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International Management

Managing Across Borders and Cultures Text and Cases

TENTH EDITION

Helen Deresky Professor Emerita, State University of New York-Plattsburgh

Stewart R. Miller University of Texas at San Antonio

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Library of Congress Cataloging-in-Publication Data Names: Deresky, Helen, author. | Miller, Stewart, author. Title: International management : managing across borders and cultures : text and cases / Helen Deresky, Professor

Emerita, State University of New York-Plattsburgh, Stewart Miller, University of Texas at San Antonio. Description: 10th edition. | New York : Pearson, [2021] | Includes index. Identifiers: LCCN 2020024826 (print) | LCCN 2020024827 (ebook) | ISBN 9780135897874 (hardcover) | ISBN

9780135897904 (hardcover) | ISBN 9780135897966 (epub) Subjects: LCSH: International business enterprises—Management. | International business

enterprises—Management—Case studies. | Industrial management. Classification: LCC HD62.4 .D47 2021 (print) | LCC HD62.4 (ebook) | DDC 658/.049—dc23 LC record available at https://lccn.loc.gov/2020024826 LC ebook record available at https://lccn.loc.gov/2020024827

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ISBN-10: 0-13-589787-4 ISBN-13: 978-0-13-589787-4

To my husband, John, for his love and support, and to my family members, who always inspire me:

John J. and his wife Alyssa: John Rock, Helena, Max Mark and his wife Sherry: Jacob, Sarah, Rachel

Lara and her husband Thomas: Thomas (TJ), Luke. Helen

To my wife, Tracy, and son, Matthew, for their constant encouragement and unending love.

Stewart

Brief Contents

Preface xi

PART 1 The Global Manager’s Environment 1

Chapter 1 Assessing the Environment 2 Chapter 2 Managing Interdependence 43

Comprehensive Cases Case 1 Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the

Way? PC1-1 Case 2 ‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain

Glory? PC1-13

PART 2 The Cultural Context of Global Management 75

Chapter 3 Understanding the Role of Culture 76 Chapter 4 Communicating Across Cultures 116 Chapter 5 Cross-Cultural Negotiation and Decision Making 152

Comprehensive Cases Case 3 Cross-Cultural Challenges for a Singaporean Expatriate in Zurich PC2-1 Case 4 Anuj Pathak Returns to India PC2-5

PART 3 Formulating and Implementing Strategy for International and Global Operations 183

Chapter 6 Formulating Strategy 184 Chapter 7 Implementing Strategy 228 Chapter 8 Organization Structure and Control Systems 257

Comprehensive Cases Case 5 Amazon.com in China: Can Elaine Chang Crack the Chinese Market? PC3-1 Case 6 Souq.com and the Battle for the Future of E-Commerce in the MENA

Region PC3-15 Case 7 Coming to America: A Successful Japanese Acquisition in Global

Business PC3-25

PART 4 Global Human Resources Management 285

Chapter 9 Staffing, Training, and Compensation for Global Operations 286 Chapter 10 Developing a Global Management Cadre 320 Chapter 11 Motivating and Leading 349

Comprehensive Cases Case 8 Daimler China: Facing a Media Firestorm PC4-1 Case 9 Cirque du Soleil’s Global Human Resource Management Practices PC4-5

PART 5 Integrative Section IC-1 Integrative Term Project IC-1

Integrative Case Case 10 IKEA’s Challenges in Russia PC5-1

Iv

v

Preface xi

PART 1 The Global Manager’s Environment 1

Chapter 1 Assessing the Environment 2 Opening Profile: Small Businesses Steel Themselves for No-Deal after Brexit 2 The Global Business Environment 4

Globalization 4 Global Trends 5 Globalization and Emerging Markets 5 Backlash against Globalization 6 Effects of Institutions on Global Trade 8 Effects of Globalization on Corporations 8 Small and Medium-Sized Enterprises (SMEs) 9 The Globalization of Human Capital 10 Regional Trading Blocs 11

Under the Lens South-East Asia Wakes Up to Power of Corporate Competition 15

Comparative Management in Focus China Loses Its Allure 16

Other Regions in the World 21 The Global Manager’s Role 23

The Political and Economic Environment 23

Political Risk 24 Political Risk Assessment 25 Managing Political Risk 26 Managing Terrorism Risk 26 Economic Risk 27

The Legal Environment 28 Contract Law 29 Other Regulatory Issues 29

The Technological Environment 29 The Globalization of Information Technology 31

Management in Action Google to Set Up German Team to Tackle Privacy and Safety Issues 32

Global E-Business 32

Developing Skills to Enhance Your Career 34

Communication 34 Critical Thinking 35

Collaboration 35

Knowledge Application/Analysis 35

Business Ethics/Social Responsibility 35

Conclusion 35 Summary of Key Points 36 • Discussion Questions 37 • Application Exercises 37 • Experiential Exercise 37

CASE STUDY: Harley-Davidson Sees $120m Hit from Tariffs This Year 38

Endnotes 39

Chapter 2 Managing Interdependence 43

Opening Profile: Samsung Finally Apologises to Its Workers around the World Struck Down by Disease 43

The Social Responsibility of MNCs 44 CSR: Global Consensus or Regional Variation? 47

From CSR to Shared Value? 48

Under the Lens Speciality Products, Support, and Shared Value are Key to Success: India 48

MNC Responsibility toward Human Rights 51

Comparative Management in Focus Doing Business in China— Censorship, Human Rights, and the Challenge for Multinationals 51 Management in Action “Impact Beyond Numbers”—GoodWeave’s Global Solution to Child Labor 54

Ethics in Global Management 55 Bribery 58

Under the Lens SAP Alerts US to South Africa Kickback Allegations 59

Ethics in Uses of Technology 60

Making the Right Decision 61

Under the Lens Volkswagen under the Spotlight 62

Managing Interdependence 63 Foreign Subsidiaries in the United States 63

Managing Subsidiary–Host Country Interdependence 64

Contents

vI CONTENTS

Managing Environmental Interdependence and Sustainability 66 Implementing Sustainability Strategies 68

Conclusion 69 Summary of Key Points 69 • Discussion Questions 70 • Application Exercises 70 • Experiential Exercise 71

CASE STUDY: Facebook Faces Fresh Probe After Photo Leak 71

Endnotes 72

Comprehensive Cases Case 1 Eliminating Modern Slavery from

Supply Chains: Can Nestlé Lead the Way? PC1-1

Case 2 ‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory? PC1-13

PART 2 The Cultural Context of Global Management 75

Chapter 3 Understanding the Role of Culture 76 Opening Profile: Social Media Bring Changes to Saudi Arabian Culture 76 Culture and Its Effects on Organizations 78

Societal Culture 78 Organizational Culture 79 Culture’s Effects on Management 80 Influences on National Culture 83

Under the Lens Religion and the Workplace 83

Cultural Value Dimensions 85 Project GLOBE Cultural Dimensions 85 Cultural Clusters 87 Hofstede’s Value Dimensions 87 Trompenaars’s Value Dimensions 91 Consequence or Cause? 92 Critical Operational Value Differences 93

The Internet and Culture 95 Under the Lens Seoul Fights Back against Workaholic Culture: Labour Law 96 Management in Action A Cultural Revolution Is Changing India, One Open-Plan Office at a Time: Office Life Modernisation 97

Developing Cultural Profiles 98 Comparative Management in Focus Profiles in Culture—Japan, Germany, Latin America 99 Culture and Management Styles around the World 104 Under the Lens Doing Business in Brazil—Language, Culture, Customs, and Etiquette 104

Saudi Arabia 107 Chinese Family Small Businesses 109

Conclusion 109 Summary of Key Points 110 • Discussion Questions 110 • Application Exercises 110 • Experiential Exercises 111

CASE STUDY: An Australian Manager in an American Company 111

Endnotes 114

Chapter 4 Communicating Across Cultures 116 Opening Profile: The Impact of Social Media on Global Business 116 The Communication Process 118

Cultural Noise in the Communication Process 119

The Culture–Communication Link 119 Trust in Communication 119 Trust in the Digital Age 121 The GLOBE Project 121 Cultural Variables in the Communication Process 121

Under the Lens Communicating in India—Language, Culture, Customs, and Etiquette 122

Second Language Use 129 Under the Lens Native English Speakers Must Learn How They Come Across 130

Nonverbal Communication 131 Under the Lens Communicating Italian Style 132

Context 135 Management in Action A Guide to (Mis) communication 136

Comparative Management in Focus Communicating with Arabs 137

Communication Channels 140

Information Technology: Going Global and Acting Local 141 Managing Cross-Cultural Communication 142

Developing Cultural Sensitivity 142 Careful Encoding 143 Selective Transmission 143 Careful Decoding of Feedback 144 Follow-Up Actions 144

Conclusion 145 Summary of Key Points 145 • Discussion Questions 146 • Application Exercises 146

CASE STUDY: Italy’s D & G in China: Fashion Show Canceled in Shanghai Following Scandal 146

Endnotes 149

CONTENTS vII

Chapter 5 Cross-Cultural Negotiation and Decision Making 152

Opening Profile: Hitachi Looks for Deal with ABB on Power Grids Business 152

Negotiation 153 The Negotiation Process 154

Stage One: Preparation 154

Negotiating Teams 154

Variables in the Negotiation Process 155

Stage Two: Relationship Building 156

Nontask Sounding 156

Stage Three: Exchanging Task-Related Information 157

Stage Four: Persuasion 157

Stage Five: Concessions and Agreement 158

Understanding Negotiation Styles 158 Successful Negotiators around the World 161

Comparing Profiles 162

Managing Negotiation 162 Dealing with Translators 164

Using the Internet to Support Negotiations 164

Managing Conflict Resolution 165

Comparative Management in Focus Negotiating with the Chinese 165

Context in Negotiations 169

Decision Making 169 The Influence of Culture on Decision Making 170

Under the Lens Ryanair Secures UK Licence in Preparation for No-Deal Brexit 170

Management in Action Spotify’s Plan to Beat Apple: Sign the Rest of the World 172

Approaches to Decision Making 173

Comparative Management in Focus Decision Making in Japanese Companies 174 Conclusion 175 Summary of Key Points 176 • Discussion Questions 176 • Experiential Exercises: Multicultural Negotiations 176

CASE STUDY: India’s Ecommerce Crackdown Upends Big Foreign Players 177

Endnotes 179

Comprehensive Cases Case 3 Cross-Cultural Challenges for

a Singaporean Expatriate in Zurich PC2-1

Case 4 Anuj Pathak Returns to India PC2-5

PART 3 Formulating and Implementing Strategy for International and Global Operations 183

Chapter 6 Formulating Strategy 184 Opening Profile: Why Ford Is Stalling in China while Toyota Succeeds 184 Reasons for Going International 187

Reactive Reasons 187 Management in Action Why Dyson Is Shifting Its HQ to Singapore 188

Proactive Reasons 190

Comparative Management in Focus Global Companies Take Advantage of Growth Opportunities in Africa 191

Challenges When Going International 194

Strategic Formulation Process 195 Steps in Developing Strategies 196

Step 1. Establish Mission and Objectives 196 Step 2. Assess External Environment 197 Competitive Analysis 199 Porter’s Five Forces Industry-Based Model 201 Step 3. Analyze Internal Factors 202 Step 4. Evaluate Global and International Strategic Alternatives 205 Approaches to World Markets 205 Transnational Strategies 207 Using E-Business for Global Expansion 208 Step 5. Evaluate Entry Strategy Alternatives 210

Strategic Planning for Emerging Markets 216 Management in Action Strategic Planning for Emerging Markets 217 Under the Lens Revolut’s Russian Founder Stirs Up Lithuania’s Fintech Debate 218

Step 6. Decide on Strategy 218

Timing Entry and Scheduling Expansions 220

Foreign Direct Investment Decisions under High Uncertainty 220 The Influence of Culture on Strategic Choices 221

Conclusion 221 Summary of Key Points 222 • Discussion Questions 222 • Application Exercises 222 • Experiential Exercise 223

CASE STUDY: How UK Businesses Are Planning—or Not—for a No-Deal Brexit 223

Endnotes 224

Chapter 7 Implementing Strategy 228 Opening Profile: Alibaba to Set Up Online Retail Service in Russia 228 Strategic Alliances 229

Joint Ventures 230 Non-equity Strategic Alliances 231 Global Strategic Alliances 231

vIII CONTENTS

Global and Cross-Border Alliances: Motivations and Benefits 232 Challenges in Implementing Global Alliances 233 Implementing Alliances between SMEs and MNCs 235 Guidelines for Successful Alliances 235

Implementing Strategy 236 Comparative Management in Focus Joint Ventures in the Russian Federation 237

Implementing Strategies for SMEs 239 Under the Lens Breaking Down Barriers for Small or Medium-Sized Enterprises (SMEs) 240

Implementing a Global Sourcing Strategy: From Offshoring to Next-Shoring? 241

Under the Lens Ford to Use Blockchain in Pilot to Trace Cobalt Mined in Congo 243

Implementing Strategies for Emerging Economy Firms 243 Challenges in Implementing Strategies in Emerging Markets 244

Management in Action Infosys’s Path from Emerging Start-up to Emerging MNC 245

Managing the Firm’s Performance in International Joint Ventures 246

Knowledge Management in IJVs 248 Government Influences on Strategic Implementation 248 Cultural Influences on Strategic Implementation 249 E-Commerce Impact on Strategy Implementation 251

Conclusion 251 Summary of Key Points 251 • Discussion Questions 252 • Application Exercise 252

CASE STUDY: IKEA Finally Opens in India, Minus the Meatballs 252

Endnotes 254

Chapter 8 Organization Structure and Control Systems 257 Opening Profile: Citi Sets Post-Brexit Frankfurt Trading Hub in Motion 257 Organizational Structure 258 Evolution and Change in MNC Organizational Structures 258

Integrated Global Structures 260

Management in Action Volkswagen Makes Sweeping Changes to Management and Structure 262

Organizing for Globalization 264 Dual Headquarters 265

Under the Lens Unilever Backs Down on Plan to Move Headquarters From UK 266

Organizing to Be Global, Act Local 267

Under the Lens Yum China Battles McDonald’s in China 267

Emergent Structural Forms 268 Teams as a Global–Local Structure 269

Comparative Management in Focus Changing Organizational Structures of Emerging Market Companies 269

Business Groups 270

Organizational Structure in the Digital Economy 270

Platform-Based teaming 271

Centralization and Decentralization 271

Changing Role of the Headquarters 271

Digital Organizational Readiness 271

The Global E-Corporation Network Structure 272

The Transnational Corporation (TNC) Network Structure 272

Choice of Organizational Form 273

Organizational Change and Design Variables 274

Control Systems for Global Operations 276

Direct Coordinating Mechanisms 277

Indirect Coordinating Mechanisms 277

Managing Effective Monitoring Systems 278

The Appropriateness of Monitoring and Reporting Systems 278

The Role of Information Systems 278

Evaluation Variables across Countries 279

Conclusion 279 Summary of Key Points 280 • Discussion Questions 280 • Application Exercises 280 • Experiential Exercise 281

CASE STUDY: Renault and Nissan Attempt to Ease Tension with New Board 281

Endnotes 282

Comprehensive Cases Case 5 Amazon.com in China: Can

Elaine Chang Crack the Chinese Market? PC3-1

Case 6 Souq.com and the Battle for the Future of E-Commerce in the MENA Region PC3-15

Case 7 Coming to America: A Successful Japanese Acquisition in Global Business PC3-25

CONTENTS Ix

PART 4 Global Human Resources Management 285

Chapter 9 Staffing, Training, and Compensation for Global Operations 286 Opening Profile: Staffing Company Operations 286 The Role of IHRM in Global Strategy Implementation 288 Staffing for Global Operations 290 Under the Lens Tata’s Staffing Challenges in the United States 292

Managing Expatriates 296 Expatriate Selection 297

Expatriate Performance Management 298

Under the Lens Expatriate Employees Struggle to Readjust to Old Lives 298 Comparative Management in Focus Expatriate Performance Management Practices: Samples from Five Countries 300

Global Team Performance Management 301

Expatriate Training and Development 302

Cross-Cultural Training 304

Training Techniques 304

Compensating Expatriates 307

Training and Compensating Host- Country Nationals 309

Training HCNs 309

Management in Action Starbucks’ Java Style Helps to Recruit, Train, and Retain Local Managers in China 310

Training Priorities for E-Business Development 312

Compensating HCNs 312

Conclusion 313 Summary of Key Points 313 • Discussion Questions 313 • Application Exercises 314 • Experiential Exercise 314

CASE STUDY: Kelly’s Assignment in Japan 314

Endnotes 316

Chapter 10 Developing a Global Management Cadre 320 Opening Profile: The Expat Life 320 Expatriate Career Management 322

Preparation, Adaptation, and Repatriation 323

The Role of the Expatriate Spouse 324

Under the Lens Should I Stay or Should I Go? Overseas Jobs Demand the Extra Mile 324

Expatriate Retention 325

The Role of Repatriation in Developing a Global Management Cadre 326

Knowledge Transfer 326

Global Management Teams 328 Virtual Global Teams 328

Management in Action The Emergence of a Virtual Multinational Enterprise 330

Managing Transnational Teams 331

The Role of Women in International Management 333 Working Within Local Labor Relations Systems 336

The Impact of Unions on Businesses 336

Under the Lens German Manufacturer to Close Two UK Plants 336

Organized Labor around the World 337

Convergence versus Divergence in Labor Systems 339

Adapting to Local Industrial Relations Systems 340

USMCA and Labor Relations in Mexico 341

Comparative Management in Focus Labor Relations in Germany 341 Conclusion 343 Summary of Key Points 343 • Discussion Questions 344 • Application Exercise 344 • Experiential Exercise 344

CASE STUDY: Expat Tax Breaks for Brexit Bankers: FT Readers Respond 345

Endnotes 346

Chapter 11 Motivating and Leading 349 Opening Profile: Motoi Oyama of Asics: The Globally Minded Shoe Ambassador 349 MOTIVATING 350 Cross-Cultural Research on Motivation 351

The Meaning of Work 352

The Needs Hierarchy in the International Context 354

Comparative Management in Focus Motivation in Mexico 355 Under the Lens Bad Bosses Are Making the UK’s Productivity Puzzle Worse 358

Culture and Job Motivation 359

Reward Systems 359

LEADING 361 The Global Leader’s Role and Environment 361 Under the Lens Japanese Boards Move to Open Up to Overseas Executives 363

Women in Global Leadership Roles 364

x CONTENTS

Comprehensive Cases Case 8 Daimler China: Facing a Media

Firestorm PC4-1 Case 9 Cirque du Soleil’s Global

Human Resource Management Practices PC4-5

PART 5 Integrative Section IC-1 Integrative Term Project IC-1 Integrative Case

Case 10 IKEA’s Challenges in Russia PC5-1

Glossary 378 Index 382

Under the Lens French Companies Lead the Way on Gender Diversity 364

Global Team Leadership 365 The Role of Technology in Leadership 366

Cross-Cultural Research on Leadership 366 Management in Action Leadership in a Digital World 367

Contingency Leadership: The Culture Variable 368

The GLOBE Project 368 Earlier Leadership Research 370

Conclusion 372 Summary of Key Points 372 • Discussion Questions 373 • Application Exercises 373 • Experiential Exercise 373

CASE STUDY: How to Bring Cross-Cultural Teams Together 373

Endnotes 375

xI

Preface

International Management: Managing Across Borders and Cultures explores how recent developments and trends within a hypercompetitive, digitally driven global economy present managers with challenging situations. Companies seeking to operate overseas are confronted with varied and dynamic environments in which they must accurately navigate the political, legal, technological, competitive, and cultural factors that shape their strategies and operations. The fate of overseas operations depends greatly on the international manager’s cultural skills and sensitivity as well as on their ability to carry out the company’s strategy within the context of the host country’s business practices.

NEW TO THIS EDITION This edition has 11 chapters, with a particular focus on global strategic positioning, entry strate- gies and alliances, effective cross-cultural understanding and management, and developing and retaining an effective global management cadre. It has been revised to reflect current research, events, and global developments and includes examples of companies around the world from the popular business press such as Financial Times, Wall Street Journal, Fortune International, and Bloomberg Businessweek. The following section summarizes specific features and changes:

• Integrative case: A new comprehensive case in the Integrative section “IKEA’s Challenges in Russia”

• Comprehensive cases: All the comprehensive cases are new.

■ Part 1, Case No. 1. Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way?

■ Part 1, Case No. 2. Enrich, Not Exploit: Can the New CSR Strategy Help Body Shop Retain Its Glory?

■ Part 2, Case No. 3. Cross-Cultural Challenges for a Singaporean Expatriate in Zurich

■ Part 2, Case No. 4. Anuj Pathak Returns to India

■ Part 3, Case No. 5. Amazon.com in China: Can Elaine Chang Crack the Chinese Market?

■ Part 3, Case No. 6. Souq.Com and the Battle for the Future of E-Commerce in the MENA Region

■ Part 3, Case No. 7. Coming to America: A Successful Japanese Acquisition in Global Business

■ Part 4, Case No. 8. Daimler China: Facing a Media Firestorm

■ Part 4, Case No. 9. Cirque du Soleil’s Global Human Resource Management Practices

• Chapter-end case studies: There are nine new chapter-end case studies. These help the students to refocus on the salient, important, and key contents of the chapter in a real- world scenario.

■ Chapter 1. Harley-Davidson Sees $120m Hit from Tariffs This Year

■ Chapter 2. Facebook Faces Fresh Probe after Photo Leak

■ Chapter 4. Italy’s D & G in China: Fashion Show Canceled in Shanghai Following Scandal

xII PREFACE

■ Chapter 5. India’s E-Commerce Crackdown Upends Big Foreign Players

■ Chapter 6. How UK Businesses Are Planning—or Not—for a No-Deal Brexit

■ Chapter 7. IKEA Finally Opens in India—Minus the Meatballs

■ Chapter 8. Renault and Nissan Attempt to Ease Tension with New Board

■ Chapter 10. Expat Tax Break for Brexit Bankers: FT Readers Respond

■ Chapter 11. How to Bring Cross-Cultural Teams Together

• Chapter-opening profiles: There are eight new opening profiles, which draw the student’s attention to the chapter contents with a short example, such as “The Impact of Social Media on Global Business,” and “Citi Sets Post-Brexit Frankfurt Trading Hub in Motion.”

• All of the “Comparative Management in Focus” sections have been revised and up- dated. For example, “Global Companies Take Advantage of Growth Opportunities in Africa” now examines all of Africa rather than just South Africa.

• All of the “Management in Action” boxes have been replaced or updated. For example, “‘Impact Beyond Numbers’—GoodWeave’s Global Solution to Child Labor,” “A Guide to (Mis)communication,” and “Spotify’s Plan to Beat Apple.”

• Coverage on geopolitical developments, such as Brexit and the tariff war with China, and their effects on strategy has been added throughout the tenth edition. Such discussions highlight the dynamic nature of the global manager’s job.

CHAPTER-BY-CHAPTER UPDATES

Part 1: The Global Manager’s Environment

CHAPTER 1 ASSESSING THE ENVIRONMENT: POLITICAL, ECONOMIC, LEGAL, TECHNOLOGICAL

• New Opening Profile: Small Businesses Steel Themselves for No-Deal after Brexit

• New Management in Action (MIA): Google to Set Up German Team to Tackle Privacy and Safety Issues

• New Under the Lens (UTL): South-East Asia Wakes Up to Power of Corporate Competition

• Updated Comparative Management in Focus (CMF): China Loses Its Allure

• Updated Case: Harley-Davidson Sees $120m Hit from Tariffs This Year

• Added and updated material on regional economic groups

• New section, “Developing Skills to Enhance Your Career”

CHAPTER 2 MANAGING INTERDEPEN- DENCE: SOCIAL RESPONSI- BILITY, ETHICS, SUSTAIN- ABILITY

• New Opening Profile: Samsung Finally Apologises to Its Workers around the World Struck Down by Disease

• New UTL: SAP Alerts US to South Africa Kick- back Allegations

• Revised CMF: Doing Business in China— Censor- ship, Human Rights and the Challenge for Multina- tionals

• New UTL: Volkswagen under the Spotlight • New UTL: Specialty Products, Support, and Shared

Value Are Key to Success: India • New MIA: ‘Impact Beyond Numbers’—GoodWeave’s

Global Solutions to Child Labor • New End Case: Facebook Faces Fresh Probe after

Photo Leak • New section on ethics in uses of technology

—censorship and privacy

PREFACE xIII

Part 2: The Cultural Context of Global Management

CHAPTER 3 UNDERSTANDING THE ROLE OF CULTURE

• New UTL: Seoul Fights Back against Workaholic Culture: Labour Law

• New MIA: A Cultural Revolution Is Changing India, One Open-Plan Office at a Time: Office Life Modernisation

• New section, “Consequence or Cause?” • Expanded coverage of culture’s effects on

management • Inclusion of the Culture Classification Model (task

versus relationship orientation) • Updated coverage of the connection between the

Internet and culture

CHAPTER 4 COMMUNICATING ACROSS CULTURES

• New Opening Profile: The Impact of Social Media on Global Business

• New UTL: Native English Speakers Must Learn How They Come Across

• New MIA: A Guide to (Mis)communication • New End Case: Italy’s D & G in China: Fashion

Show Canceled in Shanghai Following Scandal • New sections on trust in the digital age and second

language use

CHAPTER 5 CROSS-CULTURAL NEGO- TIATION AND DECISION MAKING

• New Opening Profile: Hitachi Looks for Deal with ABB on Power Grids Business

• New UTL: Ryanair Secures UK Licence in Preparation for No-Deal Brexit

• New MIA: Spotify’s Plan to Beat Apple: Sign the Rest of the World

• New End Case: India’s E-Commerce Crackdown Upends Big Foreign Players

• New section on negotiating styles and dealing with translators

Part 3: Formulating and Implementing Strategy for International and Global Operations

CHAPTER 6 FORMULATING STRATEGY

• New Opening Profile: Why Ford Is Stalling in China while Toyota Succeeds

• New MIA: Why Dyson Is Shifting Its HQ to Singapore

• Updated CMF: Global Companies Take Advantage of Growth Opportunities in Africa

• Updated and Revised MIA: Strategic Planning for Emerging Markets

• New UTL: Revolut’s Russian Founder Stirs Up Lithuania’s Fintech Debate

• New End Case: How UK Businesses Are Planning—or Not—for a No-Deal Brexit

• Revised section on transnational strategies • New section on the Strategy Diamond to help with

formulating strategies • New sections of liability of foreignness and foreign

direct investment decisions under uncertainty • Expanded section on e-business and born globals

• Expanded, revised feature on strategic planning for emerging markets

• Updated data and charts on global Internet usage and global services

• New features and updated examples focusing, among others, on Singapore, Africa, Lithuania, and China as well as features on how the uncertainty from Brexit affects the strategic decision of multinational companies

CHAPTER 7 IMPLEMENTING STRATEGY: STRATEGIC ALLIANCES, SMALL BUSINESSES, EMERGING ECONOMY FIRMS

• New Opening Profile: Alibaba to Set Up Online Retail Service in Russia

• Updated CMF: Joint Ventures in the Russian Federation

• Revised and Updated UTL: Breaking Down Barriers for Small or Medium-Sized Enterprises (SMEs)

• New UTL: Ford to Use Blockchain in Pilot to Trace Cobalt Mined in Congo

• Updated MIA: Infosys’s Path from Emerging Start-up to Emerging MNC

• New End Case: IKEA Finally Opens in India, Minus the Meatballs

• New sections regarding implementing strategies for equity and nonequity strategic alliances and wholly owned subsidiaries

• Updated and expanded discussion of motivations and benefits of global and cross-border alliances

• New section on trends regarding labor and supply chain sourcing, which provide further updates on issues facing managers

CHAPTER 8 ORGANIZATION STRUC- TURE AND CONTROL SYSTEMS

• New Opening Profile: Citi Sets Post-Brexit Frankfurt Trading Hub in Motion

• New UTL: Volkswagen Makes Sweeping Changes to Management and Structure

• New UTL: Unilever Backs Down on Plan to Move Headquarters from UK

• New UTL: Yum China Battles McDonald’s in China • New End Case: Renault and Nissan Attempt to Ease

Tension with New Board • New sections on dual headquarters and business groups • New section, “Teams as a Global–Local Structure” • New sections on organizational structure in the

digital economy and digital organizational readiness

Part 4: Global Human Resources Management

CHAPTER 9 STAFFING, TRAINING, AND COMPENSATION FOR GLOBAL OPERATIONS

• Updated Opening Profile: Staffing Company Operations • Updated UTL: Tata’s Staffing Challenges in the

United States • New UTL: Expatriate Employees Struggle to

Readjust to Old Lives • Updated MIA: Starbucks’ Java Style Helps to

Recruit, Train, and Retain Local Managers in China • Updated research information and focuses on the

“war for talent” around the world, in particular the competition for talent in emerging markets

• Updated information on the role of IHRM in global strategies, staffing for global operations, and train- ing host-country nationals

xIv PREFACE

CHAPTER 10 DEVELOPING A GLOBAL MANAGEMENT CADRE

• Updated Opening Profile: The Expat Life • New UTL: Should I Stay or Should I Go? Overseas

Jobs Demand the Extra Mile • New MIA: The Emergence of a Virtual

Multinational Enterprise • New UTL: German Manufacturer to Close Two UK

Plants • Updated CMF: Labor Relations in Germany • New End Case: Expat Tax Breaks for Brexit

Bankers: FT Readers Respond • Expanded and updated sections, “Global Manage-

ment Teams,” “Expatriate Career Management,” and “The Role of Women in International Management”

• Updated information on the role of organized labor around the world and its impact on strategy and hu- man resources management.

• New feature on best practices for virtual multinational companies

• New survey results regarding expatriate retention and the roles of their families

• New feature examining the role of expatriates’ careers in knowledge transfer to the firm

CHAPTER 11 MOTIVATING AND LEADING

• New Opening Profile: Motoi Oyama of Asics: The Globally Minded Shoe Ambassador

• New UTL: Bad Bosses Are Making the UK’s Productivity Puzzle Worse

• New UTL: Japanese Boards Move to Open Up to Overseas Executives

• New Under the Lens: French Companies Lead the Way on Gender Diversity

• Updated MIA: Leadership in a Digital World • New End Case: How to Bring Cross-Cultural Teams

Together • Updated and expanded sections on reward systems,

culture, and job motivation as well as the global leader’s role and environment

• Updated section on leadership in a digital world

SOLVING TEACHING AND LEARNING CHALLENGES Most students who take the International Management course do not yet have the international exposure and the understanding of the cultural differences in which a business must operate. This text guides students in what actions to take and how to develop the requisite skills to for- mulate and implement international strategies, to conduct effective cross-national interactions, and to manage daily operations in and with foreign subsidiaries as well as with global allies and partners. This text takes the perspective of managers around the world so that students can learn how to work effectively in cross-national teams and how to combine best practices for the local environment in which the firm is operating.

To ensure students understand the change in decision making due to cultural shifts, this text uses the following features to keep the attention of students by challenging them to think criti- cally about the practical applications of the text.

PREFACE xv

Cases and the term project:

About Amazon

Amazon was founded in June 1994 by Jeff Bezos (Bezos). In June 1995, he launched his online bookstore, Amazon.com. It soon increased its product portfolio and became a force to reckon with in retailing. Analysts felt that by offering low prices, a wide selection, and a great customer experience, Amazon was able to drive traffic (customers) and increase

To order copies, call +91 9640901313 or write to IBS Cen- ter for Management Research (ICMR), IFHE Campus, Donthanapally, Sankarapally Road, Hyderabad 501 203, Telangana, India or email: [email protected] www .icmrindia.org

“China is a very important market for Amazon. We’re committed to growing our business here.”

Case 5 Amazon.com in China: Can Elaine Chang Crack the Chinese Market? This case was written by Koti Vinod Babu, under the direction of Debapratim Purkayastha, IBS Hyderabad. It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. Source:

Part end cases help students to recognize, to provide analysis, and make and implement deci- sions in complex situations experienced by real companies.

Chapter end cases help students to recognize and apply the chapter concepts in a specific situation.

The new comprehensive case in the Integrative section—“IKEA’s Challenges in Russia”— is especially informative and challenging because it covers a range of topics from the entire book.

Case 10 IKEA’s Challenges in Russia This case was written by Hadiya Faheem, under the direction of Debapratim Purkayastha, IBS Hyderabad.1

taking kickbacks from the rental company for inflating the rental price of the service. Consequently, IKEA was rebuked in court for a breach of the rental contract. While the bureaucratic system added to its troubles in Russia, there were also times when local or federal authorities were supportive, which enabled the company to get things done faster than in any other country in the world.

Over the years, IKEA grew and experienced success with its stores in Russia. Some of its stores went on to become the

“[. . .] not all companies succumb to corruption. The Swedish furniture retailer IKEA has steadfastly refused to bribe Russian officials.”2

- 3

“Ikea is clearly quite successful in Russia but in the early days when they entered the market they took the expres-

P A R T 5 : Integrative Case

The popular Integrative Term Project has been retained, providing the opportunity for stu- dents to pull together the concepts and management decisions and actions covered in the book. This end-term project challenges students to create teams that take on the role of top management in a situation that requires applying the entire content of the course.

xvI PREFACE

Comparative Management in Focus Negotiating with the Chinese

The Chinese way of making decisions begins with socialization and initiation of personal guanxi rather than business discussion. The focus is not market research, statistical analysis, facts, Power-Point presentations, or to-the-point business discussion. My focus must be on fostering guanxi.40

With the increasing business being conducted in China (see Map 5-1) or with Chinese allies or other companies, business practices there are now showing more similarity to those in the West. However, when Westerners initiate business negotiations with representatives from

Comparative Management in Focus–Allows the students to apply chapter concepts to a specific country or region to gain further insight into comparative management. These provide in-depth comparative applications of chapter topics in a broad range of specific countries or re- gions, thus helping the students to understand cultural differences—what applies in one culture may need a different approach elsewhere.

Management in Action–Helps the students understand through real examples of managing regarding the concepts in the chapter. These examples, often gleaned from the press, demonstrate to students what managers actually do to address the kinds of situations and challenges in the chapter.

UNDER THE LENS South-east Asia Wakes Up to Power of Corporate Competition 48

When Mahathir Mohamad reprised his role as Malaysia’s prime minister in May [2018], he brought along a lengthy list of promises. Vows to root out corruption and review bloated China-backed infrastructure projects dominated the headlines. But Mr Mahathir is also

following up on a less-publicised, but no less ambitious, pledge. He wants to break up monopolies. Governments across south-east Asia are with him, especially after a loud wake-up call earlier this

year. The regional merger of ride-hailing groups Grab and Uber made it clear that authorities were

Under the Lens–Helps students to gain further insight into an important topic in the chapter by focusing on a specific subject in a specific situation. This feature can then “tune in” the student to real situations that demonstrate the chapter challenges. One of the Under the Lens is “Should I Stay, or Should I Go? Overseas Jobs Demand the Extra Mile” from Chapter 10.

DEVELOPING SKILLS TO ENHANCE YOUR CAREER For students to succeed in a rapidly changing job market, they should be aware of their career options and how to go about developing a variety of skills. Chapter 1 includes a new section on Developing Skills to Enhance your Career. It focuses on five critical employability skills: (1) communication, (2) critical thinking, (3) collaboration, (4) knowledge application/analysis, and (5) business ethics/social responsibility. Specifically, it highlights how the material in this textbook helps to develop skills in each of these areas to prepare students for success in their professional endeavors. Each chapter offers many opportunities to acquire and refine skills that can lead to professional success in the digital economy. For example, the Opening Profiles, Man- agement in Action sections, Under the Lens sections, and Comparative Management in Focus sections provide an opportunity to engage the students with real-world situations and challenges facing multinational firms and their leadership teams. Experiential learning exercises offer the opportunity to learn by doing—often a hands-on assignment involving a group. The case studies entail real-life situations of people and firms—some of which involve best practices while oth- ers reveal negative consequences. The case studies provide students with valuable opportunities to engage in critical thinking, apply key frameworks, develop recommendations, and even use breakout sessions in which students can refine their ideas and analytical skills in a team setting. Moreover, we include some cases that emphasize the digital economy (e.g., blockchain) while addressing a social responsibility issue (e.g., work conditions). All five employability skills are essential—whether you seek an international management position or a functional role.

PREFACE xvII

MANAGEMENT IN ACTION Spotify’s Plan to Beat Apple: Sign the Rest of the World76

Few could be happier about the synergy between music streaming and Latin America than Spotify — whose stock price, and arguably its future, depend on repeating the same trick in new markets.

Spotify needs to keep adding subscribers to make Wall Street happy as it battles Apple, one of the richest companies in the world, to dominate how people listen to music. There is a finite amount of affluent 20-somethings in western cities to pay Spotify $10 a month for its services. However, after growing at a torrid clip in Europe and the US, investors are betting that Spotify can sign up hundreds of millions of people in what the Swedish company bluntly calls the “Rest of the World”.

xvIII PREFACE

INSTRUCTOR RESOURCES For more information and resources, visit www.pearson.com.

ACKNOWLEDGMENTS The authors would like to acknowledge, with thanks, the individuals who made this text possible. For the tenth edition, these people include Susan Leshnower, who updated both the Instructor’s Manual and the PowerPoint slides, and John Capela, who updated the Test Bank.

The authors would also like to thank the following reviewers from previous editions:

Gary Falcone, Rider University Lawrenceville, NJ William Wardrope, University of Central Oklahoma, Edmond, OK Eric Rodriguez, Everest College, Los Angeles, CA Paul Melendez, University of Arizona, Tucson, AZ Kathy Wood, University of Tennessee, Knoxville, TN Daniel Zisk, James Madison University, Harrisonburg, VA Dinah Payne, University of New Orleans, New Orleans, LA Marion White, James Madison University, Harrisonburg, VA Gary Tucker, Northwestern Oklahoma State University, Alva, OK David Turnspeed, University of South Alabama, Mobile, AL Lauren Migenes, University of Central Florida, Orlando, FL Steven Jenner, California State University, Dominguez Hills, CA Arthur De George, University of Central Florida, Orlando, FL

Stewart Miller also thanks (1) his NU life teammates for being great leaders on and off the field and (2) his coaches and mentors—Pasto, Chief, Dart, RW, Lorraine Eden, and Mike Hitt—for their lifelong enthusiastic support and guidance.

—Helen Deresky & Stewart R. Miller

Employability Skills Matrix

Critical thinking

Communi- cation

Collabora- tion

Knowledge Application and Analysis

Social Responsibility

Opening Profiles

Manage- ment in Action

Under the Lens

Compara- tive Man- agement in Focus

Application exercises

Experiential exercises

Case studies

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P A R T O U T L I N E

C H A P T E R 1 Assessing the Environment: Political, Economic, Legal, Technological

C H A P T E R 2 Managing Interdependence: Social Responsibility, Ethics, Sustainability

The Global Manager’s Environment1

P A R T

2

1-1. To understand the global business environment and how it affects the strategic and operational decisions that managers must make

1-2. To develop an appreciation for the ways in which political and economic factors and changes influence the opportunities that companies face

1-3. To recognize the role of the legal environment in international business

1-4. To review the technological environment around the world and how it affects the interna- tional manager’s decisions and operations as well as the war for talent around the globe

1-5. To explore essential skills for developing your career as a manager in a multinational company

Assessing the Environment Political, Economic, Legal, Technological

O B J E C T I V E S

1 C H A P T E R

G raham Masarik is in the minority of Britain’s small and medium-sized business owners. Little more than a month before the UK is due to leave the EU on March 29, he is preparing for a no-deal Brexit.2

Mr Masarik has moved most of the distribution operations for Eurocams, his auto parts company, to the Netherlands to avoid the import duties and standards checks that will accompany a no-deal depar- ture from the EU.

The Weston-super-Mare-based group has factories in China, so for some products the switch means bypassing Britain entirely. Already 95 per cent of Eurocams’ annual revenues of £5m come from Europe.

“[This] will mean closing down a majority of what I’ve got here and going to Holland—not some- thing I wanted to do but it is out of my hands,” said Mr Masarik. “You can’t wake up on 30 March and find that you have no business.”

Smaller UK companies’ preparations for Brexit vary widely. Some, such as Shiner, a Bristol-based manufacturer of skateboards and related goods, are trying to stockpile as much as they can in the EU ahead of March 29—and are likely to set up legal entities in the bloc.

Others, such as Albion Stone, a group that exports Portland stone, a prestigious building material, are stockpiling in the UK—at considerable cost—and thinking about scrapping sales to the EU entirely.

But many companies lack the resources or the information to prepare for a no-deal. Allie Renison, head of EU and trade policy at the Institute of Directors, said that only 14 per cent

of the business group’s members were “very prepared” for such an outcome. “At the moment, there is still far too much information missing for most small and medium enterprises to be ready for no-deal on 29 March,” she said.

Opening Profile: Small Businesses Steel Themselves for No-Deal after Brexit1

CHAPTER 1 • ASSESSING THE ENVIRONMENT 3

With Prime Minister Theresa May still looking for a deal with Brussels that will win majority support in the House of Commons, companies have to prepare for a host of uncertainties.

“The reality is that yesterday the first freighter that will arrive after Brexit set off from Felixstowe with no clarity on the terms on which its cargo will arrive,” said Greg Clark, business secretary, on Tuesday. “No one should regard waiting to the last moment . . . as acceptable.”

But neither businesses nor politicians know whether there will be a deal or no-deal, nor indeed whether Brexit will be delayed to allow both sides to adjust.

Matt Griffith, policy director at Business West, a group that helps companies in the west of England, said most groups had assumed that policymakers would give them enough time to adapt to a no-deal Brexit, but now recognise this was “dangerously optimistic.”

“Because the government have not decided what they are going to do, businesses like us are having to spend hundreds of thousands of pounds [on storage],” said Charlie Allen, managing director at Shiner.

“By March 30 [2019] we need to transfer a lot of stock to third-party logistics, especially the stock with high duty.”

Mr Allen noted that if Britain leaves the EU without a deal, clothes may be subject to tariffs of about 12 per cent, and that he needs to give six weeks’ notice to logistics partners—a milestone that has already passed.

Speaking before Mrs May announced a deadline of March 12 [2019] to hold a “meaningful vote,” Mr Allen said: “Every day makes a difference; they need to have decided what the outcome is by the end of February.” He added that delaying the Brexit date “would just prolong the uncertainty.”

He said EU authorities had already warned the company that, unless it had a legal presence in the bloc, any websites with the .eu suffix would be taken down.

“We will have to pay for the pick and pack operation in Germany or Holland,” he added. “The work will be done on mainland Europe instead of in the UK. This means less jobs in Bristol.”

Last autumn the government published technical notices to help businesses prepare for a no-deal, but these were widely derided as lacking enough detail for any practical planning purposes. In October the CBI, the employers’ organisation, called for a “one-stop shop” of advice for businesses trying to prepare for Brexit. This has not materialised.

Many businesses are still unaware of what information is available. The British Exporters Association says it is directing its members to online resources such as the government’s “Prepare your business for EU exit” website.

Source: © The Financial Times Limited 2019.

As evidenced in the opening profile, managers in the twenty-first century are being challenged to operate in an increasingly complex, global economy in which some regions undergo periods of uncertainty, thus requiring these managers to be more responsive yet more flexible. Uncertainty abounded after the referendum on Brexit (for Britain to exit the European Union (EU). British lawmakers finally approved exiting from the EU in January 2020. And, of course, the digital economy provides a threat to some companies but offers opportunity to others. Clearly, those in- volved in international and global business have to adjust their strategies and management styles to the global disruption brought on by the digital economy as well as other global developments.

As well as the disruption driven by the digital economy, typical challenges that managers face involve politics, cultural differences, global competition, terrorism, technology, sustainabil- ity, and economic uncertainties. For example, changes to the European Union (Brexit) and the free trade agreement between Mexico, Canada, and the United States have led many multination- al companies to reassess their strategies and investment decisions in Europe and the Americas as of the writing of this text.

In addition, the opportunities and risks of the global marketplace increasingly bring with them the societal obligations of operating in a global community. Many companies face increased scrutiny from investors and nongovernment organizations (NGOs) to provide a thorough account of the environmental and social implications of their supply chains. For instance, the London Metal Exchange has supported a consortium of metals traders and financial institutions to build a blockchain-based system to track the trade of physical metal. Through digital technology—a blockchain-based system—“you know where your metal is, you have proof of your metal, but

4 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

nobody can see what your metal is and where your metal is,” according to Matt Chamberlain, chief executive of the London Metals Exchange. Managers in those companies are struggling to find ways to balance their social responsibilities, their reputations, and their competitive strategies.

To compete aggressively, firms must make considerable investments overseas—not only capital investment but also investment in well-trained managers with the skills essential to working effectively in a multicultural environment. In any foreign environment, managers need to handle a set of dynamic and fast-changing variables, including the pervasive variable of culture that affects every facet of daily life. Added to that behavioral “software” are the challenges of the digital economy, which are rapidly changing the dynamics of competition and operations.

International management (IM), then, is the process of developing strategies, designing and operating systems, and working with people around the world to ensure sustained competitive advantage. Corporate leaders need to instill a global mindset with their employees while navigat- ing the diverse competitive landscapes as well as the uncertainty associated with the digital econ- omy. Even more, international managers need to consider how to recruit, train, and develop the new generation of talent from around the world. These management challenges are shaped by the prevailing conditions and ongoing developments in the world, as outlined in the following sections and subsequent chapters.

THE GLOBAL BUSINESS ENVIRONMENT Following is a summary of some of the global situations and trends that managers need to moni- tor and incorporate in their strategic and operational planning. We discuss the status of globaliza- tion and the debates about its effects on countries, on corporations, on human capital, and on the relationship with information technology (IT). We look briefly at some of the areas in the world in which you might find yourself doing business, with a particular focus on China (see World Map 1, after the chapter, for reference throughout this book).

Globalization The types of events described in the opening profile illustrate the interdependence of the business, politics, trade, finances, and technological environment around the world. That interdependence has come to be known as globalization—global competition characterized by networks of inter- national linkages comprising economic, financial, political, and social markets that in turn bind countries, institutions, and people in an interdependent global economy. These linkages have re- sulted in the free movement of goods, people, money, and information across borders. Economic integration results from the lessening of trade barriers and the increased flow of goods and services, capital, labor, and technology around the world. The invisible hand of global competition has been propelled by the phenomenon of an increasingly borderless world, by technological advancements, and by the rise of emerging markets such as China and India—a process that Thomas Friedman called “leveling the playing field” among countries—or the “flattening of the world.”3 That was then, but this is now—and some are now arguing that the world is no longer so flat, such that the pace of globalization has slowed and, in some instances, has declined. This retreat is resulting from political crises, cybertheft, protectionism, and increasing trade barriers.4 As Bremmer notes in the Harvard Business Review, the governments of many developing nations have become increasingly nationalistic in protecting their own industries rather than open them to foreign companies, in particular multinational corporations (MNCs).5

On a strategic level, Ghemawat argues that the business world is in a state of “semi- globalization”—that various metrics show that only 10 to 25 percent of economic activity is truly global. He bases this conviction on his analysis that “most types of economic activity that can be conducted either within or across borders are still quite localized by country.”6 Ghemawat posits that we are in an “unevenly globalized world” and that business opportunities and threats depend on the individual perspective of country, company, and industry.7 He observes that, as emerg- ing market countries have gained in wealth and power and increasingly call their own shots, a reverse trend of globalization is taking place—evolving fragmentation—which he says is having, ironically, a ripple effect of globalization.8

1-1. To understand the global business environment and how it affects the strategic and operational decisions that managers must make

CHAPTER 1 • ASSESSING THE ENVIRONMENT 5

Global Trends Nevertheless, globalization is still here; it is a matter of degree and direction in the future. The rapid development of globalization over the past decades is attributable to many factors, includ- ing the burgeoning use of technology and its accompanying uses in international business; political developments that enable cross-border trade agreements; and global competition for the growing numbers of consumers around the world. From studies by Bisson et al. and others, we can also identify six key global trends that provide both challenges and opportunities for compa- nies to incorporate into their strategic planning:9

• The changing balance of growth toward emerging markets compared with developed ones, along with the growing number of middle-class consumers in those areas

• The need for increased productivity and consumption in developed countries to stimulate their economies

• The increasing global interconnectivity—technologically and otherwise, as previously discussed—and in particular the phenomenon of an “electronically flattened earth” that gives rise to increased opportunity and fast-developing competition

• The increasing gap between demand and supply of natural resources, in particular to sup- ply developing economies, along with the push for environmental protection

• The challenge facing governments to develop policies for economic growth and financial stability10

• The growing number of emerging-market companies embracing digital technologies

Globalization and Emerging Markets There are growing concerns about rising political and economic risks in developed economies. Despite wariness, MNC leaders remain relatively positive on the global economy. Moreover, FDI levels fell again in 2018. According to research by the A. T. Kearney Company on the foreign direct investment (FDI) intentions and preferences of the leaders of 300 top companies in vari- ous industry sectors spanning six continents, companies view foreign direct investment (FDI) as crucial to profitability and sustainable competitive advantage. Indeed, 77 percent of MNC lead- ers indicated that FDI will grow in importance in the years ahead.11 These corporate leaders also viewed FDI as a means to achieve localization, which implies shifting managers, production, operations, and/or marketing to local markets. The Kearney report reveals some paradoxes as corporate leaders affirm that they will be increasing foreign investment, yet the actual levels of FDI do not reflect that affirmation.

Exhibit 1-1 shows the 2017–2019 results of the A. T. Kearney Foreign Direct Investment Confidence Index. The exhibit shows the top 25 countries in which those executives have confi- dence for their investment opportunities. Kearney’s results show that the United States continues to be in the lead since 2017 and up from 4th in 2012. China has slipped from 3rd in 2017 to 7th in 2019. Germany, Canada, and the United Kingdom ranked 2nd, 3rd, and 4th respectively. India has dropped from 8th in 2017 to 16th in 2019. There are two other notable declines in ranking: Mexico dropped from 17th to 25th while Brazil dropped from 16th to unranked during the 3-year period.12 Overall, the results show renewed confidence in the economic recovery in the United States and Europe and that emerging economies are improving their rankings, but not enough to be in the top 25 (see Map 1-1).

Although the United States remains dominant in many new-age industries such as nanotech- nology and biotechnology, emerging markets continue to grow their countries’ economies, and, in turn, will provide growth markets for the products and services of developed economies. It is clear also that the phenomenon of rapidly developing economies continues.

The Boston Consulting Group’s (BCG) 2018 list of Global Challengers shows evidence of the growing number of companies from emerging markets: companies that are growing faster than comparable companies are. Although there are relatively fewer from China and India than in previous years, there are more from smaller countries, including five from Thailand, four from Turkey, and three from Chile, which are at all-time highs.13 Examples of the now more mature emerging giants are, from China, Huawei Technologies, Lenovo Group, and Baosteel;

6 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

from India, Infosys Technologies, Tata Group, and Bharti Airtel; from Brazil, Embraer and Votorantim Group; from Mexico, Group Bimbo; from Russia, Gazprom; and from Indonesia, Bumi Resources—to name a few.

Further evidence that globalization is the increase in the number of emerging-market com- panies acquiring established large businesses and brands from the so-called developed countries. Clearly, companies in emerging markets are providing many tangible business opportunities for investment and alliances around the world and establishing themselves as competitors to reckon with. One example of a company enjoying rapid global growth through technology is China- based Tencent, which tends to acquire minority stakes in companies whose products can link to its WeChat and WeChat Pay platforms. Tencent offers those companies the opportunity to reach over one billion users.

It’s almost impossible to succeed in China retail without Alibaba or Tencent. James Root, Hong Kong-based partner at Bain & Co.14

Backlash against Globalization As we consider the many facets of globalization and how they intertwine, we observe how eco- nomic power and shifting opinions and ideals about politics and religion, for example, result in an increasing backlash against globalization and a rekindling of nationalism. Capitalism and open markets, most notably by Western companies, have propelled globalization. Now, digitally

+ –Maintained ranking Moved up Moved down

1 3 2 4 7 6 5 10 8

2018

12 15 13 9 20 16 11 19 21 14 18 23 – –

24 17

1 2 3 4 5 6 7 8 9

2019

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

2017 1 2 5 4 7 6 3 13 9 10 11 14 12 –

15 8 18 20 21 19 22 – – –

17

2016

Ranking Values calculated on a 0 to 3 scale

0.00 0.50 1.00 1.50 2.00 2.50 1 4 3 5 8 6 2 15 7 10 14 13 11 20 19 9 16 18 –

21 22 – –

23 17

Low confidence High confidence 1.49 1.49 1.50 1.50 1.50 1.52 1.52 1.54 1.54 1.54 1.55 1.58 1.59 1.61 1.62 1.65 1.67 1.67 1.72

1.78 1.79

1.85 1.87 1.90

2.10

Mexico Norway Finland Taiwan Austria Ireland

New Zealand Belgium

South Korea India

Sweden Denmark

Switzerland Netherlands

Spain Singapore Australia

Italy China Japan

France United Kingdom

Canada Germany

United States +

+

– + + +

+ + – +

+ + +

–

– +

–

+ – –

–

ExHIBIT 1-1 2019 Foreign Direct Investment Confidence Index Top 25 Targets for FDI The main types of FDI are acquisition of a subsidiary or production facility, joint ventures, licensing, and investing in new facilities or expansion of existing facilities.

Source: 2019 FDI Confidence Index, © A. T. Kearney, 2019. All rights reserved. Reprinted with permission.

CHAPTER 1 • ASSESSING THE ENVIRONMENT 7

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8 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

oriented multinational companies from China, India in particular, represent the new drivers of economic growth around the globe.15

The rising nationalist tendencies are evident as emerging and developing nations—wielding their economic power in attempted takeovers and inroads around the world—encounter protection- ism. There is hostility toward takeovers such as Indian company Flipkart by U.S. retailer, Walmart.

Although the debate about the effects of globalization continues, it is clear that economic globalization will be advanced by corporations looking to maximize their profits with global ef- ficiencies, by politicians and leaders wishing to advance their countries’ economies, and by tech- nological and transportation advances that make firms’ production and supply networks more efficient. However, pressure by parties against those trends, as well as the resurgence in national- ism and protectionism, may serve to pull back those advances to a more regional scope in some areas or limit them to bilateral pacts.16

In addition, although competition to provide the best and cheapest products to consumers exerts pressure on corporations to maximize efficiencies around the world, there is also increas- ing pressure and publicity for them to consider the social responsibility of their activities (dis- cussed further in Chapter 2).

Effects of Institutions on Global Trade17

Two major groups of institutions (supranational and national) play differing roles in global- ization. Supranational institutions such as the World Trade Organization (WTO) and the International Labor Organization (ILO) promote the convergence of how international activities should be conducted. For example, the WTO promotes the lowering of tariffs and a common set of trade rules among its member countries. Similarly, the ILO promotes common standards of how workers should be treated. Although many supranational institutions frequently promote rules or laws favorable to foreign firms (e.g., requiring intellectual property rights protections in China), others have been criticized for infringing on national sovereignty (e.g., challenges to certain environmental laws in the United States).

National institutions, in contrast, play a role in creating favorable conditions for domestic firms and may make it more difficult for foreign firms to compete in those countries. For exam- ple, the stringent drug testing rules the U.S. Food and Drug Administration (FDA) requires and the anti-dumping rules the U.S. Department of Commerce’s International Trade Administration (ITA) enforces act as entry barriers for foreign firms (see Chapter 6 for a more detailed discus- sion of these entry barriers).

Some supranational institutions represent the interests of a smaller group of countries. For ex- ample, the European Commission acts in the interest of EU members as a whole rather than in the interest of individual member countries. The European Commission is the executive arm of the EU and is responsible for implementing the decisions of the European Parliament and the European Council. Of relevance to international business, the European Commission speaks for the EU at the World Trade Organization and is responsible for negotiating trade agreements on behalf of the EU.18

Effects of Globalization on Corporations In returning to our discussion at the corporate level, we can see that almost all firms around the world are affected to some extent by globalization and, in turn, cause globalization by their activ- ities abroad. Firms that have investment, operations, or marketing activities in several countries are called multinational corporations (MNCs) or multinational enterprises (MNEs). Firms from any country now compete with companies at home and abroad, and domestic competitors are competing on price by outsourcing or offshoring resources and services anywhere in the world. Often it is difficult to tell which competing products or services are of domestic or foreign origin. Examples abound—for example, do you really drive an American car?

Look at your vehicle identification number (VIN): If it starts with 1 it is made in America; 2, Canada; 3, Mexico; 4, anywhere else in the world. The only cars allowed to park in a United Auto Workers (UAW) plant are those with VIN numbers beginning with 1 and 2.19

Honda vehicles, for example, are manufactured in many markets outside of Japan: Argentina, Australia, Bangladesh, Brazil, Canada, China, France, India, Indonesia, Italy, Malaysia, Mexico, Pakistan, Peru, Philippines, Taiwan, Thailand, the United Kingdom, the United States, and Vietnam.20

CHAPTER 1 • ASSESSING THE ENVIRONMENT 9

Some companies have made multiple investments in particular countries. For example, Japan’s Toyota has been investing in North America for 20 years in plants, suppliers, and dealer- ships as well as in design, testing, and research centers. As of 2019, it makes nine vehicles in the United States. For example, its Sienna model is assembled in Indiana. The Camry and Lexus models are made in Kentucky, while the Tundra is made in Texas.

It would seem that competition has no borders, with many global companies producing and selling a substantial portion of their global brands and services abroad than domestically. In 2018, Cisco Systems received 48.3 percent of its revenues from overseas. General Electric, however, derives 66.5 percent of its US$121 billion from overseas markets. Nestlé has 98.6 per- cent of its sales outside of its home market, with 42 percent of its sales coming from emerging markets. Coca-Cola has 64 percent foreign sales, while Procter & Gamble has 59 percent. 21

The Tata Group, a conglomerate originating in India, generates over 60 percent of its rev- enues from its operations in over 100 international markets. In Europe, Tata has 19 companies across the continent with over 60,000 employees. In North America, it operates 13 companies with over 35,000 employees. In the Asia-Pacific region, Tata operates 16 companies consisting of over 7,000 employees. In particular, Tata has over 3,000 employees in both Singapore and China. Tata has a sizable presence in the Middle East with more than 20 companies and 10,000 employees.22

Investment by global companies around the world means that this aspect of globalization benefits developing economies—through the transfer of financial, technological, and managerial resources as well as through the development of local allies that later become self-sufficient and have other operations. Global companies are becoming less tied to specific locations, and their operations and allies are spread around the world as they source and coordinate resources and activities in the most suitable areas and as technology facilitates faster and more flexible interac- tions and greater efficiencies.

It is essential, therefore, for managers to look beyond their domestic market. If they do not, they will be even further behind the majority of managers who have already recognized that they must have a global vision for their firms, beginning with preparing themselves with the skills and tools of managing in a global environment. Companies that desire to remain globally com- petitive and expand their operations to other countries must develop a cadre of top management with experience operating abroad and an understanding of what it takes to do business in other countries and work with people of other cultures. Many large firms around the world are getting to the stage of evolution known as the stateless multinational, when work is sourced wherever it is most efficient; the result of this stage of development is that:

[F]or business leaders, building a firm that is seamlessly integrated across time zones and cul- tures presents daunting obstacles. 23

The above quote continues to resonate with multinational companies seeking to balance being global and local simultaneously. For example, India’s largest technology and ecommerce start-up firms are based in its biggest cities—Bangalore and Greater Delhi serve as home to most of them. Yet Alibaba’s Jack Ma told an Indian entrepreneur, “you must focus on the smaller cities and towns—they’re untapped.” Indeed, ecommerce growth is now fastest outside India’s eight largest cities. Indian startup firms are facing increased competition from multinationals such as Amazon, which has observed the relatively higher growth rates in smaller Indian towns and cit- ies.24 According to Kishore Thota, an Amazon executive, “For a year or so we’ve been seeing this huge growth differential from outside the metros,” he said. In light of the growth of online purchasing, Indian ecommerce users remain wary of online payment mechanisms, so Amazon offers them a cash payment option upon delivery. Needless to say, cash is the preferred payment choice for most Indian online transactions, suggesting that multinational companies—especially digitally oriented ones—need to understand local customers or miss huge growth opportuni- ties.25 For example, in 2018, Amazon created a Hindi version of its platform.

Small and Medium-Sized Enterprises (SMEs) SMEs are also affected by and, in turn, affect globalization. They play a vital role in contribut- ing to their national economies—through employment, new job creation, development of new products and services, and international operations, typically exporting. The vast majority (about

10 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

98 percent) of businesses in developed economies are small and medium-sized enterprises, which are typically referred to as those companies having fewer than 500 employees. Small businesses are rapidly discovering foreign markets. Although many small businesses are affected by global- ism only to the extent that they face competing products from abroad, an increasing number of entrepreneurs are being approached by potential offshore customers, thanks to the burgeoning number of trade shows, federal and state export initiatives, and the growing use of websites that ease making contact and placing orders online.26

There has never been a better time for SMEs to go global; the Internet is as valid a tool for small companies to find customers and suppliers around the world as it is for large companies. By using the Internet, email, and web-conferencing, small companies can inexpensively contact customers and set up their global businesses.

