The Cultural Challenges of Doing Business Overseas

Running head: THE CULTURAL CHALLENGES OF DOING BUSINESS OVERSEAS

The Cultural Challenges of Doing Business Overseas

The Cultural Challenges of Doing Business Overseas

Steve Kafka, an American of Czech origin is considering opening a Chicago Style pizza franchise in the Czech Republic. He understand that their will be many difficulties for him to overcome if he is to be successful at doing business overseas. For 45 years, Communism dictated the rules of the Czech Republic. Employment was guaranteed, but the notion of ownership did not exist and entrepreneurial sprit was prohibited. In 1989 the Communist regime broke down and democratization immediately triggered an economic boom. This opened the door to franchising in the Czech Republic and in 1991 the first foreign franchise was established. Today many types of franchises are prospering in the Czech Republic, from restaurants, clothing and hotels to car rentals, household appliances and education creating a good opportunity for Steve to open a pizza franchise in this country.

In this paper the major differences between the U.S and Czech cultures will be addressed in regard to how they affect doing business in the Czech Republic for a foreigner. The comparative advantages of the Czech Republic will be identified. Hofstede's four dimensions of culture will be applied to the Czech business environment. The current barriers to trade affecting the Czech Republic will be examined. Finally, the demand and cost structure used to determine the price for pizza will be assessed.

Differences and Incompatibilities Between the U.S. and Czech Cultures

A number of differences and incompatibilities between U.S. and Czech cultures create major business risks for Steve. However, with careful planning, most of these business risks can be mitigated creating a high likelihood that Steve could be successful with his pizza franchise in the Czech Republic.

One of the biggest challenges Steve will face is the effect decades of communist influence has had on the culture of Czechs. Years of communist influence has created an underdeveloped entrepreneurial culture in the Czech Republic that is very different from the culture in the U.S. As a result, the Czech labor force is lacking local managerial skills and business experience. However, the labor force is well educated and if Steve invests the time to provide proper training, he can establish an excellent workforce with local people who know the market.

Another challenge Steve faces involves the eating culture in the Czech Republic. Most Czechs prefer to dine in and do not frequent restaurants often. The economic department of the French Embassy in Prague did a study on Czech's consumer profile. The report showed that in 2004 Czech's spent only 5% of their household income in Restaurants/hotels (Proust, 2005). During the week, children tend to eat at school and adults usually eat at work. In addition, on weekends lunch is the main meal in the Czech Republic while dinner and breakfast are light. The eating culture of the Czech's is a risk for Steve. Steve needs to be aware of this culture and should structure his business plan accordingly. To help mitigate this risk, Steve should select a location for his pizza restaurant near one of Prague's main tourist attraction. Tourism is becoming popular in the Czech Republic, especially in Prague where Steve plans to open his pizza franchise. When selecting his restaurant location, Steve should consider hot tourist destinations and pick a location near one of Prague's main attractions. In 2004, tourism generated approximately $4 billion in total earnings for the Czech economy (Proust, 2005).

Another major problem is the lack of available domestic capital for U.S. franchises looking to enter the Czech franchising market. Franchising if fairly new in the Czech Republic and Czech banks have been slow to accept the concept of franchising, making it difficult to obtain credit. Although this challenge has gotten better since the Czech Republic joined the European Union in 2004, it still poses an obstacle that Steve might face. One way to avoid this challenge is for Steve to get corporate financing. Over 40% of all Czech franchises are corporate financed (Proust, 2005). Another option would be for Steve to look for help from foreign banks operating in the Czech Republic. For example, Citibank provided some of the financing for a TGI Fridays (Proust, 2005). Yet another option would be for Steve to work with Komercni Banka, the Czech Republic's third-largest lender. In mid-2003 Komercni Banka started a program that offers tailor-made longs to franchises in the Czech Republic. However, if Steve decides to seek financing through Komercni Banka he needs to be aware that a potential client must be a member of the CAF and agree to follow the EU franchising ethical code, in addition to being financially strong (Heskova & Pivoda,2007).

Steve also needs to examine closely his operating costs. In the U.S. a number of restaurants serving pizza are in operation and ingredients are relatively inexpensive due to high supply and demand. However, in Prague, pizza is not a main staple of their diet, so many ingredients will need to be imported or if produced locally, they could be high priced due to low demand. Prague's first Pizza Hut failed because too many ingredients had to be imported to support one restaurant. This drove up food costs and made operating expenses too high (Czech Republic Franchising, 2008). To avoid any surprises in operating expenses, Steve needs to do a complete market analysis.

Although Steve is of Czech origin and speaks the language, he should still take into consideration language barriers as well as different attitudes and expectations from local partners. His friends living in Czech can help him, but Steve cannot expect them to be around for all his business transactions. For example, to show respect to others in the Czech Republic, one addresses both men and women by their professional titles and last names. People do not use first names until they are well acquainted. This culture is very different from the U.S. and Steve needs to be aware of it in order for him to avoid offending local business partners and customers (Czech Republic, 2008).

Another major obstacle is the fact that the Czech Republic does not have any specific laws or regulations for franchising, which means that no legal definition of franchising exist (Czech Republic Franchising, 2008). This differs greatly from the U.S. where strict guidelines are in place to regulate franchising. The