ERP implementation failures in China: Case studies ...

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Int. J. Production Economics 97 (2005) 279–295 www.elsevier.com/locate/ijpe

ERP implementation failures in China: Case studies with implications for ERP vendors Yajiong Xuea,, Huigang Liangb, William R. Boultonc, Charles A. Snyderc a College of Business Administration, University of Rhode Island, Kingston, RI 02881, USA Department of Information Technology and Operations Management, Florida Atlantic University, Ft. Lauderdale, FL, USA c Department of Management, Auburn University, Auburn, AL, USA

b

Received 1 June 2003; accepted 31 July 2004

Abstract Chinese enterprise resource planning (ERP) vendors have been able to defend the challenge from global ERP leaders such as SAP and Oracle. This article seeks possible reasons for major international ERP vendors not being able to dominate the Chinese ERP market. Taking an ensemble view of technology, we conceptualize ERP systems as being embedded in complex social contexts, which heavily influence ERP implementation and use. Based on this conceptualization, we contend that a historical perspective and a social-cultural perspective can offer a rich understanding on ERP implementations in China. From the historical perspective, this paper describes China’s ERP evolution and compares it with the ERP evolution in Western countries. From the social-cultural perspective, five cases in which foreign ERP vendors have failed in their Chinese implementations are presented and analyzed. Eight factors are identified which have contributed to ERP failure. Implications of the findings for future ERP implementations in China are discussed. r 2004 Elsevier B.V. All rights reserved. Keywords: ERP failure; ERP implementation; China; Historical perspective; Social–cultural perspective; Ensemble view

1. Introduction Although information systems help streamline individual business functions, disparate information systems across business units may in fact Corresponding author. Tel.: +1 401 874 9348;

fax: +1 401 874 4312. E-mail address: [email protected] (Y. Xue).

impede an organization’s long-term development. To take advantage of information systems, information must be shared easily, correctly, and on time among business units. If each business unit of a large enterprise implements independent or incompatible information systems, communication between business units can become much more complicated and error-prone. The enormous costs of maintaining various incompatible systems then

0925-5273/$ - see front matter r 2004 Elsevier B.V. All rights reserved. doi:10.1016/j.ijpe.2004.07.008

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becomes a nightmare for executives (Davenport, 1998). Managers realized that more efficiency and effectiveness could be achieved if operations are easily coordinated across the ‘‘silo’’ systems that developed in the organization. An early attempt by manufacturers to obtain the advantages of better communications across the incompatible systems was called computer-integrated manufacturing (CIM). CIM was a philosophical integration of the systems needed in manufacturing. The idea was to have interoperable systems that were an essential part of the manufacturing process. Many of these systems were only marginally interoperable because of incompatible equipment, operating systems, etc. CIM sought to integrate most systems such as material requirements planning (MRP), manufacturing resource planning (MRP II), JIT, etc., of the time (see McGaughey and Snyder (1994) for a CIM definition). The philosophy envisioned for CIM was incorporated into the vision of enterprise resource planning (ERP): the enterprise connected and the systems integrated and interoperable. ERP systems include a set of software modules linked to a common database, and these modules can handle basic corporate functions such as manufacturing, finance, human resources, materials management, sales, and distribution (Slater, 1998). ERP systems focus on integrating all internal enterprise transaction processing to balance demand and supply (Wallace and Kremzar, 2001). Through cross-functional integration, businesses can improve their productivity and customer service while lowering costs and inventory. Hence, ERP systems hold the promise of providing companies with greater competitive advantage. As estimated by TEC Group (www.technologyevaluation.com), an information technology research firm, the global ERP market in 2001 was between USD 20.5 and USD 22.5 billion (growing 3–13% over 2000). Driven by e-commerce initiatives and continuing mergers and acquisitions, the global ERP market is predicted to grow at a compound annual rate of 10.5% (EBN, 2002). Table 1 shows the distribution of market shares. The five major ERP vendors account for approximately 63.2% of the ERP market and the top eight ERP vendors account for 67.8% of the market.

Table 1 Global ERP market shares Rank (by supplier)

Company name

Market share (%)

1 2 3 4 5 6 7 8

SAP Oracle PeopleSoft J.D. Edward Baan GEAC SCT Intentia Other Total

32.0 14.5 9.0 5.0 2.7 2.5 2.1 1.8 30.4 100.0

Source: TEC Group (Jakovljevic, 2001).

The inherent appeal of ERP has not gone unnoticed in Asia. Indeed, recent years have witnessed a dramatic increase in ERP adoption and diffusion in China (Huo, 2002). However, since ERP systems are extremely complex and difficult to implement, many implementing companies have encountered unexpected failures. ERP success is even harder to achieve when cultural issues are involved. Considering that most ERP systems are designed by Western IT professionals and the structures and processed embedded in these systems reflect Western cultures, we assume that fundamental misalignments are likely to exist between foreign ERP systems and Chinese companies whose existing structures and processes are largely determined by the Chinese culture (Davison, 2002; Soh et al., 2000). As a result of these misalignments, ERP implementation failures tend to occur when Chinese companies attempt to adopt foreign ERP systems. Therefore, some international ERP giants could not establish their dominance in the Chinese ERP market (Liang et al., 2004). In contrast to foreign ERP vendors’ difficulty in the Chinese market, an interesting observation is that China’s domestic ERP vendors seem to be able to expand their market share, showing capability to compete against their international competitors. Taking an ensemble view of technology (Orlikowski and Iacono, 2001), we conceptualize ERP systems as being embedded in complex social contexts, which heavily influence ERP

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implementation and use. We believe that a historical perspective should be taken in seeking explanations to this observation. Hence, one objective of this article is to analyze the differing evolution paths of ERP in the Western world and in China. In addition to the historical perspective, we consider the social, cultural contexts of ERP implementations to be critical and many contextual factors can affect ERP outcomes. Understanding what factors contribute to ERP failures will deepen the understanding of ERP implementations and help avoid implementation mistakes, thereby increasing the rate of ERP success in culturally different contexts. Therefore, another objective of this article is to identify the factors manifested in failing ERP implementation projects. The rest of the article is organized as follows. Section 2 describes the Chinese ERP market. Then the Western and Chinese ERP evolutions are compared in Section 3. Section 4 proceeds to review literature on ERP implementation, and it is followed by Section 5, which presents research methodology and five failing ERP cases. The case analyses are provided in Section 6. Finally, Section 7 discusses implications of this research for future ERP implementations.

