Expansion and Cultural Risks: What Businesses Need to Know

Cultural risks are essential for businesses to consider before expanding, whether it be abroad or to another region. Understanding these cultural risks helps companies to avoid failure. Additionally, cultural differences can affect consumer behaviour and preferences, which ultimately helps businesses determine what products and marketing are appropriate for a particular region and can increase revenue.

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Read this article to learn more about cultural risk.

Understanding Cultural Risk

Risk culture is a term that refers to the potential difficulties a business may face when operating in a specific country or region due to differences in language, norms, culture, and consumer preferences. Both global and local companies need to pay attention to cultural differences between one region and another. The term “culture” refers to a set of standards that a particular group of people accepts collectively.

3 Cultural Risks Businesses Often Face

Ignoring cultural differences can result in a poor market share, low ROI (Return on Investment), missed opportunities, damaged brand reputation, and other negative impacts that can lead to business failure.

Here are 3 cultural risks that businesses often face when expanding:

Failing to adapt global business models to the local market

It is important to understand that consumer behavior and attitudes are greatly influenced by culture. When businesses enter a new market, the business model used previously must be modified and adapted to local preferences, habits, and customs.

Businesses need to integrate local features and global ideas, products, or processes. This adaptation usually involves product and service offerings, pricing, and marketing strategies.

Failing to understand local business practices

To achieve success in expanding to new areas, businesses must have a deep understanding of local business customs and practices.

The inability to understand how politics, regulations, economics, and cultural influences operating in the region can make it difficult for a business to succeed for a long time.

Failing to understand local legal and ethical issues

Failing to understand local legal and ethical issues can significantly damage a business’s reputation and finances in a specific area. For example, the French fashion brand Hermes lost its trademark name after a 15-year struggle against the local Chinese company Foshan. The reason was that in 1995, Foshan had registered a trademark for a Chinese character with a similar pronunciation but a slightly different written form from the name Hermès in Chinese.

The Importance of Cultural Risk

As mentioned above, offering products or services in a specific area requires a deep understanding and comprehensive research on various cultural components in the region. The importance of awareness of cultural differences can be seen in the case of the world’s largest computer software vendor, Microsoft. At that time, Microsoft coloured 8 out of 800,000 pixels on a map of India with a different shade of green to present the disputed region of Kashmir. This difference in green colour indicated that Kashmir was shown as not being a part of India, and ultimately, the product was banned in India.

Another example is the case of the large Japanese car company Honda, which in 2001 decided to continue using the name “Fitta” when introducing a car to Sweden. However, “Fitta” is an old word referring to a woman’s private parts in Swedish, Norwegian, and Danish.

Reducing the Likelihood of Cultural Risk with LOKASI Intelligence

The success rate of expansion can be increased by understanding local cultures and identifying behavior patterns and attitudes influenced by them. LOKASI has various data such as demographic, religious, socio-economic status, and income data that can help businesses reduce the likelihood of cultural risk when adding new branches.

Learn more about how LOKASI Intelligence can help businesses by contacting email: [email protected] or WhatsApp: 087779077750.