Case
1.
MGMT 461-Cross Cultural Management
Katherine Rosenbusch
Fall 2018
George Mason University
Table of Contents
Disneyland Resort Paris: Mickey Goes to Europe............................................................................5
Leo Burnett Company Ltd.: Virtual Team Management..................................................................23
Blue Ridge Spain............................................................................................................................39
Ellen Moore (A): Living and Working in Korea................................................................................55
NES China: Business Ethics (A).....................................................................................................71
MGMT 461-Cross Cultural Management Fall 2018
Katherine Rosenbusch George Mason University
2.
I N T E R N A T I O N A L
IMD523 21.11.2006
DISNEYLAND RESORT PARIS: MICKEY GOES TO EUROPE
Research Associate Karsten Jonsen prepared this case under the supervision of Professor Martha Maznevski as a basis for class discussion rather than to illustrate either effective or ineffective handling of a business situation.
Globalization in the positive sense is like a mosaic of cultures where identities remain visible and where we can play freely with the interaction in between. Where people can project themselves in something that is created elsewhere but is not perceived foreign. We are contributing to something important here. We need to help Disney become global in this positive sense. It is a long journey but we now understand the magnitude of globalization and can use this learning elsewhere.
Dominique Cocquet, Executive VP, Development & External Relations
Dominique Cocquet was legendary among Disneyland Resort Paris managers for his vision. He was part of the senior management team determined to turn the vision into reality. “We create magic,” explained Roland Kleve, director of parks & resort operations support, “Mickey is a great boss.”
Disneyland Resort Paris opened its gates in April 1992 amidst enormous controversy as a bastion of American cultural imperialism in Europe. By 2006 it was the most visited tourist site in Europe with over 12 million annual visitors. In spite of a difficult tourist industry in the early 2000s, Disneyland Resort Paris’s attendance remained stable: 60% of its visitors were repeat visitors, and guest satisfaction was extremely high. The operation had created 43,000 jobs, invested more than €5 billion and contributed to the development of a new region. “You cannot say this is not a success!” exclaimed Cocquet.
As the leaders developed their execution plans, they wondered what principles should guide them and how to interpret Disney in multicultural Europe. Guests from different parts of Europe wanted different things from a vacation: how could they keep the classic Disney magic yet successfully appeal to European consumers? After 15 years of switching between French and American leadership, the answers were still not obvious. The leaders agreed that the 2007 celebrations of its 15th anniversary should set the scene for Disney’s recognition as a well- established experience in the heart of Europe, and a long-term financial success. But what would it look like and what path would take them there?
Copyright © 2006 by IMD - International Institute for Management Development, Lausanne, Switzerland. Not to be used or reproduced without written permission directly from IMD.
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The Walt Disney Company: A 20th Century Fairytale
The Walt Disney Company was founded in 1923 by Walter Elias Disney and his brother Roy, as Disney Brothers Studio. In the early years, Disney created classic cartoons such as Mickey Mouse and Donald Duck. In 1937 they bet the company and created the first – and perhaps most successful ever in the company’s history – full-length animated color film: Snow White and the Seven Dwarfs.
The company was known early on for professional marketing as well as creativity, and continued to make animated movies. It has remained the world leader in animation ever since. Disney added live productions in 1950 with a television program called Disneyland. Movies and television would later prove to be long- term pillars for the Walt Disney Company. In 1995 Disney acquired ABC to become the largest entertainment company in the US, the year after the revolutionary animated film The Lion King had broken all box office records.
Walt, always the visionary, wanted to create a “real” world of fantasy that families could immerse themselves in to get away from the trials of the real world and to have fun, together. In 1955 he bet the company for the second time and opened the first Disney theme park, Disneyland, in Anaheim, Southern California – inspired by Tivoli Gardens in Copenhagen. Disneyland was an instant success, and other parks followed. Walt Disney World opened near Orlando, Florida in 1971 and quickly became the world’s largest resort area with several Disney parks and many other attractions. Tokyo Disneyland, the first Disney Park outside the US, opened in 1983. Euro Disneyland (now Disneyland Resort Paris) the first multicultural park, opened in 1992. Hong Kong Disneyland opened in September 2005.
By 2005, the Walt Disney Company was a large diversified organization with yearly revenues of more than US$30 billion, a film library of almost 1,000 theatrical releases and a market capitalization of almost $60 billion. Most revenues came from theme park resorts, films and the media-network business. Although the company was more than 80 years old, the strong voice of the founding father still provided guidance for decision making: How would Walt have done it?
The Magic of Stories
Disney believed in magic. And the essence of Disney magic was storytelling. The excitement of great adventures, the challenge of impossible tasks, the loneliness of being among strangers, the shame of guilt, the terror of evil, the warmth of good, the pride of accomplishment, the love of a family. All of these themes were evoked by Disney stories.
Disney told its purest stories in animated films, many of which won Academy Awards. From the classics like Snow White, the Jungle Book and Cinderella to more recent releases like The Lion King, Beauty and the Beast, Finding Nemo and The Incredibles,1 millions of people around the world were drawn to the powerful
1 Finding Nemo and The Incredibles are produced by Pixar Animation Studios and distributed by The Walt Disney Company.
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stories. They related to the characters, quoted the dialogue, told the stories and sang the songs. Would the youngsters of the 21st century continue this admiration for animated characters? Disney believed so and acquired Pixar Animation Studios – their partner in many successful films – in January 2006 to ensure the creation of animated magic for many years ahead.
The acquisition of Pixar was a great strategic move. It will provide the storytelling we need to reach today’s and tomorrow’s generations, and it will also provide the foundation for building more interactive attractions. In combination with a constant revitalization of classic characters on the Disney channels, we can help ensure that experiences and emotions are shared across the different generations within families.
Jeff Archambault, Vice President, Communications & Corporate Alliances
At Disney resorts, the magic became real and tangible. Walt Disney, visionary founder of the company, pictured the resorts as places where families would go to live the stories – to escape from the real world’s worries, highways and “visual pollution” and become immersed in the imaginary world of magic.
The animated films provided the link between the real world and the fantasy world: What families watched on screen in the cinemas or their homes was brought to life in the parks, as a multidimensional sharing of emotions. Film characters met with guests and signed autographs, many attractions immersed guests in the scenes and plots of the films and other attractions took guests into related fantasy worlds. More than 50
million visitors a year went to Disney resorts around the world to experience this magic.
This powerful experience was created by attention to detail and leaving nothing to chance. The attractions were designed by “Imagineers” – engineers who brought together people and knowledge from hundreds of disciplines to create environments:
Guests enter fantasy worlds through portals. Once through a portal, everything in the world – characters, rides, shows, sidewalks, buildings, even the costumes of cleaning staff – plays a part in creating that world’s experience for the guests. This is how the magic gets created. Imagineers are the only Cast Members that have a dual reporting relationship in all Disney parks: We report both to the Imagineering head office in Burbank California, and to the local management of the park. We also rotate around parks. I started off here in Paris, creating “It’s a Small World” in Fantasyland for the park opening. Then I worked in California and Tokyo before coming back here to head Imagineering. We have a strong international community of Imagineers to share ideas and make sure we create this all- encompassing experience everywhere.
Peter McGrath, Director, Creative Development & Show Quality Standards
I love to stand on Main Street, just inside the front gates, and watch guests come through the gates into the park. It’s amazing to see their faces light up as they come in! The kids, of course, but even the adults. They lose their self-consciousness, that veneer we put on to be serious in the adult world, and they remember the kid inside. You can see that happening as they walk in!
Norbert Stiekema Vice President, Sales and Distribution
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Disneyland Resort Paris was meticulous about details in service and operations. All resort staff (Cast Members) attended Disney University2 to learn how to provide the cheerful, friendly and flexible service to create a worry-free fantasy experience for the guests. Disneyland Resort Paris spent more than four times the French minimum legal requirement on training and education and each year they received 70,000 spontaneous job applications as an indication of being an attractive employer in the region. One of the training programs, HAT (hôte d’accueil touristique), was recognized as a professional qualification by the French Ministry of Labor and won an international Worldwide Hospitality Award in 2004.
The more than 12,200 Cast Members came from more than 100 nationalities (73% were French) speaking 19 different languages and were on average 33 years old. Half of the employees had more than 5 years of tenure and 30% had more than 10 years. The total annual staff turnover was 22% which was considered very low for the industry.
Disney’s attention to technical innovation, operational excellence and service provided global benchmarks for companies, especially those in the service and creative industries.
Operations is all about making sure the guest has a seamless experience in the park. That goes from helping our shuttle bus drivers to smile and provide good, reliable, on time service taking guests between the park and their hotels, to making sure Cast Members feel comfortable in their costumes so they can focus on providing service, to ensuring that in every part of the resort we have Cast Members who speak different languages so they can help guests in their own language. It’s the details that count.
Roland Kleve, Director, Parks & Resort Operations Support
Euro Disneyland to Disneyland Resort Paris: Magical Stories in Europe
To 1992: It’s a Small World
When Tokyo Disneyland opened in 1983, the Disney US theme parks had known nothing but success. The park in Tokyo was deliberately designed to imitate the parks in the US and from the customer perspective little local adaptation was put in place (except covers for rain protection) so the Japanese would have “the real
2 The Disney University is located at Disneyland Resort Paris. The university offers training on- location in over 400 different training programs: from table service to animal care to water quality control to leadership development. In 2006 Disney University was awarded a quality label from the French AFNOR organization, which is highly respected in the continuing education sector.
One afternoon I was called down to the front gates to speak to a family. When I got there, they seemed happy, so I wondered what the problem was. Then the father explained to me that his young daughter was autistic, and she had never responded to anything or communicated anything to the family. That day, at Disneyland, was the first time they had ever seen her smile. He wanted to thank me for creating something that helped them connect as a family for the first time. That’s the magic we make.
Roland Kleve Director
Parks & Resort Operations Support
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thing.” Japanese culture was startlingly different from American, and Disney was aware of the risk. They hedged their investment by working with a Japanese owner who paid royalties on the revenue streams. Tokyo Disneyland soon became the most profitable Disneyland in the world. Everything that worked well in the US was positively received in Tokyo despite the obvious cultural distance.
“When you have a success it’s natural that you want to replicate it,” Cocquet stated. “We thought: why not Europe? Europeans watched Disney movies, bought Disney products and went to Walt Disney World in Florida. If it worked in Tokyo, it could work in Europe.” Because of the enormous success of Tokyo, The Walt Disney Company decided to invest significant equity this time rather than only collect royalties. Many analysts believed that the resort should have been located in Spain, which had vacation-friendly weather and was associated with leisure holidays. But The Walt Disney Company decided to build Euro Disneyland near Paris because Paris was the most visited tourist area in Europe, it offered the greatest number of visitors within driving and short-flight distance, and the French government offered incentives through infrastructure building, labor development and other vehicles.
1992–1994: Culture Shock and the Original Sin
Amidst intense criticism from Europe’s cultural elite, Euro Disney S.C.A. opened the Disneyland Park and its hotels on the planned date of April 12, 1992 with much publicity and hype. The initial public offering of 51% of the shares had been sold almost overnight. The future looked very bright, despite the continuously escalating construction costs that had climbed to more than three times the original budget, leaving Euro Disneyland with what seemed to be an eternal debt burden of $3 billion.
Unfortunately, the story did not follow the Tokyo script. The French president, François Mitterrand, did not show up for the opening event, stating that it wasn’t his “cup of tea.” Fewer guests walked through the gates than expected, especially from France. Labor relations were strained, and some early service controversies became infamous and affected the resort’s reputation long after they had been resolved. For example, consistent with other Disney parks, Euro Disneyland did not serve alcohol when it first opened. This decision was ridiculed and scorned by European consumers. Soon after opening, Euro Disneyland started serving wine and beer, but the public did not forget the initial mistake. Also the long queuing for the attractions was something that needed special attention. The original planning was based on “American queue length.” As it turned out, the same length of queue in Europe contained twice as many people as an American queue. Guests’ expectations regarding line wait times were, therefore, not met.
Another major part of the Euro Disneyland project was the establishment of a number of hotels inside and just outside the Disneyland Park. The original intention was to sell the hotels quickly, then lease them back. However, the real estate value declined dramatically and it was not possible to sell them. Instead, Euro Disneyland was forced to continue payments. The decreased revenues, coupled with an investment burden that was hard to carry, put an end to the optimism and euphoria. Euro Disneyland dove into financially troubled waters in the midst of a European recession.
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It was like we bought a house in a promising neighborhood. After we moved in, prices dropped way below the mortgaged value. But we had to make the best of it, ride out the storm and try to forget about what we paid for it in the first place.
Roland Kleve, Director of Parks & Resort Operations Support
Disney Village, located at the resort outside the Disney Parks, opened in 1992 and also struggled to find its balance between on-site resort guests and the Eastern Paris market. Disney Village was a collection of restaurants, night clubs, cinemas and a concert venue, all designed for evening entertainment. Some activities were targeted at families, while others were aimed at young adults. The first years Disney Village was open only for resort guests but it later opened to the broader public. As the Paris subway line went directly to the resort and there was no entry fee to Disney Village, it attracted a large number of local guests.
At the brink of bankruptcy, a financial re-structuring in 1994 gave some breathing space and a new major investor, Prince Alwaleed Bin Talal Abdulaziz Al Saud. Interest charges were cut, principal repayments of loans were deferred and Euro Disneyland was liberated from royalty payments (to The Walt Disney Company) for a period of 5 years.
In the beginning there were mistakes on both sides. From our side perhaps some bloated self-assurance, power and optimism, creating investments as well as expectations that were too large. On the French side, there was some easy and non-rational anti-Americanism.
Dominique Cocquet, Executive VP of Development and External Relations
The financial difficulties of the early years, which Euro Disney managers referred to as “the original sin,” occupied much of the media coverage from the opening of Euro Disneyland through the end of the millennium. The high level of debt and increased focus on cost-cuttings, constrained decision-making, and the turnover of senior managers was high.
1995–2001: Becoming a Landmark
From October 1994 Euro Disney began to change the public name of the resort to Disneyland Paris, partly to distance themselves from the controversial Euro currency, and partly to emphasize the Paris location. Euro Disney S.C.A., the operator of Disneyland Resort Paris, became profitable by 1997 with a positive cash flow from operating activities. Things were beginning to look and feel better in every sense. The number of guests climbed, and Disneyland Paris became the most visited tourist destination in Europe; 85% of guests were highly satisfied, and more than 70% intended to return.
The European landscape gradually became clearer. “We had to teach Europeans what a short stay resort destination is,” Pieter Boterman, company spokesman, explained. “There is nothing in Europe like Disneyland Paris, so there was no category in customers’ minds for what we were offering.” Even in 2001, European guests did not stay as long at the resort as American guests did in Florida: In Europe most people stayed only one or two nights. European guests also did not spend as much per capita during their visits. The lower revenue per guest meant that Disneyland Paris managers became experts at providing operational excellence for less money; in fact, the resort provided other Disney theme parks an important benchmark on several important operating measures.
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Very little in our core product needs adaptation, but the way we position it and sell it is completely different in each of our key markets. This is a result of not only market conditions, competition and distribution legacy, but also the fact that Mickey or Winnie the Pooh mean different things to different people, depending on the national context. For example, Germans want tangible value for money, and it is difficult to position our product in the German market place. Try and describe emotions and a wholesome emotional family experience in a factual datasheet! Those who do come are very satisfied, but it is hard to explain it ahead of time.
Norbert Stiekema, VP of Sales and Distribution
The most difficult challenge was learning to create universal emotional experiences:
Picture the jungle cruise, which is a boat going down a river in a jungle. In the US the jungle guide tells you to watch out for the mighty hippopotamus, and then suddenly a hippo rises out of the river and spews water towards the group. Children love the anticipation of watching for the hippo, being just a bit afraid. Now picture the guide in Europe warning passengers about the hippo in six languages. By the time he gets to Spanish, the hippo is already out and the Italians and Dutch – whose languages we haven’t got to yet – completely miss the emotion we’re trying to create! At Disneyland Paris we had to learn to create emotion without verbal scripts. This was a challenge Disney hadn’t ever addressed before, so we’ve had to start from scratch here.
Peter McGrath, Director of Creative Development and Show Quality Standards
The cultural learning was replicated internally where American and French leadership styles were often confronted.
Part of the cultural understanding is in the art of debate here, where people try to understand every angle of an aspect instead of just moving on when 80% is agreed upon
Wendy Crudele, VP Human Resources
In April 2002 a second theme park opened next to the Disneyland Paris. Walt Disney Studios Park was built with an investment of more than $500 million. It was based on the theme of cinema and cartoons, and highlighted movie-making techniques and the history of films. Walking through the front gate was like walking into the studios where animated and live movies are made. Attractions ranged from interactive experiences with the technology to multimedia shows on film-making to animation-based theme rides.
We tried to include as many European film-making elements as we could. For example, the stunt show was designed with European stunt expert Rémi Julienne, and in the historical attractions we included European directors and key players. That didn’t seem to be important to the guests, but it was important to the European observers.
Peter McGrath, Director of Creative Development and Show Quality Standards
Walt Disney Studios was established to appeal to a broader age range than the Disneyland Paris, including teenagers and young adults. It was also intended to prolong the stay of the average Disney tourist and appeal to a broader spectrum of age categories such as teenagers and young adults.
The least published success was ironically the construction of a “real” city, Val d’Europe. This constantly growing neighboring real estate development project
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included a shopping center, business center, downtown with cafés and restaurants and a residential area for over 20,000 “real” people, only 10% to15% of whom worked at Disneyland Paris. The architecture evoked images of classic Paris itself and Val d’Europe was vital to integrating Disney into France and Europe.
Val d’Europe is the “yin” to the Disneyland “yang.” The imaginary village is not sustainable without the real one, or the other way around. Val d’Europe is a thriving, healthy suburban French community that brings balance to the universal magic of the Disney fantasy. The community belongs to France but has Disney as catalyst. Without the Disney values influence I would not have looked at France, my own country, in the same way. The cultural exchange has made me discover what France is heading for or what has been missing here.
Dominique Cocquet, Executive Vice President, Development & External Relations
Val d’Europe was a profitable part of the Euro Disney portfolio, and had also been an important public relations success: It created tens of thousands of jobs and – like Disneyland Paris – contributed significantly to the French tax base. The development was done in careful balanced coordination with the public parties. Since the creation of the destination, more than €5 billion have been invested by private investors and €534 million by the public sector, that is €10 of private funds invested for every €1 of public money.
It is a very rare and unique opportunity to have a new community built between public and private partners. The backbone of our discussions is always a healthy balance between financial interests, short term interests and long term interests. In a way this also works as an illustration of what it means to do business in a foreign environment and how to integrate and adapt to the culture.
Dominique Cocquet, Executive Vice President, Development & External Relations
The healthy development of Val d’Europe was perhaps reflected in the fact that it was one of the few Paris suburbs not affected by the French riots in late 2005.
2002–2004: A Test of Character
Starting in 2002, the leaders of Disneyland Resort Paris faced another series of challenges created by events referred to internally as “the plagues of Moses.” Although tourism within Europe did not decrease right after the 9/11 tragedy, the consequent war in Iraq did create uncertainty and lower levels of tourism. The German economy shattered, other European economies went into decline and tourists turned to cheaper and more local travel. At the same time, the Euro increased against most other world currencies, and Disneyland Resort Paris became more expensive relative to vacations outside Europe. Tour operators in the US, northern Africa and Asia, were desperate to attract tourists and, therefore, offered vacations at loss-leading prices. As if that were not enough, Euro Disney S.C.A. had to repay €600 million in convertible bonds in late 2001. Financial statements again began to look dim.
