- Email: [email protected]
Organizational learning in China
Organizational Learning in China Jenny S.Y. Lee
D
espite thorough planning, many foreignowned companies today are having a hard time sustaining their business operations in China. With substantial sums of money invested in the country, however, they are reluctant to close up shop. Given the rapidly changing business environment in the 1990s and China’s ever-shifting government policies and developments, their difficulties are not surprising; most foreign firms desire a piece of this giant new market, but lack the relevant knowledge and experience for conducting business there. The way to develop the capacity for reducing barriers to foreign entry is by accumulating foreign experience through organizational learning. Companies with the ability to learn, and to apply that knowledge, will gain new insights into unfamiliar environments and identify areas for refining their business decisions. Because China is unique by the very nature of its market, companies attempting to do business there need to make organizational learning an explicit objective. They must ensure that staff members maintain good learning abilities in order to keep abreast of changes in the local environment. In addition to defining the concept of organizational learning and explaining why it is necessary in the context of China, our aim here is to explore how members of a firm can acquire the knowledge that can be shared among team members and retained throughout the organization. The Concept of Organizational karning Learning, say Argyris and Schon (1978), is the accumulation of information in the form of knowledge. The definition of organizational learning remains somewhat vague, in part because it is a multidimensional construct characterized by disciplines, skills, styles, elements, and procedures. Several types of organizational learnOrgamzational Learning in China
ing have been identified. Argyris and Schon distinguish between singleloop learning, which entails incremental change within an existing framework, and double-loop learning, which involves transformative change and the testing of underlying assumptions. Some authors adopt a static framework; others focus on “process.” Fiol and Lyles (1985) note that organizational learning entails the process of improving actions through better knowledge and understanding. According to Huber (19911, the activity in the learning process involves knowledge acquisition, sharing, and utilization. Although researchers may have different points of emphasis, organizational learning essentially must involve three levels: the individual, the team, and the firm. The first is crucial, of course, because individuals form the basis of the teams and the firm. Senge (1990) states that individual learning does not guarantee organizational leaning, but without it the latter cannot occur. Individual opportunities include self-managed learning, learning from coworkers, daily work experiences, and personal insights. Team learning occurs when team members share their experiences, both negative and positive, with other members of the firm, generating new values and insights to improve the practices in use. Organizational learning builds on a firm’s memory, which depends on such institutional mechanisms as policies and strategies to retain knowledge. Influenced by structural variables, it starts with the individual and disseminates the
new knowledge among other individuals and team members throughout the firm. Not only are the three levels of learning highly interrelated and complementary but the resulting composite knowledge creates a powerful resource in which the whole is much greater and more valuable than the sum of its parts. The origin of organizational learning can be traced in the research literature as far back as the 1920s. Not until the 198Os, however, did some firms begin realizing the potential of linking it to corporate performance, competitiveness, and success. The application of the concept to the multinational company (MNC) is still emerging. How the individual and the firm can learn in this context still needs to be explored, but many MNCs are well aware of the critical need to develop new knowledge in their foreign operations. Many companies obtain their knowledge from experience. Others learn through hiring, grafting on new members who possess knowledge not previously available within the firm. Neither of these methods, however, may be adequate in the international setting. According to the Uppsala process model, outlined in Johanson and Wiedersheim-Paul (1975),companies that seek to become involved in foreign markets and operations should gradually become committed to those markets as well as to learning about them. One reason such internationalization is gradual is the lack of available knowledge about many foreign markets. Knowledge is usually acquired by accumulating over time the information from practical operations in those markets. This is where firms may receive feedback on their results, on what works, and on what does not. New opportunities and unforeseen problems are discovered. Some products even undergo change after substantial knowledge is accumulated. But what about the relevant knowledge and experience needed during actual operation? Often, expanding knowledge about foreign activities depends on the company’s own willingness and ability to collect information through various resources to build an international knowledge base. Consequently, corporate policies must be flexible enough that foreign managers can make use of this new learning to help modify their operational processes. One of the first duties of foreign managers going abroad is to learn about and build a knowledge base of the local environment they are entering. 38
THENEEDFORNEWLEARNINGJN DEVELOPING CHINESE OPERATIONS
W
hen entering the Chinese market, many foreign firms with an entrepreneurial orientation and a strong focus on international market opportunities may, in the initial stages, be little aware of the more practical demands or problems they face. Doing business in China is quite different from one’s original perceptions. The most intractable problems arise from mercurial government policies and the unique cultural and business environment. Such problems increase the risk and uncertainty of doing business in China, leading many foreign firms to reduce their commitments and perhaps even withdraw from the market. To overcome this problem, some international firms rely on a management team with experience in foreign operations, using the same core staff to set up operations in different countries. Once startup is accomplished, the team is then transferred to other proximate countries with similar linguistic, cultural, and political backgrounds. Some MNCs began their Asian operations by first moving to a city such as Hong Kong or Singapore, or a country such as Malaysia or Thailand. When the decision was made to move into China, they used the same team to start up those operations. The team can even be used in transfers from province to province within China to start up new facilities. It is not always possible, however, for staff to transfer knowledge learned in one country to another and benefit from the accumulated experience. The process depends on the background and common practice of the two countries and the company’s objectives at the time. In the case of China, a country with a unique communist government and newly opened market, foreign firms may lack relevant knowledge and experience in several areas, including the economic reforms, trading laws and contracts, and public information. Economic