The Globalization of Human Capital Talent performance is now clearly seen as key to growth, job creation, and innovation. New ap- proaches are emerging to stimulate entrepreneurial talent . . . Such strategies affect all aspects of talent competitiveness, including education, skilling, and re-skilling, attracting external talents and fostering co-creation with local ones, as well as encouraging imported or returning talent to stay and contribute to long-term local objectives.27

2019 Global TalenT CompeTiTiveness index RepoRT

Firms around the world have been offshoring manufacturing jobs to countries with lower wages for decades. Firms of all sizes have been and are continuing to produce or assemble parts of their products in many countries, that is, outsourcing by contracting to a local firm and then integrating it into their global supply chains. However, an increasing number of firms are realizing that their cost advantage of producing abroad is disappearing because wages and other manufacturing costs in countries such as China are going up, transportation costs are increasing, the risks involved in complex supply chains are becoming more apparent, and there is continuing pressure to supply jobs at home. According to Reshoring Initiative, an advocacy group, a growing number of U.S. firms are actively reshoring jobs back to the United States. They indicated that during the period 2010 to 1Q 2018, the 16 companies that reshored the most jobs, collectively brought back 73,000 manufacturing jobs to the United States. Apple led the way with 22,200 reshored jobs, followed by General Motors (12,988), Boeing (7,725), Ford (4,200), and Intel (4,000).28

But shipping costs do not affect nonmanufacturing jobs, and firms are outsourcing white- collar jobs to India, China, Mexico, and the Philippines. Customer support, medical analysis, technical work, computer programming, form filling, and claims processing—all these jobs can now move around the globe in the same way that farming and factory jobs could move a century ago.29 We have all experienced talking to someone overseas when we call the airlines or a tech- nology support service; now increasingly sophisticated jobs are being outsourced, leaving many people in developed economies worried about job retention.

For multinational firms, winning the war for talent is one of the most pressing issues, especially because hot labor markets in emerging markets are causing extremely high turn- over rates.30 Moreover, companies seeking to leverage a global talent pool need to recog- nize national differences in the abilities to “develop, attract, and empower the human capital that contributes to productivity and prosperity.”31 The Global Talent Competitiveness Index (GTCI) ranks countries according to six pillars—a country’s ability to enable talent to de- velop, as well as what that country is doing to attract, grow, and retain talent. Two outcome- based pillars are the levels of vocational-technical skills and global knowledge skills of people in those countries. Switzerland, Singapore, and the United States ranked 1, 2, and 3 respectively in the 2019 GTCI rankings. The remaining countries in the top ten are all from Europe: Norway, Denmark, Finland, Sweden, the Netherlands, U.K., and Luxembourg. The United Arab Emirates ranked 19th, ahead of Israel (20th), Japan (22nd), South Korea (30th), Russian Federation (49th), and Brazil (72nd).32 Table 1-1 shows the top three countries by competitiveness pillar.

CHAPTER 1 • ASSESSING THE ENVIRONMENT 11

FIGURE 1-1 IT allows service jobs to be performed anywhere in the world.

te xe

la rt

/1 23

R F

G B

L td

TABLE 1–1 Global Talent Competitiveness Index by Pillar33

Pillar Top Countries

Enabling Talent Singapore, Switzerland, Denmark

Attracting Talent Singapore, Luxembourg, UAE

Growing Talent United States, Switzerland, Netherlands

Retaining Talent Switzerland, Norway, Austria

Vocational-Technical Skills Switzerland, United States, Germany

Global Knowledge Skills Singapore, Iceland, United States

The 2019 Global Talent Competitiveness Index reveals several key takeaways. First, there is a growing talent inequality gap across countries. Second, entrepreneurial talent can mitigate inequalities. In China, for example, the migration of talent to the private sector has contributed to the emergence of globally competitive firms such as Ten-cent, Alibaba, and Haier. Third, digita- lization and globalization enhance the role of entrepreneurial talent. Fourth, cities will assume a large role in cultivating entrepreneurial ecosystems.

Of all the developments propelling global business today, the one that is transforming the international manager’s agenda more than any other is the rapid advance in IT. The explosive growth of IT is both a cause and an effect of globalization. Recently, however, large Indian IT companies such as Infosys Limited and the Tata Group were hiring their staff in the United States. Infosys, for example, has proclaimed on its website a “national commitment to hire 10,000 American workers.”34 The role of IT in international management is discussed later in this chapter, in the section titled “The Technological Environment.”

Regional Trading Blocs The recent departure of the UK from the European Union draws attention to economic agree- ments between countries, or regional economic groups, which refer to “agreements among countries in a geographic region to reduce and ultimately remove tariff and nontariff barriers to the free flow of goods, services and factors of production between each other.”35 There are different types of regional economic groups, each of which is based on the level of integration between the member countries.

The most basic form of regional economic group is the free trade area (FTA), which in- volves an agreement between countries that commits to removing all barriers to trade of goods and services among the member countries. However, each member country is permitted to

12 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

negotiate independently trade policies with nonmember countries. Examples of FTAs include the European Free Trade Association, which currently consists of Iceland, Norway, Liechtenstein, and Switzerland, and the North American Free Trade Agreement between Canada, Mexico, and the United States (subsequently replaced by the USMCA [United States, Mexico, Canada Agreement]).

A customs union entails a deeper level of economic integration. It refers to an agreement between countries that involves the removal of all barriers to the free flow of goods and ser- vices between member countries and establishment of a common trade policy with nonmember countries. An example of a customs union is the Andean Community, which consists of Bolivia, Columbia, Ecuador, and Peru.

The next step toward economic integration is a common market, which refers to an agree- ment between a group of countries that commit to the removal of all barriers to the free flow of goods and services, as well as factors of production—such as the free movement of labor and capital between member countries. Moreover, common market member countries pursue a common external trade policy. A current example of a common market is Mercosur, which has consisted of Argentina, Brazil, Paraguay, Uruguay, and Venezuela. However, Venezuela has ex- perienced difficulty in getting its membership ratified.

An economic union describes a deeper level of economic integration between member countries compared with a common market, customs union, and free trade area. In an economic union, member countries commit to the removal of all barriers to the free flow of goods, services, and factors of production between member countries. Moreover, member countries may adopt a common currency, establish uniform tax rates with member countries, and establish common trade policy with nonmember countries. The most recognized example of an economic union is the European Union. However, some EU member countries have adopted a common currency (the Euro), but other member countries have retained their own currencies.

The deepest level of economic integration is the political union, which consists of a central political system that directs and oversees economic, social, and foreign policies of the member states. An example of a political union is the United States.

Low Economic Integration

Free Trade Area Customs Union Common Market Economic Union Political Union

High Economic Integration

Over time, economic groups may evolve. Some of these economic groups begin as free trade areas and then pursue deeper levels of integration over time. In addition, the members of the eco- nomic groups can change over time. For instance, some economic groups may add new member countries. However, there are instances in which member countries have been removed from the economic group for violating covenants and member countries have left voluntarily.

BENEFITS AND COSTS OF ECONOMIC INTEGRATION One of the principal reasons to form an economic group is trade creation, which arises when high-cost domestic producers are replaced by lower-cost producers from other member coun- tries. Moreover, it can reduce political risk between member countries, while enhancing the political strength of the economic group. Lastly, additional trade can increase job opportuni- ties in the member countries. However, in light of these proposed benefits, there are some potential costs to economic integration. For example, it is conceivable to incur trade diversion, which arises when lower-cost producers from nonmember countries are replaced by higher- cost producers from member countries. Another concern with economic groups is the loss of sovereignty. For instance, some member countries may relinquish some monetary policy in economic unions. Also, expansion of an economic group may result in dilution of voting rights of existing member countries. Lastly, some member countries may contribute more than oth- ers, which can lead to concerns of inequity and even abandonment of the economic group if the inequity becomes excessive.

CHAPTER 1 • ASSESSING THE ENVIRONMENT 13

THE EUROPEAN UNION In a watershed event, British citizens voted to leave the EU in its 2016 United Kingdom European Union membership referendum. As of 2020 the European Union (EU) will comprise a 27-nation unified borderless market, as shown in Map 1-2. The political fallout of Brexit has created a cloud of uncertainty pertaining to regulations, labor mobility, and trade between the UK and the rest of the EU member countries.

Total exports of goods between EU member countries steadily increased from 2003 to 2008, followed by a significant drop in exports through mid-2009. Following the global recession, ex- ports between member countries began to increase, surpassing prerecession levels in 2011 and continuing the export trend through July 2018.36 Countries around the world trade with the EU countries. Among non–EU members, the United States, China, Switzerland, Russia, and Turkey exhibited the highest trade with EU member countries in 2018.37 The uncertainty as to what will

Cities over 1 million Capitals over 1 million

Countries members in EU Countries not members in EU

MONTENEGRO

CROATIA SERBIABOSNIA-

HERZEGOVINA

MACEDONIA ALBANIA

KOSOVO

Seville

Madrid

Valencia

Barcelona

Valletta

Rome

Turin Milan

Frankfurt

Warsaw Amsterdam

Dublin

Bonn Cologne

Hamburg

Copenhagen

Oslo

Reykjavik

Helsinki

Stockholm

Murmansk

Bern Zurich

Athens

Naples

Palermo

Lisbon

Bordeaux

Paris

Marseille

Geneva

ViennaMunich

Berlin

Brussels

The Hague

S P A I N

F R A N C E

NORWAY

SWEDEN

F I N L A N D

G E R M A N Y P O L A N D

ESTONIA

LATVIA

LITHUANIA

HUNGARY

ANDORRA MONACO

LIECH.

LUX. BELGIUM

N. IRELAND

ICELAND

IRELAND NETH.

DENMARK

SWITZ.

AUSTRIA

MALTA

GREECE

CYPRUS

ITALY

PORTUGAL

SICILY

ORKNEY ISLANDS

SHETLAND ISLANDS (U.K.)

FAEROE ISLANDS (Denmark)

SARDINIA

CORSICA

CRETE

Strait of Gibraltar

M e d i t e r r a n e a n S e a

Ionian Sea

Bay of Biscay

N o r t h S e a

Baltic Sea

N o r w e g i a n S e a

A r c t i c O c e a n

A t l a n t i c O c e a n

A egean Sea

Adriat ic Sea

D e n m a r k S t r a i t

Prague CZECH

REPUBLIC SLOVAKIA

ROMANIA

BULGARIA

SLOVENIA

Budapest Bucharest

Sofia

Skopje Tirana

Zagreb

Sarajevo

Belgrade

Podgorica

Pristina

EdinburghGlasgow SCOTLAND

Birmingham

London

ENGLAND

UNITED KINGDOM

WALES

MAP 1-2 European Union

14 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

result from Brexit has led some multinational firms to rethink locating operations in the U.K. versus other EU member countries.

The importance of Germany to the eurozone is clear, but it is also a two-way street. In 2017, Germany exported the most goods to other EU member countries. From 2003 to 2017, Germany had a 4 percent annual growth rate in exports to other EU member countries. Moreover, it is among the top three trading partners of 26 EU member countries.38 The strength of the German manufacturing model is evidenced by the fact that, although Germany has about a quarter of the population of the United States, and a quarter of the U.S. GDP (gross domestic product), it exports more than the United States.39 Germans were concerned, however, that the need to help prop up weaker economies in the eurozone, such as Greece, would dilute their economic strength.

In spite of those problems, the World Economic Forum’s 2018 Global Competitiveness Index (GCI) shows that six out of the top ten countries are in Europe (see Table 1-2).40 The United States’ rank rose from 3rd to 1st in three years, interestingly. The GCI is based on 12 pillars of competitiveness that provide attractive conditions and incentives for both local and foreign companies to do business there.41 However, the elimination of internal tariffs and cus- toms, as well as financial and commercial barriers, has not eliminated national pride. Although most people in Europe are thought of simply as Europeans, national identities prevail as they still think of themselves first as British, French, Danish, Italian, and so on, and are wary of giving too much power to centralized institutions or of giving up their national culture. The continuing enlargement of the EU to include many less prosperous countries, such as Croatia in 2013, has also promoted divisions among the older members.42 In addition, continuing eurozone problems has prompted skepticism of any further enlargement.

Global managers face two major tasks. One is strategic: how firms outside of Europe can deal with the implications of the EU and of what some have called a Fortress Europe—that is, a market giving preference to insiders. Although firms must have a pan-European business strategy, they must realize that suitable market entry strategies need to be considered on a country-by-country basis.

Although the EU continues to move in the direction of a Single Market, some of Europe’s most prominent industrial leaders are working together to invest more in job creation and innova- tion at home. One of the leaders of this initiative is Mr. Carl-Henric Svanberg, chairman of the European Round Table of Industrialists and head of Swedish truck manufacturer Volvo. Stressing the importance of a competitive home base, Mr. Svanberg stated, “We as companies, even though we are global, will not be successful if the countries we come from are not successful.” 43

The other task is cultural: how to deal effectively with multiple sets of national cultures, traditions, and customs within Europe such as differing attitudes about how much time should be spent on work versus leisure activities.

ASIA It would be difficult to overstate the power of the fundamental drivers of Asian growth. First, Asian economies have been enjoying a remarkable period of “productivity catch-up,” adopting modern technologies, industrial practices, and ways of organizing—in some cases leapfrog- ging Western competitors.44

TABLE 1-2 2018 Global Competitiveness Index 45

2014–2015 Rank Country 2018 Rank

3 United States 1

2 Singapore 2

5 Germany 3

1 Switzerland 4

6 Japan 5

8 Netherlands 6

7 Hong Kong (SAR) 7

9 United Kingdom 8

10 Sweden 9

13 Denmark 10

Source: Based on selected data from www.worldeconomicforum.org.

CHAPTER 1 • ASSESSING THE ENVIRONMENT 15

Manufacturing, in particular, has propelled Asia’s emerging markets, helping to fuel the demand for materials and supplies from the developed world and lending hope for a quick global economic re- covery.46 Japan and the Four Tigers—Singapore, Hong Kong, Taiwan, and South Korea—have pro- vided most of the capital and expertise for Asia’s developing countries. Now the focus is on China’s role in driving closer integration in the region through its rapidly growing exports. Japan continues to negotiate trade agreements with its neighbors; China is negotiating with the entire thirteen-member Association of Southeast Asian Nations (ASEAN), whereas ASEAN has “virtually established” its own free trade area, that is the ASEAN Free Trade Area (AFTA).47 The following “Under the Lens” examines government initiatives to spur competitiveness in Southeast Asia.

UNDER THE LENS South-East Asia Wakes Up to Power of Corporate Competition 48

When Mahathir Mohamad reprised his role as Malaysia’s prime minister in May [2018], he brought along a lengthy list of promises. Vows to root out corruption and review bloated China-backed infrastructure projects dominated the headlines. But Mr Mahathir is also

following up on a less-publicised, but no less ambitious, pledge. He wants to break up monopolies. Governments across south-east Asia are with him, especially after a loud wake-up call earlier this

year. The regional merger of ride-hailing groups Grab and Uber made it clear that authorities were ill-equipped to keep up with today’s fast-acting tech companies.

Countries are recognising that monopolies and anticompetitive practices threaten to undermine trade deals and hard-won economic integration. If they level the playing field, though, it could go a long way to making the bloc a more attractive place to do business.

Mr Mahathir set things in motion immediately after his stunning victory. In May [2018], his new government ordered state-affiliated Telekom Malaysia to share its vast cable ducts for high-speed broadband. This will save new operators the expense of laying underground fibre optic networks, and save the government the burden of processing approvals. . . .

If there were any doubts about Mr Mahathir’s determination, the government removed them in mid-October with a review of a five-year economic plan drawn up by his predecessor, Najib Razak.

The plan runs through 2020. “In the remaining period, focus will be given [to] reviewing and streamlining the role of state-owned enterprises and monopoly entities to meet the objectives of enhancing market efficiency and fair competition,” the government said in a report. In the Philippines, President Rodrigo Duterte is making similar moves. Aiming to break the duopoly in the telecom sec- tor, the government opened bidding for a third operating license on November 7. A few weeks before he took office in 2016, Mr Duterte complained about the country’s poor internet connections. “If you cannot improve on the services . . . I would really agree to the coming in of foreign players,” he said, adding that the same applied to energy. At least 10 potential bidders applied for the chance to take on PLDT, in which Japan’s NTT Group and Indonesia’s Salim Group are key shareholders, and Globe Telecom, a joint venture between Singapore Telecommunications and local conglomerate Ayala. An alli- ance between China Telecom and Davao-based tycoon Dennis Uy, an ally of Mr Duterte, emerged as the sole qualified bidder. The process is part of a broader effort to promote competition in the Philippines, led by an assertive new antitrust authority established in 2016.

Governments are focusing on competition to deliver “more economic benefits to their citizens”, said Cassey Lee, senior fellow at the ISEAS-Yusof Ishak Institute and an expert on the region’s com- petition laws. “Cross-border barriers to trade can be lowered through greater Asean integration, but anti-competitive conduct can reduce such benefits to citizens.” Economically, south-east Asia may be one of the world’s fastest-growing regions, but it lags behind in terms of ensuring fair play in business. Singapore offers the most level playing field of any country worldwide, according to the World Economic Forum. After the city-state, there is a drop-off to Malaysia in 24th place. The Philippines ranks 60th.

Vietnam, at 102nd place, has a new competition law set to take effect next July. The legislation will give the government authority over offshore business endeavours if there are implications for the domestic market, an upgrade prompted by cross-border acquisitions. Cambodia, the only Asean member that does not have a competition law, is in the process of establishing one.

The problem is that, although south-east Asian countries are changing their ways, the business landscape is changing even faster, particularly in the tech sector. The deal between Singapore’s Grab and the US-based Uber showed how quickly the authorities can be overwhelmed.

(Continued )

16 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

On March 26 [2018], Grab and Uber announced they were merging their south-east Asian operations. Grab would take over Uber’s regional business. In exchange, Uber would get a stake in Grab. The companies moved ahead without notifying competition authorities in advance. After all, it was not mandatory to do so.

Grab and Uber “proceeded to complete the transaction on March 26 and began the transfer of the acquired assets immediately, thus rendering it practically impossible to restore the status quo,” the Competition and Consumer Commission of Singapore, or CCCS, pointed out later.

Since Uber runs a digital service with few physical assets, pulling out of the region was a breeze. Just two weeks after the announcement, Uber ended its ride-hailing services in six of the eight countries where it operated, leaving Grab as the dominant player in most markets.

The result? Fares rose while incentives for drivers were scaled back. South-east Asian authorities gained valuable experience as they scurried to respond, suggested Toh

Han Li, chief executive of the CCCS and this year’s chair for Asean’s competition agencies group. The Grab-Uber case “can be considered as the first significant case involving co-operation among Asean competition authorities,” he said.

He noted that Singapore, the Philippines, Vietnam and Malaysia exchanged information and helped one another assess the effects of the deal. . . .

After only six years in business, Grab operates in eight south-east Asian countries and its app has been downloaded more than 100m times. Digital technology has made this sort of rapid expansion possible, which means cases such as the Grab-Uber merger are bound to increase.

Asean itself, as a bloc, recognised the significance of competition and cross-border mergers and ac- quisitions in 2015, when it compiled a blueprint for 2025. Member states aimed to foster a “competition- aware” region and to establish enforcement co-operation agreements.

Yet it took the Grab-Uber case to prompt meaningful action. On October 9, the competition agencies of Asean members established a regional enforcers’

network to share information and co-ordinate responses. The stakes are high. The Asean economy has been growing at an annual rate of about 5 per cent

over the past few years, but the pace may slow as markets mature. An effective framework for ensuring competition would help the region attract investors and maintain momentum.

Making that framework function properly is no easy task. South-east Asia is not Europe, and each country has its own legal structure.

“Asean is an intergovernmental organisation and member states retain full sovereignty over cross-border competition cases, unlike the European Union, which has powers to decide on [such] cases,” said Mr Toh at the CCCS.

. . . “The countries need to come together and take advantage of the regional market in order to compete

more effectively with the larger economies in Asia,” he said.

Source: © The FInancial Times Limited 2018.

CHINA

The Chinese market offers big opportunities for foreign investment, but you must learn to tolerate ambiguity.49

China has enjoyed success as an export powerhouse, a status built on its strengths of low costs and a constant flow of capital. Its tremendous growth, although now slowing, is further dis- cussed in the following feature, “Comparative Management in Focus: China Loses Its Allure.”

Comparative Management in Focus China Loses Its Allure 50

In 2018, China’s official GDP growth rate was 6.4 percent. Nevertheless, the country is facing its slowest rate of economic growth in 30 years. A combination of forces, from flagging demand for exports to a sluggish property market, threaten to weigh down growth this year.51 Beijing’s plan for

managing the slowdown in growth this year has been a stronger-than-expected burst of fiscal stimulus.

CHAPTER 1 • ASSESSING THE ENVIRONMENT 17

Central leadership has gone on a Rmb1.2tn ($179bn) issuance spree of local government bonds in the first three months of the year, most of which will be spent on infrastructure projects. A Brookings Institution study suggests the economic slowdown may be more severe than previously acknowledged by the Chinese government.52 Indeed, the 2019 Brookings Institution study revealed that the official economic growth rate may have been overstated by approximately 2 percentage points per year since 2008.53

In 2018, China became the largest trading partner with the United States, passing Canada.54 It is the world’s second largest recipient of FDI after the United States—investment largely coming from MNCs. China is now a hybrid market-driven economy—driven by competition, capital, and entre- preneurship. As such, it is still attractive to companies wanting a piece of the action in this rapidly growing economy. In fact, more than 400 of the Fortune Global 500 companies are operating there.55

In spite of the economic slowdown, Chinese consumers are spending more on personal luxury goods. Young Chinese consumers associate high-end designer brands with social capital, not just a prod- uct to wear or use. According to a 2019 McKinsey & Company report on Chinese luxury goods, roughly 50 percent of post-1990 Chinese consumers made their first luxury good purchase within the past year.56 Indeed, Chinese consumers are expected to increase luxury good spending by 6 percent per year from 2020 to 2025, while the rest of the world is expected to achieve only a 2 percent growth rate.57

SMEs are also active and gaining ground in this complex country, but all companies should do their homework first, as advised by the Foreign Commercial Service (FCS), which is part of the U.S. Department of Commerce’s International Trade Administration:

FCS counsels American companies that to be a success in China, they must thoroughly inves- tigate the market, take heed of product standards, pre-qualify potential business partners and craft contracts that assure payment and minimize misunderstandings between the parties.58

With more than 1.4 billion people,59 China benefits greatly from its large and growing foreign and domestic market size, which provides significant economies of scale. Innovation is becoming an- other competitive advantage with rising company spending on R&D coupled with strong university– industry research collaboration and an increasing rate of patenting. In addition, China has the world’s largest foreign-exchange reserves, even though their annual foreign exchange reserves declined in 2018—the third time in four years—as the yuan faced strong selling pressure from the softening economy and rising trade tensions with the United States.60 Not to be overlooked is the fact that the Chinese government often subsidizes and supports its manufacturing base and favors its local indus- tries and companies. Those factors, along with rising costs of labor and shipping, mean that foreign firms are finding it increasingly difficult to do well there.

China’s vast population of low-wage workers, with continued large numbers moving to the cities to work, as well as its massive consumer market potential, have long attracted offshoring of manufacturing from companies around the world. It is this low-cost manufacturing base that has contributed greatly to its exports and growth, a major factor in China’s uniqueness, making it the world’s largest manufacturer, second-largest consumer, largest saver, and probably the second-largest military spender. China has the world’s largest shipped goods port capacity. For these reasons, China would seem well positioned to expand globally as long as global demand for its products and manufacturing continues. In all, China is still a developing country, with considerable differences between urban and rural areas making for quite varied markets. The great diversity is indicated by China’s eight major languages, several dialects, and several other minority languages. Mandarin is the main language in the north, Cantonese in the south, in particular in Hong Kong. Each language reflects its own history and culture and, therefore, markets and economies. However, the fact remains that, in virtually all industrial sectors, state firms play a signifi- cant or dominant role. In addition, central, regional, and local political influences create unpredictability for businesses, as do the arbitrary legal systems, suspect data, and underdeveloped infrastructure.61 The FCS cautions investors to beware of the following factors:

• China’s legal and regulatory system is arbitrary. Protection of intellectual property rights is critical.

• In spite of its progress toward a market economy, China still leans toward protecting its local firms, especially the state-owned ones, from imports, and promotes their exports.

• Political goals and agendas often take precedence over commercially based decisions.

• Discrepancies of business practices make it difficult for SMEs with limited budgets to get started. The FCS advises those firms to start with fostering a sales network through regional agents or distributors who can assist in keeping track of policy and regulation updates and who have local contacts.62

How to negotiate with the Chinese is the subject of a further feature in Chapter 5. Presented here are ten basic tips for doing business in China, published by Mia Doucet in CanadExport.

(Continued )

18 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

TEN TIPS FOR DOING BUSINESS IN CHINA63

When doing business in China, the ability to navigate cross-cultural issues is just as important as the goods and services you bring to the marketplace. This is true whether your company is just now considering the China market, recently gained its first sale, or maintains an in-country presence.

Tip #1 Never underestimate the importance of existing connections. You need to be dealing with a Chinese person of influence. If that person feels you are trustworthy enough, and if they can get their network of contacts to trust you, there is a chance you will succeed. Asians want to do business with people they trust. But there is no real trust unless a person is in their circle. At first, they don’t know if you will be a good partner. Show respect by keeping some distance. Focus on building the relation- ship before talking business. Do not go for big profit on your first contract.

Tip #2 To protect your intellectual property, use the same due diligence you would in the West.

Tip #3 Never pressure your Asian colleagues for a decision. To speed up the decision process, slow down. Start from the beginning and work through to a solution in a logical, step-by-step fashion. Then stand your ground.

Tip #4 The negotiation process will be anything but smooth. Your best strategy is a walk-away men- tality. You have to go in trying not to make the deal. Explain your position in clear, concise words. State your terms clearly and respectfully. Then be prepared to walk away if your terms are not met.

Tip #5 Respect face. Never argue or voice a difference of opinion with anyone—even a member of your own team. Never make the other person wrong. Never say “no” directly, as that is considered rude and arrogant.

Tip #6 Because of language differences, account for potential miscommunications and misunder- standings with your Chinese business associate. Their smiles and nods have more to do with saving face than getting your meaning. Talk in short sentences. Listen more than you speak. Pause between sentences. Find four or five easy ways to say the same thing. Never ask a question that can be an- swered with a simple yes. Avoid all slang. Skip humor altogether.

Tip #7 Manage the way you present written information. Document everything in writing and in precise detail. Present your ideas in stages. Write clearly, using plain English text. In order to appeal to Asian visual bias, use sketches, charts, and diagrams.

Tip #8 Prepare for every interaction. Do not count on your ability to wing it. A lack of preparedness can cause loss of face and trust. Do not give or expect to receive partial answers from your Chinese colleagues, as that is considered offensive.

Tip #9 Make sure your facts are 100 percent accurate in every detail, or you will lose credibility. Do not present an idea or theory that has not been fully researched, proven, or studied beforehand. If you make a mistake, you are not to be trusted.

Tip #10 Everyone on your team needs to know how to avoid costly gaffes.

Most of us are not by nature sensitive to the differences in culture—we have to be taught. Time- honored passive resistance could bring your company to its knees. It makes sense to teach people the cross-cultural factors that have a direct impact on your profits.

INDIA

As the world’s largest democracy and the third-largest economy, it is clear that there is much opportunity for foreign businesses in India with its population of 1.4 billion and great potential for continued growth.64 However, with its slow pace of reform and continuing corruption cases, India is losing opportunities to other emerging markets that are more investor friendly. India ranked 11th on the A. T. Kearney 2018 FDI Confidence Index, as shown in Exhibit 1-1; this was down from 2nd in the 2012–2013 Index and 7th in the 2014–2015 ranking. Nevertheless, growth for fiscal year 2018–2019 was estimated at 7.3 percent, which is up from the 6.7 percent growth rate in the previous year. India is one of the fastest-growing economies in the world, capturing about 15 percent of worldwide economic growth. Moreover, India’s robust economy has elevated millions of people out of poverty.65

CHAPTER 1 • ASSESSING THE ENVIRONMENT 19

Whereas China is known as the world’s factory, India has become known as the world’s services supplier, providing highly skilled and educated workers to foreign companies. India is the world’s leader for outsourced back-office services and, increasingly, for high-tech ser- vices, with outsourcing firms such as Infosys becoming global giants themselves. India is the fastest-growing free-market democracy, yet its biggest hindrance to growth, in particular for the manufacturing sector, remains its poor infrastructure, with both local and foreign companies experiencing traffic gridlocks and power outages. However, much of India’s growth has been in technology industries that have not been affected by poor roads, compared with China’s manufacturing-based growth. Nevertheless, optimism abounds in India about the country’s prospects. The expanding middle class of more than 300 million people is fueling demand-led growth. Increasing deregulation is enabling whole sectors to be competitive. Here, too, there is considerable diversity in markets, incomes, and economies; there are 15 major languages and more than 1,600 dialects. Yet India’s rise is largely fueled by family firms that often maintain pyramid structures and grow vertically out of convenience because of problems with red tape, erratic supply chains, and infrastructure.

Adaptable, ingenious and combustible, the family firm remains the backbone of India’s private sector, not an anachronism. . . . The oldest, such as Aditya Birla, Tata and Bajaj, stretch back over three or more generations and are wily survivors.66

Even so, approximately 40 percent of the profits of India’s 100 biggest listed firms come from state-controlled firms; an estimated two-thirds of production from India’s finance, energy, and natural resources firms is state controlled, despite India’s moves toward further privatization.67

A common comparison between China and India notes that China’s economy grows be- cause of its government, whereas India’s economy grows in spite of it. However, with its 1.4 billion people, many are still mired in poverty, although the poverty rate is half that of 20 years ago. Although India’s large upcoming youth bulge—compared with China—will bring a wave of workers for the economy, it will also bring many more mouths to feed. (India has the largest working-age population in the world, with about one-third under age 25 and one-third under age 15, whereas China is experiencing the results of its one-child policy.)

In many areas in India, the economic transformation is startling, with growth fed by firms like the Tata Group—a global conglomerate producing everything from cars and steel to soft- ware and consulting systems. Further discussion of doing business in India is included in Chapter 4.

SOUTH ASIA

In South Asia, an agreement was signed in 1985 to form the South Asia Association of Regional Cooperation (SAARC), a free-trade pact among seven South Asian nations: Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, and Sri Lanka. Afghanistan was invited to become a mem- ber in 2005.68 The agreement was to lower tariffs to 25 percent within three to five years and to eliminate them within seven years. The member nations comprise more than 1.5 billion people, with an estimated one-third of them living in poverty. Officials in those countries hope to follow the success of the other Asian regional bloc, the ASEAN.

OCEANIA

Although not regarded as part of Southeast Asia but, rather, of the region called Oceania, which also includes New Zealand and neighboring islands in the Pacific Ocean, Australia did sign an ASEAN friendship treaty with Southeast Asia. Australia is one of the richest countries in the world, with the mining industry responsible for attracting about a third of its investment inflows. More than 50 percent of its exports go to East Asia, with more transported through the region to markets around the world. Australia ranked 8th in the 2018 FDI Confidence Index—unchanged from the 2014–2015 ranking. However, New Zealand entered the top 20 at 14th in the 2018 FDI Confidence Index shown in Exhibit 1-1.

20 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

THE AMERICAS FROM NAFTA TO USMCA (UNITED STATES-MExICO-CANADA FREE TRADE AGREEMENT)

The goal of the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico was to bring faster growth, more jobs, better working conditions, and a cleaner environment for all as a result of increased exports and trade. This trading bloc—one America—has 470 million consumers. Canada–United States trade is the largest bilateral flow between two countries. In addition, the vast majority—around 84 percent—of both Canadian and Mexican exports goes to the United States. Mexico is the United States’ third largest trade partner (after Canada and China) and second largest export market for U.S. products.

From Mexico’s perspective, the country’s exports have exploded under NAFTA; U.S.– Mexico bilateral trade increased from $88 billion in 1993, the year prior to the implementation of NAFTA, to $394 billion in 2010, and to $612 billion in 2018.69 However, Mexico’s dependence on the United States for its exports—NAFTA’s greatest success—was shown to be a liability in the global economic downturn as Mexico felt the full brunt of declining consumption in the United States. The auto industry, for example, which has flourished under NAFTA, ground to a virtual standstill at the time of the global recession in 2009.70 However, with the U.S. economy strong, the 2019 FDI Confidence Index showed the United States atop the rankings, with Canada slipping from 2nd to 3rd place, and Mexico dropping to 25th.71 Recent increases in violence among drug gangs, especially in border areas, have created insecurity for businesspeople.

Mexican trade policy is among the most open in the world, and the country has become an important exporting and importing power. Although the Mexican economic cycles depend on the American economy, it has signed 10 trade agreements with 45 nations, putting roughly 90 per- cent of its trade under free trade regulations.72 In addition, it is estimated that 40 percent of the content of products from Mexico reimported to the United States originated in the United States as well as 25 percent from Canada.73

In 2018, the United States, Mexico, and Canada reached an agreement—called the United States- Mexico-Canada Agreement (USMCA)—following their renegotiations of the North American Free Trade Agreement (NAFTA). After many delays, it was finally approved by the U.S. Congress.74

USMCA is a great deal for all three countries, solves the many deficiencies and mistakes in NAFTA, greatly opens markets to our farmers and manufacturers, reduces trade barriers to the U.S. and will bring all three Great Nations together in competition with the rest of the world.75

U.S. President Donald J. Trump

MERCOSUR

This is the fourth largest trading bloc after the EU, NAFTA, and ASEAN. Established in 1991, it comprises the original parties—Brazil, Argentina, Paraguay, and Uruguay. Venezuela joined in 2012, but its membership has been indefinitely suspended since 2016.76 Mercosur showed a tenfold increase in trade among member countries during the 1990s. Several South American countries have been granted associate membership: Bolivia, Chile, Colombia, Ecuador, Guyana, Peru, and Suriname. These countries receive reduced tariff in trade with member countries but lack full voting rights and free access to their respective markets. Bolivia was invited to join as a full member in 2012. Its accession from associate to full member is pending.77

BRAZIL

The Federal Republic of Brazil is Latin America’s biggest economy and the fifth largest country in the world in terms of land mass and population, with about 209 million people. According to the U.S. Department of Commerce, Brazil is the seventh largest economy in the world. Bolstered by demand from China and elsewhere for its raw materials, strong domestic demand, and a growing middle class, Brazil ranked 25th in the 2018 FDI Confidence Index, a sharp drop from its 5th place ranking in the 2014–2015 ranking (see Exhibit 1-1).

Brazil entered a severe economic recession in 2015–2016, in which real GDP dropped by over 3 percent in each year. However, the economy has begun to rebound as real GDP grew by 1 percent in 2017 and 1.1 percent in 2018. Brazil’s central bank has forecasted 2 percent growth for 2019.78 In recent years, Brazil was hampered by corruption scandals that implicated a large

CHAPTER 1 • ASSESSING THE ENVIRONMENT 21

number of Brazil’s corporate establishment.79 Brazil business environment is plagued by “[a] mind-bending tax system, regulatory uncertainty, crumbling infrastructure and widespread inef- ficiency.”80 These systemic problems have contributed to Brazil being ranked only 109th out of 190 countries in terms of ease of doing business according to a World Bank survey.81 Further discussion regarding doing business in Brazil is included in Chapter 3.

CAFTA-DR

The Dominican Republic-Central America FTA (CAFTA-DR) is the first free-trade agreement between the United States and Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic. Collectively, the CAFTA member countries represent the 16th largest U.S. goods trading partner. Trade between the United States and the six CAFTA-DR partners has increased more than 71 percent since inception, from $35 billion in 2005 to $60 billion in 2013. However, U.S.-CAFTA trade dropped to $53 billion in 2015. (U.S. exports to the CAFTA-DR countries totaled $29 billion; imports totaled $24 billion.)82

Other recent agreements include three trade agreements, between the United States and South Korea, Colombia, and Panama, all passed on October 12, 2011. As of 2019, there are 20 free-trade agreements with the United States.83

Other Regions in the World Sweeping political, economic, and social changes around the world present new challenges to global managers. The move toward privatization has had an enormous influence on the world economy. Economic freedom is a critical factor in the relative wealth of nations.

One of the most striking changes today is that most nations have suddenly begun to develop decentralized, free-market systems to manage a global economy of intense competition, the com- plexity of high-tech industrialization, and an awakening hunger for freedom.

THE RUSSIAN FEDERATION Foreign investment in Russia, as well as its consumers’ climbing confidence and affluence, did bode well for the economy—until the illegal annexation of Crimea (Ukraine) in 2014 and ag- gression toward the Ukrainian navy in 2018, which caused a considerable downturn in confi- dence and in the economy.84 The rate of inflation soared to 11.4 percent as the ruble lost nearly half its value over the 2014–2015 period. GDP contracted 2.8 percent in 2015 and 0.2 percent in 2016, followed by modest growth of 1.6 percent in 2017.85 According to the World Economic Forum’s 2018 Global Competitiveness Report, the Russian Federation was ranked 43rd in the 2018 global competitive rankings, which is up two slots from 2017. Its global competitiveness has benefited from having a large market size and technological adoption, but is hamstrung by its lack of transparency, institutions, and relatively weak entrepreneurial climate.86

Membership in the WTO in 2011 promised additional trade liberalization. Until recently, Russia was regarded as more politically stable. New land, legal, and labor codes have encouraged foreign firms to take advantage of opportunities in that immense area, in particular the vast natural resources and the well-educated population of 145 million. Moscow, in particular, is teeming with new con- struction sites, high-end cars, and new restaurants. Export opportunities abound in Russia, with a growing middle class and vast infrastructure needs. However, corruption and government interfer- ence persist, along with excessive regulations, weak rule of law, and infrastructure problems.

THE MIDDLE EAST The Middle East has been experiencing transition. In the past, Middle Eastern governments in many countries across the region expected (or required) citizens to sacrifice a certain degree of individual economic prosperity in return for stability and security. This arrangement was made feasible by exports of natural resources and foreign aid. It led to government inefficiencies, per- vasive subsidies, and government control over large parts of the economy. Unfortunately this government-driven economic approach has proven unsustainable.

Egypt, where the political landscape has been redrawn in recent years, is beginning to attract interest from Gulf, Western, and Asian international investors. “I think the main theme when considering whether to enter these markets is the potential for long-term growth that will ulti- mately lead to a more positive outcome.”87

22 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

Although a few countries have engaged in real economic reform and increased investments, the aggregate competitiveness of the Arab world economies remains stagnant over the past de- cade. For example, the United Arab Emirates and Qatar ranked 17 and 25 out of 137 countries on the 2018 Global Competitiveness Index.88

Keys to the region’s economic progress are becoming less dependent on natural resources and increasing the role of the private sector. However, obstacles include a weak educational sys- tem, an underdeveloped financial system, and poor governance quality.89

DEVELOPING ECONOMIES Developing economies are characterized by change that has come about more slowly as they struggle with low gross national product (GNP) and low per capita income as well as the burdens of large, relatively unskilled populations and high international debt. Their economic situations and the often unacceptable level of government intervention discourage the foreign investment they need. Many countries in Central and South America, the Middle East, and Africa desper- ately hope to attract foreign investment to stimulate economic growth.

THE AFRICAN UNION (AU) As of September 2018, the AU comprises the 55 African countries and was formed from the original Organization of African Unity (OAU) primarily to deal with political issues.90 According to the International Monetary Fund (IMF), seven of the world’s ten fastest growing economies are in Africa. However, there continue to be many major problems in the region. Unfortunately, Africa has received little interest from most of the world’s investors, although it receives increasing investment from companies in South Africa, which has the region’s biggest economy. However, trade between China and Africa has risen from $10 billion in 2000 to over $200 billion in 2018. Specifically, China’s exports to Africa reached US$104.9 billion (a 10.8 percent increase over 2017) and China’s imports from Africa were US$99.3 billion, up 30.8 percent over 2017.91

China’s infrastructure projects in Africa—for example, dams, railways, ports, and telecommunications networks—have drawn considerable attention from the international com- munity. From 2000 to 2014, the stock of Chinese investment in Africa went from 2 percent to 55 percent of U.S. investment levels. Also, China’s appetite for commodities led to a surge in FDI in Africa.92

Chinese involvement in Africa is not just about state-driven efforts. A just as large, if not larger, component is these private enterprises, which are more job-intensive, which localise quicker and which have a much larger economic and social impact.

Irene Yuan Sun, associate partner at McKinsey & Co.

Nevertheless, widespread unemployment and extreme poverty prevail on the continent and remind businesspeople of the tremendous challenges that remain. Africa is featured in a “Comparative Management in Focus” in Chapter 6.

SOUTH AFRICA

The South African economy grew steadily since 1998 amid a more stable political environment since the defeat of apartheid. However, its annual average GDP growth has slowed—hovering around 1 percent from 2016 through 2018.93 This is the longest economic upswing in the coun- try’s history, although unemployment remains very high.94 South Africa is a country of roughly 57.7 million people that is rich in diverse cultures, people, and natural resources. “Enjoying remarkable macroeconomic stability and a pro-business environment, South Africa is a logical and attractive choice for U.S. companies to enter the African continent.”95 In fact, the 2014–2015 FDI Confidence Index by A. T. Kearney ranked South Africa thirteenth. In 2017, it dropped to 17th, and in 2018, it was unranked.96

For firms willing to take the economic and political risks, developing economies offer con- siderable potential for international business. Assessing the risk–return trade-offs and keeping up with political developments in these developing countries are two of the many demands facing international managers.

CHAPTER 1 • ASSESSING THE ENVIRONMENT 23

The Global Manager’s Role Whatever your level of involvement, it is important to understand the global business environ- ment and its influence on the manager’s role. This complex role demands a contingency ap- proach to dynamic environments, each of which has its own unique requirements. Within the larger context of global trends and competition, the rules of the game for the global manager are set by each country (see Exhibit 1-2): its political and economic agenda, its technological status and level of development, its regulatory environment, its comparative and competitive advan- tages, and its cultural norms. The astute manager will analyze the new environment, anticipate how it may affect the future of the company, and then develop appropriate strategies and operat- ing styles. The manager will need to take into account the business practices and expectations of varying sets of suppliers, partners, customers, and local managers. These factors in the man- ager’s role are the subjects of the rest of this book.

THE POLITICAL AND ECONOMIC ENVIRONMENT Proactive, globally oriented firms maintain an up-to-date profile of the political and economic environment of the countries in which they maintain operations (or have plans for future in- vestment). Surveys of top executives around the world show that sustainability—economic, political, social, and environmental—has become a significant worldwide issue. Executives who recognize that fact are leading their companies to develop new policies and to invest in sustain- ability projects with the purpose of benefiting the environment as well as profitability.97 The opening profile provides a recent example of how political developments can create considerable uncertainty and therefore affect strategic decisions of local firms and multinational corporations. Among the strategic and operational risks global companies report, the top four were govern- ment regulation, country financial risks, currency risk, and political and social disturbances;

1-2. To develop an apprecia- tion for the ways in which political and economic factors and changes influ- ence the opportunities that companies face

Interdependence

• Ethics

• Sustainability

G lob

al

MNC–Host Country Interdependence

MEGA ENVIRONMENT Tre

nd s a

nd Fo

rce s Competition

Global

Subsidiary–Host

Economic

Technological Political

HOST-COUNTRY

Cu ltu

re Lo

ca l C

om pe

tit io

n ENVIRONMENT

OPERATING ENVIRONMENT

Functions and People

• Regulations • Culture

• Skills • Social Responsibility

ExHIBIT 1-2 An Open Systems Model

24 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

these were followed by a poor legal system; problems with suppliers, customers, or partners; ter- rorist attacks; and theft of intellectual property.98

From a separate survey by the Aon Risk Solutions Company, we can see the top ten risks as reported by 2,600 risk managers from 60 countries, giving us an overview of how concerns can change over time. The risks of economic slowdown, damage to reputation/brand, and ac- celeration of changes in market drivers were the top three risks facing organizations according to the 2019 Aon survey.

The Aon report noted that “investors seem to have had the wind knocked out of them by a series of incidents, each impacting the world economy’s ability to manage volatility.” Some of these incidents include the uncertainty surrounding Brexit, U.S. interest rates, and slowing economic growth in Europe, China, Japan, as well as many emerging markets. The report also identified geopolitical tensions—especially between the United States and China—as a driver of increased risk.99 That led the researchers to conclude that formal risk management using busi- ness analytical tools would be more useful than experience in identifying new risks. According to the 2019 Aon report, the top ten risks overall were:

• Economic slowdown

• Regulatory/legislative changes

• Increasing competition

• Damage to reputation/brand

• Business interruption

• Acceleration of changes in market factors

• Cyber security

• Commodity price risk

• Cash flow/liquidity risk

• Inability to innovate/satisfy customer needs.100

Regions view these risks differently. For example, cyber security is the top risk in North America; however, economic slowdown is the top risk in both Latin America and the Middle East. In Europe, acceleration of changes in market factors is most important, while in the Asia-Pacific region, damage to reputation/brand is considered the most important risk.

An additional important aspect of the political environment is the phenomenon of ethnicity— a driving force behind political instability around the world. In fact, many uprisings and conflicts that are thought to be political in nature are actually expressions of differences among ethnic groupings. Often, religious disputes lie at the heart of those differences. Managers must under- stand the ethnic and religious composition of the host country to anticipate problems of general instability as well as those of an operational nature, such as effects on the workforce, on produc- tion and access to raw materials, and on the market.

Political Risk Clearly, as evidenced by the 2011 Arab Spring uprisings, the 2014 annexation of the Crimean Peninsula by the Russian Federation, and the 2019 political unrest in Venezuela, major po- litical changes can affect the business environment and risk level almost overnight. As far as political risk is concerned, a survey—based on 211 countries and territories—by Aon Risk Solutions (the firm discussed earlier) found that the political risk level is rising in more coun- tries than it is declining. That conclusion was based on the level of exposure to factors such as currency inconvertibility and transfer; strikes, riots, and civil commotion; war; sovereign non- payment; political interference; supply chain interruption; and legal and regulatory risk.101 It is clear from the past that firms operating in some countries are exposed to political risks that can drastically affect them with little warning, as illustrated by the opening profile.

The managers of a global firm need to investigate the political risks to which they expose their company in certain countries—and the implications of those risks for the economic suc- cess of the firm. Political risks are any governmental action or politically motivated event that could adversely affect the long-run profitability or value of a firm. Like many countries in the world, certain countries in the Middle East have faced periods of instability in recent decades. As such, political risk heavily influences business decisions in unstable countries.

CHAPTER 1 • ASSESSING THE ENVIRONMENT 25

In unstable areas, multinational corporations weigh the risks of nationalization or expro- priation. Nationalization refers to the forced sale of an MNC’s assets to local buyers, with some compensation to the firm, perhaps leaving a minority ownership with the MNC.102 In April 2012, Argentina, under President Cristina Fernandez de Kerchner, announced plans to nationalize Repsol YPF, the Spanish oil company, taking a 51 percent stake in YPF, which accounts for a third of Argentina’s oil production.103 In retaliation, Spain announced that it would restrict imports of biodiesel from Argentina. In Venezuela, nationalization was a key policy of the Hugo Chavez regime. Over the past decade, the state seized farmers’ farms, food processing plants, and retailers’ supermarket chain stores. Nationalization is not the only driver of food shortages throughout Venezuela. Price controls have forced businesses to oper- ate at a loss or to cease operating. In fact, 75 percent of private businesses in Venezuela had discontinued as of 2018.104

Expropriation occurs when a local government seizes and provides inadequate compensa- tion for the foreign-owned assets of an MNC; when no compensation is provided, it is confisca- tion. In countries that have a proven history of stability and consistency, the risk of expropriation is relatively low; it is highest in countries that experience continuous political upheaval, violence, and change. An event that affects all foreign firms doing business in a country or region is called a macropolitical risk event. In many regions, terrorism poses a severe and random politi- cal risk to company personnel and assets and obviously can interrupt the conduct of business. According to Micklous, terrorism is “the use, or threat of use, of anxiety-inducing . . . violence for ideological or political purposes.”105 The increasing incidence of terrorism around the world concerns MNCs. In particular, the kidnapping of business executives has become quite common. In addition, the random acts of violence around the world have a downward effect on global expansion, not the least because of the difficulty in attracting and retaining good managers in high-risk areas as well as the expense of maintaining security to protect people and assets and the cost of insurance to cover them. Companies that invest in those high-risk areas do so with the expectation of a higher profit premium to offset risk.

An event that affects one industry or company or only a few companies is called a micropo- litical risk event. Such events have become more common than macropolitical risk events. Such micropolitical action is often called creeping expropriation, indicating a government’s gradual and subtle action against foreign firms. This situation occurs when a firm hasn’t been expropri- ated, but it takes ten times longer to do anything. Typically, such continuing problems with an investment present more difficulty for foreign firms than do major events that are insurable by political-risk insurers. The following list describes seven typical political risk events.

• Expropriation of corporate assets without prompt and adequate compensation

• Forced sale of equity to host-country nationals, usually at or below depreciated book value

• Discriminatory treatment against foreign firms in the application of regulations or laws

• Barriers to repatriation of funds (profits or equity)

• Loss of technology or other intellectual property (such as patents, trademarks, or trade names)

• Interference in managerial decision making

• Dishonesty by government officials, including canceling or altering contractual agree- ments, extortion demands, and so forth106

Political Risk Assessment International companies must conduct some form of political risk assessment to manage their exposure to risk and minimize financial losses. Dow Chemical, for example, has a program in which it uses line managers trained in political and economic analysis, as well as executives in foreign subsidiaries, to provide risk analyses of each country.

Risk assessment by MNCs usually takes two forms. One uses experts or consultants familiar with the country or region under consideration to monitor important trends and make recom- mendations. A second and increasingly common means of political risk assessment that MNCs use is the development of internal staff and in-house capabilities: by having staff assigned to foreign subsidiaries, by having affiliates monitor local political activities, or by hiring people with expertise in the political and economic conditions in regions critical to the firm’s operations.

26 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

Frequently, all means are used, but nothing can replace timely information from people on the front line. For an autonomous international subsidiary, most of the impact from political risk (nationalization, terrorism) will be at the level of the ownership and control of the firm because its acquisition by the host country would provide the state with a fully operational business. For global firms, the primary risks are likely to be from restrictions (on imports, exports, currency, and so forth), with the impact at the level of the firm’s transfers (or exchanges) of money, prod- ucts, or component parts.

Managing Political Risk After assessing the potential political risk of investing or maintaining current operations in a spe- cific country, managers face perplexing decisions on how to manage that risk. On one level, they can decide to suspend their firm’s dealings with a certain country at a given point—by the avoid- ance of investment or by the withdrawal of current investment (by selling or abandoning plants and assets). On another level, if they decide that the risk is relatively low in a particular country or that a high-risk environment is worth the potential returns, they may choose to start (or main- tain) operations there and to accommodate that risk through adaptation to the political regulatory environment. That adaptation can take many forms, each designed to respond to the concerns of a particular local area. Some means of adaptation that Taoka and Beeman suggest are as follows:

• Equity sharing includes the initiation of joint ventures with nationals (individuals or those in firms, labor unions, or government) to reduce political risks.

• Participative management requires the firm to involve nationals actively, including those in labor organizations or government, in the management of the subsidiary.

• Localization of the operation includes the modification of the subsidiary’s name, manage- ment style, and so forth, to suit local tastes. Localization seeks to transform the subsidiary from a foreign firm to a national firm.

• Development assistance includes the firm’s active involvement in infrastructure develop- ment (foreign-exchange generation, local sourcing of materials or parts, management training, technology transfer, securing external debt, and so forth).107

In addition to avoidance and adaptation, two other means of risk reduction available to manag- ers are dependency and hedging. Some means that managers might use to maintain dependency— keeping both the subsidiary and the host nation dependent on the parent corporation—include, for example, maintaining control over key inputs or technology or control over distribution; other means are through expatriate control in key positions.108 Firms can also minimize loss through hedging, which includes, for example, political risk insurance and local debt financing.

Multinational corporations also manage political risk through their global strategic choices. Many large companies diversify their operations both by investing in many countries and by oper- ating through joint ventures with a local firm or government or through local licensees. By involv- ing local people, companies, and agencies, firms minimize the risk of negative outcomes due to political events. (See Chapters 6 and 7 for further discussion of these and other global strategies.)

Managing Terrorism Risk No longer is the risk of terrorism for global businesses focused only on certain areas such as South America or the Middle East. That risk now has to be considered in countries such as France, England, and the United States, which had previously been regarded as safe. Eighty countries lost citizens in the World Trade Center attack on September 11, 2001. Many companies from Asia and Europe had office branches in the towers of the World Trade Center. According to the 2018 Global Terrorism Index (GTI), Iraq, Afghanistan, Nigeria, Syria, and Pakistan have sat atop the ranking every year since 2013. Other notable countries listed in the 2018 GTI in- clude India (8th), Egypt (9th), the Philippines (10th), Turkey (12th), the United States (20th), the United Kingdom (28th), and France (30th).109

As incidents of terrorism accelerate around the world, many companies are increasingly aware of the need to manage the risk of terrorism. For instance, tighter border security following the November 2015 Paris terrorist attack led to increased supply chain and security costs. Also, the 2015–2016 terror attacks in Western Europe cost airlines $2.5 billion in lost revenue.110

CHAPTER 1 • ASSESSING THE ENVIRONMENT 27

In high-risk countries, some MNCs develop a benevolent image through charitable contri- butions to the local community. They also try to maintain low profiles and minimize publicity in the host countries by using, for example, discreet corporate signs at company sites.111 Some companies have assembled teams to monitor the patterns of terrorism around the world. Almost all MNCs have heightened their security measures abroad—for example, by hiring consultants in counterterrorism to train employees to cope with the threat of terrorism. For many firms, how- ever, the opportunities outweigh the threats, even in high-risk areas.

Economic Risk Closely connected to a country’s political stability is its economic environment—and the relative risk that it may pose to foreign companies. A country’s level of economic development generally determines its economic stability and, therefore, its relative risk to a foreign firm. Historically, most industrialized nations have posed little risk of economic instability; less-developed nations pose more risk. However, recently, the level of economic risk in Europe, for example, was a great concern around the world, in particular regarding concerns in the eurozone brought about by debt problems in Greece.

In 2019, the Heritage Foundation published its annual Index of Economic Freedom (ex- cerpted in Table 1-3), which covers 186 countries and is based on 12 specific freedoms such as rule of law, trade freedom, business freedom, investment freedom, and property rights—all of which reduce economic risk. Interestingly, the much-discussed emerging BRICs—Brazil (150), Russia (98), India (129), and China (100)—are way down on the list, indicating that there is quite a risk–return trade-off for investment in those markets. (Further details of all 180 countries on the index are available at www.heritage.org.) More than half of all nations and territories examined in the 2019 Index have institutional environments with at least a moderate degree of economic freedom.112

A country’s ability or intention to meet its financial obligations determines its economic risk. The economic risk incurred by a foreign corporation usually falls into one of two main

Source: https://www.heritage.org/index/ranking.

TABLE 1-3 2019 Index of Economic Freedom

Rank: Free Country Score

1 Hong Kong 90.2

2 Singapore 89.4

3 New Zealand 84.4

4 Switzerland 81.9

5 Australia 80.9

6 Ireland 80.5

Mostly Free

7 United Kingdom 78.9

8 Canada 77.7

9 United Arab Emirates 77.6

10 Taiwan 77.3

11 Iceland 77.1

12 United States 76.8

Moderately Free

35 Botswana 69.5

45 Peru 67.8

55 St. Vincent and the Grenadines 66.8

65 Slovakia 64.5

75 Morocco 62.9

94 Tanzania 60.2

28 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

categories. Its subsidiary (or other investment) in a specific country may become unprofitable if (1) the government abruptly changes its domestic monetary or fiscal policies, or (2) the govern- ment decides to modify its foreign-investment policies. The latter situation would threaten the company’s ability to repatriate its earnings and would create a financial or interest-rate risk. Furthermore, the risk of exchange-rate volatility results in currency translation exposure to the firm when the balance sheet of the entire corporation is consolidated and may cause a negative cash flow from the foreign subsidiary. Currency translation exposure occurs when the value of one country’s currency changes relative to that of another. The U.S. dollar remained strong rela- tive to Euro and the British Pound in 2018 due, in large part, to what was happening in that part of the world..The U.S. dollar has been strong against other currencies in developing countries, which can have a negative affect because it costs them more to import from the United States, and their exports would bring less revenue. When exchange-rate changes are radical, repercus- sions are felt around the world.

Because every MNC operating overseas exposes itself to some level of economic risk, often affecting its everyday operational profitability, managers constantly reassess the level of risk that their companies may face in any specific country or region of the world, by carefully tracking economic indicators that they have found to be relevant to the company.113

THE LEGAL ENVIRONMENT The prudent global manager consults with legal services, both locally and at headquarters, to comply with host-country regulations and maintain cooperative long-term relationships in the local area. If the manager waits until a problem arises, little legal recourse may be available outside of local interpretation and enforcement. Indeed, this has been the experience of many foreign managers in China, where financial and legal systems remain limited in spite of attempts to show the world a capitalist face. Foreign companies may periodically face issues with debts being repaid by Chinese businesses. The lesson for many foreign companies in China is that they are losing millions because Beijing often does not stand behind the commitments of its state- owned enterprises.

Although no guarantee is possible, the risk of massive losses may be minimized, among other ways, by making sure you get approval from related government offices (national, pro- vincial, and local), by showing that you are not going to run riot over long-term government goals, and by getting loan guarantees from the headquarters of one of Beijing’s main banks. Some of the contributing factors in cases that go against foreign companies are often the personal connections—guanxi—involved and the fact that some courts offer their services to the business community for profit. Many countries around the world face problems with corruption in the judicial system, and there are demonstrated issues of individuals receiving appointments as judges through corruption and nepotism. This reportedly happens in China as well.

Although the regulatory environment for international managers consists of the many local laws and the court systems in those countries in which they operate, certain other legal issues are covered by international law, which governs relationships between sovereign countries, the basic units in the world political system. One such agreement, which regulates international busi- ness by spelling out the rights and obligations of the seller and the buyer, is the United Nations Convention on Contracts for the International Sale of Goods (CISG). This applies to contracts for the sale of goods between countries that have adopted the convention.

Generally speaking, the manager of the foreign subsidiary or foreign operating division will comply with the host country’s legal system. Such systems, derived from common law, civil law, or Islamic law (Sharia law), are a reflection of the country’s culture, religion, and tradi- tions. Under common law, used in the United States and 26 other countries of English origin or influence, past court decisions act as precedents to the interpretation of the law and to common custom. Civil law is based on a comprehensive set of laws organized into a code. Interpretation of these laws is based on reference to codes and statutes. About 70 countries, predominantly in Europe (e.g., France and Germany), are ruled by civil law, as is Japan. In Islamic countries, such as Saudi Arabia, the dominant legal system is Islamic law; based on religious beliefs, it domi- nates all aspects of life. Islamic law is followed in approximately 27 countries and combines, in varying degrees, civil, common, and indigenous law.

1-3. To recognize the role of the legal environment in international business

CHAPTER 1 • ASSESSING THE ENVIRONMENT 29

Contract Law A contract is an agreement by the parties concerned to establish a set of rules to govern a business transaction. Contract law plays a major role in international business transactions because of the complexities arising from the differences in the legal systems of participating countries and because the host government in many developing and state-controlled countries is often a third party in the contract. Both common law and civil law countries enforce con- tracts, although their means of resolving disputes differ. Under civil law, it is assumed that a contract reflects promises that will be enforced without specifying the details in the contract; under common law, the details of promises must be written into the contract to be enforced. Astute international managers recognize that they will have to draft contracts in legal con- texts different from their own, and they prepare themselves accordingly by consulting with experts in international law before going overseas. Whereas Western companies want to spell out every detail in a contract, in some countries the contract may be ignored or changed, and in Asia, “there is no shortcut for managing the relationship.”114 In other words, the contract is in the relationship, not on the paper, and the way to ensure the reliability of the agreement is to nurture the relationship.

Neglect regarding contract law may leave a firm burdened with an agent who does not per- form the expected functions, or a firm may be faced with laws that prevent management from laying off employees (which, for example, is often the case in some countries in Europe).

Other Regulatory Issues Differences in laws and regulations from country to country are numerous and complex. These and other issues in the regulatory environment that concern multinational firms are briefly dis- cussed here.

Countries often impose protectionist policies, such as tariffs and nontariff barriers, quotas, and other import and trade restrictions, to give preference to their own companies and industries. The Japanese have come under much criticism for protectionism, which they use to limit imports of foreign goods while they continue exporting consumer goods (e.g., cars and electronics) on a large scale.

A country’s tax system influences the attractiveness of investing in that country and affects the relative level of profitability for an MNC. Foreign tax credits, holidays, exemptions, deprecia- tion allowances, and taxation of corporate profits are additional considerations the foreign inves- tor must examine before acting. Many countries have signed tax treaties (or conventions) that define such terms as “income,” “source,” and “residency” and spell out what constitutes taxable activities.