Management turnover during this time was very high. Of the nine top management positions, eight were replaced during 2003 and 2004. Four of the eight new executives came from outside Disney. In some cases managers were brought back to Disney after a few years with other companies or at other Disney sites. It was a long-standing practice for managers to rotate between Disney sites
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across the world and thus act as carriers of cultural and operational practices that should remain consistent across continents.
Local input and innovation was encouraged through both formal and informal methods. For example, in 2003, management led a series of “summer camps” during his first summer at Disneyland Paris. These were brainstorming sessions with cross-sections of Cast Members and created ideas for increasing revenue, guest satisfaction and delight and cost-cutting. Some initiatives from these sessions were grand, such as the new attraction Space Mountain: Mission 2. Others were apparently smaller but had wide impact, such as the “Park Hopper” pass, a new class of ticket which let visitors into both Disneyland Paris and Walt Disney Studios on a single day.
Throughout the turbulent financial times, the operational excellence and spirit among employees and guests stayed high. Attendance rates held stable at Disneyland Resort Paris, while decreasing among European competitors. Satisfaction rates increased, and repeat visit rates shot up. Managers developed sophisticated knowledge about their guests in terms of spending habits, means of transportation, geographical distribution, preferred activities and competing destinations. The revenue also remained stable above €1 billion annually, of which a good half came from the Disneyland and Walt Disney Studios and almost 40% from the Disney Hotels and Disney Village. The seven medium-high standard hotels had a total capacity of 5,800 beds and since 2000 achieved occupancy rates of 80% to 89%.
Financial difficulties had plagued the resort since it opened, crippling its ability to invest and creating urgency for short-term cash flow. Disney managers had focused on survival without compromising quality. After yet another difficult couple of years, Euro Disney S.C.A. leaders sought financial restructuring and investment to allow them to enhance the resort. By the end of 2004, the package was in place. It included restructuring of debt totaling $3 billion, and an infusion of $330 million new capital from existing investors. In March 2005, shares were distributed between the Walt Disney Company (40%), Prince Alwaleed (10%) and other shareholders (50%), with the latter category including a large proportion of French banks.
The Market Place – 2005/2006
In its home country, Disneyland Resort Paris was part of a complex vacation and leisure market. France was the world’s favorite tourist destination with over 75 million international arrivals each year. Disneyland Resort Paris was the most visited attraction, with twice as many visitors as the Eiffel Tower. France had fourteen attractions that hosted more than one million visitors annually, divided into “cultural” and “non-cultural” categories. The former included well-known Parisian sites such as the Louvre, Notre Dame and the Palace of Versailles, while the latter included Parc Asterix3 and ParcFuturoscope.4 Theme parks were the
3 Thrills and shows in a theme park (opened in 1989) 35 km from Paris, based on the Gallic characters of Asterix, Obelix and friends in Brittany who would never surrender to Cesar. Standard admission fee 2005 was €31.
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most preferred “paid-for” attractions. “Free” cultural attractions, including all places of historic interest, natural interest and exhibitions, had more visitors than theme parks and zoos. Visitors of theme parks and zoos tended to have average incomes, while cultural attractions often catered to the higher end of the income scale.
The European amusement park industry was much smaller than that of either the United States or East Asia. European theme parks enjoyed an increasing number of visitors, although still only a small fraction of the number in the United States. Nine parks had more than 2.5 million yearly visitors; these parks were distributed through Denmark, Holland, Germany, Spain and the United Kingdom. Unlike the so called “thrill parks,” Disneyland Resort Paris also competed with a variety of vacation resorts such as Club Med or hotel/beach resorts.
The evolution of the “resort concept” as a new way of vacationing was gradually establishing itself in the European public’s mind. People were increasingly looking for an integrated destination where they could enjoy a wide variety of experiences according to their own choices. This trend was partially driven by socio-economic trends, such as a larger middle class with shorter but more intensive vacations. It was also partially the effect of ongoing marketing by Disneyland Resort Paris and other resorts, and people experiencing and becoming personally familiar with the resort vacation.
2005–2007: Disneyland Resort Paris Comes of Age
Disneyland Resort Paris had set strategic goals to return to profitability. The strategy targeted long-term traffic and increased average spending per guest through two key measures:
� a multi-year investment plan (€240 million over four years from 2005 to 2009)
� an innovative sales and marketing policy.
Four new or renewed attractions were planned for the four-year period. In 2005 the Disneyland Park star attraction, Space Mountain, was completely reprogrammed and reopened as Space Mountain: Mission 2. This was the first redesign of Space Mountain in any Disney resort. In 2006, Buzz Lightyear’s Laser Blast opened, based on the Disney/Pixar movie Toy Story 2. This was a sophisticated, interactive ride that pitted guests in a laser shooting competition against the evil Emperor Zurg. In 2007 two new attractions would open in Walt Disney Studios Park, Crush’s Coaster and Cars: Quatre Roues Rallye. Finally, in 2008 the Tower of Terror would open in Walt Disney Studios Park. This thrill ride included a long free-fall drop in the elevator of a haunted high-rise building, and was one of the most popular attractions in the other parks.
4 Interactive attractions and shows, primarily based on science and technology. This leisure space is situated in Poitiers, between Paris and Bordeaux (1h20 by TGV train from Paris). Standard admission fee in 2005 was €33.
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Innovation was one of Disney’s core values, and experience demonstrated that new attractions had the capacity to enhance the quality and impact of the guest experience in the Parks. In addition, new attractions would bolster the Park’s attractiveness and capacity. Each new attraction was designed to meet the needs of future guests and round out what was already a one-of-a-kind guest experience. Offering something new and innovative brought guests in and would make them come back.
For many years the company researched key European markets extensively to identify different categories of future guests and to determine the most effective ways to reach them. There was no such thing as “the European consumer.” Thanks to continuous research, the company now had detailed knowledge of each of its key European markets and became one of the key experts in understanding European travelers. The challenge was how to use this information to adapt to the different market segments without losing the core of Disney magic.
The Script for the Future: Journey to 2015
The leaders of Disneyland Resorts Paris, including the new CEO Karl Holz, were enthusiastic about the opportunities provided by the 2004 financial restructuring: however, they were also aware that investors would not wait for a financial return forever. Magic could only continue if it earned money.
Disneyland Resorts Paris had learned a lot over the years about how to compete in the European vacation market. But, just as the market signals were mixed about how the park should be positioned when it opened in 1992, the market still sent mixed messages about which road to take to reach financial success in the future. Some research suggested the resort would be more successful if managers did not worry about how true it was to the Disney formula. If Europeans really wanted a Disney experience, they went to Florida or California. Disneyland Resort Paris should, therefore, create its own brand of family experience completely adapted to the local market.
Other research suggested that Disney could never be anything but the American- style Disney, and that Disneyland Resort Paris would be better off to position itself as providing “the real thing” in Europe. This would be a copy of the Tokyo model, which had been highly successful.
There is a trade-off between Disney values and cultural sensitivity. In business, as well as in private life, it is all about doing things genuinely. Be true to who you are – work on your delivery.
Jeff Archambault, Vice President, Communications & Corporate Alliances
The outcome of the analysis had to create a consistent and compelling experience for the guests. Management was debating, however, which principles would best guide the choice of which offerings should stay global and which offerings should be locally adapted – with what levels of adaptation?
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Exhibit 1 The Walt Disney Company Timeline
� 1923: The Disney Bros. studio, founded by Walt and his brother Roy Oliver Disney, produces the Alice in Cartoonland series
� 1927: The Alice series ends; Walt picks up the contract to animate Oswald the Lucky Rabbit
� 1928: Walt loses of the Oswald series; first Mickey Mouse cartoon: Steamboat Willie � 1929: First Silly Symphony: The Skeleton Dance � 1930: First appearance of Pluto � 1932: First three-strip Technicolor short released: Flowers and Trees; first appearance of
Goofy � 1934: First appearance of Donald Duck � 1937: Studio produces its first feature, Snow White and the Seven Dwarfs � 1940: Studio moves to the Burbank, California buildings where it is located to this day � 1941: A bitter animators' strike occurs; as the USA enters World War II, the studio begins
making morale-boosting propaganda films for the government � 1944: The company is short on cash; a theatrical re-release of Dumbo generates much-
needed revenue and begins a reissue pattern for the animated feature films � 1945: The studio hires its first-ever live actor for a film, James Baskett, to star as Uncle
Remus in Song of the South � 1949: The studio begins production on its first all-live action feature, Treasure Island; the
popular True-Life Adventures series begins � 1954: The studio founds Buena Vista International to distribute its feature films; beginning
of the Disneyland TV program � 1955: Opening of Disneyland in Anaheim, California � 1961: The studio licenses the film rights to Winnie-the-Pooh, whose characters continue to
be highly profitable to this day; international distribution arm Buena Vista International is established
� 1964: The company starts buying land near Orlando, Florida for Walt Disney World - then known as Disneyworld, or 'The Florida Project'
� 1965: The regular production of short subjects ceases, as theatres no longer have any demand for them
� 1966: Walt Disney dies � 1967: Construction begins on Walt Disney World; the underlying governmental structure
(Reedy Creek Improvement District) is signed into law � 1971: Walt Disney World opens in Orlando, Florida; Roy Oliver Disney dies; Donn Tatum
becomes chairman and Card Walker becomes CEO and president � 1977: Roy Edward Disney, son of Roy and nephew of Walt, resigns from the company
citing a decline in overall product quality and issues with management � 1978: The studio licenses several minor titles to MCA Discovision for laserdisc release;
only TV compilations of cartoons ever see the light of day through this deal � 1979: Don Bluth and a number of his allies leave the animation division; the studio releases
its first PG-rated film, The Black Hole � 1980: Tom Wilhite becomes head of the film division with the intent of modernizing studio
product; a home video division is created
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� 1981: Plans for a cable network are announced � 1982: EPCOT Center opens at Walt Disney World; Ron W. Miller succeeds Card Walker
as CEO � 1983: As the anthology series is canceled, The Disney Channel begins operation on US
cable systems; Tom Wilhite resigns his post; Tokyo Disneyland opens in Japan � 1984: Touchstone Pictures is created; after the studio narrowly escapes a buyout attempt by
Saul Steinberg, Roy Edward Disney and his business partner, Stanley Gold, remove the Ron W. Miller as CEO and president, replacing him with Michael Eisner and Frank Wells
� 1985: The studio begins making cartoons for television; The home video release of Pinocchio is a best-seller
� 1986: The studio's first R-rated release comes from Touchstone Pictures; the anthology series is revived; the company's name is changed from Walt Disney Productions to The Walt Disney Company.
� 1989: Disney offers a deal to buy Jim Henson's Muppets and have the famed puppeteer work with Disney resources; the Disney-MGM Studios open at Walt Disney World
� 1990: Jim Henson's death sours the deal to buy his holdings; the anthology series canceled for second time
� 1992: The controversial Euro Disney opens outside Paris, France � 1993: Disney acquires independent film distributor Miramax Films; Winnie the Pooh
merchandise outsells Mickey Mouse merchandise for the first time; the policy of periodic theatrical re-issues ends with this year's re-issue of Snow White and the Seven Dwarfs but is augmented for video
� 1994: Frank Wells is killed in a helicopter crash; Jeffrey Katzenberg resigns to co-found his own studio, DreamWorks SKG
� 1995: In October, the company hires Hollywood superagent, Michael Ovitz, to be president � 1996: The company takes on the Disney Enterprises name for non-Walt Disney branded
ventures and acquires the Capital Cities/ABC group, renaming it ABC, Inc. ;in December, Michael Ovitz, president of the company, leaves "by mutual consent"
� 1997: The anthology series is revived again; the home video division releases its first DVDs
� 1998: Disney's Animal Kingdom opens at Walt Disney World � 2000: Robert Iger becomes president and COO � 2001: Disney-owned TV channels are pulled from Time Warner Cable briefly during a
dispute over carriage fees; Disney's California Adventure opens to the public; Disney begins releasing Walt Disney Treasures DVD box sets for the collector's market
� 2003: Roy Edward Disney again resigns as head of animation and from the board of directors, citing similar reasons to those that drove him off 26 years earlier; fellow director Stanley Gold resigns with him; they establish "Save Disney" (http://www.savedisney.com) to apply public pressure to oust Michael Eisner
� 2003: Pirates of the Caribbean: The Curse of the Black Pearl becomes the first film released under the Disney label with a PG-13 rating
� 2004: o The studio breaks off renegotiation talks with Pixar (their current contract expires in
2006); Disney announces it will convert its animation studio to all computer- animated production
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o Announced the closure of their Florida feature-film animation department (http://www.savedisney.com/news/se/wdfa_closure.asp);
o Comcast makes a $66 billion unsolicited bid to buy The Walt Disney Company (Comcast withdraws its bid in April);
o Disney purchases rights to The Muppets; o Company stockholders give Michael Eisner a 43% vote of no confidence; as a result,
Eisner is removed from the role as chairman of the board (but maintains his position as CEO) and George J. Mitchell becomes chairman in his place.
o After investing $6 million into production of the documentary film Fahrenheit 9/11 by Michael Moore, Walt Disney Pictures announced their previously mentioned intentions of not distributing the film. The director and the heads of Miramax arrange an alternate distribution arrangement and the film becomes the most successful documentary film of all time. At $100 million+, that film earns more than most of Disney's other film releases that year.
� 2005: o Disneyland celebrates its 50th birthday on 17 July. o Robert A. Iger, currently president of the company, will replace Michael Eisner as
CEO on October 1. o Disney starts talks with Steve Jobs (Chairman of Pixar) about acquisition of Pixar
Animation Studios. The $ 7.4 billion deal was announced in late January 2006. This made Steve Jobs the single largest Disney shareholder and Jobs also joined Disney’s board of directors.
Source: Company information
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Exhibit 2 Key Figures 2003-2005
Source: Euro Disney S.C.A., 2005 Annual Review
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Exhibit 3 Stock Information
Source: Euro Disney S.C.A., 2005 Annual Review
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Exhibit 4 Worldwide Park Attendance 20041)
1. Magic Kingdom at Walt Disney World, Florida 15.1
2. Disneyland in Anaheim, California 13.4
3. Tokyo Disneyland, Japan 13.2
4. Disneyland Resort Paris, France 2) 12.4
5. Tokyo Disney Sea, Japan 12.2
6. Universal Studios Osaka, Japan 9.9
7. EPCOT at Walt Disney World, Florida 9.4
8. Disney-MGM Studios, Florida 8.3
9. Lotte World in Seoul (indoor), South Korea 8.0
10. Disney’s Animal Kingdom, Florida 7.8
1) The world market for the 50 most visited amusement parks rose to a record level of 252.4 million visitors, an increase of 2.2% from 2003.
2) Includes visitors to both theme parks, Disneyland Paris and the Walt Disney Studios.
Europe accounted for 11 out of the top 50 parks with a total of 41 million visitors in 2004, an increase of 2.8% from 2003. Tivoli gardens (Denmark), Europa Park (Germany) and Gardaland (Italy) are the most visited after Disneyland Resort Paris. Tivoli increased its attendance nearly 30% to 4.2 million visitors, thanks in part to a new attraction “the Demon.” Europa Park increased its number of attendants to 3.7 million (of which 20% were of French nationality).
Source: Amusement Business Online and le Quotidien Tourisme
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Exhibit 5 Disneyland Resort Paris: “Magic on Your Doorstep”
Source: Company information
Exhibit 6 Early Morning in Val d’Europe
Source: Company information
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3.
9B03M052 THE LEO BURNETT COMPANY LTD.: VIRTUAL TEAM MANAGEMENT Elizabeth O’Neil prepared this case under the supervision of Professor Joerg Dietz and Fernando Olivera solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright © 2003, Richard Ivey School of Business Foundation Version: 2018-06-04 Janet Carmichael, global account director for The Leo Burnett Company Ltd. (LB), United Kingdom, sat in her office wondering how to structure her global advertising team. The team was responsible for the introduction of a skin care product of one of LB’s most important clients, Ontann Beauty Care (OBC). The product had launched in the Canadian and Taiwanese test markets earlier that year. Taiwanese sales and awareness levels for the product had been high but were low for the Canadian market. Typically, at this stage in the launch process, Carmichael would decentralize the communications management in each market, but the poor performance in the Canadian market left her with a difficult decision: should she maintain centralized control over the Canadian side of her team? In three days, she would leave for meetings at LB’s Toronto, Canada office, where the team would expect her decision. THE LEO BURNETT COMPANY LTD. BACKGROUND LB, which was founded in Chicago in 1935, was one of North America’s premier advertising agencies. It had created numerous well-recognized North American brand icons, including The Marlboro Man, Kellogg’s Tony the Tiger, and the Pillsbury Dough Boy. In 2000, LB merged with two other global agencies to form b|com3 (the actual company name), one of the largest advertising holding companies in the world, but each LB office retained the Leo Burnett company name. LB had expanded around the globe to include 93 offices in 83 markets. The company employed approximately 9,000 people, and worldwide revenues were approximately US$9 billion. LB Services and Products As a full-service agency, LB offered the complete range of marketing and communications services and products (see Exhibits 1 and 2). The company’s marketing philosophy was to build “brand belief.” The idea driving this philosophy was that true loyalty went beyond mere buying behavior. LB defined “believers” as customers who demonstrated both a believing attitude and loyal purchase behavior. The company strove to convert buyers into believers by building lasting customer affinity for the brand. F
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Page 2 9B03M052 One of the most important measures of an agency’s success was the quality of the creative product that was developed to connect brands to their end consumers. Each local office strove to produce outstanding creative advertising to break through the clutter of marketing messages that the general public was subjected to daily, and truly reach the consumer in a memorable way. Award shows were held nationally and internationally to recognize this effort, one of the most prestigious being the annual festival in Cannes, France. With each award, individual employees (usually the art director and copy writer who had worked together to develop the ad) were recognized, as was the local agency office where they worked. These creative accolades were instrumental in helping an office win new client business. Even within the global LB network, awards were given to the local offices that produced the most outstanding creative work. LB Internal Team Structures A multidisciplinary team serviced each brand. Each team had representatives from all core areas of the agency as well as members from the specialized services as appropriate for the brand. In most cases, team members had two sets of reporting lines. First and formally, they directly reported to the supervisor of their home department (for example, account management). It was this formal supervisor who was responsible for conducting performance evaluations and assigning and managing an employee’s workload. Informally, the team members reported to a project team leader, the senior account services person, who usually was an account director or a vice-president of client services director. It was this team leader’s responsibility to manage the project in question, ensure that the client was satisfied with project progress, and build and manage the overall relationship between the client and the agency. Employees on the project team would be responsible to this person for meeting project deadlines and managing their individual client relationships. This team leader would often provide input to a team member’s performance evaluation, along with other agency colleagues (see Exhibit 3). At any given time, an agency employee typically worked on two or three different brand teams, virtually all of them face-to-face teams servicing local clients. LB Typical Office Environment Most LB employees were young (in their 20s and 30s) and worked about 60 hours per week. Client needs and project deadlines dictated work priorities, and the volume of work often required late nights at the office. Agency office environments were often open-concept and social. Employees spent many hours each day up and about, discussing projects with colleagues and responding to client requests. The pace was fast and the general spirit was one of camaraderie; it was common for LB employees to socialize together after a late night at the office. LB Toronto LB’s Toronto office was founded in 1952 to service the Canadian arms of the Chicago-based clients. It was LB’s first expansion beyond Chicago. It employed a staff of approximately 200 people and billings were approximately $200 million.