2. Chinese ERP market The Chinese ERP market, started in the late 1980s, has boomed in recent years as more business managers applied ERP systems in their organizations. According to China Center for Information Industry Development (CCID) Consulting, the Chinese ERP market nearly doubled its growth from approximately USD 70 million in 2000 to USD 106 million in 2001. IDC (www.idc. com), a premier global market intelligence and advisory firm in the information technology industries, reported that the Chinese ERP market grew from USD 78.4 million in 1997 to USD 243 million in 2002. From 2002 to 2005, the Chinese ERP market is expected to have an annual growth rate of 25%. Attracted by tremendous business opportunities in the Chinese ERP market, SAP, Oracle, and

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Table 2 Chinese ERP market shares Ranking (by supplier)

Company name

Market share (%)

1 2 3 4 5 6 7 8

SAP UFSofta Kingdeea GenerSofta Oracle HJSofta Anyia Riamba Other Total

16.9 16.2 13.2 10.3 7.5 4.3 3.9 3.7 24.0 100.0

Source: CCID Consulting (CCIDNET, 2002). a Chinese ERP vendors.

other foreign ERP vendors have entered China one after another. SAP entered the Chinese ERP market in 1988 and Oracle followed in the middle of the 1990s. Given their past success history, these ERP giants anticipated taking control of the Chinese ERP market. In reality, it has not been so easy for the global ERP vendors to tame the Chinese ERP market. In the 2002 report of Chinese ERP market from CCID Consulting, domestic ERP vendors take a major share of the market. As Table 2 shows, the top eight players hold 76% of the ERP market, with six Chinese domestic companies holding 51.7% and the two foreign ERP leaders holding a 24.3% market share. Evidently, in the competition to sell ERP systems, the foreign giants have not demonstrated their usual dominance. Instead, Chinese domestic ERP companies have held their ground against the foreign giants. Obviously, the Chinese ERP firms have emerged as dominant players in this important market. Next, we explore the history of ERP development in the Western nations and contrast it with the Chinese ERP evolution.

3. An historical perspective of ERP development 3.1. Western ERP evolution As noted in the Introduction, in Western countries the development of ERP went through

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several stages: inventory control, MRP, MRP II, and ERP. The 1960s and 1970s witnessed a shift from inventory control to the development of MRP, which was embraced by many manufacturing companies to more efficiently calculate what materials were needed, when they were needed, and in what optimal quantities (Ptak and Schragenheim, 2000). MRP, originally focused on the master schedule, quickly evolved into a more sophisticated system, which encompassed additional factors such as long-range planning, highlevel resource planning, master scheduling, rough cut capacity planning, detailed capacity planning, and shop floor control. By continuously monitoring operations, companies could streamline their processes to achieve more efficiency. At this point, the MRP systems were stand-alone systems. MRP II systems were expanded to include sales and operations planning, a financial interface, and a simulation as part of the system (Wallace and Kremzar, 2001). MRP II systems integrate the material planning with related business processes, and they are regarded as an effective planning tool for all resources of a manufacturing company. With the advent of advanced information technologies, a new challenge facing companies became that of controlling all the major business processes within a single IS architecture. Although MRP II was the logical progression for production and materials planning, companies quickly realized that profitability and customer satisfaction should be incorporated. These requirements generated the need for integrating capabilities such as finance, forecasting, sales order processing, sales analysis, local and global distribution, quality control, and reporting and monitoring tools. The philosophy of system integration was envisioned by CIM (McGaugheya and Snyder, 1994) and realized in ERP systems. ERP systems have been applied to the management of every operation of an enterprise’s value chain to minimize costs and time required to deliver products to customers. The ERP evolution in Western countries has developed naturally. The idea was generated in manufacturing companies and the systems evolved into the current concept of ERP. Material planning drove the initial development of systems to address this generic production issue.

Subsequently, other business functions were incorporated as the systems gradually became mature, eventually incorporating a full range of operating and management needs into ERP systems. Recently, supply chain management and customer relationship management have been integrated into ERP systems as vendors recognized the evolving needs of firms. Presently, ERP systems have been developed extensively in the US and Europe. Next, we examine the evolution of ERP in China, one of the fastest growing locations of manufacturing. 3.2. China’s ERP evolution China’s ERP evolution took a totally different path from that described above. China’s domestic ERP research and development started in 1988 and went through three stages: accounting software, financial software, and ERP (‘‘ERP Applications Guide,’’ 2002). The accounting software stage was from 1988 to the early 1990s. China’s earliest software companies that focus on developing accounting software were founded during this period. The Department of Finance of the Chinese government had issued a series of policies and regulations to encourage the accounting software development. The major modules of the accounting software included accounting management, reporting, payment calculation, asset calculation, material calculation, and sales calculation. Some of the modules were designed specifically to meet Chinese accounting regulations, e.g., the reporting module generated reports that were formatted in accordance with China’s National Accounting Regulations. These reports were unique to China and the objectives were simply to provide electronic data and to release accountants from heavy manual accounting work. The financial software development stage of China’s ERP evolution started in the middle of the 1990s. The demand for management software started to grow after Chinese markets opened to the rest of the world. The Chinese accounting software companies shifted their strategic focus to financial software development. One should note that financial software can also be considered a management system that can support business