The level of government involvement in the economic and regulatory environment varies a great deal among countries and has a varying impact on management practices. In Canada, for example, the government has a significant involvement in the economy. It has a powerful role in many industries, including transportation, petrochemicals, fishing, steel, textiles, and building materials—forming partly owned or wholly owned enterprises. Wholly owned businesses are called Crown Corporations (Petro Canada, Ontario Hydro, Saskatchewan Telecommunications, and so forth), many of which are as large as major private companies. The government’s role in the Canadian economy, then, is one of both control and competition. Government policies, sub- sidies, and regulations directly affect the manager’s planning process, as do other major factors in the Canadian legal environment, such as the high proportion of unionized workers. In Quebec, the law requiring official bilingualism imposes considerable operating constraints and expenses. For a foreign subsidiary, this regulation forces managers to speak both French and English and to incur the costs of language training for employees, translators, the administration of bilingual paperwork, and so on.

THE TECHNOLOGICAL ENVIRONMENT The world is going to be data . . . I think this is just the beginning of the data period. We think data is going to be so important to human life in the future . . . Tomorrow [with the Internet of things], everything will be connected.115

Jack Ma, 2017 Fortune Global Forum held in Guangzhou, China

1-4. To review the technologi- cal environment around the world and how it affects the international manager’s decisions and operations as well as the war for talent around the globe

30 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

Jack Ma, cofounder and Executive Chairman CEO of Alibaba Group, has made several bold predictions for the digital age that will shape business for decades to come. He asserted that data lies at the heart of the digital age. He predicted, “In the next 30 to 40 years, globalization will empower 80 percent of countries, businesses and people that have not benefited from globaliza- tion.”116 From Mr. Ma’s predictions, it is clear that the digital age will introduce a whole new level of global competition. For instance, he pointed out that “globalization . . . is increasingly in the hands of the people and the ‘netpreneurs.’”117

The global management implications of the digital age technology are pervasive—both in how companies formulate strategy, organize their activities, and recruit global talent, just to name a few. Moreover, these companies need to integrate technology in various aspects of their business, especially as customers continue to incorporate technology into more aspects of their lives (e.g., purchasing products vis-à-vis mobile phones). Technology disruptions are no longer the exception, but rather the new norm. MNC leaders need to consider the magnitude and scope of these disruptions and how they affect their ability to formulate and implement strategy, as well as recruit and develop talent.

Now that we are in a global information society, it is clear that corporations must incorporate into their strategic planning and their everyday operations the accelerating mac- roenvironmental phenomenon of the digital economy, in which the rapid developments in information and communication technologies (ICTs) are propelling globalization and vice versa. Investment-led globalization is leading to global production networks, which result in global diffusion of technology to link parts of the value-added chain in different countries. That chain may comprise parts of the same firm, or it may comprise suppliers and customers or technology-partnering alliances among two or more firms. Either way, technological develop- ments are facilitating, indeed necessitating, the firm network structure that allows flexibility and rapid response to local needs.

Clearly, the effects of technology on global trade and business transactions cannot be ig- nored; in addition, the Internet is propelling electronic commerce around the world. The ease of use and pervasiveness of the Internet raise difficult questions about ownership of intellectual property, consumer protection, residence location, taxation, and other issues.

New technology specific to a firm’s products represents a key competitive advantage to firms and challenges international businesses to manage the transfer and diffusion of proprietary technology, with its attendant risks. Whether it is a product, a process, or a management technol- ogy, an MNC’s major concern is the appropriability of technology—that is, the ability of the innovating firm to profit from its own technology by protecting it from competitors.

FIGURE 1-2 Cloud computing imagined.

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CHAPTER 1 • ASSESSING THE ENVIRONMENT 31

An MNC can enjoy many technological benefits from its global operations. Advances resulting from cooperative R&D can be transferred among affiliates around the world, and specialized management knowledge can be integrated and shared. However, the risks of tech- nology transfer and piracy are considerable and costly. Although firms face few restrictions on the creation and dissemination of technology in developed countries, less-developed countries often impose restrictions on licensing agreements, royalties, and so forth, as well as on patent protection.

In most countries, governments use their laws to some extent to control the flow of tech- nology. These controls may be in place for reasons of national security. Other countries in earlier stages of development use their investment laws to acquire needed technology (usu- ally labor-intensive technology to create jobs), increase exports, use local technology, and train local people.

The most common methods of protecting proprietary technology are the use of patents, trademarks, trade names, copyrights, and trade secrets. Various international conventions afford some protection in participating countries; more than 80 countries adhere to the International Convention for the Protection of Industrial Property (often referred to as the Paris Union) for the protection of patents. However, restrictions and differences in the rules in some countries not signatory to the Paris Union, as well as industrial espionage, pose continuing problems for firms trying to protect their technology.

One risk to a firm’s intellectual property is the inappropriate use of the technology by joint- venture partners, franchisees, licensees, and employees (especially those who move to other companies). Some countries rigorously enforce employee secrecy agreements.

Another major consideration for global managers is the need to evaluate the appropri- ateness of technology for the local environment—especially in less-developed countries. By studying the possible cultural consequences of the transfer of technology, managers must as- sess whether the local people are ready and willing to change their values, expectations, and behaviors on the job to use new technological methods, whether applied to production, research, marketing, finance, or some other aspect of the business. Often, a decision regarding the level of technology transfer is dominated by the host government’s regulations or requirements. In some instances, the host country may require foreign investors to import only their most modern machinery and methods so that the local area may benefit from new technology. In other cases, the host country may insist that foreign companies use only labor-intensive processes, which can help to reduce high unemployment in an area. In still other situations, the digital economy has created access to more customer and user information. This phenomenon raises questions about the ethical use and potential abuse of customer information around the globe. The follow- ing “Management in Action” examines Google with respect to innovations, privacy, and safety challenges.

The Globalization of Information Technology The rapid advancement in IT and its applications around the world has had, and will continue to have, a transformative effect on global business for businesses of all sizes. The speed and ac- curacy of information transmission are changing the nature of the global manager’s job by mak- ing geographic barriers less relevant. Indeed, managers and families around the world recognize the necessity of being able to access IT and are giving priority to that access over other lifestyle accoutrements.

Governments can no longer control information completely; political, economic, market, and competitive information is available almost instantaneously to anyone around the world, per- mitting informed and accurate decision making. Even cultural barriers are being lowered gradu- ally by the role of information in educating societies about one another. Indeed, as consumers around the world become more aware, through various media, of how people in other countries live, their tastes and preferences begin to converge, as the Arab Spring illustrated.

The explosive growth of information technology is both a cause and an effect of globalism. The information revolution is boosting productivity around the world. Sweden is the most net- worked economy in the world, followed by Singapore, the Netherlands, Norway, and Switzerland according to the 2019 edition of The Network Readiness Index. The report assessed 121 econo- mies and ranked their ICT readiness levels to use and benefit from ICT for increased growth and

32 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

development. (Table 1-4 shows the top ten as well as the ranks of selected other countries.) The report stresses the key role of ICT as an enabler of a more economically, environmentally, and socially sustainable world. Other notable countries include Japan (12), Israel (22), UAE (29), Turkey (51), Mexico (57), and South Africa (72).119

Technology, in all its forms, is dispersed around the world by MNCs and their alliance part- ners in many countries. However, some of the information intended for electronic transmission is currently subject to export controls by an EU directive intended to protect private informa- tion about its citizens. In addition, some countries, such as China, monitor and limit electronic information flows. So, perhaps IT is not yet borderless but rather is subject to the same norms, preferences, and regulations as human cross-border interactions.

When the choice is left to international managers, experts in economic development recom- mend that managers make informed choices about appropriate technology. The choice of tech- nology may be capital intensive, labor intensive, or intermediate, but the key is that it should suit the level of development in the area and the needs and expectations of the people who will use it.

Global E-Business Without doubt, the Internet has had a considerable impact on how companies buy and sell goods around the world—mostly raw materials and services going to manufacturers. Internet-based electronic trading and data exchange are changing the way companies do business while breaking

MANAGEMENT IN ACTION Google to Set Up German Team to Tackle Privacy and Safety Issues 118

Google is assembling a team of engineers in Germany to tackle privacy and safety issues on its platforms as big tech companies try to quell a backlash over the harm caused by their products and services.

The team will attempt to make privacy-focused changes for Google’s products from a new “safety engineering centre” in Munich, where the company already employs around 750 people. The expansion will see Google hire approximately 100 engineers in Munich by the end of the year, as well as 150 other staff.

“The team will work hand-in-hand with privacy specialists in Google offices across Europe and globally, and the products built there will be used around the world,” chief executive Sundar Pichai wrote in a blog post. He added that it was “no accident” the centre would be based in a country well- known for its focus on privacy.

The new centre will open just one week after Google unveils a suite of new products and services at its annual conference that rely on getting to know its customers in even greater detail.

Like Facebook, the company is struggling to balance its advertising focused business, which has grown rapidly on the back of user data and user-generated content on YouTube, with a new emphasis on privacy.

Engineers in Munich have previously built Google’s account system, where people can manage set- tings across email, calendars, photos, documents and YouTube. Mr Pichai said the engineers in Munich had made it easier for users to find privacy controls while browsing the web, adding that these features would also be introduced to Google Maps, the assistant and YouTube.

However, activists have cautioned that default settings still allow Google to collect data on users, while new products such as a “graph” of user’s interests and a “smart screen” for the home, which is equipped with cameras, are fundamentally at odds with the principles of privacy.

Meanwhile, a peer-reviewed study of almost 1m Android apps has revealed how data from smart- phones are harvested and shared, with nearly 90 per cent of Google Play apps set up to transfer informa- tion back to Google.

Earlier this year Google was slapped with a €50m penalty from the French data protection authority for failing to be transparent about how it uses data and not having a legal basis for personalising ads. It is challenging the fine.

Google also said on Tuesday it had set up a €10m grant to fund research on safety issues such as hate crimes online.

Source: © The Financial Times Limited 2019.

CHAPTER 1 • ASSESSING THE ENVIRONMENT 33

down global barriers of time, space, logistics, and culture. However, the Internet is not totally open; governments still make sure that their laws are obeyed in cyberspace. This was made ap- parent early on when France forced Yahoo! to stop displaying Nazi trinkets for sale where French people could view them.120 The reality is that

Different nations, and different peoples, may want a different kind of Internet—one whose lan- guage, content, and norms conform more closely to their own.121

There is no doubt, however, that the Internet has introduced a new level of global competi- tion by providing efficiencies through reducing the number of suppliers and slashing adminis- tration costs throughout the value chain. E-business is “the integration of systems, processes, organizations, value chains, and entire markets by using Internet-based and related technologies and concepts.”122 E-commerce refers directly to the marketing and sales process through the Internet. Firms use e-business to help build new relationships between businesses and custom- ers.123 The Internet and e-business provide a number of uses and advantages in global business, including the following:

• Convenience in conducting business worldwide; facilitating communication across bor- ders, which contributes to the shift toward globalization and a global market

• An electronic meeting and trading place, which adds efficiency in conducting business sales

• A corporate intranet service, merging internal and external information for enterprises worldwide

• Power to consumers as they gain access to limitless options and price differentials

• A link and efficiency in distribution124

Although most early attention was on e-commerce, experts now believe the real opportuni- ties are in business-to-business (B2B) transactions. Alibaba (China), for example, is the largest B2B site in the world. In addition, although the scope, complexity, and sheer speed of the B2B phenomenon, including e-marketplaces, have global executives scrambling to assess the impact and their own competitive roles, estimates for growth in the e-business marketplace may have been overzealous because of the global economic slowdown and its resultant dampening of cor- porate IT spending. Although we hear mostly about large companies embracing B2B, it is note- worthy that a large proportion of current and projected B2B use is by small and medium-sized firms for three common purposes: supply chain, procurement, and distribution channel.

A successful Internet strategy—especially on a global scale—is, of course, not easy to develop. Problems include internal obstacles and politics, difficulties in regional coordination

TABLE 1-4 The Network Readiness Index 2019

Top Ten Rank by Country Selected Other Ranks

1 Sweden Japan 12

2 Singapore Canada 14

3 Netherlands France 18

4 Norway Iceland 21

5 Switzerland Hong Kong 24

6 Denmark China 41

7 Finland Russia 48

8 United States Brazil 59

9 Germany Indonesia 76

10 United Kingdom India 79

Source: Based on selected data from The Network Readiness Index 2019: Towards a Future-Ready Society, Portulans Institute: Washington, DC. https://networkreadinessindex.org/wp-content /uploads/2020/01/The-Network-Readiness-Index-2019_VJan2020.pdf.

34 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

and in balancing global versus local e-commerce, languages and cultural differences, and local laws.125 Barriers to the adoption and progression of e-business around the world include lack of readiness of partners in the value chain, such as suppliers. If companies want to have an ef- fective marketplace, they usually must invest in increasing their trading partners’ readiness and their customers’ capabilities. Other barriers are cultural. In Europe, for example, “Europe’s e- commerce excursion has been hindered by a laundry list of cultural and regulatory obstacles, like widely varying tax systems, language hurdles, and currency issues.”126

In other areas of the world, barriers to creating global e-businesses include differences in physical, information, and payment infrastructure systems. In such countries, innovation is re- quired to use local systems for implementing a web strategy. In Japan, for example, very few transactions are conducted using credit cards. Typically, bank transfers and COD are used to pay for purchases. In addition, some Japanese use convenience stores, such as 7-Eleven Japan, to pay for their online purchases by choosing that option online.127

For these reasons, B2B e-business is likely to expand globally faster than B2C (business- to-consumer) transactions such as those by Amazon.com. In addition, consumer e-commerce depends on each country’s level of access to computers and the Internet as well as the relative efficiency of home delivery. Clearly, companies who want to go global through e-commerce must localize to globalize, which means much more than just presenting online content in local languages.

Localizing . . . also means recognizing and conforming to the nuances, subtleties, and tastes of multiple local cultures, as well as supporting transactions based on each country’s currency, local connection speeds, payment preferences, laws, taxes, and tariffs.128

It is clear that e-business is not only a new website on the Internet but also a source of sig- nificant strategic advantage. Hoping to capture this strategic advantage, the European Airbus venture—a public and private sector combination—joined a global aerospace B2B exchange for aircraft parts. The exchange illustrates two major trends in global competition: (1) those of cooperative global alliances, even among competitors, to achieve synergies, and (2) the use of technology to enable those connections and synergies. Indeed, “leading B2B firms, including Accenture, DuPont, GE, and IBM, spend significant amounts of money and effort building and managing their brands, and those brands account for a significant portion of their market capi- talization.”129 In addition, many small businesses exist almost completely online as B2Bs, pur- chasing, marketing, and selling their products and services online without ever having to build a physical storefront. Their B2B services can even help small businesses look and feel like a large business. An example of services for small businesses is www.microsoftsmallbusiness.com.130

DEVELOPING SKILLS TO ENHANCE YOUR CAREER If you are not an employee of a multinational company, or an international business major, or you do not plan to work in a multinational company or work for a company in another country, you may think that this section is not applicable to you. However, it is very relevant to you. The lessons learned in this textbook can be useful in your professional and personal life. Indeed, your academic training enables you to develop a set of skills that recruiters have identified as critical to professional success. In this course, you will have the opportunity to learn more than international management concepts, frameworks, and current events. This text provides you with the opportunity to develop five critical employability skills—(1) communication, (2) critical thinking, (3) collaboration, (4) knowledge application/analysis, and (5) business ethics/social responsibility.

Communication As we discuss in Chapter 4, communication describes the process of sharing meaning by trans- mitting messages through media such as words, behavior, or material artifacts. In a multinational setting, cross-border communication becomes challenging as individuals may speak and listen in a nonnative language as well as differ with respect to the use of verbal and nonverbal communi- cations. For example, we provide sections on the communication process (Chapter 4) and manag- ing cross-cultural communication (Chapter 4) and culture’s effects on management (Chapter 3).

1-5. To explore essential skills for developing your career as a manager in a multina- tional company

CHAPTER 1 • ASSESSING THE ENVIRONMENT 35

In addition, we have features on communicating in India and the Arab world. In other chapters we provide examples of how individuals and organizations have communicated effectively (e.g., The Emergence of a Virtual Multinational Enterprise [Chapter 10]). In addition, we have several application exercises throughout the book that give you the opportunity to improve your com- munication skills (e.g., Interview One or More Managers [Chapter 10]).

Critical Thinking Critical thinking refers to purpose-driven and goal-oriented thinking that helps to identify and solve problems, make decisions, and critique actions. The end-of-chapter discussion questions, application exercises, and experiential exercises are intended to think about concepts and frame- work at a deeper level. The cases are intended to facilitate analysis of real-world situations con- fronted by multinational companies. The cases and chapter features are especially helpful in developing ethics-oriented cognitive skills when examining countries with different laws and norms for labor conditions, labor participation, privacy, product standards, environmental stan- dards, and intellectual property protection.

Collaboration Collaborative learning occurs when individuals work together on projects, tasks, and problem solving. Several of the application exercises and experiential learning exercises are intended to be group-based. We include a special case, How to Bring Cross-Cultural Teams Together (Chapter 11), that emphasizes the cultural challenges confronting cross-cultural teams. In many case analyses, the instructor forms breakout groups in which individuals get together with their unique skill sets and diverse perspectives in order to come up with team-based recommendations to problems facing multinational companies and executives.

Knowledge Application/Analysis Knowledge application and analysis refers to the ability to learn particular concepts and frame- works and then apply them in various situations. We provide you with case studies at the end of each chapter (e.g., IKEA Finally Opens in India [Chapter 7]; Kelly’s Assignment in Japan [Chapter 9]) to give you the opportunity to analyze situations and make recommendations or critique organizational/executive decisions. We also include applications exercises (e.g., research on monitoring and reporting [Chapter 8]; joint ventures . . . in India or Russia [Chapter 7]) as well as an experiential exercise (Multicultural Negotiations [Chapter 5]). Lastly, some of the features provide a great opportunity to apply concepts and framework (e.g., Ryanair Secures UK Licence [Chapter 5]; The Expat Life [Chapter 10]).

Business Ethics/Social Responsibility Business ethics are sets of moral principles that shape individual and organizational behav- ior within their operating environments. Corporate social responsibility refers to social actions (e.g., environmental protection, work conditions) that go above and beyond what is required by law. Chapter 2 focuses on various issues pertaining to CSR and includes features on working conditions, censorship in China; GoodWeave’s Global Solution to Child Labor, and financial kickbacks in South Africa. Chapter 2 also includes a case study on Facebook leaks. We have woven CSR into other chapters as well: organizational changes at Volkswagen (Chapter 8), Ford’s use of blockchain (Chapter 7), and women in international management (Chapter 10), among others.

CONCLUSION A skillful global manager cannot develop a suitable strategic plan or consider an investment abroad without first assessing the environment—political, economic, legal, and technological— in which the company will operate. This assessment should result not so much in a comparison of countries as in a comparison of (1) the relative risk and (2) the projected return on investments among these countries for that particular investment. Similarly, for ongoing operations, both the subsidiary manager and headquarters management must continually monitor the environment for

36 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

potentially unsettling events or undesirable changes that may require the redirection of certain subsidiaries or the entire company. Some of the critical factors affecting the global manager’s environment (and therefore requiring monitoring) are listed in Exhibit 1-3.

Risk in the global environment, as discussed in this chapter, has become the new frontier in global business. The skills of companies and the measures taken to manage their exposure to risk on a world scale will soon largely replace their ability to develop, produce, and market global brands as the key element in global competitive advantage.

The pervasive role of culture in international management will be discussed fully in Part 2, with a focus on how the managerial functions and the daily operations of a firm are also affected by a subtle, but powerful, environmental factor in the host country—that of societal culture.

Chapter 2 presents some increasingly critical, and scrutinized, factors in the global environment—those of sustainability, corporate social responsibility (CSR), and ethical be- havior. We will consider a variety of questions: What is the role of the firm in the future of other societies and their people? What stakeholders must managers consider in their strategic and operational decisions in other countries? How do the expectations of firm behavior vary around the world, and should those expectations influence the international manager’s deci- sions? What role does long-term global economic interdependence and sustainability play in the firm’s actions in other countries?

Political Environment Economic Environment

• Form of government • Economic system • Political stability • State of development • Foreign policy • Economic stability • State companies • GNP • Role of military • International financial standing • Level of terrorism • Monetary/fiscal policies • Restrictions on imports/exports • Foreign investment

Regulatory Environment Technological Environment

• Legal system • Level of technology • Prevailing international laws • Availability of local technical skills • Protectionist laws • Technical requirements of country • Tax laws • Appropriability • Role of contracts • Transfer of technology • Protection for proprietary property • Infrastructure • Environmental protection

Cultural Environment (see Part 2)

ExHIBIT 1-3 The Environment of the Global Manager

Summary of Key Points

■ Competing in the twenty-first century requires firms to invest in the increasingly refined managerial skills needed to perform effectively in a multicultural environment. Managers need a global orientation to meet the challenges of world markets and rapid, fundamental changes in a world of increasing economic interdependence.

■ International management is the process of develop- ing strategies, designing and operating systems, and

working with people around the world to ensure sus- tained competitive advantage.

■ One major direction in world trade is the rise of rapidly developing economies such as China, India, Brazil, Russia (often called the BRIC countries), and South Africa. Other emerging markets include Mexico, Indonesia, and Turkey.

CHAPTER 1 • ASSESSING THE ENVIRONMENT 37

Discussion Questions

1-1. Poll your classmates about their attitudes toward globaliza- tion. What are the trends and opinions around the world that underlie those attitudes?

1-2. How has the economic downturn affected trends in protec- tionism and nationalization?

1-3. Discuss examples of recent macropolitical risk events and the effect they have or might have on a foreign subsidiary. What are micropolitical risk events? Give some examples and ex- plain how they affect international business.

1-4. What means can managers use to assess political risk? What do you think is the relative effectiveness of these different methods? At the time you are reading this, what countries or areas do you feel pose political risk sufficient to discourage you from doing business there?

1-5. Can political risk be managed? If so, what methods can be used to manage such risk, and how effective are they? Discuss the lengths to which you would go to manage

political risk relative to the kinds of returns you would ex- pect to gain.

1-6. Discuss the importance of contracts in international manage- ment and how contracts are viewed in other countries. What steps must a manager take to ensure a valid and enforceable contract?

1-7. Discuss the effects of various forms of technology on inter- national business. What role does the Internet play? Where is all this leading? Explain the meaning of the appropriabil- ity of technology. What role does this play in international competitiveness? How can managers protect the proprietary technology of their firms?

1-8. Discuss the risk of terrorism. What means can managers use to reduce the risk or the effects of terrorism? Where in the world, and from what likely sources, would you anticipate terrorism?

Application Exercises

1-9. Do some further research on the technological environment. What are the recent developments affecting businesses and propelling globalization? What problems have arisen regard- ing use of the Internet for global business transactions, and how are they being resolved?

1-10. Consider recent events and the prevailing political and eco- nomic conditions in the Russian Federation. As a manager who has been considering investment there, how do you assess the political and economic risks at this time? What should be your company’s response to this environment?

Experiential Exercise

In groups of three, represent a consulting firm. You have been hired by a diversified multinational corporation to ad- vise it regarding the political and economic environment in different countries. The company wants to open one or two

manufacturing facilities in Asia. Choose a specific type of com- pany and two specific countries in Asia and present them to the class, including the types of risks that would be involved and what steps the firm could take to manage those risks.

■ Drastic worldwide changes in technology, political and economic trends, and terrorism present dynamic challenges to global managers. Global managers must be aware of political risks around the world that can adversely affect the long-run profitability or value of a firm. Managers must evaluate various means to ei- ther avoid or minimize the effects of political risk.

■ The risk of terrorist activity represents an increasing risk around the world. Managers have to decide how to incorporate that risk factor in their strategic and op- erational plans.

■ Economic risk refers to a country’s ability to meet its financial obligations. The risk is that the government may change its economic policies, thereby making a foreign company unprofitable or unable to repatriate its foreign earnings.

■ The regulatory environment comprises the many laws and courts of those nations in which a company op- erates. Most legal systems derive from common law, civil law, or Islamic law.

■ Use of the Internet in e-commerce—in particular, in business-to-business (B2B) transactions—and for in- tracompany efficiencies has become a critical factor in global competitiveness.

■ The appropriability of technology is the ability of the innovating firm to protect its technology from competitors and obtain economic benefits from that technology.

■ Economic uncertainty comes from various sources such as Brexit. It has profound strategic implications for local firms and multinational corporations seeking to serve customers in an economic region.

38 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

CASE STUDY Harley-Davidson Sees $120m Hit from Tariffs This Year131

New tariffs around the world helped wipe out profits at Harley-Davidson in the final quarter of last year and are expected to cost it up to $120m this year, as the US motorcycle maker becomes one of the highest-profile victims of escalating trade disputes.

Harley set out the costs of new tariffs in Europe, China and the US on Tuesday as it reported disappointing fourth-quarter earnings and forecast lower than expected shipments for 2019, sending its shares down 7 per cent by midday in New York.

It said it planned to minimise the impact of those tariffs by using its plant in Thailand to serve the European and Chinese markets.

As an iconic American brand, Harley-Davidson was made a target for tariffs by China and the EU in retaliation for levies introduced by President Donald Trump. It has also been hit by some of the tariffs imposed by the US, which have increased the costs of components and materi- als that it imports.

The company faces tariffs of 25 per cent in the EU and China, and 10–25 per cent on some of the components it imports into the US.

Those tariffs around the world cost it about $13m in the fourth quarter, Harley said. Along with restructuring costs of about $23m, that meant the company reported net income of just $495,000 for the quarter.

John Olin, chief financial officer, told analysts on a call that the company expected ad- ditional tariff costs on its exports and imports to be approximately $100m–$120m this year, equivalent to about a fifth of the $531m net income it reported for 2018.

That impact is on top of the effect of the Trump administration’s new tariffs on steel and aluminum imports. Harley’s raw materials costs were up $17m last year, and Mr Olin said “the primary driver of that was the tariffs.”

He added that Harley intended to “mitigate” the impact of the European and Chinese tariffs by the end of the year.

The company’s new plant in Thailand, heavily criticised by Mr Trump, opened in the third quarter of last year. Mr Olin said that the group intended to “utilise it to make more of our prod- uct”, targeting international markets including China, following a plan set out in 2017, before the latest round of tariffs had hit.

He said: “We expect to be producing the majority of our motorcycles for the EU, China and Asian markets [in Thailand] by the end of this year.” As a result, he added, the cost of tariffs should be much lower in 2020.

In 2018 the group sold 228,051 bikes worldwide, a 6.1 per cent drop from 2017. Harley projected that it would ship 217,000–222,000 motorbikes this year, representing a

further fall of up to 5 per cent. That forecast was below the 228,190 shipments expected by ana- lysts polled by Consensus Metrix, according to Reuters.

“Our initial impression of Harley-Davidson fourth-quarter results was disappointing, under- whelming outlook for ’19 motorcycle shipments,” said analysts at Stifel.

Matt Levatich, Harley’s chief executive, said: “The challenges we experienced during the year reinforced the commitment we have for our More Roads to Harley-Davidson accelerated plan for growth . . . New and different people, riders and non-riders, are taking notice of Harley- Davidson and the thrill of riding.”

Source: © The Financial Times Limited 2019.

1-11. What options does a company have to guard against being caught in a tariff trade war, as was the case in 2019?

1-12. Analyze the tariff trade war with China and its effects on Harley-Davidson. 1-13. What obligations does a company like Harley-Davidson have and to whom?

Case Questions

CHAPTER 1 • AssEssing THE EnviRonmEnT 39

Endnotes

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113. F. John Mathis, “International Risk Analysis,” in Global Business Management in the 1990s, R. T. Moran, ed. (Washington, DC: Beacham, 1990), pp. 33–44.

114. Rahul Jacob, “Asian Infrastructure: The Biggest Bet on Earth,” Fortune, October 31, 1994, 139–146.

115. M. Ward, “Jack Ma: This Is What to Study If You Want a High-Paying Job in the Future,” CNBC, June 21, 2017, https:// www.cnbc.com/2017/06/21/jack-ma-this-is-what-to-study -if-you-want-a-good-job-in-the-future.html (accessed April 27, 2019).

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119. World Economic Forum, “Global Information Technology Report 2016,” http://www3.weforum.org/docs/GITR2016 /WEF_GITR_Full_Report.pdf (accessed May 9, 2019).

120. Jack Goldsmith and Tim Wu, Who Controls the Internet? Illusions of a Borderless World (London: Oxford University Press, 2006).

121. Ibid. 122. Hans Dieter Zimmerman, “E-Business,” www.businessmedia

.org, June 13, 2000. 123. J. Rajesh, “Five E-Business Trends,” Net. Columns, www

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2000, pp. 178–213. 128. A. Chen and M. Hicks, “Going Global? Avoid Culture Clashes,”

PC Week, April 3, 2000, pp. 9–10. 129. S. Muylle, N. Dawar, and D. Rangarajan, “B2B Brand

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130. B2B Directory, www.Forbes.com (accessed March 29, 2012). 131. E. Crooks and S. Provan, “Harley-Davidson Sees $120m Hit

from Tariffs This Year,” Financial Times, January 29, 2019, https://www.ft.com/content/cde6b214-23c6-11e9-b329-c7e- 6ceb5ffdf (accessed April 28, 2019).

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43

2-1. To understand the social responsibility of corporations toward their various constituencies around the world, in particular their responsibilities toward human rights

2-2. To acknowledge the strategic role that ethics must play in global management and pro- vide guidance to managers to maintain ethical behavior amid the varying standards and practices around the world

2-3. To recognize the importance of managing interdependence and include sustainability and shared value in their long-term plans

Managing Interdependence Social Responsibility, Ethics, Sustainability

O B J E C T I V E S

2 C H A P T E R

Opening Profile: Samsung Finally Apologises to Its Workers around the World Struck Down by Disease

South Korean Company to Offer Compensation to Semiconductor and Display Plant Employees 1

For over a decade, Samsung has denied that hundreds of workers fell seriously ill in its factories manufacturing chips and LCD displays, stonewalling campaigners and fighting legal claims through the courts.

On Friday, the company finally sought to draw a line under the scandal, making a formal apology to the workers and their families and accepting a compensation plan, drawn up by mediators.

“Our beloved colleagues and their families have suffered for a long time but Samsung Electronics failed to take care of this earlier,” said Kim Ki-nam, the company’s president in charge of semiconductors.

“Samsung also did not sufficiently and completely manage potential health risks at its chip and liquid-crystal display production lines,” he added, admitting fault for the first time. “We offer our sincere apology to them.”

Under the arbitration proposal signed on Friday, Samsung will offer up to Won150m ($132,000) to each worker who has contracted cancer or other serious diseases while working at its electronics facto- ries since 1984. The compensation process will start within this year and continue until 2028.

Samsung also donated Won50bn to the state-run Korea Occupational Safety and Health Agency to help improve industrial safety in the country, which has one of the highest industrial death rates in the developed world and a culture of covering up industrial accidents and illnesses.

The agreement marks a breakthrough for the victims and their families who have struggled to win official recognition of the health risks that semiconductor and LCD plants pose to workers.

Their struggle against Samsung began in 2007 when taxi driver Hwang Sang-ki refused to accept a set- tlement for his 22-year-old daughter who died of leukaemia after working at a Samsung plant for four years.

About 260 Samsung workers have fallen seriously ill over the past decade due to their exposure to toxic chemicals, with fewer than 30 of them granted official financial compensation, according to Sharps, a South Korean labour advocacy group.

“No apology would be enough for our suffering but I will consider it as the company’s pledge [to prevent any recurrence],” said Mr Hwang. “Compensation for occupational diseases is important but what counts more is prevention.”

(Continued)

44 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

Mr Hwang has called for Samsung to offer compensation for ailing workers at its subcontractors and overseas factories as well as those at its affiliates such as Samsung Electro-Mechanics, Samsung SDI and Samsung SDS.

Samsung has come under fire at overseas plants for labour issues with UN experts voicing concern in March about the treatment of workers at its smartphone factories in Vietnam.

The agreement comes as Samsung, beset by corruption scandals and allegations of labour sabotage, struggles to repair its tarnished corporate image at home.

The group’s billionaire heir, Lee Jae-yong, is serving a suspended sentence for bribing the coun- try’s former president, Park Geun-hye, for business favours. He has appealed against the decision.

In September, South Korean prosecutors indicted the company’s board chairman, Lee Sang-hoon, and dozens of other senior executives for alleged sabotage of labour unions.

Source: © The Financial Times Limited 2018.

Global interdependence is a compelling factor in the global business environment, creating de- mands on international managers to take a positive stance on issues of social responsibility and eth- ical behavior, workplace safety, economic development in host countries, and ecological protection around the world. Managers today are usually quite sensitive to issues of social responsibility and ethical behavior because of pressures from the public, from interest groups, from legal and gov- ernmental concerns, and from media coverage (as illustrated in the opening profile). The United Nations published guidelines for the responsibilities of transnational corporations and called for companies to be subject to monitoring, verification, and censure. Although many companies agree with the guidelines, they resist the notion that corporate responsibility should be regulated and question where to draw the line between socially responsible behavior and the concerns of the corporation’s other stakeholders.2 In the domestic arena, managers are faced with numerous ethical complexities. In the international arena, such concerns are compounded by the larger numbers of stakeholders involved, including customers, communities, allies, and owners in various countries. However complex, it is clear that for the most part corporations have accepted, acknowledged, and incorporated into their planning process their responsibility toward ethical behavior, human rights issues, and the environment. Unfortunately, what we hear most about is those incidents and examples of poor implementation of those lofty plans, especially in developing countries, and it is those incidents, emphasized in the media, that overshadow the otherwise responsible position of the leaders of those corporations.

This chapter’s discussion focuses separately on issues of corporate social responsi- bility (CSR), which is defined as “actions that appear to further some social good, beyond the interests of the firm and that which is required by law”3 and ethical behavior, though considerable overlap is apparent. The difference between the two is a matter of scope and degree. Whereas ethics deals with decisions and interactions mostly on an individual level, decisions about social responsibility are broader in scope, tend to be made at a higher level, affect more people, and reflect a general stance a company or its decision makers take. Also discussed separately is the topic of sustainability—although it, too, falls under the umbrella of corporate social responsibility and—for more proactive firms—the direction of creating shared value (CSV).

THE SOCIAL RESPONSIBILITY OF MNCS Investing in emerging markets is the best way international investors can instigate change in the sector. We understand that it might be easier to justify an investment in Denmark over Ivory Coast . . . but if investments do not flow [to emerging and frontier markets], this en- sures low ESG [Environment, Social, and Governance] scores stay low for longer. Inaction creates a negative consequence while proactive investments can play a small role in driving a big improvement.4

Charles Robertson, global chief economist of Renaissance Capital

2-1. To understand the social responsibility of corpora- tions toward their various constituencies around the world, in particular their responsibilities toward human rights

CHAPTER 2 • MANAGING INTERDEPENDENCE 45

Multinational corporations (MNCs) have been—and to less extent continue to be—at the center of debate regarding corporate social responsibility (CSR), particularly concerning the benefits versus harm wrought by their operations around the world, especially in developing countries. The criticisms of MNCs have been lessened in recent years by the decreasing economic dif- ferences among countries, the emergence of developing countries’ own multinationals, and the greater emphasis placed on social responsibility by MNCs.

Issues of social responsibility continue to center on poverty and lack of equal opportunity around the world, the environment, consumer concerns, and employee safety and welfare. Many argue that, because MNCs operate in a global context, they should use their capital, skills, and power to play proactive roles in handling worldwide social and economic problems and that, at the least, they should be concerned with host-country welfare. Others argue that MNCs already have a positive impact on developing economies by providing managerial training, investment capital, and new technology as well as by creating jobs and improving infrastructure. Certainly, multinational corporations constitute a powerful presence in the world economy and often have a greater capacity than local governments to induce change. The sales, debts, and resources of some of the largest MNCs exceed the gross national product, the public and private debt, and the resources, respectively, of some nations.

The concept of international social responsibility includes the expectation that MNCs concern themselves with the social and economic effects of their decisions. The issue is how far that concern should go and what level of planning and control that concern should take. Opinions on the level of social responsibility that a domestic firm should demonstrate range from one extreme—the only responsibility of a business is to make a profit, within the confines of the law; to produce goods and services; and serve its shareholders’ interests5—to another extreme— companies should anticipate and try to solve problems in society. Between these extremes are varying positions described as socially reactive, in which companies respond to some degree of currently prevailing social expectations and to the environmental and social costs of their actions, as illustrated in the opening profile. Although most firms comply with national and local laws and regulations, they also might actually locate some operations where those legal requirements are less restrictive or not imposed at all. As an additional layer of responsibility, most firms will formalize programs for ethical compliance—it’s hoped for the right reasons—but also to avoid problems. Usually, those organizations will provide guidelines and programs to avoid problems such as sexual harassment cases and the thorny issue of the expectations of bribery when op- erating abroad. Beyond those rather minimal approaches, firms that take social responsibility seriously attempt to view the perspectives of all stakeholders involved when taking a long-term approach to the firm’s ability to continue operations in any location, as discussed below.

The stance toward social responsibility that a firm should take in its international op- erations, however, is much more complex—ranging from assuming some responsibility for economic development in a subsidiary’s host country to taking an active role in identifying and solving world problems. The increased complexity regarding the social responsibility and ethical behavior of firms across borders is caused by the additional stakeholders in the firm’s activities through operating overseas as well as the legal and regulatory requirements and ex- pectations prevailing where the firm is operating. As illustrated in Exhibit 2-1, managers are faced not only with considering stakeholders in the host country but also with weighing their rights against the rights of their domestic stakeholders. Most managerial decisions will have a trade-off of the rights of these stakeholders—at least in the short term. For example, a deci- sion to discontinue using children in Pakistan to sew soccer balls means the company will pay more for adult employees and will, therefore, reduce the profitability to its owners. That same decision—while taking a stand for human rights according to the social and ethical expecta- tions in the home country and bowing to consumers’ demands—may mean that those children and their families go hungry or are forced into worse working situations. Another decision to keep jobs at home to satisfy local employees and unions will mean higher prices for consumers and less profit for shareholders. In addition, if competitors take their jobs to cheaper overseas factories, a company may go out of business, which will mean no jobs at all for the domestic employees and a loss for the owners.

Clearly, foreign investment in China, for example, has driven spectacular growth, increased wages, and radically lowered the poverty rate. This compares with Bangladesh, with minimal foreign investment and a population continuing in abject poverty.6 Nevertheless, the campaigns

46 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

of anti-sweatshop activists have resulted in some improvements in workers’ lives in other coun- tries, in particular regarding health and safety issues.

In spite of conflicting agendas, there is some consensus about what CSR means at a basic level— that “corporate activity should be motivated in part by a concern for the welfare of some non-owners, and by an underlying commitment to basic principles such as integrity, fairness and respect for persons.”7

In addition, it is clear that long-term competitive benefits derive from CSR, many of which result from the goodwill, attractiveness, and loyalty of the various stakeholders connected with the company. These may be in the local area, such as government, suppliers, employees, brand reputation, and so on, or far-flung, such as consumers. IKEA is an example of a long-term attitude to CSR. In October 2018, the Swedish home furnishings retailer, with 422 IKEA stores in over 50 markets, celebrated that it had broken ground for its third India IKEA store in Nagasandra, Bengaluru. Two months earlier, IKEA had opened its first IKEA India store in Hyderabad.

According to Peter Betzel, CEO, IKEA India, “With the IKEA store, we will contribute to a better everyday life for all Bengalureans with well designed, functional home-furnishing solution. We will contribute positively to the state’s development by creating employment op- portunities, investing in skill/competence development, growing local sourcing to meet India and global demands and bringing IKEA’s global best practices to grow India’s retail and manu- facturing sector.”8

Following the opening of its third IKEA store, company executives reinforce the company’s long-term commitment to India. Mr. Betzel further stated, “We will contribute positively to the state’s development by creating employment opportunities, investing in skill/competence devel- opment, growing local sourcing to meet India and global demands and bringing IKEA’s global best practices to grow India’s retail and manufacturing sector.”9

IKEA has redoubled its efforts to source locally in India. For instance, one of the company’s top priorities is to source locally available sustainable raw materials such as bamboo, jute, and banana fibers.10

It would seem from this development that the company’s benevolence and perseverance have paid off.

In India, IKEA will strive towards having a positive impact in all we do, be it with supply chain, retail operations or with the range offer which can support a more sustainable life at home. We have also started initiatives to become more energy efficient, waste management (last year 91% of our global waste was recycled and energy recovered) and recycling, com- munity projects and more.11

Susanne Pulverer, store manager (New Delhi), 2018

MNC

Home Country Owners Customers Employees Unions Suppliers Distributors Strategic allies Community Economy Government

Society in General (global interdependence/ standard of living) Global environment and ecology Sustainable resources Population's standard of living

Host Country Economy Employees Community Host government Consumers Strategic allies Suppliers Distributors

MNC Stakeholders

ExHIBIT 2-1 MNC Stakeholders

CHAPTER 2 • MANAGING INTERDEPENDENCE 47

Manuela Weber suggests that the impact of CSR on business benefits, listed below, can in- crease the firm’s competitiveness and thus economic success.

Business benefits from CSR12

• Improved access to capital

• Secured license to operate

• Revenue increases

• Cost decreases

• Risk reduction

• Increase in brand value

• Improved customer attraction and retention

• Improved reputation

• Improved employee recruitment, motivation, and retention

CSR: Global Consensus or Regional Variation? With the growing awareness of the world’s socioeconomic interdependence, global organizations are beginning to recognize the need to reach a consensus on what should constitute moral and ethical behavior. Some think that such a consensus is emerging because of the development of a global corporate culture—an integration of the business environments in which firms currently operate. This integration results from the gradual dissolution of traditional boundaries and from the many intricate interconnections among MNCs, internationally linked securities markets, and communication networks. Nevertheless, there are commonly acknowledged regional variations in how companies respond to CSR:

The U.S. and Europe adopt strikingly different positions that can be traced largely to history and culture. In the U.S., CSR is weighted more towards “doing business right” by following basic business obligations; . . . in Europe, CSR is weighted more towards serving—or at least not conflicting with—broader social aims, such as environmental sustainability.13

Financial Times

While making good faith efforts to implement CSR, companies operating abroad face con- fusion about the cross-cultural dilemmas it creates, especially concerning how to behave in host countries, which have their own differing expectations and agendas. Recommendations about how to deal with such dilemmas include:

• Engaging stakeholders (and sometimes nongovernmental organizations, or NGOs) in a dialogue

• Establishing principles and procedures for addressing difficult issues such as labor stan- dards for suppliers, environmental reporting, and human rights

• Adjusting reward systems to reflect the company’s commitment to CSR14

Although it is very difficult to implement a generalized code of morality and ethics in in- dividual countries, such guidelines do provide a basis of judgment regarding specific situations. Bowie uses the term moral universalism to address the need for a moral standard that all cul- tures accept.15 Although, in practice, it seems unlikely that a universal code of ethics will ever be a reality, Bowie says that this approach to doing business across cultures is far preferable to other approaches such as ethnocentrism or ethical relativism. With an ethnocentric approach, a company applies the morality used in its home country—regardless of the host country’s system of ethics.

A company subscribing to ethical relativism, on the other hand, simply adopts the local moral code of whatever country in which it is operating. With this approach, companies run into value conflicts, such as continuing to do business in China despite home-country objections to China’s continued violation of human rights. In addition, public pressure in the home country often forces the MNC to act in accordance with ethnocentric value systems anyway, such as not

48 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

exporting products that are considered harmful in the home country. In addition, in 2011, “fac- ing pressure from universities and student groups, Nike announced an agreement on Monday in which it pledged to pay $1.54 million to help 1,800 workers in Honduras who lost their jobs when two subcontractors closed their factories.”16

The difficulty, even in adopting a stance of moral universalism, is in deciding where to draw the line. Individual managers must decide at some point, based on their own moral compass, when they believe a situation is simply not right and withdraw their involvement.

One fact, however, is inescapable: in a globalized market economy, CSR has to be part of modern business.

From CSR to Shared Value? According to Porter and Kramer, the concept of social responsibility in which corporations regard societal issues as legal or image concerns outside of the main business is a short-sighted approach to value creation and therefore to competitiveness.17 Rather, Creating Shared Value (CSV) ex- pands the pool of economic and social value and so “leverages the unique resources and expertise of the company to create economic value by creating social value.”18 By viewing the growth, prof- itability, and sustainability of the corporation as intermeshed with societal and economic progress in the markets in which it operates, companies such as Nestlé, Google, and Intel are creating shared value by “reconceiving products and markets; redefining productivity in the value chain; and enabling local cluster development”19 (clusters of related business in a local area in which the company operates). As another example, Walmart has reduced its environmental footprint by revamping the plastic used in its stores and by reducing its packaging. Also, it has cut 100 million miles from its delivery routes, saving $200 million even as it shipped more products.

Google announced its plan to go all out to establish the company in Europe “as more of a local player that is investing in jobs, in facilities, our physical presence, and all the ancillary things that come with that.”20 Google clearly has developed this new approach in response to challenges on issues including privacy, copyright disputes, antitrust actions, and taxation. “The company is spending hundreds of millions of euro to try to demonstrate that it is a responsible corporate citizen and a valuable contributor to the local economy.”21 In this case, one questions whether this is truly creating shared value or simply practicing CSR in response to Google’s negative image and lost opportunities. Nevertheless, Google is still being charged with violating privacy rules in Europe. The following “Under the Lens” examines how shared value can be cre- ated even in the most impoverished areas of the world.

UNDER THE LENS Speciality Products, Support and Shared Value are Key to Success: India 22

Subsistence farmers are turning their lives around thanks to a coffee co-op, reports Amy Kazmin Ten years ago, the residents of Kabada Boddaput—in southeastern India’s remote Araku

valley—were impoverished subsistence farmers, living in mud huts and getting by on the millet, yams, pumpkin and greens they grew on their one- to five-acre plots.

Cash was scarce and emergencies meant borrowing from friends and family—debts that might take years to repay. “It was a very terrible situation,” recalls Sanyasi Gullela, a farmer. “There were not enough clothes and no money for cattle.”

But life has changed dramatically for Kabada Boddaput’s tribal farmers—along with around 13,000 others in the Araku valley—since they began cultivating coffee, encouraged by the Naandi Foundation, a Hyderabad-based philanthropic organisation.

Last year, Mr Gullela earned Rs105,000 ($1,640) from coffee, which he grows on 1.3 of his three acres of land, and additional funds from the pepper vines coiling around the surrounding shade trees. In recent years, these earnings have financed four cattle for ploughing and an auto-rickshaw for his son. His neighbour has purchased a second-hand tractor.

Daily life has improved, with the newfound cash used to buy more nutritious food, such as lentils, and new clothes. Some locals have upgraded their mud homes with cement and tiles. “Nowadays, I have

CHAPTER 2 • MANAGING INTERDEPENDENCE 49

a lot of choices,” says G. Tirupati Rao, who grows coffee on two of his 3.5 acres. “What we want we can easily buy from the market. Earlier, we had to compromise.”

While around the world coffee has developed a reputation for bringing few tangible benefits to those toiling to grow it, the view in the Araku valley is different. The crop—grown bio-dynamically without costly fertilisers or agrochemicals—has become an unlikely stepping stone to socio- economic progress for some of India’s most neglected and marginalised peoples. “Coffee has given dignity to farmers,” says Chiranjeevi Naidu, a board member for the Small and Marginal Tribal Farmers Mutually-Aided Co-operative Society, set up in 2006 to process the coffee grown through the Naandi project.

The Araku valley has a history of coffee production dating back to the colonial era, when British planters grew thousands of acres. After independence, India’s government-run Coffee Board took over the plantations, employing local people. And the board gave coffee seeds to farmers, although few flour- ished in the absence of other support.

But many Araku farmers were eager to keep trying. “They said: ‘Anything that was valuable in India, the British took control of, so coffee must be valuable’,” says Manoj Kumar, Naandi’s chief ex- ecutive officer.

Naandi’s corporate donors were less enthusiastic, he recalls. “I’ve never heard of anyone coming out of poverty through coffee,” one told him. But Mr Kumar—who had rather stumbled into the coffee business when he was asked in 2004 to develop “livelihood projects” to help Araku farmers—was unde- terred. Naandi promised technical support with cultivation and offered to market the farmers’ produce overseas.

Since then, Naandi’s agricultural experts have taught Araku’s novice growers to produce top-quality organic coffee, some of which is being sold as “speciality” coffee to select roasters and traders from Japan, Korea, and Europe. These high-end buyers—who taste and rate each lot before purchasing—are willing to pay up to Rs700 per kg for the best of the beans. The bio-dynamic agriculture practised by the Araku farmers is labour intensive but requires no costly cash inputs. Farmers enrich the soil through mulching, using leaves, fallen fruits and other freely available organic matter. They use inexpensive, herbal soil additives to enhance soil fertility and fight pests.

They have learnt the discipline of harvesting beans only when they are bright red and fully ripe. For these efforts, co-op members last year received a guaranteed price of Rs375 per kg of top quality, fully-ripened beans.

From that, the co-op—where the beans are processed within 12 hours of being harvested—deducts Rs90 per kg for transport and processing, with Rs280 per kg profit left for the farmer.

This compares with Rs90–Rs110 per kg that Indian farmers typically receive for bulk coffee to be sold on the New York Commodity Exchange.

“If you want to do sustainable coffee at scale, it has to be speciality coffee,” says Mr Kumar. “When they buy, they pay more than anyone else will pay.”

Problems remain, especially in finding enough buyers willing to pay a premium for all the high- quality coffee the Araku farmers can produce. Last year, co-op members grew 100 tonnes of coffee, but Naandi is working with another 7,000 farmers whose saplings will mature soon, and other villages are pleading to join the initiative.

Mr Kumar believes Araku’s coffee output could easily rise to 500 tonnes or more. But the total world market for speciality coffee was just 10m tonnes in 2011—although it is said to be growing fast— and speciality coffee buyers tend to buy in small lots from diverse regions around the world. “I don’t have enough high-quality buyers,” Mr Kumar admits.

To expand the market for its own speciality coffee, Naandi recently raised $5m from its Indian phi- lanthropists for Araku Originals—its dedicated, for-profit, coffee marketing arm—to market its wares in Europe.

Araku Originals has opened a flagship store in Paris and is also selling its coffee though 34 other gourmet food shops and other upmarket retail outlets across France. The coffee that does not make the grade as speciality coffee is sold as organic, fair trade coffee elsewhere in Europe. “We are a benevolent link to the international market,” Mr Kumar says. “It can’t just be procured and dumped.”

Despite the challenges, Mr Kumar is convinced that coffee can be made a sustainable cash crop for farmers—but only if those involved across the industry are willing to share the profits more generously.

“You need a very clear-cut, shared value business model with the farmer,” he adds. “Otherwise, it won’t work.”

Source: © The Financial Times Limited 2017.

50 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

Among the increasing number of companies that are transitioning from corporate social respon- sibility (CSR) to a more strategic perspective known as creating shared value (CSV), Nestlé Corporation stands out for its focus and breadth of action within this realm.

Nestlé, with its head office in Vevey, Switzerland, is the largest food company in the world, with 330,000 employees; 165,000 contractual suppliers; and 456 factories in 86 countries.

In its model, illustrated in Exhibit 2-2, Nestlé shows how it has advanced the company strategy and resources beyond that of social responsibility to that of creating shared value with its stakeholders in a long-term agenda. As you compare the approach in the model for CSV with those typical of CSR, it is clear that Nestlé has evolved from a perspective of responding to outside conditions and pressures to that of internal and community initiatives and integration throughout the company’s operations, along with the community.

The Nestlé website explains its CSV philosophy as follows:

To create value for our shareholders and our company, we must create value for people in the countries where we are present. This includes the farmers who supply us, the employees who work for us, our consumers and the communities where we work.23

www.nestle.com

Nestlé’s SAI (sustainable agriculture initiative) has become the gold standard within the global food industry for sustainable sourcing and agriculture, promoting rural development. In fact, recognizing that other global food companies faced the same issues, Nestlé joined forces with companies such as Danone and Unilever in 2003 to consult on how to deal with problems such as scarce resources, quality issues, contaminants, and pollution. Today, Nestlé’s focus on sustainable water resources, nutrition, and rural development uses consultation with its stake- holders around the world and incorporates that feedback into strategic development. That focus is incorporated into the firm’s strategy and operations through its employees at all levels of the company rather than a directive from a compliance officer.

As an example, Nestlé Bangladesh sources raw materials from local suppliers and farmers to ensure that the farmers get fair prices for their produce and to promote the company’s sustainability by reducing dependence on imports. In addition, under the Nestlé Clean Drinking Water project, the company provides water tanks for schools in Gazipur, benefiting more than 43,000 students.

Creating

Shared Value

Nutrition, Water, Rural development; Our focus areas

Sustainability Protect the future

Compliance Laws, Business Principles, Codes of Conduct

ExHIBIT 2-2 Nestlé Creates Shared Value

Source: http://www.nestle.com/csv/what-is-csv/

CHAPTER 2 • MANAGING INTERDEPENDENCE 51

MNC Responsibility toward Human Rights With almost all tech products now made by contract manufacturers in low-wage nations where sweatshops are common, . . . Hewlett Packard, Dell, IBM, Intel, and twelve other tech compa- nies decided to unite to create the Electronic Industry Code of Conduct (EICC).24

BusinessWeek

Whereas many situations regarding the morality of the MNC’s presence or activities in a country are quite clear, other situations are not, especially when dealing with human rights. So loud has been the cry about products coming from so-called sweatshops around the world that former President Bill Clinton established an Anti-Sweatshop Code of Conduct, which includes a ban on forced labor, abuse, and discrimination and requires companies to provide a healthy and safe work environment and to pay at least the prevailing local minimum wage, among other require- ments. Nike’s efforts to address its problems include publishing its entire list of contract manu- facturers on the Internet to gain transparency. The company admits that it is difficult to keep track of what goes on at its 800-plus contracted factories around the world.25

What constitutes human rights is clouded by the perceptions and priorities of people in differ- ent countries. Although the United States often takes the lead in the charge against what it consid- ers human rights violations around the world, other countries point to the homelessness and high crime statistics in the United States. Often the discussion of human rights centers on Asia because many of the products sold in the West are imported from Asia by Western companies using manu- facturing facilities located there (see, for example, the accompanying “Comparative Management in Focus” section, which focuses on China). It is commonly held in the West that the best chance to gain some ground on human rights issues is for large MNCs and governments around the world to take a unified stance; many global players now question the morality of trading for goods that have been produced by forced labor or child labor. Although laws in the United States ban prison imports, shady deals between the manufacturers and companies acting as intermediaries make it difficult to determine the origin of many products—and make it easy for companies wanting ac- cess to cheap products or materials to ignore the law. However, under pressure from their labor unions (and perhaps their consciences), a number of large, image-conscious companies, such as Reebok and Levi Strauss, have established corporate codes of conduct for their buyers, suppliers, and contractors and have instituted strict procedures for auditing their imports. In addition, some companies are uniting with others in their industry to form their own code for responsible action.26

Comparative Management in Focus Doing Business in China—Censorship, Human Rights, and the Challenge for Multinationals 27

“China has tightened controls over all aspects of public life and clamped down hard on freedom of expression since President Xi Jinping took over as leader in 2012.”28

While China has made tremendous economic progress in recent decades, the status of human rights (and the very concept of human rights themselves) remains more nascent.

As of 2019, the pace of economic growth had slowed considerably—nearing a 30-year low. Large numbers of Chinese workers have been staging protests for unpaid compensation. For example, taxi drivers have surrounded government buildings and demanded better treatment. Some construc- tion workers have made extreme threats (e.g., leaping off buildings) if they do not receive back wages. The Chinese Labour Bulletin recorded over 1700 labor disputes in 2018. Government officials have sought to control the protests, and in some cases, detain leading activists.29 The protests highlight the economic challenges faced by Xi Jinping, who has been a strong proponent of the “Chinese dream,” which encapsulates his vision of greater prosperity and fairness throughout China.30 According to a Shenzhen protester, Zhou Liang, “Nobody cares about us anymore . . . I sacrificed my health for the company, . . . and now I can’t afford to buy even a bag of rice.”31 The slowing Chinese economy, coupled with more intense competition and burdensome government policies, has made it difficult— even for people who have experienced the Chinese dream.32

(Continued)

52 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

Although there has been growth in higher-skilled jobs and in services, there is continuing concern among MNCs about the pitfalls of operating in China. These include the uncertain legal climate; the difficulty of protecting intellectual property there; the repression of free speech; and the difficulty of monitoring, let alone correcting, human rights violations in factories. MNCs face considerable pressure in their home markets to address human rights issues in China and elsewhere. Consumers boycott their products, and trade unions in the United States, for example, complain that repression of workers’ rights has enabled Chinese companies to push down labor costs, causing considerable loss of manufacturing jobs at home. In addition, whereas the culture of profit has resulted in a market economy in regions of China—reducing the number of state-owned enterprises while increasing joint ventures and private ownership—that culture seems to have led to short- cuts in manufacturing, thus creating problems with products and poor treatment of workers, as illustrated in the accompanying photograph of garment workers. For example, the 2017 China Labour Dynamics Survey revealed that more than 40 percent of the respondents claim to work more than 50 hours per week. In the technology sector, employees often refer to “996” to describe their work life: 9am to 9pm, six days a week.33

Freedom of information took a particularly hard hit when “China’s education minister ... vowed that ‘western values’ will never be allowed in the country’s classrooms as the Communist Party steps up ef- forts to consolidate autocratic rule and stave off demands for democracy and universal human rights.”34 The Chinese government has taken an especially hard line as it relates to Internet censorship. The Chinese government restricts and/or denies access to a range of websites using a censorship mechanism commonly referred to as the “great firewall.” The government has exerted more control over censorship in recent years in order to suppress online communication and information access—such as curbs on Twitter-style micro- blogs that have been critical of the government—as well as severe limits on television programs.

Microsoft’s Bing search engine, for example, felt the heavy censorship hand of the Chinese government in January 2019 when it was blocked temporarily by the Chinese government’s censor- ing mechanism. Microsoft is the most recent major U.S. technology company to be blocked in China since Facebook’s WhatsApp messaging app in 2017. Initially, the Chinese government did not offer an explanation for blocking (and unblocking) the website.35 Bing, which served a niche market for English-language searches, had a 2 percent share of the Chinese online search market at the time of the blockage—compared to 70 percent for China’s Baidu—according to StatCounter.36 Online cen- sorship in China creates a dilemma for many foreign companies such as Google, which faced a tem- porary block of its website prior to a complete block, resulting in its exit from China. Nevertheless, Google has been working on a controversial censored version of its search engine in order to appease Chinese government officials, as discussed in the section “Ethics in Uses of Technology.”

The Chinese government has also fined individuals and companies for accessing foreign web- sites. The government has ratcheted up its efforts to quash “virtual private networks,” which have been

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CHAPTER 2 • MANAGING INTERDEPENDENCE 53

A considerable number of organizations have developed their own codes of conduct; some have gone further to join others around the world to establish standards to improve the quality of life for workers around the world. For example, the following Management in Action fea- tures Goodweave International and its initiatives to eliminate child labor (e.g., its Goodweave label). Some companies have joined with the Council on Economic Priorities (CEP) to establish SA8000 (Social Accountability 8000, on the lines of the ISO9000 manufacturing quality stan- dard). Their proposed global labor standards would be monitored by outside organizations to certify whether plants are meeting those standards, among which are the following:

• Do not use child or forced labor.

• Provide a safe working environment.

• Respect workers’ rights to unionize.

• Do not regularly require more than 48-hour workweeks.

• Pay wages sufficient to meet workers’ basic needs.41

used to circumvent the government’s censorship apparatus in order to access banned websites such as Twitter and Google. The fines follow from the passing of laws in 2017 that permit only “government- approved providers” to operate virtual private networks (VPNs).37 The newly enacted laws have forced multinationals—sometimes by blocking their private online access— to purchase costly VPN services from the government. In response, Apple removed 674 VPNs from its China App Store.38

The latest censorship moves come as a disappointment because it had seemed that China was becoming more conscious of the need to improve its image regarding CSR as it takes a larger eco- nomic role on the world stage; indeed, its membership in the WTO obliges the country to act in con- cert with the policies and values of a free market.39 The censorship issues have contributed to rising political and economic tensions between the United States and China. U.S. officials have pressed for substantial changes to economic policies especially with respect to protection of intellectual property rights and discriminatory treatment of U.S. multinational enterprises. U.S. officials have also voiced concerns about widespread subsidization of enterprises in particular industrial sectors that puts U.S. companies at a competitive disadvantage.40

FIGURE 2-1 Women in Garment Factory in China Garment factory of an unnamed company in China, where women work very long hours.

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54 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

In addition, four international codes of conduct provide some consistent guidelines for multinational enterprises (MNEs). These codes were developed by several institutions and integrated by Getz into their common underlying principles, thereby establishing MNE be- havior toward governments, publics, and people, as shown in Exhibit 2-3. (The originating institutions are in parentheses.) Getz concludes, “As international organizations and institu- tions (including MNEs themselves) continue to refine the codes, the underlying moral issues will be better identified, and appropriate MNE behavior will be more readily apparent.”47 The examples shown in Exhibit 2-3 are excerpted from the codes and show how companies can provide a cooperative, long-term relationship with the local people and governments where they operate.