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Page 3 9B03M052 LB United Kingdom LB acquired its London, United Kingdom, office in the mid-1970s as part of an expansion into Europe. The office had grown to over 350 employees and billings were approximately $400 million. London was also the regional LB headquarters for all European, Middle Eastern and African offices. LB’S RELATIONSHIP WITH ONTANN BEAUTY CARE Ontann Beauty Care (OBC) OBC was a leading global manufacturer of health and beauty care products. OBC made a strategic decision to centralize the global marketing of its brands and products, designating a global team to define the global strategy for a given brand and develop the core communication materials as templates for local markets to follow. Local offices were given the responsibility for adapting the global materials and developing local “below the line” (BTL) materials, which would synergize with the global vision and creative templates. Below the line materials included direct marketing, in-store materials, digital marketing, public relations and promotions (that is, everything except strict advertising). In practice, on established brands with well- defined communication templates and strong local knowledge, some local markets (at least key regional markets) were awarded more opportunity to develop their own communication material. The global team, however, retained veto power to ensure all communications were building a consistent personality and look for the brand. Each OBC global office had as many teams as it had brands. An OBC brand team usually consisted of the global category director, the brand manager and an assistant brand manager, plus a representative from each of the various departments: marketing technology, consumer, trade/distribution, PR, sales, product development, and production. Relationship Between LB and OBC OBC, which, like LB, was founded in Chicago, was one of LB’s original clients. As one of the top three LB clients worldwide, OBC did business with most LB offices. OBC, however, awarded its business to advertising agencies brand-by-brand. As a result, other advertising agencies also had business with OBC. Competition among advertising agencies for OBC business was strong, in particular when they had to work together on joint brand promotions. OBC had been a client of LB’s Toronto office since 1958 and of LB’s London office since its acquisition in the mid-1970s. Both the Toronto and London offices initially developed advertising and communications materials for various OBC facial care brands and eventually also worked on OBC’s skin care brands. To better service OBC, LB also centralized its decision-making for this client’s brands and appointed expanded and strengthened global teams with the power to make global decisions. For its other clients, LB’s global teams were significantly smaller, tending to consist simply of one very senior LB manager who shared learning from across the globe with a given client’s senior management.
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Page 4 9B03M052 A NEW OBC BRAND: FOREVER YOUNG The OBC London office announced a new skin care line called “Forever Young.” Product formulas were based on a newly patented process that addressed the needs of aging skin. For OBC, this brand presented an opportunity to address a new market segment: the rapidly growing population of people over the age of 50. The product line was more extensive than other OBC skin care brands. It also represented the company’s first foray into premium-priced skin care products. Product cost, on average, was double that of most other OBC brands, falling between drug store products and designer products. OBC intended Forever Young to be its next big global launch and awarded the Forever Young advertising and brand communications business to LB. GLOBAL ADVERTISING AND COMMUNICATIONS TEAM FOR FOREVER YOUNG Team Formation For LB, a successful launch of this new product would significantly increase revenues and the likelihood of acquiring additional global OBC brands. An unsuccessful launch would risk the relationship with OBC that LB had built over so many years. LB management in Chicago decided that LB London would be the global team headquarters. This decision reflected the experience that the London office had in leading global business teams and the proximity to the OBC global team for Forever Young. It was also likely that the United Kingdom would be the test market for the new product. In LB’s London office, Janet Carmichael was assigned as brand team leader for the Forever Young product. Carmichael was the global account director for OBC. The 41-year-old Carmichael, a Canadian, had begun her career at LB Toronto as an account executive, after completing an MBA degree at the University of Toronto. Later, Carmichael moved to Europe, where she continued her career with LB. She became an account supervisor in Italy, an account director in Belgium, and finally a regional and global account director in Germany before taking on a global account director role on OBC brands in the United Kingdom. She was very familiar with OBC’s business and had built excellent relationships with the OBC skin care client group. LB’s initial Forever Young brand team had six members who were all employees of the London office: Carmichael as the team leader, an account director, an account executive (she formally supervised these two employees), the agency’s creative director, and two “creatives” (an art director and a copy writer). Carmichael outlined a project timetable (see Exhibit 4). The LB team worked with the OBC team on consumer research, market exploration, brand creative concepts (creative), packaging samples and global copy testing throughout North America and Europe. Carmichael viewed marketing a new product to a new consumer segment in a crowded category as challenging; however, after several months of testing, LB’s Forever Young brand team developed a unique creative concept that was well received by OBC. OBC decided that the United Kingdom would be the lead market for another skin care product. Because North America was a priority for the Forever Young brand and Canada was “clean” (that is, OBC was not testing other products in Canada at that time), Canada became the new primary test market for Forever Young. In addition, Canadians’ personal skin care habits and the distribution process for skin care products were more reflective of overall Western practices (i.e., the Western world) than were those in other potential test markets. Taiwan became the secondary test market for Asian consumers. These choices were consistent with OBC’s interest in global brand validation. Fo
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Page 5 9B03M052 In keeping with OBC’s team structures, LB maintained the global brand team in London and formed satellite teams in Toronto, Canada, and Taipei, Taiwan, to manage material execution in their local markets. It was up to the LB Toronto and Taipei offices to determine their members in the Forever Young satellite teams. In Taipei, Cathy Lee, an account director who was particularly interested in the assignment, took the lead on local agency activities. In Toronto, Geoff Davids, an account supervisor from the direct marketing group, was assigned to lead the Toronto team. The global brand team and the two satellite teams now formed the LB side of the global advertising and communications team for Forever Young (see Exhibit 5). Kick-off Meeting A face-to-face kick-off meeting took place in Toronto with the intent to bring all senior members of LB’s and OBC’s London, Toronto, and Taipei teams onto the same page regarding the new brand and the status of the launch process. One or two senior representatives from OBC London, Toronto, and Taipei participated in the meeting. From LB, the complete London team participated, along with Geoff Davids and a senior agency representative from the Toronto office, and Cathy Lee and a senior agency representative from the Taipei office. Carmichael and her U.K. team members shared their initial brand creative concepts, which had already garnered admiration throughout the LB network, and their knowledge about the product and target audience. It was decided that Davids and Lee would serve as the main links to LB’s London-based global brand team. Specifically, Davids and Lee reported to Annabel Forin, Carmichael’s account director in the United Kingdom. Forin then reported to Carmichael and OBC’s London team. Besides Forin, Carmichael’s primary contacts would be Annabelle Manning, the global creative director at LB United Kingdom, and Sarah Jones, OBC’s global vice-president of skin care in London. All work produced by LB’s satellite teams would require approval from LB’s London team. The Creative Assignments The creative assignments for the Canadian and Taiwanese teams were slightly different from each other. Normally, the global team would produce a creative template for a brand (meaning the design of the advertising and communications materials), which would then be passed to the satellite teams to be adapted for the local market. In the Taiwanese market, this would be the case. The Taiwanese LB team would be responsible for adapting the advertising materials, which would include re-filming the television ad to star an Asian actress, as well as retaking photos for the print ads, again, to demonstrate product benefits on Asian skin. The brand message (meaning the text in print ads and the vocal message in television ads) would be adapted to appeal to the Taiwanese audience. In Toronto, however, the assignment broke from this traditional format. The LB team in London would produce English television and print advertising, which would be used in the Canadian market. The LB team in Toronto would design and produce the direct marketing and website materials because the London office did not have strong in-house capabilities in these areas. While the Toronto office would have control of the design of these communication pieces, the U.K. office would require that certain elements be incorporated into the design (for example, specific photos and colors), in order for the pieces to be visually consistent with the print advertising.
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Page 6 9B03M052 EVENTS LEADING UP TO THE LAUNCH LB’s Taipei Office After returning to Taipei from the kick-off meeting, Lee formed her local team, which consisted of an account executive (Tanya Yang) and a creative team (one art director and one copy writer). In co-operation with OBC’s Taipei team, Lee and her team focused first on recreating the television ad. The ad followed the original creative idea developed in the United Kingdom but used a popular Taiwanese actress in the lead. The character differentiation was necessary to demonstrate the product’s benefit for Asian skin because the original ad featured a blond, Caucasian actress as the lead. The team moved on to adapt the brand’s print advertising and direct marketing pieces, and developed a public relations campaign to meet local market needs. These communication elements were visually and strategically consistent with the television ad as they incorporated photos of the same Taiwanese actress. Throughout this process, the Taipei team regularly updated LB’s and OBC’s London teams about its progress. Although all work required U.K. approval, the Taiwanese team worked with a significant amount of autonomy because of the cultural differences present in its market. Carmichael and Manning occasionally travelled to Taiwan to meet with the team and approve its creative work, which they generally received well. In addition, the Taipei team communicated with the London offices through videoconference calls and e-mail. The LB Taipei and Toronto teams had contact with each other only during the global team videoconference meetings, held every two months. LB’s Toronto Office After the kick-off meeting, Davids, with the approval of LB’s Toronto management, assigned representatives from the direct marketing group and the interactive marketing group to the brand team. This included account management (Tara Powell, account executive for direct; Liz Nelson, account supervisor; and Alexis Jacobs, project manager for interactive) and creative staff (Shirley Watson, creative director; and one copy writer from each of the direct and interactive groups). In co-operation with OBC’s Toronto team, the LB Toronto team was responsible for developing a full communication plan for its local market. Along with running the television and print ads developed in the United Kingdom, the team would focus on producing the brand’s below the line materials (i.e., direct mail, website). These communication elements served as the education pieces that supplemented the TV ad. Davids conducted an internal team debrief, outlining the information he had received at the kick-off meeting. From this, the team developed a communications plan that, in Carmichael’s opinion, was “on- brief” (i.e., consistent with the original brand strategic direction) and included some very innovative thinking. Next, the team began determining a creative look and feel for the direct mail pieces. The look and feel could be different from the television creative but had to be consistent across all of the paper-based (print ads, direct mail pieces and in-store materials) and online communication elements. The creatives on LB’s Toronto team developed the direct marketing materials, and, simultaneously, the creatives on LB’s U.K. team developed the print advertising. The two sides’ creative work evolved in different directions, but each side hoped that the other would adapt their look and feel. Eventually, however, LB’s Toronto team told its London counterpart to “figure it out,” and they would follow London’s lead. Communication between the two sides mostly flowed through Davids and Forin to Carmichael. Carmichael, however, had received a copy of the following e-mail from Watson to Davids: Fo
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Page 7 9B03M052
Geoff, as you know, it’s always a challenge to work with someone else’s art direction. I don’t think the model that London chose is right for this market, and the photography we have to work with doesn’t have as contemporary a feel as I would like. This would be easier if I could connect directly with Annabelle [Manning] but she’s on the road so much of the time it’s hard to catch her. We weren’t asked for our opinion initially and, given the timing constraints at this point, we don’t have much choice but to use what they’ve sent us, but could you please convey to Annabel [Forin] that in the future, if possible, we’d like to have the chance to input on the photography before it’s taken? It will help us develop good direct mail creative. For now, though, I think we’ll be able to do something with what they’ve sent us. Thanks.
There had been other challenges for LB’s Toronto team. Davids described an incident that had occurred when his direct marketing team tried to present its creative concept to the team in the United Kingdom during a videoconference meeting:
Our direct mail concept was a three-panel, folded piece. We sent two flat files to the United Kingdom via e-mail, which were to be cut out, pasted back-to-back [to form the front and back of the piece] and then folded into thirds. It took us so long to explain how to do that—somehow we just weren’t getting through! Our colleagues in London cut and folded and pasted in different places, and what should have been a simple preliminary procedure took up 45 minutes of our one- hour videoconference meeting! By the time we actually got around to discussing the layout of the piece, everyone on the call was frustrated. That’s never a good frame of mind to be in when reviewing and critiquing a new layout. It’s too bad our clients were on that call as well.
A greater challenge came when the team was behind schedule in the development of the website after encountering difficulties with OBC’s technology standards. The budgeting for the website development came out of the global budget, not the local budget. This meant that the members of LB’s Toronto team who were responsible for the website development (“interactive marketing”) received directions from OBC’s London team. The budgeting for direct marketing, however, came out of the local budget, and the members of LB’s Toronto team who were responsible for the development of the direct marketing materials dealt with OBC’s Toronto team. The instructions from these two OBC teams were often inconsistent. Compounding matters, the two OBC client teams repeatedly requested changes of the Web and direct marketing materials, which made these materials even more different from each other and forced the LB Toronto team into extremely tight timeframes. Carmichael learned about this sort of difficulty mostly through the direct supervisors of the team members. She frequently received calls from LB Toronto’s Interactive Marketing Group and Direct Marketing Group senior managers. Carmichael repeatedly had to explain the basic project components to these senior managers and wished that the members of LB’s Toronto team would just follow the team communications protocol and forward their concerns to Davids, who would then take up matters as necessary with the U.K. team. CANADIAN PRE-LAUNCH TEST Despite these challenges, LB’s Toronto team produced the materials in time for the Canadian pre-launch test. The pre-launch test was a launch of the complete communications program (TV ad, newspaper inserts, Fo
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Page 8 9B03M052 distribution of trial packs, direct mail, and a website launch) in a market whose media could be completely isolated. A small town in the interior of British Columbia, Canada’s most westerly province, met these conditions. In terms of product trial and product sales as a percentage of market share, the test indexed 120 against its objectives, which had a base index of 100. Subsequently, OBC and LB decided to move immediately into research to test the advertising in the U.S. market. The global OBC and LB teams worked with their Canadian counterparts to conduct this research, the results of which were very poor. As a result, OBC London required that LB’s London and Toronto teams revised the advertising materials even before the Canadian launch. CANADIAN NATIONAL LAUNCH The days before the launch were panic-filled, as LB’s London and Toronto teams scrambled to revise the advertising. In February 2001, the campaign was launched in Canada with the following elements: • One 30-second TV ad; • One direct mail piece; • The English website; • Product samples available from the web, from direct mail piece, and from an in-store coupon; • Specially designed in-store displays; • Trial-sized package bundles (one week’s worth); • A public relations campaign; and • Five print ads in national magazines. Research following the national launch showed that the brand did not perform well among Canadian consumers. It indexed 50 against a base index of 100. Because of the success of the Canadian pre-launch test, OBC and LB were surprised. The Forever Young global advertising and communications team attributed the discrepancy between the pre-launch test and national launch, in part, to the fact that the pre- launch test conditions were not replicable on a national scale. The audience penetration in the small B.C. town, the pre-test site, was significantly greater than it was in the national launch. OBC decided that the results of the Canadian launch were below “action standards,” meaning that OBC would not even consider a rollout into the U.S. market at the current time. The tension levels on both LB’s side and OBC’s side of the Forever Young global advertising and communications team were high. LB’s future business on the brand was in jeopardy. The OBC side was under tremendous pressure internally to improve brand trial and market share metrics, and already planned to decentralize the local teams for the global product rollout. Despite numerous revisions to the advertising, it never tested well enough to convince OBC that a U.S. or European launch would be successful. A DIFFERENT STORY IN ASIA In Taiwan, the product launch was successful. Test results showed that the brand was indexing 120 per cent against brand objectives. Research also showed that Taiwanese consumers, in contrast to Canadian consumers, did not perceive some of the advertising elements as “violent.” Moreover, in Taiwan, overall research scores in terms of “likeability” and “whether or not the advertising would inspire you to try the product” were higher, leading to higher sales. The Taiwanese team was ready to take on more local-market responsibility and move into the post-launch phase of the advertising campaign. This phase would involve creating new ads to build on the initial success and grow sales in the market.
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Page 9 9B03M052 RECOVERY PLAN FOR CANADA LB needed to take drastic measures to develop a new Forever Young campaign in order to improve the brand’s performance in the Canadian marketplace. Whereas, before the launch, there had been a clear division of responsibilities (with the United Kingdom developing the television and print advertising and Canada developing direct marketing, in-store and website communications), now the global LB team in London decided that it would be necessary to have all hands on deck. New creative teams from the mass advertising department in the Toronto office, as well as supplementary creative teams from the London office, were briefed to develop new campaign ideas. Each team had only three weeks to develop their new ideas, less than half of the eight weeks they would normally have, and the teams had to work independent of each other. The London and Toronto creative teams had to present their concepts to the entire global OBC and LB teams at the same time. Subsequently, the results of market research would determine the winning creative concept. Squabbling between the offices began over which team would present first, which office received what compensation for the development, and whether or not overall remuneration packages were fair. Moreover, the communication between the account services members of LB’s London and Toronto teams, which was the primary communication channel between the two agencies, became less frequent, less candid and more formal. The presentations took place in Toronto. Watson, the creative director in Toronto, commented:
This process has been exciting, but we’re near the ends of our collective ropes now. We have a new mass advertising creative team [who specialized in TV ads] on the business in Toronto, and they’re being expected to produce world-class creative results for a brand they’ve only heard about for the past few days. They don’t—and couldn’t possibly—have the same passion for the brand that the direct marketing creative team members have after working on it for so long. I’m having a hard time motivating them to work under these tight timelines. We’re even more isolated now in Toronto. Our connection to the creative teams and the global creative director in London was distant at best, and now it’s non-existent. And our relationship with the local OBC client feels very remote, too. Still, we’re moving forward with our work. We’re trying to learn from the Taiwanese experience and are considering what success we would have with a nationally recognized actress starring in our television ads.
EVOLUTION OF THE FOREVER YOUNG GLOBAL ADVERTISING AND COMMUNCATIONS TEAM Personnel Changes Numerous personnel changes in the Forever Young global advertising and communications team occurred (see Exhibit 5). In LB’s London office, Forin, the U.K. account director, had been replaced following her departure for maternity leave. In OBC’s London office, Sarah Jones, the global vice-president for skin care, took early retirement without putting a succession plan in place. In LB’s Toronto office, Davids, the Toronto brand team leader, had left the agency. Tara Powell, who had reported to Davids, took on his responsibilities, but she had not met most of the global team members. Liz Nelson, the account supervisor for interactive, left LB’s Toronto office to return to school. Alexis Jacobs, who had managed the website development, took over her responsibilities. Powell and Jacobs did not have close relationships with their international counterparts. At OBC Toronto, Sally Burns, the local brand manager who had been LB’s main contact in the local market and had been with the brand since inception, left OBC. LB’s and OBC’s Taiwanese teams remained stable over time. Cathy Lee worked with a team that was nearly identical to her initial team.