Reforms
Since 1979, the central Chinese government has sought to create a modern economic structure capable of supporting its ambitions with its Open Door Policy. But it has not yet found the appropriate degree of economic reform that best suits the country. China’s economy has an alarming propensity to seesaw between boom and bust. When things get out of control, the government simply slams on the brakes. Witness the Tiananmen Square event in 1989, the credit freeze to avoid uncontrollable inflation in the early 199Os, and the ban on direct marketing in May 1998. The transition from a planned to a free economy Business Horizons /January-February
1999
is not easy, and economic reform has led to severe cyclical spirals. Given the history of ideological U-turns in China, pressing for an all-out free market economy has to be done with caution. The environment can actually change overnight. Another aspect of economic reforms is the creation of a mixed economy with state-owned, collective, and private enterprises. Vice-Premier Zhu Rongji told an international conference in 1993 that China would continue to allow and support the development of private and foreignfunded enterprises that would compete with publicly owned firms on an equal footing. But private businesses still face several problems, such as obtaining bank loans and selling their privately made products in state-owned stores. Trading Laws and Contracts Laws and contracts do not necessarily create certainty or provide a blueprint for doing business in China. Cases have been reported by foreign investors in which agreements or contracts were not honored by Chinese business partners. This is because the Chinese have a fundamentally different view of contracts than Westerners. In countries with strong traditions of law, a contract is a binding agreement between two parties. But in China, it is no more than a symbol of the beginning of a relationship between two sides. With the contract signed, both sides can begin to negotiate or even change the important clauses in the contract. A closer look at Chinese law reveals that often the wording is vague and open to different interpretations. Professional advisers working in China agree that the law is unclear, and that it depends on what a party can negotiate with the local authorities, from tax rates to environmental controls. Negotiation over implementation of the law is one of the aspects of Chinese business practice many outsiders find confusing. On top of this, rules are conveniently considered nonapplicable because of supposed special conditions. Local authorities in different parts of the country may interpret rules in different ways. The complexities created by these differences make it nearly impossible to take a unified approach to doing business with different Chinese provinces. Time-consuming discussions and negotiations with the local authorities are generally involved. It is true that China constantly refines its existing trade laws, among which are taxation law, intellectual property rights, and labor law. However. the legacy of Chinese legal laxity still persists and will take some time to change. Moreover, new laws do not necessarily make for greater certainty. They may, in fact, create more new Organizational
Learning
in China
areas of ambiguity in which investors must seek clarification and negotiation. Public Information While forging their strategic plans, companies may have to rely on statistics to make judgments and forecasts. But how reliable are Chinese statistics? Because of the Chinese attitude toward information of all kinds, it has often been difficult to obtain accurate figures. Historically, statistical data have been used as ideological ammunition, compiled and published with an eye toward political advantage. In many subject areas, there simply is not much data because of the limited demand for information; most people believe that statistics tend to emphasize the good and play down the bad. At times, the lack of data or information is not the result of malicious intent on the part of the Chinese. The main causes are the poor communication within the huge Chinese bureaucracy and the slowness of the information-gathering process. Thus, foreign investors cannot always compile firsthand statistical information for their strategic plans. They may have to rely on the ability of the management team to detect the relevant information for ensuring that the planned strategy is on the right track. And because management teams moving into China may not be starting out with relevant information about the market, they must consider learning as an explicit objective, creating mechanisms and systems in which it can take place. ORGANIZATIONAL LEARNING IN CHINA
A
ccording to the three levels of organizational learning, the ability of individual managers to identify paths for collecting information on local habits, preferences, market structure, and ways of approaching customers is the first step in building a knowledge base about the Chinese market. At the next level, the firm has to ensure that team members are willing to share knowledge and exchange insights among themselves and with business partners on what needs to be done. At the organizational level, the firm has to ensure that the new learning it gained through experience and reflection is documented and stored as one of the principal sources of value-adding for the corporation. The new learning must also be available for 39
Figure 1 The Three Levels of Organizational Learning in Business Operations in China
transfer to the home office for future decisions. Figure 1 depicts the framework of the three levels of organizational learning for business operations in China. Knowledge Acquired at the Individual Level Government Intentions. Among the factors any foreign manager needs for continuously updating information about a local market and its macroeconomic environment are geographical, sociocultural, political, and economic conditions. Doing business in China is no exception. Companies need to develop a diverse information resource base that should include relevant information extracted from trade publications or from the services of consultants. More important, foreign companies need to clear information on the Chinese government’s plans for the types of businesses it will allow foreign investors to form. Such information includes the location, size, and level of business activities that will be allowed. Much depends on whether the government considers the business the foreign firms will bring in as beneficial to the country. A business is perceived to be financially wasteful and contrary to public interest if it falls outside the government’s approved plan. The province of Guangzhou invited Japan’s Jusco Department Store to open a shop in a newly developed town because the provincial government believed that having foreign shops in the new shopping mall might attract visitors to the town. On the other hand, the Shanghai Provincial Government stopped issuing new retail licenses after 1997because the government believed com-
