Groupon in China

Intercultural Competences in Business

Group Report

Karla Cioppa 314054

Leif Gramer 322170
Stefan Nenov 323716
Mi Nguyen 326159
Yen Nguyen 320249
Osadolor Ogwu 316317
Huilin Qiang 316143

Word count:

Ms Gemma Nijdam
Executive Summary

This case analysis, written by an international consultant team, examines Groupon’s failed entry
into the Chinese markets by collecting valuable information about the company’s history.

Established in 2006, Groupon started as an e-commerce business, acting as an intermediary

between retailer and customer.
With a great surge in sales, the business was able to create a solid implantation in Europe and
North America’s economy.

Furthering it’s expansion into the Chinese markets, the establishment encountered few obstacles
due to incongruous marketing and media strategy, underestimating China’s competitors, as well
as disregarding the intercultural differences between both nations.

More specific examples will be surveyed and dissected in detail, while applying theories such as
Edward Hall’s high-low context communication, monychrony and polychrony concept and
Hofstede’s cultural dimensions.
Finally, the report will be concluded with recommendations and an implementation plan, on how
to rectify the past mistakes.

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Table of Contents
Executive Summary......................................................................................................................................... 2
1. Introduction............................................................................................................................................. 4
2. Methodology............................................................................................................................................ 5
3. Reasons of failures.................................................................................................................................. 6
3.1. Inappropriate marketing strategy................................................................................................................ 6
3.2. Underestimation of China’s competitors.................................................................................................. 7
3.3. Negotiation and consulting........................................................................................................................... 9
3.4. Sino-American relations................................................................................................................................ 9
3.5. Inappropriate announcement in the media............................................................................................. 10
4. Theories behind the problems........................................................................................................... 11
4.1. Short and long-term orientation................................................................................................................ 11
4.2. Assumption of similarities.......................................................................................................................... 12
4.3. Individualism vs. Collectivism.................................................................................................................. 12
4.4. Monochrony vs. Polychrony...................................................................................................................... 12
5. Conclusion............................................................................................................................................. 13
6. Recommendation/Implementation.................................................................................................... 14
Short-term:.................................................................................................................................................................... 14
Long-term:..................................................................................................................................................................... 15
7. Bibliography.......................................................................................................................................... 18

1.

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1. Introduction

The following report deals with an American company called Groupon, which compares the
prices of several products online and offers special sales every day. Founded in 2006, the
enterprise experienced its breakthrough in 2008 due to the high amount of subscribers, who
enabled new, larger projects and also provided ‘a group of consumers buying power’ (Goldman,
2011).

As every company’s goal is to expand into new, different markets to gain more profit, Groupon
accomplished to establish itself in the European market by using a direct marketing strategy.

Since the Asian market is rising and taking over an important role in the international economy,
the focus of Groupon was to penetrate China’s consumer market. Succeeding with an aggressive
marketing strategy in Europe, they had to face many negative outcomes in China.

Those problems, including an inefficient marketing campaign and an expertise lacking staff, were
caused by an inconsideration of cultural differences, which will be analysed in this report’s
subtopics by using several theories. As an example for the theories being used are, for instance
the Edward Hall’s high-low context communication or Hofstede’s prism of cultural dimensions.

As an intercultural consultant team, several possible solutions and recommendations to avoid

such problems were conducted and also included in this report.

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2. Methodology

A group of seven people form a consultancy team in order to advise and explain Groupon’s
implementation failure in the Chinese market. Therefore, reliable sources were used to create a
valid report. The consultancy team had to collect relevant data and information with help from
different sources of secondary and primary research.

For secondary research, mainly the internet was used to gain a deeper insight into the Groupon
case. Journals and articles from trustworthy websites, such as Financial Times, were conducted.
In addition, theoretical knowledge was applied to explain the intercultural issues and differences
between the American and Chinese culture. For this the textbook ‘Intercultural Skills For
International Business And International Relations’ by Verluyten were used.

Furthermore, primary research was needed to strengthen the consultancy’s decisions with help of
two coach meetings and intercultural business lectures from Mrs. Nijdem, where further
information could be gathered to give a better understanding of this case.