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Page 10 9B03M052 Communications Early on, after the kick-off meeting, Carmichael had orchestrated frequent face-to-face meetings to ensure clarity of communication and sufficient information sharing. In the following months, the team relied on videoconferences and phone calls, with visits back and forth between London and Toronto on occasion. Later, the team had relied increasingly on e-mails and telephone calls to communicate. Carmichael noted that the communication had become more formal, and she had lost the feeling of being part of a global team. She wondered if giving the LB’s Toronto team more autonomy to develop the brand in their market would help the brand progress. Working together as a smaller team might improve the Toronto group’s team dynamic as well. Carmichael was concerned that the current discord between LB’s London and Toronto offices would negatively affect the relationship to OBC. Budget Problems The extra creative teams assigned to the redevelopment of the brand’s television advertising and the unexpected changes to the Forever Young communication materials had meant that LB’s costs to staff the project had been higher than originally estimated and higher than the revenues that had been negotiated with OBC. Since OBC did not want to pay more for its advertising than had been originally budgeted, LB faced tremendous internal pressure to finish the project as soon as possible. This situation created conflict between LB and OBC in the United Kingdom, who was responsible for negotiating LB’s overall fees. Because all fees were paid to the global brand office (in this case, LB’s London office) and then transferred to the local satellite teams, this situation also created conflict between LB’s London and Toronto teams, who had both expended additional staff time to revise the advertising materials and wanted “fair” compensation. WHAT NEXT? In three days, Carmichael had to leave for Toronto to sit in research sessions to test the recently presented new creative concepts. In the meetings that followed, she would present to the team her recommendation for how to move forward with the brand. Carmichael reviewed the brand events and team interaction of the past two years (see Exhibit 4) to determine the best global team structure for salvaging the Forever Young brand and maintaining the relationship between OBC and LB. Carmichael felt torn in her loyalties. On the one hand, she was Canadian and knew LB’s Toronto office well—she knew that LB’s Toronto brand team worked hard, and she wished them every success. On the other hand, she had now worked in LB’s London office for several years, and she had always liked the creative that the U.K. team had initially produced. If she maintained the current form of centralized control of the team, either creative concept might be chosen; however, if she decentralized team control, the Toronto team would almost certainly choose their own creative concept for the television ads. Since the creative direction chosen now would become the brand’s advertising in most North American and European markets, it needed to be top calibre. Carmichael thought this posed a risk if the creative development was left to the new Toronto-based mass advertising creative team. It would be a shame to lose the U.K. team’s original creative concept. In making her decision on whether to decentralize the team, Carmichael considered the following:
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Page 11 9B03M052 1. Where was the knowledge necessary to create a competitive advantage for the brand in Canada?
Would it be in the Canadian marketplace because they understood the market, or would it be in London because they had more in-depth knowledge of the brand?
2. Where was the client responsibility, and where should it be? Now that the London-based global vice- president of skin care was retiring, the client was considering creating a virtual global team to manage the brand, headquartered in the United States but composed of members of the original United Kingdom OBC team, in preparation for a U.S. launch. If the client team had its headquarters in North America, should LB also structure its team this way?
3. If Carmichael decentralized the brand and gave the Toronto team greater autonomy, who would lead the brand in Toronto now that Davids had left the agency? How would the necessary knowledge be imparted to the new leader?
4. If they remained centralized, would the team make it through before it self-destructed? How much would this risk the client relationship? To what extent would it strain the already tight budget?
Carmichael had to make a decision that was best for the brand, LB and OBC.
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Page 12 9B03M052
EXHIBIT 1: LB AGENCY SERVICES Traditional core agency services included: Account Management Account management worked in close partnership with planning, creative, media, production and the client to craft tightly focused advertising strategies, based on a deep understanding of the client’s products, goals and competition, as well as insights into contemporary consumer behavior. Creative Services In most LB offices, creative was the largest department. Creatives focused its visual art and copywriting talents on turning strategic insights into advertising ideas. This department was a key part of each client’s brand team and often interacted with both clients and clients’ customers. Planning Planners conducted research to gain insights about the consumer and the marketplace. They also provided valuable input to the strategic and creative agency processes in the form of the implications raised by that research, specifically combining that learning with information about a given product, the social context in which it fit and the psychology of the people who used it. Media Starcom was the media division for LB’s parent holding company. Its role was to identify the most influential and efficient media vehicles to deliver brand communications to the appropriate audience. Production Production staff brought creative ideas to life with the highest quality execution in television, cinema, radio, print, outdoor, direct, point of sale, interactive or any other medium. In addition to these core services, most offices also offered expertise in more specialized services, including: • B2B Technology Marketing • Direct and Database Marketing • Health-care Marketing • Interactive Marketing • Multicultural Marketing • Public Relations • Sales Promotion and Event Marketing
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EXHIBIT 2: LB AGENCY PRODUCTS Traditional Advertising Products Television Broadcast Advertising — Usually 30-second (:30s) or 60-second (:60s) TV ads that ran during local or national television programming. This also included sponsoring specific programs, which usually consisted of a five-second announcement before or after the show, i.e., “This program is brought to you by . . .” accompanied by the visual of the sponsoring company’s logo. Radio Broadcast Advertising — Usually 15-, 20-, or 30-second (:15s, :20s, :30s) radio ads that were placed throughout local or national radio programming. Radio ads could include sponsoring specific programs, which usually consisted of a five-second announcement before or after the show, i.e. “This program brought to you by . . .” Print Advertising — Included black and white and color print ads in local, national or trade newspapers, journals and magazines. Magazine ads could be single-page ads or double-page spreads (two pages facing each other.) Non-Traditional or “Below the Line” Advertising Products Direct Marketing — Normally a series of mail-out items (letters, post cards, product samples, etc.) sent to a specifically targeted population(s) called “cells”, e.g., companies might send promotional mail-outs to current customers, former customers who have not shopped with the company for a period or time, and new prospective customers — each of these groups would be considered a cell. Digital or Interactive Marketing — Any marketing efforts that were delivered to the consumer online or by wireless networks (e.g., hand-held wireless devices). This could include Web site design and production, banner advertising and promotions on other Web sites, e-mail marketing, and internal corporate marketing tools such as customer relationship marketing or database building tools. Collateral — Any piece of print material that was not strictly advertising, for instance brochures, annual reports, posters, flyers and in-store materials. Promotions — Any marketing effort that included a time-limited offer or incentive to either purchase a product or offer personal data. Promotions could involve advertising, direct marketing, interactive marketing, product packaging and/or outdoor marketing.
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EXHIBIT 3: LB AGENCY FORMAL AND INFORMAL REPORTING LINES Interactive Marketing Group
Account Supervisor
Project Mgr
Technical Manager
Tech Specialist
Tech Specialist
VP General Manager
Art Director/Copy Writer Team
Art Director/Copy Writer Team
Project Mgr
Project Mgr
Project Mgr
Direct Marketing Group
Account Supervisor
Acct Executive
Account Director
Acct Co-ord
Creative Director
Art Director/Copy Writer Team
Art Director/Copy Writer Team
Mass Marketing Group
Acct Supervisor
Acct Exec
Account Director
Acct Co-ord
Creative Director
Art Dir/Writer Team
Client Service Director
Print Production Department
Art Dir/Writer Team
Art Dir/Writer Team
Art Dir/Writer Team
Art Dir/Writer Team
Art Dir/Writer Team
Acct Supervisor
Acct Exec
Account Director
Acct Co-ord
Acct Supervisor
Acct Exec
Account Director
Acct Co-ord
Indicates employees assigned to same project
Indicates informal project reporting lines
Indicates formal departmental reporting lines
used for agency management, performance
evaluations, workload assignment, etc.
Sample Client Project
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UK Team formed
Consumer And Market Research
Canada Creative and Taiwan Teams formed
Dev. and Material Production
Pre- Product launch Launch test in in Canada Canada
and Taiwan
Kick-off Meeting in Toronto
Regional Markets assume autonomy, prepare for global rollout
Canada: Canada: Canada: Sales/ Sales/ Creative Re - Aware- Aware- development ness ness from scratch, Over- Under- question of Index Index 50 local 120, autonomy
Materials test poorly in US
Taiwan: Sales/ Aware- ness Over- Index 120
Taiwan: Team preparation for local autonomy
Creative differences between TO and UK re: look and feel of print pieces
Creative teams (UK and TO) compete for creative development of campaign redesign
Davids Sally leaves LB Burns, TO (direct), duties turned over to Powell
Sarah Jones, global VP skin care, OBC UK, retires early, succession plans TBD
Forin (LB UK) goes on maternity leave, duties turned over to new acct. director
brand mgr. leaves OBC TO, duties turned over to assist. Nelson brand leaves LB mgr. TO
(interactive) duties turned over to Jacobs
Global Team Member Changes
Global Team Issues
Research, Advertising, and Sales Results
Planned Development Schedule
EXHIBIT 4: BRAND DEVELOPMENT CHRONOLOGY
Year 1 Year 2 Year 3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
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EXHIBIT 5: THE GLOBAL FOREVER YOUNG TEAM
Canada
United Kingdom
Taiwan
LBOBC
Sarah Jones Global VP, Skin Care Janet Carmichael
Global Account Director
Annabelle Manning Global Creative Dir
Annabel Forin, Account Director
Art Director and
Copy Writer
Account Executive
Kristen Tyler Assistant Brand Manager
Sally Burns Brand Manager
Consumer Research
Marketing Technology
Main Reporting Lines
Cathy Lee Account Director
Art Director And
Copy Writer
Assistant Brand Manager
Vasso Smith Global Brand Manager
Consumer Research Specialist
Francoise Desmond Marketing Tech
Specialist
VP, Technology
Product Development
Specialist
Product and Packaging
Sales and Distribution
Assistant Brand Manager
Brand Manager
Sales and Distribution
Art Director and
Copy Writer
Geoff Davids
Acct Sup, Direct
Tara Powell Acct Exec,
Direct
Liz Nelson Acct Sup, Interactive
Alexis Jacobs Project Mgr, Interactive
Shirley Watson Creative Director
Positions that changed
Fig. 1 Fig. 2
Fig. 3 Fig. 4
Fig. 5 Fig. 6
Tanya Yang Account Executive
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4.
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9B02M003 BLUE RIDGE SPAIN Jeanne M. McNett prepared this case under the supervision of David Wesley and Professors Nicholas Athanassiou and Henry W. Lane solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services is the exclusive representative of the copyright holder and prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661- 3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca. Copyright © 2002, Northeastern University, College of Business Administration Version: (A) 2009-12-01 Yannis Costas, European managing director of Blue Ridge Restaurants, found it difficult to control the anger welling up inside him as he left the meeting with the company’s regional vice-president (VP) earlier in the day. That evening, he began to reflect on the day’s events in the relative peace of his London flat. “Ten years work gone down the drain,” he thought to himself, shaking his head. “What a waste!” Costas recalled the many years he had spent fostering a successful joint venture between his company, Blue Ridge Restaurants Corporation, and Terralumen S.A., a mid-sized family-owned company in Spain. Not only had the joint venture been profitable, but it had grown at a reasonably brisk pace in recent years. Without a doubt, partnering with Terralumen was a key reason for Blue Ridge’s success in Spain. Therefore, Costas was somewhat dismayed to find out that Delta Foods Corporation, Blue Ridge’s new owner, wanted out. Yes, there had been recent tension between Terralumen and Delta over future rates of growth (see Exhibits 2 and 3), but the most recent round of talks had ended in an amicable compromise — he thought. Besides, Delta’s senior managers should have realized that their growth targets were unrealistic. They had gone over the arguments several times, and Costas tried every angle to convince his superiors to stick with the joint venture, but to no avail. To make matters worse, Costas had just been assigned the unpleasant task of developing a dissolution strategy for the company he had worked so hard to build. BLUE RIDGE RESTAURANTS CORPORATION Blue Ridge was founded in Virginia in 1959, and quickly established a reputation for quality fast food. In 1974, after establishing more than 500 food outlets in the United States and Canada, Blue Ridge was sold to an investment group for US$4 million. Over the next five years, the company experienced sales growth of 96 per cent annually. However, international sales were haphazard and there was no visible international strategy. Instead, whenever a foreign restauranteur wanted to begin a Blue Ridge franchise, the foreign company would simply approach
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Blue Ridge headquarters with the request. As long as the franchise delivered royalties, there was little concern for maintaining product consistency or quality control in foreign markets. In 1981, Blue Ridge was acquired by an international beverages company for US$420 million. Under new ownership, the company made its first major foray into international markets, and international operations were merged with the parent company’s existing international beverage products under a new international division. The strategy at the time was to enter into joint ventures with local partners, thereby allowing Blue Ridge to enter restricted markets and draw on local expertise, capital and labor. Partnering also significantly reduced the capital costs of opening new stores. The strategy of local partnering combined with Blue Ridge’s marketing know-how and operations expertise, quickly paid off in Australia, Southeast Asia and the United Kingdom, where booming sales led to rapid international expansion. On the other hand, there were some glaring failures. By 1987, Blue Ridge decided to pull out of France, Italy, Brazil and Hong Kong where infrastructure problems and slow consumer acceptance resulted in poor performance. Some managers, who had been accustomed to high margins and short lead times in their alcoholic beverages division, did not have the patience for the long and difficult road to develop these markets and would tolerate only those ventures that showed quick results. These early years of international expansion provided important learning opportunities as more managers gained a personal understanding of the key strategic factors behind successful foreign entry. The success of the company’s international expansion efforts helped Blue Ridge become the company’s fastest growing division. When Blue Ridge was sold to Delta Foods in 1996 for US$2 billion, it was one of the largest fast- food chains in the world and generated sales of US$6.8 billion. Delta was a leading soft drink and snack food company in the United States, but at the time of the Blue Ridge acquisition, it had not achieved significant success internationally. It had managed to establish a dominant market share in a small number of countries with protected markets in which its main competitors were shut out. For example, one competitor was shut out of many Arabic countries after deciding to set up operations in Israel. The company’s senior managers disliked joint ventures, in part because they were time-consuming, but also because they were viewed as a poor way to develop new markets. Delta was an aggressive growth company with brands that many believed were strong enough to support entry into new overseas markets without the assistance of local partners. When needed, the company either hired local managers directly or transferred seasoned managers from the soft drink and snack food divisions. Delta also achieved international growth by directly acquiring local companies. For example, in the late 1990s, Delta acquired the largest snack food companies in Spain and the United Kingdom. However, given that joint ventures had been the predominant strategy for Blue Ridge, and that some countries, such as China, required local partnering, Delta had no choice but to work with joint venture partners. YANNIS COSTAS Yannis Costas was an American-educated Greek who held degrees in engineering and business (MBA) from leading U.S. colleges. Although college life in a foreign country had its challenges, it afforded him an opportunity to develop an appreciation and understanding of American culture and business practices. Fo
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Therefore, upon completing his MBA, Costas turned-down several offers of employment from leading multinational corporations that wanted him to take management positions in his native country. Such positions, however appealing they may have been at the time, would have doomed him to a career as a local manager, he thought. He chose instead to accept a position in international auditing at Blue Ridge headquarters in Virginia, mainly because of the opportunity for extended foreign travel. The transition from university to corporate life was a difficult one. Social life seemed to revolve around couples and families, both at Blue Ridge and in the larger community. Although Costas met some single women from the local Greek community, his heavy travel schedule prevented him from establishing any meaningful relationships. Instead, he immersed himself in his work as a way to reduce the general feeling of isolation. Costas was fortunate to have an office next to Gene Bennett, the company’s director of business development. Bennett had served as a lieutenant in the U.S. Navy before working in the pharmaceutical industry setting up joint ventures in Latin America and Europe. He was hired by Blue Ridge specifically to develop international joint ventures. As Costas’ informal mentor, Bennett passed on many of the lessons Costas would come to draw on later in his career. It was at the urging of Bennett that Costas applied for a transfer to the international division in 1985. Three years later, Costas was asked to relocate to London, England, in order to take on the role of European regional director for Blue Ridge. In this position, he became responsible for joint ventures and franchises in Germany, the Netherlands, Spain, Northern Ireland, Denmark, Sweden and Iceland. In 1993, Costas was transferred to Singapore where, under the direction of the president of Blue Ridge Asia,1 he advanced in his understanding of joint ventures, market entry and teamwork. Over the next five years, Costas built a highly productive management team and successfully developed several Asian markets. He was eager to apply these new skills when he returned to London in 1998 to once again take up the role of European director (see Exhibit 1 for a summary of Costas’ career). THE SPANISH DECISION When the decision was first made to enter the Spanish market, Bennett was sent overseas to meet with real estate developers, construction companies, retail distributors, agribusiness companies, lawyers, accountants and consumer product manufacturers in order to gather the preliminary knowledge needed for such an undertaking. Bennett soon realized that Blue Ridge would need a credible Spanish partner to navigate that country’s complex real estate and labor markets. Few Spaniards among Bennett’s peer generation spoke English. However, Bennett had a basic knowledge of Spanish, a language that he had studied in college, and this helped open some doors that were otherwise shut for many of his American colleagues. Still, Bennett knew that finding a suitable partner would be difficult, since Spaniards frequently appeared to distrust foreigners. The attitude of one investment banker from Madrid was typical:
Many Spaniards do not want to eat strange-tasting, comparatively expensive American food out of paper bags in an impersonal environment. We have plenty of restaurants with good inexpensive food, a cozy atmosphere and personal service, and our restaurants give
1At the time, Blue Ridge Asia was one of the company’s most successful operations with nearly 800 restaurants in Singapore, Malaysia, Taiwan and Thailand.
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you time to enjoy your food in pleasant company. Besides, we don’t even really know you. You come here for a few days, we have enjoyable dinners, I learn to like you, and then you leave. What kind of relationship is that?
Luckily, Bennett had a banker friend in Barcelona who recommended that he consider partnering with Terralumen. TERRALUMEN S. A. Terralumen was a family-owned agricultural company that had later expanded into consumer products. In doing so, Terralumen entered into several joint ventures with leading American companies. In recent years, Terralumen had also begun to experiment with the concept of establishing full-service restaurants. Bennett was introduced to Francisco Alvarez, Terralumen’s group vice-president in charge of restaurant operations and the most senior non-family member in the company. In time, Bennett had many opportunities to become well acquainted with Terralumen and its managers. On weekends he stayed at Alvarez’s country home, attended family gatherings in Barcelona and had family members visit him in Virginia. Over the span of their negotiations, Bennett and Alvarez developed a solid friendship, and Bennett began to believe that Terralumen had the type of vision needed to be a successful joint venture partner. After two years of negotiations, Blue Ridge entered into a joint venture with Terralumen to establish a Blue Ridge restaurant chain in Spain. Upon returning to Virginia, Bennett could not hold back his euphoria as he related to Costas the details of what he considered to be the most difficult joint venture he had ever negotiated. BLUE RIDGE SPAIN Alvarez hired Eduardo Rodrigo to head up the joint venture as its managing director. An accountant by trade, Rodrigo was a refined and personable man who valued his late afternoon tennis with his wife and was a professor at a university in Barcelona. He also spoke fluent English. Before assuming his new role, Rodrigo and another manager went to Virginia to attend a five-week basic training course. Upon his return, Rodrigo’s eye for detail became quickly apparent as he mastered Blue Ridge’s administrative and operating policies and procedures. He knew every detail of the first few stores’ operating processes and had an equally detailed grasp of each store’s trading profile. As a result, Blue Ridge Spain began to show an early profit. Profitability was one thing; growth was another. Although the Blue Ridge concept seemed to be well received by Spanish consumers, Rodrigo was cautious and avoided rapid expansion. Moreover, one of the most important markets in Spain was Madrid. Rodrigo, who was Catalan,2 was not fond of that city and avoided travelling to Madrid whenever possible. As personal contact with real estate agents, suppliers and others was necessary to develop new stores, Blue Ridge’s expansion efforts remained confined to the Barcelona area. Terralumen, becoming impatient with Blue Ridge’s sluggish growth, decided to focus more resources on its consumer product divisions and less on the restaurant business. 2Catalonia, a state in northeast Spain, had a distinct culture and language (Catalan).
