languages that may be difficult to understand due to its tones and character idioms (Soderberg and Worm 56). With the core objective of interacting with the local consumers and employees, the expatriate managers ought to learn the Mandarin dialect. Grasping the true meaning of the Chinese language tends to be difficult for expatriate managers working in China. Chinese employees may be sensitive to the language spoken by foreigners. They may interpret the expatriates’ willingness to understand Mandarin as their commitment to work in China. Notably, culture has a significant influence on Chinese communication. The Chinese interpret actions and spoken words through a cultural filter. The Chinese language is viewed as a cultural tool that influences people’s attitudes and actions. It is regarded as an effective way of transmitting cultural values. The close relationship between culture and language gives the locals the motive to increase their language’s currency. It is not necessary for the expatriate managers to perfect their Chinese language since demonstrating elementary speaking skills may assist them to understand the host culture. 

Apart from the spoken language, the expatriate managers need to realize that they should also understand unspoken Chinese language.  Some expatriate managers have complained that China does not embrace open communication. For instance, they may feel offended when the local employees remain silent during meetings (Soderberg and Worm 58). However, expatriate managers should realize that in Chinese culture, silence is valuable when an individual does not have anything to say. Moreover, expatriate managers in China should realize that the Chinese also communicate through their facial expressions. Therefore, they need training on verbal and nonverbal communication as part of their preparation before undertaking the international assignment. 

Coca Cola’s expatriate managers can only overcome the communication challenges in China through training programs. They need to learn Chinese cultural etiquette and communication style. Moreover, they should learn basic communication skills such as forms of greeting. The expatriates should also learn the significance of nonverbal gestures in Chinese communication. The training should provide the expatriate managers with the skills they can use to overcome culture shock. 

Ethics and Social Responsibility

Coca Cola’s expatriate managers are likely to face a wide range of ethical and social responsibility issues while working in the host country. They will be responsible for informing the public that their company’s motive is to promote the locals’ living standards through the provision of quality products. Corrupt practices may constitute the primary ethical dilemma for expatriate managers in China. They tend to be prevalent in the Chinese business environment (Clair and Norris 6). Government officials in this country have in the recent past required foreign companies to offer them bribes before obtaining business permits. In the Chinese culture, the Guanxi, which advocates for the principles of trust and reciprocity, requires business managers to return the favor they receive from the locals and government officials (Clair and Norris 3). Expatriate managers working in China may be tempted to engage in unfair business practices. For instance, due to the low labor costs in China, the managers may engage in practices that may exploit employees. With the core objective of avoiding these ethical dilemmas, expatriate managers should comply with the country’s business regulations. They should not engage in unfair business practices that might have adverse impacts on the company’s image and reputation in the international market. 

The main social responsibility issue that managers may face in China is their companies’ ability to engage in local CSR practices. The locals will expect the managers through their firms to contribute to society’s wellbeing. The Confucian values which tend to be prevalent in the Chinese culture advocate for good practices and harmony. Therefore, it will be important for the managers to embrace the Confucian values and engage in activities that can promote society’s good and wellbeing. They should balance profitability, responsibility, and sustainability while managing their businesses.  


Works Cited

Banutu-Gomez, Michael Ba. Coca Cola: International Business Strategy for Globalization. International Trade and Academic Research Conference, 2012

Clair, Norman and Norris, John. Business Ethics and Social Responsibility in Contemporary China. Journal of Academic and Business Ethics, 2012

Gupta, Abhishek. International HRM in Sustaining International Business Operations. Educationatia Confab, Vol. 2, no. 5, 2013 

Jayaraman, Karthik. Doing Business in China: A Risk Analysis. Journal of Emerging Knowledge on Emerging Markets, Vol. 1, 2009

Mourdoukoutas, Panos. Coca Cola could Spoil Starbuck’s Momentum in China. Forbes, 2 September 2018

Soderberg, Anne-Marie and Worm, Verner. Communication and Collaboration in Subsidiaries in China- Chinese and Expatriate Accounts. European J. Cross-Cultural Competence and Management, Vol. 2, No. 1, 2011

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