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decision-making. Functions including financial analysis, financial prediction, financial control, financial planning, and inventory management were added to the system. The enacting of the China Financial Software Data Interface Standard by the China Financial Software Association greatly enhanced and encouraged the development of Chinese Financial Software. At the beginning of 1999, the domestic software industry was reoriented towards the development of integrated ERP systems, which expanded the accounting and financial software to include production, supply, human resources, and customer service capabilities. Today, development of Internet-based ERP systems are the focus of China’s software industry (Huo, 2002). With economic reforms, China is moving rapidly to become a market economy in which competition determines survival. Managers have been given more autonomy and need more help from managerial information systems. Domestic software vendors are putting a lot of effort into the development of ERP systems with unique Chinese characteristics. The Chinese ERP evolution is not spontaneous. The government heavily influenced the first two stages of the ERP evolution. In China’s social system, the government’s recommendation had a huge impact on corporate strategies, planning, and decision-making. Many companies implemented accounting software or financial software in response to the government’s advocacy. This created more opportunities for domestic software companies to enlarge their market shares. Foreign ERP vendors did not recognize the potential of China’s market until the late 1990s. By then, Chinese software companies had already established their brands and reputation in the accounting and financial software fields, and had established a substantial market share. Based on their past IT adoption experiences, many Chinese firms tend to trust domestic ERP vendors more than foreign ones. Considering the unique evolution path of the Chinese ERP market, it is understandable that foreign ERP vendors are not dominant in China. Apart from the above historical perspective, an examination of the social, cultural context of ERP

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implementation, and factors relating to Chinese firms’ ERP failure can offer a richer understanding of why foreign ERP vendors encountered difficulties in the Chinese ERP market. From the next section, we start investigating the ERP failure factors by reviewing past literature and constructing a research model.

4. Theoretical foundation for ERP implementation ERP implementation is a complicated largescale project, has far-reaching strategic and organizational implications, and can easily turn into a nightmare for implementing firms (Davenport, 1998). According to Robbins-Gioia survey conducted in 2001, only 51% American firms perceived their ERP implementation as unsuccessful (IT Cortex, 2003). Given the context differences between China and the US, we anticipate that the ERP success rate in China is even lower. It is estimated that the ERP success rate in China is approximately 10% (Zhang et al., 2003). The high failure rate intrigues and motivates us to explore what factors affect the ERP implementation in China. We are particularly interested in the failure of foreign ERP systems. This section reviews the key success/failure factors identified by existing literature and the cultural impact on ERP implementation, and presents a theoretical model used to analyze five failure cases in China. 4.1. An ensemble view of ERP This research is centered on the IT artifact of ERP. To ensure the centrality of ERP, we adopt an ensemble view, which focuses on the dynamic interaction between people and technology (Orlikowski and Iacono, 2001). The ensemble view posits that, ERP systems, by definition, are not natural, neutral, universal, or given. Because ERP systems are designed, constructed, and used by people, they are shaped by the interests, values, and assumptions of a wide variety of communities of developers, investors, users, and other actors involved. According to Orlikowski and Iacono (2001), ‘‘IT artifacts are always embedded in some time, place, discourse, and community. As such,

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their materiality is bound up with the historical and cultural aspects of their ongoing development and use, and these conditions, both material and cultural, cannot be ignored, abstracted, or assumed away (p. 131).’’ Hence, we conceptualize ERP systems as embedded in specific social and cultural contexts and these contexts have fundamental influences on the way ERP systems are implemented and used as well as the outcomes of ERP implementation and use. 4.2. ERP success factors Critical success factors (CSFs) are widely used in the information systems arena (Davis, 1979; Jenster, 1986; Rockart, 1979, 1982). CSFs originally refer to the limited number of areas in which satisfactory results will ensure successful competitive performance for the individual, department, or organization (Bullen and Rockart, 1981). As to ERP implementation, CSFs can be understood as the few key areas where ‘things must go right’ for the implementation to be successful. With the ensemble view of ERP, CSFs pertain to not only technical issues but also contextual issues including social and cultural impact on the interaction between people and the ERP technology. Past studies have identified a variety of CSFs for ERP implementation, among which context-related factors consistently appear. For example, Motwani et al. (2002) find that organizational environment, ready culture, and balanced network relationships are key factors to ERP success. Mabert et al. (2001, 2003) note that a clear guidance on how to use outside consultants and detailed plans for training users are critical. Based on the case of Huck International Inc., Umble et al. (2003) identified multi-site issues as one of the CSFs for ERP success. Legare (2002) found that individual characteristics (knowledge, cognitive abilities, and motivation), group characteristics (goals, roles, norms, diversity, and problem solving), and organizational characteristics (strategy, resources, rewards, culture, and structure) could influence the success of ERP implementation. From the standpoint of IT practitioners, contextual issues are also important. A survey of CIOs of Fortune 1000 companies shows that