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For Costas, one of the challenges during his first assignment as European director was to convince Terralumen to focus more on the joint venture and support faster growth. Rodrigo positively opposed more rapid growth, even though Alvarez, his direct superior, voiced support for the idea. Although he had been very cordial in his interactions with his American counterparts, Rodrigo believed himself to be in a much better position to judge whether or not the Spanish market would support faster growth. In 1993, shortly after Costas was transferred to Singapore, Blue Ridge decided to send one of its own managers to oversee the Spanish joint venture. Under pressure, Rodrigo began to ignore criticism about the company’s lack of growth. On one occasion, Rodrigo decided to close the Blue Ridge offices for an entire month just as Blue Ridge’s international director of finance arrived in Barcelona to develop a five-year strategic plan.3 Terralumen finally replaced Rodrigo with a more proactive manager who had just returned from a successful assignment in Venezuela. Under the new leadership of Carlos Martin, Blue Ridge Spain began to prosper. Soon everyone was occupied with the difficult task of acquiring new sites, as well as recruiting and training employees. COSTAS RETURNS TO EUROPE In late 1998, Costas was transferred from Singapore to London to resume the role of European managing director. The previous director had performed poorly and it was felt that Costas had the experience needed to repair damaged relations with some of Blue Ridge’s Middle Eastern joint venture partners. By this time, Blue Ridge had more than 600 stores in Europe and the Middle East. One of Blue Ridge’s more lucrative joint ventures was in Kuwait. However, the partners were threatening to dissolve the enterprise after the previous managing director became upset that the Kuwaitis were not meeting growth targets. The partners were especially concerned when they discovered that he had begun to seek other potential partners. Costas decided to schedule a visit to Kuwait in early January. The partners counselled against the visit since Costas would be arriving during Ramadan,4 and therefore would not be able to get much work done. Nevertheless Costas went to Kuwait, but spent nearly all of his time having dinners with the partners. He recalled:
Most American managers would have considered my trip to be a waste of time, since I didn’t get much “work” done. But it was a great opportunity to get to know the partners and to re-establish lost trust, and the partners felt good about having an opportunity to vent their concerns.
Costas returned to London confident that he had reassured the Kuwaiti partners that Blue Ridge was still committed to the joint venture. Costas was also happy to be working with his old friend Alvarez again, as the two began working on an ambitious plan to develop a total of 50 stores by 2002 (see Exhibit 2).5 As Blue Ridge Spain continued to
3In Spain, the month of August was traditionally set aside for vacations. 4 Ramadan is the holy month of fasting ordained by the Koran for all adult Muslims. The fast begins each day at dawn and ends immediately at sunset. During the fast, Muslims are forbidden to eat, drink or smoke. 5 The plan to develop 50 stores was agreed to in 1998, prior to Costas’ arrival.
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grow, stores were opened in prime locations such as the prestigious Gran Via in Madrid and Barcelona’s famous Las Ramblas shopping district. Costas and Alvarez, both of whom had been involved from the beginning of the joint venture, were delighted to see how far the company had come. EUROPEAN REORGANIZATION Delta began to take a more direct and active role in the management of Blue Ridge. In Europe, for example, Delta created a new regional VP position with responsibility for Europe, the Middle East and South Africa. When Costas became aware of the new position, he asked whether or not he was being considered, given his extensive experience in managing international operations. The human resources department in the United States explained that they wanted to put a seasoned Delta manager in place in order to facilitate the integration of the two companies. Although disappointed, Costas understood the logic behind the decision. He also considered that by working under a seasoned Delta manager, he could develop contacts in the new parent company that might prove favorable to his career at some future date. In May 1999, Costas received a phone call from Bill Sawyer, Blue Ridge’s director of human resources, whom Costas had known for many years. Sawyer: We hired someone from Proctor and Gamble. He’s 35 years old and has a lot of marketing
experience, and he worked in Greece for three years. You’ll like him. Costas: That’s great. Have your people found anyone for the VP job yet? The line was silent, then Sawyer replied in an apologetic tone, “He is the new VP.” Costas was dumbfounded. Costas: I thought you said you were planning to transfer a Delta veteran to promote co-operation. Sawyer: Nobody from Delta wanted the job, so we looked outside the company. Kinsley (president,
international division) wanted a “branded” executive, so we stole this guy from P&G. Sawyer went on to explain that Mikael Södergran, who was originally from Finland, had no background in restaurant management, but had achieved a reputation for results in his previous role as a P&G marketing manager for the Middle East and Africa. He had recently been transferred from Geneva, Switzerland to P&G European headquarters in Newcastle upon Tyne.6 Södergran was not happy in Newcastle and saw the Delta position both as an opportunity to take on greater responsibility and to move back to the civilization of London. “You couldn’t find anyone better than that?,” Costas exclaimed. He was furious, not only for having been deceived about the need to have a Delta manager as VP, but also that he, with 10 years experience managing international operations, had been passed over in favor of someone with no experience managing operations, joint ventures or a large managerial staff. Nevertheless, the decision had been made, and Södergran was scheduled to start in two weeks. 6 Newcastle upon Tyne, United Kingdom, was an important industrial and transportation center located in northeast England (approximately 3 hours from London). It had a population of 263,000 (1991 census).
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THE DIRECTORS’ MEETING It was Södergran’s first day on the job when he met with Blue Ridge Spain’s board of directors to discuss a recently drafted consultants’ report and negotiate new five-year growth targets (see Exhibit 3). The study, which was conducted by a leading U.S.-based management consulting firm, projected significant expansion potential for Blue Ridge in Spain, as well as in France and Germany, where Blue Ridge had no visible presence.7 Delta also wanted to increase the royalties and fees payable from the joint venture partner in order to cover the cost of implementing new technologies, systems and services (see Exhibit 4). Other Blue Ridge managers at the meeting included Yannis Costas and Donald Kinsley, Blue Ridge’s new international president. Although Kinsley had formerly been president of a well-known family restaurant chain in the United States, this was his first international experience. Terralumen was represented by company president Andres Balaguer, Francisco Alvarez and Carlos Martin, Blue Ridge Spain’s managing director. Even before the meeting began, Delta’s management team assumed that Terralumen was content to keep growth rates at their current levels and would have to be pressed to accept more aggressive targets. As expected, Martin protested that his team of 10 managers could not handle the introduction of 30 new stores a year, as suggested by the study. The meeting’s cordial tone quickly dissolved when Södergran unexpectedly began to press the issue. His aggressive stance was not well received by Terralumen, who in turn questioned the ability of the consulting firm’s young freshly minted American MBAs to understand the intricacy of the Spanish fast-food market. Balaguer simply brushed off the study as “a piece of American business school cleverness.” Södergran became visibly annoyed at Balaguer’s refusal to consider Delta’s targets. “The contract says that you are required to grow the markets,” Södergran demanded. Balaguer, a tall, elegant man, slowly stood up, lifted a sheaf of papers and replied, “If this is your contract, and if we rely on a contract to resolve a partnership problem, well, here is what I think of it and of you.” He walked across the room and dropped the papers into a garbage can. Then upon returning to his seat, he remarked in Spanish, “If this meeting had been conducted in my language, you would have known what I really think of you,” in reference to Södergran. After a long pause, Costas tried to mend the situation by pointing out that Terralumen had already committed to considerable growth, and had therefore already come some way toward Delta’s expansions goals. He suggested that the two companies break to consider alternatives. A few weeks later, Costas sent an e-mail to Södergran outlining his recommendations (see Exhibit 5). EMERGING CONFLICTS Costas tried his best to keep an open mind with regard to Södergran and to support him as best he could. However, as time went on, Costas began to seriously question Södergran’s ability. He never seemed to interact with anyone except to conduct business. On one occasion Costas suggested that they have dinner with the joint venture partners. Södergran replied, “Oh, another dinner! Why don’t we get some work done instead?” 7Large restaurant chains served only four per cent of fast food meals in Spain, compared with 15 per cent for the rest of Western Europe, and 50 per cent for the United States.
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Costas became more concerned after Södergran rented a suite two floors below the company offices “in order to have some peace and quiet.” Some of the regional headquarters staff began to wonder if Södergran had taken on too much responsibility and whether he was avoiding them because of the pressure he was under. Costas also believed that Södergran was uncomfortable with him, knowing that he resented not being offered the VP position. In October 1999, Delta sent a finance manager from the snack foods division to become the company’s new VP of finance for Europe. Geoff Dryden had no overseas experience, but when he was in the United States, he had been involved in several large international acquisitions. Dryden, who was originally from North Carolina, was pleasant, well polished in his manners and dress, and very proud of his accomplishments at Delta. For him, the European assignment was an opportunity to move out of finance and, if all went well, to assume greater managerial responsibilities. Costas, who had specialized in finance when doing his MBA, had always done his own financial projections and was not very fond of the idea of surrendering this responsibility to someone else. Still, he helped Dryden as much as needed to make accurate projections, taking into account the unique aspects of each market. A NEW STRATEGY Over the next six months, the joint venture board of directors met four times. In the end, Terralumen committed to half the growth rate originally proposed by Delta and agreed to make upward revisions if market conditions proved favorable. Delta’s managers were clearly becoming frustrated by what they perceived to be their partner’s entrenched position. After the final meeting, Södergran and Costas met with their European staff to discuss the results. Dryden asked why they put up with it. “Why don’t we just buy them out?” he asked, calling to mind Delta’s successful acquisition of a Spanish snack food company. Costas reminded Dryden that not only were snack foods and restaurants two very different enterprises, but all the joint venture managers had come from Terralumen, and most would leave Blue Ridge if Delta proceeded to buy out the partners. After the meeting, Dryden discussed the situation privately with Södergran. Noting that a major loan payment would soon be due to one of their creditors (a major Spanish bank), Dryden suggested holding back Delta’s contribution, thereby forcing the joint venture company to default on the loan. If all went according to plan, the joint venture would have to be dissolved and the assets divided between the partners. This, he noted, would be much less expensive than trying to buy out their partner. As expected, Terralumen requested matching funds from Delta, but Dryden simply ignored the request. However, unbeknownst to Dryden or anyone else at Delta, Alvarez proceeded to sell one of the company’s prime real estate properties and lease back the store as a means of paying the loan. Costas happened to be in Barcelona working on Blue Ridge Spain’s marketing plan with Carlos Martin. One evening, Costas was dining with his counterparts from Terralumen when Alvarez mentioned the sale of the company’s Barcelona property. Costas, who at the time was unaware of Dryden’s strategy, was dismayed. Real estate values in Barcelona were expected to appreciate significantly over the short term. Selling now seemed illogical. Furthermore, Costas was surprised to discover that Alvarez had been given power of attorney to make real estate transactions on behalf of the joint venture. Alvarez explained: Fo
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This case was made possible through the generous support of Darla and Frederick Brodsky through their endowment of the Darla and Frederick Brodsky Trustee Professorship in International Business.
Quite a few years ago, when you were in Singapore, Blue Ridge decided to give Terralumen this authority in order to reduce the amount of travel required by your managers in the United States. Besides, as you know, it is not often that good properties become available, and when they do, we must act quickly.
On his return to London, Costas discussed the real estate transaction with Dryden, who, upon hearing the news, furiously accused Costas of “siding with the enemy.” Costas was quick to remind Dryden that he had not been privy to the dissolution strategy and, besides, the whole thing was unethical. Dryden retorted, “Ethics? Come on, this is strategy, not ethics!” Dryden was clearly surprised by the news, especially given the fact that Delta would never have given such powers of attorney to a joint venture partner. The company’s lawyers could have warned Dryden, but he had not been very fond of the “old hands” at Blue Ridge’s legal affairs department, and therefore had chosen to not disclose his plan. Now that his strategy had failed, an alternative plan would have to be devised. Costas felt torn between his responsibility to his employer and his distaste for the company’s new approach. This whole thing was a mistake, he believed. Costas discussed his views with Södergran:
We cannot hope to take over the stores in Spain while simultaneously developing new markets in Germany and France. Where are we going to find suitable managerial talent to support this expansion? People in Europe don’t exactly see the fast-food industry as a desirable place to grow their careers. And besides, Delta hasn’t given us sufficient financial resources for such an undertaking.
Why don’t we focus on France and Germany instead, and continue to allow Terralumen to run the Spanish operation? Revenue from Spain will help appease Delta headquarters while France and Germany suffer their inevitable growing pains. In the meantime, we can continue to press Terralumen for additional growth. Södergran dismissed these concerns and instead gave Costas two weeks to develop a new dissolution strategy. Costas was furious that all his suggestions were so easily brushed off by someone who, he believed, had a limited understanding of the business. On his way home that evening Costas recalled all the effort his former mentor, Gene Bennett, had put into the joint venture 16 years earlier, and all the good people he had had the privilege to work with in the intervening years. Just as all that work was about to pay off, the whole business was about to fall apart. Why hadn’t he seen this coming? Where did the joint venture go wrong? Costas wondered what to do. Surely he had missed something. There had to be another way out.
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Exhibit 1
TIMELINE
Year Blue Ridge Restaurants Yannis Costas
1959 Company founded in Virginia
1974 Blue Ridge Sold for $4 million
1975-1980 96 per cent annual growth Leaves Greece to study in United States 1981 Blue Ridge sold for $420 million 1982 International expansion Completes his BS in United States 1983 Begin negotiations for JV in Spain
1984
Completes MBA and is hired by Blue Ridge; moves to Virginia
1985 JV agreement with Terralumen S.A. Applies for transfer to International Div. 1986 Rodrigo appointed managing director of
Blue Ridge Spain
1987 Company pulls out of France, Brazil, Hong Kong and Italy
1988 Promoted to European regional director; moves to London
1988-1993 Spanish JV grows slower than expected 1993 U.S. manager sent to oversee Spanish JV Transfer to Singapore
1995 Rodrigo replaced by Carlos Martin 1996 Blue Ridge sold to Delta for $2 billion
1995-1998 Spanish JV grows more rapidly 1998 5-year plan for 50 restaurants in Spain,
Blue Ridge has 600 stores in Europe/ME Costas asked to return to London
Jan. 1999 Rescues JV in Kuwait May 1999 Södergran hired as Delta VP for Europe June 1999 Directors meeting for Spanish JV December
1999 Dryden withholds Delta payment to JV; Alvarez sells prime Barcelona property
January 2000
Asked to develop dissolution strategy for Spain
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Exhibit 2
DEVELOPMENT PLAN AGREED BETWEEN BLUE RIDGE RESTAURANTS AND TERRALUMEN (as of December 1998) (in 000s U.S. dollars)
1998 2000 2001 2002 2003 2004 No. of Stores 12 24 37 50 65 80 Avg. Annual Sales 700 770 847 932 1,025 1,127 Gross Sales $8,400 18,480 31,339 46,600 66,625 90,160 Cost of Goods Food 1,680 3,322 5,474 8,141 11,639 15,770 Cost of Goods Direct Labor 1,680 3,323 5,641 8,374 11,646 15,766 Advertising/Promotion 504 1,109 1,880 2,796 3,998 5,410 Occupancy Costs 1,260 1,848 3,129 4,660 6,663 9,016 Fixed Labor 840 1,478 2,507 3,728 5,330 7,213 Miscellaneous 168 277 470 699 999 1,352 Royalties to Blue Ridge U.S. 420 924 1,560 2,330 3,331 4,508 Total Costs 6,552 12,281 20,662 30,728 43,606 59,035 Contribution to G&A 1,848 6,199 10,677 15,872 23,019 31,125 Salaries and Benefits 875 1,531 2,641 3,493 4,580 5,899 Travel Expenses 120 240 300 375 469 586 Other 240 312 406 527 685 891 Occupancy Costs 240 720 828 952 1,095 1,259 Total G&A 1,475 2,803 4,175 5,347 6,829 8,635 Earnings Before Interest/Tax $ 373 3,396 6,502 10,525 16,190 22,490 % of Gross Sales 4.44 18.38 20.75 22.59 24.30 24.94 Office Employees (Spain) 10 20 30 35 40 45
Notes: • This plan was agreed before Yannis Costas’ appointment to Blue Ridge Europe in late 1998. • End 2004 plan: 20 stores in Barcelona, 30 in Madrid, 30 in other cities • Capital Investment per store $700,000 to $1 million • Site identification, lease or purchase negotiation, permits, construction: 18 to 24 months. Key Money is a part of
occupancy costs. It is a sum paid to property owner at signing; varies by site $100,000 plus. Up to 1999, many owners wanted Key Money paid off the books, often in another country.
• Store Staffing (at the average sales level): - One manager, two assistants full time (larger stores three to four assistants) - 10 to 12 employees per eight-hour shift (40 hours per week); 980 employee hours per week
• Store employees needed by end of 1999: 300; by the end of 2004: 2,250 (approx.) • Store employee attrition: approximately 25 per cent per year • Dividends from earnings were declared periodically and then were shared equally between partners. Source: Company files.
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Exhibit 3
CONSULTANTS’ RECOMMENTATIONS BLUE RIDGE EUROPEAN EXPANSION (SELECTED MARKETS)
1998 2000 2001 2002 2003 2004
Stores Spain 12 30 65 100 135 170 France 0 10 20 55 90 130 Germany 3 15 30 65 100 150 Total 15 55 115 220 325 450 Regional Managers (London) 1 15 20 22 24 26 Country Staff/Managers 12 40 90 180 220 250 Store Employees 215 1,650 3,450 6,600 9,750 13,500
Source: Company files.
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Exhibit 4
BLUE RIDGE SPAIN EXCEPTIONAL TERM HIGHLIGHTS
Blue Ridge U.S. Desired
Objective Blue Ridge Spain - Variance
Joint Venture Outlets Royalty
At least 4 per cent
No royalty
Fees $20,000 $5,000 Term 10 years 5 years Exclusivity Avoid exclusivity Spain, Canary Islands, Spanish
Sahara, Beleares Islands Advertising 5 per cent, right of approval No obligations Outlet Renewal Requirements Renewal fee at least $2,000;
Upgrading or relocation No fee or other specific requirements
Delta Products Required No requirement Development Program Schedule for required development
of territory No requirement
Non-Competition Restrictions on similar business No provision Assignment First refusal right; approval of
assignee No provision
Sub-Franchising Contract privity
Blue Ridge U.S. should be a party and successor to franchisor
Blue Ridge cited; Blue Ridge succeeds on JV dissolution
Royalty At least 4 per cent None Fees
$20,000 None
Joint Venture Operation Equity Participation
More than 50 per cent
50 per cent
Profit Distribution At least 50 per cent Additional 20 per cent when profits are greater than 20 per cent
Actual Management Blue Ridge U.S. should appoint General Manager
General Manager is from JV partner
Board Control Blue Ridge U.S. should have majority
Equal number of board members
Source: Company files.
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Exhibit 5
COSTAS’ RECOMMENDATIONS From: Yannis Costas [Costas@deltafoods.co.uk] Sent: Wednesday, July 7, 1999 10:16 AM To: ‘Sodergran@deltafoods.co.uk’ Subject: Key Issues – Here is what I believe we should be going for in Spain. Mikael: Here are my recommendations for Spain. A. PRESERVE PARTNERSHIP
• Need a “real” market success while developing markets elsewhere in Europe. - Fuel interest of potential partners elsewhere. - Keep Blue Ridge and Delta believing in European potential. - Market for real testing of concepts and ideas. - No complete reliance on UK for “successes.”