MNE and Host Governments

Economic and Developmental Policies

• MNEs should consult with governmental authorities and national employers’ and workers’ organizations to ensure that their investments conform to the economic and social development policies of the host country. (ICC; OECD; ILO; UN/CTC)

• MNEs should not adversely disturb the balance-of-payments or currency exchange rates of the countries in which they operate. They should try, in consultation with the govern- ment, to resolve balance-of-payments and exchange rate difficulties when possible. (ICC; OECD; UN/CTC)

• MNEs should cooperate with governmental policies regarding local equity participation. (ICC; UN/CTC)

Political Involvement

• MNEs should refrain from improper or illegal involve- ment in local political activities. (OECD; UN/CTC)

• MNEs should not pay bribes or render improper benefits to any public servant. (OECD; UN/CTC)

• MNEs should not interfere in intergovernmental rela- tions. (UN/CTC)

MNEs and the Public

Technology Transfer

• MNEs should cooperate with governmental authorities in assessing the impact of transfers of technology to developing countries and should enhance the technological capacities of developing countries. (OECD; UN/CTC)

ExHIBIT 2-3 International Codes of Conduct for MNEs

MANAGEMENT IN ACTION ‘‘Impact Beyond Numbers’’—GoodWeave’s Global Solution to Child Labor 42

GoodWeave envisions a day when no child is made to work instead of going to school, and when freedom, access to education, and the right to childhood are guaranteed.43

goodweave.org, 2018

GoodWeave International has been a key player in terms of setting child labor standards, estab- lishing product certification and worker-protection programs, as well as devising inspection and monitoring programs for informal supply chains. GoodWeave has established a GoodWeave

label that provides assurance that a product is child-labor free. GoodWeave works aggressively with the private sector to provide transparency and accountability throughout supply chains.

Goodweave CEO Nina Smith recalled when companies did not acknowledge the presence of child labor in the supply chain. All too often, companies had child labor policies that were not enforced.44

Today, through dialogue and advocacy, they are reassessing this approach and are beginning to work with us to accept such practices and to clean up their supply chains, including reme- diating child, forced and bonded labor.45

Nina Smith. CEO, GoodWeave

GoodWeave’s strategic imperative for labor rights involves workable solutions that penetrate the many subcontracting layers in order to reach “remote sites and informal homeworkers, who are often intentionally hidden, and ensure their protection and freedom.”46

Sources: C. Skroupa. ‘‘Impact Beyond Numbers’’—GoodWeave’s Global Solution to Child Labor. www.forbes.com; https://goodweave.org/about/our-vision/

CHAPTER 2 • MANAGING INTERDEPENDENCE 55

ETHICS IN GLOBAL MANAGEMENT National, as well as corporate, cultures need to be taken into account if multinationals are to enforce their codes across different regions.48

Financial Times

Globalization has multiplied the ethical problems facing organizations. However, business ethics have not yet been globalized. Attitudes toward ethics are rooted in culture and business

Sources: OECD: The Organization for Economic Cooperation and Development Guidelines for Multinational Enterprises; ILO: The International Labor Office Tripartite Declarations of Principles Concerning Multinational Enterprises and Social Policy; ICC: The International Chamber of Commerce Guidelines for International Investment; UN/CTC: The United Nations Universal Declaration of Human Rights, UN Code of Conduct on Transnational Corporations.

Employment Practices (excerpts)

• MNEs should cooperate with host governments’ efforts to create employment opportunities in particular localities. (ICC)

• MNEs should try to increase employment opportunities and standards in the countries in which they operate. (ILO)

• MNEs should give advance notice of plant closures and mitigate the resultant adverse e�ects. (ICC; OECD; ILO)

• MNEs should provide standards of employment equal to or better than those of comparable employers in the countries in which they operate. (ICC; OECD; ILO)

• MNEs should pay, at minimum, basic living wages. (ILO) • MNEs should maintain the highest standards of safety

and health, and should provide adequate information about work-related health hazards. (ILO)

Human Rights

• MNEs should respect human rights and fundamental freedoms in the countries in which they operate. (UN/CTC)

• MNEs should not discriminate on the basis of race, color, sex, religion, language, social, national and ethnic origin, or political or other opinion. (UN/CTC)

• MNEs should respect the social and cultural objectives, values, and traditions of the countries in which they operate. (UN/CTC)

• MNEs should not dominate the capital markets of the countries in which they operate. (ICC; UN/CTC)

• MNEs should provide the information necessary for correctly assessing taxes to be paid to host government authorities. (ICC; OECD)

• MNEs should not engage in transfer pricing policies that modify the tax base on which their entities are assessed. (OECD; UN/CTC)

• MNEs should give preference to local sources for components and raw materials if prices and quality are competitive. (ICC; ILO)

• MNEs should reinvest some profits in the countries in which they operate. (ICC)

Laws and Regulations

• MNEs are subject to the laws, regulations, and jurisdiction of the countries in which they operate. (ICC; OECD; UN/CTC)

• MNEs should respect the right of every country to exercise control over its natural resources, and to regulate the activities of entities operating within its territory. (ICC; OECD; UN/CTC)

• MNEs should use appropriate international dispute settlement mechanisms, including arbitration, to resolve conflicts with the governments of the countries in which they operate. (ICC; OECD)

• MNEs should resolve disputes arising from expropriation by host governments under the domestic law of the host country. (UN/CTC)

• MNEs should develop and adapt technologies to the needs and characteristics of the countries in which they operate. (ICC; OECD; ILO)

• MNEs should conduct research and development activities in developing countries, using local resources and personnel to the greatest extent possible. (ICC; UN/CTC)

Environmental Protection

• MNEs should respect the laws and regulations concerning environmental protection of the countries in which they operate. (OECD; UN/CTC)

• MNEs should cooperate with host governments and with international organizations in the development of national and international environmental protection standards. (ICC; UN/CTC)

• MNEs should supply to appropriate host governmental authorities information concerning the environmental impact of the products and processes of their entities. (ICC; UN/CTC)

MNEs and Persons

Consumer Protection

• MNEs should respect the laws and regulations of the countries in which they operate with regard to consumer protection. (OECD; UN/CTC)

• MNEs should preserve the safety and health of consumers by disclosure of appropriate information, proper labeling, and accurate advertising. (UN/CTC)

ExHIBIT 2-3 Continued

2-2. To acknowledge the stra- tegic role that ethics must play in global management and provide guidance to managers to maintain ethi- cal behavior amid the vary- ing standards and practices around the world

56 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

practices. Swee Hoon Ang found, for example, that east Asians considered deception as amoral, and acceptable only if it has a positive effect on larger issues such as the company, the extended family, or the state.49 For an MNC, it is difficult to reconcile consistent and ac- ceptable behavior around the world with home-country standards. One question, in fact, is whether it should be reconciled. It seems that, although the United States has been the driv- ing force to legislate moral business conduct overseas, perhaps more scrutiny should have been applied to those global MNCs headquartered in the United States, such as Enron and WorldCom, that so greatly defrauded their investors, employees, and all who had business with them.

The term international business ethics refers to the business conduct or morals of MNCs in their relationships with individuals and entities. Such behavior is based largely on the cultural value system and the generally accepted ways of doing business in each country or society, as we have discussed throughout this book. Those norms, in turn, are based on broadly accepted guide- lines from religion, philosophy, professional organizations, and the legal system. The complexity of the combination of various national and cultural factors in a particular host environment that combine to determine ethical or unethical societal norms is illustrated in Exhibit 2-4. The au- thors, Robertson and Crittenden, note,

Varying legal and cultural constraints across borders have made integrating an ethical compo- nent into international strategic decisions quite challenging.50

National legal and cultural differences introduce an ethical dilemma for MNC managers. Should managers of MNC subsidiaries base their ethical standards on those of the host country or those of the home country—or can the two be reconciled? What is the moral responsibility of expatriates regarding ethical behavior, and how do these issues affect business objectives? How do expatriates simultaneously balance their responsibility to various stakeholders—to owners, creditors, consumers, employees, suppliers, governments, and societies? The often conflicting objectives of host and home governments and societies also must be balanced.

Economic Ideology: Capitalism versus Socialism

Culture: Western versus Eastern

Societal Moderators: Language Religion Historic traditions

Macro-Level Moderators: Natural resources GDP per capita Form of government Political stability

Dominant Moral Philosophy

Ethical or Unethical Societal Norms

Individual Behavior

Firm Specific Moderators: Corporate culture Policies Profit motive

ExHIBIT 2-4 A Moral Philosophy of Cross-Cultural Societal Ethics

Source: C. Robertson and W. Crittenden, “Mapping moral philosophies: Strategic implications for multinational firms,” Strategic Management Journal 24 (2003), pp. 385–392, © John Wiley & Sons, Inc. Reproduced with permission.

CHAPTER 2 • MANAGING INTERDEPENDENCE 57

The approach to these dilemmas varies among MNCs from different countries. Whereas the American approach is to treat everyone the same by making moral judgments based on gen- eral rules, managers in Japan and Europe tend to make such decisions based on shared values, social ties, and their perceptions of their obligations. According to many U.S. executives, there is little difference in ethical practices among the United States, Canada, and Northern Europe. According to Bruce Smart, former U.S. Undersecretary of Commerce for International Trade, the highest ethical standards seem to be practiced by the Canadians, British, Australians, and Germans. As he says, “a kind of noblesse oblige still exists among the business classes in those countries”—compared with the prevailing attitude among many U.S. managers that condones “making it” whatever way one can.51 Another who experienced few problems with ethical prac- tices in Europe is Donald Petersen, former CEO of Ford Motor Company. However, he warns us about countries under a dictatorship where bribery is a generally accepted practice.52

Donald Petersen’s experience has been borne out by research by Transparency International, a German nongovernmental organization (NGO) that fights corruption. It ranks 180 countries based on perceived levels of public sector corruption. The organization’s year 2017 Global Corruption Barometer (selections are shown in Exhibit 2-5) shows the results of research into the extent that business and other sectors of their society are affected by corruption, as perceived by businesspeo- ple, academics, and risk analysts in 69 countries. A primary focus of the research was the relative prevalence of bribery in various spheres of people’s lives, including political and business practices.

The 2017 Corruption Perceptions Index shows that more than two-thirds of the 180 coun- tries in the index score below fifty on a scale from 100 (highly clean) to 0 (highly corrupt). These results indicate a serious corruption problem. Overall, New Zealand sits atop the list of least corrupt countries. The data show that countries in Western Europe, Singapore, and Canada

Rank Score Country

1 89 New Zealand 2 88 Denmark 3 85 Finland 6 84 Singapore 8 82 Canada 8 82 UK

13 77 Hong Kong 16 75 USA 20 73 Japan 23 70 France 51 54 South Korea 77 41 China 81 40 India 96 37 Brazil

135 29 Mexico 135 29 Russia 178 14 Syria 180 9 Somalia

ExHIBIT 2-5 2017 Corruption Perceptions Index—Selected Ranks Each country’s ranking is based on its score as it relates to perceptions of the degree of corruption as seen by business people and country analysts and ranges between 100 (very clean) and 0 (highly corrupt). For example, New Zealand’s score was 89, and Mexico’s and Russia’s scores were 29.

Source: Based on selected data from the TI Corruption Perceptions Index, 2017, www.transparencyinter national.org, accessed December 22, 2018.

58 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

were among the top ten least corrupt countries. Notably, the UK rose from 14th in 2014 to 8th in 2017. Australia, Hong Kong, and Iceland tied for 13th; and the United States ranked 16th. France’s rank improved to 23rd (from 26th on 2014), Japan dropped to 20th (from 15th in 2014), South Korea slipped to 51st (from 43rd in 2014), China was 77th (up from 100th in 2014), while Russia’s rank was 135th (a one-spot improvement from 2014).53

The right to information is vital for preventing corruption. When citizens can access key facts and data from governments, it is more difficult to hide abuses of power and other illegal activities—governments can be held accountable.54

Transparency International

The biggest single problem for MNCs in their attempt to define a corporate-wide ethical posture is the great variation of ethical standards around the world. Many practices considered unethical or even illegal in some countries are accepted ways of doing business in others.

Bribery There are few other areas where a single employee can with one instance of misjudgment, create huge embarrassment [for the company]. 55

Financial Times

The computer is on the dock, it’s raining, and you have to pay $100 [bribe] to get it picked up.56 William C. Norris, Control Data Corporation

MNCs are often caught between being placed at a disadvantage either by refusing to go along with a country’s accepted practices, such as bribery, or being subject to criticism at home for using unethical tactics to get the job done. Large companies that have refused to participate have led the way in taking a moral stand because of their visibility; their potential impact on the local economy; and, after all, their ability to afford such a stance. Some other large companies, how- ever, have not always taken a moral stand.

Whereas the upper limits of ethical standards for international activities are set by the in- dividual standards of certain leading companies—or, more realistically, by the moral values of their top managers—it is more difficult to set the lower limits of those standards; that limit is set in each situation by whether the laws are actually enforced in that location.

The bribery of officials is prohibited by law in all countries, but it still goes on as an ac- cepted practice; often, it is the only way to get anything done. In such cases, the MNC managers have to decide which standard of behavior they will follow. What about the $100 bribe to get the computer off the rainy dock? William Norris says he told his managers to pay the $100 because to refuse would be taking things too far. Generally, Control Data did not yield to such pressure, though it said sales were lost as a result.57

A specific ethical issue for managers in the international arena is that of questionable payments. These are business payments that raise significant questions of appropriate moral behavior either in the host nation or in other nations. Such questions arise out of differences in laws, customs, and ethics in various countries and whether the payments in question are political payments, extortion, bribes, sales commissions, or grease money—payments to ex- pedite routine transactions. Other common types of payments are made to speed the clearance of goods at ports of entry and obtain required certifications. They are called different names in different countries: tokens of appreciation, la mordida (“the bite,” in Mexico), bastarella (“little envelope” in Italy), and pot-de-vin (“jug of wine” in France). For the sake of simplicity, all these types of questionable payments are categorized in this text as some form of bribery. In Mexico, for example, companies make monthly payments to the mail carriers, or their mail gets lost.

Most managers perceive bribery as “endemic in business and government in parts of Africa and south and east Asia. Corruption and bribery are considered to be part of the culture and en- vironment of certain markets, and will not simply go away.”58 In some parts of Latin America, for example, customs officers are paid poorly and so are encouraged to take bribes to supplement their incomes. However, developed countries are not immune to bribery—as demonstrated in 2015 when the FIFA president of World Cup Soccer was under criminal investigation for bribery.

CHAPTER 2 • MANAGING INTERDEPENDENCE 59

The dilemma for many managers operating abroad is how much to adhere to their own ethical standards in the face of foreign customs or how much to follow local ways to be competitive. Certainly, in some societies, gift giving is common to building social and familial ties, and such gifts incur obligation. Nevertheless, a bribe is different from a gift or other reciprocation, and those involved know that by whether it has a covert nature. In his book on bribes, Noonan takes the following position:

Bribery is universally shameful. There is not a country in the world that does not treat bribery as criminal on its books. . . . In no country do bribetakers speak publicly of their bribes, nor do bribegivers announce the bribes they pay. No newspaper lists them. No one advertises that he can arrange a bribe. No one is honored precisely because he is a big briber or bribee. No one writes an autobiography in which he recalls the bribes he has taken or paid. . . . Not merely the criminal law—for the transaction could have happened long ago and prosecution be barred by time—but an innate fear of being considered disgusting restrains briber and bribee from pa- rading their exchange. Significantly, it is often the Westerner with ethnocentric prejudice who supposes that a modern Asian or African society does not regard the act of bribery as shameful in the way Westerners regard it.59

However, Americans must be able to distinguish between harmless practices and actual brib- ery, between genuine relationships and those used as a cover-up. To help them distinguish, the Foreign Corrupt Practices Act (FCPA) of 1977 was established, which prohibits U.S. com- panies from making illegal payments, other gifts, or political contributions to foreign govern- ment officials for the purpose of influencing them in business transactions. The goal was to stop MNCs from contributing to corruption in foreign governments and to upgrade the image of the United States and its companies operating overseas.

The FCPA covers the activities of foreign firms that are cross-listed in the United States. In 2018, for example, the Security Exchange Commission (SEC) announced that Credit Suisse will pay roughly $30 million to resolve allegations that it breached the FCPA by influencing foreign officials in order to obtain investment banking business in the Asia Pacific region. In 2016, the SEC announced that German-based SAP SE agreed to relinquish $3.7 million in profits to settle charges that it violated the FCPA during its attempts to obtain business in Panama.60 According to the investigation, a former SAP executive made bribe payments to a Panamanian government official in order to obtain contracts.61 SAP has remained in the ethical spotlight as discussed in the “Under the Lens” section below.

UNDER THE LENS SAP Alerts US to South Africa Kickback Allegations 62

The allegations of wrongdoing in our South African business have had a profound impact on our employees, customers and partners, and on the South African public—and we apologise whole- heartedly for this.63

Adaire Fox-Martin, SAP board member, 2017

SAP, Europe’s largest software company, says it is changing its global sales practices and has alerted the US authorities to allegations that its South African office paid kickbacks to a company linked with the country’s influential Gupta family.

In a statement on Thursday apologising for what it described as a “humbling” scandal, the German group said it had “voluntarily disclosed the situation in its South Africa business” to the US Department of Justice and US Securities and Exchange Commission, pledging its “full and complete co-operation.”

SAP said it had also begun disciplinary proceedings against three employees in South Africa, after a three-month investigation “uncovered indications of misconduct in issues relating to the management of Gupta-related third parties” in bidding for contracts from government-owned companies.

SAP’s approach to US investigators underlines the growing international ramifications of what has become South Africa’s biggest post-apartheid political scandal. The ruling African National Congress

(Continued)

60 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

Ethics in Uses of Technology A growing concern among Internet users and companies around the world is cyber security (i.e., protection of private information that has been posted online). Facebook has been the subject of a major investigation regarding data protection in Europe after the social media giant revealed yet another data breach involving photos belonging to millions of its users. The Irish data protection commission acknowledged that it had launched a new investigation into Facebook due to the vol- ume of data breaches during the past year. A spokesperson for the Irish data protection commis- sioner said, “The Irish DPC has received a number of breach notifications from Facebook since the introduction of the [EU’s General Data Protection Regulation] GDPR on May 25 2018,” a spokesperson said. “With reference to these data breaches, including the breach in question, we have this week commenced a statutory inquiry examining Facebook’s compliance with the rele- vant provisions of the GDPR.” (Facebook is discussed further in the end-of-chapter Case Study.)

The ethical use of technology around the world poses a considerable challenge to have consistent practices because of the varied expectations about the use of technological devices and programs as they intersect with people’s private lives. The electronic data privacy laws in Europe illustrate this conflict. The EU Directive on Data Protection guarantees European citizens absolute control over data concerning them. A U.S. company wanting personal infor- mation must get permission from that person and explain what the information will be used for; the company must also guarantee that the information won’t be used for anything else without the person’s consent. It appears that Europe is setting the rules. Regulators in France, Germany, and Italy, for example, were focusing on whether Apple’s iPhone and iPad violated privacy rules by tracking the location of users. Google, also, had previously started a firestorm in Germany when it was discovered to have been gathering information for its street map- ping service from people’s unsecured wireless networks. Later, Sony acknowledged a breach

has been split over allegations that the Gupta family has used a friendship with President Jacob Zuma to exert control over government business.

The FBI recently opened its own probe into US links to the family, whose influence is claimed to extend to appointments to Mr Zuma’s cabinet and the awarding of contracts from state-owned compa- nies including Eskom, the power monopoly, and Transnet, a logistics giant. The Guptas and Mr Zuma have always denied the allegations ... SAP said it had not uncovered “any evidence of a payment to a South African government official” in the probe. Adaire Fox-Martin, an SAP board member, said the company had been co-operating with the Justice Department and SEC in the US since July 13. She con- firmed the two agencies were still investigating the issue.

“The allegations of wrongdoing in our South African business have had a profound impact on our employees, customers and partners, and on the South African public—and we apologise wholeheartedly for this,” she said in a press release.

When reports in local media first emerged in July, SAP had originally responded by calling the allegations “unfounded and unsubstantiated,” but it soon placed four managers on leave, seized their electronic devices and launched an investigation.

The South African press had reported an alleged R100m ($7.5m) in kickbacks. SAP allegedly agreed to pay a 10 per cent “sales commission” in 2015 to CAD House, a company ultimately owned by Gupta family members, to secure business from Transnet, South Africa’s state-owned port and rail operator, according to the reports.

The three employees SAP is disciplining were among the four placed on leave. The remain- ing employee “had no material involvement” in the matter and will return to work. SAP, which of- fers backroom-to-boardroom software to help businesses run their operations, also pledged sweeping changes to its overseas offices. It said it would immediately “eliminate sales commissions on all public sector deals” in countries deemed by Transparency International to have a Corruption Perceptions Index below 50. South Africa’s rating is 45.

It will also introduce new controls, due diligence measures and audit practices. In South Africa specifically, SAP is beefing up its legal compliance staff. SAP has promised to publish the findings of its internal probe, which is being carried out by the law firm Baker McKenzie. The investigation is continuing.

Source: © The Financial Times Limited 2018.

CHAPTER 2 • MANAGING INTERDEPENDENCE 61

of data of 77 million users of its PlayStation network. Because of such breaches of privacy, Ms.Viviane Reding, the European Justice Commissioner, has proposed extending privacy rules to social media and online banking, shopping, and video games, among others.64 The United States has no agency dedicated to monitoring issues of data privacy as Europe does. In fact, Google is in a fight with the European regulators, which are pressing for the so-called right to be forgotten rule to be imposed outside of Europe.65

Another ethical debate has emerged as some governments such as China restrict access to the Internet. Eight years ago, Google pulled out of China because of the country’s restrictions on free- dom of speech. However, Google has been secretly developing a heavily censored version of its services in China (i.e., “Dragonfly”). Over one thousand Google employees signed a protest let- ter complaining that the new censored search engine for China creates ethical dilemmas. Indeed, the protest letter stated, “Currently we do not have the information required to make ethically- informed decisions about our work, our projects, and our employment.”66 The letter also stated, “To make ethical choices, Googlers need to know what we’re building. Right now, we don’t,” said the letter. “Our industry has entered a new era of ethical responsibility: the choices we make mat- ter on a global scale. Yet most of us only learned about project Dragonfly through news reports in early August.”67

As for China, Google and the other tech firms that do business there have some big decisions to make. The era in which multinational corporations can simply fly 35,000 feet over the problems of various nation states is ending.68

Rana Foroohar, Financial Times, August 20, 2018

Chinese firms have also immersed themselves in the center of the censorship debate by try- ing to develop solutions. For example, Bytedance, a Chinese Internet company, developed the wildly popular Chinese short-video apps Douyin and Tik Tok, which seem to be almost the same. However, Douyin can be downloaded only from a Chinese app store by someone on the main- land, while Tik Tok is accessible only to users outside the country.69

Making the Right Decision How is a manager operating abroad to know what is the right decision when faced with ques- tionable or unfamiliar circumstances of doing business? Usually, the manager or salesperson is faced with wanting to make certain decisions that will benefit her company, her career, or both. That decision, or set of actions, is likely to be profitable for the company and secure new market opportunities. However, there are many other considerations that make it less clear whether to continue to pursue that avenue, in particular in countries or settings that provide less transpar- ency, and often certain pressures, about what to do. If the manager is faced with such a situation, a number of steps can help her clarify the way to proceed.

Steps to an Ethical Decision

• Consult the laws of both the home and the host countries—such as the FCPA. If any of those laws would be violated, then you, the manager, must find some other way to com- plete the business transaction or withdraw altogether.

• Consult the International Codes of Conduct for MNEs (see Exhibit 2-3). These are broad and cover various areas of social responsibility and ethical behavior; even so, many issues are subject to interpretation. If there is no apparent conflict on these legal grounds, then proceed with further consultation.

• Consult the company’s code of ethics (if there is one) and established norms. Note that it is the responsibility of the company to provide guidelines for the actions and deci- sions its employees make. What kinds of decisions do your colleagues typically make in these kinds of circumstances? If your intended action runs contrary to the norms or the formal code, discontinue that plan. Consult your superiors if you still need clarification. Unfortunately, often the situation is not that clear-cut, or your boss will tell you to use your own judgment. Sometimes your superiors in the home office just want you to com- plete the transaction to the benefit of the company and don’t want to be involved in what you have to do to consummate the deal. Failing clear guidance:

62 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

• Weigh stakeholders’ rights (see Exhibit 2-1). To whom are you responsible? What are the priorities of responsibilities to those stakeholders? What is the potential benefit versus harm involved in your decision or set of actions? (For example, does the proposed action [rigged contract bid, bribe, etc.] harm anyone? What are the likely consequences of your decision in both the short run and long run? Who would benefit from your contemplated action? Who might be harmed? In the case of a rigged contract bid through bribery, for example, people are put at a disadvantage, especially over the long term, with a pattern of this behavior.)

• Follow your own conscience and moral code. Ask yourself whether you can live with the potential decision and what would be the next step for you if you continue along that path.

It is important to decide where to draw the line in the sand to operate with integrity; otherwise, the line moves further and further away with each transgression. In addition, what can start here with a small bribe or cover-up—a matter of personal ethics—can, over time, and taken together with many people covering up, result in a situation of a truly negligent, and perhaps criminal, stance toward responsibility to society, like that revealed by investigations of the tobacco industry in the United States. Indeed, executives are increasingly being held personally and criminally ac- countable for their decisions; this is true even for people operating on companies’ boards of direc- tors. Criminal charges brought against executives of WorldCom in 2003 and convictions against Enron executives in 2006—as well as international banks such as Citigroup and JP Morgan Chase that disguised Enron’s financial woes—reveal the consequences that face MNC executives who engage in misconduct. In May 2018, the former Volkswagen chief executive officer was charged by U.S. authorities with conspiracy following a 2015 scandal in which the company manipulated the emissions for its diesel vehicles in order to falsely comply with national pollution guidelines.70

The Volkswagen scandal raises another important issue pertaining to organizational re- sponses after a major ethical or legal scandal. For example, Siemens adopted a proactive ap- proach by overhauling its top management team, extracting money from its former executives, and engaging in extensive governance reform following its “slush-fund” scandal. In con- trast, Volkswagen has offered a lackluster response following its emission scandal. Although Volkswagen took measures to cut costs and reduce engineering complexity, for example, it has initiated few salient changes to its governance practices and even sought to divert attention from its own emissions scandal by trying to make it an industry-wide issue (as discussed in the “Under the Lens” feature that follows).71

UNDER THE LENS Volkswagen under the Spotlight

Loopholes in the lab tests: Three years after the Dieselgate scandal auto companies are ma- nipulating emissions data, using ‘lawful but awful ways’ to game even a new testing regime. Brussels is now trying to make the system more robust.72

W hen Volkswagen was caught cheating diesel emissions tests in 2015, one of the first actions its engineers took was to launch a secret project: to obtain cars from rival manufacturers and conduct tests on their emissions. Its aim was to find evidence of widespread cheating across

the industry, so guilt could be spread around and penalties diluted, say two people inside the company. The Volkswagen Scandal, in other words, might helpfully become the Car Scandal. Vehicles from Fiat, Hyundai and others were tested for harmful nitrogen oxide emissions by VW

engineers at the group’s Wolfsburg headquarters from late 2015 to early 2016. The engineers had a simple conundrum: VW had just admitted to equipping 11m cars with software to detect laboratory tests and enable them to enter a low-emissions mode. If VW’s best engineers found regulations so onerous that they resorted to deliberate fraud, what had its rivals done? A third person in the company insists there was a more innocent explanation for the tests. Engineers uninvolved in the original cheating had to use rival cars as control variables to better understand their own sophisticated software—some of it supplied by third parties and used by rival brands. “We were not dirtying others’ hands to make our own look clean,” says this employee.

CHAPTER 2 • MANAGING INTERDEPENDENCE 63

MANAGING INTERDEPENDENCE Because multinational firms (or other organizations, such as the Red Cross) represent global interdependency, their managers at all levels must recognize that what they do, in the aggre- gate, has long-term implications for the socioeconomic interdependence of nations. Simply to describe ethical issues as part of the general environment does not address the fact that manag- ers must control their activities at all levels—from simple, daily business transactions involving local workers, intermediaries, or consumers to global concerns of ecological responsibility—for the future benefit of all concerned. Whatever the situation, the powerful long-term effects of MNC and MNE action (or inaction) should be planned for and controlled, not haphazardly con- sidered part of the side-effects of business. The profitability of individual companies depends on a cooperative and constructive attitude toward global interdependence.

Foreign Subsidiaries in the United States Much of the preceding discussion has related to U.S. subsidiaries around the world. However, to highlight the growing interdependence and changing balance of business power globally, foreign subsidiaries in the United States should also be considered. Since much criticism about a lack of responsibility has been directed toward MNCs with headquarters in the United States, we must think of these criticisms from a global perspective. The number of foreign subsidiaries in the United States has grown and continues to grow dramatically; FDI in the United States by other countries is, in a number of industries, far more than U.S. investment outward. Americans are thus becoming more sensitive to what they perceive as a lack of control over their own country’s business.

Things look very different from the perspective of Americans employed at a subsidiary of an overseas MNC. Interdependence takes on a new meaning when overseas managers are calling the shots regarding strategy, expectations, products, and personnel. Often, Americans’ resent- ment about different ways of doing business by foreign companies in the United States inhibits the cooperation that gave rise to the companies’ presence in the first place.

Today, managers from all countries must learn new ways, and most MNCs are trying to adapt. In Japan, corporate social responsibility has traditionally meant that companies take care of their employees, whereas in the United States both the public and private sectors are expected to share responsibility for the community. Part of the explanation for this difference is that U.S. corporations get tax deductions for corporate philanthropy, whereas Japanese firms do not; nor are Japanese managers usually familiar with community needs. For these and other reasons, Japanese subsidiaries in the United States have not been active in U.S. philanthropy.

Volkswagen declined to comment on this previously unreported episode. What the engineers found shocked them. Rival brands’ NOx emissions were considered “a com-

plete disaster.” Performance on the road was “completely different to the technical data,” says a VW worker briefed on the results. The overall summary of whether rivals were also skewing emissions results was clear: “It’s not only VW who is cheating.”

What is unclear is whether rivals were deploying the same strategy as VW—using a “defeat device” to illegally trick regulators into believing its cars were green—or if they had simply become better at bending the rules on tests, a problem that still exists with petrol cars today, as the European Commission revealed last month when it disclosed the latest “tricks” carmakers were using to exploit loopholes for incoming 2020 emissions procedures.

The distinction is blurred but important. VW paid the consequences of crossing the line and cheat- ing NOx emissions tests in the US. But the efforts of other carmakers to legally undermine testing for both NOx and CO2 in Europe have never resulted in real penalties.

“Legal optimisation was done on an industrial scale,” says Nick Molden, chief executive of Emissions Analytics, which conducts real-world driving emissions tests. “It became so ingrained in how cars were certified that the carmakers didn’t understand they had done something wrong ... That’s the scandal in Europe: that these actions were not illegal.”

Source: © The Financial Times Limited 2018.

2-3. To recognize the impor- tance of managing inter- dependence and include sustainability and shared value in their long-term plans

64 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

Managing Subsidiary–Host Country Interdependence When managing interdependence, international managers must go beyond general issues of social responsibility and deal with the specific concerns of the MNC subsidiary–host country re- lationship. Outdated attitudes that focus only on profitability and autonomy are shortsighted and usually result in only short-term realization of those goals. Managers in those companies must learn to accommodate the needs of other organizations and countries:

Interdependence rather than independence, and cooperation rather than confrontation are at the heart of that accommodation ... the journey from independence to interdependence man- aged badly leads to dependence, and that is an unacceptable destination.73

Most of the past criticism levied at MNCs has focused on their activities in less- developed countries (LDCs). Their real or perceived lack of responsibility centers on the transfer in of inappropriate technology, causing unemployment, and the transfer out of scarce financial and other resources, reducing the capital available for internal develop- ment. In their defense, those corporations and NGOs help developing countries by contribut- ing new technology and managerial skills, improving the infrastructure, creating jobs, and bringing in investment capital from other countries by exporting products. The infusion of outside capital provides foreign-exchange earnings that can be used for further develop- ment. The host government’s attitude is often referred to as a love–hate relationship. It wants the economic growth that foreign investment provides, but it does not want the incursions on national sovereignty or the technological dependence that may result. Most criticisms of MNC subsidiary activities, whether in less-developed or more-developed countries, are along the following lines:

• MNCs locally raise their needed capital, contributing to a rise in interest rates in host countries. The majority (sometimes even 100 percent) of the stock of most subsidiaries is owned by the parent company. Consequently, host-country people do not have much con- trol over the operations of corporations within their borders.

• MNCs usually reserve the key managerial and technical positions for expatriates. As a re- sult, they do not contribute to the development of host-country personnel.

• MNCs do not adapt their technology to the conditions that exist in host countries.

• MNCs concentrate their research and development activities at home, restricting the transfer of modern technology and know-how to host countries.

• MNCs give rise to the demand for luxury goods in host countries at the expense of essen- tial consumer goods.

• MNCs start their foreign operations by purchasing existing firms rather than by develop- ing new productive facilities in host countries.

• MNCs dominate major industrial sectors, thus contributing to inflation by stimulating de- mand for scarce resources and earning excessively high profits and fees.

• MNCs are not accountable to their host nations but only respond to home-country gov- ernments; they are not concerned with host-country plans for development.74

Specific MNCs have been charged with tax evasion, union busting, and interference in host-country politics. Of course, corporations have both positive and negative effects on different economies. For every complaint about MNC activities (whether about capital mar- kets, technology transfer, or employment practices), we can identify potential benefits (see Exhibit 2-6).

Numerous conflicts arise between MNC companies or subsidiaries and host countries, including conflicting goals (both economic and noneconomic) and conflicting concerns, such as the security of proprietary technology, patents, or information. Overall, the resulting trade- offs create an interdependent relationship between the subsidiary and the host government, based on relative bargaining power. The power of large corporations is based on their large- scale, worldwide economies, their strategic flexibility, and their control over technology and production location. The bargaining chips of the host governments include their control of raw materials and market access and their ability to set the rules regarding the role of private

CHAPTER 2 • MANAGING INTERDEPENDENCE 65

enterprise, the operation of state-owned firms, and the specific regulations regarding taxes, permissions, and so forth.

MNCs run the risk of their assets becoming hostage to host control, which may take the form of nationalism, protectionism, or governmentalism. Under nationalism, for example, public opinion is rallied in favor of national goals and against foreign influences. Under protectionism, the host institutes a partial or complete closing of borders to withstand competitive foreign prod- ucts, using tariff and nontariff barriers such as those Japan uses. Under governmentalism, the government uses its policy-setting role to favor national interests rather than relying on market forces.75 This was illustrated by the actions of governments around the world to support their banking systems in 2008 and 2009.

The intricacies of the relationship and the relative power of an MNC subsidiary and a host- country government are situation specific. Clearly, such a relationship should be managed for mutual benefit; a long-term, constructive relationship based on the corporation’s socially respon- sive stance should result in progressive strategic success for the company and economic progress for the host country. The effective management of subsidiary–host country interdependence must have a long-term perspective. Although temporary strategies to reduce interdependence through controls on the transnational flows by firms (for example, transfer-pricing tactics) or by gov- ernments (such as new residency requirements for skilled workers) are often successful in the short run, they result in inefficiencies that must be absorbed by one or both parties, with negative long-term results. In setting up and maintaining subsidiaries, managers are wise to consider the long-term trade-offs between strategic plans and operational management. By finding out for them- selves the pressing local concerns and understanding the sources of past conflicts, they can learn from mistakes and recognize the consequences of the failure to manage problems. Furthermore,

Benefits Costs

Capital Market Effects

• Broader access to outside capital • Economic growth • Foreign-exchange earnings • Import substitution effects allow governments to save foreign exchange for priority projects

• Risk sharing • Increased competition for local scarce capital • Increased interest rates as supply of local capital decreases • Capital service effects of balance of payments

Technology and Production Effects

• Access to new technology and R&D developments • Employee training in new technology • Infrastructure development and support • Export diversification • Introduction of new management techniques

• Technology is not always appropriate • Plants are often for assembly only and can be dismantled • Government infrastructure investment is higher than expected benefits • Increased pollution

Employment Effects

• Direct creation of new jobs • Introduction of more humane employment standards • Opportunities for indigenous management development • Income multiplier effects on local community business

• Limited skill development and creation • Competition for scarce skills • Low percentage of managerial jobs for local people • Employment instability because of ability to move production operations freely to other countries

ExHIBIT 2-6 MNC Operations Bring Host Country Benefits and Costs

Source: Based on R. H. Mason and R. S. Spich, Management: An International Perspective (Homewood, IL: Irwin, 1987), p. 202.

66 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

managers should implement policies that reflect corporate social responsibility regarding local economic issues, employee welfare, or natural resources. At the least, the failure to manage inter- dependence effectively results in constraints on strategy. In the worst case, it results in disastrous consequences for the local area, for the subsidiary, and for the global reputation of the company.

The interdependent nature of developing economies and the foreign companies operating there is of particular concern when discussing social responsibility because of the tentative and fragile nature of the economic progression in those countries. Corporations (and nongovern- mental organizations [NGOs]) must set a high moral standard and lay the groundwork for future economic development. At the minimum, they should ensure that their actions will do no harm. Some recommendations for MNEs operating in and doing business with developing countries are as follows:

• Do no intentional harm. This includes respect for the integrity of the ecosystem and con- sumer safety.

• Produce more good than harm for the host country.

• Contribute by their activity to the host country’s development.

• Respect the human rights of their employees.

• To the extent that local culture does not violate ethical norms, respect the local culture and work with and not against it.

• Pay their fair share of taxes.

• Cooperate with the local government in developing and enforcing just background (infra- structure) institutions (i.e., laws, governmental regulations, unions, and consumer groups, which serve as a means of social control).76

Managing Environmental Interdependence and Sustainability Sustainability lies at the intersection of financial, social and environmental health— described sometimes as the “triple bottom line.”77

International managers can no longer afford to ignore the impact of their activities on the envi- ronment and their stakeholders. The demand for corporations to consider sustainability in their CSR plans comes from various stakeholders around the world. A generally accepted definition of sustainable development for business enterprises is that of

adopting business strategies and activities that meet the needs of the enterprise and its stake- holders today, while protecting, sustaining and enhancing the human and natural resources that will be needed in the future.78

Journal of Socio-Economics

Existing literature generally agrees on three dimensions of sustainability: (1) economic, (2) social, and (3) environmental. A sustainable business has to take into account “the inter- ests of future generations, biodiversity, animal protection, human rights, life cycle impacts, and principles like equity, accountability, transparency, openness, education and learning, and local action and scale.”79

A study by Mirvis et al. found that, although most executives agree that sustainability is important to the financial success of their companies, fewer than half of them are making serious commitments to integrate the necessary steps with their business systems. Reasons include a lack of clear view on what comprises sustainability and the difficulty in allocating responsibility in the company for the vast and overlapping concerns of environmental, social, and governance is- sues. As a result, sustainability often is not internalized in the culture or systems of the company, and competing priorities such as short-term profits intervene.80 However, companies such as GE, Nike, Nestlé, and Gap are among the world’s prominent sustainable organizations and are providing leadership in their transparent models for other organizations to resolve the complex issues involved in implementing sustainability.

A more positive report in 2017 from a survey by McKinsey consultants of 2,711 execu- tives representing the full range of industries and geographic regions shows that many companies are actively integrating sustainability principles with their businesses, and they are doing so by

CHAPTER 2 • MANAGING INTERDEPENDENCE 67

pursuing goals that go far beyond earlier concern for reputation management. The McKinsey report noted a more mature attitude toward sustainability and its expected benefits than in prior surveys, saying that, “a larger share of respondents than ever before say the top reason for imple- menting a sustainability agenda is better alignment between an organization’s practices and its goals, missions, or values (46 percent in 2017 compared with 30 percent in 2012).”81 In addition, nearly 60 percent said their companies have an increased level of engagement with sustainability compared with two years earlier, and only 9 percent revealed a decline. The 2017 report shows that 70 percent of the companies in the survey instituted formal governance of sustainability, up from 56 percent in 2014. The survey respondents indicate that technology is playing a growing role in sustainability. For instance, 54 percent of the companies reveal that advances in sustainability- related technologies led to an increase in commitment. Another McKinsey report indicates a sig- nificant drop in the cost of sustainability-related technologies—renewable energy, energy storage, digital platforms, and advanced data analytics—thus making it more affordable for companies in general. Another key driver of sustainability engagement is safety and security concerns.82

The dilemma for corporations is that they believe they are faced with trying to meet two often contradictory requirements: (1) selling at low prices and (2) being environmentally and socially conscious. However, competitive pressures limit the company’s ability to raise prices to cover the cost of socially responsible policies. This is obviously contradictory to the well-being of societies.83 However, a long-term view is that sustainability is good for business, and many companies, such as BP and Nike, have learned this the hard way.

One example of the turnaround in a company’s sustainability efforts is the Coca-Cola com- pany in India. The company struggled to accommodate the rising concerns and protests from local farmers about the company’s depletion of water resources. As reported on the PBS Newshour,84 farmers are particularly angry in Kala Dera, in the drought-stricken state of Rajasthan. The Coca- Cola factory is one of 49 across India. The company has invested over $1 billion, building a market for its products in this country. The plant used about 900,000 liters of water in 2007, about a third of it for the soft drinks, the rest to clean bottles and machinery. It is drawn from wells at the plant but also from aquifers Coca-Cola shares with neighboring farmers. The water is virtually free to all users. The farmers say their problems began after the Coca-Cola factory arrived in 1999. At the heart of the issue is water, which is the principal ingredient in almost every Coca-Cola product. Yet in locations where Coca-Cola does not use local water resources, the Coca-Cola brand’s per- vasiveness influences the negative perception that the company is a massive water user.

According to the farmers:

Before, the water level was descending by about one foot per year. Now it’s 10 feet every year. We have a 3.5-horsepower motor. We cannot cope. They (Coca-Cola) have a 50-horsepower pump.85

PBS Newshour with Jim Lehrer, November 17, 2008

Coca-Cola agreed to an independent third-party assessment of some of its operations in India, which confirmed that the Rajasthan plant is contributing to a worsening water situation. It recommended that the company bring water in from outside the area or shut the factory down. Coca-Cola rejected that recommendation. For his part, Coca-Cola’s India head, Atul Singh, says it would be irresponsible to leave, saying that “walking away is the easiest thing we can do. That’s not going to help that community build sustainability.”86

Atul Singh, who became a group president at Coca-Cola, recommended that Coca-Cola build water facilities not only near its plants, but also in locations where Coca-Cola did not have operations. The new water facilities did not have the company logo. Beyond India, Coca-Cola set a goal of completely replacing the water it uses in its finished products at all its facilities, world- wide. It set this goal for 2020, but it achieved it as of 2015.87

We need to be Coca-Cola—we need to do more than is expected. Atul Singh, 2018

The Coca-Cola example makes clear to global managers that effectively managing environ- mental interdependence and sustainability includes considering ecological interdependence as well as the economic and social implications of MNC activities. According to Greg Koch, Coca- Cola’s director of global water stewardship, “Ultimately, Kerala became a wake-up call for the company to address its responsibility for water ‘beyond the four walls of the plant.’”88

68 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

There is an ever-increasing awareness of, and a mounting concern worldwide about, the ef- fects of global industrialization on the natural environment. Government regulations and power- ful interest groups are demanding ecological responsibility regarding the use of scarce natural resources and production processes. MNCs have to deal with each country’s different policies and techniques for environmental and health protection. Such variations in approach reflect different levels of industrialization, living standards, government–business relations, philosophies of collec- tive intervention, patterns of industrial competition, and degrees of sophistication in public policy.

In recent years, the export of hazardous wastes from developed countries to less-developed ones has increased considerably. E-waste—from electronic components, computers, and cell phones, for example, all of which are full of hazardous materials—has become a major problem for developing economies, producing sickness and death for its handlers there; this continues in spite of laws against such dumping by U.S. companies and others. Often, companies choose to dispose of hazardous waste in less-developed countries to take advantage of weaker regulations and lower costs. Until we have strict international regulation of trade in hazardous wastes, com- panies should take it upon themselves to monitor their activities, as Singh and Lakhan demand:

To export these wastes to countries which do not benefit from waste-generating industrial processes or whose citizens do not have lifestyles that generate such wastes is unethical. It is especially unjust to send hazardous wastes to lesser-developed countries which lack the technology to minimize the deleterious effects of these substances.89

Implementing Sustainability Strategies Effective implementation of sustainability strategies, according to Epstein and Buhovac, requires companies to have both formal and informal systems in place: “Companies need the processes, performance measurement, and reward systems (formal systems) to measure success and to pro- vide internal and external accountability. But they also need the leadership, culture, and people (informal systems) to support sustainability implementation. An alignment among the formal and informal systems along with the organizational structure is critical for success.”90

Epstein’s model (Exhibit 2-7) provides a system for examining, measuring, and managing the drivers of corporate sustainability. Essential to success is the commitment of top leadership

INPUTS

External Context

Internal Context

Business Context

Leadership

Sustainability Strategy Sustainability

Performance (may be both an output and

outcome)

Stakeholder Reactions Long-Term

Corporate Financial

Performance

There are three major sets of impacts.

Feedback Loop

Sustainability Structure

Sustainability Systems,

Programs, and

ActionsHuman and Financial Resources

PROCESSES OUTPUTS OUTCOMES

2

1

3

Corporate Financial Costs/Benefits of Actions Social Impact Financial Impact through Sustainable Performance

2

1

3

Corporate Costs/Benefits of Actions

ExHIBIT 2-7 Corporate Sustainability Model

Source: Marc J. Epstein, “Implementing Corporate Sustainability: Measuring and Managing Social and Environmental Impacts,” Strategic Finance, January 2008. © 2008 by IMA, Montvale, NJ, www.imanet .org, used with permission.

CHAPTER 2 • MANAGING INTERDEPENDENCE 69

and the recognition of sustainability as a process that will benefit the company—i.e., that it is a good business idea. Key to understanding the role of corporate sustainability is the relation- ship between managers’ decisions, their impact on the society and its environment, and financial performance. In Epstein’s model, the inputs include the external contexts in which the company operates that are specific to the locations; the internal context of the company’s systems and structure; the business context, such as the industry sector, customers, and products; and the human and financial resources available to the corporation for sustainability purposes.91 Output measures of the success of the corporation’s sustainability would include, for example, reduction in energy use or hazardous waste, positive change in human rights complaints, and so on. These could result, among other factors, in cost savings and in increased sales from improved reputa- tion (as was the case, for example, when Nike turned around its human rights reputation after a student embargo on its products).

Multinational corporations already have had a tremendous impact on foreign countries, and this impact will continue to grow and bring about long-lasting changes. Because of interdepen- dence at both the local and global level, it is not only moral but also in the best interest of MNCs to establish a single clear posture toward social and ethical responsibilities worldwide and to ensure that it is implemented. In a real sense, foreign firms enter as guests in host countries and must respect the local laws, policies, traditions, and culture as well as those countries’ economic and developmental needs.

CONCLUSION When research findings and corporate actions indicate differential attitudes toward ethical be- havior and social responsibility across cultures, MNCs must take certain steps. For example, they must be careful with overseas assignments if an individual's values are incongruent with those in the host country because this could lead to conflicts with local managers, governmental bodies, customers, and suppliers. As discussed earlier, expatriates, as well as local employees, should be oriented to the legal and ethical ramifications of questionable foreign payments, the differences in environmental regulations, and the local expectations of personal integrity. They should also be supported as they attempt to integrate host-country behaviors with the expectations of the company’s headquarters.

Social responsibility, ethical behavior, interdependence, and sustainability are important concerns to be built into management control—not as afterthoughts but as part of the ongoing process of planning and controlling international operations for the long-term benefit of all. The perspective of CSV—creating shared value—encompasses a positive and proactive role in in- cluding those concerns in the strategic planning of the organization. Part 2 focuses on the perva- sive and powerful influence of culture in the host-country environment in which the international manager operates. Chapter 3 examines the nature of culture. What are its various dimensions and roots? How does culture affect the behavior and expectations of employees, and what are the implications for how managers operating in other countries should behave?

■ The concept of international social responsibility (known in business circles as CSR—corporate social responsibility) includes the expectation that MNCs should be concerned about the social and economic ef- fects of their decisions on activities in other countries and that they should build appropriate provisions into their strategic plans to deal with those potential effects.

■ Moral universalism refers to the need for a moral standard that is accepted around the world; however, varying cultural attitudes and business practices make this goal unattainable at this time. A number

Summary of Key Points

of groups of corporations within industries have col- laborated on sets of policies for CSR for both their companies and those in their supply chains. Such collaborations help to raise the standard in host countries and level the playing field for managers within those industries.

■ Concerns about MNC social responsibility revolve around issues of human rights in other countries. Many organizations develop codes of conduct that specifi- cally deal with human rights in their operations around the world.

70 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

■ International business ethics refers to the conduct of managers in their relationships to all individuals and entities with whom they come into contact. Ethical behavior is judged and based largely on the cultural value system and the generally accepted ways of doing business in each country or society. Managers must decide whether to base their ethical standards on those of the host country or those of the home country and whether these different standards can be reconciled.

■ MNCs must balance their responsibility to various stakeholders, such as owners, creditors, consumers, employees, suppliers, governments, and societies. Firms with a long-term perspective recognize the need to consider all of their stakeholders in their busi- ness plans.

■ Managers operating abroad are often faced with dif- fering attitudes toward bribery or other payments that raise significant questions about appropriate moral behavior in either the host nation or other nations, yet bribery or other payments are frequently demanded to conduct business. The Foreign Corrupt Practices Act prohibits most questionable payments by U.S. compa- nies doing business in other countries.

■ Managers must control their activities relative to in- terdependent relationships at all levels—from simple, daily business transactions involving local workers,

intermediaries, or consumers to global concerns of ecological responsibility. Issues of sustainability have come to the forefront as firms consider their long- term relationships with host countries.

■ The failure to manage interdependence effectively will result in constraints on strategy, at the least, or in disastrous consequences for the local area, the sub- sidiary, and the global reputation of the company. The perspective of CSV—creating shared value—provides a proactive model to guide companies to incorporate these concerns into their strategic planning.

■ Managing environmental interdependence includes the need to consider ecological interdependence as well as the economic and social implications of MNC activities.

■ Implementation of sustainability strategies requires the company to have both formal and informal sys- tems to support the goals. Essential to success is the commitment of top leadership and the recognition of sustainability as a process that will benefit the company—that it is a good business idea.

■ The organizational response following a legal or ethi- cal scandal is important. Some companies enact major governance changes in order to prevent legal and ethi- cal scandals in the future. Others, unfortunately, fail to take corrective measures, which may lead to more problems in the future.

2-1. Discuss the concept of CSR. What role does it play in the re- lationship between a company and its host country? How does CSV move beyond CSR?

2-2. Discuss the criticisms that have been leveled against MNCs in the past regarding their activities in less-developed coun- tries. What counterarguments are there to those criticisms?

2-3. What does moral universalism mean? Discuss your perspec- tive on this concept. Do you think the goal of moral univer- salism is possible? Is it advisable?

2-4. What do you think should be the role of MNCs toward human rights issues in other countries? What are the major human rights concerns at this time? What ideas do you have for dealing with these problems? What is the role of corporate codes of conduct in dealing with these concerns?

2-5. What is meant by international business ethics? Should the local culture affect ethical practices? What are the

Discussion Questions

implications of local norms for ethical decisions by MNC managers?

2-6. If you were a manager of a company bound by the Foreign Corrupt Practices Act, how can you reconcile local expec- tations of questionable payments? What is your stance on the problem of payoffs? How does the degree of law en- forcement in a particular country affect ethical behavior in business?

2-7. What do you think are the responsibilities of MNCs toward the global environment? Give some examples of MNC ac- tivities that run counter to the concepts of ecological inter- dependence and sustainability.

2-8. Discuss the ethical issues that have developed regarding the use of IT in cross-border transactions. What new conflicts have developed since the printing of this book? What solu- tions can you suggest?

2-9. Do some research to determine the codes of conduct of two familiar companies. Compare the issues that they cover and share your findings with the class. After several students have presented their findings, prepare a chart showing the com- monalities and differences of content in the codes presented. How do you account for the differences?

Application Exercises

2-10. Examine an MNC that faced a human rights or environ- mental scandal. Critique the organizational responses of the MNC. What did it do well in the aftermath of the scandal? How could it have improved its response?

CHAPTER 2 • MANAGING INTERDEPENDENCE 71

Consider the ethical dilemmas in the following situation and decide what you would do. Then meet in small groups of stu- dents and come to a group consensus. Discuss your decisions with the class.

You are the VP for global sales of a telecommunications equipment company. The accounting manager of your company recently brought to your attention an unusual charge of a 3 per- cent commission to a purchasing manager in Russia with whom your company had recently started doing business. One state- owned manufacturing company in Russia (for privacy’s sake, we will call the company “R”) submitted a bid for a large order of your equipment. You remember being surprised to get the con- tract with “R” because your company had never been able to do business with it since it started there many years ago. As it turned out, your new sales manager for the region had a relative in “R” who promised to supply him with all of your competitors’ bids if he paid him a 3 percent commission on all of the sales to his company. The area manager accepted this arrangement. He got the competing bids and secured the deal with your company.

Experiential Exercise

What would you do, given the following: (1) If you re- fuse to accept the business without any legitimate reasons (presently, there are none), your company will be blacklisted in that country—which amounts to about 20 percent of gross yearly profit. (2) If you accept the business and do not pay the 3 percent commission, the purchasing manager will make much trouble when he receives your shipment. No doubt he will not release the 5 percent bank guarantee letter about the quality and quantity of the material. (3) If you accept the business and pay the 3 percent commission, you feel that it would malign your company’s reputation and your beliefs.

You have three ethical problems here: First, your company has won a rigged bid. Second, you must pay the person who rigged it or he will make life miserable for you. Third, you have to decide what to do with the area manager who accepted this arrangement.

Source: Based on Delaney and D. Sockell, “Ethics in the Trenches,” Across the Board (October 1990), p. 17.

CASE STUDY Facebook Faces Fresh Probe After Photo Leak

Tim Bradshaw in London December 14, 2018

Facebook has been hit with the broadest data protection investigation yet in Europe after the so- cial media group revealed another leak of private photos belonging to millions of people.

The Irish data protection commission said it had opened a new investigation into Facebook because of its high number of data breaches this year.

The social network said on Friday that it had discovered a problem with the way hundreds of third-party developers accessed photos using its app platform. The flaw leaked private photos that Facebook users had uploaded but not chosen to share publicly.

“Because of this bug, some third-party apps may have had access to a broader set of photos than usual for 12 days between September 13 to September 25, 2018,” Facebook’s engineering director Tomer Bar said. “Currently, we believe this may have affected up to 6.8m users and up to 1,500 apps built by 876 developers.”

The Irish data protection commissioner said in response to Facebook’s revelation that it had opened an investigation into the Silicon Valley company’s compliance with the EU’s General Data Protection Regulation—not just on the latest leak but on the broad spread of privacy issues this year.

“The Irish DPC has received a number of breach notifications from Facebook since the in- troduction of the GDPR on May 25, 2018,” a spokesperson said. “With reference to these data breaches, including the breach in question, we have this week commenced a statutory inquiry examining Facebook’s compliance with the relevant provisions of the GDPR.”

Facebook has been left reeling from a series of privacy and security problems in the wake of the Cambridge Analytica scandal, which has prompted investigations from regulators in the US, Europe and the UK.

In September, Facebook disclosed a cyber attack that it said could have exposed the personal information of tens of millions of its users.

Under GDPR, companies must inform regulators of any data breach within 72 hours of its discovery. Fines can run to as much as 4 per cent of a company’s global revenues for the prior year.

72 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

Facebook said it was “sorry” the latest photo breach had happened and would release a tool next week to help developers determine which users had been affected. “We will also notify the people potentially impacted by this bug via an alert on Facebook,” it said.

Source: © 2018 The Financial Times Limited 2018.

1. Song Jung-a. November 23, 2018. “Samsung finally apologises to workers struck down by disease.” Financial Times. https:// www.ft.com/content/2b57424e-eedc-11e8-89c8-d36339d835c0. Accessed December 23, 2018.

2. A. Maitland, “No Hiding Place for the Irresponsible Business,” Financial Times Special Report, September 29, 2003, p. 4.

3. McWilliams, A., & Siegel, D. 2001. Corporate social responsi- bility: A theory of the firm perspective. Academy of Management Review, 26, p. 117.

4. J. Thompson, December 2, 2018. “Emerging markets: change in the air for responsible investment.” Financial Times, https:// www.ft.com/content/b91bddb4-db91-11e8-b173-ebef6ab1374a. Accessed December 23, 2018.

5. Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1962).

6. Ibid. 7. T. Donaldson, June 3, 2005. “Defining the Value of Doing Good

Business,” Financial Times. 8. IKEA India Breaks Ground for its 3rd India Store in Bengaluru!

https://www.ikea.com/in/en/newsroom/ikea-retail-india -moves-the-opening-date-to-9-th-of-august-2018-pubc5760e9c. Accessed January 18, 2019.

9. Ibid. 10. Interview with Susanne Pulverer. June 5, 2018. https://

www.indianretailer.com/interview/retail-people/profiles /Sustainability-is-an-integral-part-of-our-business-IKEA.i1459/

11. Interview with Susanne Pulverer. June 5, 2018. https:// www.indianretailer.com/interview/retail-people/profiles /Sustainability-is-an-integral-part-of-our-business-IKEA .i1459/

12. Based on Manuela Weber, Business Case for Corporate Social Responsibility: A Company-Level Measurement Approach for CSR. European-Management Journal 26, No. 4 (2008), pp. 247–261.

13. Financial Times, June 3, 2005. 14. Weber, 2008.

Endnotes

15. N. Bowie, “The Moral Obligations of Multinational Corporations,” in Problems of International Justice, Steven Luper-Foy, ed. (New York: Westview Press: 1987), pp. 97–113.

16. Steven Greenhouse, “Nike Agrees to Help Laid-Off Workers in Honduras,” www.nytimes.com, July 26, 2011.

17. Michael E. Porter and Mark R. Kramer, Creating Shared Value. Harvard Business Review, 00178012, 89, No. 1/2 (January– February 2011).

18. Ibid. 19. Ibid. 20. Eric Pfanner, “Google Turns on Charms to Win over Europeans,”

www.nytimes.com, May 15, 2011. 21. Ibid. 22. A. Kazmin, September 25, 2017. Speciality products, support

and shared value are key to success: India. Financial Times; London (UK). https://search.proquest.com/businesspremium /docview/1955237031/D9D2E8FB3F944655PQ/17?accountid= 7122. Accessed January 25, 2019.

23. https://www.nestle.com.sg/csv/creatingsharedvaluecasestudies. Accessed February 6, 2019.

24. Peter Burrows, “Stalking High-Tech Sweatshops,” BusinessWeek, June 19, 2006, p. 63.

25. Jem Bendell, “Nike Says Time to Team Up,” The Journal of Corporate-Citizenship, Autumn 2005, No. 19, p. 10(3).

26. J. Anderlini, “Communist Clampdown: Beijing Blocks ‘Western Values’ in Classrooms,” Financial Times, January 31, 2015.

27. E. Feng and Y. Jia. September 17, 2018. “China’s Bytedance maps out route around firewall: Technology. Content challenge Internet group creates video apps to reach foreign markets without upsetting cen- sors.” Financial Times; London (UK). Accessed January 19, 2019.

28. J. Anderlini, “Communist Clampdown: Beijing Blocks ‘Western Values’ in Classrooms,” Financial Times, January 31, 2015.

29. J. Hernández. February 6, 2019. Workers’ activism rises as China’s economy slows. Xi aims to rein them in. New York Times. http://www.nytimes.com/2019/02/06/world/asia/china-workers -protests.html. Accessed February 6, 2019.

Case Questions

2-11. Who are Facebook’s stakeholders? What are the social responsibilities of the company? To what level of CSR or CSV is the company adhering at the time of this case?

2-12. No doubt, much will have transpired since the writing of this case regarding Facebook’s pri- vacy challenges. Research and compile an update. What other privacy issues have arisen in Europe, in the United States, and around the world? What has Mark Zuckerberg done about it to placate the public and preserve the brand?

2-13. What is your personal opinion about the problems of privacy from using Facebook? 2-14. What regulations or restrictions for Facebook have been put in place in Europe and the United

States? Do you agree with them?

CHAPTER 2 • MANAGING INTERDEPENDENCE 73

30. Ibid. 31. Ibid. 32. Li Yuan. January 21, 2019. China Transforms, and a Factory

Owner Struggles to Follow. New York Times. https://www .nytimes.com/2019/01/21/technology/china-economy -manufacturing-labor-costs.html. Accessed February 6, 2019.

33. Wang Xueqiao and Tom Hancock. January 17 2019. Overdoing it: the cost of China’s long-hours culture. Financial Times.

34. J. Anderlini. January 30, 2015. ‘Western values’ forbidden in Chinese universities. Financial Times. https://www.ft.com/content/95f3f866 -a87e-11e4-bd17-00144feab7de. Accessed February 7, 2019.