petition was already very intense in the city, and that more stores would simply damage the whole retail industry. Testing the Local Market. International operations are often initiated by potential customers in unexpected ways. Foreign firms with little or no experience in China are attracted by the magic number “1.2 billion.” In terms of purchasing power, China is larger than most of the present East and Southeast Asian markets today. Many foreign companies hope to tap this huge, newly opened consumer market. Realistically, however, what is the size of the potential market and how can we describe the Chinese consumer? The marketing manager for the WD-40 Company, reports Nobel (19941, has suggested that if one really wants to know the Chinese market and consumers well, one must visit plants and meet wholesalers and retailerseven those on the back streets-to become familiar with Chinese modes of operating. It will then become possible to create a picture of the people and their preferences, assess whether the market is ready for a product, and, if so, determine exactly who the end user is. Giordano, the Hong Kong clothing manufacturer and retailer, started out thinking that China was different from Hong Kong because of its large and seemingly diverse consumer market. The company stocked an extensive range of merchandise throughout the country, hoping to create American-style megastores. But Chinese shoppers stayed away, leaving the firm with huge inventories. Since then, Giordano has repositioned itself in China and become more “lean and mean,” limiting the range of products and reverting to its winning strategy Gillette also overestimated China’s potential and entered into a large-scale joint venture with a Shanghai manufacturer, realizing too late that growth in China’s shaving market would not amount to more than 2 to 3 percent per annum. Facial hair is not a major concern for Chinese men, and women either do not need to shave or are disinclined to do so. Encouraging the Chinese to take up shaving would require major expenditures on advertising and the time it takes to alter their beliefs and habits. Some foreign firms are convinced they can make a killing in selling high-priced goods, believing there are many cash-flush consumers hungry to buy imported goods. Others are entering China with the determination to offer rockbottom prices, believing that most of the shoppers are value-oriented. Successes and failures are occurring with both these practices. Moreover, the Chinese market is not unified and the affluent consumers are not concentrated in one area. Average per capita income and typical disposable income differ by city. Cultural differences Business
Horizons
/ JXNIXy-FebrUaIy
1999
exist in traditions and food preferences. Testing the local market is one way to learn what will work in China. With firsthand knowledge, foreign firms have the advantage of responding to the market more quickly than their competitors. Sharing Information. Organizations may cooperate with other business entities through formal terms of agreement or contracts. But this does not necessarily lead to sharing knowledge and insights or exchanging information. To acquire and exploit more knowledge in the Chinese business environment, it is important to develop informal cooperation with diverse industries. United Biscuits Asia Pacific owns a factory in Shekou and sells its biscuits all over China. The major hurdle for the firm is maintaining an efficient distribution and supply chain with products of short shelf life from southern to northern China. Traditional channels held by government distributors are too congested. As a result, the number of private distributors is increasing, but they vary widely in their ability and reliability. So United Biscuits has joined a “conglomerate” of multinationals that meet regularly to discuss how to improve the problem of distribution channels. Members share such information as tips on the availability of a large warehouse in Shuzhou and whether a formal market will work where goods move through unofficial channels. Cooperation can sometimes be more useful than competition. Firms can save each other a lot of effort and time by sharing information with each other. In Beijing, a group of expatriate human resource managers, including trainers and consultants, meets informally to discuss common personnel problems and share information on such issues as recruitment techniques, labor regulations, and housing benefits. They also refer business to each other for training projects. Noncompeting international firms like Shell, IBM, and Henkel are actively collaborating to deliver inhouse skills training by sharing venues and instructors to teach basic management courses to staff members. Exxon is carrying out similar joint training initiatives in southern China. Networks. Choi (1994) points out that Chinese businessmen operate within tight networks that serve many purposes. In addition to allowing members to have ongoing informal agreements and opportunistic business deals, they also act as informal channels for the movement of business information and knowledge among the group members, which is perhaps otherwise impossible even for those with formal alliance contracts. Networks are also a useful means of gathering information on governmental policies, especially regarding import regulations and restrictions, which change rapidly and are rarely well codified. However, it is difficult for foreign firms to include networks in the strategic planning cycle, OrganzWmal
Learning
in China
because network development may depend on individuals and their particular situations. Networks can be unbounded and, over time, may radiate out to a complex web of relationships. For firms to be successful at networking in China, says Monge (19871, two network roles are necessary. One is the liaison and the other is the clique member. Liaisons do not necessarily belong to particular groups, but have information links with people in two or more groups and frequently connect groups. In the new environment, foreign managers may not be able to identify the relevant networks in which they should build relationships. They need to rely on an individual who acts as the liaison to provide the information and make the connections. Finding the liaison who knows the “right people” is the first step in developing a network system in China. Once the connection is made, foreign managers may develop relationships with the team members to gain acceptance as clique members for information exchange. The Japanese senior manager of Jusco’s supermarket department in Shanghai noted that he has a personal friend who works in a Guangzhou supermarket. With his friend’s information, he was able to contact many reliable local suppliers who are now providing up to 50 percent of locally made goods that otherwise would have been imported from Japan. Knowledge Acquired at the Team Level Chinese Joint-Venture Partners. Many international businesses begin their activities in China by teaming up with local partners through some form of joint venture (JV,. In the initial stage, one of the objectives of a JV is to share resources in achieving goals that would be difficult to achieve alone, or to provide a hedge against uncertainties for foreign firms with very limited understanding of and experience in the Chinese markets. In the long term, JVs provide an effective learning vehicle for foreign firms to build their knowledge bases. Chinese JV partners are resourceful channels to learn from. They can provide input on the domestic market and environment, sources of raw materials, and contacts with government authorities, local suppliers, and labor unions. Foreign firms are better able to obtain information that would be difficult for them to gain in advance and would take too much time to learn on their own. Moreover, given joint ownership rights and the mutual commitment of sharing resources, Chinese partners may be more willing to share their knowledge with their foreign partners than if there were no formal relationship. Of course, foreign firms must also develop the capability of acquiring, evaluating, integrating, and deploying knowledge on their own.