change management program and culture is one of the top five CSFs for ERP implementation success (Nah et al., 2003). 4.3. Cultural impact on ERP implementation The effects of national and organizational cultures on IS implementation have been extensively studied (Burkhardt, 1994; Cooper, 1994; EinDor et al., 1993; Robey et al., 1992; Straub, 1994). The discrepancy between the Western and Chinese cultures has been recognized to have profound influences on IS implementations (Martinsons and Westwood, 1997; Ping and Grimshaw, 1992). In general, Chinese societies are based on networks of relationships. Chinese people are more likely to adapt to the environment rather than to seek a scientific solution. The Chinese business culture is shaped by paternalism, personalism, and highcontext communications, while the Western culture is centered with individualism, impersonalism, and formal communications. The fundamental differences between the Chinese and Western cultures inevitably influenced the use of information technologies developed by Western developers in Chinese organizations. A detailed discussion on the comparison of the Chinese and Western cultures can be found in Martinsons and Westwood’s paper (Martinsons and Westwood, 1997). The impact of cultural issues on ERP implementation has attracted considerable attention from IS researchers (Davison, 2002; Robey et al., 2002; Soh et al., 2000; Zhang et al., 2003). Based on a study of ERP implementation in a Singapore hospital, Soh et al. (2000) identified three cultural problems: (1) incompatibilities between organizational requirements and the ERP package in terms of data format, (2) incompatibilities in processing procedures required, and (3) incompatibilities in the presentation format and the information content of reports. Davison (2002) also found cultural differences by comparing educational ERP implementation practices between North America and Hong Kong. The cultural differences causing ERP implementation problems included (1) different beliefs in providing access to information, (2) miscommunication due to homonyms in the Chinese language, and (3) difficulties in

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reengineering organizational processes. Robey et al. (2002) noted that radical changes associated with business process reengineering (BPR) were perceived differently in Chinese and Western cultures. In contrast to the Western cultures, the Chinese culture is more past-oriented, reactive, and reluctant to conduct organizational transformations. Accordingly, the Chinese culture must be taken into account when investigating ERP implementation issues in China. 4.4. IT focused view of ERP success While we take the ensemble view of ERP and emphasize the contextual influences on ERP implementation, it should not be neglected that the quality of ERP itself is essentiarol for success. In the well-known IS success model, Delone and McLean (1992) postulate that system quality and information quality are two central dimensions of IS success. System quality measures technical success, that is, the accuracy and efficiency of the IS that produces information, and information quality assesses semantic success, referring to the extent to which the information coveys the intended meaning (Delone and McLean, 2003). When studying the success of complex IS such as data warehousing, system quality, and data quality also prove to be significant factors (Wixon and Watson, 2001). It is clear that, in the research of ERP implementation, technical characteristics of ERP should be taken into account. While only focusing on the technology is not advisable, only emphasizing the context may also lead to biased conclusions. 4.5. Theoretical model Drawing on the ensemble view and IT focused view of ERP, we propose a model as the theoretical foundation to examine the ERP implementation problems in China (Fig. 1). We postulate that two broad contextual factors could affect ERP implementation, that is, culture and environment. Based on the D&M IS success model, we contend that technical issues such as system quality and information quality have an effect on ERP implementation. According to the

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Culture

Technical issues

ERP Implementation

Environment

Fig. 1. ERP implementation model.

ensemble view, ERP systems embed the norms, values, and cultures of the developers, which will interact with the local norms, values, and cultures of the location where they are implemented and used. As a result of the interaction, some technical issues will arise. For example, language is not a problem at all when SAP’s R/3 is implemented in English-speaking countries, but it becomes a vital issue when R/3 is implemented in China, showing that the cultural difference can turn a trivial technical problem into a major concern. Therefore, as shown in Fig. 1, culture and environment affect ERP implementation both directly and indirectly by causing technical concerns. In the remainder of this paper, this model will be used to analyze five ERP implementation failure cases.

5. Case studies 5.1. Methodology Following Benbasat et al. (1987), Eisenhardt (1989), and Yin (2003), case research is employed to answer the question ‘‘what are the factors that affect foreiERP implementation failures in China?’’ Few studies have addressed the topic of IS failure and the problem domain remains underresearched. ERP implementation is a complicated undertaking which involves inevitable interactions between ERP systems and implementing contexts. The duality of information technologies (Orlikowski, 1992) posits that IT embed developer values on the one hand, and the use of IT affects human action on the other. ERP systems also demonstrate duality. Given that IT-based

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innovation is heavily dependent on the context of application (Newell et al., 2000; Swan et al., 1999), the implementation of ERP can be viewed as a dynamic process of interaction, in which the implementation of ERP shapes the firm’s utilization of ERP and vice versa. Consequently, it is difficult to delineate a separating line between ERP and context. According to Yin (2003), ‘‘a case study is an empirical inquiry that investigates a contemporary phenomenon within its real-life context, especially when the boundaries between phenomenon and context are not clearly evident.’’ Therefore, the characteristics of ERP implementation legitimize our selection of a case research method. Five ERP implementation failure cases were examined. These cases included CosmeticCo, PharmaCo, ElectricCo, FurnitureCo, and StoneCo.1 The selection of these five companies was based on three criteria. First, they have to be Chinese companies that implemented foreign ERP systems. Second, they have experienced unconquered problems during their ERP implementations. Third, they are in differing industries and located in different regions of China. The purpose of applying these criteria is to facilitate identifying common failure factors across industries and across geographic regions, which are relatively more generalizable. In order to lend validity to our data, this study used the triangulation method recommended by Yin (2003). Data were collected using multiple methods from multiple sources, including semistructured interviews with subjects in each company, examination of company documentations, and examination of relevant information on public media. Two authors called a senior manager of each company and the person in charge of the ERP implementation project and interviewed them using the semi-structured questions. The interviews were tape-recorded. The companies provided documentations on their ERP projects. In addition, the public information regarding each company was collected from the Internet and newspaper. 1

CosmeticCo, PharmaCo, ElectricCo, FurnitureCo, and StoneCo are pseudonyms being used to protect the anonymity of the companies.

