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Strategic Options and Recommendations

Student’s Name
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Adoption of a New Management Theory: The Polycentric Approach
The polycentric approach is a management strategy utilized by multinationals entering
new markets, where they hire and promote managers from the host country to manage the
subsidiary (Gentili, 2021). Although Costco has excelled in its e-commerce business in
China, there is no guarantee that it will succeed in establishing physical stores and
warehouses in the country. Previously, Western retailers like Amazon, Carrefour, and Tesco
have had difficulties penetrating the Chinese market, thanks to their failure to meet Chinese
clients’ social and economic expectations (Vidalon, Yee, & Rosemain, 2019). Generally, the
Chinese consumer decisions are not entirely based on pricing; hence, any firm relying
primarily on pricing strategies is unlikely to survive in the Chinese market. Chinese
consumers incline towards customized products and shopping environments that reflect local
preferences. Therefore, for Costco to succeed where its predecessors failed, it must adopt the
polycentric approach in establishing online stores and warehouses across China.
Opportunity for Growth in the China Market
The exit of international retailers such as Amazon, Tesco, and Carrefour from the
Chinese market provides an excellent opportunity for other international retailers such as
Costco to enter the market. Also, the Chinese market has been growing exponentially over
the years, primarily due to its growing middle-class population. According to the Center for
Strategic and International Studies (2022), China’s middle-class has grown from 3 percent in
2000 to over 50 percent of the country’s total population in 2018, an equivalent of 707 million
people. Also, the country’s urban population grew to 83.14 million in 2018, an equivalent of
59.58 percent of the total population. Growth in both the urban population and the middle
class provides a strategic opportunity for businesses to thrive, especially across Chinese
urban centers. As Costco prepares to increase its physical presence in the country, it must

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adopt the polycentric approach to management to avoid the tragedy that befell its
predecessors such as Walmart and Carrefour.
The Polycentric Approach
The polycentric approach is founded on the belief that local managers and employees
are better positioned to understand local market dynamics and, therefore, are the best suited
to help a company establish operations in a foreign market (Business Jargons, 2022). While
previous foreign retailers have failed to survive stiff competition from local retailers across
China, Costco has the opportunity to succeed in the Chinese market by applying the
polycentric approach. In this approach, residents from the host country fill managerial
positions in an international firm. It is believed that the locals understand the culture and
business demands of the country’s population and are, therefore, likely to manage the
business more efficiently than their foreign counterparts.
In extending its physical operations across China, Costco must hire local managers to
run the subsidiaries. Mainly, the majority of the subsidiary’s senior management should be
Chinese professionals, who have vast experience and understanding of Chinese people’s
mannerisms, consumer behavior, social and political environments. Hiring locals over
foreigners has various benefits. For instance, it eliminates the difficulties of bringing
expatriates into the country (Gentili, 2021). It also increases staff motivation and better
productivity due to understanding local dynamics. Besides, hiring locals attracts business
support from both government and local communities. Also, hiring locals saves labor costs.
For instance, Chinese labor is three times cheaper than the US. Hence, Costco is more suited
to hiring local managers than sending American ones to China. Therefore, applying the
polycentric approach will give Costco a competitive edge against its international
counterparts operating in China.

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Why Polycentrism is Necessary
As highlighted earlier, the polycentrism strategy presents Costco’s best opportunity to
expand into the Chinese retail market. The underlying reason for choosing polycentrism is
that there exist broad cultural, social, and consumer behavior differences between the Chinese
and Americans. For instance, Americans and Chinese have different styles of communication.
According to University Times (2018.), the Chinese view Americans’ manner of speaking as
very upfront, which may be misunderstood as arrogance. In the US, people are encouraged to
defend their opinions, unlike in China, where such behavior could be perceived as
disrespectful (University Times, 2018). Also, while Americans enjoy individualism, the
Chinese like doing things communally. Such cultural differences affect the operations of a
multinational, and therefore, polycentrism in Costco is necessary to avoid such cultural
misunderstandings.
Why Paid Membership Model Failed
Costco opened its first Chinese store in Shanghai on August 27th, 2019. Its opening
was accompanied by an influx of customers that the store was closed for five hours to allow
traffic flow. However, customers had already begun canceling their membership cards and
returning them to Costco within a week of opening. Among the factors leading to
cancellations were: a decline in discount rates. For instance, a product selling for 39.9 Yuan
was adjusted to 53.9 Yuan. Also, the Chinese prefer fresh goods, …