All in all, with the use of those confidential resources, a credible report could be created to advise
and make the company Groupon aware of their cultural misunderstandings in the Chinese market,
and in order to avoid those in the future in case of re-entering the market.

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3. Reasons of failures

Groupon failed to enter the Chinese market because most of the managers and people in charge
for marketing and sales were not from China. They used the same marketing campaigns than in
Europe or America. This led to the following problems (Tech in Asia, n.d.):

3.1.Inappropriate marketing strategy

Groupon’s failure on the Chinese market had several reasons; some were based on naivety and
arrogance. First and foremost, believing that the same market strategy that work for Europe will
also work for China. Right at the beginning of the venture, Groupon announced that it aims to
become Chinas largest shopping site. This might be achieved in the long run but in the short run
it was not possible. Unlike people from Asia, Westerners want to implement a business decision
as fast as possible (Verluyten, 2010: 52).

The main strategy of Groupon to enter the Chinese market was the attempt to take over the
largest Chinese buying site Lashou, by offering a large amount of money to the owners. But also
this attempt failed when Lashou refused the bid (Zhu, 2011).

Secondly, Groupon’s understanding of the local Chinese culture and the plan on how to target the
local potential customer were non-existing when it entered into the Chinese market. Generally
speaking it is hard for foreign companies to settle on the Asian market, especially in China,
because of the strong social-cultural background (Verluyten, 2010: 1-19). It will not work out
well for a foreign company to adopt its marketing model to the Chinese market. Marketing
models such as direct marketing, which works well in the American market, is likely to fail in the
Chinese market. Although Groupon has spent millions into marketing its brand on the Chinese
market, the Chinese customers were not ready to see the brands products being better as the one
of its competitors. This is due to the fact, that Chinese customers are less likely to be loyal to any
brand. For a Chinese customer what counts the most for a purchase decision is the price and
Groupon has failed to recognize that (Vitamin Imc, 2012).

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Another mistake of Groupon was to use mass mail marketing which was successfully used in
Germany, as a way to reach the local Chinese people, even though having been informed that
such marketing approach is not going to work, because the Chinese people tend not to read such
type of emails (Zhu, 2011). The Chinese people prefer to establish a connection with the seller or
provider before making a purchase [CITATION The15 \l 1043 ].

Thirdly, Groupon failed to focus on more recruitment of local personal in its management
structure, which could have aid to a better understanding of the local Chinese market, because of
their expertise and knowledge. It would have also helped Groupon to create a suitable strategy,
which would have been more successful on the Chinese market. However, by relying too heavily
on foreign managers to run operations in China, who have little or no understanding about the
Chinese local market and its social-cultural background, the Chinese employees find themselves
being managed in a western fashion, which was not very effective. This was not very welcomed
by the Chinese employees. As a result some employees did not respect or feel loyal to their
managers and quit their job (Zhu, 2011).

3.2.Underestimation of China’s competitors

One of the most important factors to evaluate when entering any new market, especially overseas,
is the competition. This is crucial to determine strategies by which the company can gain
customers from their competitors, by offering more attractive options. But it is also a good point
of reference to know what works on that specific market and what are consumers looking for.

Groupon, is not the first nor the last company to underestimate the amount of competition. Big
companies such as Groupon, often think that they can beat any number of competitors by
investing a lot of money on applying their standardized campaigns. Yet, for markets such as the
Chinese there are many cultural factors in play, and assuming similarities between this market
and the others they operate in can be a costly mistake.

To respond to a situation, people act according to their set of norms and values, a frame of
reference that guides the decision. This often leads to attribution mistakes, when individuals

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assume that their point of view is applicable to every situation (2012, Verluyten). Especially in
intercultural situations, where people often have different cultural backgrounds.

Groupon, entered an oversaturated market where companies are already trying very hard to stay
in business. Groupon made a smart move by partnering with Tencent Holdings Inc., one of the
biggest Internet companies in the country. However, they made a mistake by assuming they could
tackle the Chinese market the same way they have tackled the US and European market.