B. REVERSAL NOT EASY TO OVERCOME
• May have to pay a high premium to buy out joint venture. • Will lose all key managers (no substitutes on hand) • If we inherit “green field”
- Down time close to 2 years. - Why? From decision to opening will take approximately nine months to one year. - In a new market this will be longer as we have no human resource experience to draw on. - Potential new partners need to be convinced about why we broke up with a “good” partner. - Real estate market does not want to deal with foreigners or raises the price.
• If the divorce is messy, we may be bound by the current contract for another year. C. WORK TOWARDS ACHIEVING ACCEPTABLE INTEGRATION WITH OUR DESIRABLE CONTRACT
FRAMEWORK OVER CURRENT DELTA PLANNING HORIZON (5 YEARS) • Strong development schedule for joint venture. • Royalty integration over mutually acceptable period. • Designated “agency” for franchisees immediately, but fee flow indirectly to Blue Ridge only the
amount over current terms with existing franchisees. Phase-in higher flow on schedule similar to royalties.
• Accept the notion of phasing in royalties as we phase in systems and services (If we don’t phase them in there won’t be much of a business anyhow!)
D. KEY RATIONALLE
• We may have the perfect contract, but no stores to apply it to for three years – hence no income to cover overheads. SO…
• Accept half the current growth targets with the full expectation that by year 3 or 5, there will be a decent system for the contract’s objectives to be meaningful.
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Appendix 1
MANAGEMENT STYLES FOR SELECTED NATIONALITIES1 Spain In Spain, a strong differentiation of social classes and professional occupations exists. Business communication is often based on subjective feelings about the topic being discussed. Personal relationships are very important as a means to establish trust, and are usually considered more important than one’s expertise. Established business contacts are essential to success in Spain. Therefore, it is important to get to know someone prior to conducting business transactions. Only intimate friends are invited to the home of a Spaniard, but being invited to dinner is usual. Spaniards are not strictly punctual for either business or social events, and once a business meeting is started, it is improper to begin with a discussion of business. National pride is pervasive, as is a sense of personal honor. To call someone “clever” is a veiled insult. Only about 30 per cent of local managers speak English, while French is often the second language of choice for many older Spaniards. Greece Greek society employs a social hierarchy with some bias against classes, ethnic groups and religions. For Greeks, interpersonal relationships are very important when conducting business, and decisions are often based on subjective feelings. Much importance is placed on the inherent trust that exists between friends and extended families. Authority lies with senior members of any group, and they are shown great respect. They are always addressed formally. While punctuality is important, it is not stressed. Greeks have a strong work ethic and often strive for consensus. United States Americans are very individualistic, with more stress placed on self than on others. Friendships are few and usually based on a specific need. Personal contacts are considered less important than bottom line results. Americans have a very strong work ethic, but a person is often considered to be a replaceable part of an organization. Great importance is placed on specialized expertise. Punctuality is important. Business is done at lightning speed. In large firms, contracts under $100,000 can often be approved by a middle manager after only one meeting. Often companies and individuals have a very short-term orientation and expect immediate rewards. Small talk is very brief before getting down to business, even during dinner meetings and social gatherings. Finland Finns have a strong self orientation. More importance is placed on individual skills and abilities than on a person’s station in life. Decisions are based more on objective facts than personal feelings. Privacy and personal opinions are considered very important. Finns often begin business immediately without any small talk. They are very quiet and accustomed to long periods of silence, but eye contact is important when conversing. Authority usually rests with the managing director. Punctuality is stressed in both business and social events.
1Based on Kiss, Bow, or Shake Hands: How to do Business in Sixty Countries, Adams Media, 1994. The descriptions do not account for individual differences within each nationality or culture.
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5.
9A97G029 ELLEN MOORE (A): LIVING AND WORKING IN KOREA Chantell Nicholls and Gail Ellement prepared this case under the supervision of Professor Harry Lane solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright © 1997, Richard Ivey School of Business Foundation Version: (A) 2017-02-23 Ellen Moore, a Systems Consulting Group (SCG) consultant, was increasingly concerned as she heard Andrew’s voice grow louder through the paper-thin walls of the office next to her. Andrew Kilpatrick, the senior consultant on a joint North American and Korean consulting project for a government agency in Seoul, South Korea, was meeting with Mr. Song, the senior Korean project director, to discuss several issues including the abilities of the Korean consultants. After four months on this Korean project, Ellen’s evaluation of the assigned consultants suggested that they did not have the experience, background, or knowledge to complete the project within the allocated time. Additional resources would be required:
I remember thinking, “I can’t believe they are shouting at each other.” I was trying to understand how their meeting had reached such a state. Andrew raised his voice and I could hear him saying, “I don’t think you understand at all.” Then, he shouted, “Ellen is not the problem!
WSI IN KOREA Joint Venture Inc. (JVI) was formed as a joint venture between a Korean company, Korean Conglomerate Inc. (KCI), and a North American company, Western Systems Inc. (WSI) (Exhibit 1). WSI, a significant information technology company with offices worldwide employing over 50,000 employees, included the Systems Consulting Group (SCG). KCI, one of the largest Korean “chaebols” (industrial groups), consisted of over 40 companies, with sales in excess of US$3.5 billion. The joint venture, in its eighth year, was managed by two Regional Directors — Mr. Cho, a Korean from KCI, and Robert Brown, an American from WSI. The team working on Ellen’s project was led by Mr. Park and consisted of approximately 40 Korean consultants further divided into teams working on different areas of the project. The Systems Implementation (SI) team consisted of five Korean consultants, one translator, and three North American SCG consultants: Andrew Kilpatrick, Ellen Moore, and Scott Adams, (see Exhibit 2). Fo
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Page 2 9A97G029 This consulting project was estimated to be one of the largest undertaken in South Korea to date. Implementation of the recommended systems into over 100 local offices was expected to take seven to ten years. The SCG consultants would be involved for the first seven months, to assist the Korean consultants with the system design and in creating recommendations for system implementation, an area in which the Korean consultants admitted they had limited expertise. Andrew Kilpatrick became involved because of his experience with a similar systems implementation project in North America. Andrew had been a management consultant for nearly 13 years. He had a broad and successful background in organizational development, information technology, and productivity improvement, and he was an early and successful practitioner of business process reengineering. Although Andrew had little international consulting experience, he was adept at change management and was viewed by both peers and clients as a flexible and effective consultant. The degree of SCG’s involvement had not been anticipated. Initially, Andrew had been asked by SCG’s parent company, WSI, to assist JVI with the proposal development. Andrew and his SCG managers viewed his assistance as a favor to WSI since SCG did not have plans to develop business in Korea. Andrew’s work on the proposal in North America led to a request for his involvement in Korea to gather additional information for the proposal:
When I arrived in Korea, I requested interviews with members of the prospective client’s management team to obtain more information about their business environment. The Korean team at JVI was very reluctant to set up these meetings. However, I generally meet with client management prior to preparing a proposal. I also knew it would be difficult to obtain a good understanding of their business environment from a translated document. The material provided to me had been translated into English and was difficult to understand. The Korean and English languages are so different that conveying abstract concepts is very difficult. I convinced the Koreans at JVI that these meetings would help demonstrate our expertise. The meetings did not turn out exactly as planned. We met with the same management team at three different locations where we asked the same set of questions three times and got the same answers three times. We did not obtain the information normally provided at these fact-gathering meetings. However, they were tremendously impressed by our line of questioning because it reflected a deep interest and understanding of their business. They also were very impressed with my background. As a result, we were successful in convincing the government agency that we had a deep understanding of the nature and complexity of the agency’s work and strong capabilities in systems development and implementation — key cornerstones of their project. The client wanted us to handle the project and wanted me to lead it.
JVI had not expected to get the contract, because its competitor for this work was a long-time supplier to the client. As a result, winning the government contract had important competitive and strategic implications for JVI. Essentially, JVI had dislodged an incumbent supplier to the client, one who had lobbied very heavily for this prominent contract. By winning the bid, JVI became the largest system implementer in Korea and received tremendous coverage in the public press. The project was to begin in June. However, the Korean project team convened in early May in order to prepare the team members. Although JVI requested Andrew to join the project on a full-time basis, he already had significant commitments to projects in North America. There was a great deal of discussion
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Page 3 9A97G029 back and forth between WSI in North America, and JVI and the client in Korea. Eventually it was agreed that Andrew would manage the SI work on a part-time basis from North America, and he would send a qualified project management representative on a full-time basis. That person was Ellen Moore. At that time, Andrew received immediate feedback from the American consultants with WSI in Korea that it would be impossible to send a woman to work in Korea. Andrew insisted that the Korean consultants be asked if they would accept a woman in the position. They responded that a woman would be acceptable if she were qualified. Andrew also requested that the client be consulted on this issue. He was again told that a woman would be acceptable if she were qualified. Andrew knew that Ellen had the skills required to manage the project:
I chose Ellen because I was very impressed with her capability, creativity, and project management skills, and I knew she had worked successfully in Bahrain, a culture where one would have to be attuned to very different cultural rules from those prevalent in North America. Ellen lacked experience with government agencies, but I felt that I could provide the required expertise in this area.
ELLEN MOORE After graduating as the top female student from her high school, Ellen worked in the banking industry, achieving the position of corporate accounts officer responsible for over 20 major accounts and earning a Fellowship in the Institute of Bankers. Ellen went on to work for a former corporate client in banking and insurance, where she became the first female and youngest person to manage their financial reporting department. During this time, Ellen took university courses towards a Bachelor Degree at night. She decided to stop working for two years, and completed her degree on a full-time basis. She graduated with a major in accounting and minors in marketing and management and decided to continue her studies for an MBA. Two years later, armed with an MBA from a leading business school, Ellen Moore joined her husband in Manama, Bahrain, where she accepted a position as an expatriate manager for a large American financial institution.1 Starting as a Special Projects Coordinator, within one year Ellen was promoted to Manager of Business Planning and Development, a challenging position that she was able to design herself. In this role, she managed the Quality Assurance department, coordinated a product launch, developed a senior management information system, and participated actively in all senior management decisions. Ellen’s position required her to interact daily with managers and staff from a wide range of cultures, including Arab nationals. In March, Ellen joined WSI working for SCG. After the highly successful completion of two projects with SCG in North America, Ellen was approached for the Korea project:
I had never worked in Korea or East Asia before. My only experience in Asia had been a one-week trip to Hong Kong for job interviews. I had limited knowledge of Korea and received no formal training from my company. I was provided a 20-page document on Korea. However, the information was quite basic and not entirely accurate.
1 For an account of Ellen’s experience in Bahrain, see Ellen Moore (A): Living and Working in Bahrain, 9A90C019, and Ellen Moore (B), 9A90C020; Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, University of Western Ontario, London, Ontario, Canada, N6A 3K7.
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Page 4 9A97G029 After arriving in Korea, Ellen immediately began to familiarize herself with the language and proper business etiquette. She found that English was rarely spoken other than in some hotels and restaurants that catered to Western clientele. As a result, Ellen took advantage of every opportunity to teach herself the language basics:
When Andrew and I were in the car on the way back to our hotel in the evening, we would be stuck in traffic for hours. I would use the time to learn how to read the Korean store signs. I had copied the Hangul symbols, which form the Korean language, onto a small piece of paper, and I kept this with me at all times. So, while sitting back in the car, exhausted at the end of each day, I would go over the symbols and read the signs.
SCOTT ADAMS The third SCG consultant on the project, Scott Adams, arrived as planned three months after Ellen’s start date. Upon graduation, Scott had begun his consulting career working on several international engagements (including Mexico, Puerto Rico, and Venezuela), and he enjoyed the challenges of working with different cultures. He felt that with international consulting projects, the technical aspects of consulting came easy. What he really enjoyed was the challenge of communicating in a different language and determining how to modify Western management techniques to fit into the local business culture. Scott first met Ellen at a systems consulting seminar, unaware at the time that their paths would cross again. A few months later, he was asked to consider the Korea assignment. Scott had never travelled or worked in Asia, but he believed that the assignment would present a challenging opportunity, which would advance his career. Prior to arriving in Seoul, Scott prepared himself by frequently discussing the work being conducted with Ellen. Ellen also provided him with information on the culture and business etiquette aspects of the work:
It was very fortunate for me that Ellen had arrived first in Korea. Ellen tried to learn as much as she could about the Korean language, the culture, mannerisms, and the business etiquette. She was able to interpret many of the subtleties and to prepare me for both business and social situations, right down to how to exchange a business card appropriately with a Korean, how to read behavior, and what to wear.
ABOUT KOREA2 Korea is a 612-mile-long peninsula stretching southward from North Korea and the Asia mainland into the waters of the western Pacific and is bounded by the Yellow Sea, the Sea of Japan and the Korea Strait. The Republic of Korea, or South Korea, consists of approximately 38,000 square miles, slightly larger than Indiana or Portugal, for example. The South Korean population is about 49 million, with more than 10 million residing in the capital city, Seoul. Korea has an ancient heritage spanning 5,000 years. The last great traditional dynasty, the Yi Dynasty or Choson Dynasty, brought about changes in which progress in science, technology, and the arts were achieved. Hangul, the Korean script, also was developed in this period. Although Confucianism had been
2 Information for this section was taken from Official website of Korea tourism, http://english.visitkorea.or.kr/enu/index.kto; Korean Confucianism, http://www.asia-pacific-connections.com/confucianism.html; and the U.S. Department of State website, http://www.state.gov/r/pa/ei/bgn/2800.htm#people; accessed January 22, 2009.
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Page 5 9A97G029 influential for centuries in Korea, it was during this time that Confucian principles permeated the culture as a code of morals and as a guide for ethical behavior. Confucian thought came to underpin education, civil administration, and daily conduct. Lasting over 500 years, the Yi Dynasty came to a close in 1910. Today, in Korea’s modern era, traditional Confucian values mix with Western lifestyle habits and business methods. Many Korean people, particularly in Seoul, have become quite Westernized, but they often follow traditional customs. Although the major religions are Christianity and Buddhism, Korean society is strongly influenced by Confucian values and beliefs. Confucianism dictates strict rules of social behavior and etiquette. The basic values of the Confucian culture are: (1) loyalty to a hierarchical structure of authority, whether based in the family, the company, or the nation; (2) duty to parents, expressed through loyalty, love, and gratitude; and (3) strict rules of conduct, involving complete obedience and respectful behavior within superiors-subordinate relationships, such as parents-children, old-young, male-female, and teacher-student. These values affect both social and work environments substantially. MANAGING IN KOREA Business etiquette in Korea was extremely important. Ellen found that everyday activities, such as exchanging business cards or replenishing a colleague’s drink at dinner, involved formal rituals. For example, Ellen learned it was important to provide and to receive business cards in an appropriate manner, which included carefully examining a business card when received and commenting on it. If one just accepted the card without reading it, this behavior would be considered very rude. In addition, Ellen also found it important to know how to address a Korean by name. If a Korean’s name was Y.H. Kim, non- Koreans would generally address him as either Y.H. or as Mr. Kim. Koreans would likely call him by his full name or by his title and name, such as Manager Kim. A limited number of Koreans, generally those who had lived overseas, took on Western names, such as Jack Kim. WORK TEAMS Teams were an integral part of the work environment in Korea. Ellen noted that the Korean consultants organized some special team-building activities to bring together the Korean and North American team members:
On one occasion, the Korean consulting team invited the Western consultants to a baseball game on a Saturday afternoon, followed by a trip to the Olympic Park for a tour after the game, and dinner at a Korean restaurant that evening. An event of this nature is unusual and was very special. On another occasion, the Korean consultants gave up a day off with their families and spent it with the Western consultants. We toured a Korean palace and the palace grounds, and we were then invited to Park’s home for dinner. It was very unusual that we, as Western folks, were invited to his home, and it was a very gracious event.
Ellen also found team-building activities took place on a regular basis, and that these events were normally conducted outside of the work environment. For example, lunch with the team was an important daily team event, which everyone was expected to attend:
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You just couldn’t work at your desk every day for lunch. It was important for everyone to attend lunch together in order to share in this social activity, as one of the means for team bonding.
Additionally, the male team members would go out together for food, drink, and song after work. Scott found these drinking activities to be an important part of his interaction with both the team and the client:
Unless you had a medical reason, you would be expected to drink with the team members, sometimes to excess. A popular drink, soju, which is similar to vodka, would be poured into a small glass. Our glasses were never empty, as someone would always ensure that an empty glass was quickly filled. For example, if my glass was empty, I learned that I should pass it to the person on my right and fill it for him as a gesture of friendship. He would quickly drink the contents of the glass, pass the glass back to me, and fill it for me to quickly drink. You simply had to do it. I recall one night when I really did not want to drink as I had a headache. We were sitting at dinner, and Mr. Song handed me his glass and filled it. I said to him “I really can’t drink tonight. I have a terrible headache.” He looked at me and said “Mr. Scott, I have Aspirin in my briefcase.” I had about three or four small drinks that night.
Ellen found she was included in many of the team-building dinners, and soon after she arrived in Seoul, she was invited to a team dinner, which included client team members. Ellen was informed that although women were not normally invited to these social events, an exception was made since she was a senior team member.
During the dinner, there were many toasts and drinking challenges. During one such challenge, the senior client representative prepared a drink that consisted of one highball glass filled with beer and one shot glass filled to the top with whiskey. He dropped the whiskey glass into the beer glass and passed the drink to the man on his left. This team member quickly drank the cocktail in one swoop, and held the glass over his head, clicking the glasses to show both were empty. Everyone cheered and applauded. This man then mixed the same drink, and passed the glass to the man on his left, who also drank the cocktail in one swallow. It was clear this challenge was going around the table and would eventually get to me.
I don’t generally drink beer and never drink whiskey. But it was clear, even without my translator present to assist my understanding, that this activity was an integral part of the team building for the project. As the man on my right mixed the drink for me, he whispered that he would help me. He poured the beer to the halfway point in the highball glass, filled the shot glass to the top with whiskey, and dropped the shotglass in the beer. Unfortunately, I could see that the beer didn’t cover the top of the shot glass, which would likely move too quickly if not covered. I announced “One moment, please, we are having technical difficulties.” And to the amazement of all in attendance, I asked the man on my right to pour more beer in the glass. When I drank the concoction in one swallow, everyone cheered, and the senior client representative stood up and shouted, “You are now Korean. You are now Korean.”
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Page 7 9A97G029 The norms for team management were also considerably different from the North American style of management. Ellen was quite surprised to find that the concept of saving face did not mean avoiding negative feedback or sharing failures:
It is important in Korea to ensure that team members do not lose face. However, when leading a team, it appeared just as important for a manager to demonstrate leadership. If a team member provided work that did not meet the stated requirements, a leader was expected to express disappointment in the individual’s efforts in front of all team members. A strong leader was considered to be someone who engaged in this type of public demonstration when required.
In North America, a team leader often compliments and rewards team members for work done well. In Korea, leaders expressed disappointment in substandard work, or said nothing for work completed in a satisfactory manner. A leader was considered weak if he or she continuously provided compliments for work completed as required.