How much they are able to learn from their partners will depend on whether they have good information management skills and effective communication channels with them. Local Staff. Local employees are an excellent source df information about Chinese business operations. Learning from them can range from finding good local agents and middlemen, to understanding workers’ behaviors and customer preferences, to grasping many Chinese cultural practices. Local staff know how to deal with many operational problems that foreign managers may consider major disasters. The Jusco Department Store in Guangdong set up its organizational hierarchy differently from its traditional practices. Instead of functional managers, regional managers who are hired from different parts of China report directly to the managing director. The management team consists of two Japanese managers from the head office in Japan, one Chinese manager from Hong Kong, and one Chinese manager hired locally. The team meets at least once a week to share information on how to solve problems. With both foreign and local managers possessing different experiences and market knowledge, team members benefit from each other. They believe the process of sharing information during their discussions helps translate individual knowledge, insight, and information into collective knowledge, thereby aiding not only in problem solving but also in improving coordination in the work processes. Along with the cultural differences that may be learned, foreign managers may benefit from local employees’ familiarity with the “rules of the game” in negotiating with Chinese parties. With these workers along for business negotiations, foreign managers can not only avoid misunderstanding in communications, they may also learn how to gain tacit information. Knowledge Acquired at the Corporate Level Local Management Practices. Learning cannot be left to chance. An organization must clearly understand its importance as an objective and seek continuous improvement by offering a more promising environment in which members can learn. This means managers must encourage their employees to share and develop their knowledge bases with each other to improve performance. For such sharing to develop, employees need a common concern for the organization rather than merely a personal interest. Management may use teamwork to help translate individual knowledge and information into a collective knowledge base through the sharing process. As Hamel (1991) notes, the constant pressure of one team member on another garners information and exchange
through a series of daily “micro-bargains” between them. Having an appropriate staff reward system can also contribute to the development of the learning mode in an organization. Group rewards may reinforce the willingness of team members to share information in order to get work done properly. Management should permit appropriate levels of flexibility for its staff to make decisions, thereby increasing the likelihood of searching for more information together during the decisionmaking process. Appropriate human resource policies can assist knowledge sharing and development by ensuring that assignments overlap sufficiently and by allowing for job sharing. Home Office Policies. Organizational learning should not stop with those in charge of operations in China. Other managers and employees can make use of the new knowledge and help spread it throughout the company. The home office should foster a culture of feedback and disclosure, creating mechanisms and systems for transferring the learned knowledge from abroad back to headquarters, where internationalization plans are developed. Efficient communication channels and policies can enhance the frequency of knowledge transfer through informal advice and suggestions, particularly when the home office shows a willingness to support the expatriates stationed in China. Headquarters may also implement a more formal mode of communication, such as periodic reports, to ensure that all critical work processes are well documented and current. Relaxing some corporate policies or practices may help promote a learning culture and allow foreign managers the flexibility to use their new knowledge in the Chinese context. The returning expatriate is a good channel for transferring the Chinese experience back to the home office, either by participating in the firm’s future planning or by being involved in staff development for overseas assignments. When Jusco decided to enter the Chinese market, instead of sending the Japanese manager stationed in Taiwan directly to China to set up the store, the head office had him return to Japan and join the planning team so he could share his Chinese experience with other team members. After two years, some of those members were then sent to Shanghai or Guangzhou for the China operation. he emergence of China’s market over the last decade has indeed created new opportunities for firms that want to move T into the international market. But would-be investors there must pay particular attention to environmental factors. First, the market is in rapid transition and is regulated by constantly changing government policies. Second, it is underdevelBusiness Horizons /January-February
1999
oped in several important respects, rendering it less practical for foreign managers to transfer their business know-how directly from their home countries. Managers must be aware ahead of time that they may experience a wide variety of challenges. Capable foreign managers need a broader perspective that reaches beyond their immediate jobs. They need to develop an underlying curiosity to learn about the unique Chinese culture and the country’s complex business environment. They must carefully determine how to adapt to it and how to make the business work. With many implicit sets of rules for business practices, foreign managers who swap stories and develop interorganizational relationships with other enterprises may reduce the learning curve. Local team members and business partners are great sources for learning through feedback and discussion. At the same time, the head office should provide a facilitative climate in which learning is highly encouraged and knowledge transfer is seen as a professional responsibility and an integral part of a foreign manager’s job. Doing business in China is by no means an easy mission. It is indeed challenging, often arduous, sometimes frustrating. But foreign firms with the stamina to learn and the ability to understand China’s business environment will find tremendous potential in the country’s vast market. 0
Gary Hamel, “Competition for Competence and Interpartner Learning in International Strategic Alliances,” Strategic ManagementJournal, 12 (1991): 83-103. George Huber, “Organizational Learning: The Contributing Processes and Literature,” Organization Science, February 1991, pp. 88-115. “Human Resource Networks Bloom in Beijing,” Business China, June 23, 1997, p. 12. Jan Johanson and Jan-Erik Vahlne, “The Mechanism of Internationalization,” International Marketing Rev&-u: 7, 4 (1990): 11-24. Jan Johanson and F. Wiedersheim-Paul, “The Internationalization of Firms: Four Swedish Cases,” Journal of Management Studies, 32, 3 (1975): 305-322. Jusco Department Store, General Manager and Senior Manager, Shanghai branch, and Managing Director, Vice Managing Director, and Manager for Sales Planning, Guangzhou branch, personal interviews with the author, June-July 1997.
Daryl McKee, “An Organizational Learning Approach to Product Innovation,” Journal of Product Innovation Management, September
1992, pp. 232-245.
P.R. Monge, “The Network Level of Analysis,” in C.R. Berger and S.H. Chaffee (eds.), Handbook of Communication Science (Newbury Park, CA: Sage Publications, 1987): 239-270. G. Morgan and R. Ramirez, “Action Learning: Holographic Metaphor for Guiding Change,” Human Relations, January 1983, pp. l-17.
References Chris Argyris and Donald A. Schon, Organizational Learning: 7&eory,Method, and Practice (Reading, MA: Addison-Wesley, 1978). Gabriel R. Benito, Carl Arthur Solberg, and Lawrence S. Welch, “An Exploration of the Information Behavior of Norwegian Exporters,” International Journal of Information Management, August 1993, pp. 274-286. W. J. Bilkey and B. Tesar, “The Export Behavior of Smaller-sized Wisconsin Firms,” Journal of International Business Studies, 8, 1 (1977): 93-98. “Blunt, Not Sharp,” Business China, August pp. 4-i.
19, 1996,
“A New Set of Clothes,” 1995, pp. 2-3.
Business China, February
6,
William Nobel, “Company Profile: WD-40,” Access China, June-July 1994, pp. 12-13. Richard Norman, “Developing Capabilities for Organizational Learning,” in Johannes M. Pennings (ed.>, Organizational Strategy and Change (San Francisco: Jossey-Bass, 1985): 217-248. Ren Wen Yan, Vice Chairman, Commercial Commission, Shanghai Municipal People’s Government, personal interview with author, June 1997.
P.J. Buckley and P. Ghauri, The Internationalization of the Firm: A Reader (London: Academic Press, 1993).
York: AMACOM, 1987).