Groupon has implemented an aggressive strategy in the above mentioned markets, including:

• High investments

• 50-50 profit split with vendors

• Fast launch of the company

As good as these actions worked in the other markets, it was not a guarantee that it will work in
China. They assumed that because it is a fast growing market the strategy was going to be
successful. However, they forgot to take into consideration the many cultural differences that
exist between these countries.

Even though they were advised against it, they disregarded Tencent's suggestion of taking their
time to fully understand the market and then launch the site. Furthermore, they first insisted on
having 50-50 split of profits with the vendors, without knowing that the Chinese vendors have so
much power in the market, because of the massive amount of competitors, that they usually end
up with a 90-10 profit split in favor of the vendor.

Moreover, Groupon tried offer high salaries to win over competitors’ top employees. Unluckily
for them this strategy did not work out well (Zhu, 2011). Chinese employees tend to be very loyal
to their employer and are less likely to change their employer except they are lead off.

Furthermore, an assortment of Chinese group buying sites joined forces, in order to issue a formal
statement that warned any employee about the consequence of leaving their employer to work for
Groupon, which entails not being hired by any company in their alliance, in case she or he leaves
or is lead of by Groupon in the future (Zhu, 2011).

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Many mistakes were made because of the stubborn decision of Groupon guided their decisions
from what they know to work in other countries, without appropriate research, not listening to
their partner and most important not taking into consideration the behavior of their competitors.
This is all lead by their frame of reference, what they knew to work, without much thought on the
similarities they were assuming.

3.3.Negotiation and consulting

In the US and in Europe, Groupon was successful by using an aggressive strategy to "force"
retailers/wholesalers to agree to their strict contractual rules. It worked out since the companies
were afraid of losing market shares to competitors. Assuming that it will be similar in China, the
managers took the same aggressive approach. They failed for several reasons: First of all, the
profit margins of Chinese companies are way lower (around 10%) than the one of similar US-
based companies (Financial times 2015). Therefore, it would have been simply impossible for the
companies to stick to the harsh contractual rules without getting bankrupt. Secondly, in Asian
countries it is common to get to know the counterpart before doing business together. Chinese
businessmen rely on a network of people they know. For them, "building up trust is essential and
may take a long time" (S. Paul Verluyten 2010: Chapter 3, p. 47). Asian managers prefer the
"zooming in" structure in a negotiation. This means, before getting to the details of a deal, the
general concept has to be discussed. US-managers rather choose a "zooming out" approach by
starting with the details of the deal first (S. Paul Verluyten 2010: Chapter 3, p. 49). To sum up,
western businessmen tend to meet up to settle a deal while Asian businessmen rather meet up to
develop a relationship (Paik & Tung 1999: 115).

3.4.Sino-American relations

Due to the fact that China rules under a dictatorship and the US is a federal presidential
constitutional republic. Two completely different political systems explain the difficulties of
intercultural cooperation between two countries. One aspect, which the US and China do not
agree on, are human rights, since Chinese citizens are not allowed to have as many kids as they

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want and do not have the freedom of expression. Another aspect of distrust is that the US is
obliged to defend Taiwan against the Chinese (The Heritage Foundation, 2012). Based on these
facets, both countries are neither friends, nor trusted friends. Despite the fact, the US and China
are aware that they have to cooperate with each in order to sustain a good economic situation.

For Groupon, as well as any other American company, this means an already tense environment
to work on. Groupon, failed to understand this causing friction with the local managers. The
problems between the two were mainly caused by the lack of understanding between both parties,
not referring to the language, but the understanding of their actions. By declining Tencent’s
suggestions as mentioned above, they insulted their Chinese counterparts. Groupon needed to
realize that build their businesses upon relationships and trust, contrary to the western way.

3.5.Inappropriate announcement in the media

Groupon's China venture, GaoPeng, conducted mass layoffs at offices in more than 10 cities.
According to GaoPeng, the cuts were needed as part of organizational restructuring. Chinese
media posted the report about the number of layoffs, which reached 400 (Michael, 2011).
Groupon did not comment on it, which really made staffs angry. The reasons caused this situation
are, firstly, Groupon underestimated the difficulty to enter Chinese market, and additionally, as it
is well-known, staff in Groupon have the highest level of salary. Hiring more local employees
and cutting down salary appropriately and analysing the local environment are the ways to open
on the Chinese market.