Hierarchy The Koreans’ respect for position and status was another element of the Korean culture that both Ellen and Scott found to have a significant influence over how the project was structured and how people behaved. The emphasis placed on hierarchy had an important impact upon the relationship between consultant and client that was quite different from their experience in North America. As a result, the North Americans’ understanding of the role of a consultant differed vastly from their Korean counterparts. Specifically, the North American consultants were familiar with ‘managing client expectations.’ This activity involved informing the client of the best means to achieve their goals and included frequent communication with the client. Generally, the client’s customer was also interviewed in order to understand how the client’s system could better integrate with their customer’s requirements. Ellen recalled, however, that the procedures were necessarily different in Korea:
The client team members did not permit our team members to go to their offices unannounced. We had to book appointments ahead of time to obtain permission to see them. In part, this situation was a result of the formalities we needed to observe due to their rank in society, but I believe it was also because they wanted to be prepared for the topics we wanted to discuss.
The Korean consultants refused to interview the customers, because they did not want to disturb them. Furthermore, the client team members frequently came into the project office and asked the Korean consultants to work on activities not scheduled for that week or which were beyond the project scope. The Korean consultants accepted the work without question. Ellen and Scott found themselves powerless to stop this activity. Shortly after arriving, Scott had a very confrontational meeting with one of the Korean consultants concerning this issue:
I had been in Korea for about a week, and I was still suffering from jet lag. I was alone with one of the Korean consultants, and we were talking about how organizational Fo
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processes should be flow-charted. He was saying the client understands the process in a particular manner, so we should show it in that way. I responded that, from a technical standpoint, it was not correct. I explained that as a consultant, we couldn’t simply do what the client requests if it is incorrect. We must provide value by showing why a different method may be taken by educating the client of the options and the reasons for selecting a specific method. There are times when you have to tell the client something different than he believes. That’s what we’re paid for. He said, “No, no, you don’t understand. They’re paying our fee.” At that point I raised my voice: “You don’t know what you are talking about. I have much more experience than you.” Afterwards, I realized that it was wrong to shout at him. I pulled him aside and apologized. He said, “Well, I know you were tired.” I replied that it was no excuse, and I should not have shouted. After that, we managed to get along just fine.
The behavior of subordinates and superiors also reflected the Korean’s respect for status and position. Scott observed that it was very unusual for a subordinate to leave the office for the day unless his superior had already left:
I remember one day, a Saturday, when one of the young Korean consultants who had been ill for some time, was still at his desk. I made a comment: “Why don’t you go home, Mr. Choi?” Although he was not working for me, I knew his work on the other team was done. He said, “I can’t go home because several other team members have taken the day off. I have to stay.” I repeated my observation that his work was done. He replied: “If I do not stay, I will be fired. My boss is still here, I have to stay.” He would stay and work until his boss left, until late in the evening if necessary.
Furthermore, Scott found that the Korean consultants tended not to ask questions. Even when Scott asked the Korean consultants if they understood his instructions or explanation, they generally responded affirmatively, which made it difficult to confirm their understanding. He was advised that responding in a positive manner demonstrated respect for teachers or superiors. Asking a question would be viewed as inferring that the teacher or superior had not done a good job of explaining the material. As a result, achieving a coaching role was difficult for the North American consultants even though passing on their knowledge of SI to the Korean consultants was considered an important part of their function on this project. WOMEN IN KOREA Historically, Confucian values have dictated a strict code of behavior between men and women and husband and wife in Korea. Traditionally, there has been a clear delineation in the respective responsibilities of men and women. The male preserve can be defined as that which is public, whereas women are expected to cater to the private, personal world of the home. Although change has taken place, these old values have lingered and the attitude of male superiority has not entirely disappeared. Korean public and business life still tend to be dominated by men.3
3 See for example “Women’s Role in Contemporary Korea”, http://www.askasia.org/teachers/essays/essay.php?no=21, and “Women's Development and Information on Women in Korea”, Young-Joo Paik, Korean Women's Development Institute, Seoul, Korea. Paper presented at the 64th IFLA General Conference , August 16 - August 21, 1998; http://www.ifla.org/IV/ifla64/112-122e.htm, accessed January 22, 2009. See also Korea: The Essential Guide to Customs & Culture, Culture Smart, 2008.
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Page 9 9A97G029 Nevertheless, compared to the Yi Dynasty era, the position of women in society has changed considerably. There is now virtual equality in access to education for men and women, and a few women have embarked on political careers. As in many other areas of the world, the business world has until recently been accessible only to men. However, this is changing as Korean women are beginning to seek equality in the workplace. Young Korean men and women now often participate together in social activities, such as evenings out and hikes, something that was extremely rare even 10 years ago. Dual income families are becoming more common in South Korea, particularly in Seoul, although women generally hold lower-paid positions. Furthermore, working women often retain their traditional household responsibilities, while men are expected to join their male colleagues for late night drinking and eating events, which usually exclude women. Although the younger generation are breaking from such traditions, Scott felt that the gender differences were quite apparent in the work place. He commented:
The business population was primarily male. Generally, the only women we saw were young women who were clerks, wearing uniforms. I suspected that these women were in the workforce for only a few years, until they were married and left to have a family. We did have a few professional Korean women working with us. However, because we are a professional services firm, I believe it may have been more progressive than the typical Korean company.
THE SYSTEMS IMPLEMENTATION TEAM Upon her arrival in Korea, Ellen dove into her work confident that the Korean consultants she would be working with had the skills necessary to complete the job in the time frame allocated. The project work was divided up among several work groups, each having distinct deliverables and due dates. The deliverables for the SI team were required as a major input to the other work groups on the project (see Exhibit 3). As a result, delays with deliverables would impact the effectiveness of the entire project:
JVI told us they had assigned experienced management consultants to work on the project. Given their stated skill level, Andrew’s resource plan had him making periodic visits to Korea; I would be on the project on a full-time basis starting in May, and Scott would join the team about three to four months after the project start. We were informed that five Korean consultants were assigned. We believed that we had the resources needed to complete the project by December.
JACK KIM J.T. Kim, whose Western name was Jack, was the lead Korean consultant reporting to Mr. Park. Jack had recently achieved a Ph.D. in computer systems from a reputable American university and he spoke English fluently. When Andrew initially discussed the organizational structure of the SI team with Mr. Park and Jack, it was agreed that Jack and Ellen would be co-managers of the SI project.
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Page 10 9A97G029 Three weeks after her arrival, Jack informed Ellen, much to her surprise, that he had never worked on a systems implementation project. Additionally, Ellen soon learned that Jack had never worked on a consulting project:
Apparently, Jack had been made the lead consultant of SI upon completing his Ph.D. in the United States. I believe Jack was told he was going to be the sole project manager for SI on a daily basis. However, I was informed I was going to be the co-project manager with Jack. It was confusing, particularly for Jack, when I took on coaching and leading the team. We had a lot of controversy — not in the form of fights or heated discussions, but we had definite issues during the first few weeks because we were clearly stepping upon each other’s territory.
Given Jack’s position as the lead Korean consultant, it was quite difficult for Ellen to redirect team members’ activities. The Korean team members always followed Jack’s instructions. Scott recalled:
There were frequent meetings with the team to discuss the work to be completed. Often, following these meetings, the Korean consultants would meet alone with Jack, and it appeared that he would instruct them to carry out different work. On one occasion, when both Andrew and Ellen were travelling away from the office, Andrew prepared specific instructions for the team to follow outlined in a memo.
Andrew sent the memo to me so I could hand the memo to Jack directly, thereby ensuring he did receive these instructions. Upon his return, Andrew found the team had not followed his instructions. We were provided with the following line of reasoning: you told us to do A, B and C, but you did not mention D. And, we did D. They had followed Jack’s instructions. We had a very difficult time convincing them to carry out work as we requested, even though we had been brought onto the project to provide our expertise.
In July, a trip was planned for the Korean client team and some of the Korean consulting team to visit other project sites in North America. The trip would permit the Koreans to find out more about the capabilities of WSI and to discuss issues with other clients involved with similar projects. Jack was sent on the trip, leaving Ellen in charge of the SI project team in Korea. While Jack was away on the North American trip, Ellen had her first opportunity to work with and to lead the Korean consultants on a daily basis. She was very pleased that she was able to coach them directly, without interference, and advise them on how to best carry out the required work. Ellen felt that everyone worked together in a very positive manner, in complete alignment. When Jack returned, he saw that Ellen was leading the team and that they were accepting Ellen’s directions. Ellen recalled the tensions that arose as a result:
On the first day he returned, Jack instructed someone to do some work for him, and the person responded, “I cannot because I am doing something for Ellen.” Jack did not say anything, but he looked very angry. He could not understand why anyone on the team would refuse his orders.
THE MARKETING RESEARCH PROJECT A few days after Jack returned from the North American trip, the project team realized they did not have sufficient information about their client’s customer. Jack decided a market research study should be conducted to determine the market requirements. However, this type of study, which is generally a large Fo
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Page 11 9A97G029 undertaking on a project, was not within the scope of the contracted work. Ellen found out about the proposed market research project at a meeting held on a Saturday, which involved everyone from the entire project — about 40 people. The only person not at the meeting was Mr. Park. Jack was presenting the current work plans for SI, and he continued to describe a market research study:
I thought to myself, “What market research study is he talking about?” I asked him to put aside his presentation of the proposed study until he and I had an opportunity to discuss the plans. I did not want to interrupt his presentation or disagree with him publicly, but I felt I had no choice.
DINNER WITH JACK Two hours following the presentation, Ellen’s translator, Susan Lim, informed her that there was a dinner planned for that evening and Jack wanted everyone on the SI team to attend. Ellen was surprised that Jack would want her present at the dinner. However, Susan insisted that Jack specifically said Ellen must be there. They went to a small Korean restaurant, where everyone talked about a variety of subjects in English and Korean, with Susan translating for Ellen as needed. After about one hour, Jack began a speech to the team, speaking solely in Korean. Ellen thought it was unusual for him to speak Korean when she was present, as everyone at the dinner also spoke English:
Through the limited translations I received, I understood he was humbling himself to the team, saying, “I am very disappointed in my performance. I have clearly not been the project leader needed for this team.” The team members were responding “No, no, don’t say that.” While Jack was talking to the team, he was consuming large quantities of beer. The pitchers were coming and coming. He was quite clearly becoming intoxicated. All at once, Susan stopped translating. I asked her what was wrong. She whispered that she would tell me later. Five minutes went by and I turned to her and spoke emphatically, “Susan, what is going on? I want to know now.” She realized I was getting angry. She told me, “Jack asked me to stop translating. Please don’t say anything, I will lose my job.”
I waited a couple of minutes before speaking, then I interrupted Jack’s speech. I said, “Susan is having difficulty hearing you and isn’t able to translate for me. I guess it is too noisy in this restaurant. Would it be possible for you to speak in English?” Jack did not say anything for about 30 seconds and then he started speaking in English. His first words were, “Ellen, I would like to apologize. I didn’t realize you couldn’t understand what I was saying.
Another thirty minutes of his speech and drinking continued. The Korean team members appeared to be consoling Jack, by saying: “Jack, we do respect you and the work you have done for our team. You have done your best.” While they were talking, Jack leaned back, and appeared to pass out. Ellen turned to Susan and asked if they should help him to a taxi. Susan insisted it would not be appropriate. During the next hour, Jack appeared to be passed out or sleeping. Finally, one of the team members left to go home. Ellen asked Susan, “Is it important for me to stay, or is it important for me to go?” She said Ellen should go. When Ellen returned to her hotel, it was approximately 11 p.m. on Saturday night. She felt the situation had reached a point where it was necessary to request assistance from senior management in North America. Andrew was on a wilderness camping vacation in the United States with his family, and could Fo
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Page 12 9A97G029 not be reached. Ellen decided to call the North American project sponsor, the Senior Vice President, George Peterson:
I called George that Saturday night at his house and said: “We have a problem. They’re trying to change the scope of the project. We don’t have the available time and we don’t have the resources. It is impossible to do a market research study in conjunction with all the contracted work to be completed with the same limited resources. The proposed plan is to use our project team to handle this additional work. Our team is already falling behind the schedule, but due to their inexperience they don’t realize it yet.” George said he would find Andrew and send him to Korea to further assess the situation.
THE MEETING WITH THE DIRECTOR When Andrew arrived in August, he conducted a very quick assessment of the situation. The project was a month behind schedule. It appeared to Andrew that the SI team had made limited progress since his previous visit:
It was clear to me that the Korean team members weren’t taking direction from Ellen. Ellen was a seasoned consultant and knew what to do. However, Jack was giving direction to the team, which was leading them down different paths. Jack was requesting that the team work on tasks which were not required for the project deliverables, and he was not appropriately managing the client’s expectations.
Andrew held several discussions with Mr. Park concerning these issues. Mr. Park insisted the problem was Ellen. He argued that Ellen was not effective, she did not assign work properly, and she did not give credible instructions to the team. However, Andrew believed the Korean consultants’ lack of experience was the main problem.
Initially, we were told the Korean team consisted of experienced consultants, although they had not completed any SI projects. I felt we could work around it. I had previously taught consultants to do SI. We were also told that one of the Korean consultants had taught SI. This consultant was actually the most junior person on the team. She had researched SI by reading some texts and had given a presentation on her understanding of SI to a group of consultants.
Meanwhile, Andrew solicited advice from the WSI Co-Managing Director, Robert Brown, who had over ten years experience working in Korea. Robert suggested that Andrew approach Mr. Park’s superior, Mr. Song, directly. He further directed Andrew to present his case to the Joint Venture committee if an agreement was not reached with Mr. Song. Andrew had discussed the issues with George Peterson and Robert Brown, and they agreed that there was no reason for Ellen to leave the project:
However, Robert’s message to me was that I had been too compliant with the Koreans. It was very important for the project to be completed on time, and that I would be the one held accountable for any delays. Addressing issues before the Joint Venture committee was the accepted dispute resolution process at JVI when an internal conflict could not be resolved. However, in most cases, the last thing a manager wants is to be defending his position before the Joint Venture committee. Mr. Song was in line to move into senior Fo
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executive management. Taking the problem to the Joint Venture committee would be a way to force the issue with him.
Andrew attempted to come to a resolution with Mr. Park once again, but he refused to compromise. Andrew then tried to contact Mr. Song and was told he was out of the office. Coincidentally, Mr. Song visited the project site to see Mr. Park just as Ellen and Andrew were completing a meeting. Ellen recalls Mr. Song’s arrival:
Mr. Song walked into the project office expecting to find Mr. Park. However, Mr. Park was out visiting another project that morning. Mr. Song looked around the project office for a senior manager, and he saw Andrew. Mr. Song approached Andrew and asked if Mr. Park was in the office. Andrew responded that he was not. Mr. Song proceeded to comment that he understood there were some concerns about the project work, and suggested that perhaps, sometime, they could talk about it. Andrew replied that they needed to talk about it immediately.
Andrew met with Mr. Song in Mr. Park’s office, a makeshift set of thin walls that enclosed a small office area in one corner of the large open project office. Ellen was working in an area just outside the office when she heard Andrew’s voice rise. She heard him shout, “Well, I don’t think you’re listening to what I am saying.” Ellen was surprised to hear Andrew shouting. She knew Andrew was very sensitive to what should and should not be done in the Korean environment:
Andrew’s behavior seemed so confrontational. I believed this behavior was unacceptable in Korea. For a while, I heard a lot of murmuring, after which I heard Andrew speak adamantly, “No, I’m very serious. It doesn’t matter what has been agreed and what has not been agreed because most of our agreements were based on inaccurate information. We can start from scratch.” Mr. Song insisted that I was the problem.
The Richard Ivey School of Business gratefully acknowledges the generous support of The Richard and Jean Ivey Fund in the development of this case as part of the Richard And Jean Ivey Fund Asian Case Series.
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Exhibit 1
ORGANIZATIONAL STRUCTURE — FUNCTIONAL VIEW
Korean Conglomerate Inc.
(KSI) Korea
Western Systems Inc. (WSI) U.S.A.
Joint Venture Inc. (JVI) Korea
Mr. Cho Co-Managing Director
Joint Venture Inc. (JVI)
Robert Brown Co-Managing Director
Joint Venture Inc. (JVI)
Mr. Song Director
Joint Venture Inc. (JVI)
Mr. Park Manager
Joint Venture Inc. (JVI)
Jack Kim Consultant
Joint Venture Inc. (JVI)
Bob Stewart President - Region A Western Systems Inc.
(WSI)
George Peterson Senior VP
Systems Consulting Group (SCG)
Brian McKenna Vice-President
Systems Consulting Group (SCG)
Andrew Kilpatrick Principal
Systems Consulting Group (SCG)
Ellen Moore Senior Consultant
Systems Consulting Group (SCG)
Scott Adams Senior Consultant
Systems Consulting Group (SCG)
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Exhibit 2
ORGANIZATIONAL STRUCTURE — SI PROJECT TEAM
Korean Conglomerate Inc. (KSI) Korea
Western Systems Inc. (WSI) U.S.A.
Joint Venture Inc. (JVI) Korea
Mr. Cho Co-Managing Director
Joint Venture Inc. (JVI)
Robert Brown Co-Managing Director
Joint Venture Inc. (JVI)
Mr. Song Director
Joint Venture Inc. (JVI)
Mr. Park Manager
Joint Venture Inc. (JVI)
Jack Kim Consultant
Joint Venture Inc. (JVI)
Bob Stewart President - Region A Western Systems Inc.
(WSI)
George Peterson Senior VP
Systems Consulting Group (SCG)
Andrew Kilpatrick Principal
Systems Consulting Group (SCG)
Ellen Moore Senior Consultant
Systems Consulting Group (SCG)
Scott Adams Senior Consultant
Systems Consulting Group (SCG)
Korean Consultants (4) Joint Venture Inc.