Chong Ju Choi, “Contract Enforcement Across Cultures,”
Peter Senge, 75e Fytb Discipline (New York: Double-
Organization Studies, 15, 5 (1994): 673-682. H. Davies, T. Leung, S. Luk, and Y. Wong, “The Benefits of Guanxi: The Value of Relationships in Developing the Chinese Market,” Industrial Marketing Management, 24, 3 (1995): 207-214. CM. Fiol and M. Lyles, “Organizational Learning,” Academy ofManagement Review, 10 (1985): 803-813.
Organizational
Learning
in China
Franklin
R. Root, Foreign Market Entry Strategies (New
day, 1990). Peter Senge, Art Kleiner, Charlotte Roberts, Richard Ross, and Bryan Smith, The Fifth Discipline Fieldbook (New York: Doubleday, 1994). P. Shrivastava, “A Typology of Organizational Learning Systems,” Journal of Management Studies,January 1983, pp. 7-28.
43
Stanley Slater and John Narver, “Does Competitive Environment Moderate the Market Orientation-Performance Relationship?” Journal of Marketing, 58 (1994): 46-55. Stanley Slater and John Narver, “Market Orientation and the Learning Organization,” Journal of Marketing, July 1995,pp. 63-74. Ray Stata, “Organizational Learning-The Key to Management Innovation,” Sloan Management Review, Spring 1989, pp. 63-74. “The Way the Cookie Crumbles,” October 30, 1995,pp. 3-4.
Business China,
L.S. Welch, “Internationalization by Australian Franchisors,” Asia Paczfic Journal of Management 7, 2 (1990): 101-121. A. Yaprak, “An Empirical Study of the Differences Between Small Exporting and Non-Exporting U.S. Firms,” International Marketing Review, 2, 2 (1985): 72-83.
Jenny S.Y. lee is a university lecturer in management at the City University of Hong Kong.
Business Horizons /January-February
1999
D
espite thorough planning, many foreignowned companies today are having a hard time sustaining their business operations in China. With substantial sums of money invested in the country, however, they are reluctant to close up shop. Given the rapidly changing business environment in the 1990s and China’s ever-shifting government policies and developments, their difficulties are not surprising; most foreign firms desire a piece of this giant new market, but lack the relevant knowledge and experience for conducting business there. The way to develop the capacity for reducing barriers to foreign entry is by accumulating foreign experience through organizational learning. Companies with the ability to learn, and to apply that knowledge, will gain new insights into unfamiliar environments and identify areas for refining their business decisions. Because China is unique by the very nature of its market, companies attempting to do business there need to make organizational learning an explicit objective. They must ensure that staff members maintain good learning abilities in order to keep abreast of changes in the local environment. In addition to defining the concept of organizational learning and explaining why it is necessary in the context of China, our aim here is to explore how members of a firm can acquire the knowledge that can be shared among team members and retained throughout the organization. The Concept of Organizational karning Learning, say Argyris and Schon (1978), is the accumulation of information in the form of knowledge. The definition of organizational learning remains somewhat vague, in part because it is a multidimensional construct characterized by disciplines, skills, styles, elements, and procedures. Several types of organizational learnOrgamzational Learning in China
ing have been identified. Argyris and Schon distinguish between singleloop learning, which entails incremental change within an existing framework, and double-loop learning, which involves transformative change and the testing of underlying assumptions. Some authors adopt a static framework; others focus on “process.” Fiol and Lyles (1985) note that organizational learning entails the process of improving actions through better knowledge and understanding. According to Huber (19911, the activity in the learning process involves knowledge acquisition, sharing, and utilization. Although researchers may have different points of emphasis, organizational learning essentially must involve three levels: the individual, the team, and the firm. The first is crucial, of course, because individuals form the basis of the teams and the firm. Senge (1990) states that individual learning does not guarantee organizational leaning, but without it the latter cannot occur. Individual opportunities include self-managed learning, learning from coworkers, daily work experiences, and personal insights. Team learning occurs when team members share their experiences, both negative and positive, with other members of the firm, generating new values and insights to improve the practices in use. Organizational learning builds on a firm’s memory, which depends on such institutional mechanisms as policies and strategies to retain knowledge. Influenced by structural variables, it starts with the individual and disseminates the
new knowledge among other individuals and team members throughout the firm. Not only are the three levels of learning highly interrelated and complementary but the resulting composite knowledge creates a powerful resource in which the whole is much greater and more valuable than the sum of its parts. The origin of organizational learning can be traced in the research literature as far back as the 1920s. Not until the 198Os, however, did some firms begin realizing the potential of linking it to corporate performance, competitiveness, and success. The application of the concept to the multinational company (MNC) is still emerging. How the individual and the firm can learn in this context still needs to be explored, but many MNCs are well aware of the critical need to develop new knowledge in their foreign operations. Many companies obtain their knowledge from experience. Others learn through hiring, grafting on new members who possess knowledge not previously available within the firm. Neither of these methods, however, may be adequate in the international setting. According to the Uppsala process model, outlined in Johanson and Wiedersheim-Paul (1975),companies that seek to become involved in foreign markets and operations should gradually become committed to those markets as well as to learning about them. One reason such internationalization is gradual is the lack of available knowledge about many foreign markets. Knowledge is usually acquired by accumulating over time the information from practical operations in those markets. This is where firms may receive feedback on their results, on what works, and on what does not. New opportunities and unforeseen problems are discovered. Some products even undergo change after substantial knowledge is accumulated. But what about the relevant knowledge and experience needed during actual operation? Often, expanding knowledge about foreign activities depends on the company’s own willingness and ability to collect information through various resources to build an international knowledge base. Consequently, corporate policies must be flexible enough that foreign managers can make use of this new learning to help modify their operational processes. One of the first duties of foreign managers going abroad is to learn about and build a knowledge base of the local environment they are entering. 38
THENEEDFORNEWLEARNINGJN DEVELOPING CHINESE OPERATIONS
W