On the other hand, Groupon made a mistake regarding Chinese culture. Their SuperBowl ads
read: “people in Tibet are in trouble” and “whip up an amazing fish curry”, which is absolutely
politically insensitive (Staff , 2011). According to Chinese history, Tibet is a province of China.
However Tibetans are one of the biggest groups of national minority (there are 55 national
minorities in China), so some of them want to be independent from China. As for this
advertisement, talking about “Free Tibet’ is a big mistake for Groupon which is trying to make
friends with China.

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Finally there were many contradictions between Groupon and Tencent reported to the press,
regarding the timing for the site to go online, this caused a lot of confusion among the public
(Marc, 2011). It also created a “bad reputation” for Groupon since Tencent is not willing to
cooperate with them due to their arrogance and disrespectful behaviour towards their practices.

4. Theories behind the problems

The root of all problems Groupon faced entering the Chinese market is the failure to identify and
appropriately address the cultural differences. From the macro level, meaning the understanding
of the Chinese market and the country itself; to the micro level that entails the interpersonal
relationships within the company and with the other parties involved. This problems are specific
and supported by theories created to assess cultural differences.

4.1.Short and long-term orientation

Groupon´s managers encountered a completely different business environment in China. They

failed because they mistakenly assumed similarities to their way of doing business in the US.
Unlike people from Asia, Westerners want to implement a business decision as fast as possible
(S. Paul Verluyten 2010: Chapter 3, p. 52). While the US-managers of Groupon pushed to enter
the market, the managers of Tencent proposed to wait for the right moment. The tensions led to
the shut-down of the jointly run website by the managers of Tencent (WantChinaTimes 2011).
The problems were also caused by the different temporal orientation of the managers. According
to Hofsteder, western civilizations are short-term oriented while Asian civilizations tend to be
more long-term oriented (S.Verluyten 2010: Chapter 3.4,p. 54-57). The US-managers were
obsessed of making high profits in a short time, while their Chinese partners urged them to first
take steps that support long-term oriented goals like the focus on the company´s strategic
planning (WantChinaTimes 2011).

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 4.2.Assumption of similarities

One answer to the question of why misunderstandings occur is that many people naively assume
that certain similarities exist among all people of the world; they expect that simply being human
makes everyone alike. Unfortunately, vastly different values, beliefs, and attitudes that vary from
culture to culture are often overlooked. Saying that “people are people” is a common trap, even
when it reduces the discomfort of dealing with difference (Barna, 1994).

As mentioned many times above, Groupon failed to take into account the differences between the
markets they are used to deal in (US and Europe) and the Chinese market. Assumption of
similarities is the root of the inappropriate marketing strategies and the underestimation of
competitors, which was highly costly for the company.

4.3.Individualism vs. Collectivism

The degree to which people in a country prefer to act as individuals rather than as members of
groups. On the individualist side we find societies in which the ties between individuals are
loose: everyone is expected to look after him/herself and his/her immediate family. On the
collectivist side, we find societies in which people from birth onwards are integrated into strong,
cohesive in-groups, often extended families (with uncles, aunts and grandparents) which continue
protecting them in exchange for unquestioning loyalty. The word 'collectivism' in this sense has
no political meaning: it refers to the group, not to the state (Hofstede, 1984)

For Groupon to think that Chinese employees would simply leave their current employers for a
better opportunity was based on their individualistic perception, failing to realize that Chinese
people are far more loyal to their employers because they are a collectivistic society.

4.4.Monochrony vs. Polychrony

Monochromic people tend to do only one activity at a time. They like to focus on the job at hand,
and move to next one when the previous one is done. In addition, these group of people tend to

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show a great deal of respect for privacy. On the contrary, Polychromic people tend to spread their
attention over the multiple activities at a time. They more focus on people, in which means they
have a tendency to build lifetime relationships (Rutledge, 2011).