35. Yuan Yang. January 24, 2019. “Access restored in China for Microsoft’s Bing search engine.” Financial Times; London (UK). https://www.ft.com/content/379b0b82-2049-11e9-b126 -46fc3ad87c65. Accessed February 19, 2019.

36. Ibid. 37. Yuan Yang. January 7, 2019. “China turns up heat on individual users

of foreign websites.” Financial Times. https://www.ft.com/content /dda957be-1256-11e9-a581-4ff78404524e, Accessed February 7, 2019.

38. Ibid. 39. Po Keung Ip, The Challenge of Developing a Business Ethics in

China. Journal of Business Ethics 88 (2009), pp. 211–224. 40. J. Politi and T. Mitchell. January 23, 2019. “US-China trade talks:

what does the US want?” Financial Times. https://www.ft.com /content/a747e98e-1f5c-11e9-b126-46fc3ad87c65. Accessed February 7, 2019.

41. “Sweatshop Police,” BusinessWeek, October 20, 1997, pp. 30–32. 42. C. Skroupa. ‘Impact Beyond Numbers’—GoodWeave’s

Global Solution to Child Labor. https://www.forbes.com/sites /christopherskroupa/2018/06/18/impact-beyond-numbers -goodweaves-global-solution-to-child-labor/#5a8e1fd71ee1. Accessed December 11, 2018. https://www.forbes.com/sites/christopherskroupa/2018/06/18 /impact-beyond-numbers-goodweaves-global-solution-to-child -labor/#3786b1ce1ee1. Accessed December 11, 2018.

43. https://goodweave.org/about/our-vision/. Accessed December 11, 2018.

44. https://www.forbes.com/sites/christopherskroupa/2018/06/18 /impact-beyond-numbers-goodweaves-global-solution-to-child -labor/#3786b1ce1ee1. Accessed December 11, 2018.

45. https://www.forbes.com/sites/christopherskroupa/2018/06/18 /impact-beyond-numbers-goodweaves-global-solution-to-child -labor/#3786b1ce1ee1. Accessed December 11, 2018.

46. C. Skroupa. ‘Impact Beyond Numbers’—GoodWeave’s Global Solution to Child Labor.

47. Kathleen A. Getz, “International Codes of Conduct: An Analysis of Ethical Reasoning,” Journal of Business Ethics 9 (1990), pp. 567–577.

48. Alison Maitland, “How Ethics Codes Can Be Made to Work,” Financial Times, March 7, 2005.

49. Swee Hoon Ang, Money: A Cross-Cultural Analysis of Business- Related Beliefs. Journal of World Business 35, No. 1 (2000), p. 43.

50. C. J. Robertson and W. F. Crittenden, Mapping Moral Philosophies: Strategic Implications for Multinational Firms. Strategic Management Journal 24 (2003), pp. 385–392.

51. A. Singer, “Ethics—Are Standards Lower Overseas?” Across the Board (September 1991), pp. 31–34.

52. Ibid. 53. www.transparencyinternational.org, accessed December 22, 2018. 54. Right to information: Knowledge is power. September 27, 2018.

Transparency International. https://www.transparency.org/news

/feature/Right_to_information_knowledge_is_power. Accessed December 22, 2018.

55. Reena SenGupta, “Trouble at Home for Overseas Bribes,” Financial Times, February 2, 2006.

56. Ibid. 57. G. R. Laczniak and J. Naor, “Global Ethics: Wrestling with

the Corporate Conscience,” Business, July–August–September 1985, p. 152.

58. “How to Respond When Only Bribe Money Talks,” Financial Times, July 11, 2005.

59. J. T. Noonan, Jr., Bribes (New York: Macmillan, 1984), p. ii. 60. https://www.investor.gov/additional-resources/news-alerts

/press-releases/sec-charges-software-company-fcpa-violations. Released 02/01/2016. Accessed December 22, 2018.

61. Ibid. 62. J. Cotterill and P. McGee. October 26, 2017. “SAP alerts US

to South Africa kickback allegations.” Financial Times. https:// www.ft.com/content/0c287542-ba34-11e7-8c12-5661783e5589. Accessed December 22, 2018.

63. Ibid. 64. Kanter, 2011. 65. Robinson and Kuchler, 2015. 66. K. Conger and D. Wakabayashi. August 16, 2018. Google em-

ployees protest secret work on censored search engine for China. New York Times. https://www.nytimes.com/2018/08/16 /technology/google-employees-protest-search-censored-china .html. Accessed December 22, 2018.

67. R. Faroonhar. August 20, 2018. “Don’t be evil—Google at war with itself,” Financial Times.” https://www.ft.com/content/2b7cdc2a- a3e6-11e8-8ecf-a7ae1beff35b, Accessed February 5, 2019.

68. R. Faroonhar. August 20, 2018. Don’t be evil — Google at war with itself, Financial Times. https://www.ft.com/content/2b7cdc2a- a3e6-11e8-8ecf-a7ae1beff35b, Accessed February 5, 2019.

69. E. Feng and Y. Jia. September 17, 2018. “China’s Bytedance maps out route around firewall: Technology. Content challenge Internet group creates video apps to reach foreign markets with- out upsetting censors.” Financial Times; London (UK). Accessed January 19, 2019.

70. J. Ewing. May 3, 2018. https://www.nytimes.com/2018/05/03/ business/volkswagen-ceo-diesel-fraud.html. Accessed January 19, 2019.

71. P. McGee July 24, 2018. “VW’s half-throttle reform effort causes dismay: Sputtering governance moves after scandal compare unfa- vourably with Siemens, where change came ‘like a locomotive.’” Financial Times; London (UK). Accessed January 19, 2019.

72. P. McGee. August 7, 2018. Loopholes in the lab tests: Three years after the Dieselgate scandal auto companies are manipulating emis- sions data, using ‘lawful but awful ways’ to game even a new testing regime. Financial Times; London (UK). https://search.proquest.com/ businesspremium/docview/2100110137/AD29EB4D91484CA0PQ/ 9?accountid=7122. Accessed January 18, 2019.

73. P. W. Beamish et al., International Management (Homewood, IL: Irwin, 1991).

74. Based on Asheghian and Ebrahimi, International Business (NY: Harper and Row, 1990).

75. R. H. Mason and R. S. Spich, Management: An International Perspective (Homewood, IL: Irwin, 1987).

76. R. T. De George, Competing with Integrity in International Business (New York: Oxford University Press, 1993), pp. 3–4.

77. Hilary Bradbury-Huang, Sustainability by Collaboration: The SEER Case. Organizational Dynamics 39, No 4, October– December 2010, pp. 335–344.

74 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

78. György Málovics, Noémi Nagypál Csigéné, and Sascha Kraus, The Role of Corporate Social Responsibility in Strong Sustainability. Journal of Socio-Economics 37, No. 3 (2008), pp. 907–918.

79. J. A. G. van Kleef and N. J. Roome, Developing Capabilities and Competence for Sustainable Business Management as Innovation: A Research Agenda. Journal of Cleaner Production 15 (2007), pp. 38–51.

80. Philip Mirvis, Bradley Googins, and Sylvia Kinnicutt, Vision, Mission, Values: Guideposts to Sustainability. Organizational Dynamics 39, No. 4 (October–December 2010), pp. 316–324.

81. “Sustainability’s deepening imprint,” McKinsey Quarterly, October 2017. https://www.mckinsey.com/business-functions /sustainability-and-resource-productivity/our-insights/sustain -abilitys-deepening-imprint. Accessed December 22, 2018

82. Ibid. 83. B. Atkins, Corporate Social Responsibility: Is It ‘Irresponsibility’?

Corporate Governance Advisor 14 (2006), pp. 28–29. 84. Newshour with Jim Lehrer, PBS news report, November 17, 2008.

85. Ibid. 86. Ibid. 87. B. Carmichael and B. Moriarty. May 31, 2018. How Coca-Cola came

to terms with its own water crisis. The Washington Times, https://www .washingtonpost.com/news/business/wp/2018/05/31/how-coca-cola -came-to-terms-with-its-own-water-crisis/?noredirect=on&utm _term=.d3360f8c2486. Accessed December 22, 2018.

88. Ibid. 89. Jang B. Singh and V. C. Lakhan, Business Ethics and the

International Trade in Hazardous Wastes. Journal of Business Ethics 8 (1989), pp. 889–899.

90. Marc J. Epstein and Adriana Rejc Buhovac, Solving the Sustainability Implementation Challenge. Organizational Dynamics 39 (2010), pp. 306–315.

91. Marc J. Epstein, Implementing Corporate Sustainability: Measuring and Managing Social and Environmental Impacts. Strategic Finance, January 2008.

P A R T 1 : Comprehensive Cases

as well as cost and pricing pressures. However, some analysts said Nestlé being a financially sound company, it could do more to stop slave labor and take more control over its supply chain management. According to Marianne Smallwood, a diplomat for the US Agency for International Development, “In initiating the public examination of its flaws, and in working with an organi- zation like Verite, Nestlé has already gone a more honorable and transparent route than other companies have done. But while it has taken the first step toward being a more responsible com- pany, Nestlé’s commitment to funding a long-term strategy—and how it pushes beyond the inevitable roadblocks ahead—will determine its ultimate footprint and legacy.”4

According to Batato, “Every reasonable person who has gone to Africa, gone to Asia, who has seen the farmers and factories, can tell you that [child labor] does exist. It is part of their life. Do we accept it? No. Are we going to stay quiet and do nothing? No. But making a big declaration that tomor- row morning we are going to see it disappear, sometimes the problem is bigger than us, bigger than a company even the size of Nestlé.”5 Nevertheless, the critical question before him was: How to eliminate forced labor from Nestlé’s supply chains worldover? Could he address the problem and bring real and sustained change in how the company’s cocoa supply chains were managed?

Background Note

Nestlé, headquartered in Vevey, Switzerland, was founded in 1866. One of the leading players in the food and beverage categories, the company had a global presence and employed more than 328,000 people as of 2017. Its sales and profits for the year 2016 were CHF 89.5 billion and CHF 8.53 billion respectively.6

Though Nestlé was among the world’s largest food process- ing companies and had great consumer brands well known for their quality, critics pointed out that there seemed to be an ele- ment of arrogance in its actions.7 The company had a history of confrontations over a range of issues.8 There were instances of Nestlé being accused of disregarding its corporate responsibility in many countries in which it operated. The Swiss conglomer- ate had had its fair share of controversies and ethical dilemmas during its nearly 150-year-long history.9 Experts pointed out that the history of Nestlé’s public relations troubles began in the 1970s with allegations of unethical marketing of baby formula10 in less developed countries.11 Since then, Nestlé had continued to get into trouble. For instance, in 2008, it was blacklisted by the Chinese government.12 Later, it was targeted for the mis- leading promotion of its bottled water brands as well as for in- terfering in policies that protected natural water resources.13

Case 1 Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way? This case was written by Syeda Maseeha Qumer and Debapratim Purkayastha, IBS Hyderabad.1

In March 2017, a federal judge in California dismissed a long-running (12-year) class action lawsuit against Nestlé SA (Nestlé) and two more companies over claims the global choc- olate manufacturer facilitated the use of forced child labor in West Africa. Nestlé, one of the world’s largest food processing companies, had been grappling with accusations of aiding and abetting child slavery on cocoa plantations in Ivory Coast2 for more than a decade.

Earlier in 2015, Nestlé surprised many by admitting that it had found forced labor in its seafood supply chain in Thailand. Magdi Batato (Batato), Executive Vice President and Head of Operations at Nestlé, self-reported that Nestle had uncovered child labor exploitation on fishing boats in Thailand that supplied its factories. He reported details of the investigation and also initi- ated a detailed action plan on how it intended to tackle the issue. The news generated a mixed response from industry observers. Hailing Nestlé’s honesty, Brian Griffin, CEO of digital marketing agency Vero PR, said, “First of all, what Nestlé did was brave, and from a moral perspective, they did the right thing to let stake- holders know about this issue. They will feel some pain from this initially, particularly from a consumer standpoint, and it’s not hard to imagine that sales of seafood products may decline. There is no question that the issue must be cleaned up, and that it must happen now. We should appreciate what Nestlé has done to bring even more attention to the issue.”3 However, Nestlé’s critics con- tended that the company had done this only to fend off growing criticism against it. It had admitted to slavery in seafood, a low- profit area of the company’s business, while not doing enough to tackle this problem in its lucrative chocolate business.

In September 2015, three class action lawsuits brought in by consumers in California accused Nestlé of turning a blind eye to human rights abuses by cocoa suppliers in West Africa while falsely portraying itself as a socially and ethically respon- sible company. Nestlé said it was committed to tackling child labor in its cocoa supply chain, and had been taking action to address the issue which included increasing access to educa- tion, stepping up systems of age verification at cocoa farms, and increasing awareness about the company’s own code of conduct. Despite Nestlé’s assurances, the use of child labor continued and became even more prevalent in its cocoa sup- ply chains. Though Nestlé’s commitment to eliminating slavery seemed promising, lawsuits related to slavery in its core busi- ness operations questioned such promises, critics said.

The existence of modern slavery within its cocoa supply chain posed ethical and reputational risks for Nestlé. Analysts said addressing slavery would be a critical issue for the com- pany going forward due to the complexity and limited visibility of its supply chain, its reputation for reliability among stake- holders (customers, investors, NGOs), transparency dilemmas,

PC1-1

PC1-2 PART 1 • COMPREHENSIVE CASES

In the UK, the Ethical Consumer Research Association (ECRA)14 gave Nestlé an ethical rating, Ethiscore,15 of 0.5 out of 20. ECRA had found the company to be linked to social ills such as child labor, slavery, rainforest destruction, water extrac- tion, and debt perpetuation. Critics pointed out that in 2005, when it launched the ‘Partners Blend’ fair trade16 coffee, Nestlé was termed as the UK’s most boycotted and irresponsible corporation.17

Modern Slavery in Global Supply Chains

Modern slavery could be described as control by people or orga- nizations over vulnerable individuals in order to obtain personal gain or profit. Modern slavery included forced labor, debt-bond- age, child labor, wage exploitation, human trafficking, forced

marriage, involuntary domestic servitude, or any other practice wherein victims were engaged in unreasonable work through physical or mental threat. According to the 2016 Global Slavery Index, about 40.3 million people were victims of some form of modern slavery globally. Of these people, about 24.9 million were in forced labor. The rate of modern slavery was reported to be the highest in Africa, with 7.6 victims for every 1,000 people in the region (See Exhibit I and Exhibit II).

Modern slavery had broader social and economic costs, in terms of impeding economic development and perpetuating poverty, said experts. According to them, globalization had led companies to turn to lower-cost suppliers who sourced cheaper raw materials and used low-wage labor in order to maximize profits. According to an ILO report, forced labor generated about US$ 150 billion in illegal profits annually.

W or

ld

A fri

ca

A sia

a nd

th e

Pa cif

ic

Eu ro

pe a

nd C

en tra

l A

sia

A ra

b St

at es

A m

er ica

s

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

Forced Marriages Forced Labour

2.1

3.4

2.8

4.8

4.0

2.0

3.6

0.4

2.2

1.1 1.3 0.7

ExHIBIT I Prevalence of Modem Slavery (per 1,000 population), by Region and Category

Source: Adapted from https://www.alliance87.org/global_estimates_of_modern_slavery -forced_labour_and_forced_marriage.pdf.

ExHIBIT II Number and Prevalence of Persons in Modern Slavery, by Category and Age

Number in thousands and prevalence in per thousand

Source: Adapted from https://www.alliance87.org/global_estimates_of_modern_slavery-forced_labour_and_ forced_marriage.pdf.

Forced labor sub-categories

Forced labor slavery

exploitation

Forced sexual exploitation of adults

and commercial sexual exploitation of children

State-imposed forced labor

Total forced labor

Forced marriage

Modern slavery

World Number 15, 975 4,816 4,060 24,850 15,442 40,293

Prevalence 2.2 0.7 0.5 3.4 2.1 5.4

Age

Adults Number 12,995 3,791 3,778 20,564 9,762 30,327

Prevalence 2.5 0.7 0.7 3.9 1.9 5.8

Children Number 2980 1024 282 4286 5679 9965

Prevalence 1.3 0.4 0.1 1.9 2.5 4.4

CASE 1 • ELIMINATING MODERN SLAVERY FROM SUPPLY CHAINS: CAN NESTLÉ LEAD THE WAY? PC1-3

to produce a ‘slavery and human trafficking statement’ once a year disclosing what action they had taken to ensure their sup- ply chains were free of slave labor. Experts felt that though the legislation did not impose financial penalties on companies that failed to comply, the adverse effects of being prosecuted for failing to do so could lead to reputational risks and could be more damaging than any fine.

Child Slavery in Nestlé’s Cocoa Supply Chain

Nestlé was a leader in the chocolate confectionery industry and used 10% of the world’s cocoa production. It worked directly with almost 165,000 direct suppliers and 695,000 individual farmers worldwide for procuring raw materials such as cocoa, dairy, sugar, coffee, etc. Nestlé primarily sourced cocoa from co-ops and farms in Ivory Coast and Ghana. Nestlé purchased around 414,000 tons of cocoa annually for chocolate and con- fectionery as well as beverages. The cocoa supply chain in- cludes many intermediaries between the farmer and consumer. Small farmers typically sell their cocoa harvest to local mid- dlemen for cash. The middlemen work under contract for local exporters, who, in turn, sell cocoa to international traders and the major international cocoa brands.

Allegations of child labor and human rights abuses in its cocoa and agricultural supply chains had dogged Nestlé for years. Since the late 1990s, Nestlé and its competitors had re- ceived negative publicity and media coverage over their use of child slave labor and the lack of transparency within their cocoa supply chain. Though Nestlé’s Corporate Business Principles and Supplier Code prohibited both child and forced labor, Nestlé was aware that cocoa beans from Ivory Coast were pro- duced using child labor. While Nestlé and its competitors vied for market share and profits, cocoa farmers suffered due to low income attributed to the fall in the price of cocoa beans. Cocoa bean futures on the Intercontinental Exchange in New York hit US$2,052 per metric ton on February 3, 2017, compared to US$3,422 per metric ton in December 2015. Many farmers felt that child labor was a viable option in order to cut produc- tion and work costs. As a result, child slavery had become ex- tremely prevalent throughout the cocoa supply chain, and there had been minimal action taken by the chocolate manufacturing companies to stop the exploitation of these children.

The practice of child labor was rampant in the cocoa indus- try wherein harvesting and processing of the cocoa plant was left to children, often unpaid and living in slavery (See Exhibit IV). Some children were sold by their parents to traffickers, while many were kidnapped. Reportedly, they worked from dawn to dusk each day, were denied sufficient food, and locked in a shed at night where they were given a tiny cup in which to urinate.18 Some children were forced to do unsafe tasks, including carry- ing heavy loads, using machetes and sharp tools, and applying pesticides and fertilizers. “The rules and regulations are so lax there that there is no government to step in and stop the atroci- ties. This horrific state of child slavery is also the perfect cheap labor for candy companies that want to sell you chocolate for dirt cheap prices. Why do you think it only costs $1 for a choco- late bar?”18 wrote journalist LJ Vanier.

Analysts pointed out that slavery was an abuse of human rights in the pursuit of profits and that corporations had a moral duty not to indulge in or tolerate it. Addressing human rights and labor issues in the supply chain had become a necessity for businesses in the consumer goods industry, they said. This was partly due to rising consumer demand for ethical products. Several governments had enacted legislations which mandated that companies ensure respect for human rights in their sup- ply chains. A number of anti-modern slavery regulations had also come into existence (See Exhibit III). The California Transparency in Supply Chains Act, signed in 2010 and enacted on January 1, 2012, was one of the first anti-modern slavery regulations. This Act aimed to ensure that “large retailers and manufacturers provide consumers with information regarding their efforts to eradicate slavery and human trafficking from their supply chains.” The United Nations Guiding Principles on Business and Human Rights (UNGPs) were endorsed by the UN Human Rights Council in June 2011. These were a set of guidelines for States and companies to prevent, address, and remedy human rights abuses committed in business operations. The UNGPs based on the three pillars ‘Protect, Respect, and Remedy’ had since become the trusted global framework for business and human rights.

The most prominent of anti-slavery regulations was the UK Modern Slavery Act, passed on March 26, 2015. It required businesses with a turnover of more than £36 million annually

ExHIBIT III Anti-Modern Slavery Regulations

Source: Compiled from various sources

Year Regulation

2000 The United Nations passes the Protocol to Prevent, Suppress, and Punish Trafficking in Persons as part of the Convention against Transnational Organized Crime. It is the first global legally binding treaty with an inter- nationally agreed definition of trafficking in persons.

2002 The International Cocoa Initiative is established as a joint effort of anti-slavery groups and major chocolate companies to protect children and contribute to the elimination of child labor.

2004 The United Nations appoints a Special Rapporteur on Human Trafficking.

2008 The Council of Europe Convention on Action against Trafficking in Human Beings comes into force.

2010 California enacts the California Transparency in Supply Chains Act.

2014 The ILO adopts a protocol on forced labor, bringing its 1930 Convention on Forced Labor into the modern era to address practices such as human trafficking.

2015 Britain’s Modern Slavery Act comes into force.

2015 The United Nations adopts 17 Sustainable Development Goals, including a target of ending slavery and eradi- cating forced labor and human trafficking.

PC1-4 PART 1 • COMPREHENSIVE CASES

eradicate it,”23 said Paul Bakus, President of Corporate Affairs, Nestlé USA. After a first dismissal in 2008, the case was exam- ined again and the lawsuit was reinstated by The US court of appeals in San Francisco in 2014 on the grounds that the plain- tiffs had valid reasons to accuse Nestlé of pursuing profits more than human well-being.

In October 2009, Nestlé launched a companywide initia- tive called The Nestlé Cocoa Plan (TNCP) in collaboration with International Cocoa Initiative24 (ICI) in order to ensure a sustainable future for the cocoa industry worldwide and the communities depending on it. The goal of TNCP was “to help cocoa farmers run profitable farms, respect the environment, have a good quality of life and for their children to benefit from an education and see cocoa farming as a respectable profes- sion.”25 To achieve this, Nestlé committed CHF 110 million to the plan for 10 years and pledged to source 230,000 MT of cocoa through TNCP by 2020. Despite the industry’s assur- ances, critics contended that the worst forms of child labor con- tinued in Ivory Coast.

Amid accusations of failing to carry out checks on child labor in its cocoa supply chain, in November 2011, Nestlé com- missioned Fair Labor Association (FLA)26 to assess its cocoa supply chain in Ivory Coast. The goals of the assessment were to map stakeholders involved in Nestlé’s cocoa supply chain and to analyze the associated labor risks in its cocoa supply chain. The assessment team mapped the cocoa supply chain in depth including Nestlé’s headquarters in Switzerland, R&D in Abidjan and local operations in the Ivory Coast; Tier 1 sup- pliers of Nestlé and their subsidiaries in West Africa, process- ing facilities and buying centers in the Ivory Coast; third-party service providers; pisteurs27; cooperatives; traitants28; farmers; Métayers29; Coxers30 and workers (See Exhibit V). A team of 20 local and international experts visited a total of seven sup- pliers, 20 co-operatives, and two co-operative unions, and 87 farms. In all, over 500 interviews were conducted with farm- ers and other stakeholders in the supply chain, including local community members, local governments, NGOs, suppliers, and Nestlé staff. The FLA released the results of its audit in 2012, finding continued evidence of child labor in the Ivory Coast farms supplying Nestlé. The researchers found 56 workers under the age of 18, of whom 27 were under 15. According to Steve Berman (Berman), managing partner at law firm Hagens Berman Sobol Shapiro LLP, “They claim they’ve been taking

Children in Child Labour World (5–17 Years)

Children in Hazardous Work World (5–17 Years)

Number (000s) Prevalence (%) Number (000s) Prevalence (%)

2000 245,500 16.0% 170,500 11.1%

2004 222,294 14.2% 128,381 8.2%

2008 215,209 13.6% 115,314 7.3%

2012 167,956 10.6% 85,344 5.4%

2016 151,622 9.6% 72,525 4.6%

The growing awareness about child slaves working in the production of cocoa led to consumers questioning where ex- actly their chocolate was coming from and who was making it. In 2001, following pressure and outrage from civil society groups, media, and the general public, eight chocolate manu- facturing companies in the US including Nestlé, signed the Harkin-Engel protocol20 to investigate the labor practices and eliminate the worst forms of child labor in the processing of cocoa in Ivory Coast and Ghana by 2005. However, when the 2005 deadline arrived, the companies had yet to eradicate child labor from their supply chains. The target was then extended to 2008. Unable to meet the new self-imposed deadline again, in 2010, the signatories of the protocol started afresh with a treaty called The Declaration of Joint Action to implement the Harkin-Engel Protocol and to reduce the worst forms of child labor by 70% across the cocoa plantations of Ivory Coast by 2020.

In 2005, a lawsuit was filed against Nestlé, Archer Daniels Midland Co,21 and Cargill Inc22 by three former child slavery victims originally from Mali in West Africa who alleged that these companies aided and abetted human rights violations through their active involvement in purchasing cocoa in Ivory Coast. The lawsuit claimed that the companies were aware of the child slavery problem and offered financial and technical assistance to local farmers to procure the cheapest source of cocoa. In court documents, the three plaintiffs claimed that they had been trafficked from their homes and put to work on plantations in Ivory Coast. They described how they had been whipped, beaten, and forced to work for 14 to 16 hours a day before being allowed to retire to their dark rooms. One plaintiff recounted how guards would slice open the feet of any child worker who tried to escape. The lawsuit accused Nestlé of mak- ing false assertions to consumers and not disclosing that its suppliers relied on child laborers to procure cocoa at the point of purchase.

Nestlé said that the claims against it should be dismissed as it was committed to the goal of eliminating child labor from its cocoa supply chain. Claiming that the lawsuit was without merit, Nestlé said that “proactive and multi-stakeholder efforts” were required to eradicate child labor, not lawsuits. “Forced child labor is a complex, global social issue in foreign coun- tries that is not going to be solved by lawsuits in U.S. courts against the very companies that are leading the fight to help

ExHIBIT Iv Children’s Involvement in Child Labour and Hazardous Work, 2000-16

Source: Adapted from https://www.ilo.org/wcmsp5/groups/public/@dgreports/@dcomm/documents/publication/wcms_575541.pdf.

CASE 1 • ELIMINATING MODERN SLAVERY FROM SUPPLY CHAINS: CAN NESTLÉ LEAD THE WAY? PC1-5

Chocolate Products back to the cocoa plantations on which they are grown, much less ensure that the cocoa beans are not the product of child or slave labor. And meanwhile Nestlé con- tinues to profit from the child and forced labor that is used to make its Chocolate Products. This is shameful.”33

Nestlé’s Initiatives to Address the Issue

Following the findings of the FLA report, Nestlé set out to ad- dress child labor by undertaking the 11 recommendations the FLA had made to it which included strengthening the Nestlé Supplier Code, increasing accountability from the various tiers of suppliers, and developing a robust and comprehen- sive internal monitoring and remediation system. Reiterating the promise made in 2001, Nestlé said it was taking action to progressively eliminate child labor in cocoa-growing areas by assessing individual cases and tackling the root causes. “The use of child labor is unacceptable and goes against every- thing Nestlé stands for. Nestlé is committed to following and respecting all international laws and is dedicated to the goal of eradicating child labor from our cocoa supply chain,”34 the company said in a statement.

In 2012, Nestlé was the first cocoa purchaser to set up a Child Labor Monitoring and Remediation System (CLMRS) in Ivory Coast in association with ICI (See Exhibit VI). The system locally recruited ‘community liaison people’ and ‘child labor agents’ who worked to raise awareness about child labor in communities, identified children at risk, and reported their findings to Nestlé and its suppliers. By the end of 2015, the system covered 40 cooperatives and 26,000 cocoa farmers.

steps. They partner with the Fair Labor Association to inves- tigate, and they claim they’re committed to eradicating it, but the fact is the recent reports show the number of children in the cocoa industry has increased. We doubt that Nestlé is taking this very seriously.”31

Moreover, Nestlé’s claims that it had made progress to- ward meeting the Harkin-Engel Protocol fell flat when a 2015 report from the Payson Center for International Development of Tulane University, sponsored by the US Department of Labor, found that the number of children engaged in cocoa production in Ivory Coast had increased 51% to 1.4 million in 2013–14, compared to 791,181 children engaged in such work in 2008–09. However, Nestlé defended itself stating, “cocoa supply chain is long and complex–making it difficult for food companies to establish exactly where their cocoa comes from and under what conditions it was harvested.”32

Nestlé’s failure to bring transparency into its supply chain again came under the public spotlight in September when con- sumers filed three class-action lawsuits against Nestlé, The Hershey Co., and Mars Inc. for allegedly using child labor in chocolate production. The lawsuit stated that in violation of California law, the companies did not disclose that their suppli- ers in Ivory Coast relied on child laborers and instead continued to profit by tricking consumers into indirectly supporting the use of such labor. According to the complaint, “Nestlé, as one of the largest companies in the world, can dictate the terms by which cocoa beans are produced and supplied to it, including the labor conditions in the supply chain. But through its own inadequate efforts over the course of decades Nestlé is pres- ently not able to trace all of the cocoa beans that make up its

Head Office Exporter

Nestlé

Exporter in the Ivory Coast

Union of Cooperatives

Section

Sub-Section

Member Farmers

Farmers

Coxer Pisteurs

Traitants/ SARL

Buying Centers of Exporter

Cooperatives Cooperatives in Sustainability

Programs

Family/ Workers

Family/ Workers

Sharecropper/ Family/Workers

Sharecropper/ Family/Workers

Contract Only with One Cooperative Cocoa Flow Not in Every Case

Cooperatives not in Sustainability

Programs

Procssing Facilities of Exporter

ExHIBIT v Nestlé’s Cocoa Supply Chain Map in the Ivory Coast

Source: http://www.fairlabor.org/sites/default/files/documents/reports/cocoa -report-final_0.pdf.

PC1-6 PART 1 • COMPREHENSIVE CASES

The child is monitored to ensure the process is successful, and the Effectiveness of the Remediation Activities is Critically Revieved on an on-going basis

Step 7:

Step 1: The Community Liaision Person (CLP) Visits the Households and Farms of Every Member of the Nestle Cocoa Plan Co-operative Gather Basic Information on the Issue Step 2: A child is Spotted (or Self-declares) Engaging in a Hazardous Activity

Step 3: This Information is Entered into a Centralized database via Mobile app

Step 4: At the Co-operative Level, the Child Labour Agent (CLA) Verifies the Information and Validates the Report Submitted by the CLP

Step 5: ICI Analyses the Data Coming from a Co-operative, Identifies Trends and Suggests a Palette of Remediation Activities that will be Implemented by ICI with the Support of the CLA and CLP

Step 6: ICI, or one of its Local Partners, Implements or distributes Remediation Support to the Child and/or their Parents

In 2017, 51% of Children Identified are no Longer in Child Labour

51%

ExHIBIT vI Child Labor Monitoring & Remediation System

Source: Adapted from www.nestle.com.

In 2016, the CLMRS was extended to a further 29 coopera- tives, taking the total to 69. By 2016, CLMRS covered 37,130 farmers and identified 3,933 children who were involved in hazardous tasks on cocoa farms (See Exhibit VII). Half of the identified children were included in CLMRS and sent to school while income generating activities were developed for their families. Nestlé built 40 schools in Ivory Coast to help end un- lawful child labor. Despite this, allegations that the company was not doing enough continued. According to a spokesperson

from Nestlé, “Unfortunately, the scale and complexity of the issue is such that no company sourcing cocoa from Ivory Coast can guarantee that it has completely removed the risk of child labour from its supply chain.”35

Earlier in 2010, Nestlé entered into a partnership with the Danish Institute for Human Rights36 (DIHR) to support its commitment to respecting human rights as stated in the com- pany’s Corporate Business Principles. As part of this commit- ment, Nestlé developed and implemented an 8-pillar Human

ExHIBIT vII Growth of CLMRS

Source: Adapted from Nestle CSV Full Report 2016 and other sources.

2015 2016 2017

Number of co-ops in CLMRS 40 69 95

Number of farmers covered by CLMRS 24 470 37 130 65486

Farmers and community members who attended awareness-raising sessions 120 067 193 424 289657

Number of women supported to carry out an income-generating activity 1311 1073 -

Cumulative total of schools built 42 42 -

Number and % of children participating in child labor 5 135 19%

6 065 16%

-

Number and % of child labor cases assisted 3 591 70%

4 680 77%

-

Number of families of children identified in child labor benefiting from income-generating activities

1 167 1 305 -

CASE 1 • ELIMINATING MODERN SLAVERY FROM SUPPLY CHAINS: CAN NESTLÉ LEAD THE WAY? PC1-7

possibility of forced labor and human trafficking in Nestlé’s Thai supply chain. The investigation was targeted specifi- cally at the vessel-to-market place shrimp and fishmeal sup- ply chain. Verité interviewed more than 100 people, including about 80 workers from Myanmar and Cambodia, as well as boat owners, shrimp farm owners, site supervisors, and rep- resentatives of Nestlé’s suppliers. It visited fishing ports, fish- meal packing plants, shrimp farms, and docked fishing boats in Thailand. Verite found indicators of forced labor, human traf- ficking, and child labor present in land and sea-based work- ers at the sites assessed. These indicators included deceptive recruitment practices, little or no employment protections for workers, restriction on the freedom of movement of workers, and instances of both verbal and physical abuse.

According to the Verité study, workers were either sold as slaves to seafood suppliers in Thailand, or trapped in the fishing industry through false promises and debt bondage. Often trafficked from Thailand’s neighboring countries such as Cambodia and Myanmar, the laborers were sold to fishing boat captains needing crews to man their fishing boats, accord- ing to the report. The work was strenuous with shifts lasting up to 20 hours a day with little or no pay and refusal to work to a supervisor’s satisfaction led to beatings or sometimes even death. “Sometimes, the net is too heavy and workers get pulled into the water and just disappear. When someone dies, he gets thrown into the water. Some have fallen overboard,”40 said a Burmese worker to Verité.

While Nestlé had publicly accepted the findings of the re- port, Verité said this problem was not unique to Nestlé’s supply chain but rather “systemic in nature” within the vulnerable mi- grant worker communities in Thailand.

Meanwhile, in August 2015, pet food buyers filed a class- action lawsuit against Nestlé for importing fish-based pet food41 from suppliers in Thailand who used slave labor. According to the lawsuit, Nestlé supported a system of slave labor and human trafficking to distribute and market its Purina brand Fancy Feast

Rights Due Diligence Program (HRDD) with the aim of making Nestlé’s approach to human rights strategic, comprehensive, and coordinated (See Exhibit VIII). As part of the program, Nestlé continued to tackle child labor in its cocoa supply chain in Ivory Coast by focusing on vulnerable groups, especially girls and children of migrant workers. In 2015, Nestlé was one of the early adopters of the UNGP Reporting Framework to effectively manage human rights in its operations. This Framework was based on the global standard of the UNGPs.

In October 2015, Batato36 was appointed as Executive Vice President and Head of Operations at Nestlé. Batato con- trolled all 500 of Nestle’s manufacturing facilities around the world. He was also responsible for Nestlé’s rural development activities and procurement. Nestlé operated a Child Labour and Women’s Empowerment Steering Group, chaired by Batato, to identify measures, take decisions and monitor progress.

In 2016, Nestlé increased the amount of cocoa purchased through TNCP to 140,933 tonnes at a cost of about CHF 30 mil- lion. By 2017, the company planned to source 150,000 tonnes of cocoa through TNCP and 230,000 tonnes by 2020. The com- pany claimed that its KitKat brand had become the first global confectionery brand to be sourced from 100% certified cocoa. In order to strengthen its cocoa bean supply in a responsible way, Nestlé encouraged its supplying farms to be UTZ38 certi- fied. The process included farm selection and farmer training in good agricultural practices, health and safety, and care for the environment. Farmer compliance was checked by both Nestlé agronomists and an external auditor.

Nestlé Admits to Forced Labor

Following allegations that it was using slave labor to catch and process fish for its popular Fancy Feast cat food, in early 2015, Nestlé commissioned Verité,39 a human rights watchdog, to conduct an investigation into six of its production sites in Thailand. Verité conducted a three-month assessment into the

ExHIBIT vIII Nestlé Human Rights Due Diligence Program – Achievements 2016

Source: Adapted from http://www.nestle.com/csv/communities/respecting-human-rights and sources.

HRDD pillar Achievements

1 Policy commitments Preparation of the Nestlé Commitment on Labor Rights in Agricultural Supply Chains.

2 Stakeholder engagement Organized a stakeholder convening in Geneva, which included a specific human rights breakout session with expert stakeholders.

3 Training and awareness Rolled out human rights training to high-risk countries, training 9573 employees in eight such countries in 2016.

4 Risk evaluation Having identified 11 salient issues, Nestlé developed detailed action plans for seven of them.

5 Impact assessment Carried out assessments on Nestlé’s tomato supply chains in Spain and Italy and sugarcane supply chain.

6 Governance Established clear roles and responsibilities at different levels of the company.

7 Partnerships Engaged with vanilla supplier, MANE, to upscale the company’s activities on the ground in Madagascar.

8 Monitoring and reporting Carried out Human Rights Impact Assessment in Egypt.

PC1-8 PART 1 • COMPREHENSIVE CASES

factories. According to industry observers, the disclosure came as a surprise as international companies rarely acknowledged abuses in their supply chains. Some analysts felt that Nestlé’s voluntary disclosure could boost its ethical image and possibly shift the parameters of what could be expected of businesses when it came to supply chain accountability. “Nestlé’s decision to conduct this investigation is to be applauded. If you’ve got one of the biggest brands in the world proactively coming out and admitting that they have found slavery in their business op- erations, then it’s potentially a huge game-changer and could lead to real and sustained change in how supply chains are managed,”44 said Nick Grono, CEO of NGO the Freedom Fund.

In December 2015, the Central District of California dis- missed the lawsuit on the grounds that the California Act had created a ‘safe harbor’ under which companies were sheltered from liability when they accurately complied with the limited disclosure obligations that the law mandated.

Following Verité’s investigation and its own admis- sion, Nestlé launched an action plan on seafood sourced from Thailand which included a series of actions to protect workers from abuses and improve working conditions (See Exhibit IX). The plan included commitments to establish an emergency re- sponse team with various partners to remediate risks and take short-term action to protect workers, a grievance mechanism allowing anonymous reporting, a fishing vessel verification program involving regular third-party verification of randomly selected boats to assess working conditions, and a training program for boat owners and captains based on best practices. Batato, said, “As we’ve said consistently, forced labor and human rights abuses have no place in our supply chain. Nestlé believes that by working with suppliers we can make a positive difference to the sourcing of ingredients.”45 Batato further added

cat food while hiding its involvement in human rights viola- tions from the public. Nestlé had partnered with Thai Union Frozen Products PCL to import seafood-based pet food for its Purina pet food brand. Melanie Barber, the plaintiff, alleged that Nestlé had violated consumer protection statutes by fail- ing to disclose that some ingredients in its cat food products contained seafood which was sourced from forced labor. She argued that Nestlé was obliged to make additional disclosures at the point of sale regarding the probability that the product contained seafood sourced from forced labor.

According to Berman, “By hiding this from public view, Nestlé has effectively tricked millions of consumers into sup- porting and encouraging slave labor on floating prisons. It’s a fact that the thousands of purchasers of its top-selling pet food products would not have bought this brand had they known the truth – that hundreds of individuals are enslaved, beaten or even murdered in the production of its pet food.”42

The alleged violations were brought under the California Unfair Competition Law (UCL), the California Legal Remedies Act, and the California False Advertising law. Nestlé applied for the lawsuit to be dismissed, arguing that it could rely on so-called ‘safe harbor’ provisions, as the company had made specific disclosures on forced labor issues as required by the California Transparency in Supply Chain Acts of 2010.

After fending off allegations, in November 2015, Nestlé took observers by surprise when it publicly admitted that its sea- food supply chain was tainted by modern slavery. The company emphasized that “no other company sourcing seafood from Thailand, the world’s third-largest seafood exporter, could have avoided being exposed to the same risks.”43 In 2015, Batato in a brave move self-reported that Nestlé had uncovered child labor exploitation on fishing boats in Thailand that supplied its

ExHIBIT Ix Responsible Sourcing of Seafood-Thailand Action Plan 2015–2016

Objective Action

Incorporate new business requirements into commercial relationship, based on the current signature of the Nestlé Supplier Code.

• Work closely with suppliers to ensure development and implementation of capacity building programs and business requirements that address human rights and labor standards and demonstrate compliance on an ongoing basis.

• At a minimum the supplier shall run a traceability system enabling the identification of all potential origins (farms, mills, back to fishing vessels) linked with seafood and other ingredients used as part of product recipes.

• Additionally the supplier shall operate a seafood responsible sourcing program to ensure that origins identified are continuously assessed and assisted in meeting business requirements detailed in the Nestlé Responsible Sourcing Guidelines.

Enforce traceable supply chains identifying all potential sources of origins as part of a compre- hensive supply chain risk assessment.

• Ensure a verifiable supply chain traceability system as part of a comprehensive supply chain risk assessment that is aligned with industry partners and stakeholders within the Thailand Seafood Industry enabling traceability of seafood ingredients from fishing ves- sels through the complete supply chain to the receiving manufacturing sites and finished products.

Define and communicate requirements to boat owners and/or captains, including recruitment practices and living/working conditions for boat workers.

• Building on the Marine Catch Purchasing Document, or any other industry recognized best practice, create a set of requirements for boat owners and captains.

• Requirements will cover traceability, recruitment practices, fish catching system, living and working conditions for boat workers.

• A toolkit composed of Employment Contract Template and rules, Worker ID cards, template to monitor worker’s names, working time, salary, and associated deductions if any.

CASE 1 • ELIMINATING MODERN SLAVERY FROM SUPPLY CHAINS: CAN NESTLÉ LEAD THE WAY? PC1-9

Objective Action

Implement a training program for boat owners and/or captains.

• In association with industry partners and stakeholders within the Thailand Seafood Industry, create a training hub to generate awareness and provide education to ensure effective worker protections in priority areas as determined by Verite.

• The training hub may take the form of a “demonstration boat” or “university” where a training program will be given to electable boat owners/captains.

• As reward and enabler for continuous improvement, the program will include a mechanism to apply for financial support to speed up the implementation of best practices learned.

• Award financial support in the form of sponsoring or micro credit, for instance, for boat lodging and cooking facilities.

Implement an awareness raising campaign on human rights and labor conditions, targeting primarily boat workers.

• In collaboration with local authority and industry partners and stakeholders in the Thailand Seafood Industry, create an awareness raising campaign addressing the areas of labor standards & health and safety at the workplace.

• Campaign to be deployed in locations identified as impactful for migrant workforce & linked with regular boat’s docking, including the introduction of a grievance mechanism & providing some immediate tangible personal benefits to workers.

• Campaign will incorporate an anonymous reporting system to identify the worst form of labor conditions to be addressed by the Emergency Response Team.

Enable the work of a Migrant Workforce Emergency Response team.

• Identify a third-party partner [e.g. project Issara, to be considered] experienced in pro- tecting individuals from the worst form of labor conditions.

• Deploy and empower this partner organization as the Migrant Workforce Emergency Response Team in charge to deploy the necessary assessments to identify individuals in need of immediate assistance.

Create and implement a fishing vessels verification program.

• Implement, at first, an internal audit program verifying working (labor and health and safety at workplace) conditions in fishing vessels for 100% of the fleet used

• Along with monitoring of compliance through Key Performance Indicators, randomly select boats on a monthly basis to undergo a third-party verification audit by an independent organization, executed every quarter.

• Third-party verification audit should include interview of boat workers and establish the history of their working career in the region and country

Dedicate resources. • Appoint an executive from Nestlé to implement the action plan. His profile will include coordination with relevant parties, management of implementation activities, establish- ment of KPIs and dashboard, effective use of internal and financial resources, represen- tation to relevant industry parties and stakeholders.

Collaborate and scale up. • Leverage opportunities for collaboration with industry partners and stakeholders with the Thailand Seafood Industry and seek to become a member of the Shrimp Sustainable Supply Chain Taskforce, share progress on implementation of action plan and learning, contribute to testing of innovative solutions and continuously seek to expand imple- mentation to other supply schemes and locations in South East Asia.

• Achieve similar aims as part of the Good Labor Practices Working Group, convened by Government of Thailand and supported by the International Labor Organization.

Publicly report. • Report publicly on progress, including challenges and failures identified with how to best resolve and solutions to address. This should include ongoing monitoring of business partners’ supply chain management systems by independent third-party assessments and identification of risks and issues to be addressed.

that it would be neither a quick nor an easy endeavour, but the company planned to achieve significant progress going forward.

By the end of 2016, over 99% of the seafood ingredients that Nestlé sourced from its seafood supply chain in Thailand were traceable back to fishing vessels and farms due to actions taken as part of the plan. Nestlé worked with Verité, its supplier Thai Union, the Royal Thai Government, and the Southeast Asian Fisheries Development Center (SEAFDEC) to develop a train- ing program to educate fishing vessel owners, captains, and crew members on living and working conditions onboard the boats,

Source: Adapted from “Responsible Sourcing of Seafood –Thailand Action plan 2015–2016, “https://www.nestle.com

and on workers’ rights. In March 2016, Nestlé partnered with the Issara Institute, a not-for-profit body focusing on worker voice and grievance mechanisms, to help workers voice their concerns.

Experts said Nestlé’s disclosures and commitment to change served as an example to other companies in indus- tries in which labor trafficking and slavery were rampant. Praising Nestlé for self-policing and public reporting, Mark Lagon, president of nonprofit anti-trafficking organization Freedom House, said, “It’s unusual and exemplary. The pro- pensity of the PR and legal departments of companies is not

PC1-10 PART 1 • COMPREHENSIVE CASES

CEO of anti-human trafficking charity Unseen UK. Analysts said that this apparent double standard had raised doubts among civil society activists and customers regarding Nestlé’s true motives. Critics said by its admission, Nestlé had left con- sumers falsely confident in the ‘goodness’ of its products.

Some anti-trafficking advocates remained highly skepti- cal of Nestlé’s actions and saw the move toward transparency as a tactic to deflate other pending civil litigation suits in its cocoa supply chains. They said Nestlé had been falsely assur- ing customers that it would eliminate child and forced labor in its Ivory Coast supply chain since 2001 and in the meantime an entire generation of children in West Africa had been suffering due to Nestlé’s false promises.

Nestlé’s admission that it had found slavery in its supply chain in Thailand was greeted with a negative reaction from both traditional and social media. According to the LexisNexis Newsdesk48 analysis, mentions of Nestlé in relation to slavery rose steeply with 20 to 90 articles per week, discussing slav- ery in the company’s supply chain. According to the sentiment chart, more than a third of the coverage was entirely negative, while only 2.5% was positive (See Exhibit X).

to ‘fess up, not to even say they are carefully looking into a problem for fear that they will get hit with lawsuits.”46

Criticism

Though Nestlé was applauded for its admission of forced labor within its seafood supply chain and its move toward transpar- ency, some analysts felt that this was just an attempt by the company to cover up bigger allegations of child labor in its profitable chocolate making business. They felt that in order to escape the charges of being an unethical company, Nestlé had admitted to slavery in seafood suppliers, a low-profit area of the company’s business, in Thailand. Some critics saw Nestlé’s actions as a public relations stunt to alleviate the criticism it had received for abetting child slavery in Ivory Coast. “For me there is a big issue with one part of Nestlé saying, ‘OK we have been dragged along with everyone else to face the issue of slavery in Thailand and so let’s take the initiative and do some- thing about it’, and at the same time fighting tooth and nail through the courts to avoid charges of child slavery in its core operations in the Ivory Coast,”47 remarked Andrew Wallis,

ExHIBIT x Nestlé’s Media Coverage Related to Slavery

Nestlé and Slavery

N ov

9

0 %

25 %

50 %

75 %

100 %

N ov

1 6

N ov

2 3

N ov

3 0

De c

7

De c

14

De c

21

De c

28

Ja n

4

Ja n

11

Ja n

18

Ja n

25

Fe b

1

Fe b

8

Nestlé and Slavery

Neutral 64.10%; 225 Articles,

64.10%

Positive 2.56%; 9 Articles,

2.56%

Negative 33.33%; 117

Articles, 33.33%

Source: Adapted from https://bis.lexisnexis.co.uk/blog/posts/human-trafficking-awareness /reputational-risks-are-greater-than-ever-for-brands-associated-with-slavery.

CASE 1 • ELIMINATING MODERN SLAVERY FROM SUPPLY CHAINS: CAN NESTLÉ LEAD THE WAY? PC1-11

America who were using child labour. But it doesn’t always solve the bigger problem. There is no one-size fits all solution. If we took the view to delist every single supplier who is doing the wrong thing today, it will not improve the situation. It will cut the income of those who rely on this income. It is lose-lose. But, with our size, we believe we can change things over time,”51 said Batato.

Modern slavery was considered as a criminal activity often actively hidden by perpetrators, making it difficult to detect. Third-party auditors appointed by Nestlé might struggle to get full access to facilities and victims would be unwilling to speak up fearing retribution.

Another challenge would be driving workers toward community awareness-raising sessions. Some families were often resistant to change as they had few livelihood alterna- tives. Moreover, the isolation of some of the farms and vil- lages was a challenge in itself. Supplying school kits and providing literacy classes to women were all the more diffi- cult as a result. Some researchers found that though Nestlé’s code of conduct prohibited the use of child labor in its sup- ply chain, awareness of the code was low among farmers. Moreover, the farmers did not attend training sessions either due to lack of interest or lack of time. “Being a leader in our industry . . . we do understand we can influence the supply chains we work with, and that’s what we do. We recognize it is a difficult issue to deal with,”52 said Marco Goncalves, Nestlé’s chief procurement officer.

Analysts said that given its global scale and financial prowess, Nestlé could play a crucial role in driving signifi- cant changes and abolishing slavery from the global cocoa supply chain. Going forward, the question before Nestlé was what more the company could do to ensure its cocoa supply chain was free from slavery. How could it assure consum- ers that its products did not come at the expense of inno- cent people who went through untold suffering. Could Nestlé have a positive impact on the chocolate industry through its honest revelations and by raising the bar on labor protection? Should the company take a clear leadership position on this issue given its influence? If so, how should Nestlé go about doing this?

Case Questions

1. What is modern slavery? Where does it fit in with a company’s CSR strategy?

2. What are the conditions enabling slavery in cocoa supply chains in Ivory Coast?

3. Why is tackling the issue of modern slavery so important for a company like Nestlé?

4. Investigate the existence of modern slavery in Nestlé’s supply chains and its efforts to address the issue.

5. Discuss the key challenges Nestlé faced while addressing modern slavery in its cocoa supply chain.

6. What more should Nestlé do to mitigate the risk of modern slavery in its cocoa supply chain

Some analysts contended that Nestlé’s efforts to eliminate child labor from its global cocoa supply chain were not cred- ible because of its inadequately transparent self-monitoring system. For instance, they pointed out that the company pro- vided incomplete and insufficient information regarding the details of TNCP and its certification schemes and had omitted material information related to TNCP’s distribution and prog- ress in the rest of its global cocoa supply chain. Some analysts pointed out that the FLA investigation was not an accurate rep- resentation of the conditions on Nestlé’s cocoa farms because a majority of Nestlé’s cocoa farms (about 75%) were not part of TNCP. They also said that there was significant discrep- ancy between Nestlé’s grand official policies and statements to combat slavery and the nominal actions it took. Nestlé had yet to develop a concrete plan outlining when it would source entirely sustainable cocoa. They said that TNCP was only a greenwashing ploy aimed at making Nestlé appear to be ethi- cally responsible.

The Way Forward

Nestlé received some respite in March 2017, when US district judge Stephen V. Wilson dismissed the case on child slavery in Africa on the ground that the complaint “seeks an impermis- sible extraterritorial application of the Alien Tort Statue which means companies can be sued in the US for actions outside the country but only when some conduct touches and concerns the US with sufficient force.”49 He said that the former child slaves could not sue in the US over wrongdoing that had occurred in Africa. The judge said that the plaintiffs’ attempt to single out CSR initiatives as evidence that Nestlé was knowingly aiding and abetting child slavery was counter-productive because it would freeze companies’ speech and prevent them from taking up such initiatives in the future. He said, “Even worse, rely- ing on corporate social responsibility programs as ‘relevant conduct’ would also chill corporations from creating these programs. Corporations would be incentivized to allow human rights abuses to occur without shedding light on the issue or trying to combat it out of fear they will displace the presump- tion and be held responsible.”50

Going forward, analysts said that identifying and tackling the menace of modern slavery in its cocoa supply chain would not be an easy task for Nestlé. Nestlé’s cocoa supply chain was complex, and regulating the co-operatives and farms could be tough for the senior management, they said. It would be chal- lenging to continually follow up on the work of co-operatives given their remote locations, they added. Though Nestlé had monitoring systems in place to communicate supplier policies and conduct audits, they often covered only tier one suppliers at the top of the value chain, while forced labor was mostly found in the bottom tiers. Moreover, cost and pricing pressures, supplier engagement, and transparency dilemmas were some of the issues Nestlé had to deal with while addressing slavery. “The problem is, we can’t just stop using a supplier. People ask why we don’t boycott them. We did that in the case of palm oil. We delisted suppliers. We delisted coffee suppliers in South

PC1-12 PART 1 • COMPREHENSIVE CASES

27. Pisteurs are individuals commissioned to buy cocoa beans from farmers. 28. Traitants are middlemen, licensed by the government, who trade cocoa

beans. Traitants may source beans either from cooperatives or from pisteurs.

29. Métayers are sharecroppers who manage a cocoa farm on behalf of its owner.

30. Coxers are individuals who live in the villages and inform pisteurs when there is a harvest ready to be collected.

31. Abby Haglage, “Lawsuit: Your Candy Bar Was Made by Child Slaves,” www.thedailybeast.com, September 30, 2015.

32. “Nestle ‘to Act over Child Labour in Cocoa Industry’,” www.bbc.com, November 28, 2011.

33. “Nestle - Truth in Advertising,” www.truthinadvertising.org, September 28, 2015.

34. Ellen Wulfhorst, “U.S. Supreme Court Gives Boost to Child Slave Labor Case Against Nestle,” www.reuters.com, January 14, 2016.

35. Joe Sandler Clarke, “Child Labour on Nestlé Farms: Chocolate Giant’s Problems Continue,” www.theguardian.com, September 2, 2015.

36. The Danish Institute for Human Rights is Denmark’s independent state- funded human rights institution.

37. Previously, Batato served as the CEO and Managing Director of Nestle Pakistan Limited from June 6, 2012 to September 1, 2015 and May 25, 2012 to September 1, 2015 respectively. He has extensive experience in the manufacturing and technical area, combined with business experi- ence in both developed and emerging markets.

38. UTZ Certified is a program and a label for sustainable farming. 39. Verité is a Massachusetts-based non-profit organization that advocates

workers’ rights worldwide. 40. James Tennent, “Nestlé Admits Forced Labour, Trafficking, and Child

Labour in its Thai Seafood Supply,” www.ibtimes.co.uk, November 24, 2015.

41. The fishmeal used to feed farmed shrimp and a prawn is made from fish caught by migrant workers. The US is the biggest customer of Thai fish, and pet food is among the fastest growing exports from Thailand. In 2014, Thai Union shipped more than 28 million pounds of seafood-based cat and dog food for some of the top brands sold in America including Iams, Meow Mix, and Fancy Feast.

42. “Nestle Accused of Using Slave-Caught Fish in Cat Food,” www .nationmultimedia.com, August 28, 2015.

43. Annie Kelly, “Nestlé Admits Slavery in Thailand While Fighting Child Labour Lawsuit in Ivory Coast,” www.theguardian.com, February 1, 2016.

44. “Control Over Supply Chain a Must,” www.pressreader.com, November 5, 2016.

45. Annie Kelly, “Nestlé Admits Slavery in Thailand While Fighting Child Labour Lawsuit in Ivory Coast,” www.theguardian.com, February 1, 2016.

46. Marthe Mendoza, “Nestle Confirms Labor Abuse among its Thai Seafood Suppliers,” www.ap.org, November 23, 2015.

47. Claire Bernish, “Why is Nestle Finally Admitting to Using Slave Labor?” www.mintpressnews.com, February 2, 2016.

48. LexisNexis is a global provider of legal, regulatory and business infor- mation and analytics.

49. “Nestlé, Cargill and ADM Cocoa Child Slavery Lawsuit Dismissed,” www.confectionerynews.com, March 15, 2017.

50. Daniel Fisher, “Judge Tosses Nestlé Suit Over Child Slavery in Africa,” www.forbes.com, March 13, 2017.

51. Mark Hawthorne, “One Step at a Time, Nestle Slowly Changes its Ways,” www.smh.com.au, February 24, 2017.

52. Katie Nguyen, “All Companies Have Slave Labour in Supply Chains but it Can be Stopped-Tesco,” www.reuters.com, November 18, 2015.

1. This was compiled from published sources and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation.

2. Ivory Coast, also known as Côte d’Ivoire, is a tropical country in southern West Africa. It is the world’s largest producer of cocoa, the raw ingredient used in making chocolates.

3. Faaez Samedi, “Nestlé Admits Forced Labor is Part of its Seafood Supply Chain,” www.campaignlive.co.uk, November 27, 2015.

4. Marianne Smallwood “Slavery Found within Nestle’s Seafood Supply Chain ... Now What?”www.triplepundit.com, December 14, 2015.

5. Mark Hawthorne, “One Step at a Time, Nestle Slowly Changes its Ways, “www.smh.com.au, February 24, 2017.

6. “Annual Results 2016,” www.nestle.com. 7. “Nestle’s 12 Dark Secrets Worldwide!”www.theequalizerpost

.wordpress.com, November 18, 2010. 8. Jon Entine, “Greenpeace and Social Media Mob Nestlé,” www.blog

. american.com, March 31, 2010. 9. “Nestlé’s 12 Dark Secrets Worldwide!” www.theequalizerpost

.wordpress.com, November 18, 2010. 10. Baby formula is food manufactured for supporting the adequate growth

of infants. 11. “Starbucks as Fairtrade-lite and Nestlé on the Blacklist,” www

. faircompanies.com, October 8, 2008. 12. “Pepsi and Nestlé Backlisted for Water Pollution in China,” www. polarisinstitute

.org/pepsi_and _nestle_backlisted_for_water_pollution_in_china 13. “Nestlé’s Sinking Division,” www.polarisinstitute.org/nestl%C3

%A9%E2%80%99s_sinking_division 14. The ECRA is a not-for-profit, multi-stakeholder co-operative, dedicated

to the promotion of universal human rights, environmental sustainability, and animal welfare.

15. The Ethiscore is a numerical rating that differentiates companies based on the level of criticism that they have attracted. Generally, an Ethiscore of 15 would be the best, while 0 would be the worst.

16. Fair trade coffee is one that is obtained directly from the growers. It usually retails at a higher price than standard coffee.

17. “Starbucks as Fairtrade-lite and Nestlé on the Blacklist,” www . faircompanies.com, October 8, 2008.

18. Abby Haglage, “Lawsuit: Your Candy Bar Was Made by Child Slaves,” www.thedailybeast.com, September 30, 2015.

19. LJ Vanier, “Hershey, Nestle and Mars Use Child Slaves to Make Your Chocolate,” http://thespiritscience.net, October 18, 2015.

20. In 2001, the Chocolate Manufacturers Association of the US signed the protocol for the growing and processing of cocoa beans and their deriva- tive products in a manner that complied with ILO Convention 182 con- cerning the prohibition and immediate action for the elimination of the worst forms of child labor.

21. The Archer Daniels Midland Co is a US-based global food processing and commodities trading corporation.

22. Based in Minnesota, US, Cargill Inc is a provider of food, agriculture, financial, and industrial products and services worldwide.

23. Daniel Fisher, “Cue The Documentary: Nestlé Still Fighting Slavery Lawsuit by Foreign Plaintiffs,” www.forbes.com, October 7, 2016.

24. Established in 2012, The International Cocoa Initiative (ICI) is a multi- stakeholder partnership between cocoa companies, labor unions, and NGOs in order to eliminate the worst forms of child labor and forced labor in the growing and processing of cocoa beans.

25. www.nestle.com.au/creating-shared-value/social-impact/the-nestl %C3%A9-cocoa-plan.

26. Fair Labor Association is a non-profit multi-stakeholder initiative that works with major companies to improve working conditions in their sup- ply chains.

Endnotes

Case 2 ‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory? This case was written by Syeda Maseeha Qumer and Debapratim Purkayastha, IBS Hyderabad.1

in ethical retail. However, some analysts felt the new CSR goals were not exceptional. “With leading companies such as Marks & Spencer, Unilever, Smurfit Kappa and Skanska all placing sustainability at the heart of their business strate- gies, all formally disclosing their objectives and targets, and all committed to driving best practice right through their en- tire supply chains, the 14 goals of The Body Shop don’t seem particularly extraordinary,”3 remarked Senior Corporate Sustainability Adviser, Darina Eades. So going forward what could Schwartz and Davis do to distinguish Body Shop from its rivals who were more actively involved in CSR than be- fore? Would the new CSR approach help the beauty retailer in regaining its past glory as a leader of ethical business prac- tices in retail and boost sales?