hen entering the Chinese market, many foreign firms with an entrepreneurial orientation and a strong focus on international market opportunities may, in the initial stages, be little aware of the more practical demands or problems they face. Doing business in China is quite different from one’s original perceptions. The most intractable problems arise from mercurial government policies and the unique cultural and business environment. Such problems increase the risk and uncertainty of doing business in China, leading many foreign firms to reduce their commitments and perhaps even withdraw from the market. To overcome this problem, some international firms rely on a management team with experience in foreign operations, using the same core staff to set up operations in different countries. Once startup is accomplished, the team is then transferred to other proximate countries with similar linguistic, cultural, and political backgrounds. Some MNCs began their Asian operations by first moving to a city such as Hong Kong or Singapore, or a country such as Malaysia or Thailand. When the decision was made to move into China, they used the same team to start up those operations. The team can even be used in transfers from province to province within China to start up new facilities. It is not always possible, however, for staff to transfer knowledge learned in one country to another and benefit from the accumulated experience. The process depends on the background and common practice of the two countries and the company’s objectives at the time. In the case of China, a country with a unique communist government and newly opened market, foreign firms may lack relevant knowledge and experience in several areas, including the economic reforms, trading laws and contracts, and public information. Economic
Reforms
Since 1979, the central Chinese government has sought to create a modern economic structure capable of supporting its ambitions with its Open Door Policy. But it has not yet found the appropriate degree of economic reform that best suits the country. China’s economy has an alarming propensity to seesaw between boom and bust. When things get out of control, the government simply slams on the brakes. Witness the Tiananmen Square event in 1989, the credit freeze to avoid uncontrollable inflation in the early 199Os, and the ban on direct marketing in May 1998. The transition from a planned to a free economy Business Horizons /January-February
1999
is not easy, and economic reform has led to severe cyclical spirals. Given the history of ideological U-turns in China, pressing for an all-out free market economy has to be done with caution. The environment can actually change overnight. Another aspect of economic reforms is the creation of a mixed economy with state-owned, collective, and private enterprises. Vice-Premier Zhu Rongji told an international conference in 1993 that China would continue to allow and support the development of private and foreignfunded enterprises that would compete with publicly owned firms on an equal footing. But private businesses still face several problems, such as obtaining bank loans and selling their privately made products in state-owned stores. Trading Laws and Contracts Laws and contracts do not necessarily create certainty or provide a blueprint for doing business in China. Cases have been reported by foreign investors in which agreements or contracts were not honored by Chinese business partners. This is because the Chinese have a fundamentally different view of contracts than Westerners. In countries with strong traditions of law, a contract is a binding agreement between two parties. But in China, it is no more than a symbol of the beginning of a relationship between two sides. With the contract signed, both sides can begin to negotiate or even change the important clauses in the contract. A closer look at Chinese law reveals that often the wording is vague and open to different interpretations. Professional advisers working in China agree that the law is unclear, and that it depends on what a party can negotiate with the local authorities, from tax rates to environmental controls. Negotiation over implementation of the law is one of the aspects of Chinese business practice many outsiders find confusing. On top of this, rules are conveniently considered nonapplicable because of supposed special conditions. Local authorities in different parts of the country may interpret rules in different ways. The complexities created by these differences make it nearly impossible to take a unified approach to doing business with different Chinese provinces. Time-consuming discussions and negotiations with the local authorities are generally involved. It is true that China constantly refines its existing trade laws, among which are taxation law, intellectual property rights, and labor law. However. the legacy of Chinese legal laxity still persists and will take some time to change. Moreover, new laws do not necessarily make for greater certainty. They may, in fact, create more new Organizational
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areas of ambiguity in which investors must seek clarification and negotiation. Public Information While forging their strategic plans, companies may have to rely on statistics to make judgments and forecasts. But how reliable are Chinese statistics? Because of the Chinese attitude toward information of all kinds, it has often been difficult to obtain accurate figures. Historically, statistical data have been used as ideological ammunition, compiled and published with an eye toward political advantage. In many subject areas, there simply is not much data because of the limited demand for information; most people believe that statistics tend to emphasize the good and play down the bad. At times, the lack of data or information is not the result of malicious intent on the part of the Chinese. The main causes are the poor communication within the huge Chinese bureaucracy and the slowness of the information-gathering process. Thus, foreign investors cannot always compile firsthand statistical information for their strategic plans. They may have to rely on the ability of the management team to detect the relevant information for ensuring that the planned strategy is on the right track. And because management teams moving into China may not be starting out with relevant information about the market, they must consider learning as an explicit objective, creating mechanisms and systems in which it can take place. ORGANIZATIONAL LEARNING IN CHINA
A
ccording to the three levels of organizational learning, the ability of individual managers to identify paths for collecting information on local habits, preferences, market structure, and ways of approaching customers is the first step in building a knowledge base about the Chinese market. At the next level, the firm has to ensure that team members are willing to share knowledge and exchange insights among themselves and with business partners on what needs to be done. At the organizational level, the firm has to ensure that the new learning it gained through experience and reflection is documented and stored as one of the principal sources of value-adding for the corporation. The new learning must also be available for 39
Figure 1 The Three Levels of Organizational Learning in Business Operations in China
transfer to the home office for future decisions. Figure 1 depicts the framework of the three levels of organizational learning for business operations in China. Knowledge Acquired at the Individual Level Government Intentions. Among the factors any foreign manager needs for continuously updating information about a local market and its macroeconomic environment are geographical, sociocultural, political, and economic conditions. Doing business in China is no exception. Companies need to develop a diverse information resource base that should include relevant information extracted from trade publications or from the services of consultants. More important, foreign companies need to clear information on the Chinese government’s plans for the types of businesses it will allow foreign investors to form. Such information includes the location, size, and level of business activities that will be allowed. Much depends on whether the government considers the business the foreign firms will bring in as beneficial to the country. A business is perceived to be financially wasteful and contrary to public interest if it falls outside the government’s approved plan. The province of Guangzhou invited Japan’s Jusco Department Store to open a shop in a newly developed town because the provincial government believed that having foreign shops in the new shopping mall might attract visitors to the town. On the other hand, the Shanghai Provincial Government stopped issuing new retail licenses after 1997because the government believed com-