Based on the data gathered from these multiple sources, two of the authors first performed analyses independently and examined the cases for evidence relevant to factors which contributed to ERP failure. The evidence was summarized and categorized. The two authors’ case analyses were compared, and they were also reviewed by the other two authors who offered complementary comments. Discrepancies between the two analyses were resolved through debate and referencing back to the case data. The cases presented in the following five subsections are based on the final analyses agreed upon by all the authors. 5.2. Case 1: CosmeticCo CosmeticCo is a cosmetic company located in Beijing and ranks in the top five of China’s 2,000 cosmetic enterprises. The company is well known for its herbal series of cosmetics. It sells five product series, including skincare, hair care, beauty care (makeup), perfume, and clinical series, in more than one hundred varieties. The sales networks of CosmeticCo cover China’s entire domestic market and about 30 foreign countries or regions. CosmeticCo has USD 13.18 million in fixed assets, sales of USD 64.69 million, with tax and profit of USD 22.56 million in 1998. In early 1998, CosmeticCo realized that their existing finance software could not meet the company’s development requirements and decided to implement an ERP system. 5.2.1. Selecting an ERP system provider and a service provider CosmeticCo selected Sweden’s Intentia AB as their software package provider and chose Legend Advanced Systems Ltd. (LAS) (now a member of Digital China) as their service provider. On March 20, 1998, CosmeticCo signed a contract with LAS and agreed to pay USD 98,320 for the MOVEX software, USD 8,390 for the design and implementation service, and USD 105,460 for the hardware and other services. 5.2.2. Problems during the implementation process The MOVEX software package was not totally translated into Chinese. The English words in the

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user interface confused employees. The formats of the financial tables and reports generated by MOVEX were different from what the Chinese government required and incompatible with the Chinese finance standards. The minus sign of negative numbers is placed after the numbers instead of before them. Moreover, the numbers and other signals in the finance reports were overlapped and became unrecognizable. As a result, MOVEX generated manufacturing and purchasing reports at a lower speed than the previous manual methods. The service provider, LAS, was not familiar with the MOVEX software and did not follow the standard implementation procedures as the software supplier required. 5.2.3. Results At the end of 2000, LAS still had no good solution for the problems described above. CosmeticCo filed a lawsuit against LAS on December 11, 2000. The case lasted for almost 15 months. In February 2002, mediation was achieved in the court. The court announced that the defendant, LAS, should pay the Plaintiff, CosmeticCo, USD 250,000 before February 28, 2002. CosmeticCo restarted its ERP project in May 2001 after choosing HJSoft, a domestic ERP provider, as its software and service provider. The first phase of the HJSoft ERP project was successfully finished in May 2002, having achieved the integration of purchasing, sales, inventory, and finance management. 5.3. Case 2: PharmaCo PharmaCo is a large-scale enterprise group with integrated science, industry, and trade operations. As an important member of China’s pharmaceutical industry, PharmaCo owns a holding company whose stocks are registered and traded on the stock market, 13 wholly owned subsidiary companies, and three associated companies. PharmaCo has total assets of USD 547 million in 1998, with net assets of USD 151 million. Total industrial output was USD 248 in 1998, with total business revenue of USD 392 million, and profit and tax of USD 39.8 million. It earned USD 30 million from export. PharmaCo has the ability to produce medicines in about 20 kinds of dosage forms and

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in five series, including antibiotics, Chinese medical injection (a traditional Chinese medicine product), tonics and health-care products, traditional high-class Chinese medicine, and biological engineering medicine. PharmaCo decided to implement ERP in 2000. 5.3.1. Selecting an ERP system provider and a service provider After comparing the ERP systems from Oracle and a local provider, Riamb Software Tech., PharmaCo selected Oracle as its ERP system provider. The service provider was chosen from two local software technology companies, Riamb Software Tech. and Harbin Huaxu. Riamb Software Tech. won and signed a contract with PharmaCo in October 2001. The total contract amount was USD 853,659, including an USD 451,220 service fee. 5.3.2. Problems during the implementation process PharmaCo was not well prepared for implementing ERP. The company’s managers did not fully understand that implementing ERP involved BPR. Riamb Software Tech. had never implemented the Oracle ERP system before and was not familiar with Oracle products. As a result, they had to purchase some service consulting from Oracle. 5.3.3. Results Before February 2002, Riamb Software Tech. only offered PharmaCo some basic training and a few tests on Oracle’s test version software, but no fundamental BPR was conducted. The mutiny (mass departure) of more than 60 persons in Riamb Software Tech. in March 2002 ended the project. After 8 months, PharmaCo restarted the ERP project. It still used Oracle’s ERP system, but selected a new ERP consulting company, HAND, a Chinese ERP service provider and Oracle’s close business partner. 5.4. Case 3: ElectricCo Ranked 29th in China’s electric equipment industry, ElectricCo focuses on research, production, and sales of electric and power automation,

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as well as protection and control equipment. ElectricCo consists of two public companies, eight joint venture companies, and 11 other subsidiary companies. There are 4,260 employees with 2,550 professional technicians. ElectricCo has more than 1,000 products and more than 10,000 specifications. Its products have been exported to more than 20 countries or regions, including France, Australia, and Iran. In 1998, ElectricCo’s sales were USD 183 million. ElectricCo decided to implement ERP in early 1998 to standardize business processes, improve access to information, and control product costs. 5.4.1. Selecting an ERP system provider and a service provider ElectricCo initially planned to purchase an ERP system from SAP, but it gave up this plan because SAP’s USD 2 million price was too high. Finally, it chose Symix, an American ERP provider. The intended customers of Symix are American middle-sized companies, and ElectricCo’s scale is similar to American middle-sized companies. The contract was for USD 609,756, including software and service fees. 5.4.2. Problems during the implementation process In August 1998, ElectricCo changed from a State-Owned Enterprise structure into a subsidiary company structure to adapt to the changing market. The new ERP system could not respond to this tremendous organizational change. 5.4.3. Results Until July 1998, the ERP implementation went smoothly, including the data collection, BPR, and logistics organizing. However, the radical change in the company in August 1998 left the ERP almost useless. The Symix ERP system was not flexible enough to adapt to the sudden organizational change. Finally, an agreement was achieved between ElectricCo and Symix, and the ERP project was ended. The project lasted for 5 months. After that, only some Symix ERP modules were being used in a few ElectricCo subsidiary factories and the majority of ElectricCo’s business information was managed by its selfdeveloped information systems.