The Body Shop (1976–2006)

In March 1976, Anita Roddick and her husband Gordon set up their first Body Shop store at Brighton, UK. The store sold around 15 lines of homemade cosmetics made with natural in- gredients such as jojoba oil, rhassoul mud, etc. From its very early days, Body Shop was associated with the social activism of Roddick, who was critical of what she called the environ- mental insensitivity of industry and wanted a change in stan- dard corporate practices. By the late 1970s, the company had a number of franchisee stores throughout the UK.

Roddick gave the company’s products brand names such as, ‘Tea Tree Oil Facial Wash’, ‘Mango Dry Mist’, etc. Urine sample bottles, the cheapest packaging available at the time, were used as containers. All labels were hand-written. Unlike other branded cosmetics, the packaging of its products contained detailed descriptions of the ingredients and their properties. The company never ‘sale’ priced its products but customers who returned product containers for refilling were offered a 15% discount. In addition to providing product infor- mation, a number of leaflets and posters on recycled paper pro- vided information about the social causes the company believed in and encouraged its customers to get involved. Customers were greeted with employees wearing T-shirts bearing a social message. The windows of Body Shop stores featured bills of local charity and community events.

Under Roddick’s leadership, Body Shop set a new standard, “retailing with a conscience” on a large scale. The company sourced the ingredients for its products from indig- enous farmers in developing countries. The company promoted recycling, used natural ingredients in its products, and avoided selling products tested on animals. Body Shop’s core brand identity was its “profits-with-a-principle” philosophy and the brand was closely associated with the social justice agenda.

On February 2, 2016, The Body Shop International Plc. (Body Shop), a UK-based retailer of natural-based and ethically-sourced beauty products, unveiled a new global CSR strategy to reassert its leadership in ethical business. The commitment, entitled ‘Enrich Not Exploit’, outlined 14 new sustainability targets to be achieved by 2020 that touched all areas of the business. According to Jeremy Schwartz (Schwartz), Chairman and CEO of Body Shop, “The Body Shop can be both a force for good and a successful, profit- able business. 40 years ago [founder] Anita Roddick set out a challenge for The Body Shop to tackle the big issues of her time. We’re now tackling the big issues of today, We want our Enrich Not Exploit™ commitment to inspire a new genera- tion of customers, supporters and especially millennials who truly care about how a company operates. Re-establishing The Body Shop as a leader will come from delivering our ambitious aim to be the world’s most ethical and truly sus- tainable global business.”2

Founded in 1976 by Dame Anita Roddick (Roddick), Body Shop was regarded as a pioneer of modern CSR. Since its inception, the beauty retailer, which was strongly associ- ated with the social activism of Roddick, had endorsed and championed various social issues that complemented its core values–opposition to animal testing, developing community trade, building self-esteem, campaigning for human rights, and protection of the planet. Through these initiatives, Body Shop had cultivated a loyal customer base. But following its acqui- sition by beauty care giant L’Oréal SA (L’Oréal) in March 2006, both Body Shop and Roddick came under severe criti- cism. Loyal customers felt betrayed as Roddick had previously been quite vocal in her criticism of companies like L’Oreal that tested their cosmetics on animals, exploited the sexuality of women, and sold their products by making women feel inse- cure. After its acquisition, the fortunes of Body Shop took a sharp downturn. With a host of new competitors jumping on the natural products bandwagon and offering their own green cosmetic lines, its sales plummeted. The beauty retailer’s op- erating margin narrowed, reaching a seven-year low in 2015. Body Shop’s ethical message also faded and by the company’s own admission it had been comparatively quieter on the sus- tainability front over a period of time.

To re-establish itself as the world’s most ethical and truly sustainable global business, Body Shop announced a new CSR commitment with the focus on people, products, and the planet. According to Christopher Davis (Davis), International Director of Corporate Responsibility and Campaigns at Body Shop, the new sustainability commit- ment would broaden Body Shop’s appeal to the next genera- tion of customers and revive its image as a pioneering force

PC1-13

PC1-14 PART 1 • COMPREHENSIVE CASES

branches globally including 304 in the UK. Its brand portfolio consisted of more than 600 products.

Takeover by L’Oréal

On March 17, 2006, Body Shop announced that it had agreed to be taken over by French cosmetics giant L’Oréal in a £652 million (US$ 1.14 billion) deal. Commenting on the acqui- sition, Lindsay Owen-Jones, chairman and CEO of L’Oréal, said, “We have always had great respect for The Body Shop’s success and for the strong identity and values created by its outstanding founder, Dame Anita Roddick. A partnership between our companies makes perfect sense. Combining L’Oreal’s expertise and knowledge of international markets with The Body Shop’s distinct culture and values will benefit both companies.”7

Post-acquisition, Body Shop continued to operate inde- pendently within the L'Oréal Group. The management team of Body Shop was retained and reported directly to the CEO of L'Oréal. Roddick continued to act as a consultant till she passed away in September 2007.

Following the deal with L’Oréal, Body Shop and Roddick faced an angry backlash. Body Shop was regarded by many as one of the pioneers of modern CSR. On the other hand, L’Oréal was viewed by activists as the face of modern con- sumerism – a company that tested its cosmetics on animals, exploited the sexuality of women, and sold its products by making women feel insecure. Body Shop’s critics said they felt betrayed by the deal as Roddick had previously been highly critical of companies like L’Oréal.8 She had vocifer- ously accused the cosmetic industry of making women feel insecure and particularly criticized L’Oréal for its alleged policy of employing only “sexy” saleswomen on its coun- ters. To make matters worse, 26% of L’Oréal was owned by Nestlé, one of the most boycotted companies in the world for its alleged unethical business practices and aggressive promotion of baby milk in developing countries. The move sparked calls for boycotts from animal welfare activists, who feared L’Oréal would destroy what remained of the Body Shop’s eco-friendly ethos. There were also questions raised about whether L’Oréal was trying to improve its image and buy CSR through this deal.

Some customers called for a boycott of Body Shop’s products as they felt that the company had sold out its val- ues and principles. Some of them vowed never to shop at Body Shop again. A consumer said, “The Body Shop used to be my high street ‘safe-house,’ a place where I could walk into and know that what I bought was okay, that people were actually benefiting from my purchase. Now the people ben- efiting are the overpaid, underworked ‘fat-cat’ CEOs of ani- mal-testing L’Oreal and baby-milk-selling Nestle. By buying from the Body Shop, you are now no longer supporting ethi- cal consumerism. If I want legitimate fair-trade, non-animal tested products, I can find them easily, at the same price, elsewhere.”9

This was a revolutionary idea at the time, and Body Shop de- veloped a loyal customer base.

In 1978, Body Shop’s first foreign franchisee opened in Brussels, Belgium, and shortly after, it entered North America. In April 1984, the stock of Body Shop opened for the first time on London’s Unlisted Securities Market, at 95 pence. By the time it obtained a full listing on the London Stock Exchange in January 1986, the stock was selling at 820 pence.

In the 1980s, Body Shop was quite vocal on environmen- tal issues and it launched the ‘Save the Whales’ campaign. It also teamed up with Amnesty International4 and from the 1990s became vocal in its support for international human rights. In 1990, The Body Shop Foundation, the charitable arm of the company, was established to fund human rights, animal welfare, and environmental protection groups and projects globally.

During the 1980s and 1990s, Body Shop had its share of critics who accused the company of hypocrisy as they felt that it was making profits under the guise of endorsing social equality. On the other hand, some shareholders complained that instead of maximizing profits, the company was divert- ing money into “social work” projects. However, the company showed strong growth through the 1980s and at its height, in 1991, it was worth £700 million. In 1993, the firm banned any products tested on animals. Body Shop was regarded as one of the first firms in the world to publish a proper report on its so- cial responsibility initiatives, having published its first ‘Values Report’ in 1996.5

However, problems surfaced for Body Shop in the early 1990s as many “me too” retailers mushroomed in the UK, run- ning businesses on a similar green agenda. Competitors such as Boots and Sephora encroached on Body Shop’s market niche by offering their own natural health and beauty products. Body Shop’s international expansion strategy too did not achieve much success. In the US, it faced major reverses as Bath & Body Works emerged as a tough competitor.

Though Body Shop continued to grow in size, its market value was on the decline. The board had also got tired of Roddick’s radicalism and her combative stance on global- ization. In 1998, Roddick was forced to step down as CEO and Patrick Gournay (Gournay) replaced her. However, she continued to carry out PR functions for Body Shop. In 1999, Body Shop exited manufacturing and wholesaling, and fo- cused on retailing. The Body Shop At Home, the direct- selling arm of the retailer, was launched in the UK (1994), Canada (1995), Australia (1997), and the US (2001). But problems persisted.

In 2002, both Roddick and Gordon stepped down as co- chairmen, but Roddick was retained as a creative consultant of the company. Gournay also quit and was replaced by Peter Saunders, who had earlier been the CEO of Body Shop’s North American operations. Body Shop started working on reposi- tioning itself to the ‘masstige’6 sector of the consumer market. The re-positioning exercise began to bear fruit and the com- pany was back to profits. By March 2006, Body Shop had 2,085

CASE 2 • ‘ENRICH NOT EXPLOIT’: CAN NEW CSR STRATEGY HELP BODY SHOP REGAIN GLORY? PC1-15

Body Shop and Roddick defended the deal saying that L’Oréal would not compromise Body Shop’s ethics and that the merger would give Body Shop a chance to spread its val- ues to L’Oréal. Roddick agreed that she had had an issue with L’Oréal over animal testing earlier, but she was now con- vinced that the company was sincere in its commitment to this issue. L’Oréal also announced that it would not dilute Body Shop’s ethical stance and committed itself to upholding the values of the company.

Body Shop’s Core Values

According to Davis, Roddick was ahead of her time in estab- lishing Body Shop as an ethical beauty business.10 Speaking about this, Schwartz said, “The Body Shop courageously pi- oneered new ways of thinking, acting and speaking out as a

ExHIBIT I Core Values of Body Shop

ACTIVATE SELF ESTEEM

1995 — UK stores carried ‘What Women Want’ cards, receiving 14,000 responses in three months. These were published in a report and book and influenced wider campaigning on women’s issues.

1998 — Developed a self-esteem campaign featuring the body-positive Ruby doll, to challenge stereotypes and spark debate.

2013 — Self-esteem related to disability became one of three funding priorities for The Body Shop Foundation.

AGAINST ANIMAL TESTING

1989 — Started campaigning to end animal testing in cosmetics, the first cosmetics company to do so.

1998 — Following the sustained campaign, the UK government banned animal testing of cosmetic products and ingredients.

2004 — Campaigning by Body Shop and BUAV (British Union for the Abolition of Vivisection) contributed to a European Union ban on animal testing in cosmetic products.

2009 — The European Union banned animal testing of cosmetic ingredients.

2013 — Sale and import of animal tested products and ingredients was banned in the EU. The company’s campaign continued to collect 1 million signatures in support of Cruelty Free International for a global ban on animal testing in cosmetics.

COMMUNITY FAIR TRADE

1987 — The CFT program was started with sourcing ‘footsie’ massage rollers from an education and employment charity in India, which became a best-selling line.

1989 — Bought Nepalese sustainable paper gifts made from plants clogging local waterways, leading to new employment for people and seed funding for community projects,

1993 — Sourced its first CFT ingredient–sesame seed oil.

1994 — Roddick discovered shea butter from Tamale, northern Ghana.

1999 — Sourced organic cotton Moisturising Gloves and Socks from Mauritius.

2007 — Awarded ‘The Big Tick’ Business in the Community (BITC) Supply Chain Award.

2008 — First to use fair trade organic alcohol in cosmetics.

2009 — CFT program certified by The Institute for Marketecology (IMO).

2011 — Established the Global Shea Alliance, bringing industry members together to improve benefits for producers and increase the number of women involved in the trade.

2013 — BITC named The Body Shop International Responsible Business 2013, based on its CFT program.

DEFEND HUMAN RIGHTS

1991 — Supported the ‘Tie a Yellow Ribbon’ campaign, which led to the release of kidnapped journalist John McCarthy after five years of captivity allegedly by militant groups in Lebanon.

Continued

company. Our ground-breaking campaigns were ahead of their time and changed laws on animal testing, domestic violence and human trafficking. We were the first in beauty to use com- munity trade and we still have the strongest programme in the industry. We are small, but we lead.”11

The CSR strategy of Body Shop was based on five core values (See Exhibit I):

Support Community Fair Trade

Launched in 1987, Community Fair Trade (CFT) was Body Shop’s own independently verified fair trade initiative to help marginalized communities improve their lives and alleviate poverty. The objectives of CFT were to source high-quality ingredients, gifts, and accessories in a fair way; to provide benefits to smallholders, artisans, and their communities; and to share stories that inspired the company’s mission. Through

PC1-16 PART 1 • COMPREHENSIVE CASES

DEFEND HUMAN RIGHTS

1993 – Its ‘Free the Ogoni 19’ Campaign was supported in 17 countries, raising awareness of people persecuted for protesting against oil exploitation in Nigeria.

1998 — The ‘Make Your Mark’ campaign with Amnesty International to highlight the plight of human rights defenders collected over 3 million signatures and helped secure the release of 17 prisoners.

2000 — It established the Human Rights Award for grassroots human rights activists.

2004–2008 — The global ‘Stop Violence in the Home’ campaign raised awareness, generated funds for women’s crisis centers, and helped make domestic violence illegal in Indonesia.

2008–2010 — In partnership with MTV International, Body Shop raised £2 million for the Staying Alive Foundation to raise HIV and AIDS awareness among young people.

2009–2012 — Its ‘Stop Sex Trafficking of Children and Young People’ campaign mobilized 7 million people to demand action and 24 governments committed to introducing new legislation.

PROTECT THE PLANET

1986 — Launched the ‘Save the Whale’ campaign in partnership with Greenpeace; Set up an Environmental Projects Department to coordi- nate its campaigns and commercial practices.

1989 — The ‘Stop the Burning’ campaign collected almost 1 million signatures to help save the Brazilian rainforest

1993 — Banned PVC in its packaging

2002 — Its ‘Choose Positive Energy’ campaign with Greenpeace promoted renewable energy, presenting over 6 million signatures to the World Summit for Sustainable Development

2004 — Was a founder member of the Roundtable on Sustainable Palm Oil (RSPO) – set up to promote the use and growth of sustainable palm oil.

2007 — All of Body Shop products became 100% vegetarian.

2012 — The company launched its Pulse stores.

Source: Adapted from Body Shop 2015 Value Report and other sources.

CFT, Body Shop sourced products from under developed com- munities for a fair price in a sustainable way. Annually, Body Shop’s CFT offered a stable income to thousands of workers and developed communities by building schools and health care centers, providing clean water, and offering education scholarships.

Body Shop developed a set of Fair Trade Guidelines in 1994 (see Exhibit II). The company conducted participatory audits, and provided its CFT suppliers with information and feedback to assist them in maximizing long-term benefits. It helped suppliers to reduce their dependence on Body Shop by helping them gain access to wider markets and sharing its best practices with them. With Body Shop being acquired by L’Oréal, eight of Body Shop’s CFT raw materials were being used by other brands of L’Oréal as part of their Solidarity Sourcing program.12

By 2013, Body Shop’s CFT worked with 25 suppliers in 21 countries, buying over 1,200 tonnes of ingredients and 2.2

million gift and accessory items from across the world. In 2014, Body Shop sourced CFT organic argan oil from six Moroccan co-operatives, thereby providing 334 rural women with a regu- lar income, giving them financial independence, reducing relo- cation, and supporting local economic development. In 2014– 2015, Body Shop spent about £21 million on purchasing over 3 million kilos of CFT ingredients. It worked with 25,000 CFT producers and farmers in 21 countries.

Activate Self-Esteem

Body Shop valued people and their work and challenged what it called the “unrealistic beauty ideal presented by the beauty industry.” The beauty retailer supported and built self-esteem, particularly among women, through its human rights campaigns and income-generating projects linked to its CFT initiative as well as in-store and in the media. Its campaigns on self-esteem took off in a big way in 1995 when it launched a “Women’s Rights Campaign” during the

ExHIBIT II Body Shop’s Fair Trade Guidelines

Source: Adapted from www.thebodyshop.com/bodyshop/values/support_community_trade.jsp.

Community: We are looking to work with established community organizations which represent the interests of their people. Community in Need: We target those groups who are disadvantaged in some way, those whose opportunities are limited. Benefits: We want the primary producers and their wider community to benefit from the trade –socially as well as economically. Commercial Viability: It has to make good commercial sense meaning that price, quality, capacity and availability are carefully considered. Environmental Sustainability: The trade has to meet The Body Shop standards for environmental and animal protection.

CASE 2 • ‘ENRICH NOT EXPLOIT’: CAN NEW CSR STRATEGY HELP BODY SHOP REGAIN GLORY? PC1-17

a water, sanitation, and hygiene program in Arba Minch Zuria, Ethiopia, where 40% of people did not have access to clean water.

Against Animal Testing

Body Shop ensured that none of its products were tested on animals and that its ingredients were procured from suppliers who did not test their ingredients on animals for any cosmetic purpose. Some of the animal-derived ingredients it used such as honey were harvested without causing harm to the animals. Reportedly, all the Body Shop products and ingredients un- derwent extensive testing to ensure that they were safe and ef- fective, while also remaining cruelty-free. The company used three main assessment methods involving computer data, lab- oratory-created tissues, and people15 to make its products safe and effective.

Along with customers and animal protection groups, Body Shop campaigned for a change in laws on the testing of animals for cosmetics purposes in the UK, Europe, the Netherlands, Germany, and Japan. In 1996, Body Shop pre- sented the European Union with a petition signed by over 4,000,000 people, which at the time was the largest petition against animal testing. Body Shop was also instrumental in the UK government’s decision in 1998 to ban animal test- ing for cosmetic products and ingredients. In addition to this, the company’s campaigns also resulted in finished product test bans in Germany and the Netherlands. In 1997, Body Shop was one of the first international cosmetics companies to comply with the Humane Cosmetic Standards.16 In 2006, Body Shop received the Best Cruelty-free Cosmetics Award from PETA.17 In 2008, it received the Lifetime Achievement Award from the Royal Society for the Prevention of Cruelty to Animals.18

In 2012, Body Shop relaunched its ‘Against Animal Testing’ campaign in partnership with Cruelty Free International.19 On March 11, 2013, after the anti-animal testing campaign had gone on for more than 20 years, the European Union banned the sale and import of animal-tested products and ingredi- ents. The same year, Body Shop was named International Responsible Business of 2013 by the prestigious Business in The Community Organisation, a group of not-for-profit organizations.

fourth UN World Conference on Women. As a part of the campaign, the retailer collected more than a million signa- tures in support of the issue from people in 25 countries. In 1997, it launched a campaign based on ‘Ruby’, a realistic doll which represented real women as opposed to dolls such as ‘Barbie’.

In its ads, Body Shop used language and images that showed respect for women. Every poster displayed in-store and every image on the company’s website adhered to certain guidelines such as avoiding altering the size or body shape of its models and not featuring ultra-thin or very young models, as was the norm in beauty advertising. Body Shop promoted diversity, acceptance, and empowerment in its workplace and maintained equal opportunities standards. Employees were groomed through volunteering, training, and personal de- velopment programs. In 2013, self-esteem related to disabil- ity became one of the funding priorities for The Body Shop Foundation.

Defend Human Rights

Using its global presence, Body Shop campaigned for human rights in the media and in its stores. It also partnered with its suppliers to expand ethical trade practices that respected workers’ rights. Body Shop conducted and supported many human rights campaigns. For instance, in 1998, to celebrate the 50th Anniversary of the Universal Declaration of Human Rights, it launched a joint worldwide campaign with Amnesty International to highlight the plight of human rights defenders around the world, encouraging customers to ‘Make Your Mark’ for human rights. About three million people signed up for this campaign.

Body Shop’s ‘Stop Sex Trafficking of Children and Young People’ campaign that ran between September 2009 and March 2012 in partnership with ECPAT International13 made a tremendous impact globally. The campaign called on governments to protect young survivors of trafficking and offer specialized services to the survivors. In all, the cam- paign presented 36 national petitions to governments and the UN. In response to the petition campaign, 14 countries changed their policies and laws and 8 countries committed to adopting international standards to protect children from sex trafficking.

In 2014–2015, Body Shop started diversity and inclusion training for its employees at its international headquarters in the UK. It worked with suppliers in more than 20 countries to improve workers’ rights and supply chain ethics. Body Shop was a founding member of the Ethical Trade Initiative and en- sured that its suppliers complied with its ethical trade standards and shared good practices with other retailers and local partners (See Exhibit III).

In 2014, Body Shop raised over £200,000 for War Child14 by selling pre-packed Christmas gifts. The funds raised sup- ported the education of 6,000 children displaced by war in Afghanistan, Jordan, the Democratic Republic of the Congo, and Sudan. During Christmas 2015 and Ramadan 2016, Body Shop raised funds of about £210,000 through the sale of special gift sets in order to help Water Aid and fund projects including

ExHIBIT III Body Shop’s Ethical Trade Standards

Source: Adapted from www.thebodyshopinternational.com.

• Employment is freely chosen • Freedom of association and the right to collective bargaining are

respected • Working conditions are safe and hygienic • Child labor is not used • Living wages are paid • Working hours are not excessive • No discrimination is practiced • Regular employment is provided • No harsh or inhumane treatment is allowed

PC1-18 PART 1 • COMPREHENSIVE CASES

protected 200 hectares of forest and restored 89 hectares of habitat in Mexico, Ecuador, and Brazil.

Criticism

Though Body Shop was considered the poster child of CSR, it began facing increased scrutiny from environmental groups of its activities and claims. Environmental watchdogs such as McSpotlight25 and Greenpeace UK accused Body Shop of ex- ploiting consumers by championing various agendas, while not being any different from other corporate entities in its pursuit of profit. Business ethics expert Jon Entine (Entine) reported that the Charity Commission for England and Wales records did not show any charitable contributions from the company in its first 11 years of operation. In the subsequent years, its con- tribution to charity was less than 1.5% of pretax profits, which was the average contribution made by US corporates. Entine also alleged that the company was making false claims that its products were natural and that there was extensive use made of petrochemicals in the preparation of Body Shop’s products. He quoted many ex-employees who had claimed that the sto- ries put out to customers about various products were totally fabricated.26

However, Body Shop clarified that it was not using in- gredients in its cosmetics that had been tested on animals for cosmetic purposes after December 31, 1990. It further pointed out that most of the ingredients used in cosmetic and toiletry products had been animal tested for some purpose at some time in their history, and it would be almost impos- sible to sell products whose ingredients had never been tested on animals. McSpotlight dismissed the company’s CFT practices as a mere marketing ploy as it accounted for less than 1% of sales of Body Shop products.27 Its CFT was also viewed as patronizing and was said to have created tensions and divisions within indigenous communities and under- mined self-sufficiency and self-dependence. The retailer was also accused of paying exploitative wages and of adopting an anti-trade union stance.

Some environmental groups accused Body Shop of mar- keting products by making people feel insecure about their looks, in the same way that other firms did to sell their personal care products. Some critics pointed out that the visual on the home page of Body Shop was no different from the idealized body images of beauty projected by the cosmetics industry.

Critics felt that there was a huge gap between the image projected by the company and its actual practice. Retail analyst Richard Ratner felt that Body Shop’s “anti-city” attitude was hypocritical for a company that raised funds by listing on the London Stock Exchange.28 The company was also accused of being very aggressive in its response to any form of criticism and of trying to intimidate its critics through invectives and/or lawsuits.

According to some critics Bodyshop engaged heavily in CSR to the point that it had deviated from its business strat- egy, lost its direction and jeopardized the long-term mission and vision of the company. According to them, Body Shop suc- cumbed to corporate greed at the expense of consumers and

Protect the Planet

Body Shop was an early pioneer in green business and the com- pany constantly explored ways to run its business in a more environmentally sustainable way. In 1986, Body Shop began its campaign for the protection of the planet and developed its first international environmental policy in 1992. In 2002, Body Shop ran a global campaign with Greenpeace International to promote renewable energy.

In order to reduce CO2 emissions, Body Shop rolled out increasingly energy-efficient Pulse20 stores, which used low-energy LED lighting and more recycled materials. The retailer reduced energy consumption in its stores through Building Management Systems (BMS) that automatically controlled heating and lighting in the stores. The company set a target of reducing CO2 emissions from stores by 50% between 2010 and 2020. By 2015, just over 50% of all Body Shop stores sourced renewable energy. In order to reduce its carbon footprint, Body Shop encouraged third-party contrac- tors who transported its products globally to adopt more sus- tainable practices such as using low-emission vehicles and adopting ways to move more products in fewer journeys. According to the company, Body Shop reduced its airfreight by 35% from 2011 to 2013.

Body Shop had set a target of 25% reduction in water use by 2020. Between 2010 and 2013, it achieved a 37% re- duction in water use, surpassing its 2020 target. The com- pany also committed to reducing the amount of landfill waste it generated. Starting in 2010, Body Shop rolled out waste management programs on its sites in the UK and the US and educated staff on issues such as bins removal, recycling, and composting.

To minimize its environmental impact, Body Shop sourced sustainable materials for use in its products, packaging, and stores. In June 2014, Body Shop began reformulating its fa- cial skincare products to contain naturally derived exfoliants in line with its body products. By the end of 2015, all Body Shop products were free from polyethylene microbeads,21 which ad- dressed the concerns of some key stakeholders who were wor- ried about the presence of non-biodegradable materials in the marine food chain. Body Shop was one of the founder members of the Roundtable on Sustainable Palm Oil22 (RSPO) set up in 2004 to promote the growth and use of sustainable palm oil. It was the first cosmetics company to source sustainably har- vested palm oil for use in its products.

On the packaging front, Body Shop introduced 100% re- cycled PET bottles and also increased the usage of glass pack- aging as research showed that glass had high recycling rates among consumers. In 2015, the company replaced the plastic vac forms used in gift packaging with corrugated cardboard, thereby reducing the use of plastic by 154 tonnes. All of Body Shop’s wood-derived packaging, accessories, and shop fit mate- rials were Forest Stewardship Council23 (FSC) certified, imply- ing that they were sourced from sustainable forests. Between 2012 and 2014, Body Shop planted and protected more trees through its Wood Positive program started in association with the World Land Trust.24 Through this initiative, Body Shop

CASE 2 • ‘ENRICH NOT EXPLOIT’: CAN NEW CSR STRATEGY HELP BODY SHOP REGAIN GLORY? PC1-19

In Q4 2015, Body Shop reported its worst quarterly sales per-

formance with sales dropping 5.8% while all of L’Oréal’s other

divisions surpassed expectations. In 2015, Body Shop’s sales

reached €967 million, a mere 3.8% of L’Oreal’s total sales. The

company’s operating margin plunged to a seven-year low of 5.7%

in 2015, down from 8.1% in 2007 (See Exhibit IV and Exhibit V). The retailer attributed the drop in sales mainly to the tough mar-

kets in Asia, notably Hong Kong, and poor holiday sales in North

America. However, observers pointed out that Body Shop lacked

in innovation and a core selling proposition to its customers.32

According to Andrew Wood, an analyst at investment man- agement firm Sanford C. Bernstein, & Company LLC, Body Shop was the weakest business of L’Oreal, and a major disap- pointment for the French cosmetics maker as its poor perfor- mance had dragged down the overall results of the group33 (See Exhibit VI). Generally, bigger companies acquired small, ethi- cally driven competitors to transfer some of their environmen- tal knowledge and skills into their own global supply chains. Similarly, L’Oréal too had felt it had a lot to gain from the ethical retailer but was surprised to learn how poor the environ- mental systems were at the Body Shop, said analysts.34 Though Body Shop sourced its materials ethically, L’Oréal had, by this point, developed better mechanisms for monitoring its supply chain and achieving its environmental goals, they pointed out.

Body Shop was one of the first global businesses to prac- tice fair trade and conduct social and environmental cam- paigns. Davis said that while Body Shop had maintained these

thereafter started to lose that special bond with its customers that had previously made them loyal to the brand.29 Where Body Shop’s staunchest critics were concerned, its acquisition by L’Oreal was vindication of their stand that Body Shop was nothing more than a green washer.

Time for Change

Since its acquisition by L’Oréal, Body Shop’s performance had been dismal as it struggled to post profits. In 2010, Body Shop’s net sales were £754 million, accounting for just 4% of L’Oréal’s net sales. According to some analysts, the beauty retailer had lost its edge as rivals jumped on the ethical products bandwagon and devoured its market share. Competitors such as Lush, The Body Deli, and Skin & Tonic made similar green claims and benefitted from the growing demand for natural-beauty prod- ucts. As a result, Body Shop was languishing at a crossroads with a steady decline in sales, according to some analysts.30

To revive the ailing company, in September 2013, Schwartz,31 who was then the country manager for L’Oréal UK and Ireland, was asked to step in as CEO of Body Shop. Schwartz reoriented the business around skincare, introduced new products such as ‘Drops of Youth’ creams and lotions, and hired consultants to advise customers about products that suited them. He also added more expensive ranges such as ‘Spa of the World’ and the ‘Hawaiian Kukui’ cream priced between £10 and £23. After Schwartz took over the company, skincare sales grew at more than 10% annually. However, the surge in sales was short lived.

Retail Sales of Body Shop (1)

2014 / 2015 Growth

€ Millions 2013 2014 2015 2015 weight Like-For-Like Reported Figures

Western Europe 544.8 562.0 595.2 38.2% +2.8% +5.9%

North America 168.6 179.1 178.7 11.5% –10.2% –0.2%

New Markets 685.5 734.3 785.7 50.4% +1.9% +7.0%

Total 1,398.9 1,475.3 1,559.6 10% +0.7% +5.7%

ExHIBIT Iv

Consolidated Sales

€ MILLIONS 2013 2014 2015 Like-For-Like 2014/2015 Growth

Retail sales (1) 1,398.9 1,475.3 1,559.6 +0.7%

Retail sales with a comparable store base (2)

1,306.6 1,319.8 1,402.7 +0.1%

Consolidated sales 835.8 873.8 967.2 0.9%

(1) Total sales to consumers through all channels, including franchisees and e-commerce. (2) Total consumer sales made by stores and e-commerce websites that were continuously present between January 1 and December 31, 2015 and the

same stores and websites present in 2014 and 2013, and for the same periods for 2014 and 2013, including franchisees.

Source: Adapted from www.loreal-finance.com/eng/brands/the-body-shop.

PC1-20 PART 1 • COMPREHENSIVE CASES

values all the while, they were less distinctive in 2016 than in 1976.35 Critics contended that after its lackluster performance, the management at Body Shop was more focused on improv- ing its financial position. By Body Shop’s own admission it had been comparatively quieter on the CSR front over a pe- riod of time. However, defending the company, Kate Levine, director of commitment and corporate communications, Body Shop, said, “That doesn’t mean we haven’t been doing things. We had a Stop Sex Trafficking campaign which delivered seven million signatures to the UN and changed laws in 20 coun- tries. And in 2013 we were instrumental in changing laws on animal testing. We just haven’t talked about it in the way we were in the past.”36

The challenges facing the world had changed signifi- cantly over the years. Schwartz felt businesses had an impor- tant role to play in tackling the environmental challenges facing the planet and its people. According to him, the key challenge

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ExHIBIT v Body Shop’s Quarterly Sales Growth (2010–2015)

Source: Adapted from www.bloomberg.com/news/articles/2016-02-12/body-shop-s-terrible -quarter-is-l-oreal-s-sole-blemish-chart.

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ExHIBIT vI Growth of L’Oréal vs. Body Shop

Source: Adapted from www.bloomberg.com/news/articles/2016-04-07/body-shop-heads-back -to-the-body-shop-to-repair-battered-margins.

facing Body Shop was how to orient itself in the new global landscape marked by climate change, habitat destruction, spe- cies depletion, and the growing economic inequality and rebuild itself as a sustainable global business. Schwartz wanted to re- focus Body Shop to meet the challenges facing the planet and its people in a more reliable and strategic way and re-establish Body Shop as the world’s most ethical and sustainable global business. He wanted to reconnect the company with its values and attract a new generation of customers. Hoping to find inspi- ration, Schwartz flew down to South America on an intellectual journey with a team of colleagues. Standing on the edge of the Amazon River, he asked himself questions like – What does the future hold? And how can Body Shop be an original, progres- sive company? “The idea of a company that made money but is also a force for good was laughed at 40 years ago. That’s now mainstream ... Lots of people are doing corporate social respon- sibility now, from BMW to Coke. They have copied us. Anita was

CASE 2 • ‘ENRICH NOT EXPLOIT’: CAN NEW CSR STRATEGY HELP BODY SHOP REGAIN GLORY? PC1-21

‘Sharing Beauty With All’ sustainability strategy and its four pillars – Innovating Sustainably, Producing Sustainably, Living Sustainably, and Developing Sustainably. According to Davis, the new commitment complemented L’Oréal’s sustainabil- ity strategy while taking forward the essence of Body Shop’s founding principles to meet the challenges of a new era. “Our new Commitment combines all the experience and knowledge of our expert people with new advances in science and tech- nology. It means understanding how our business is contrib- uting to our existence on the planet, understanding what we need to change to contribute to a sustainable future by work- ing backwards from a visionary end point to the here and now and asking ourselves what comes next. We'll continue to work in partnership with suppliers, NGOs, academics, governments and other businesses to deliver the innovation and changes needed to make our ambitions a reality,”40 he said.

Enrich Not Exploit

On February 2, 2016, Body Shop unveiled its new global CSR strategy. The new commitment, entitled ‘Enrich Not Exploit’, was aimed at making Body Shop the world’s most ethical and truly sustainable global business. As part of the new cam- paign, Body Shop had set several targets touching all areas of the business that it planned to achieve by 2020. Davis said the commitment was intended to make Body Shop the “innovative troublemaker” within the L’Oréal group. “This commitment is kind of a statement that The Body Shop is back and that this is the kind of company that we want to be, and that we can be. Our goal is to be different and to be what The Body Shop always has been, which is the agitator, the experimenter,”41 he said.

The new sustainability framework included 14 specific, measurable CSR targets based on a commitment to enrich peo- ple, products, and the planet. The goals included doubling Body Shop’s CFT to 40 ingredients, regenerating 75 million square metres of habitat to help communities live more sustainably, powering 100% of Body Shop stores with renewable energy, de- veloping and delivering new sustainable packaging innovations, and ensuring 100% of its natural ingredients were traceable and sustainably sourced, protecting 10,000 hectares of forest and other habitat (See Exhibit VIII). Schwartz implemented sys- tems, training, and reporting companywide to monitor progress against these new targets. He also set up a new internal advisory group and several inter-departmental working groups to ease communication and establish new ways of working across the business.

Body Shop aimed to broaden the brand’s appeal to the next generation of customers with this new CSR approach. “Today’s millennial generation doesn’t know the heritage of The Body Shop the way that some of us do. They didn’t grow up with the Save the Whales campaign or wearing white musk [from The Body Shop]. Although they don’t know this heritage, I think a lot of the interests are aligned. People are interested in brands that have a social impact, brands that are transparent and brands that do good,”42 said Jayme Jenkins, vice-president, marketing & corporate responsibility, Body Shop Canada. The company also planned to drive the new commitment further

a pioneer, but we can’t just say we are doing this [already]. We have to find a brand new thought,”37 said Schwartz.

Formulating a New CSR Strategy

The work on the new CSR commitment began in 2013. Christopher Davis38 was promoted from head of campaigns to Director of International Corporate Responsibility and Campaigns at Body Shop. He was responsible for developing and overseeing the implementation of the company’s global corporate responsibility and campaign strategy. As the head of CSR, Davis wanted to maintain the legacy of founder Roddick. Nearly for two years (2013–2015), Davis and his team under- took a comprehensive review of Body Shop’s business across all areas and 67 countries. Their agenda was not looking at what competitors were doing or at the past performance of Body Shop, but instead refocusing the company to meet the challenges facing the planet and its people in a more planned way. The team spent some months talking to a range of aca- demics, thought leaders, and campaigners in order to know what the real issues facing the world were. They wanted to use the scale and networks of Body Shop to address the critical problems facing the Earth.

In order to develop a new systemic framework for sustain- ability, the management at Body Shop adopted the Future-Fit Business Benchmark,39 which became a starting point for de- veloping the company’s own seven long-term sustainability goals (See Exhibit VII). Based on the sustainability objectives and by mapping the world’s challenges and where Body Shop would have the most positive impact, Davis and his team for- mulated a new CSR philosophy under the name ‘Enrich Not Exploit’ with emphasis on three core pillars – People, Products, and Planet. The new commitment replaced the earlier five core values of Body Shop.

The new strategy was developed in close partnership with Body Shop’s parent L’Oréal and was integrated in its

ExHIBIT vII Body Shop’s 7 Long-Term Sustainability Goals (2016)

Source: Adapted from Body Shop 2015 Value Report

1. Source all inputs in ways that have no negative social or envi- ronmental impact

2. Emit no substances which could harm the environment or society

3. Ensure the presence of the business does not cause disruption to ecosystems

4. Meet needs without any environmental impact, during product use and at end of life

5. Create a working environment within which all employees can flourish

6. Help to create thriving communities wherever the business operates

7. Engage and empower customers to act in the best interests of people and the environment

PC1-22 PART 1 • COMPREHENSIVE CASES

ExHIBIT vIII ‘Enrich Not Exploit’ Targets

Target How the Target is Measured

TARGET 1: Double CTP from 19 to 40 ingredients and help enrich the communities that produce them

• By tracking the number of ingredients that have attained CT status and are cur- rently in production.

TARGET 2: Help 40,000 economically vulnerable people access work around the world

• Through regular supplier reporting and auditing process to record the number of people employed.

TARGET 3: Engage 8 million people in Enrich Not Exploit™ mission, creating its biggest campaign ever

• By counting the number of people who sign petitions. • By tracking the number of national and international institutions the company

lobbies for change.

TARGET 4: Invest 250,000 hours of its skills and know- how to enrich the biodiversity of its local communities

• By measuring the number of hours employees contribute in their local com- munities.

• By sharing stories of employees’ community achievements globally to show the positive impact of the company’s community involvement.

TARGET 5: Ensure that 100% of our natural ingredients are traceable and sustainably sourced, protecting 10,000 hectares of forest and other habitats

• 100% traceability & sustainability: Tracking the proportion of renewable raw materials after confirming the country of origin, establishing legal compliance, assessing social and environmental risks, and ensuring accountability.

• Protecting 10,000 hectares: Dividing the tonnage of renewable raw materials purchased from relevant habitats by the area required to generate this volume of material. This approach is the best practice for monitoring and evaluating the conservation benefit of non-timber forest products.

TARGET 6: Reduce year on year the environmental footprint of all our product categories

• By evaluating every ingredient in use to understand how biodegradable it is and the level of dilution required to avoid any negative environmental impact (its water footprint). These two indicators will enable comparing of the environ- mental impact of every formulation the company produces.

• By calculating averages for each formula type or category, which will become the target for new formulas to meet or exceed.

• By recalculating the averages annually, in order to improve the environmental footprint of Body Shop products.

TARGET 7: Publish our use of ingredients of natural origin, ingredients from green chemistry, and the biode- gradability and water footprint of our products

• By tracking the amount and percentage of product information published on the company’s website, both by the number of products covered and the type of information.

TARGET 8: Develop an innovation pipeline that delivers pioneering cosmetic ingredients which are sustainably sourced from biodiversity hotspots and help to enrich these areas

• By tracking the number of ingredients sourced in line with the company’s rigorous selection criteria:

- proven cosmetic benefit - feedstock that is traceable to a biodiversity hotspot - help protect biodiversity - not currently used by Body Shop - relatively unknown in the rest of the cosmetics industry.

TARGET 9: Build Bio-bridges, protecting and regen- erating 75 million square meters of habitat and helping communities to live more sustainably

• This campaign will be accredited by the Climate, Community and Biodiversity Alliance (CCBA), demonstrating its climate, social, and biodiversity benefits.

• To comply with this accreditation, Body Shop needs to report impact; primar- ily areas protected, impact on local biodiversity and community engagement in addition report on areas it protected annually.

TARGET 10: Reduce the environmental footprint of our stores every time we refurbish or redesign them

• Using the best practice Material Scoring Mechanism and Low Impact Sustain- ability Tool (LIST) from the Buildings Research Establishment (BRE) to rate the environmental credentials of all shop fixtures.

• All countries of operation of Body Shop will report twice annually on their store energy consumption and stores’ energy source.

TARGET 11: Develop and deliver three new sustainable packaging innovations

• Body Shop will require any packaging innovations it uses to deliver improved environmental results.

TARGET 12: Ensure that 70% of our product packaging does not contain fossil fuels

• Review the company’s existing packaging and calculate the amount of fossil- fuel based materials the company currently uses.

• Measure the company’s progress against the target every six months and report the percentage of packaging materials it uses by material type, recycled mate- rial content, and whether the raw material is from a fossil fuel or alternative carbon source.

CASE 2 • ‘ENRICH NOT EXPLOIT’: CAN NEW CSR STRATEGY HELP BODY SHOP REGAIN GLORY? PC1-23

and where ingredients were being grown. As part of the ini- tiative, the company planned to make customer transactions completely paperless and cashless at its stores in the future. Schwartz and his team were working on a system where cus- tomers could pay through their phones and immediately receive a receipt and loyalty points to the same device. In the long term, Schwartz planned to invest heavily in redesigning Body Shop’s stores and making every retail outlet eco-friendly by using lo- cally sourced SSC-certified wood, sustainable materials in its flooring, LED lighting, and non-toxic paints.

In order to promote the commitment among customers, Body Shop planned to create video, in-store, and social media content. With 65% of its customers aged below 35 years, the brand began increasingly testing social media channels like Snapchat, Instagram, and Pinterest to promote its new CSR strategy. “What we want consumers to think is ‘I want this and I know when I buy it no person, animal or plant has been exploited and I’m buying it from a company doing a good thing,”44 said Kate Levine, director of commitment and corpo- rate communications, Body Shop.

In June 2016, as part of its new CSR strategy, Body Shop launched a campaign called ‘Help Reggie Find a Date’, a Bio- Bridges planting program in Vietnam, which would connect rainforests that had been deforested to help endangered animals find a mate and enable them to breed and flourish. The cam- paign featured an endangered red-shanked douc monkey called Reggie, drawing attention to the need to build a bridge between the two islands cut off from each other where the monkeys lived. Davis, who related the project to a “dating service for en- dangered species”, said it could drive consumer engagement to the company’s improved CSR commitment. The campaign was also launched on dating app Tinder featuring Reggie’s profile, wherein users could learn more about the Bio-Bridges program. Every purchase made at Body Shop (in stores or online) from July 2016 to September 2016 would fund one square meter of rainforest bio-bridge. Through this initiative, Body Shop aimed to restore 14.5 million square meters of rainforest in Khe Nuoc Trong, Vietnam, and aimed to regenerate and reconnect 75 mil- lion square meters of damaged forests by 2020 in partnership with the World Land Trust.45

In February 2016, Body Shop entered into a research part- nership with Newlight Technologies LLC46 to make its packag- ing free from greenhouse gases that would otherwise pollute the atmosphere. The partnership was part of Body Shop’s new commitment to reduce its use of oil-based plastic packaging by 70% by 2020. The initiative would also see Body Shop become the first company to industrialize AirCarbon47 in the beauty

Target How the Target is Measured

TARGET 13: Power 100% of our stores with renewable or carbon-balanced energy

• All its countries of operation will report twice annually on how their stores are powered.

TARGET 14: Reduce by 10% the energy use in all our stores

• Tracking energy usage in stores, by country.

by engaging with key stakeholders across the globe includ- ing Future Fit Foundation, the University of Brighton, and the Cambridge Institute for Sustainability. This would allow the company to explore and learn how effectively the sustainable development could be applied across the business.

Marketing the New Commitment

One of the biggest challenges for the management of Body Shop was to involve all 23,000 employees of the company across 65 countries in this new initiative. To make employees aware of the new commitment, the company created a teaser video and a full-length film outlining its ambitions and how each employee could contribute. Employees were also pro- vided with booklets and factsheets to keep them informed and help them spread the word about the new strategy. Besides, the company organized workshops and conferences to ensure that employees and franchise holders were fully involved. At these events, employees had the opportunity to hear inspiring speak- ers and informally question senior managers about specific as- pects of the commitment. “The Commitment is an evolution of Anita Roddick’s values-led approach; it is very ambitious and to succeed it needs everyone to be clear and get behind it. By reaching out to our people – especially our store staff and our marketing teams – we also reach customers and share and en- gage them with our new story and new ambition for our com- pany. It is vital our message has a big impact on those who visit our stores and engage with our digital community to ensure we keep our business healthy and profitable,”43 said Davis.

In order to be transparent about its business practices and to showcase the progress of its new CSR targets, beginning 2016, Body Shop planned to publish annual commitment re- ports in addition to internal management reporting. Across all the countries of its operation, the retailer would measure perfor- mance and progress in waste production, water use, and energy consumption, including use of renewable energy. According to Davis, regular reviews of the company’s performance against clear policies and indicators would help the top management make changes where necessary and be effective.

The new commitment was mostly promoted in-store. Body Shop made some cosmetic changes to its stores including the introduction of a vibrant yellow colour-scheme and an eye- catching front window featuring a specially designed logo of the commitment. It placed one square meter of faux-grass at the checkout point of its stores on which the customer stood to see what the company was helping to build as they paid their bills. Webcams were installed inside the stores to show how

Source: Adapted from https://www.thebodyshop.com/en-gb/commitment/manifesto.

PC1-24 PART 1 • COMPREHENSIVE CASES

and very creative. I hope our new plan does this at The Body Shop – that’s our vision.”48

However, some analysts contended that offering natural products with sustainable credentials was not enough to spur sales as consumers were seeking cosmetics that offered der- matological benefits in addition to being ethical. They felt that Body Shop was more focused on its environmental message than on innovation.49

Moreover, some analysts felt that its new CSR goals were not outstanding and did not completely align with the strategy of the parent company, L’Oréal. Corporate responsibility ad- visor Julien Goy commented, “I would say that these goals are very good by themselves, but there is the context missing. Context related to the mother company, related to the sector, related to sustainable development.”50

Schwartz said that moving forward, the new commitment would not only be a part of Body Shop’s business strategy, but would also be central to the development and success of the com- pany. He was optimistic that the new commitment would help Body Shop reclaim its past glory as a pioneer in ethical retail and emerge as the world’s most ethical and truly sustainable global business. “Because Anita is no longer with us, and she was the spokesman for the company, our voice has not been as loud and as clear as we wanted it to be. Our goal is to get more people to reconsider and re-understand what The Body Shop is about. We’ve got the products; we’ve got the stores; we’ve got the ser- vice. What we’ve got to get is people talking again,”51 he said.

industry. In October 2016, Body Shop collaborated with Ben Eine, one of the most renowned street artists in the world, to redesign its limited edition Hemp Hand Protector. The prod- uct featured the artist’s typography spelling out the message “change” on the front of the product. For every tube of this product and Almond Hand & Nail Cream sold, £1.50 was do- nated to The Body Shop Foundation. More than 200,000 hand creams were sold globally and the company raised £325,000 to fund innovative social and environmental projects.

Can Body Shop Regain Its Former Glory?

In the first quarter ended March 31, 2016, Body Shop reported sales of €200.1 million compared to €192.4 million in the cor- responding quarter of 2015. It delivered growth of +2.1% like- for-like and +4.0% based on reported figures (see Exhibit IX). According to analysts, going forward, one of the biggest chal- lenges for Body Shop would be tough competition from the ever-increasing numbers of sustainable brands in the cosmetic marketplace. However, Davis was positive that the renewed CSR strategy would help Body Shop scale new heights. “The vast majority of companies are actively embracing a sustain- ability strategy. If everyone is doing it, can we really suggest it is a source of competitive advantage or would better be de- scribed as a licence to operate? I think and hope there is space for companies who do things radically differently to stand out but to do this, I think you have to be pretty radical, opinionated

Quarterly Sales Growth

€ Million 1Q 2015 1Q 2016 Like-for-like Reported

By Operational Division

Professional Products 852.6 854.3 2.5% 0.2%

Consumer Products 3,078.3 3,106.0 3.9% 0.9%

L’Oréal Luxe 1,753.7 1,831.4 5.5% 4.4%

Active Cosmetics 559.2 560.7 4.5% 0.3%

Cosmetics Divisions total 6,243.9 6,352.4 4.2% 1.7%

By Geographic Zone

Western Europe 2,100.4 2,127.5 2.0% 1.3%

North America 1,622.0 1,715.9 4.3% 5.8%

New Markets, of which: 2,521.5 2,509.0 6.1% –0.5%

- Asia, Pacific 1,476.1 1,510.4 4.5% 2.3%

- Latin America 460.2 409.0 8.5% –11.1%

- Eastern Europe 396.6 390.6 9.5% –1.5%

- Africa, Middle East 188.7 198.9 8.0% 5.4%

Cosmetics Divisions total 6,243.9 6,352.4 4.2% 1.7%

The Body Shop 192.4 200.1 2.1% 4.0%

Group total 6,436.3 6,552.4 4.2% 1.8%

ExHIBIT Ix L’Oréal’s Sales by Operational Division and Geographic Zone

Source: Adapted from www.loreal-finance.com/eng/news/first-quarter-2016-sales-1059.htm.

CASE 2 • ‘ENRICH NOT EXPLOIT’: CAN NEW CSR STRATEGY HELP BODY SHOP REGAIN GLORY? PC1-25

3. Critically analyze Body Shop’s new CSR approach. 4. Do you think the revamped strategy will help Body Shop

regain its lost glory as a leader in ethical business? What possible challenges could Schwartz and Davis face going forward and how can they be tackled?

Case Questions

1. How did Body Shop emerge as a champion of CSR while challenging industry norms? How important a contribution did Roddick make to the creation of Body Shop?

2. How did the acquisition by L’Oréal affect the ethical image of Body Shop? Discuss the problems Body Shop faced following the takeover.

Endnotes 1. This case was compiled from published sources, and is intended to be

used as a basis for class discussion rather than to illustrate either ef- fective or ineffective handling of a management situation. This case was a Runner Up in the 2017 oikos Global Case Writing Competition (Corporate Sustainability track), organized by oikos International, Switzerland. © 2017, IBS Center for Management Research. All rights reserved. To order copies, call +91 9640901313 or write to IBS Center for Management Research (ICMR), IFHE Campus, Donthanapally, Sankarapally Road, Hyderabad 501 203, Telangana, India or email: [email protected] www.icrmrindia.org

2. “At Forty, The Body Shop Launches Pioneering New Commitment in Drive to be the World’s Most Ethical and Sustainable Global Business,” www. prnewswire.com, February 10, 2016.

3. Darina Eades, “The Pioneer of CSR Launches a New CSR Strategy,” http://darinaeades.com, February 12, 2016.

4. Amnesty International is one of the leading and most respected human rights organizations in the world.

5. “Is This the First Ever Corporate Social/Environmental Report?” www . mallenbaker.net, February 2003.

6. The term ‘masstige’ (Mass-market combined with prestige) covers rela- tively low-priced retail goods that are sold under the banner of a presti- gious brand name.

7. “L’Oréal Buys Body Shop for £652m,” www.theguardian.com, March 17, 2006.

8. Fiona Walsh and Julia Finch, “£600m - Because it’s Worth it,” www .guardian.co.uk, February 24, 2006.

9. “Has the Body Shop Sold Out?” www.newconsumer.org, April 2006. 10. https://www.thebodyshop.com/medias/Values-Report-2015. 11. Sheila Shayon, “Enrich Not Exploit: The Body Shop Turns 40 with

Renewed CSR Strategy,” http://brandchannel.com, February 11, 2016. 12. Through its Solidarity Sourcing program, the L’Oréal Group opens up its

purchasing process and calls for tenders from small new suppliers who employ people from economically vulnerable communities and enable them to have access to income. The stated aim was to work with these suppliers to build commercial partnerships that were equitable and sus- tainable, creating economic and social value.

13. ECPAT International is a Bangkok-based global network of 90 civil soci- ety organizations’ in 82 countries fighting against sexual exploitation of children.

14. War Child is a global charity for children affected by war. 15. Body Shop tests its products using patch testing, which involves placing

a very small amount of product on a person’s skin to ensure that it is safe and effective, usually at the final stage.

16. The Humane Cosmetics Standard is an internationally recognized stan- dard for cosmetic products to confirm that they have not been tested on animals.

17. People for the Ethical Treatment of Animals (PETA) is the largest animal rights organization in the world.

18. The Royal Society for the Prevention of Cruelty to Animals (RSPCA) is a UK-based charity that works for the welfare of animals.

19. Cruelty Free International is an international organization working to end animal testing for cosmetics globally.

20. Launched in 2012, Pulse Stores are Body Shop’s sustainable concept stores with a boutique feel. The store design combines technology with nature and offers a vibrant retailing environment wherein customers are invited to discover the innovations, to take the time to try out the

sensorial products, and to learn about the story behind ingredients. By the end of 2013, Body Shop had rolled out over 800 Pulse stores across the globe.

21. Microbeads are little beads that are put in scrubs to remove dry skin, but then they go through the water and end up in the sea and are consumed by fish. Such fish are unsafe for human consumption.

22. Roundtable on Sustainable Palm Oil is a not-for-profit association whose members represent the oil palm growers, palm oil processors and traders, consumer goods manufacturers, retailers, banks and investors, environ- mental/nature conservation NGOs, and social/development NGOs.

23. The Forest Stewardship Council is an international non-profit organi- zation that protects forests by setting standards for responsible forest management.

24. World Land Trust is a UK-based international conservation charity, which protects the most biologically important and threatened habitats in the world.

25. McSpotlight is a website that highlights the alleged exploitation of ani- mals, people, and the environment by the McDonald’s fast-food restau- rant chain.

26. “Body Shop’s Packaging Starts to Unravel,” Australian Financial Review, www.jonentine.com, December 18, 2002.

27. Gerard Bodeker and Marc Cohen, Understanding the Global Spa Industry, Routledge, August 20, 2010.

28. “Dame Anita’s Radical Approach,” www.news.bbc.co.uk, July 17, 2003. 29. P. V. Gutierrez Zarate, “The CSR Dilemma: An Analysis of the

Complicated Relationship between Firms and Society,” http://arno.uvt .nl, July 9, 2012.

30. “Guest Opinion: The Body Shop Experiment with Entrepreneurship and CSR,” www.endeavor.org, July 9, 2013.

31. Schwartz held senior marketing positions at Sainsbury’s and Coca-Cola before joining News International where he was commercial director and CMO. Prior to joining Body Shop, he was general manager at L’Oréal for brands including Maybelline and Garnier.

32. “Guest Opinion: The Body Shop Experiment with Entrepreneurship and CSR,” www.endeavor.org, July 9, 2013.

33. Paul Jarvis, “Body Shop's 'Terrible Quarter' is L’Oreal’s Sole Blemish: Chart,” www.bloomberg.com, February 12, 2016.

34. Alexander C. Kaufman and Jo Confino, “What Ever Happened to the Body Shop?” www.huffingtonpost.in, December 8, 2015.

35. https://www.thebodyshop.com/medias/Values-Report-2015. 36. Jennifer Faull, “How Marketing Will Help The Body Shop Become

the World’s Most Ethical and Sustainable Brand,” www.thedrum.com, February 22, 2016.

37. Sarah Butler, “Body Shop Boss Goes Back to the Rainforest,” www . theguardian.com, February 13, 2016.

38. Prior to joining Body Shop, Christopher Davis was responsible for International Corporate Relations and Global Development at The International Save the Children Alliance. Davis is also a Director of the MTV Staying Alive Foundation, a global movement focusing on raising HIV and Aids awareness among young people.

39. The Future-Fit Business Benchmark (co-developed by Bob Willard and Geoff Kendall) defines a set of goals that together identify the level of performance any truly sustainable company must achieve across all criti- cal social and environmental dimensions, irrespective of its size or sector. It also provides a set of KPIs on which progress toward each goal can be measured.

PC1-26 PART 1 • COMPREHENSIVE CASES

40. “At Forty, The Body Shop Launches Pioneering New Commitment in Drive to be the World’s Most Ethical and Sustainable Global Business,” www.prnewswire.com, February 10, 2016.

41. Madeleine Cuff, “The Body Shop Freshens up Climate Commitments with New Strategy to Become ‘Truly Sustainable’ Global Business,” www. businessgreen.com, February 10, 2016.

42. Rebecca Harris, “The Body Shop Goes Back to Ethical Roots,” www . marketingmag.ca, February 16, 2016.

43. Liam Doud, “Leadership Series: Christopher Davis, The Body Shop,” www.ethicalcorp.com, February 10, 2016.

44. Jennifer Faull, “How Marketing Will Help The Body Shop Become the World’s Most Ethical and Sustainable Brand,” www.thedrum.com, February 22, 2016.

45. World Land Trust is a UK-based non-profit environmental organization that works to protect some of the world’s most threatened habitats.

46. Based in California, Newlight Technologies is a cleantech firm that has developed, patented, and commercialized the world’s first commercially scaled carbon capture technology able to produce high-performance thermoplastics from air and methane emission.

47. AirCarbon is a thermoplastic that behaves in the same way as normal plastics but uses methane and carbon dioxide as its foundation rather than oil.

48. Liam Doud, “Leadership Series: Christopher Davis, The Body Shop,” www.ethicalcorp.com, February 10, 2016.

49. “Guest Opinion: The Body Shop Experiment with Entrepreneurship and CSR,” www.endeavor.org, July 9, 2013.

50. “The + and – of The Body Shop's New CSR Programme,” www.linkedin .com, March 31, 2016.

51. Lubna Hamdan, “Natural Beauty: Body Shop’s Jeremy Schwartz,” www.arabianbusiness.com, April 1, 2016.

P A R T

P A R T O U T L I N E

C H A P T E R 3 Understanding the Role of Culture

C H A P T E R 4 Communicating across Cultures

C H A P T E R 5 Cross-Cultural Negotiation and Decision Making

The Cultural Context of Global Management 2

76

3-1. To understand how culture affects all aspects of international management

3-2. To be able to distinguish the major value dimensions that define cultural differences among societies or groups

3-3. To understand the interaction between culture and the use of the Internet

3-4. To be able to develop a working cultural profile typical of many people within a certain society as an aid to anticipating attitudes toward work, negotiations, and so on

3-5. To gain some insight into different management styles around the world

Understanding the Role of Culture

O B J E C T I V E S

3 C H A P T E R

Opening Profile: Social Media Bring Changes to Saudi Arabian Culture1

Why is Arabic the fastest-growing language of all time on Twitter and Riyadh ranked #10 globally of the cities with the most tweets? What is behind such a rapid growth of this increasingly tech-savvy population?

As of December 2017, the number of Internet users in Saudi Arabia has reached 90.2% penetration. With 18 million Facebook users (53.6% penetration), social media is becoming more widespread.2 Each day, more than 90 million videos are viewed on YouTube, more than 3 million people are on Twitter, and more than 840,000 are on LinkedIn, with email usage becoming passé. It is clear that not only do these platforms present important avenues for international businesses to communicate and engage with customers, but also that cultural and lifestyle factors are involved. Because 70 percent of the Saudi popu- lation is under 30 and most own smartphones, many are turning to Twitter and YouTube. In addition, social interaction is sometimes monitored and restricted by patrolling religious police. For some young people, then, Twitter represents an escape from social restrictions, especially for women. More recently, however, Twitter was used by Princess Reema bint Bandar to convey that amendments had been made to labor and civil laws to lift restrictions on women and allowing them to drive and travel independently, as well as more rights in family matters.3 Perhaps, then, more open dialog between men and women has changed the power structure and created opportunities for everyone to participate in a broad array of roles.

However, the young people are not the only ones using Twitter; the use of such media is spreading to all sectors of society—government officials, the royalty, sheikhs, and those in industry. In addition, the Saudi government, which is an absolute monarchy with no parliament or political parties, does review online activity to gather intelligence and monitor public opinion. As such, there are lines that

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 77

cannot be crossed, such as criticizing religion or allowing accounts that promote adultery and homosexuality. On the other hand, it has become apparent that government authorities can conceal little because information is now rapidly disseminated through social media, so now those authorities are more likely to use the media to give their version of events or updates to get ahead of the rumors and, in particular, quell political dissent.

Clearly, social media have presented a virtual world as a force for modernity in Saudi Arabia and cause powerful interactions with cultural mores; it is a matter of personal judg- ment whether those changes are viewed as progressive, but it is also clear that there is no turning back.

Questions 1. Discuss the role of social media in societal

culture. Is this virtual world, with no geo- graphic boundaries, presenting a normaliz- ing effect across those boundaries? Is that a positive or a negative effect?

2. Is societal culture and lifestyle as intri- cately intertwined with religion in your country as it is in Saudi Arabia?

3. Discuss other countries where social me- dia are having a radical effect on cultural expectations.

This chapter’s opening profile describes the interaction between social media and culture. It is clear that the widespread use of social media both helps people become familiar with other cul- tures and ways of life and, perhaps, smooth out the differences. In this chapter, we discuss how an understanding of the local culture and business environment can give managers an advantage in competitive industries. Foreign companies—no matter what their size—ignore those aspects to their peril. Such differences in culture and the way of life in other countries necessitate that manag- ers develop international expertise to manage on a contingency basis according to the host-country environment. Powerful, interdependent factors in that environment—-political, economic, legal, technological, and cultural—influence management strategy, functions, and processes.