(JVI)
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Exhibit 3
PROJECT TIME FRAME
Mr. Park, Manager
Joint Venture Inc. (JVI)
Team 1 (SI Project Team)
Team 2
Team 3
Team 4
Team 5
______________________ 7 months _________________________________10 years
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9B01C029 NES CHINA: BUSINESS ETHICS (A) Xin Zhang prepared this case under the supervision of Professor Joerg Dietz solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca. Copyright © 2001, Ivey Management Services Version: (A) 2009-12-16 By April 1998, it had been almost a year since the Germany-headquartered multinational company NES AG had first submitted its application to the Chinese government for establishing a holding company in Beijing to co-ordinate its investments in China. The application documentation had already been revised three times, but the approval by the government was still outstanding. Lin Chen, government affairs co- ordinator at NES AG Beijing Representative Office, came under pressure from the German headquarters and had to find a way to obtain approval within a month. During the past year, Chen had almost exclusively worked on the holding company application. In order to facilitate the approval process, she had suggested giving gifts to government officials. But her European colleagues, Steinmann and Dr. Perrin, disagreed because they thought such conduct would be bribery and would violate business ethics. Confronted with the cross-cultural ethical conflict, Chen had to consider possible strategies that would satisfy everybody. COMPANY BACKGROUND NES and NES AG NES was founded in Germany in 1881. Over the following 100 years, by pursuing diversification strategies, NES had grown from a pure tube manufacturer into one of the largest industrial groups in Germany, with sales of US$14 billion in 1997. NES built plants and heavy machinery, made automotive systems and components, manufactured hydraulic, pneumatic and electrical drives and controls, offered telecommunications services and produced steel tubes and pipes. NES was managed by a holding company — NES AG — that implemented value-oriented portfolio management and directed its financial resources to the areas with the greatest profit potentials. In 1997, NES AG owned NES’s 11 companies in four business segments: engineering, automotive, telecommunications and tubes. These companies generally operated independently and largely at their own discretion, as NES AG was interested in their profitability and not their day-to-day operations. F
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NES had always been committed to move along the road of globalization and internationalization. Headquartered in Germany, NES had businesses in more than 100 countries with over 120,000 employees. In the process of globalization and internationalization, NES established a business principle that demonstrated its responsibilities not only to shareholders, employees and customers, but also to society and to the countries where it operated. As an essential part of the company’s corporate culture, this principle pervaded the decentralized subsidiaries worldwide and guided the decision-making and conduct of both the company and its employees. NES China Operations NES’s business in China dated back to 1889, when it built the flood barrages for the Canton River. In 1908, NES supplied seamless steel tubes for the construction of a waterworks in Beijing. Through the century, NES continued to broaden its presence. From the mid-1950s to 1997, NES supplied China with an enormous 5.2 million metric tons of steel tube and 1.6 million tons of rolled steel. Since China opened up to foreign trade and investment in the late 1970s, NES’s presence had grown dramatically. From 1977 to 1997, NES had completed more than 40 technology transfer and infrastructure projects. It had also set up 20 representative offices, six equity joint ventures and three wholly owned enterprises. In developing business links with China, NES adhered to its business principle. Most NES enterprises in China had highlighted this principle in their codes of conduct in employment handbooks (see Exhibit 1). These codes required employees to pursue the highest standards of business and personal ethics in dealing with government officials and business customers, and to avoid any activities that would lead to the involvement of the company in unlawful practices. Instead of tendering immediate favors or rewards to individual Chinese officials and customers, NES relied on advanced technology, management know-how and top quality products and service as a source of its competitive advantage. NES emphasized long-term mutual benefits and corporate social responsibility. Since 1979, NES had trained more than 2,000 Chinese engineers, master craftsmen, technicians and skilled workers in Germany. It had also offered extensive training programs in China. Moreover, NES was the first German company to adopt the suggestion of the German federal government to initiate a scholarship program for young Chinese academics to study in Germany. As a result, NES had built a strong reputation in China for being a fair business partner and a good guest company. NES Beijing Representative Office In 1977, NES was the first German company to open its representative office in Beijing. Along with NES’s business growth, the Beijing Representative Office continued to expand. In 1997, it had 10 German expatriates and more than 40 local staff in nine business units. One unit represented NES AG. This unit was responsible for administrative co-ordination and office expense allocation. The other eight units worked for the German head offices of their respective NES companies in the engineering, automotive and tube segments. Chinese legal restrictions severely limited the activities of the Beijing Representative Office. It was allowed only to engage in administrative activities, such as conducting marketing research for the German head offices, passing on price and technical information to Chinese customers, and arranging for meetings and trade visits. Moreover, it could not directly enter into employment contracts with its Chinese Fo
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employees. Instead, it had to go through a local labor service agency designated by the Chinese government and consult with the agency on almost all personnel issues including recruitment, compensation and dismissal. As a result, the German managers of the Beijing Representative Office found it difficult to effectively manage their Chinese employees. In the absence of direct employment contracts, the managers had to rely on an internal reporting and control system. CURRENT SITUATION Establishing China Holding Company In early 1997, NES AG had decided to establish a holding company in Beijing as soon as possible after carefully weighing the advantages and disadvantages of this decision. Establishing a China holding company was advantageous because, unlike a representative office, a holding company had its own business licence and could therefore engage in direct business activities. In addition to holding shares, a holding company could co-ordinate many important functions for its enterprises, such as marketing, managing government relations, and providing financial support. As a “country headquarters,” a holding company could also unite the NES profile in China and strengthen the good name of NES as a reliable business partner in the world’s most populous country. Moreover, it could hire staff directly and thus retain full control over its own workforce. In light of these advantages, NES AG expected substantial time and cost efficiencies from the China holding company. Several disadvantages, however, potentially outweighed the advantages of a China holding company. First, Chinese legal regulations still constrained some business activities. For example, a Chinese holding company could not balance foreign exchange accounts freely and consolidate the taxation of NES’s Chinese enterprises, although this might be permitted in the future. Second, the setup efforts and costs were high. To establish a holding company, NES had to submit a project proposal, a feasibility study, articles of association and other application documents to the local (the Local Department) and then to the central trade and economic co-operation departments (the Central Department) for examination and approval. Third, there was only a limited window of opportunity for NES AG. Once the China holding company had received its business licence, within two years, NES AG would have to contribute a minimum of US$30 million fresh capital to it. The Chinese regulations prescribed that this capital could be invested only in new projects, but otherwise would have to remain unused in a bank account. NES currently was in a position to invest the capital in its new projects, but the company was not certain how much longer it would be in this position. Working Team NES AG authorized the following three individuals in the Beijing Representative Office to take up the China holding company application issue:
Kai Mueller, 58 years old, had worked for NES in its China operations since the 1970s and had experience in several big co-operative projects in the steel and metallurgical industries. He would be the president of the holding company.
Jochen Steinmann, 30 years old, was assigned to Beijing from Germany in 1996. He would be the financial controller of the holding company.
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Dr. Jean Perrin was a 37-year-old lawyer from France who had an in-depth understanding of Chinese business laws. He would work as the legal counsel. His previous working experience included a professorship at the Beijing International Business and Economics University in the 1980s.
The trio had advocated the idea of a China holding company to NES AG for quite some time and were most happy about NES AG’s decision, because the future holding company would give them considerably more responsibilities and authority than did the Beijing Representative Office. Considering the complexity and difficulty in coping with the Chinese bureaucratic hurdles, Mueller decided in March 1997 to hire Lin Chen as a government affairs co-ordinator for the working team. Chen, a native Chinese, was a 28-year-old politics and public administration graduate who had worked four years for a Chinese state-owned company and was familiar with the Chinese way of doing business. Mueller expected that Chen would play an instrumental role in obtaining the holding company approval from the Chinese government. He also promised that Chen would be responsible for the public affairs function at the holding company once it was set up. Chen’s View of Doing Business In China Chen officially joined the Beijing Representative Office in June 1997. She commented on doing business in China:
China’s economy is far from rules-based; basically, it is still an economy based on relationships. In the absence of an explicit and transparent legal framework, directives and policies are open to interpretation by government officials who occupy positions of authority and power. In such circumstances, businesspeople cultivate personal guanxi (interpersonal connections based implicitly on mutual interest and benefit) with officials to substitute for an established code of law that businesspeople in the Western society take for granted.
In building and nurturing guanxi with officials, gifts and personal favors have a special place, not only because they are associated with respect and friendship, but also because in today’s China, people place so much emphasis on utilitarian gains. In return for accepting gifts, officials provide businesspeople with access to information about policy thinking and the potentially advantageous interpretation of the policy, and facilitate administrative procedures. Co-operation leads to mutual benefits.
Although an existing regulation forbids government officials to accept gifts of any kind,1 it remains pervasive for businesspeople to provide officials with major household appliances, electric equipment, “red envelopes” stuffed with cash, and overseas trips.
1The China State Council Order No. 20 promulgated on 1988.12.01. Article 2 Any State administrative organization and its functionary shall not give and accept gifts in activities of domestic public service. The China State Council Order No. 133 promulgated on 1993.12.05. Article 7 Gifts accepted in activities of foreign public service shall be handled properly. Gifts above the equivalent of RMB200 (about US$24) according to the Chinese market price shall be . . . handed over to the gift administrative department or acceptor’s work unit. Gifts of less than RMB200 belong to the acceptor or to the acceptor’s work unit. P. R. China Criminal Law (revised edition) promulgated on 1997.03.14. Article 394 Any State functionary who, in his activities of domestic public service or in his contacts with foreigners, accepts gifts and does not hand them over to the State as is required by State regulations, if the amount involved is relatively large, shall be convicted and punished in accordance with the provisions of Article 382 and 383 of this law. (Article 382 and 383 regulate the crime of embezzlement.)
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There is a common saying: “The bureaucrats would never punish a gift giver.” Forbidding what the West calls bribery in a guanxi-based society where gift giving is the expected behavior can only drive such under-the-table transactions further behind the curtain.
While sharing benefits with officials is normal business conduct in China, it is interpreted as unethical and abnormal in the West. Faced with their home country’s ethical values and business rules, Western companies in China cannot handle government relationships as their Asian counterparts do. They often find themselves at a disadvantage. This dilemma raises a question for a multinational company: Should it impose the home country’s moral principles wherever it operates or should it do what the Chinese do when in China, and, if so, to what extent?
Different Opinions On Bribery When Chen started working in June 1997, Mueller was sick and had returned to Germany for treatment. Steinmann and Dr. Perrin told Chen that NES had submitted the holding company application to the Local Department in April 1997 and that the Local Department had transferred the documents to the Central Department at the end of that month. But nothing had happened since then. Chen felt that she had to fall back to her former colleague, Mr. Zhu, who had close personal guanxi with the Central Department, to find out first who had the authority in the Central Department to push the processing and what their general attitudes towards the application were. In July, Chen reported her findings to Steinmann and Dr. Perrin:
The approval process at the Central Department is difficult. Because holding companies are a relatively new form of foreign investment in China, the officials are unsure whether they are a good idea for China. They have been very prudent to grant approval. Hence, we don’t have much negotiating leverage, although we are a big company and have products and technologies that China needs. The officials say that they will consider a holding company’s application within 90 days of its submission. They issue approval however, only when the application is deemed “complete and perfect” (in that all issues have been resolved to the Central Department’s satisfaction). The Central Department is under no real obligation to approve any holding company application. They can always find some minor issues. So the approval procedure may be lengthy. The legal basis for establishing holding companies is provided by the Holding Company Tentative Provisions, Supplementary Rules and some unpublished internal policies. This provisional and vague status allows the officials to be flexible in authorizing a holding company. In such circumstances, maintaining close connections with the responsible officials is absolutely critical.
Chen suggested:
The quickest and most effective way to build such connections is to invite the responsible officials to dinner and give gifts. It won’t cost the company too much. But what the company will gain in return — efficiency in obtaining approval and flexibility in the interpretation of the wording within the scope permitted by law — is worth much more.
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That would be bribery. In Germany bribing an official is a criminal offence for which both the briber and the bribed are punished. NES is a publicly traded company with a board of directors that reports to shareholders and monitoring authorities in Germany.
We have met the criteria for setting up the holding company. What we should do now is organize a formal meeting with the officials and negotiate with them. This is the way we have done it in the past, and it has always worked. I am not aware that we ever had to use bribery. NES does not have a history of wrongdoing.
Knowing how critical it was to follow China’s customary business practices in tackling such issues, Chen argued:
Yes, it is correct. NES did not have to give gifts of this kind in the past. But don’t forget: virtually all of NES’s projects or joint ventures in the past were approved by agencies responsible for specific industries or local governments that were very keen on having access to NES’s technology. As a result, NES always has had considerable bargaining power. It is different this time: we need to found a holding company, and we have to deal with the Central Department that we have never contacted before. Even Mueller does not have relations in this department. Moreover, our contacts at the industrial and local levels won’t help much because they have very limited influence on the Central Department and, hence, the holding company application issue. Moreover, you can’t equate gifts with bribes. The approval letter doesn’t have predetermined “prices” and no one forces us to pay. We give gifts just to establish relationships with officials. We develop good relationships, and favorable consideration of these officials comes naturally. According to Chinese law,2 to give gifts to government officials and expect them to take advantage of their position and power to conduct illegal actions is bribery. Our intent is to motivate officials to handle our application legally but without delay. I see no serious ethical problem.
In some ways it’s also hard to blame officials for feathering their nest because they are poorly paid. Whether they process our application quickly or slowly has absolutely no impact on their US$200 monthly income. Then, how can we expect them to give our case the green light? They are not morally wrong if they accept our gifts and don’t create obstacles for us in return.
Negotiation doesn’t help much. Unless we have close relationships with them, they will always find some minor flaws in our documents. After all, they have the authority for interpreting the regulations. Therefore, we have to be open-minded and get accustomed to the Chinese way of doing business.
Chen hoped that Dr. Perrin would support her, as she had a feeling that the French were more flexible and less ethically sensitive than the Germans. Dr. Perrin, however, shared Steinmann’s view. Perrin said: 2 The China State Council Order No. 20 promulgated on 1988.12.01. Article 8 Any State administrative organization and its functionary who give, accept or extort gifts for the purpose of securing illegitimate benefits shall be punished in accordance with relevant state law and regulations on suppression of bribery. The P. R. China Criminal Law (revised edition) promulgated on 1997.03.14. Article 385 Any State functionary who, by taking advantage of his position, extorts money or property from another person, or illegally accepts another person’s money or property in return for securing benefits for the person shall be guilty of acceptance of bribes. Article 389 Whoever, for the purpose of securing illegitimate benefits, gives money or property to a State functionary shall be guilty of offering bribes.
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We should not give officials anything that has some value, with the exception of very small objects (pens, key holders, calendars and the like) given mainly for marketing and advertisement purposes. I also think that these officials should not accept any gifts. It’s unethical and illegal. If we think it is unethical, we should combat it and refrain from it.
Nonetheless, Dr. Perrin understood the importance of guanxi as an informal solution to Chinese bureaucracies. So he agreed that Chen could invite one of the two responsible officials to dinner through Mr. Zhu and present a CD player to this official as an expression of respect and goodwill, although he thought it went too far and was approaching bribery. On a Saturday evening in July, Chen met the official at one of the most expensive restaurants in Beijing. At the dinner, the official promised to work overtime the next day on NES’s documents and give feedback as soon as possible. The following Monday, Chen got the government’s official preliminary opinion demanding a revision of 16 clauses of the application documents. Steinmann and Dr. Perrin found it difficult to understand this. NES had drafted the documents with reference to those of another company, whose application had been approved by the Central Department a few months ago. Why didn’t the Central Department accept the similar wording this time? Chen again contacted her former colleague Zhu, who told her:
You should never expect to get things done so quickly and easily. It takes time to strengthen your relationships. I can ask them to speed up the procedure without changing too much of the wording. But you’d better offer them something generous to express your gratitude since they would consider it a great favor. RMB3,000 (US$360) for each of the two will be OK. Don’t make me lose face anyway.
Steinmann and Dr. Perrin thought it was straightforward bribery even if gifts were given through a third party. If they agreed to do so, they would run high personal risks by violating the corporate business principle and professional ethics. As controller and lawyer, they were expected to play an important role in implementing strict control mechanisms in the company and keeping the corporate conscience. Moreover, they were worried that the potential wrongdoing might damage the strong ethical culture of the Beijing Representative Office and the good corporate image among the Chinese employees of the office, although it likely would not affect the whole company because NES was so decentralized. However, Chen thought that renqing (social or humanized obligation) and mianzi (the notion of face) were more important and that NES’s business ethics and social responsibility could be somewhat compromised. In Chen’s eyes, Steinmann and Dr. Perrin were inflexible and lacked knowledge of the Chinese business culture. Steinmann and Dr. Perrin told Chen that she needed to learn Western business rules and values in order to survive in a multinational company. Recent Developments In August 1997, the vice-president of NES AG led a delegation to visit China. Chen arranged a meeting for the delegation with a senior official of the Central Department. It turned out just to be a courtesy meeting and did not touch upon the details of the holding company approval issue. In November, Steinmann and Dr. Perrin met the two responsible officials in hopes of negotiating with them such that the officials would allow NES to leave some clauses unchanged. But the officials insisted Fo
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The Richard Ivey School of Business gratefully acknowledges the generous support of The Richard and Jean Ivey Fund in the development of this case as part of the RICHARD AND JEAN IVEY FUND ASIAN CASE SERIES.
on their original opinion without giving a detailed explanation of the relevant legal basis. The negotiation lasted only half an hour, and Steinmann and Dr. Perrin felt that it accomplished nothing. Because of the limited window of opportunity (that is, new investment projects required an immediate capital injection), they felt that they had no choice but to modify the documents according to the officials’ requirements. Modifying the documents was an administrative struggle with NES AG, because due to company-internal policies, the German headquarters had to approve these modifications. The application was resubmitted at the end of November. When Chen inquired about the application’s status in December, the officials, however, said that the case needed more consideration and then raised some new questions that they said they failed to mention last time. This happened once again three months later in February 1998. WHAT NEXT? In April 1998, Steinmann, Dr. Perrin and Chen submitted the newest revision of the application. As NES AG could not defer funding the new projects, it demanded that the Beijing working team obtained approval within a month so that NES AG could use the China holding company’s registered capital of US$30 million. Otherwise, NES AG would have to re-evaluate the China holding company and might abandon it all together. In that case, Mueller, Steinmann and Dr. Perrin would miss opportunities for career advancement. As for Chen, she was concerned about her job because the Beijing Representative Office would no longer need her position. Being very anxious about the current situation, Mueller decided to come back to Beijing immediately. Chen wanted to be able to suggest a practical approach that would gain the co-operation of the bureaucrats while conforming to the German moral standards. Chen also contemplated some challenging questions. For example, what constituted bribery? When ethical values conflicted, which values should people follow? How could these differences be resolved? To what extent should a multinational company like NES adapt to local business practices? Should the future China holding company develop special ethical codes to recognize the Chinese business culture? The answers to these questions were very important to Chen, because she expected to face similar ethically sensitive issues in the future.
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Exhibit 1
EXCERPT FROM THE EMPLOYMENT HANDBOOK OF ONE OF THE NES’S ENTERPRISES IN CHINA
Article 3 Employment and Duties 3.1 The Company employs the Employee and the Employee accepts such employment in accordance with the terms and conditions of the Employment Contract and this Employment Handbook. 3.6 The Company expects each Employee to observe the highest standards of business and personal ethics, and to be honest and sincere in his/her dealings with government officials, the public, firms, or other corporations, entities, or organizations with whom the Company transacts, or is likely to transact. 3.7 The Company does business without favoritism. Purchases of materials or services will be competitively priced whenever possible. An Employee’s personal interest or relationship is not to influence any transaction with a business organization that furnishes property, rights or services to the Company. 3.8 Employees are not to solicit, accept, or agree to accept, at any time of the year, any gift of value which directly or indirectly benefits them from a supplier or prospective supplier or his employees or agents, or any person with whom the Company does business in any aspect. 3.9 The Company observes and complies with all laws, rules, and regulations of the People’s Republic of China which affect the Company and its Employees. Employees are required to avoid any activities which involve or would lead to the involvement of the Company in any unlawful practices and to disclose to the proper Company authorities any conduct that comes to their attention which violates these rules and principles. Accordingly, each Employee should understand the legal standards and restrictions that apply to his/her duties. 3.10 All Employees are the Company’s representatives. This is true whether the Employee is on duty or off duty. All Employees are encouraged to observe the highest standards of professional and personal conduct at all times. Article 13 Discipline 13.1 The Company insists on utmost discipline. The Employee’s misconduct or unsatisfactory performance will be brought to the attention of the responsible Head of Department or Member of the Management when it occurs and will be documented in the Employee’s file. 13.2 Some offences are grounds for immediate dismissal and disciplinary procedures will apply to other offences. 13.3 Offences which are grounds for immediate dismissal include: (i) Breach of the Company’s rules of conduct. (j) Neglect of duties, favoritisms or other irregularities. Source: Company files.
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