5.5. Case 4: FurnitureCo Founded in 1987, FurnitureCo is one of the largest office furniture suppliers in China. FurnitureCo provides a wide range of products including desks, conference tables, system furniture, chairs, sofas and coffee tables, filing and storage systems, kitchen cabinets, etc. Its distribution outlets are widely spread over major cities in China. Twothirds of its products are sold in China and onethird of its products are exported overseas. Because of its growing business volume and the customized orders from customers, FurnitureCo’s manual business process management could not meet the company’s growing needs. The company decided to implement an ERP system in 1997. 5.5.1. Selecting an ERP system provider and a service provider Most members of FurnitureCo’s management team received their higher education from the Western countries. When they sought to adopt an ERP system, they focused on Western vendors. Finally, the SAP R/3 system was selected. The total cost of the ERP project was over USD 1.22 million. 5.5.2. Problems during the implementation process FurnitureCo had more than 10,000 products whose costs needed to be managed by the costcontrol module of the R/3 system. The costs of products had to be calculated frequently because the prices of raw materials changed daily. However, the R/3 system they implemented could only calculate the costs by using a quota planned a priori, while the actual purchasing changes due to the market price fluctuation could not be gathered into the system. Consequently, there were often huge discrepancies between the reports generated by the ERP system and real-world situation. To fix this problem they needed to change the way data were managed inside the system, which required a lot of customization to be undertaken. Not before long, FurnitureCo found the maintenance fee for the ERP system was too high to sustain. 5.5.3. Results Problems associated with the cost-control modules caused a lot of headaches for FurnitureCo . In

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addition, the maintenance fee was around USD 700,000 a year. FurnitureCo decided to switch to a local ERP system, Kingdee’s K/3 system in 1999. ‘‘SAP R/3 is terrific. It is like a Ferrari sports car which runs great on the highway.’’ Yu Min, the chairman of the board of FurnitureCo said, ‘‘But, it cannot run fast on China’s bumpy road. Besides, you cannot find a Ferrari auto shop when it has problems. We’d be better to buy a made-in-China economy car.’’ In November 2000, a K/3 system totally replaced the R/3 system in FurnitureCo. The K/3 system was well accepted by mangers and employees. It saved over a hundred thousand dollars on purchasing and production costs control alone for FurnitureCo in the first year of implementation, according to the CFO. 5.6. Case 5: StoneCo StoneCo is a member of a large group company which specializes in stone exporting, mining processes, engineering, and stone supply and sales. StoneCo is one of the biggest all-around stone enterprises in China. Covering 35,000 m2, StoneCo has a panel processing factory and specialized polishing factory, which has priority to produce and process imported stone. StoneCo processes and produces various complicated technology stones and has a solid technological capability. Its sales were approximately USD $61 million in 1997. As the company grew, StoneCo found it very hard to precisely manage products and business processes. StoneCo decided to implement an ERP system as a solution. 5.6.1. Selecting an ERP system provider and a service provider StoneCo selected Sweden’s Intentia AB as its software package provider and chose a leading Chinese IT company, Legend Advanced Systems Ltd. (LAS) (now a member of Digital China) as its service provider. StoneCo signed a contract with LAS and agreed to pay USD 137,098.60 for the software and hardware fees on January 23, 1998. 5.6.2. Problems during the implementation process StoneCo discovered that the purchasing and finance modules in the MOVEX ERP system did

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not support letter-of-credit (L/C) payments. For an export-oriented company like StoneCo, L/C payments are indispensable. The finance and accounting report format that MOVEX generated was also different from the Chinese government’s requirement. A lot of English words appeared on the MOVEX user interface, and the software’s user help was in English. The reports generated by MOVEX always had some poorly translated words that made no sense to employees. The cost-control module did not function well. It could not calculate accurate costs and prices for StoneCo’s products because of the complex calculation procedures. StoneCo’s project manager changed twice during the ERP implementation process. The original project manager left for a software company that was a vendor to StoneCo. The second manager lacked necessary capability to handle the project. 5.6.3. Results LAS had no good solution for the problems emergent during the ERP implementation. StoneCo claimed that these problems came from the complexity of the software and that the MOVEX software was not suitable for the company. LAS blamed StoneCo, saying the problems occurred because StoneCo kept changing its ERP project manager. StoneCo brought a lawsuit against LAS in November 2000. The final judgment was made on August 13, 2002. The court decided that both LAS and StoneCo should bear half of the USD 95,200 software payment, while StoneCo should pay the hardware fee, USD 41,898.6. At the time of writing the case study, StoneCo had still not resumed the ERP project.

