SGMT 3000 Lecture Notes - Lecture 1: Chen Geng, Language Barrier, Guanxi
5 Oct 2016
School
Department
Course
Professor
CASE: CHINA
EFL: English as a foreign language
- Elementary
Opportunities
- Education is a focus
- 1 child policy
- Huge market because population = more than 1 billion
- Government policy change: English now mandated at an earlier age
- Materials for early age = lucrative untouched market
Challenges
- Education heavily regulated by government
- Need someone with knowledge of the market and regulatory system
- Need strong political connections
- Need guanxi; need strong interpersonal informal relationships
- Language barrier → cultural difference
- Threat of piracy
- Competition from major multinational publishing houses
- Weak opleetay i the sese that thee’s a lak of Eglish teahes; highly depedet
- Multi-dimensional market
- Difference in income levels means must cater products differently → will increase costs
IS Lingo winning?
- term winnign is up for debate
- What are they doing right
o Market share captured = 60%
o Uiue podut that’s diffeetiated eause it’s ateed to atual Chiese ultue
o Made good relationships with publisher which is their business partner → reason why they
obtained such high market share
o They have key political connection → former minister of education → Chen geng
o They’e estalished a stog o-developed network of English and Chinese authors → key
attribute in determining productivity and unique product
- What are they doing wrong
o Government dictated royalties → because state is the only buyer
o Low profits per sale
o Government dictated a low price
o Lingo had low bargaining power
What’s you opiio as to hat Ligo is doig?
- Good idea
- Negotiate better
- Good opportunity
- Has been poor execution in terms of negotiating contract terms
- They have strong competencies in terms of development network, political connections etc.
- Can they negotiate any better?
o Maybe better leverage political connections
o Emphasize their differentiation and sell on this basis
o Think of sales channel outside of education
find more resources at oneclass.com
find more resources at oneclass.com
o Become seller of teaching services that complement the product → already have network of
teachers
POINT IS: government makes things complicated. No matter how lucrative market is, they are bound. They can
do many things.
Can they take existing competencies and product and sell to different national markets?
- Will have to develop other competency according to different language
- Will need to develop network open to other languages
- Are they transferrable skills
- Expanding is’t so siple
- Need a lot of local adaptation
- Consider what resources are and how tied they are to country
- May want to consider resources they have and how integrated they are with China
- Profit is low, but sales volume is very high
- CIPG was their first stategi alliae i Chia; dopped this pate ad joied ith People’s Eduatio
Press
o PEP wants to drop The strategic alliance (about to experience)
- Why is China such a difficult market to crack for a firm such as Lingo?
o Different culture
o Different government regulations
o Different learning styles; have to find ways of adapting
o Language barrier
o Location
o I Asia outies, you eoe fieds fist, the do usiess togethe
o Cheg Geg’s appeaae as the tuig poit fo Ligo’s usiess i Chia
o Gong Yafu
o Bailing Xia (bottom of pg.7)
▪ Able to win contracts in China
▪ Later had a seat on the board of Lingo
o Business people in Asian countries solve disputes through friendships, not in court
▪ Need to ensure that the friendship is solid as a dispute may not be solved it is not
o If outsiders want to do business with me, they need to have a connection with someone in my
clan/group
o Safe topics of discussion with the Chinese:
▪ Education
• Parents want to know what they best ways are to educate their children
• Talk about your education, why you chose certain schools over another
▪ Food
▪ Sports (esp. Soccer)
o Bribery is a prosecutable offense in China
o Power distance
▪ In Canada, power distance is flat; there is not much hierarchy in our society
find more resources at oneclass.com
find more resources at oneclass.com
• Ex. We address each other by first name
▪ Power distance is high in Asian countries, like China
• Would be asked questions from the Chinese about your personal value (where
you work, type of education, family)
o In negotiations, the Chinese will form a negotiation team. The middle ranked person will speak
about the contract with you, the high ranked person will rarely speak but without their support,
the negotiation will not be successful
o To save face, the Chinese will hire a third party to let a firm know that they do not want to
continue an alliance and will walk away
▪ They do’t at to hut the othe paty y dietly ejetig the
o In a negotiation, your Asian counterparts will nod to show that they hear you, but it does not
mean that they agree with you
o Need to be patient
o Need to find a powerful local partner
- Mr. Kraft demonstrated many personality traits that helped him be successful
o Risk-seeking
o Patient
o Can endure financial setbacks but held on; long time horizon
o Entrepreneurial
Lingo used joint venture approach to come into China
• Alliance with CIPG (Local Chinese company)
• New strategic alliance with PEP (People's Education Press)
1. Is Lingo winning in China today?
• Question about performance about Lingo's performance
• First alliance was a financial disaster
• From perspective of Lingo media, Lingo did not use the wholly-owned subsidiary approach
• Chose JV approach because it did not have distribution channel in China nor a local reputation
when initially penetrating -> thus, JV is safer and easier
▪ Other methods irrelevant for entry mode
• CPIG failed to get the contract from the Beijing municipal government's educational board
(competitor received the contract)
• Second alliance's performance
• Number of items sold (milestones in the first page of the case): extremely impressive!
• However, from a financial perspective (on page 6 of the case - last paragraph), revenue is
quite moderate due to commission structure of 4-8% royalty (unreliable)
• Chinese government dictates textbook prices
• When judging Lingo media's performance there are two perspectives, units sold and financial
• Therefore, only a medium level success
2. Why is China such a difficult market to crack for a firm such as Lingo?
• In Canada, Lingo is a small-medium sized business operating in an unconventional industry
• Highly regulated (Prof was initially hesitant at this argument - thus, not strong)
• High regulations are relevant to entry barriers --> Chinese government welcomed Lingo
Media
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Huge market because population = more than 1 billion. Government policy change: english now mandated at an earlier age. Materials for early age = lucrative untouched market. Need someone with knowledge of the market and regulatory system. Need guanxi; need strong interpersonal informal relationships. Weak (cid:272)o(cid:373)ple(cid:373)e(cid:374)ta(cid:396)y i(cid:374) the se(cid:374)se that the(cid:396)e"s a la(cid:272)k of e(cid:374)glish tea(cid:272)he(cid:396)s; highly depe(cid:374)de(cid:374)t. Difference in income levels means must cater products differently will increase costs. Is lingo winning? term winnign is up for debate. What are they doing wrong: government dictated royalties because state is the only buyer, low profits per sale, government dictated a low price, lingo had low bargaining power. Has been poor execution in terms of negotiating contract terms. They have strong competencies in terms of development network, political connections etc. No matter how lucrative market is, they are bound. Will have to develop other competency according to different language. Will need to develop network open to other languages.