petition was already very intense in the city, and that more stores would simply damage the whole retail industry. Testing the Local Market. International operations are often initiated by potential customers in unexpected ways. Foreign firms with little or no experience in China are attracted by the magic number “1.2 billion.” In terms of purchasing power, China is larger than most of the present East and Southeast Asian markets today. Many foreign companies hope to tap this huge, newly opened consumer market. Realistically, however, what is the size of the potential market and how can we describe the Chinese consumer? The marketing manager for the WD-40 Company, reports Nobel (19941, has suggested that if one really wants to know the Chinese market and consumers well, one must visit plants and meet wholesalers and retailerseven those on the back streets-to become familiar with Chinese modes of operating. It will then become possible to create a picture of the people and their preferences, assess whether the market is ready for a product, and, if so, determine exactly who the end user is. Giordano, the Hong Kong clothing manufacturer and retailer, started out thinking that China was different from Hong Kong because of its large and seemingly diverse consumer market. The company stocked an extensive range of merchandise throughout the country, hoping to create American-style megastores. But Chinese shoppers stayed away, leaving the firm with huge inventories. Since then, Giordano has repositioned itself in China and become more “lean and mean,” limiting the range of products and reverting to its winning strategy Gillette also overestimated China’s potential and entered into a large-scale joint venture with a Shanghai manufacturer, realizing too late that growth in China’s shaving market would not amount to more than 2 to 3 percent per annum. Facial hair is not a major concern for Chinese men, and women either do not need to shave or are disinclined to do so. Encouraging the Chinese to take up shaving would require major expenditures on advertising and the time it takes to alter their beliefs and habits. Some foreign firms are convinced they can make a killing in selling high-priced goods, believing there are many cash-flush consumers hungry to buy imported goods. Others are entering China with the determination to offer rockbottom prices, believing that most of the shoppers are value-oriented. Successes and failures are occurring with both these practices. Moreover, the Chinese market is not unified and the affluent consumers are not concentrated in one area. Average per capita income and typical disposable income differ by city. Cultural differences Business
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exist in traditions and food preferences. Testing the local market is one way to learn what will work in China. With firsthand knowledge, foreign firms have the advantage of responding to the market more quickly than their competitors. Sharing Information. Organizations may cooperate with other business entities through formal terms of agreement or contracts. But this does not necessarily lead to sharing knowledge and insights or exchanging information. To acquire and exploit more knowledge in the Chinese business environment, it is important to develop informal cooperation with diverse industries. United Biscuits Asia Pacific owns a factory in Shekou and sells its biscuits all over China. The major hurdle for the firm is maintaining an efficient distribution and supply chain with products of short shelf life from southern to northern China. Traditional channels held by government distributors are too congested. As a result, the number of private distributors is increasing, but they vary widely in their ability and reliability. So United Biscuits has joined a “conglomerate” of multinationals that meet regularly to discuss how to improve the problem of distribution channels. Members share such information as tips on the availability of a large warehouse in Shuzhou and whether a formal market will work where goods move through unofficial channels. Cooperation can sometimes be more useful than competition. Firms can save each other a lot of effort and time by sharing information with each other. In Beijing, a group of expatriate human resource managers, including trainers and consultants, meets informally to discuss common personnel problems and share information on such issues as recruitment techniques, labor regulations, and housing benefits. They also refer business to each other for training projects. Noncompeting international firms like Shell, IBM, and Henkel are actively collaborating to deliver inhouse skills training by sharing venues and instructors to teach basic management courses to staff members. Exxon is carrying out similar joint training initiatives in southern China. Networks. Choi (1994) points out that Chinese businessmen operate within tight networks that serve many purposes. In addition to allowing members to have ongoing informal agreements and opportunistic business deals, they also act as informal channels for the movement of business information and knowledge among the group members, which is perhaps otherwise impossible even for those with formal alliance contracts. Networks are also a useful means of gathering information on governmental policies, especially regarding import regulations and restrictions, which change rapidly and are rarely well codified. However, it is difficult for foreign firms to include networks in the strategic planning cycle, OrganzWmal
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because network development may depend on individuals and their particular situations. Networks can be unbounded and, over time, may radiate out to a complex web of relationships. For firms to be successful at networking in China, says Monge (19871, two network roles are necessary. One is the liaison and the other is the clique member. Liaisons do not necessarily belong to particular groups, but have information links with people in two or more groups and frequently connect groups. In the new environment, foreign managers may not be able to identify the relevant networks in which they should build relationships. They need to rely on an individual who acts as the liaison to provide the information and make the connections. Finding the liaison who knows the “right people” is the first step in developing a network system in China. Once the connection is made, foreign managers may develop relationships with the team members to gain acceptance as clique members for information exchange. The Japanese senior manager of Jusco’s supermarket department in Shanghai noted that he has a personal friend who works in a Guangzhou supermarket. With his friend’s information, he was able to contact many reliable local suppliers who are now providing up to 50 percent of locally made goods that otherwise would have been imported from Japan. Knowledge Acquired at the Team Level Chinese Joint-Venture Partners. Many international businesses begin their activities in China by teaming up with local partners through some form of joint venture (JV,. In the initial stage, one of the objectives of a JV is to share resources in achieving goals that would be difficult to achieve alone, or to provide a hedge against uncertainties for foreign firms with very limited understanding of and experience in the Chinese markets. In the long term, JVs provide an effective learning vehicle for foreign firms to build their knowledge bases. Chinese JV partners are resourceful channels to learn from. They can provide input on the domestic market and environment, sources of raw materials, and contacts with government authorities, local suppliers, and labor unions. Foreign firms are better able to obtain information that would be difficult for them to gain in advance and would take too much time to learn on their own. Moreover, given joint ownership rights and the mutual commitment of sharing resources, Chinese partners may be more willing to share their knowledge with their foreign partners than if there were no formal relationship. Of course, foreign firms must also develop the capability of acquiring, evaluating, integrating, and deploying knowledge on their own.