Cultural Intelligence: an outsider’s seemingly natural ability to interpret someone’s unfa- miliar and ambiguous gestures in just the way that person’s compatriots and colleagues would. 4

Harvard Business Review

There is further discussion of how to adapt to different cultures in Chapter 4. First, we need to gain an understanding of what culture is, what the variables are that will enable us to adapt, and how those variables affect the manager’s job. Clearly, it is important for anyone wishing to be successful when working with people in other countries to be able to plan how to relate to and adapt to people from different cultures.5 Managers have often seriously underestimated the significance of cultural factors. According to numerous accounts, many blunders made in

FIGURE 3-1 Saudi Arabian Woman Using a Smartphone

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78 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

international operations can be attributed to a lack of cultural sensitivity.6 Examples abound. Scott Russell, senior vice president for human resources at Cendant Mobility in Danbury, Con- necticut, recounts the following:

An American company in Japan charged its Japanese HR manager with reducing the work- force. The Japanese manager studied the issue but couldn’t find a solution within cultural Japanese parameters; so when he came back to the Americans, he reduced the workforce by resigning— which was not what they wanted.7

Cultural sensitivity, or cultural empathy, is the awareness of and an honest caring about an- other individual’s culture. Such sensitivity requires the ability to understand the perspective of those living in other (and very different) societies and the willingness to put oneself in another’s shoes.

International managers can benefit greatly from understanding the nature, dimensions, and variables of a specific culture and how these affect work and organizational processes. This cultural awareness enables them to develop appropriate policies and determine how to plan, organize, lead, and control in a specific international setting. Such a process of adapta- tion to the environment is necessary to implement strategy successfully. It also leads to effec- tive interaction in a workforce of increasing cultural diversity, in both the United States and other countries.

Company reports and management studies make it clear that a lack of cultural sensitiv- ity costs businesses money and opportunities. One study of U.S. multinational corporations found that poor intercultural communication skills still constitute a major management problem. Managers’ knowledge of other cultures lags far behind their understanding of other organizational processes.8 In a synthesis of the research on cross-cultural training, Black and Mendenhall found that up to 40 percent of expatriate managers leave their assignments early because of poor performance or poor adjustment to the local environment. About half of those who remain are considered only marginally effective. Furthermore, they found that cross-cultural differences are the cause of failed negotiations and interactions, resulting in losses to U.S. firms of more than $2 billion a year for failed expatriate assignments alone.9

Other evidence indicates, however, that cross-cultural training is effective in developing skills and enhancing adjustment and performance. In spite of such evidence, U.S. firms do little to take advantage of such important research and incorporate it into their ongoing train- ing programs, whose purpose is ostensibly to prepare managers before sending them overseas. Too often, the importance of such training in developing cultural sensitivity is realized much too late.

This chapter provides a conceptual framework with which companies and managers can assess relevant cultural variables and develop cultural profiles of various countries. This frame- work is then used to consider the probable effects of cultural differences on an organization and their implications for management. To do this, the powerful environmental factor of cultural context is examined. The nature of culture and its variables and dimensions are first explored, and then specific differences in cultural values and their implications for the on-the-job behavior of individuals and groups are considered. Cultural variables, in general, are discussed in this chapter. The impact of culture on specific management functions and processes is discussed in later chapters as appropriate. We emphasize throughout this book that no one style or manage- ment practice or culture is deemed overall to be better than others; rather, any manager from any region or society needs to find the most effective way to achieve objectives that works in that particular situation or locale.

CULTURE AND ITS EFFECTS ON ORGANIZATIONS People from different parts of the world, coming from different cultural backgrounds, are now working and communicating together. Thus, for many businesses, it is very important for manag- ers and staff to understand cultural diversity.10

Societal Culture As generally understood, the culture of a society comprises the shared values, understandings, assumptions, and goals that are learned from earlier generations, imposed by present members of a society, and passed on to succeeding generations. This shared outlook results, in large part,

3-1. To understand how culture affects all aspects of international management

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 79

in common attitudes, codes of conduct, and expectations that subconsciously guide and control certain norms of behavior.11 One is born into, not with, a given culture and gradually internalizes its subtle effects through the socialization process. Culture results in a basis for living grounded in shared communication, standards, codes of conduct, and expectations.12 Over time, cultures evolve as societies adapt—by choice or otherwise—to transitions in their external and internal environments and relationships. Globalization, in all its forms of personal and business contacts and information crossing borders, brings about changes that result in cultural diffusion. When immigrants adopt some aspects of the local culture while keeping aspects of their culture of origin, this process is called creolization. Some countries, such as France, fiercely protect their culture against outside influences and insist that immigrants assimilate into their society and respect their values.13

A manager assigned to a foreign subsidiary must expect to find large and small differences in the behavior of individuals and groups within that organization. As depicted in Exhibit 3-1, these differences result from the societal, or sociocultural, variables of the culture, such as reli- gion and language, as well as from prevailing national variables such as economic, legal, and po- litical factors. National and sociocultural variables, thus, provide the context for the development and perpetuation of cultural variables. These cultural variables, in turn, determine basic attitudes toward work, time, materialism, individualism, and change. Such attitudes affect an individual’s motivation and expectations regarding work and group relations, and they ultimately affect the outcomes that can be expected from that individual.

Organizational Culture Compared to societal culture, which is often widely held within a region or nation, organizational culture varies a great deal from one organization, company, institution, or group to another. Organizational culture represents those expectations, norms, and goals held in common by mem- bers of that group. For a business example, consider Apple, whose organizational culture is very organic, or loose and informal, with its employees typically wearing casual clothes and interacting informally.

Research shows that societal culture tends to be stronger than organizational culture, so that employees working with or for a foreign company may not easily fall into the new organizational culture.14 Clearly, there is a relationship between organizational culture and societal (national) culture, both of which can cause disputes in the workplace at all levels, including the management of cross-border alliances.

Individual and Group Employee Job Behavior • Motivation • Commitment • Productivity • Ethics

Attitudes • Work • Individualism • Time • Change • Materialism

Cultural Variables • Values • Norms • Beliefs

National Variables • Economic system • Physical situation • Legal system • Technological • Political system know-how

Sociocultural Variables • Religion • Education • Language

ExHIBIT 3-1 Environmental Variables Affecting Management Functions

80 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Culture’s Effects on Management Clearly, societal culture affects organizational culture, and there are often interaction effects, as illustrated by the comments of a Japanese CEO when asked how he would characterize his com- pany’s corporate culture:

The positives: trust, loyalty, teamwork, long-term commitment. The negatives: resistance to change and an overly domestic focus. That’s why I tell my people to embrace change and be world class.15

Kenichi Watanabe, Nomura Group

Which organizational processes—technical and otherwise—are most affected by cultural differ- ences, and how they are affected, is the subject of ongoing cross-cultural management research and debate.16 Oded Shenkar suggests that we should

[c]onsider cultural differences as having the potential for both synergy and disruption, [and that] this point cannot be overstated as it lies at the intersection of strategic logic and opera- tional challenges that underline the FDI, expatriate adjustment, auditing and other interna- tional-business issues.17

Oded Shenkar, Journal of International Business Studies

Further, Shenkar poses that, rather than focusing on how different two cultures are—that is, cultural distance (CD)—in reality, it is the interaction between them that is the working issue in international management; this is because cultural distance has little effect on management until the two cultures come in contact with each other. He proposes that we focus on the concept of friction instead of distance by considering how the relevant people and organizational processes would interact and what the effects would be on the relative success of the international business venture.18 Moreover, each situation is unique and may involve people from several cultures meet- ing in a location relative to one of them, creating a specific, multidimensional arena for under- standing and communicating. Throw in the local business practices and the corporate cultures of each, and you have a complex scenario to navigate. An example might be an American preparing to meet in Russia with the German subsidiary manager there. As Nardon and Steers point out, several combinations of factors might complicate each specific global encounter, such as:

The broad cultural and institutional context based on local geography or the firm’s industry, for example.

The organizational culture, as discussed earlier, which may or may not conflict with the culture and business practices in the specific locale of interaction.

The situational context, which includes factors such as the physical setting, the types of positions members have in their firms, each person’s individual characteristics and cross- cultural preparation, and the method of interactions at the time.19

Many researchers have acknowledged the need to recognize and adapt to the overall situational context.20 Many companies, such as Walmart, have found that their success in some countries was definitely not transferrable to others. For managers to be successful around the world, there is no doubt that

[i]t requires contextual intelligence: the ability to understand the limits of our knowledge and to adapt that knowledge to an environment different from the one in which it was developed.21

Tarun Khanna, Harvard Business Review

Some argue that the effects of culture are more evident at the individual level of personal be- havior than at the organizational level because of convergence. Convergence describes the phe- nomenon of shifting individual management styles to become more similar to one another. The convergence argument is based on the belief that the demands of industrialization, worldwide coordination, and competition tend to factor out differences in organizational-level processes such as choice of technology and structure. In a study of Japanese and Korean firms, Lee, Roehl, and Choe found that globalization and firm size were sources of convergence of management styles.22 At the individual level, the research we will discuss in this chapter and throughout the

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 81

book clearly shows that whereas an assertive, take-charge management style typically works best in the West, people across Asia usually respond better to a more subtle leadership style in which the manager works behind the scenes to accomplish goals; then again, Latino cultures tend to prefer a paternal management style and look up to leaders who command respect by virtue of their position in society.23 These factors are discussed in more detail later in this chapter.

The effects of culture on specific management functions are particularly noticeable when we attempt to impose our own values and systems on another society. Exhibit 3-2 gives some examples of the values typical of U.S. culture, compares some common perspectives held by people in other countries, and shows which management functions might be affected, clearly implying the need for the differential management of organizational processes. For example, American managers plan activities, schedule them, and judge their timely completion based on

Aspects of U.S. Culture*

People can affect what happens in the future.

It is acceptable for people to interfere with nature and make changes to their environment.

Employees’ goals should be realistic.

Hard work is valued and will accomplish our objectives (Puritan ethic).

People should follow up on their commitments and their word.

Leadership is shared and participative.

It is important to effectively use one’s time (time is money that can be saved or wasted).

A primary obligation of an employee is to the organization.

People know that their jobs are impermanent and that they or their employers may end that commitment at any time.

The best-qualified people should be hired.

Other Perspectives

What happens in the future is determined by the will of God (fatalistic attitude). People should live within the given environment and adjust to it without interference.

Idealism is valued regardless of what is “reasonable.”

The will of God, good fortune, play an important part in success as well as hard work.

A commitment only indicates an intention to perform, but may be changed as developments occur.

Leadership is often paternal and/or authoritative.

Relationships and personal concerns can take priority over meetings and schedules.

The individual employee has a primary obligation to his or her family and friends.

Employment is for a lifetime.

Nepotism is practiced. Family, friendship, and other considerations take precedence in employment.

Management Function

Strategic planning, scheduling events and operations Sustainability management; productivity

Leadership and motivation

Planning, social responsibility, human resource management. Motivation and reward system

Negotiating and bargaining

Long-and short-range planning

Loyalty, commitment, and motivation

Motivation and commitment to the company

Employment, promotions, and reward

ExHIBIT 3-2 The Role of Cultural Variables in Enacting Management Functions: A Comparison of Some Typical Views of People in the United States with Other Commonly Held Perspectives around the World

*Aspect here refers to a belief, value, attitude, or assumption that is part of a culture in that a large number of people in that culture share it.

Source: Based on Managing Cultural Differences by Philip R. Harris and Robert T. Moran, 5th ed. © 2000 by Gulf Publishing Company, Houston, TX. Used with permission. All rights reserved.

82 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

the belief that people influence and control the future rather than assuming that events will occur only at the will of Allah, as managers in an Islamic nation might believe.

Many people in the world understand and relate to others only in terms of their own culture. This unconscious reference point of one’s own cultural values is called a self-reference criterion. The result of such an attitude is illustrated in the following story.

Once upon a time there was a great flood, and involved in this flood were two creatures, a mon- key and a fish. The monkey, being agile and experienced, was lucky enough to scramble up a tree and escape the raging waters. As he looked down from his safe perch, he saw the poor fish struggling against the swift current. With the very best of intentions, he reached down and lifted the fish from the water. The result was inevitable.24

The monkey assumed that its frame of reference applied to the fish and acted accordingly. Thus, international managers from all countries must understand and adjust to unfamiliar social and commercial practices—especially the practices of that mysterious and unique nation, the United States. Japanese workers at a U.S. manufacturing plant learned to put courtesy aside and interrupt conversations with Americans when there were problems. Europeans, however, are often confused by Americans’ apparent informality, which then backfires when the Europeans do not get work done as the Americans expect.

As a first step toward cultural sensitivity, international managers should understand their own cultures. This awareness helps guard against adopting either a parochial or an ethnocentric attitude. Parochialism occurs, for example, when a person in France expects those from or in an- other country to fall automatically into patterns of behavior common in France. Ethnocentrism describes the attitude of those who operate from the assumption that their ways of doing things are best—no matter where or under what conditions they are applied. Companies both large and small have demonstrated this lack of cultural sensitivity in countless subtle (and not so subtle) ways with varying disastrous effects.

Procter & Gamble (P&G) was one such company. In an early Japanese television commercial for Camay soap, a Japanese woman is bathing when her husband walks into the bathroom. She starts telling him about her new beauty soap. Her husband, stroking her shoulder, hints that he has more on his mind than suds. The commercial, which had been popular in Europe, was a disaster in Japan. For the man to intrude on his wife “was considered bad manners,” said Edwin L. Artzt, P&G’s then vice chairman and international chief. “And the Japanese didn’t think it was very funny.” P&G has learned from its mistakes and now generates about half of its revenue from foreign sales.25

After studying his or her own culture, the manager’s next step toward establishing effective cross-cultural relations is to develop cultural sensitivity. Managers not only must be aware of cultural variables and their effects on behavior in the workplace, but also must appreciate cultural diversity and understand how to build constructive working relationships anywhere in the world. The fol- lowing sections explore cultural variables and dimensions. Later chapters suggest specific ways in which managers can address these variables and dimensions to help build constructive relationships.

Given the great variety of cultures and subcultures around the world, how can a student of cross-cultural management, or a manager wishing to be culturally savvy, develop an under- standing of the specific nature of a certain people? With such an understanding, how can a man- ager anticipate the probable effects of an unfamiliar culture within an organizational setting and thereby manage human resources productively and control outcomes?

One approach is to develop a cultural profile for each country or region with which the company does or is considering doing business. Developing a cultural profile requires some familiarity with the cultural variables universal to most cultures. From these universal variables, managers can identify the specific differences found in each country or people—and, hence, anticipate their implications for the workplace.

Managers should never assume that they can successfully transplant American, or Japanese, or any other country’s styles, practices, expectations, and processes. Instead, they should prac- tice a basic tenet of good management—contingency management. Contingency management requires managers to adapt to the local environment and people and manage accordingly. That adaptation can be complex because the manager may confront differences not only in culture but also in business practices. The need for managers to adapt to local conditions, particularly within a joint venture, was illustrated by Baruch Shimoni in his research of Thai and Israeli managers of two MNCs headquartered in Sweden and the United States. He found that the firms’

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 83

local management cultures ran into each other and produced new hybrid forms of management cultures.26 Shimoni found that the managers developed a hybrid management style that was be- tween their own and the corporation’s management practices. Whereas the Thai culture focuses on harmonious personal relationships and avoidance of confrontation, in the Israeli office practices focused on informal relationships, performance, work processes, and supervision.27

Over time, the Thai managers (Chindakohrn and Hansa) and the Israeli managers (Tamir and Shuki) came to adapt their feelings and management style to create a hybrid style suited to the situation. As Hansa said, “I try to compromise. Working together, get your opinion, what you want, what you think, then I make decisions . . . you [I] have to be very quick and execute imme- diately. . . I try to change myself, to be adopting to this [the MNC’s] kind of character, culture.”28

Influences on National Culture Managers should recognize, of course, that generalizations in cultural profiles will produce only an approximation, or stereotype, of national character. Many countries comprise diverse subcultures whose constituents conform only in varying degrees to the national character. In Canada, distinct subcultures include Anglophones and Francophones (English-speaking and French-speaking people, respectively) and indigenous Canadians.

Above all, good managers treat people as individuals, and they consciously avoid any form of stereotyping. However, a cultural profile is a good starting point to help managers develop some tentative expectations—some cultural context—as a backdrop to managing in a specific international setting. It is useful, then, to look at what cultural variables have been studied and what implications can be drawn from the results.

Before we can understand the culture of a society, we need to recognize that there are sub- systems in a society that are a function of where people live; these subsystems influence, and are influenced by, people’s cultural values and dimensions and thus affect their behaviors, both on and off the job. Harris and Moran identified eight categories that form the subsystems in any society.29 This system’s approach to understanding cultural and national variables—and their effects on work behavior—is consistent with the model shown in Exhibit 3-1 that shows those categories as a broad set of influences on societal culture. Those categories are the kinship system of relationships among families; the education system; the economic and political systems; the associations that make up formal and informal groups; the health system; attitudes toward recreation and leisure; and—perhaps most important—religion (further discussed in the accompanying “Under the Lens” feature).

UNDER THE LENS Religion and the Workplace

Since the basis of a religion is shared beliefs, values, and institutions, it is closely aligned with the accepted underpinnings of societal culture; thus, religion and culture are inextricably linked. As such, religion underlies both moral and economic norms and influences everyday business trans-

actions and on-the-job behaviors. The connections between culture and work behavior for employees and managers in various countries are discussed throughout this book. Here we note specifically that managers in the home country or abroad must recognize both the legal religious rights in the work- place and the value of such diversity in the workplace. Days off for religious holidays, accommodation for prayers, dietary requirements, and so on, are the more obvious considerations. In addition, foreign managers abroad must be particularly sensitive to the local religious context and the expectations and workplace norms of employees and others because those managers will be immersed in that context in dealing with employees, clients, suppliers, and others. Failure to do so will minimize or negate the goals of the firm in that location.

Most readers of this book are familiar with the major religions of the world (see Map 3-1), and an in-depth discussion of religions is beyond the focus here. (The four religions with the largest number of followers are Christianity, with 33.1% of world population; Islam, with 20.4%; Hinduism, with 13.5%; and Buddhism, with 6%. These figures are approximate because, of course, they are changing every day.)30 What we do focus on as we progress through the chapters are the ways in which religion inter- sects with culture and affects business interactions, expectations, operations, motivations, and leader- ship, including attitudes toward work, time, ethics, and decision-making.

(Continued)

84 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Hinduism is over 5,000 years old and typically involves worship of many gods. Prayer is usually a private matter in one’s own home. The traditional caste system, now illegal, still tends to affect the labor markets. As another example of the effects of religion in the workplace, a Western man- ager operating in some areas or enterprises in India might note the employees’ lack of sensitivity to time. As noted by Agam Nag, that attitude is attributed to the religious belief and the philosophical background: “It has been variously traced to the concept of immortality of soul and reincarnation in Hinduism that gives a sense of infiniteness to life and hence time.”31 Nag explains that the lack of sensitivity to time cuts across all religions in India, including the endless variations of Hinduism as well as many other religions such as Islam, Christianity, and Sikhism.32 Clearly, religious belief is only one dimension of Indian culture to explain the way they view time. However, we can also observe the influence and competitiveness of foreign companies operating in the cities in India, such as the many companies in the information technology industry that are operating there. Their young, educated workforce has adapted to the competitiveness and expectations in those companies, resulting in a meld of their traditional value system and the practical approach typical of Western companies. Foreign firms in India and elsewhere are reaping the benefits of this rapidly growing and highly effective workforce.33

Christianity originated in the Middle East and is now over 2,000 years old. Christians believe in one God. Christianity is based on the life and death of Jesus Christ, the son of God, and preaches love, the value of human life, self-discipline, and ethics. There are four principal denominations: Orthodox, Pentecostal, Protestant, and Roman Catholic. Roman Catholicism predominates in the Americas and

Buddhist

Buddhist/Confucian

Eastern Orthodox

Hindu

Muslim

Mixed Christian (Catholic, Protestant, and other Christian groups)

Protestant

Roman Catholic

Other

MAJOR RELIGIONS

C A N A D A

GREENLAND (Denmark)

MEXICO BELIZE

CUBA

GUYANA SURINAME

FRENCH GUIANA

URUGUAY

HONDURAS

BAHAMAS

VENEZ.

BRAZIL

COLOMBIA ECUADOR

CHILE

PERU

BOLIVIA

ARGENTINA

SOUTH AFRICA

BOTS.

ANGOLA ZAMBIA

CONGO

GABON

D.R. OF THE CONGO

C.A.R. NIGERIA

ZIMB. MADAGASCAR

LESOTHO

NAMIBIA

MALAWI

BURUN. RWAN.

DJIBOUTI

ERIT.

EQU. GUINEA

LIBERIA SIERRA LEONE

GUINEA-BISSAU GAMBIA SENEGAL

WESTERN SAHARA

IRAQ IRAN

INDIA

MONGOLIA

C H I N A

SAUDI ARABIA

JORDAN KUWAIT QATAR

OMAN YEMEN

U.A.E. PAKISTAN

TAJIKISTAN

KYRGYZSTAN

NEPAL

N. KOREA

TAIWAN

PHILIPPINES

BHUTAN

MYANMAR

THAILAND

LAOS

MALAYSIA

I N D O N E S I A

AUSTRALIA

PAPUA NEW GUINEA

NEW ZEALAND

CAMB. VIETNAM

BRUNEI

BANG.

JAPAN S. KOREA

AFGH.

TURKM. UZBEK.

KAZAKHSTAN

LEB. ISR.

R U S S I A

MOROCCO

GUINEA

BURK. FASO

CAM. TOGO

BENIN

GHANA UGAN.

SWAZILAND

MOZAM.

SOMALIA

TANZANIA

KENYA

ETHIOPIA

SUDAN

EGYPTLIBYA

CHAD NIGERMALI

ALGERIA

TUNISIA

MAURIT.

PARAGUAY

NICARAGUAGUATEMALA EL SALVADOR

COSTA RICA PANAMA

CÔTE d’IVOIRE

HONG KONG

SINGAPORE

SRI LANKA

U N I T E D S T A T E S

MAURITIUS

PORTUGAL

IRELAND

SPAIN

FRANCE

UNITED KINGDOM

ITALY SWIZ. AUS. HUN.

SERBIA MAC.

ROM. MOLDOVA

UKRAINE

POLAND BELARUS

LITH.

ESTONIA

LUX.

LATVIA

GREECE

MALTA

TURKEY

CYP.

BULG. ALB.

SL. CRO. BOS.

BELG.

NETH.

CZ. REP. SLOV.

RUS.DEN.

NORWAY

SWEDEN

FINLAND

GERMANY

SYRIA

GEOR.

ARM.

MAP 3-1 Major World Religions

Source: Data from various sources, including the U.S. Bureau of the Census international database, U.S. State Department Reports, UN Human development report.

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 85

CULTURAL VALUE DIMENSIONS Cultural variables result from unique sets of shared values among different groups of people. Most of the variations between cultures stem from underlying value systems, which cause people from different cultures to behave differently under similar circumstances. Values are a society’s ideas about what is good or bad, right or wrong—such as the widespread belief that stealing is immoral and unfair. Values determine how individuals will probably respond in any given circumstance. As a powerful component of a society’s culture, values are com- municated through the eight subsystems previously described and are passed from genera- tion to generation. Interaction and pressure among these subsystems (or more recently, from foreign cultures) may provide the impetus for slow change. The dissolution of the Soviet Union and the formation of the Commonwealth of Independent States is an example of extreme political change resulting from internal economic pressures and external encourage- ment to change.

Project GLOBE Cultural Dimensions Recent research results on cultural dimensions have been made available by the GLOBE (Global Leadership and Organizational Behavior Effectiveness) Project team. The team comprises 170 re- searchers who have collected data over seven years on cultural values and practices and leadership attributes from 18,000 managers in 62 countries. Those managers were from a wide variety of in- dustries and sizes of organizations from every corner of the globe. The team identified nine cultural dimensions that distinguish one society from another and have important managerial implications:

3-2. To be able to distinguish the major value dimen- sions that define cultural differences among societ- ies or groups

Western Europe. Orthodox Christians mostly live in Eastern Europe. Foreign corporations in Christian locales can assume that most employees and other contacts behave largely according to the Ten Commandments. In Europe, employees typically have a number of days off for religious holidays. In the United States, religious holidays are typically limited to Christmas and Easter; however, there should be respect for people not wanting to work on Sundays. One wonders, also, if the Protestant ethic of hard work, saving, and efficiency, common in the West and the basis of capitalism, is spreading because of global competition and the influence of foreign companies.

Islam was discussed in the opening profile. Muslims believe that there is only one god, Allah, and that the prophet Muhammad was his final messenger. Their lives are based on the Qur’an and Muslim law (Sharia). Businesses can be affected by the Sharia law against receiving or paying inter- est. As a further example of how religious beliefs affect the workplace, respect for Islam requires companies operating in Muslim countries to make provisions—in time and space allocation—for employees to pray five times a day. This is true, also, in countries and cities such as in the United Kingdom where there is a large Muslim population. In addition, out of respect for Ramadan, a month during which Muslims must fast from dawn until dusk, managers must expect and plan for produc- tivity to go down in the event that contractual obligations are scheduled. Businesspeople not familiar with Islam might become frustrated by the lack of precision regarding scheduling and contracts at- tributable to the perspective that things will happen in good time as Allah wills. However, the Islamic work ethic is a commitment toward fulfillment and the individual’s obligation to society, so there is considerable respect for workers and business motives.34 In addition, managers operating in Muslim countries must take care to avoid conflict with the prescribed gender roles in their hiring and place- ment practices. More recently, however, attitudes toward women’s roles are changing, resulting in more job opportunities for women.

Buddhism, founded in India 2,500 years ago, remains the dominant religion of the Far East and is increasingly popular in the West. Buddhism emphasizes compassion and love and the ways in which suffering in the world can be relieved by righteous living and the cycle of rebirth. There is a high re- gard for others as if they are all part of the family and an ethical consideration of one’s actions upon the well-being of others. Buddhism promotes a strong work ethic, persistence, and hard work and frowns on laziness. There are likely to be positive outcomes in the work environment by emphasizing teamwork and responsibility. Foreign managers should acknowledge and respect, for example, that employees expect to have a shrine on the wall or floor with a statue of Buddha and cups holding food and drink as offerings.35

86 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

assertiveness, future orientation, performance orientation, humane orientation, gender differentia- tion, uncertainty avoidance, power distance, institutional collectivism versus individualism, and in- group collectivism. Only the first four are discussed here; this avoids confusion for readers because the other five dimensions are similar to those researched by Hofstede, which are presented in the next section. (Other research results from the GLOBE Project are presented in subsequent chapters where applicable, such as in the Leadership section in Chapter 11.) The descriptions are as follows, along with selected rankings based on the GLOBE results shown in the accompanying bar charts.36

Performance Orientation

HK NZ U.S. JPN ENG SPN ITA VENEZ ARGEN

High Medium Low

*Not to scale—indicates relative magnitude.

Source: Based on results from the GLOBE project.

Assertiveness

AUSTRIA GRE U.S. FRA IRE EGT JPN SWZ SWE

High Medium Low

*Not to scale—indicates relative magnitude.

Source: Based on results from the GLOBE project.

Future Orientation

SING NETH CAN IND IRE EGT ITA ARG RUS

High Medium Low

*Not to scale—indicates relative magnitude.

Source: Based on results from the GLOBE project.

FUTURE ORIENTATION This dimension refers to the level of importance a society attaches to future-oriented behaviors such as planning and investing in the future. Switzerland and Singapore, high on this dimension, are inclined to save for the future and have a longer time horizon for decisions. This perspective compares with societies such as Russia and Argentina, which tend to plan more in the shorter term and place more emphasis on instant gratification.

PERFORMANCE ORIENTATION This dimension measures the importance of performance improvement and excellence in society and refers to whether people are encouraged to strive for continued improvement. Singapore, Hong Kong, and the United States score high on this dimension; typically, this means that peo- ple tend to take initiative and have a sense of urgency and the confidence to get things done. Countries such as Russia and Italy have low scores on this dimension; they hold other priorities ahead of performance, such as tradition, loyalty, family, and background, and they associate competition with defeat.

ASSERTIVENESS This dimension refers to how much people in a society are expected to be tough, confrontational, and competitive versus modest and tender. Austria and Germany, for example, are highly asser- tive societies that value competition and have a can-do attitude. This compares with Sweden and Japan, less assertive societies, which tend to prefer warm and cooperative relations and harmony. The GLOBE team concluded that those countries have sympathy for the weak and emphasize loyalty and solidarity.

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 87

HUMANE ORIENTATION This dimension measures the extent to which a society encourages and rewards people for being fair, altruistic, generous, caring, and kind. Highest on this dimension are the Philippines, Ireland, Malaysia, and Egypt, indicating a focus on sympathy and support for vulnerable members of society. In those societies, paternalism and patronage are important, and people are usually friendly and tolerant and value harmony. This compares with Spain, France, and the former West Germany, which scored low on this dimension; people in these countries give more importance to power and material possessions as well as self-enhancement.

Clearly, research results such as these are helpful to managers seeking to be successful in cross-cultural interactions. Anticipating cultural similarities and differences allows managers to develop the behaviors and skills necessary to act and decide in a manner appropriate to the local societal norms and expectations.

Humane Orientation

PHIL IRE MALAY U.S. SWE HK BRA FRA GER

High Medium Low

*Not to scale—indicates relative magnitude.

Source: Based on results from the GLOBE project.

Cultural Clusters Gupta et al., from the GLOBE research team, also analyzed their data on the nine cultural di- mensions to determine where similarities cluster geographically. Their results support the exis- tence of ten cultural clusters: South Asia, Anglo, Arab, Germanic Europe, Latin Europe, Eastern Europe, Confucian Asia, Latin America, sub-Saharan Africa, and Nordic Europe. They point out the usefulness to managers of these clusters:

Multinational corporations may find it less risky and more profitable to expand into more similar cultures rather than those which are drastically different.37

These clusters are shown in Exhibit 3-3. According to Gupta et al., the Germanic cluster tends to be masculine, assertive, individualistic, and result-oriented. This compares with the Latin American cluster, which tends to exhibit high power distance, low performance orienta- tion, uncertainty avoidance, and collectivism.

Latin American societies tend to enact life as it comes, taking its unpredictability as a fact of life, and not overly worrying about results.38

Most researchers feel that there is a relationship between geographic cultural clusters and their similar economic systems, histories, or environmental characteristics.39

Hofstede’s Value Dimensions Earlier research resulted in a groundbreaking framework for understanding how basic values underlie organizational behavior; Geert Hofstede developed this framework based on his re- search on more than 116,000 people in 50 countries. He proposed four value dimensions: power distance, uncertainty avoidance, individualism, and masculinity.40 We should be cautious when interpreting these results, however, because his research findings are based on a sample drawn from one multinational firm, IBM, and because he does not account for within-country differ- ences in multicultural countries. Although we introduce these value dimensions here to aid in the understanding of different cultures, their relevance and application to management functions will be discussed further in later chapters.

88 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

The first of Hofstede’s value dimensions, power distance, is the level of acceptance by a society of the unequal distribution of power in institutions. What are the attitudes toward hier- archy and the level of respect for authority? How reluctant are employees to express disagree- ment with their managers? In the workplace, inequalities in power are normal, as evidenced in hierarchical boss–subordinate relationships. However, the extent to which subordinates accept unequal power is societally determined. In countries where people tend to display high power distance (such as Malaysia, the Philippines, and Mexico), employees acknowledge the boss’s authority simply by respecting that individual’s formal position in the hierarchy, and they sel- dom bypass the chain of command. This respectful response results, predictably, in a centralized structure and autocratic leadership. In countries where people tend to display low power distance (suchas Austria, Denmark, and Israel), superiors and subordinates are apt to regard one another as equal in power, resulting in more harmony, open communication of ideas, and better coop- eration. Clearly, an autocratic management style is not likely to be well received in low power distance countries.

Anglo Australia Canada England Ireland New Zealand South Africa United States

Latin America

Argentina Bolivia Brazil Colombia Costa Rica Ecuador El Salvador Guatemala Mexico Venezuela

Latin Europe

France Israel Italy Portugal Spain Switzerland (French speaking)

Eastern Europe

Albania Georgia Greece Hungary Kazakhstan Poland Russia Slovenia

Germanic Europe

Austria Germany Netherlands Switzerland (German speaking)

Arab Egypt Kuwait Morocco Qatar Turkey

India Indonesia Iran Philippines Malaysia Thailand

Nigeria Zambia Malawi South Africa Namibia Zimbabwe (Black spots)

Sub-Sahara Africa

Denmark Finland Sweden

Nordic Europe

Nordic Europe

China Hong Kong Japan Singapore Taiwan South Korea

Confucian Asia

Southern Asia

ExHIBIT 3-3 Geographic Culture Clusters

Source: Data from V. Gupta, P. J. Hanes, and P. Dorfman, Journal of World Business 37, No. 1 (2002), p. 13.

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 89

The second value dimension, uncertainty avoidance, refers to the extent to which people in a society feel threatened by ambiguous situations. Countries with a high level of uncertainty avoidance (such as Japan, Portugal, and Greece) tend to have strict laws and procedures to which their people adhere closely, and a strong sense of nationalism prevails. In a business context, this value results in formal rules and procedures designed to provide more security and greater career stability. Managers have a propensity for low-risk decisions, employees ex- hibit little aggressiveness, and lifetime employment is common. In countries with lower levels of uncertainty avoidance (such as Denmark, Great Britain, and, to a lesser extent, the United States), nationalism is less pronounced, and protests and other such activities are tolerated. Consequently, company activities are less structured and less formal, some managers take more risks, and high job mobility is common.

Uncertainty Avoidance*

High Desire for Stability Low

GRE JPN FRA KOR ARA GER AUL CAN U.S. UK IND DEN SIN

*Not to scale—indicates relative magnitude. Note: AUL = Australia

Source: Data based on G. Hofstede, 1983.

Power Distance*

High Orientation Toward Authority Low

MAL ARA MEX IND FRA ITA JPN SPA ARG U.S. GER UK DEN ISR AUT

*Not to scale—indicates relative magnitude. Note: ARA = Arab Countries AUT = Austria

Source: Data based on G. Hofstede, “National Cultures in Four Dimensions,” International Studies of Management and Organization (Spring–Summer, 1983).

The third of Hofstede’s value dimensions, individualism (also referred to as individual- ism-collectivism), refers to the tendency of people to look after themselves and their immediate families with less emphasis on the needs of society; the primary focus is on the individual or the nuclear family. In countries that prize individualism (such as the United States, Great Britain, and Australia), democracy, individual initiative, and achievement are highly valued; the relation- ship of the individual to organizations is one of independence on an emotional level, if not on an economic level.

In countries such as Pakistan and Panama, where low individualism prevails—that is, where collectivism predominates—there is more emphasis on group achievements and harmony and the importance of the extended family or group. In such societies, there are tight social frame- works, emotional dependence on belonging to the organization, and a strong belief in group decisions. People from a collectivist country, such as Japan, believe in the will of the group rather than that of the individual, and their pervasive collectivism exerts control over individual members through social pressure and the fear of humiliation. The society valorizes harmony and saving face, whereas individualistic cultures generally emphasize self-respect, autonomy, and independence. Hiring and promotion practices in collectivist societies are based on paternalism rather than achievement or personal capabilities, which are valued in individualistic societies. Other management practices (such as the use of quality circles in Japanese factories) reflect the emphasis on group decision-making processes in collectivist societies. The individualism– collectivism dimension, then, relates to the manner in which members of a group relate to one another and work together.41

90 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Hofstede’s findings indicate that most countries scoring high on individualism have both a higher gross national product and a freer political system than those countries scoring low on individualism—that is, there is a strong relationship among individualism, wealth, and a political system with balanced power. Other studies have found that the output of individuals working in a group setting differs between individualistic and collectivist societies. In general, Americans tend to work and conduct their private lives independently, valuing individual achievement, accomplishments, promotions, and wealth above any group goals. In many other countries, individualism is not valued (as discussed previously in the context of Hofstede’s work). In China, for example, much more of a “we” consciousness prevails, and the group is the basic building block of social life and work. For the Chinese, conformity and cooperation take precedence over individual achievement, and the emphasis is on the strength of the family or community—the predominant attitude being, “We all rise or fall together.” Chinese cultural values subordinate personal interests to the greater goal of helping the group succeed. However, more recently, one sees the younger generation in the cities adopting more of a capitalist and individualistic attitude toward their jobs as global competition increases, and as more western companies oper- ate there and hire locals.

Individualism*

Individualism Collectivism

AUL U.S. UK CAN FRA GER SPA JPN MEX ITA KOR SIN

*Not to scale—indicates relative magnitude.

LowHigh

Source: Data based on G. Hofstede, 1983.

Masculinity*

Assertive/Materialistic Relational

JPN MEX GER UK U.S. ARA FRA KOR POR CHC DEN SWE

*Not to scale—indicates relative magnitude.

LowHigh

Source: Data based on G. Hofstede, 1983.

The fourth value dimension, masculinity (also referred to as masculinity-femininity), refers to the degree of traditionally masculine values. In highly masculine societies (Japan, Mexico and Austria, for example), social gender roles are distinct such that men are expected to be “assertive, tough, and focused on material success; women are supposed to be more modest, tender, and concerned with the quality of life.”42 In organizations located in masculin- ity societies, one finds considerable job stress, and organizational interests generally encroach on employees’ private lives. In countries with high femininity (such as Denmark, Sweden, and the Netherlands), social gender roles tend to overlap such that “[b]oth men and women are supposed to be modest, tender, and concerned with the quality of life.” 43 In organiza- tions located in femininity societies, one finds less conflict and job stress, more women in high-level jobs, and a reduced need for assertiveness. The United States lies somewhat in the middle, according to Hofstede’s research. American women typically are encouraged to work, and families often are able to get some support for child care (through day-care centers and maternity leaves).

The four cultural value dimensions Hofstede proposed do not operate in isolation; rather, they are interdependent and interactive—and thus complex—in their effects on work attitudes and behaviors.

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 91

LONG-TERM/SHORT-TERM ORIENTATION Later research in 23 countries, using a survey developed by Bond and colleagues called the Chinese Value Survey, led Hofstede to develop a fifth dimension, long-term/short-term orientation— also called Confucian dynamism.44 He defined long-term orientation as “the extent to which a culture programs its members to accept delayed gratification of their material, social, and emotional needs.” 45 Examples of long-term Confucian values include: adapting traditions to changed conditions, exhibiting a strong propensity to save and invest, demonstrating thriftiness, and persevering in achieving results. Alternatively, short-term Confucian values are fulfilling social obligations, showing respect for tradition, and protecting one’s face. In other words, man- agers in most Asian countries are more future-oriented, so they strive toward long-term goals; they value investment in the future and are prepared to sacrifice short-term profits. However, managers in countries such as Great Britain, Canada, and the United States place a higher value on short-term results and profitability and evaluate their employees accordingly.

Long-Term/Short-Term Orientation*

High Low

CHI HK JPN TAI VIE BRA IND UKU.S. CAN E/W AFR

*Not to scale—indicates relative magnitude.

Source: Data based on G. Hofstede, Culture’s Consequences: Comparing Values, Behaviors, Institutions, and Organizations across Nations, 2nd ed. (Thousand Oaks, CA: Sage, 2001).

Trompenaars’s Value Dimensions Fons Trompenaars also researched value dimensions; his work was spread over a ten-year pe- riod, with 15,000 managers from 28 countries representing 47 national cultures. Some of those dimensions, such as individualism, people’s attitude toward time, and relative inner- versus outer-directedness, are similar to those discussed elsewhere in this chapter and others, and so are not presented here. Other selected findings from Trompenaars’s research that affect daily busi- ness activities are explained next, along with the placement of some of the countries along those dimensions, in approximate relative order.46 If we view the placement of these countries along a range from personal to societal, based on each dimension, some interesting patterns emerge.47 One can see that the same countries tend to be at similar positions on all dimensions with the exception of the emotional orientation.

In Trompenaars’s dimension of universalism versus particularism, we find that the uni- versalistic approach applies rules and systems objectively without consideration for individual circumstances, whereas the particularistic approach—more common in Asia and Spain, for ex- ample—puts the first obligation on relationships and is more subjective. Trompenaars found, for example, that people in particularistic societies are more likely to pass on insider information to a friend than those in universalistic societies.

In the neutral versus affective dimension, the focus is on the emotional orientation of rela- tionships. The Italians, Greeks, Mexicans, and Chinese, for example, would openly express emo- tions, even in a business situation, whereas the British, Germans, and Japanese would consider such displays unprofessional; they, in turn, would be regarded as hard to read.

Obligation*

Universalistic Particularistic

*Not to scale—indicates relative magnitude.

LowHigh

GERU.S. SWE UK ITA FRA JPN SPA CHI

Source: Data based on F. Trompenaars, 1993.

92 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

It is clear, then, that a lot of what goes on at work can be explained by differences in peo- ple’s innate value systems as described by Hofstede, Trompenaars, and the GLOBE researchers. Awareness of such differences and how they influence work behavior can be very useful to you as a future international manager.

Consequence or Cause? At this point, it is worth considering the results of a study by Steel and Taras, published in 2010, in which they challenge the view held by Hofstede and others of culture as the cause, and not the effect, of variations in cultural values. Steel and Taras argue that the opposite can be true, that “culture is a consequence of certain individual and national-level factors.” 48 They conclude that the research results provide a basis for explaining variations in cultural values within and between countries and that “cultures are determined by a set of individual and country level factors and are likely to change in response to a change in the culture-determining factors.” 49 Examples of the factors they considered are macrofactors such as wealth and freedom and microfactors such as

Emotional Orientation in Relationships*

Neutral Affective

*Not to scale—indicates relative magnitude.

LowHigh

U.S.JPN GER SWE UK FRA SPA ITA CHI

Source: Data based on F. Trompenaars, 1993.

*Not to scale—indicates relative magnitude.

U.S.UK FRA GER ITA JPN SWE SPA CHI

Privacy in Relationships*

Specific Diffuse

LowHigh

Source: Data based on F. Trompenaars, 1993.

UKU.S. SWE GER FRA ITA SPA JPN CHI

Source of Power and Status*

Personal Society

*Not to scale—indicates relative magnitude.

LowHigh

Source: Data based on F. Trompenaars, 1993.

As far as involvement in relationships goes, people tend to be either specific or diffuse (or somewhere along that dimension). Managers in specific-oriented cultures—the United States, United Kingdom, France—separate work and personal issues and relationships; they compart- mentalize their work and private lives, and they are more open and direct. In diffuse-oriented cultures—Sweden, China—work spills over into personal relationships and vice versa.

In the achievement versus ascription dimension, the question that arises is, “What is the source of power and status in society?” In an achievement society, the source of status and influ- ence is based on individual achievement—how well one performs the job and what level of edu- cation and experience one has to offer. Therefore, women, minorities, and young people usually have equal opportunity to attain position based on their achievements. In an ascription-oriented society, people ascribe status based on class, age, gender, and so on; one is more likely to be born into a position of influence. Hiring in Indonesia, for example, is more likely to be based on who you are (e.g., your status and relational ties) than is the case in Germany or Australia.

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 93

age, gender, education, and socioeconomic status. Steel and Taras stress, therefore, that we should not rely on national averages to draw conclusions about individuals.50 Other researchers also hold this broader concept of the origins of cultural behavior; Meuthel and Hoegl, for example, state that “we extend the traditional view of culture as an exclusive country-level determinant to a more comprehensive view that integrates social institutions such as the education system, economic freedom, and civil liberties.” 51

Clearly, the origins, causes, and effects of cultural variables are complex, but the fact re- mains that culture plays a key role in the workplace, and international managers must be aware of that role and manage accordingly.

Critical Operational Value Differences After studying various research results about cultural variables, it helps to identify some specific culturally based variables that cause frequent problems for managers around the world. Important variables are those involving conflicting orientations toward time, task-relationship, change, ma- terial factors, and individualism. We try to understand these operational value differences because they strongly influence a person’s attitudes and probable responses to work situations.

TIME Americans often experience much conflict and frustration because of differences in the concept of time around the world—that is, differences in temporal values. To Americans, time is a valu- able and limited resource; it is to be saved, scheduled, and spent with precision, lest we waste it. The clock is always running—time is money. Therefore, deadlines and schedules have to be met. When others are not on time for meetings, Americans may feel insulted; when meetings digress from their purpose, Americans tend to become impatient. Similar attitudes toward time occur in Western Europe and elsewhere.

In many parts of the world, however, people view time from different and longer perspec- tives, often based on religious beliefs (such as reincarnation, in which time does not end at death), on a belief in destiny, or on pervasive social attitudes. In Latin America, for example, a common attitude toward time is mañana, a word that literally means “tomorrow.” A Latin American per- son using this word, however, usually means an indefinite time in the near future. Similarly, the word bukra in Arabic can mean “tomorrow” or “some time in the future.” Although Americans usually regard a deadline as a firm commitment, Arabs often regard a deadline imposed on them as an insult. They believe that important things take a long time and therefore cannot be rushed. To ask an Arab to rush something, then, is to imply that you have not given him an important task or that he would not treat that task with respect. International managers have to be careful not to offend people—or lose contracts or employee cooperation—because they misunderstand the local language of time.

TASK VERSUS RELATIONSHIP ORIENTATION Schuster and Copeland developed a Culture Classification Model based on time, task orientation and relationship orientation.52 They contended that the importance placed on tasks versus rela- tionships in making business decisions affects how time is used. As shown in Figure 3-2, cultures

Northwest & Central Europe

Middle EastCentral & South America

ChinaMediterranean Europe

Eastern Europe &

Russia

North America, Australia, & New Zealand

Japan & KoreaIndia Africa

Task Oriented Relationship Oriented

FIGURE 3-2 Culture Classification Model

Source: C. Schuster & M. Copeland. 1996. Global business practices: Adapting for success. Thomson, p. 13.

94 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

on the left side of the continuum tend to place more emphasis on the task and allocate their time in accordance with task-specific criteria. In general, Northwest and Central European countries tend to be the most task-oriented when making business decisions. In contrast, cultures on the right side of the continuum tend to devote more time to establishing and maintaining business re- lationships. African and Middle Eastern countries tend to be the most relationship-oriented coun- tries, followed by Japan and Korea. It is important to note that while these classifications hold in general, individuals vary within cultures and therefore may deviate from the country-specific expectations of the Culture Classification Model, or any national culture model for that matter. For example, bicultural individuals—that is, people who embrace the norms and values of two cultures—may deviate from cultural expectations of a given country. Nevertheless, it is critical for the foreign businessperson to recognize and respect cultural differences in order to function effectively with business associates in other countries.

For example, in Northwest and Central Europe, the principal goal of business activities is to accomplish a task in a manner that is most efficient and effective. Time tends to be a critical ele- ment of these cultures and is reflected in different business activities such as meetings. In these task-oriented countries, business meetings tend to have fixed starting and ending times that are expected to be respected. Discussions that have not reached conclusion are not continued during that meeting. That is, extending the discussion beyond the allotted meeting time is not permit- ted. Instead, another meeting is scheduled or the business will be concluded via correspondence. Business practices tend to be formal so use titles such as Mister, Ms., Doctor, or Professor. The structure of meetings tends to be very formal and announced in advance of the meeting. Meeting organizers will circulate an agenda prior to the meeting. The agenda actually functions as a ve- hicle to measure the efficiency of the meeting and professionalism of its attendees.53

CHANGE Because they are based largely on long-standing religious beliefs, values regarding the accep- tance of change and the pace of change can vary immensely among cultures. Western people generally believe that an individual can exert some control over the future and can manipulate events, particularly in a business context—that is, individuals feel they have some internal con- trol. In many non-Western societies, however, control is considered external; people generally believe in destiny or the will of their God and, therefore, adopt a passive attitude or even feel hostility toward those introducing the evil of change. In societies that place great importance on tradition (such as Japan), one small area of change may threaten an entire way of life. However, the younger generations are becoming more exposed to change through globalization, technol- ogy, and media exposure. International firms are agents of change throughout the world. Some changes are more popular than others are.

MATERIAL FACTORS In large part, Americans consume resources at a far greater rate than most of the rest of the world. Their attitude toward nature—that it is there to be used for their benefit—differs from the atti- tudes of Indians and Koreans, for example, whose worship of nature is part of their religious be- liefs. Whereas Americans often value physical goods and status symbols, many non-Westerners find these things unimportant; they value the aesthetic and the spiritual realm. Such differences in attitude have implications for management functions such as motivation and reward systems because the proverbial carrot must be appropriate to the employee’s value system.

INDIVIDUALISM In general, Americans tend to work and conduct their private lives independently, valuing indi- vidual achievement, accomplishments, promotions, and wealth above any group goals. In many other countries, individualism is not valued (as discussed previously in the context of Hofstede’s work). In China, for example, much more of a “we” consciousness prevails, and the group is the basic building block of social life and work. For the Chinese, conformity and cooperation take precedence over individual achievement, and the emphasis is on the strength of the family or community—the predominant attitude being, “We all rise or fall together.” In China, the stability of society is based on relationships that involve: mutual obligations (e.g., a junior person respects and obeys a senior person; the senior person protects a junior person); guanxi (friendships with

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 95

continual exchange of favors that bind people together); face (i.e., protection of one’s dignity, self-respect and prestige); harmony (i.e., relating to others in a harmonious way); and adjusting/ adapting to the environment.54

International managers often face conflicts in the workplace because of differences in these basic values of time, task-relationship orientation, change, materialism, and individualism. If these operational value differences and their likely consequences are anticipated, managers can adjust expectations, communications, work organization, schedules, incentive systems, and so forth to provide for more-constructive outcomes for the company and its employees.

THE INTERNET AND CULTURE As of June 30, 2018, South Korea had 92.6% of its population who were internet users— compared with 34.1% for India, 82.4% for Thailand, and 56.7% for China.55

www.internetworldstats.com

With over 4.2 billion Internet users across the globe as of June 2018,56 we would be remiss if we did not acknowledge the contemporary phenomenon of the increasingly pervasive use of the Internet in society, for it seems to be encroaching on many of the social variables discussed earlier—in particular, associations, education, and the economy, as well as politics. From 2000 to 2018, English Internet user growth increased by 649 percent to 1.055 billion users. However, Chinese Internet use growth increased 2,390 percent over the same time period to 804 million users. Spanish Internet users experienced a 1,758 percent increase (to 337 million users) while Arabic Internet users increased by 8,616 percent to 219 million users.57

At the same time that the Internet is affecting culture, culture is also affecting how the Internet is used. One of the pervasive ways that culture is determining how the Internet may be used in various countries is through the local attitude to information privacy—the right to con- trol information about oneself, as observed in the following quote.

You Americans just don’t seem to care about privacy, do you?58

Swedish executive

Although Americans collect data about consumers’ backgrounds and what they buy, often trading that information with other internal or external contacts, the Swedes, for example, are as- tounded that this is done, especially without governmental oversight.59 The Swedes are required to register all databases of personal information with the Data Inspection Board (DIB), their federal regulatory agency for privacy, and to get permission from that board before that data can be used.

In May 2018, the EU adopted the General Data Protection Regulation (GDPR), which will serve as the primary data protection legislation for EU member countries. It will increase har- monization of data protection albeit other data protection laws remain in force, especially in the areas of healthcare and financial activities. With the adoption of the GDPR, Sweden will have a new Data Protection Act (DPA), which complements the GDPR in terms of areas that are subject to national laws.60

The manner in which Europe views information privacy has its roots in culture and history, leading to a different value set regarding privacy. The preservation of privacy is considered a human right, perhaps partially because of an internalized fear about how personal records were used in war times in Europe. In addition, research by Smith on the relationship between levels of concern about privacy and Hofstede’s cultural dimensions revealed that high levels of uncer- tainty avoidance were associated with the European approach to privacy, whereas higher levels of individualism, masculinity, and power distance were associated with the U.S. approach.61

It seems, then, that societal culture and the resultant effects on business models can render the assumptions about the global nature of information technology incorrect. U.S. businesspeople, brought up on a strong diet of the market economy, need to realize that they will often need to localize their use of IT to different value sets about its use. This advice applies in particular to the many e-commerce companies doing business overseas. With 75 percent of the world’s Internet market living outside the United States, multinational e-businesses are learning the hard way that their websites must reflect local markets, customs, languages, and currencies to be successful in foreign markets. Different legal systems, financial structures, tastes, and experiences necessitate

3-3. To understand the interac- tion between culture and the use of the Internet

96 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

attention to every detail to achieve global appeal. In other words, e-businesses must localize in order to globalize, which means much more than translating online content to local languages.

One problem area often beyond the control of e-business is the cost of connecting to the Internet for people in other countries. Other practical problems in Asia, as well as in Germany, the Netherlands, and Sweden, include the method of payment, which in most of these places still involves cash or letters of credit and written receipts. Dell tackled this problem by offering debit payments from consumers’ checking accounts. Some companies have learned the hard way that they need to do their homework before launching sites aimed at overseas consumers. Dell, for example, committed a faux pas when it launched an e-commerce site in Japan with black borders on its website; black is considered negative in the Japanese culture, so many consumers took one look and didn’t want anything else to do with it. Dell executives learned that the complexity of language translation into Japanese was only one area in which they needed to localize.

As much as cultural and societal factors can affect the use of the Internet for business, it is also clear that IT can impose dramatic changes on culture and society. In addition, cultural pref- erences and legal institutions may seek to influence attitudes toward work, as illustrated by the accompanying “Under the Lens” feature about South Korea’s workaholic culture, as well as the following “Management in Action” feature about work culture in India.

UNDER THE LENS Seoul Fights Back against Workaholic Culture: Labour Law 62

Overworked South Koreans are set to get a break from this week when a new labour law imposing a cap on working hours comes into effect, in an effort to improve employees’ work-life balance.

“Worabael”—a portmanteau of worklife balance—has become a buzzword in South Korea, one of the most overworked nations in Asia, as companies with more than 300 employees and public institutions are forced to cut the maximum weekly work hours from 68 to 52.

South Korea is notorious for its workaholic culture, which has contributed to its rapid industrialisation over the past half a century and transformed the once war-torn country into the world’s 11th-largest economy.

The country is home to the longest working hours and highest suicide rate in the developed world. South Koreans put in an average of 2,024 hours in 2017, the second-most after Mexico among members of the Organisation for Economic Cooperation and Development (OECD). But the long hours have not translated into better productivity, with the country’s per-hour productivity ranking near the bottom.

The change in working hours was a campaign promise of President Moon Jae-in, who was elected last year on a populist platform of improving the lives of ordinary South Koreans by guaranteeing their “right to rest”.

Mr Moon has secured a 16 per cent increase in the minimum wage this year, the largest jump since 2000. From this month, South Koreans are allowed 40 hours of regular work and 12 hours of overtime after parliament passed the revised bill in February. A business owner violating the new law can face up to two years in prison or a fine of up to Won20m ($17,945) but the government gave a six-month grace period from the penalties. The new law will gradually reach smaller businesses by 2021, with only five sectors including transport and healthcare exempt.

The change will cost Korean businesses an additional Won12tn a year to maintain the same levels of production, according to the Korean Economic Research Institute.

Ruling Democratic party lawmakers and labour unions have welcomed the changes, as the govern- ment hopes that reduced working hours will create jobs and boost productivity. Government officials even believe it will help increase the falling birth rate, which hit a record low last year in the fast ageing society.

“We should make the utmost effort to help the new system take root as it will bring ‘Worabael’ to our society,” said Choo Mi-ae, the ruling party leader.

But the new law is facing opposition especially from small and midsized enterprises suffering from labour shortages. Critics say the change will widen the income gap between workers as those at SMEs, which offer 90 per cent of jobs in Korea, are unable to make up for lower wages with overtime pay.

“Instead of a life with an evening, it can be a life with another part-time job,” the opposition Liberty Korea party said in a statement.

Kim Tae-gi, a professor of economics at Dankook University, said: “For most SMEs, it means rising labour costs and worsening profitability while their workers will have to accept lower pay for reduced working hours.”

The country is home to the longest working hours and highest suicide rate in the developed world.

Source: © The Financial Times Limited 2018.

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 97

MANAGEMENT IN ACTION A Cultural Revolution Is Changing India, One Open-Plan Office at a Time: Office Life Modernisation

The business day used to be a formal affair, with late starts and early finishes for senior staff. But no longer. 63

When Gaurav Chopra set up IndiaLends, his Delhi-based financial services company, he was determined to import some of the relatively informal work culture he had encountered during the eight years he spent in the UK.

Out went office cubicles and in came open-plan seating arrangements. Out went communicating with bosses only via their assistants and in came regular face-to-face meetings.

That was three years ago. But no matter how hard he has tried to encourage colleagues to adopt a more relaxed, western-style of working, he has found some habits impossible to change.

“When I first started at the London School of Economics, I managed to offend some of my profes- sors by calling them ‘Sir’,” he says. “It was a pleasant surprise to me at that time, and so when I started my company in India I asked my employees to call me by my first name.

But even now, some employees still address Mr Chopra as “Sir”, no matter how much he tries to stop them.

The deferential culture he describes is, in part, a legacy of colonial rule that ended in 1947. For nearly 100 years, the British imposed their hierarchical, Victorian-era civil service on the Indian system of government.

In the decades after independence, that culture was copied by private companies. Not only were there strict hierarchies, but also those at the top were allowed to arrive late, leave early and take long lunch breaks — a habit that still exists in many Indian public sector organisations.

“Everyone knows that if a government office says it will open at a certain time, no one will be there by then,” says Mr Chopra. “And if it is due to close at 5pm, you can be sure no one will be in the office by 5.01pm.”

Since the country started to open its markets in the early 1990s, however, corporate office life has changed substantially, with office-based service jobs increasing particularly quickly. In 1991, the year liberalisation started, services accounted for just over 40 per cent of the country’s gross domestic prod- uct. Last year, that figure was about 55 per cent.

The arrival of multinational companies such as Nestlé, Microsoft and Citigroup, coupled with the sudden growth in the IT services sector, brought a new style of corporate workplace and a new way of working. Gone are the late starts and early finishes: a survey by Manpower Group in 2016 found young Indians work harder than anyone else in the world, clocking up an average of 52 hours a week.

“Hard work is generally measured by the number of hours you put in at the office,” says Prakash Rao, chief experience officer at PeopleStrong, a human resources services company. “If you leave on time, your colleagues start to wonder whether you have enough work to do.”

Amit Veer, vice-president of payments at Paytm, a financial technology start-up, says he works from 9.30am to 8pm. “But given that my commute takes one hour 15 minutes in the morning and two hours in the evening, it is a very long day.”

Gone, too, are workspaces strictly segregated by seniority. India’s new breed of start-ups have pio- neered flatter hierarchies and more informal ways of working.

Paytm, for example, has mimicked San Francisco’s culture by creating an open-plan office where Vijay Shekhar Sharma, the chief executive and billionaire company founder, sits among his colleagues at a desk indistinguishable from theirs.

The Indian corporate workplace has now become so established it has been given the ultimate mark of recognition: its own spin-off of the BBC sitcom The Office, the UK programme format that became a hit in the US and eight other countries. Instead of David Brent, regional manager of Wernham Hogg, Indian audiences will watch Jagdeep Chaddha and his colleagues at Wilkins Chawla, a company based in Faridabad, a town outside New Delhi.

Even in the face of rapid technological and cultural change, however, certain elements of the tra- ditional Indian office have remained. The lunch hour, for example, is still an hour. Even in the most dynamic start-ups, workers decamp en masse for their meal.

“Lunchtime is the one unmovable part of the day,” says one western worker in a New Delhi office. “It is where food, office gossip, and complaints about the bosses are all shared.”

Another common feature of the Indian workplace is that there is little, if any, respect for the sepa- ration between work and family life. Employees describe being called up at any time of the day and at weekends, and some are forced to come into the office on a Saturday if they are behind on deadlines.

(Continued)

98 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Mr Rao says: “In my previous job, customers expected to be able to contact me at any time of day or night. There were times when I would get a call at two o’clock in the morning and would be expected to take it.”

Krishna Rathi, general manager of Paytm’s entertainment business, says he does not have a regular day off each week. “Our busiest days are Friday and Saturday, when most people go to the cinema, and I have to be on hand to respond to customers’ problems throughout the weekend.”

Some see a link between such demands and the habit of many senior people in Indian organisations of turning up very late for meetings or not attending at all. “There is no sense of respecting other peo- ple’s time,” Kishore Jayaraman, president of Rolls-Royce in India and south Asia, told the FT this year.

Many Indian start-ups have tried to do away with scheduled meetings altogether. “It is quite an unstructured office,” says Neha Agarwal, general manager of investments at Paytm. “If you want to work with someone, you just walk up to their desk and ask them. And if they are not there, our mobile numbers are all printed above our workstations.”

But the changes brought about by new companies are also causing their own problems for those who are used to more traditional ways of doing business.

“One of the big problems we have is recruiting senior people,” says Mr Chopra. “It takes time for them to understand the workplace we are trying to create.” Candidates, he adds, are often perplexed when they ask which office they will be allocated, and he has to explain “there are none”.

Source: © The Financial Times Limited 2018.