Groupon, a company in typical monochromic culture, sees time as restrictive, as “ time is

money”, and tries to finish task and receive profit as soon as possible. However, the way is
unacceptable to Chinese businessmen because they want to establish relationship that makes
them trust each other first. Therefore, a lot of conflicts and arguments happened between
Groupon and Chinese market, and caused Groupon’s failure.

5. Conclusion

The market entry of Groupon into China faced severe difficulties. They failed to adapt to the
culture and the way of doing business in China. First of all, their marketing strategy was
inappropriate for the local market. They assumed that the same strategies that they were using in
the EU and US markets will also work on the Chinese market.
Secondly, Groupon used an aggressive negotiation strategy to approach local suppliers. This
strategy was sure to fail, because the local suppliers were usually the ones who have more
negotiating power and controlled the terms of doing business.
Furthermore, by ignoring the advises from its partner Tencent, Groupon failed to take advantage
from one of the leading firms in the industry. This resulted in failing to establish trust in business
relations and deterred potential partners.
Thirdly, the layoff of hundreds of workers as the business situation got worst was not welcomed
by many and caused bad press in the public. Moreover, it affected Groupon´s public image.

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6. Recommendation/Implementation

Groupon made mistakes in several important areas. Therefore, the issues that arose have to be
tackled with concrete actions. The following actions are divided in short- and long term.

Short-term:

Action-plan:

The tensions between the US/Chinese managers, the split between Tencent and Groupon and the
failed marketing strategy have caused a disruption in the firm´s corporate network. We advise to
organize a meeting between the US and Chinese managers hosted by the head of department of
Groupon. Prior to the meeting, every manager has to write a report about what went wrong in
his/her department and what he/she thinks has to be changed.

The meeting will be scheduled as followed and might be more effective if split over 2 or 3 days:

 speech of the head of department

 problem-analysing/feedback-round
 Setting up an action plan

The speech serves to restore the confidence of the managers and contains the outline of the
meeting. Managers are held to be constructive and avoid mutual recriminations. During the
meeting, the failures of the different departments will be analysed. It is advisable to hire a local
consultancy-company to be present in this phase of the meeting. They will then give feedback to
the different departments and propose what they think should be changed. Finally, the action-plan
will be developed. The action-plan will point out which steps have to be taken by the different
departments to get back on track.

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Corporation with local businesses:

As mentioned before, Groupon´s marketing strategy failed miserably. The reason was that they
chose the same approach as on the European and US market. By hiring a local marketing agency,
Groupon can use their market expertise to develop a suitable strategy. Such a strategy will take
the socio-cultural background of the Chinese consumers into consideration. The strategy must
focus on the long term development of Groupon in China. The first step is to gain back trust from
the local Chinese market. This can be achieved by partnering with local businesses who have
been working successfully on the Chinese market in order to build a long-time relationship.

Long-term:

Improve Communication:

One of the main sources of Groupon´s failure can be derived from the different orientations of the
Chinese and US-managers. The US-managers were focused on achieving their goals in the short-
term, while the Chinese managers aimed for a long-term strategy. The fractions led to the split of
the managers and to the lost sight of the common goal. To close the gaps between the two
cultures, to improve understanding and build up trust in the common goals, social events are a
good measure to tackle the problem. Therefore, we advice to organize dinners after work where
the managers and employees can speak with each other. This offers them the opportunity to get to
know their fellow colleagues and to better understand their way of handling things.
Another measure could be the so-called "free e-mail Friday", which has already been successfully
implemented by many well-known companies like "Intel" and "PBD" (BBC 2007). On free-email
Fridays, employees are advised to not write internal e-mails. This fosters the communication
since one has to speak with each other personally or by phone.
The mentioned measures are effective if used constantly over a longer duration.
Another cause for the bad communication between the employees can be explained by Hofstede´s
individualism / collectivism concept. The managers, the Chinese as well as the US, have to

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understand the way their colleagues behave. Therefore, we advise to have intercultural training
twice a month for both sides. This will improve the situation in the short- and long term.

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Disclaimer

We, hereby confirm that this report was written by us:

Stefan Nenov: Karla Cioppa:

Leif Gramer: Mi Nguyen:

Osadolor Oglu: Huilin Qiang:

Yen Nguyen:

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