How much they are able to learn from their partners will depend on whether they have good information management skills and effective communication channels with them. Local Staff. Local employees are an excellent source df information about Chinese business operations. Learning from them can range from finding good local agents and middlemen, to understanding workers’ behaviors and customer preferences, to grasping many Chinese cultural practices. Local staff know how to deal with many operational problems that foreign managers may consider major disasters. The Jusco Department Store in Guangdong set up its organizational hierarchy differently from its traditional practices. Instead of functional managers, regional managers who are hired from different parts of China report directly to the managing director. The management team consists of two Japanese managers from the head office in Japan, one Chinese manager from Hong Kong, and one Chinese manager hired locally. The team meets at least once a week to share information on how to solve problems. With both foreign and local managers possessing different experiences and market knowledge, team members benefit from each other. They believe the process of sharing information during their discussions helps translate individual knowledge, insight, and information into collective knowledge, thereby aiding not only in problem solving but also in improving coordination in the work processes. Along with the cultural differences that may be learned, foreign managers may benefit from local employees’ familiarity with the “rules of the game” in negotiating with Chinese parties. With these workers along for business negotiations, foreign managers can not only avoid misunderstanding in communications, they may also learn how to gain tacit information. Knowledge Acquired at the Corporate Level Local Management Practices. Learning cannot be left to chance. An organization must clearly understand its importance as an objective and seek continuous improvement by offering a more promising environment in which members can learn. This means managers must encourage their employees to share and develop their knowledge bases with each other to improve performance. For such sharing to develop, employees need a common concern for the organization rather than merely a personal interest. Management may use teamwork to help translate individual knowledge and information into a collective knowledge base through the sharing process. As Hamel (1991) notes, the constant pressure of one team member on another garners information and exchange
through a series of daily “micro-bargains” between them. Having an appropriate staff reward system can also contribute to the development of the learning mode in an organization. Group rewards may reinforce the willingness of team members to share information in order to get work done properly. Management should permit appropriate levels of flexibility for its staff to make decisions, thereby increasing the likelihood of searching for more information together during the decisionmaking process. Appropriate human resource policies can assist knowledge sharing and development by ensuring that assignments overlap sufficiently and by allowing for job sharing. Home Office Policies. Organizational learning should not stop with those in charge of operations in China. Other managers and employees can make use of the new knowledge and help spread it throughout the company. The home office should foster a culture of feedback and disclosure, creating mechanisms and systems for transferring the learned knowledge from abroad back to headquarters, where internationalization plans are developed. Efficient communication channels and policies can enhance the frequency of knowledge transfer through informal advice and suggestions, particularly when the home office shows a willingness to support the expatriates stationed in China. Headquarters may also implement a more formal mode of communication, such as periodic reports, to ensure that all critical work processes are well documented and current. Relaxing some corporate policies or practices may help promote a learning culture and allow foreign managers the flexibility to use their new knowledge in the Chinese context. The returning expatriate is a good channel for transferring the Chinese experience back to the home office, either by participating in the firm’s future planning or by being involved in staff development for overseas assignments. When Jusco decided to enter the Chinese market, instead of sending the Japanese manager stationed in Taiwan directly to China to set up the store, the head office had him return to Japan and join the planning team so he could share his Chinese experience with other team members. After two years, some of those members were then sent to Shanghai or Guangzhou for the China operation. he emergence of China’s market over the last decade has indeed created new opportunities for firms that want to move T into the international market. But would-be investors there must pay particular attention to environmental factors. First, the market is in rapid transition and is regulated by constantly changing government policies. Second, it is underdevelBusiness Horizons /January-February
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oped in several important respects, rendering it less practical for foreign managers to transfer their business know-how directly from their home countries. Managers must be aware ahead of time that they may experience a wide variety of challenges. Capable foreign managers need a broader perspective that reaches beyond their immediate jobs. They need to develop an underlying curiosity to learn about the unique Chinese culture and the country’s complex business environment. They must carefully determine how to adapt to it and how to make the business work. With many implicit sets of rules for business practices, foreign managers who swap stories and develop interorganizational relationships with other enterprises may reduce the learning curve. Local team members and business partners are great sources for learning through feedback and discussion. At the same time, the head office should provide a facilitative climate in which learning is highly encouraged and knowledge transfer is seen as a professional responsibility and an integral part of a foreign manager’s job. Doing business in China is by no means an easy mission. It is indeed challenging, often arduous, sometimes frustrating. But foreign firms with the stamina to learn and the ability to understand China’s business environment will find tremendous potential in the country’s vast market. 0
Gary Hamel, “Competition for Competence and Interpartner Learning in International Strategic Alliances,” Strategic ManagementJournal, 12 (1991): 83-103. George Huber, “Organizational Learning: The Contributing Processes and Literature,” Organization Science, February 1991, pp. 88-115. “Human Resource Networks Bloom in Beijing,” Business China, June 23, 1997, p. 12. Jan Johanson and Jan-Erik Vahlne, “The Mechanism of Internationalization,” International Marketing Rev&-u: 7, 4 (1990): 11-24. Jan Johanson and F. Wiedersheim-Paul, “The Internationalization of Firms: Four Swedish Cases,” Journal of Management Studies, 32, 3 (1975): 305-322. Jusco Department Store, General Manager and Senior Manager, Shanghai branch, and Managing Director, Vice Managing Director, and Manager for Sales Planning, Guangzhou branch, personal interviews with the author, June-July 1997.
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Jenny S.Y. lee is a university lecturer in management at the City University of Hong Kong.
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