6. Analysis Reasons that foreign ERP system vendors do not dominate China’s ERP market are both historical and cultural. Foreign ERP system vendors need to pay attention to the problems stemming from cultural differences. From our case analyses, eight specific obstacles are identified for foreign ERP system providers in China (see Fig. 2). The eight obstacles are language, report

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and table format, BPR, economic reform impact, cost-control system, human resource problem, price issue, and connection with ERP service companies. Table 3 shows the obstacles associated with each company’s ERP experience. Fig. 2 shows five cultural factors. The first factor is foreign ERP vendors’ partnership with local service providers. In order to capitalize on the huge potential of China’s ERP market, foreign ERP vendors need to better adapt to China’s ERP market. The failures of foreign ERP implementations should encourage a more localized strategy. A tactic for foreign ERP vendors should be to use a local ERP service company or a consulting

company that is more familiar with the Chinese culture to guide firms who implement their systems. By switching to domestic service providers or international service companies familiar with the Chinese culture, foreign ERP vendors can mitigate the pressures exerted by Chinese culture which values personal relationships. However, partnering with local service providers creates another problem for foreign ERP vendors: training. They must ensure that their agents know their products very well and are reliable. A service provider who receives little training from the vendor cannot understand the ERP systems and will not be competent to accomplish the implementation.

Culture • Partnership • BPR • Human resource • Report and table • Language

Technical issues • Language • Report and table • Cost control module

ERP failure

Environment • Economic reform • Cost control module • Price

Fig. 2. ERP implementation failure factors in China. Table 3 Factors affecting ERP implementation failures Case 1, CosmeticCo Language Report and table BPR Economic reform impact Cost-control module Human resource problem Price issue Partnership

Case 2, PharmaCo

+ + +

+

+

+

+

+

Case 3, ElectricCo

Case 4, FurnitureCo

Case 5, StoneCo + +

+ + + +

+ +

+ +

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The second cultural factor is BPR. ERP incorporates the western management paradigm which causes clashes with the Chinese culture (Martinsons and Westwood, 1997). Chinese companies need to redesign their current business processes to make the ERP implementation a success. Foreign ERP vendors must understand how companies operate in China’s radically changing environment and help them realize that ERP represents a totally new business process model, not simply a piece of technology that is easily implemented. The third cultural factor indicates that the human resources in Chinese companies play an important role in the ERP implementation project. The top management should understand that the ERP project requires BPR and the project team leaders should understand the company’s strategies, plans, and business processes. Unrealistic expectations and incompetent project teams often lead to implementation failures. This finding is consistent with the ERP research based on Western companies. Since the human resource problem is often complicated by the Chinese culture, it is placed in the cultural factors category. For example, Chinese company executives tend to rely on experience, intuition, and insights from personal connections to assess situations and make decisions (Martinsons and Westwood, 1997). They might not readily believe that they should change their current way of doing business due to the ERP systems implemented. The fourth cultural factor is the report and table format. This is not a trivial issue, since the presentation of information has direct impact on end users. User resistance will likely result because of alien presentation styles. Finally, the language poses another cultural challenge to ERP implementations. The Chinese language is pictographic and uses figures and shapes to represent words. It is often difficult to translate English terms into Chinese. Inaccurate translation results awkward Chinese words and causes many confusions. Given the unique cultural characteristics of China, Chinese culture must be fully studied to avoid mistakes. As commented by the general manager of the first foreign ERP vendor that entered China’s market, ‘‘You should understand

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China’s history and culture before you start doing business with Chinese companies’’. Economic reforms, the cost-control module, and price are interpreted as environmental factors because all of them are related to Chinese companies’ external environment. Due to China’s economic reforms, Chinese companies are under pressure to transform themselves into marketdriven enterprises. The rapid opening of China’s markets led to such abrupt changes that some companies are still not ready for the new management requirements. The fast-changing environment in China requires flexible ERP systems enabling the ERP implementing companies to customize certain modules to fit their changing needs. There is doubt that most foreign ERP vendors can respond to these changes gracefully in a timely manner. China’s changing market determines Chinese companies’ cost-control functions. In Western countries, purchasing plans are normally made at monthly or yearly intervals and raw materials’ prices are somewhat fixed, resulting in relatively stable product costs. In China, companies change their purchasing plans frequently, leading to a requirement for raw material costs to be updated frequently to represent the latest market prices. The changes take place weekly or even daily. Foreign ERP vendors need to create more robust cost-control modules to meet this challenge resulting from the Chinese business environment. The Chinese government requires specific finance report formats, which are different from the formats provided by foreign ERP systems. The environmental context can alter a system’s functionality. While a foreign ERP system works well in Western countries, it fails to provide fundamental outputs in China. On the contrary, Chinese ERP vendors which primarily evolved from financial software vendors are experienced with generating government-required report formats. Therefore, Chinese ERP vendors are in favor when Chinese companies choose ERP systems. Foreign ERP vendors also suffer from a need to reduce costs since they are in a competitive environment with many local Chinese ERP vendors who sell their products at lower prices. For example, SAP offered ElectricCo its R/3

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package for USD 1 million and USD 1 million for installation, while the price of a Kingdee’s K/3 package purchased by FurnitureCo was approximately USD 130,000. Although foreign ERP vendors have established a high-quality image in China, their high prices for ERP systems and services may intimidate many Chinese companies. Finally, technical issues contribute to ERP implementation failures. The translation from English to Chinese for all the user interface messages and system outputs is a difficult and error-prone job. In many occasions, direct translations from English do not make senses to native Chinese speakers. Therefore, great caution should be taken to ensure that the ERP system presents understandable Chinese. Since the interface is ‘‘the system’’ to the users, this is a critical aspect of any ERP system. The three technical factors are duplicated with some of the cultural and environmental factors. This signifies that the three categories are correlated and have intersections. The unique Chinese culture and environment dramatically change the operating context of foreign ERP systems, causing unpredictable under-performance. The technical problems are a part of the manifestation of the cultural and environmental problems experienced by foreign ERP vendors. For example, the difference between Western countries and China in terms of making tables and reports is a cultural factor. However, this cultural difference manifest itself as a technical problem, that is, the reporting module of the ERP shows poor system quality by producing incorrectly formatted tables and reports. In summary, foreign ERP vendors should take the Chinese culture, environment, and technical issues into consideration to increase the possibility of achieving successful ERP implementations. We discuss some implications for both academic researchers and practitioners in the next section.

7. Implications The results of this study have implications for both academic researchers and ERP practitioners. For academic researchers, this study provided

insights into the Chinese ERP market and environment. The authors believe that historical and cultural perspectives must be included as important issues for IS researchers. Since Chinese managers are reluctant to talk about the negative aspects of their companies, it is very difficult to collect information regarding unsuccessful IS initiatives, especially when ‘‘domestic shame should not be made public’’ is an important cultural value. It is regarded as offensive and rude to ask someone about ‘‘losing face’’. Therefore, the data presented in this article should be of great value to researchers. In addition, this study identified eight cultural and environmental problems in ERP implementation. This expands the range of cultural and environmental concerns previously found in the literature in explaining the factors affecting ERP implementation. Once the reasons for ERP implementation failures are better understood, future execution should be enhanced. Our findings can help ERP practitioners to predict likely weaknesses in their company’s ERP implementation plan and lead to better planning. The eight problems reveal a set of key areas for foreign ERP vendors to pay attention. The failing cases in China suggest that ad hoc remedies will not save an ERP vendor. Instead, strategies to address cultural barriers should be developed before an ERP vendor enters a foreign market. Based on our findings, ERP vendors may develop appropriate cultural solutions. Under such a strategy, chances of successfully implementing ERP and consequently taking more market share will likely be increased. More specifically, ERP vendors should ensure that all the modules of their system are thoroughly and correctly translated into the native language of the targeted market, including user interfaces, reports, and user help files. ERP vendors should also make their systems flexible enough to easily adapt to structural changes being made by ERP customers in the targeted market. Major events, such as China’s entry into the World Trade Organization, have caused firms to radically reorganize, and change business processes and supply chains. If an ERP system cannot adapt to such changes, ERP failure is guaranteed. Some vulnerable functions of an ERP system include

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ability for calculating rapidly changing costs and generating the format and content of tables or reports that meet local government requirements. In addition, the user interface must be customized as well as a sound help system in understandable Chinese, and the reports must be constructed so that the Chinese government regulations are met. The modification of an existing ERP system to fit local cultural needs may be costly and timeconsuming. However, to sustain a firm’s brand reputation, such efforts are essential. Having a customized ERP system in place is not enough. Product promotion and customer aftersale services are also important. In order to achieve both, communications with customers should be performed within the local cultural norms, using the local values and beliefs. Given the differences between Western and Chinese cultures, finding a local service provider as the middleman may be an essential tactic for international ERP vendors to legitimize their products. One solution for ERP vendors is to seek the best Chinese middlemen, provide through training, build custom Chinese modules, and establish such a close partnership that there will be no fingerpointing when difficulties are encountered. The middlemen must understand the vendor’s product (all modules) and be able to communicate clearly to the Chinese firms. However, this temporary solution creates a paradox. On the one hand, local service providers help ERP vendors to transcend the culture barrier, and on the other, some local service providers become the bottleneck to ERP implementation because they lack adequate knowledge about the ERP system. In addition, service fees are an extra burden to implementing companies. For foreign ERP vendors, this situation will not change in the near future. They need to build a good relationship with a local service provider, find the best talent possible, and offer adequate ERP training. In the long run, localized operations require hiring Chinese talent to replace the local service providers as well as good training. Finally and most importantly, ERP is not just an information system; it is a new way of doing business. No implementation can be successful without understanding the need for BPR. Since

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Chinese people are more focused on the past, they are more conservative and resistant to change. Consequently, ERP systems may be put onto the shelf after the implementation. Misunderstandings about the nature of ERP systems further negatively influences the relationship between culture and ERP implementation. International ERP vendors are unable to offer the same level of help to Chinese companies as they would offer in Western countries. This makes true BPR even more difficult. With this problem in mind, the selection of a local service provider becomes more critical, and should encourage ERP vendors to invest in developing their own localized service group to work closely with their customers. Of course, all these initiatives should be part of the ERP strategic plan that gives culture adequate consideration. In summary, as contended by Ahlstrom and Bruton (2001), foreign companies should learn how to establish legitimacy in China’s transition economy by carefully taking characteristics of Chinese settings into account. Foreign ERP vendors are confronted with the challenge of legitimizing their ERP systems. They should pay attention to the three categories of factors we identified in this paper when formulating their legitimacy-building strategies so that the success rate of implementing their products is augmented. In addition, it should be noted that ERP implementation is an ongoing process and ERP outcomes (success or failure) are dynamic in nature. Success at different points in time may only be loosely related to each other (Larsen and Myers, 1999; Markus et al., 2000). An early success can become a later failure and an early failure can turn to a later success. It is found that companies experienced problems at all phases of the ERP system life cycle, and many problems occurring in early phases remained unnoticed or uncorrected and manifested themselves in later phases (Markus et al., 2000). Consequently, caution must be exercised when assessing ERP success, especially during the project phase, since serious problems might be concealed underneath the surface of the seeming success. While we recommend ERP vendors and implementing companies to pay attention to the factors we identified

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to increase the likelihood of achieving ERP success, we would like it to be recognized that addressing these factors at the beginning of an ERP project cannot guarantee later success. Developing such a reasonable understanding will remind managers that ERP implementation is a dynamic process and problems can arise at any phase of this process. As such, they will not overly rely on pursuing a set of success/failure factors at a given point in time, which ultimately helps achieve long-term success.

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