DEVELOPING CULTURAL PROFILES Managers can gather considerable information about cultural variables from current research, personal observation, and discussions with people. From these sources, managers can develop cultural profiles of various countries—composite pictures of working environments, people’s at- titudes, and norms of behavior. As we have previously discussed, these profiles are often highly generalized; many subcultures, of course, may exist within a country. However, managers can use these profiles to anticipate drastic variances in motivation, communication, ethics, loyalty, and individual and group productivity that may be encountered in a given country. More such homework may have helped Walmart’s expansion efforts into Germany and South Korea, from which it withdrew in 2006.

Starbucks is a multinational enterprise that has achieved success in Japan. In 1996, Starbucks opened its first outlet in Japan. Now it has nearly 1,300 outlets in all 47 Japanese prefectures as of August 2017. The Starbucks brand has earned a reputation for “fast-casual coffee shops” in Japan. According to Norio Adachi, a director at Starbucks Coffee Japan Ltd.’s corporate affairs department, the recipe for Starbucks’ ongoing success in Japan has been “respect for the cul- ture of the local community.”64 In a bold initiative to become embedded in the local culture, Starbucks dropped its standard-issue decor in order to establish a Japanese-style coffeehouse in Kyoto in June 2017. 65

Japanese consumers like to try new things . . . so when something new comes from a foreign country, it often gets attention on TV. And people will stand in a long line in front of the store without hesitation. . . But in a market where the next new thing comes and goes in the blink of an eye, a company needs more than just novelty to survive for more than twenty years.66

Norio Adachi, director at Starbucks Coffee Japan Ltd.’s corporate affairs department

It is relatively simple for Americans to pull together a descriptive profile of U.S. culture, even though regional and individual differences exist, because Americans know themselves and because researchers have thoroughly studied U.S. culture. The results of one such study by Harris and Moran are shown in Exhibit 3-4, which provides a basis of comparison with other cultures and, thus, suggests the likely differences in workplace behaviors.

It is not so easy, however, to pull together descriptive cultural profiles of peoples in other countries unless one has lived there and been intricately involved with those people. Still, man- agers can make a start by using what comparative research and literature are available. The ac- companying “Comparative Management in Focus” feature provides brief, generalized country profiles based on a synthesis of research, primarily from Hofstede 67 and England,68 as well as

3-4. To be able to develop a working cultural profile typical of many people within a certain society as an aid to anticipating attitudes toward work, negotiations, and so on

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 99

from numerous other sources.69 These profiles illustrate how to synthesize information and gain a sense of the character of a society—from which implications may be drawn about how to adapt to and learn from that society to manage more effectively. More extensive implications and ap- plications related to managerial functions are drawn in later chapters.

Recent evidence in Japan points to some convergence with Western business culture re- sulting from Japan’s economic contraction and subsequent bankruptcies. Focus on the group, lifetime employment, and a pension has given way to a more competitive business environment with job security no longer guaranteed and an emphasis on performance-based pay. This has led Japan’s salarymen to recognize the need for personal responsibility on the job and in their lives. Although only a few years ago emphasis was on the group, Japan’s long economic slump seems to have caused some cultural restructuring of the individual. Corporate Japan is changing from a culture of consensus and groupthink to one touting the need for an “era of personal responsibil- ity” as a solution to revitalize its competitive position in the global marketplace.70

To tell you the truth, it’s hard to think for yourself . . . [but, if you don’t] . . . in this age of cutthroat competition, you’ll just end up drowning.71

Akio Kuzuoka, an employee for forty years at a Japanese company, Wall sTReeT JouRnal interview

1. Goal and achievement oriented—Americans think they can accomplish anything, given enough time, money, and technology.

2. Highly organized and institutionally minded 3. Freedom-loving and self-reliant—a belief that all persons are equal; they admire self-

made people. 4.

5. Friendly and informal—informal in greeting and dress; a noncontact culture (avoid embracing in public).

6. Competitive and aggressive—driven to achieve and succeed in play and business. 7. Values in transition—traditional family values are undergoing transition. 8. Generosity—Americans are a sharing people.

—a strong work ethic; conscious of time and efficient in doing things. Work-oriented and efficient

ExHIBIT 3-4 Americans at a Glance

Source: Based on excerpts from Managing Cultural Differences by Philip R. Harris and Robert T. Moran, 5th ed. © 2000 by Gulf Publishing Company, Houston, TX.

Comparative Management in Focus Profiles in Culture—Japan, Germany, Latin America

JAPAN The traditional Japanese business characteristics of politeness and deference have left companies without the thrusting culture needed to succeed internationally.72

With intense global competition, many Japanese companies are recognizing the need for more assertiveness and clarity in their business culture to expand abroad. As a result, Japanese employees are recognizing the need to manage their own careers as companies move away

from lifetime employment to be more competitive. Only a handful of large businesses, such as Toyota, Komatsu, and Canon, have managed to become indisputable global leaders by maintaining relationships as a foundation for their operations around the world.73 For the majority of Japanese, the underlying cultural values still predominate—at least for now.

Japanese culture is strong, formal, and largely homogeneous and inculcated to the young through the teachings and expectations conveyed by the extended family. Much of Japanese culture—and the

(Continued)

100 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

basis of working relationships—can be explained by the principle of wa, “peace and harmony.” This principle, embedded in the value the Japanese attribute to amae (“indulgent love”), probably originated in the Shinto religion, which focuses on spiritual and physical harmony. Amae results in shinyo, which refers to the mutual confidence, faith, and honor necessary for successful business relationships. Japan ranks high on pragmatism, masculinity, and uncertainty avoidance and fairly high on power distance. At the same time, much importance is attached to loyalty, empathy, and the guidance of subordinates. The result is a mix of authoritarianism and humanism in the workplace, similar to a family system. These cultural roots are evident in a homogeneous managerial value system, with strong middle management, strong working relationships, strong seniority systems that stress rank, and an emphasis on looking after employees. The principle of wa carries forth into the work group—the building block of Japanese busi- ness. The Japanese strongly identify with their work groups and seek to cooperate with them. The em- phasis is on participative management, consensus problem solving, and decision making with a patient, long-term perspective. Open expression and conflict are discouraged, and it is of paramount importance to avoid the shame of not fulfilling one’s duty. These elements of work culture result in a devotion to work, collective responsibility, and a high degree of employee productivity. In meetings, punctuality is essential; the meeting should start with a bow or handshake, then an exchange of business cards (mei- shi) using both hands, and then reading the card before you put it in your pocket. Titles and last names should be used, and some small talk should take place before business.74 Do not invade the personal space of the Japanese, and avoid any confrontation or nonverbal excess. In addition, it is important to avoid singling out any one Japanese person because it is a group process.

The Japanese culture values patience, or nintai, which, can be used effectively to extract ad- ditional concessions during negotiations with Western companies. From Japan’s history with Confucianism, people tend to be obligation oriented—compared to rights oriented in the USA. That is, a Japanese person’s actions are influenced by obligations of on and giri to others. The need to repay these obligations motivates a Japanese person’s social life. An “on” refers to a lifelong indebt- edness, typically to the emperor, a parent, or a sensai. This form of indebtedness is never considered

China, India, and Indonesia are the first, second, and fourth most populous countries in the world; China alone is home to more than one-fifth of the human race.

The Ural Mountains divide Russia into its European and Asian regions.

Of the top 20 trading nations—based on the sum of imports and exports of goods—7 are countries in East Asia.

High-income nations

Middle-income nations

Low-income nations

Major industrial areas

Capitals

Cities over 5 million

Capitals over 5 million

Sanaa

Riyadh Doha

Muscat Karachi

Kolkata

Dacca Hanoi

Viangchan

Rangoon

Kolkata

Ho Chi Minh City

Phnom Penh

Islamabad

Dushanbe

Lahore

Kabul

Tashkent

Bishkek

Mumbai

Ahmadabad

Jamshedpur

Delhi

Novosibirsk

Ulan Bator

Taiyuan

Harbin

Changchun Shenyang

Pyongyang

Seoul

Wuhan Changsha Taipei

Macáo

Kuala Lumpur

Jakarta

Dili

Tim or

-Le ste

Chengdu

Manila

Guangzhou (Canton)

Chongqing (Chungking)

Shanghai

Beijing (Peking) Tianjin

Kitakyushu

Osaka NagoyaKobe

Tokyo

New Delhi

Colombo

Chennai

Manama

Kuwait

Baghdad

Tehran Ashgabat

Beirut

Ankara

Istanbul

Yerevan Baku

Tbilisi

Damascus

Abu Dhabi

Amman

Jerusalem

Astana

Yekaterinburg Chelyabinsk

INDIA

C H I N A

N. KOREA

TAIWAN

S. KOREA

R U S S I A

K A Z A K H S T A N

M O N G O L I A

JAPAN

IRAN

SAUDI ARABIA

YEMEN OMAN

U.A.E.

QATAR BAHRAIN

KUWAIT

IRAQ

SYRIA AZERBAIJAN

TURKMENISTAN

UZBEKISTAN

TAJIKISTAN

NEPAL BHUTAN

BANG.

MYANMAR LAOS

THAILAND

CAMBODIA

SRI LANKA

PHILIPPINES

BRUNEI

A U S T R A L I A

M A L A Y S I A

VIETNAM

AFGHANISTAN

PAKISTAN

TURKEY ARMENIA

GEORGIA

JORDAN

LEBANON

ISRAEL

KYRGYZ REPUBLIC

SINGAPORE

HONG KONG

BORNEO

KURIL ISLANDS

SUM ATRA

Black Sea

Ca sp

ia n

A r a b i a n S e a

B a y o f

B e n g a l

South China Sea

Celebes Sea

East China Sea

Sea of

Japan

Sea of

Okhotsk

Lake Baikal

Aral Sea

I N D O N

E S

I A

P a c i f i c O c e a n

M e

d iterra

n ea

n Sea

PAPUA NEW GUINEA

MAP 3-2 Japan/Asia

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 101

to be fully repaid. A “giri” refers to short-term obligations to friends, work colleagues, and other per- sons of equal or lower status to oneself.75

Professor Nonaka, a specialist in how companies tap the collective intelligence of their workers, discusses a similar Japanese concept of ba: an interaction among colleagues on the job that leads to knowledge-sharing. He says that

Ba can occur in a work group, a project team, an ad hoc meeting, a virtual e-mail list, or at the frontline point of contact with customers. It serves as a petri dish in which shared insights are cultivated and grown.76

The message is clear that, in Japan, companies that give their employees freedom to interact informally are likely to benefit from new ideas and collaboration.

If we extend this cultural profile to its implications for specific behaviors in the workplace, we can draw a comparison with common American behaviors. Most of those American behaviors seem to be opposite to those of their Japanese counterparts; it is no wonder that many misunderstandings and conflicts in the workplace arise between Americans and Japanese (see Exhibit 3-5). For example, a majority of the attitudes and behaviors of many Japanese stems from a high level of collectivism, compared with a high level of individualism common to Americans. This contrast is highlighted in the center of Exhibit 3-5—“Maintain the group” compared with “Protect the individual.” In addition, the strict social order of the Japanese permeates the workplace in adherence to organizational hierarchy and seniority and in loyalty to the firm. This contrasts markedly with the typical American responses to organizational relationships and duties based on equality. In addition, the often blunt, outspoken American businessperson offends the indirectness and sensitivity of the Japanese, for whom the virtue

Man controlling nature Risk-taking

Bold initiative Spontaneity

Improvisation Outspokenness Critical thinking Logical reasoning

Clarity and frankness Confronting Threatening Decisiveness

Individuality Personal principle

Legal safeguards Individual independence

Protect the individual Righteous indignation

Being heard Chaotic anarchy

Proving oneself Rewarding performance

Track record Specialists

Opportunities Fair effort

Guilt Autonomy

Level playing field Industrial competition

Ambiguous/informal ranking Racial equality Gender equality

Man within nature . . . . . . . . . . . . . . . . . . Caution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Incremental improvement . . . . . . . . . . . . . . . Deliberation . . . . . . . . . . . . . . . . . . . . . . .

Adherence to form . . . . . . . . . . . . . . . Silence . . . . . . . . . . . . . . . . . . .

Memorization . . . . . . . . . . . . . . . . Emotional sensitivity . . . . . . . . . . . .

Indirectness . . . . . . . . . . . . . . . . . . Assuaging . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Avoiding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consensus building . . . . . . . . . . . . . . . . . . . . . . . . . .

Conformity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Group convention . . . . . . . . . . . . . . . . .

Trusted relationships . . . . . . . . . . . . . Collective strength . . . . . . .

Maintain the group . . . . . . Modest resignation . . . . . . . .

Saving face . . . . . . . . . . . . . . . . . . . . . . . Oppressive unanimity . . . . . . . . . . . . . . .

Humble cooperation . . . . . . . . . . . . . . . . . . . . Rewarding seniority . . . . . . . . . . . . . . . . Loyalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Generalists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Obligations . . . . . . . . . . . . . . . . . . . . . . . .

Untiring effort . . . . . . . . . . . . . . . . . . . . . . Shame . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Dependency . . . . . . . . . . . . . . . . . . Dutiful relationships . . . . . . . . . .

Industrial groups . . . . . . . . . . . . Strict ranking . . . . . . . . . . .

Racial differentiation . . . . . . . . . . . . . . . . . . . Gender differentiation . . . . . . . . . . . . . . . . . . . .

Action

Freedom

Equality

Patience

Harmony

Hierarchy

Japanese American

ExHIBIT 3–5 The American-Japanese Cultural Divide

Source: R. G. Linowes, “The Japanese Manager’s Traumatic Entry into the United States: Understanding the American–Japanese Cultural Divide,” Academy of Management Executive 7, No. 4 (1993), p. 24.

(Continued )

102 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

of patience is paramount, causing the silence and avoidance that so frustrates Americans. As a result, Japanese businesspeople tend to think of American organizations as having no spiritual quality and lit- tle loyalty to employees, and they think of Americans as assertive, frank, and egotistic. Their American counterparts, in turn, respond with the impression that Japanese businesspeople have little experience and are secretive, arrogant, and cautious.77 Westerners doing business in Japan need to be aware of the importance of giri—the expectations of reciprocity in relationships and how to behave. Managers should inform themselves in particular about the practice of gift-giving and the relationship of the type of gift suitable for the relative status of the parties involved; gift giving is accepted practice, but make sure it is not too big or it will be an embarrassment and may be considered an attempt to bribe.

GERMANY The reunited Germany is somewhat culturally diverse inasmuch as the country borders several nations. Generally, Germans rank quite high on Hofstede’s dimension of individualism, although their behav- iors seem less individualistic than those of Americans. They score fairly high on uncertainty avoidance and masculinity and have a relatively small need for power distance. These cultural norms show up in the Germans’ preference for being around familiar people and situations; they are also reflected in their propensity to do a detailed evaluation of business deals before committing themselves.

Christianity underlies much of German culture—more than 96 percent of Germans are Catholics or Protestants. This may be why Germans tend to like rule and order in their lives and why there is a clear public expectation of acceptable and unacceptable ways to act. Public signs everywhere in Germany dictate what is allowed or verboten (forbidden). Germans are very strict with their use of time, whether for business or pleasure, frowning on inefficiency or tardiness.

In business, Germans tend to be assertive, but they downplay aggression. Decisions are typi- cally centralized, although hierarchical processes sometimes give way to consensus decision making. However, strict departmentalization is present in organizations, with centralized and final authority at the departmental manager level. Employees do not question the authority of their managers. German companies typically have a vertical hierarchical structure with detailed planning and standardized rules and procedures; the emphasis is on order and control to avoid risk.

In the business setting, Germans look for security, well-defined work procedures, rules, estab- lished approaches, and clearly defined individual assignments. In short, the German business environment is highly structured. “Ordnung” (order) is the backbone of company life.78

What the Germans call Ordnung (the usual translation is “order,” but it is a much broader concept) is the unwritten road map of how to live one’s life. “A group of Germans lined up on an empty street corner, even in the middle of the night, waiting for a light to change before crossing, is one of the favorite first im- pressions taken away by visiting Americans, who are usually jaywalking past as they observe it.”79 For self- reliant Americans, the German adherence to precise rules and regulations is impressive but often stifling.

Hall and Hall describe the German preference for closed doors and private space as evidence of the affinity for compartmentalization in organizations and in their own lives. They also prefer more physical space around them in conversation than do most other Europeans, and they seek privacy so as not to be overheard.80 German law prohibits loud noises in public areas on weekend afternoons. Germans are conser- vative, valuing privacy, politeness, and formality; they usually use last names and titles for all except those close to them. Business interactions are specifically task-focused and not for relationship-building. Meetings are formal and require written documents in both English and German. Deference is given to people of au- thority on both sides. There is a strict protocol, including the order of people entering the room and getting seated (e.g., rank and age). It all requires patience with the protocol and formality, and you should wait to sit until it is indicated to do so. The Germans do not respond well to displays of emotions and promises, and any confrontational behavior will backfire. Once a contract is in place, it will be strictly followed.81

Most Germans prefer to focus on one task or issue at a time, that task taking precedence over other demands; strict schedules are important, as is punctuality, both showing respect for all concerned. Overall, Germany is what Walker et al. call a doing-oriented culture—that is, a task and achievement orientation of work first, pleasure second.82 Such cultures include Switzerland, Germany, Austria, the Netherlands, and the Scandinavian countries. (This compares with being-oriented cultures—such as those of Belgium, France, Greece, Ireland, and most Latin American countries—where the general predisposition is more toward work to live, rather than live to work. Priority is given to affiliation and personal qualities in being-oriented cultures.)

In negotiations, Germans want detailed information before and during discussions, which can become lengthy. They give factors such as voice and speech control much weight. However, since Germany is a low-context society, communication is explicit, and Americans find negotiations easy to understand.83 On the other hand, Germans communicating with businesspeople from a high-context culture such as that in Japan will be perceived as abrupt, insensitive, and indifferent. (Low-context refers to a direct communication style, compared with a high-context, indirect style. This variable

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 103

is further explained in Chapter 4.) Whereas most Asians, for example, will be implicit and indirect, always aware of the need to save face for everyone concerned, most Germans are very direct and straightforward; tact and diplomacy takes second place to voicing their opinions.

LATIN AMERICA Latin America is not one homogeneous area, of course; rather, it comprises many diverse, indepen- dent nations (most commonly referred to as those territories in the Americas where the Spanish or Portuguese languages prevail: Mexico; most of Central and South America; and Cuba, the Dominican Republic, and Puerto Rico in the Caribbean). Businesspeople are most likely to go to the rapidly developing economies of Chile and Brazil and, of course, to Mexico. (Portuguese is the language in Brazil.) Christianity—predominantly Roman Catholicism—prevails throughout Latin America. Latin America is the second most important emerging area economically, after Southeast Asia, with a GDP about half of China’s and three times that of India.84

For our purposes here, although we acknowledge some regional cultural differences, we can draw upon the similarities of Latin American culture and business practices as a starting point in de- veloping a helpful profile. Indeed, Latin America is relatively homogeneous culturally. Some of these generalities are discussed in the following paragraphs.

Using Hofstede’s dimensions, we can generalize that most people are high on power distance and uncertainty avoidance, fairly high on masculinity, low on individualism, and tend to have a compara- tively short-term orientation toward planning.

Latin Americans are typically being-oriented—with a primary focus on relationships and enjoy- ing life in the present—as compared with the doing-oriented German (and mostly Western) culture discussed earlier. For Latin Americans, work lives and private lives are much more closely integrated than those of Westerners, so they emphasize enjoying life and have a more relaxed attitude toward work; because of that, Westerners often stereotype them as lazy rather than realizing that it is simply a different attitude toward the role of work in life. Connected with that attitude is the tendency to be rather fatalistic—that is, a feeling that events will be determined by God—rather than a feeling of their own control or responsibility for the future.

Most people in those countries have a fluid orientation toward time and tend to be multifocused, as discussed earlier in this chapter. Planning, negotiations, and scheduling take place in a relaxed and loose time framework; those processes take second place to building a trusting relationship and reaching a satisfactory agreement.85 Communication is based on their high-context culture (this concept is discussed further in Chapter 4). This means that communication tends to be indirect and implicit, based largely on nonverbal interactions and the expectation that the listener draws infer- ence from understanding the people and the circumstances without the need to be blunt or critical. Westerners need to take time, to be subtle and tactful, and to be incremental in discussing business to avoid being viewed as pushy and thus cutting off the relationship. Maintaining harmony and sav- ing face is very important, as is the need to avoid embarrassing the other people involved. Managers must avoid any public criticism of employees, and any reprimand should be by way of suggestion.

Communication is also very expressive and demonstrative; courtesy, formality, and good manners are respected and lead to very complimentary and hospitable expressions to guests. Latin Americans tend to stand closer and touch more often than most Westerners, exuding the warmth and hospitality that is typical in the region.

Hierarchy prevails in all areas of life, from family to institutions such as government and the workplace. Each level and relationship is expected to show deference, honor, and respect to the next person or level. Status is conveyed by one’s position and title and the formality of dress and etiquette. Traditional managers have the respect of their position and are typically autocratic and paternal. Loyalty is to the superior as a person. Employees expect to be assigned tasks with little participation involved, although younger managers who have been educated in Europe or the United States are starting to delegate. However, although most Latin Americans can show some flexibility in structure, Chile is probably the most order-oriented country; managers there are very high on uncertainty avoid- ance and try hard to minimize risk and strictly adhere to social and business norms.86

Relationships have priority whether among family, friends, or business contacts. Loyalty among family and friends leads to obligations, and often nepotism, which can lead to varying levels of qual- ity in the work performance and less initiative than a Western businessperson might expect. Business is conducted through social contacts and referrals—that is, success does not depend as much on what you know as on whom you know. Latin Americans do business with people with whom they develop a trusting relationship, so it behooves businesspeople, here as in much of the world, to take time to develop a friendly, trusting relationship before getting down to business.

Western managers need to develop a warm attitude toward employees and business contacts and cultivate a sense of family at work; they should communicate individually with employees and colleagues and develop a trusting relationship.

104 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

CULTURE AND MANAGEMENT STYLES AROUND THE WORLD As an international manager, after you have researched the culture of a country in which you may be going to work or do business, and after you have developed a cultural profile, it is useful then to apply that information to develop an understanding of the expected management styles and ways of doing business that predominate in that region or in that type of business setting. The nearby feature, “Under the Lens: Doing Business in Brazil—Language, Culture, Customs, and Etiquette,” illustrates the relationship between culture and management. Two further examples then follow in the sections titled “Saudi Arabia” and “Chinese Small Family Businesses.”

3-5. To gain some insight into different management styles around the world

UNDER THE LENS Doing Business in Brazil—Language, Culture, Customs, and Etiquette

FIGURE 3-3 Christ the Redeemer statue overlooking Rio de Janeiro

Source: michaeljung/Shutterstock

FIGURE 3-4 Brazilian Flag

Source: CPJ Photography/Fotolia

FACTS AND STATISTICS

Location Eastern South America bordering Argentina, 1,224 km; Bolivia, 3,400 km; Colombia, 1,643 km; French Guiana, 673 km; Guyana, 1,119 km; Paraguay, 1,290 km; Peru, 1,560 km; Suri- name, 597 km; Uruguay, 985 km; and Venezuela, 2,200 km

Capital Brasília

Climate Mostly tropical but temperate in south

Population 210,867,954 (2018 est.)

Ethnic Makeup White (includes Portuguese, German, Italian, Spanish, and Polish) 55%; mixed white and black, 38%; black, 6%; other (includes Japanese, Arab, Amerindian), 1%

Religions Christianity 87%

Government Federative republic

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 105

LANGUAGE IN BRAZIL

Language is one of the strongest elements of Brazil’s national unity. Nearly 100 percent of the population speaks Portuguese. The only exceptions are some members of Amerindian groups and pockets of immigrants, primarily from Japan and South Korea, who have not yet learned Portuguese. The principal families of Indian languages are Tupí, Arawak, Carib, and Gê.

There is about as much difference between the Portuguese spoken in Brazil and that spoken in Portugal as between the English spoken in the United States and that spoken in the United Kingdom. Within Brazil, there are no dialects of Portuguese, only moderate regional variation in accent, vocabulary, and use of personal nouns, pronouns, and verb conjugations. Variations tend to diminish because of mass media, especially the national television net- works that the majority of Brazilians view.

BRAZILIAN SOCIETY AND CULTURE

Brazilian Diversity

• Brazil is a mixture of races and ethnicities, resulting in rich diversity.

• Many original Portuguese settlers married native women, which created a new race called “mestizos.”

• “Mulattoes” are descendants of the Portuguese and African slaves.

• Slavery was abolished in 1888, creating, over time, a further blurring of racial lines.

• Unlike many other Latin American countries that have a distinct Indian population, Brazilians have intermarried to the point that it sometimes seems that almost everyone has a combination of European, African, and indigenous ancestry.

BRAZILIAN FAMILY VALUES

• The family is the foundation of the social structure and forms the basis of stability for most people.

• Families tend to be large (although family size has been diminishing in recent years), and the extended family is quite close.

• The individual derives a social network and assistance in times of need from the family.

• Nepotism is considered a positive thing because it implies that employing people one knows and trusts is of primary importance.

ETIQUETTE AND CUSTOMS IN BRAZIL

Meeting Etiquette

• Men shake hands while maintaining steady eye contact when greeting one another.

• Women generally kiss each other, starting with the left and alternating cheeks.

• Hugging and backslapping are common greetings among Brazilian friends.

• If a woman wishes to shake hands with a man, she should extend her hand first.

Gift-Giving Etiquette

• If invited to a Brazilian’s house, bring the hostess flowers or a small gift.

• Orchids are considered a very nice gift, but avoid purple ones.

• Avoid giving anything purple or black, because these are mourning colors.

• Handkerchiefs are also associated with funerals, so they do not make good gifts.

• Gifts are opened when received.

(Continued )

106 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Dining Etiquette

If you are invited to a Brazilian’s house:

• Arrive at least 30 minutes late if the invitation is for dinner.

• Arrive up to an hour late for a party or large gathering.

• Brazilians dress with a flair and judge others on their appearance. Casual dress is more formal than in many other countries. Always dress elegantly and err on the side of overdressing rather than underdressing.

• If you did not bring a gift to the hostess, flowers the next day are always appreciated.

BUSINESS ETIQUETTE AND PROTOCOL IN BRAZIL

Relationships and Communication

Brazilians need to know whom they are doing business with before they can work effectively.

• Brazilians prefer face-to-face meetings to written communication because it allows them to know the person with whom they are doing business.

• The individual they deal with is more important than the company.

• Because this is a group culture, it is important not to do anything to embarrass a Brazilian.

• Criticizing an individual causes that person to lose face with the others in the meeting.

• The person making the criticism also loses face because he or she has disobeyed the unwritten rule.

• Communication is often informal and does not rely on strict rules of protocol. Those who feel they have something to say will generally add their opinion.

• It is considered acceptable to interrupt someone who is speaking.

• Face-to-face, oral communication is preferred over written communication. At the same time, when it comes to business agreements, Brazilians insist on drawing up de- tailed legal contracts.

• Lunch is a very important meal in Brazil. It is a great way to build relationships with coworkers and clients.

Business Negotiations

• Expect questions about your company because Brazilians are more comfortable doing business with people and companies they know.

• Wait for your Brazilian colleagues to raise the business subject. Never rush the relationship-building time.

• Brazilians take time when negotiating. Do not rush them or appear impatient.

• Expect a great deal of time to be spent reviewing details.

• Often, the people you negotiate with will not have decision-making authority.

• It is advisable to hire a translator if your Portuguese is not fluent.

• Use local lawyers and accountants for negotiations. Brazilians resent an outside legal presence.

• Brazilian business is hierarchical. Decisions are made by the highest-ranking person.

• Brazilians negotiate with people, not companies. Do not change your negotiating team or you may have to start over from the beginning.

Business Meeting Etiquette

• Business appointments are required and can often be scheduled on short notice; how- ever, it is best to make them 2 to 3 weeks in advance.

• Confirm the meeting in writing. It is not uncommon for appointments to be canceled or changed at the last minute.

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 107

• In São Paulo and Brasília, it is important to arrive on time for meetings. In Rio de Janeiro and other cities, it is acceptable to arrive a few minutes late for a meeting.

• Do not appear impatient if you are kept waiting. Brazilians see time as something out- side their control, and the demands of relationships take precedence over adhering to a strict schedule.

• Meetings are generally rather informal.

• Expect to be interrupted while you are speaking or making a presentation.

• Avoid confrontations. Do not appear frustrated with your Brazilian colleagues.

DRESS ETIQUETTE

• Brazilians pride themselves on dressing well.

• Men should wear conservative, dark-colored business suits. Three-piece suits typically indicate that someone is an executive.

• Women should dress appropriately for the situation.

BUSINESS CARDS

• Business cards are exchanged during introductions with everyone at a meeting.

• It is advisable, although not required, to have the other side of your business card translated into Portuguese.

• Present your business card with the Portuguese side facing the recipient.

Sources: https://thebrazilbusiness.com/article/dining-culture-in-brazil, August 20, 2020. https://www.brazil. org.za/traditional-customs.html, August 20, 2020. https://www.everyculture.com/Bo-Co/Brazil.html, August 20, 2020. www.kwintessential.co.uk/resources/global-etiquette/brazil-country-profile.html, September 5, 2011. Used with permission of www.kwintessential.co.uk.

Saudi Arabia Understanding how business is conducted in the modern Middle East requires an understand- ing of the Arab culture because the Arab peoples are the majority there, and most of them are Muslim. As discussed in the opening profile, the Arab culture is intertwined with the pervasive influence of Islam. Even though not all Middle Easterners are Arab, Arab culture and management style predominate in the Arabian Gulf region. Shared culture, religion, and language underlie behavioral similarities throughout the Arab world. Islam permeates Saudi life—Allah is always present, controls everything, and is frequently referred to in conversa- tion.87 Employees may spend more than two hours a day in prayer as part of the life pattern that intertwines work with religion, politics, and social life.

Arab history and culture are based on tribalism, with its norms of reciprocity of favors, support, obligation, and identity passed on to the family unit, which is the primary structural model. Family life is based on closer personal ties than in the West. Arabs value personal rela- tionships, honor, and saving face for all concerned; these values take precedence over the work at hand or verbal accuracy. Outsiders must realize that establishing a trusting relationship and respect for Arab social norms has to precede any attempts at business discussions. Honor, pride, and dignity are at the core of shame societies such as the Arabs. As such, shame and honor pro- vide the basis for social control and motivation.88 Circumstances dictate what is right or wrong and what constitutes acceptable behavior.

Saudi business culture generally tends to avoid displays of what could be considered weak- ness. It is sometimes difficult for Westerners to get at the truth because of the Arab need to avoid showing weakness; instead, Arabs present a desired or idealized situation. Shame is also brought on someone who declines to fulfill a request or a favor; therefore, a business arrangement is left open if something has yet to be completed.

The communication style of Middle Eastern societies is high context (that is, implicit and indirect), and their use of time is polychronic; many activities can be taking place at the same time, with constant interruptions commonplace. The imposition of deadlines is considered rude, and

108 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

business schedules take a backseat to the perspective that events will occur sometime when Allah wills (bukra insha Allah). Arabs give primary importance to hospitality; they are cordial to business associates and lavish in their entertainment, constantly offering strong black coffee (which you should not refuse) and banquets before considering business transactions. Westerners must realize the importance of personal contacts and networking, socializing and building close relationships and trust, practicing patience regarding schedules, and doing business in person. Exhibit 3-6 gives some selected actions and nonverbal behaviors that may offend Arabs. The relationship between cultural values and norms in Saudi Arabia and managerial behaviors is illustrated in Exhibit 3-7.

• Introducing business subjects too soon. • Commenting on a man’s wife or female children over 12 years of age. • Raising colloquial questions that may be considered as an invasion of privacy. • Using disparaging or swear words and off-color or obscene attempts at humor. • Talking about religion, politics, or Israel. • Bringing gifts of alcohol or using alcohol, which is prohibited in Saudi Arabia. • Requesting favors from those in authority or esteem, for it is considered impolite for

Arabs to say no. • Pointing your finger at someone or showing the soles of your feet when seated.

ExHIBIT 3-6 Behavior That Will Likely Cause Offense in Saudi Arabia

Source: Based on excerpts from P. R. Harris and R. T. Moran, Managing Cultural Differences, 5th ed. (Houston: Gulf Publishing, 2000).

Cultural Values Managerial Behaviors

Tribal and family loyalty Work group loyalty Paternal sociability

Careful selection of employees Nepotism

Arabic language Business as an intellectual activity Access to employees and peers Management by walking around Conversation as recreation

Close and warm friendships People orientation Theory Y management Avoidance of judgment

Islam Sensitivity to Islamic virtues Observance of the Qur’an and Sharia

Work as personal or spiritual growth Adherence to norms

Honor and shame Conflict avoidance Positive reinforcement Private correction of mistakes Avoidance of competition Responsibility

Polychronic use of time Right- and left-brain facility Action oriented

Patience and flexibility Male domination Separation of sexes

Open work life; closed family life

ExHIBIT 3-7 The Relationship between Culture and Managerial Behaviors in Saudi Arabia

Source: Based on excerpts from P. R. Harris and R. T. Moran, Managing Cultural Differences, 5th ed. (Houston: Gulf Publishing, 2000).

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 109

Chinese Family Small Businesses The predominance of small businesses in China and the region highlights the need for manag- ers from around the world to gain an understanding of how such businesses operate. Many small businesses—most of which are family or extended-family businesses—become part of the value chain (suppliers, buyers, retailers, etc.) within industries in which foreign firms may compete.

Some specifics of Chinese management style and practices in particular are presented here as they apply to small businesses. (Further discussion of the Chinese culture continues in Chapter 5 in the context of negotiation.) It is important to note that no matter the size of a Chinese company, but especially in small businesses, it is the all-pervasive presence and use of guanxi that facilitate business transactions in China. Guanxi means “connections”— the network of relationships the Chinese cultivate through friendship and affection; it entails the exchange of favors and gifts to provide an obligation to reciprocate favors. Those who share a guanxi network share an unwritten code.89 The philosophy and structure of Chinese businesses comprise paternalism, mutual obligation, responsibility, hierarchy, familialism, personalism, and connections. Autocratic leadership is the norm with the owners using their powers—but caring for people may predominate over efficiency.

According to Lee, the major differences between Chinese management styles and those of their Western counterparts are human-centeredness, family-centeredness, centralization of power, and small size.90 Their human-centered management style puts people ahead of a business relationship and focuses on friendship, loyalty, and trustworthiness.91 The fam- ily is extremely important in Chinese culture, and any small business tends to be run like a family.

Globalization has resulted in ethnic Chinese businesses (in China or other Asian countries) adapting to more competitive management styles. They are moving away from the traditional centralized power structure in Chinese organizations that comprised the boss and a few family members at the top and the employees at the bottom, with no ranking among the workers. In fact, family members no longer manage many Chinese businesses. Frequently, the managers are those sons and daughters who have studied and worked overseas before returning to the family company—or even foreign expatriates. Examples of Chinese capitalism responding to change and working to globalize through growth are Eu Yan Sang Holdings Ltd., the Hiap Moh Printing businesses, and the Pacific International Line.92

As Chinese firms in many modern regions in the Pacific Rim seek to modernize and com- pete locally and globally, a tug of war has begun between the old and the new: the traditional Chinese management practices and the increasingly imported Western management styles. As Lee discusses, this struggle is encapsulated in the different management perspectives of the old and young generations. A two-generational study of Chinese managers by Ralston et al. also found generational shifts in work values in China. They concluded that the new generation man- ager is more individualistic, more independent, and less risk averse in the pursuit of profits. However, they also found the new generation holding on to their Confucian values, concluding that the new generation may be viewed as “crossverging their Eastern and Western influences, while on the road of modernization.”93

CONCLUSION This chapter has explored various cultural values and how managers can be prepared to un- derstand them with the help of some general cultural profiles. The following chapters focus on application of this cultural knowledge to management in an international environment (or, alternatively in a domestic multicultural environment)—especially as relevant to cross-cultural communication (Chapter 4), negotiation and decision making (Chapter 5), and motivating and leading (Chapter 11). Culture and communication are essentially synonymous. What happens when people from different cultures communicate, and how can international managers under- stand the underlying process and adapt their styles and expectations accordingly? For the an- swers, read the next chapter.

110 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

3-1. What is meant by the culture of a society, and why is it im- portant for international managers to understand it? Do you notice cultural differences among your classmates? How do those differences affect the class environment? How do they affect your group projects?

3-2. Discuss the types of operational conflicts that could occur in an international context because of different attitudes toward time, change, material factors, and individualism. Give examples relative to specific countries.

Discussion Questions

3-3. Discuss how the Internet and culture interact. Which most af- fects the other, and how? Give some examples.

3-4. Discuss collectivism as it applies to the Japanese workplace. What managerial functions does it affect?

3-5. Discuss the role of Islam in cross-cultural relations and business operations.

■ The culture of a society comprises the shared values, un- derstandings, assumptions, and goals that are passed down through generations and imposed by members of the soci- ety. These unique sets of cultural and national differences strongly influence the attitudes and expectations—and therefore the on-the-job behavior—of individuals and groups.

■ Managers must develop cultural sensitivity to antici- pate and accommodate behavioral differences in vari- ous societies. As part of that sensitivity, they must avoid parochialism—an attitude that assumes one’s own management techniques are best in any situation or location and that other people should follow one’s patterns of behavior.

■ From his original research in 50 countries, Hofstede proposed four underlying value dimensions that help identify and describe the cultural profile of a country and affect organizational processes: power distance, uncertainty avoidance, individualism, and masculin- ity. In his later research, Hofstede explored the con- cept of Confucian Dynamism (i.e., long-term versus

Summary of Key Points

short-term orientation) to explain the cultural varia- tion of the types of decisions people make.

■ Through his research, Fons Trompenaars confirmed some similar dimensions and found other unique di- mensions: obligation, emotional orientation, privacy, and source of power and status.

■ The GLOBE project team of 170 researchers in 62 countries concluded the presence of a number of other dimensions and ranked countries on those di- mensions, including assertiveness, performance ori- entation, future orientation, and humane orientation. Gupta et al. from that team found geographical clusters on nine of the GLOBE project cultural dimensions.

■ On-the-job conflicts in international management fre- quently arise out of conflicting values and orientations re- garding time, change, material factors, and individualism.

■ Managers can use research results and personal ob- servations to develop a character sketch, or cultural profile, of a country. This profile can help managers anticipate how to motivate people and coordinate work processes in a particular international context.

3-6. Develop a cultural profile for one of the countries in the fol- lowing list. Form small groups of students and compare your findings in class with those of another group preparing a pro- file for another country. Be sure to compare specific findings regarding religion, kinship, recreation, and other subsystems. What are the prevailing attitudes toward time, change, mate- rial factors, and individualism?

Republic of South Africa

People’s Republic of China

Mexico

France

India

Application Exercises

3-7. In small groups of students, research Hofstede’s findings regard- ing the four dimensions of power distance, uncertainty avoid- ance, masculinity, and individualism for one of the following countries in comparison to the United States. (Your instructor can assign the countries to avoid duplication.) Present your find- ings to the class. Assume you are a U.S. manager of a subsid- iary in the foreign country and explain how differences on these dimensions are likely to affect your management tasks. What suggestions do you have for dealing with these differences in the workplace? Now assume you are a Brazilian manager.

Italy

Denmark

South Korea

Russia

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 111

3-8. A large Baltimore manufacturer of cabinet hardware had been working for months to locate a suitable distributor for its products in Europe. Finally invited to present a demonstra- tion to a reputable distributing company in Frankfurt, it sent one of its most promising young executives, Fred Wagner, to make the presentation. Fred not only spoke fluent German but also felt a special interest in this assignment because his pa- ternal grandparents had immigrated to the United States from the Frankfurt area during the 1920s. When Fred arrived at the conference room where he would be making his presentation, he shook hands firmly, greeted everyone with a friendly guten tag, and even remembered to bow the head slightly as is the German custom. Fred, an effective speaker and past president of the Baltimore Toastmasters Club, prefaced his presentation with a few humorous anecdotes to set a relaxed and receptive atmosphere. However, he felt that his presentation was not well received by the company executives. In fact, his instincts were correct, for the German company chose not to distribute Fred’s hardware products. What went wrong?

3-9. Bill Nugent, an international real estate developer from Dallas, had made a 2:30 P.M. appointment with Mr. Abdullah, a high-ranking government official in Riyadh, Saudi Arabia. From the beginning, things did not go well for Bill. First, he was kept waiting until nearly 3:45 P.M. before he was ushered into Mr. Abdullah’s office. When he finally did get in, several other men were also in the room. Even though Bill felt that he wanted to get down to busi- ness with Mr. Abdullah, he was reluctant to get too specific because he considered much of what they needed to discuss sensitive and private. To add to Bill’s sense of frustration, Mr. Abdullah seemed more interested in engaging in mean- ingless small talk than in dealing with the substantive issues concerning their business. How might you help Bill deal with his frustration?

Experiential Exercises

3-10. Tom Forrest, an up-and-coming executive for a U.S. elec- tronics company, was sent to Japan to work out the details of a joint venture with a Japanese electronics firm. During the first several weeks, Tom felt that the negotiations were pro- ceeding better than he had expected. He found that he had very cordial working relationships with the team of Japanese executives, and in fact, they had agreed on the major policies and strategies governing the new joint venture. During the third week of negotiations, Tom was present at a meeting held to review their progress. The meeting was chaired by the president of the Japanese firm, Mr. Hayakawa, a man in his mid-forties, who had recently taken over the presi- dency from his 82-year-old grandfather. The new president, who had been involved in most of the negotiations during the preceding weeks, seemed to Tom to be one of the stron- gest advocates of the plan that had been developed to date. Hayakawa’s grandfather, the recently retired president, also was present at the meeting. After the plans had been dis- cussed in some detail, the octogenarian past president pro- ceeded to give a long soliloquy about how some of the fea- tures of this plan violated the traditional practices on which the company had been founded. Much to Tom’s amazement, Mr. Hayakawa did nothing to explain or defend the policies and strategies that they had taken weeks to develop. Feeling extremely frustrated, Tom then gave a fairly strong argument in defense of the plan. To Tom’s further amazement, no one else in the meeting spoke up in defense of the plan. The ten- sion in the air was quite heavy, and the meeting adjourned shortly thereafter. Within days, the Japanese firm completely terminated the negotiations on the joint venture. How could you help Tom understand better this bewildering situation?

Source: Gary P. Ferraro, The Cultural Dimensions of International Business, 2nd ed. (Upper Saddle River, NJ: Prentice Hall, 1994).

CASE STUDY An Australian Manager in an American Company

“Qantas Flight 23 to Sydney is now boarding. Please have your boarding passes and passports ready for the attendant at the gate.”

Les Collins picked up his briefcase and started toward the jet way. He paused to look around the waiting area and, as had been the case so often here in Houston, he saw nothing to indicate that he was in a foreign country. Certainly the accents were different from in Sydney, but the language was English and readily understandable. This superficial familiarity, he concluded, must help ex- plain why he had had difficulties adjusting to his role at the Global Oil Company office in Houston.

Global Oil Company, or GOC, was headquartered in Houston, Texas, with partners and sub- sidiaries in countries around the world. Les had worked at GOC’s Sydney office for eight years before being offered the chance to work at Houston headquarters for two years. His boss, Jim Branson, had encouraged Les to apply for the job in Houston because he knew it would enhance Les’s chances for promotion within GOC-Australia. Although Les’s family—his wife and two middle school-age children—was not very enthusiastic about the move, he reluctantly applied for the job because he knew it was critical to his success at GOC.

As he settled back in his seat on the flight to Sydney, Les thought back to the day he arrived in Houston over a year ago. Les had left Sydney on a hot, humid day in January and arrived 30 hours later to find Houston almost closed down due to a sleet and ice storm. That juxtaposition of

112 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

seasons probably should have alerted him that there would be many differences between Australia and the United States. When he hailed a taxi outside the terminal at IAH, the driver looked at him in amazement when Les opened the door to the front seat and sat down next to the driver.

During his first few weeks at the Houston office, everything seemed to go well. He met with his staff to introduce himself and his goals for his two-year assignment. Everyone seemed friendly enough, although he didn’t get much feedback at that meeting or in subsequent meet- ings on his request for their ideas and input on how he could fit in and be effective. Thinking that maybe he needed to get to know the staff in a more informal setting, he invited them to join him after work one day at a local pub. Several staff members begged off, citing personal com- mitments, and the three senior managers who did come were clearly uncomfortable and left after about 30 minutes of awkward conversation.

Over the next six months, Les stayed busy learning operations for his area at GOC head- quarters. He met often with his Houston boss, Tom Sanchez, to discuss the changes Tom wanted Les to help him realize during his tenure there.

“I’m counting on you, Les, to help me bring the staff around on the changes we’ve dis- cussed. Your group hasn’t moved nearly as fast as I think they could and that’s partly due to the staff’s reluctance to change the ways they’ve always done things. I’m confident that a new leader, especially someone from a completely different country, will convince them of the sound- ness of what I’m proposing.

“Keep me posted on your progress,” Tom concluded, as he walked Les to the reception area outside his office.

One of the things Les noticed soon after arriving in Houston was how many more manage- ment levels the U.S. operation had than comparable offices in Australia. The hierarchy seemed excessive to Les, and he sought to break down some of the communication barriers he perceived by meeting with all staff members in one large meeting.

At one of these meetings, Les brought up the proposed changes in procedures that he had discussed with Sanchez. “I know that some of you may not be in favor of the changes we’re pro- posing and I’d like to know your reasons for this. Let’s have an open discussion of the changes in general and see where our major disagreement lies.”

After a few minutes of silence, one of the senior managers explained his reasons for resisting a change in their reporting procedures for expenses. “I’m not sure that the new method will capture a true picture of expenses and outlay if we change what we’re doing now. I’m not opposed to mak- ing changes that improve our work—I just am not convinced that the new method will be better.”

“Okay, I’d like to hear from others on that specific change. Let’s table this discussion,” Les said. The managers and staff at the table looked at each other in confusion at that point. No

one said anything for several minutes, and Les concluded that no one else had an objection or concern on this particular point. The meeting continued for another hour as Les moved through the list of changes he was charged with making and when no one offered much objection or proposed any alternatives, he concluded that his predecessor and Sanchez had misinterpreted the staff’s resistance to the changes.

A week later, in a meeting with Bill Crosby, one of the senior managers in his department, Les decided to get his manager’s views on how to involve junior managers in decisions and how to encourage their ideas on various topics.

“I notice that in most meetings only the senior managers seem to participate in discussions,” Les began. “I’m eager to have more input on some ideas I have for a new marketing plan, and I’m wondering how I can get junior managers and staff to contribute in our meetings.”

Bill hesitated before saying, “Sometimes staff are reluctant to put forward ideas when their bosses are in the same meeting. Perhaps you should have some of the senior managers solicit ideas in their own staff meetings and then bring these to the meeting with you.”

“But what about the synergy we can create if we have people from different levels discussing an idea together? Especially if the idea will affect the work staff are expected to do. I think there’s too much separation of people by level in our department. I’d like to eliminate some of the impediments to collaboration that hierarchy creates,” Les said. “What are your thoughts on how to do that?”

“I’ll need to take some time to think about that,” Bill said. “Maybe we can talk about it in our next one-on-one.”

Later that day, during lunch with one of his peers in the company cafeteria, Bill brought up his discussion with Les. “He wants to eliminate some of the barriers that the hierarchy puts in

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 113

the way of collaboration,” Bill began. “What exactly do you think he means by collaboration? We all get along just fine as far as I can see. We cooperate when we need to. And I really don’t know how to get staff to speak their minds if they don’t want to. I don’t feel comfortable forcing anybody to be part of a discussion in a meeting if they prefer to just listen.”

At the next all-staff meeting, Les began by handing out a sheet with five topics on it. “Rather than following one of our regular agendas today, I thought we might do a little brainstorming on the topics I’ve outlined here. As you can see, these topics all relate to marketing, and what we come up with in our discussion can go a long way toward finalizing that plan.

“And here’s a twist on our usual meeting protocol: instead of my leading the discussion, I’m going to assign one of these topics to five people and let you take over the discussion.”

In thinking about the meeting afterward, Les decided that although it hadn’t been a complete success, he thought he had made some progress in getting increased participation. When one of the senior managers requested a meeting a couple of days later, Les was surprised at the man- ager’s comments about the meeting.

“I’m sure you were sincere in your request for ideas from everybody but I need to tell you that you made a lot of people very uncomfortable. Staff are not used to leading a discussion with senior managers present. When that staff member is leading a brainstorming session and has to tell a manager that he’s out of order because he’s criticizing someone’s idea, you’re putting the staff member in a really awkward position.”

“I guess I don’t understand,” Les said. “The whole point of doing what I did was to break down the barriers that make people feel uncomfortable. I think everybody has good ideas, and I’m trying to figure out how I can get them to share those ideas. I thought putting people in dif- ferent roles would be helpful.”

At his next meeting with Tom Sanchez, Les expressed his frustration with achieving as much as he hoped for when he started.

“It just seems as though I’m being stonewalled at every turn. In fact, I’ve heard that several people are thinking of transferring to another department,” Les said. “What am I missing? I’ve done things just like I do at GOC-Sydney, but the results are not the same.

“Maybe I can make some progress when I get back after vacation. Sometimes three weeks away helps give a different perspective on things.”

“Yes, Les,” Tom began, “we’ll need to talk about this when you get back from vacation. Three weeks is a pretty long time for a senior manager to be gone, but I know you and your family have plans to visit a lot of the national parks in the west, so I reluctantly approved your request. Have a good trip and I’ll talk with you when you get back.”

When Les returned from vacation, Tom Sanchez was out of the office for a week and they didn’t have a chance to meet before Les got word that his mother had passed away suddenly and that he needed to return to Sydney for the funeral. As he headed for Sydney, Les wondered how he could explain to his former boss in Sydney the problems he was having at GOC headquarters.

Case Questions

3-11. Using Geert Hofstede’s cultural characteristics, compare Australia and the United States on various measures. As you’ll see, the two countries are fairly similar, but there are some differences that may help explain Les Collins’s apparent lack of success in the American setting. Which of these do you think is the most significant and why?

3-12. What could GOC have done to prepare Collins for his assignment in the United States? Outline an action plan for companies to use in preparing executives—and their families—for international assignments.

3-13. Articulate and evaluate your own opinion about the degree of distance prevalent in U.S. com- panies between managers and their direct reports. Who is protected by this management style? What adverse organizational impacts might result from this style?

Source: Linda Catlin. Ms Catlin is an organizational anthropologist and the co-author of International Business: Cultural Sourcebook and Case Studies. She consults with clients on projects related to crosscul- tural business communications, organizational culture, and organizational change dynamics. Her clients include the Mayo Clinic, the Kellogg Foundation, General Motors, Ascension Health, and BASF. Linda Catlin, Claymore Associates. Used with permission.

114 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Endnotes

1. Ian Black, “Saudi Digital Generation Takes on Twitter, YouTube, . . . and the Authorities,” Guardian, December 17, 2013; Helen Gaskell, “Saudi Arabia Reviews Social Media Laws,” ArabianBusiness.com, June 3, 2014, www.socialmedia -series.com/saudi/(accessed October 1, 2014); “A Virtual Revolution; Social Media in Saudi Arabia,” Economist, 412, 8904, 57, September 13, 2014; Statista, www.statista.com /statistics/284451/saudi-arabia-social-network-penetration/ (ac- cessed October 1, 2014); Saudi Social Media Summit, www .socialmedia-series.com/saudi/(accessed October 1, 2014); “Social Media Plays Matchmaking Role in Saudi Arabia,” February 11, 2014, www.al-monitor.com/pulse/culture/2014/03/ social-media-saudi-breaking-barriers.html##ixzz3FCdKXc5r (accessed October 3, 2014).

2. www.internetworldstats.com/middle.htm#sa 3. Kareem Fahim, “Saudi Arabia allows women to travel without

permission from men” The Washington Post, August 2, 2019. 4. P. C. Earley and E. Mosakowski, Cultural Intelligence. Harvard

Business Review 82, No. 10 (October 2004), pp. 139–146. 5. P. C. Earley and S. Ang, Cultural Intelligence: Individual Interactions

across Cultures (Palo Alto, CA: Stanford University Press, 2003). 6. David A. Ricks, Big Business Blunders: Mistakes in Multinational

Marketing (Homewood, IL: Dow Jones–Irwin, 1983). 7. Carla Joinson, “Why HR Managers Need to Think Globally,” HR

Magazine (April, 1998), pp. 2–7. 8. Ibid. 9. J. Stewart Black and Mark Mendenhall, Cross-Cultural Training

Effectiveness: A Review and a Theoretical Framework for Future Research. Academy of Management Review 15, No. 1 (1990), pp. 113–136.

10. A. Bartolome, “Business Mentor: How Cultural Differences Affect Doing Business,” ABS CBN News, July 1, 2017, https://news. abs-cbn.com/business/06/30/17/business-mentor-how-cultural -differences-affect-doing-business (accessed December 31, 2018).

11. Geert Hofstede, Culture’s Consequences: International Differences in Work-Related Values (Beverly Hills, CA: Sage Publications, 1980), p. 25; E. T. Hall, The Silent Language (Greenwich, CT: Fawcett, 1959). For a more detailed definition of the culture of a society, see A. L. Kroeber and C. Kluckholhn, “A Critical Review of Concepts and Definitions,” in Peabody Museum Papers 47, No. 1 (Cambridge, MA: Harvard University Press, 1952), p. 181.

12. David Dressler and Donald Carns, Sociology: The Study of Human Interaction (New York: Knopf, 1969), pp. 56–57.

13. Maia de la Baume and Steven Erlanger, “Social and Economic Ills Feed Rise of a Far-Right Party in France,” March 27, 2011, www.nytimes.com.

14. Hofstede, 1980. 15. Emma Jacobs, “20 Questions: Kenichi Watanabe, Nomura:

‘I don’t like to analyse myself,’” Financial Times, September 23, 2011, p. 12.

16. Lane Kelley, Arthur Whatley, and Reginald Worthley, Assessing the Effects of Culture on Managerial Attitudes: A Three-Culture Test. Journal of International Business Studies (Summer 1987), pp. 17–31.

17. Oded Shenkar, Cultural Distance Revisited: Towards a More Rigorous Conceptualization and Measurement of Cultural Differences. Journal of International Business 43, No. 1 (January 2012), pp. 1–11.

18. Ibid.

19. Luciardo Nardon and Richard M. Steers, Managing Cross- Cultural Encounters: Putting Things in Context. Organizational Dynamics 43 (2014), pp. 138–145.

20. Tarun Khanna, Contextual Intelligence. Harvard Business Review, 59 (September 2014).

21. Ibid. 22. Jangho Lee, T. W. Roehl, and Soonkyoo Choe, What Makes

Management Style Similar and Distinct across Borders? Growth Experience and Culture in Korean and Japanese Firms. Journal of International Business Studies 31, No. 4 (2000), pp. 631–652.

23. C. Sanchez-Runde et al., Looking beyond Western Leadership Models. Organizational Dynamics (2011), doi:10.1016/j .orgdyn.2011.04.008.

24. E. T. Hall, The Silent Language in Overseas Business. Harvard Business Review (May–June 1960).

25. “One Big Market,” Wall Street Journal, February 6, 1989, p. 16. 26. Baruch Shimoni, The Representation of Cultures in International

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27. Ibid. 28. Ibid. 29. Philip R. Harris and Robert T. Moran, Managing Cultural

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32. Ibid. 33. Ibid. 34. A. Ali, The Islamic Work Ethic in Arabia. Journal of Psychology

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37. V. Gupta, P. J. Hanges, and P. Dorfman, Cultural Clusters: Methodology and Findings. Journal of World Business 37 (2002), pp. 11–15.

38. Ibid. 39. Taras et al., 2011. 40. Geert Hofstede, Cultures and Organizations: Software of the

Mind (New York: McGraw-Hill, 1997), pp. 79–108. 41. K. Roth, T. Kostova, and M. Dakhli, Exploring Cultural Misfit:

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42. G. Hofstede, Culture’s Consequences: Comparing Values, Behaviors, Institutions, and Organizations across Nations, 2nd ed. (Thousand Oaks, CA: Sage, 2001), p. 297.

43. Ibid. 44. G. Hofstede and M. Bond, The Confucian Connection: From

Cultural Roots to Economic Growth. Organizational Dynamics, 16, No. 4 (1988), pp. 4–21.

45. G. Hofstede, Culture’s Consequences: Comparing Values, Behaviors, Institutions, and Organizations across Nations, 2nd ed. (Thousand Oaks, CA: Sage, 2001), 500–502.

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46. F. Trompenaars, Riding the Waves of Culture (London: Nicholas Brealey, 1993).

47. L. Hoeklin, Managing Cultural Differences: Strategies for Competitive Advantage (New York: The Economist Intelligence Unit/Addison-Wesley, 1995).

48. P. Steel and V. Taras, Culture as a Consequence: A multi-level multivariate meta-analysis of the effects of individual and coun- try characteristics on work-related cultural values. Journal of International Management, 16 (2010), pp. 211–233.

49. Ibid. 50. Ibid. 51. M. Muethel and M. Hoegl, “Cultural and societal influences

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52. C. Schuster and M. Copeland, Global Business Practice: Adapting for Success (Mason, OH: Thomson, 1996).

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59. Ibid. 60. International Comparative Legal Guides, https://iclg

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91. R. Sheng, “Outsiders’ Perception of the Chinese,” Columbia Journal of World Business 14, No. 2 (Summer 2000), pp. 16–22.

92. Henry Yeung Wai-chung, “Debunking the Myths of Chinese Capitalism,” May 11, 2005, www.nus.edu.sg/cororate/research /gallery/research30.htm.

93. D. A. Ralston, Yu-Kai-Ceng, Xun Wang, R. H. Terpstra, and He Wei, “An analysis of managerial work values across the six regions of China.” Presented at the Academy of International Business, Boston, November 1994.

116

4 C H A P T E R

4-1. To recognize the communication process and how cultural differences can cause noise in that process

4-2. To appreciate the cultural variables that affect communication for both the sender and the listener

4-3. To be aware of the impact of IT on cross-border communications

4-4. To learn how to manage cross-cultural business communications successfully

Communicating Across Cultures

O B J E C T I V E S

Opening Profile: The Impact of Social Media on Global Business

Brands have gone all in on Instagram.1

Alexa Tonner, Cofounder of Social Media Marketing Agency Collectively, April 5, 2019

Managers in international business or non-profit enterprises around the world are grappling with the question of how to benefit from the burgeoning use of social media networks—through the Internet, video, audio, and phone—both external and internal to the organization. The

networks, such as Facebook, are directly and indirectly linking people and business around the world. (Facebook, for example, had 2.49 billion monthly users around the world as of 4th quarter 2019).2 eMarketer forecasts that Instagram will make up 6 per cent of global mobile ad spending this year, and one-fifth of Facebook’s ad revenues.3

Another challenge to the effective use of social media is how to measure the effectiveness of each source as a benefit to the company, given the considerable investment their use would require. Firms such as Target, Dell, and Burger King are trying to find what works best for them as social media ap- plications such as Google+, Facebook, LinkedIn, YouTube, blogs, microblogs such as Twitter, etc., have changed the way consumers interact with companies and friends about brands and services—with both positive and negative feedback.4

For early-stage companies looking to develop a following, Instagram has helped pro- vide a “level playing platform” because it shows users the posts and ads it thinks they will like most, rather than those from the biggest brands . . .

. . .brands could still build a following for free on social media if they “create great content and gain buzz.”5

Debra Williamson, analyst at eMarketer, 2019

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 117

Global business managers are realizing that these social media are potential sources of rich in- formation, outside the normal chain of communication, that their companies could use to find out more about what customers want, how new ideas might be received, what competitors are doing, what problems might be lurking and how to deal with them, and so on. As an example, K. Ananth Krishnan, the chief technology officer (CTO) of Tata Consultancy Services, stated, “I see an enterprise’s move to ‘Being Digital’ as an inflexion point in its evolution.”6 Krishnan further notes, however, “You can- not offer to others what you don’t have in abundance in yourself! To me, any enterprise that wants to meet the demands of its digital native consumers, should start ‘thinking’ digitally, not just ‘adopt’ digital.”7

Social media trends

As firms seek to refine how they will use social media to implement their strategies, several trends have emerged. According to Social Media Marketing, privacy and security top the list. Data breaches at Facebook have called into question cybersecurity at many social media platforms.8 The second most salient trend involves video usage. A study conducted by Cisco indicated that 75 per- cent of mobile traffic will be achieved via video.9 The third social media trend entails a heavier focus on augmented reality (AR). In June 2016, Snapchat offered the first AR social media app.10 Cosmetics firm L’Oreal developed AR apps that enabled potential customers to try makeup and hairstyles before purchasing any products. The L’Oreal AR app was well received, leading to a strong increase in sales.11 The fourth trend is the internet as the primary source of news content. The fifth trend pertains to data and artificial intelligence (AI) usage. With rising concerns about fake news, AI will be able to better segment data in order to provide the best information content possible.12

Regardless of how companies interact with and use social media networks, it is clear that they are here to stay, that they can have considerable impact on global businesses. Social media users worldwide increased from 0.97 billion to an estimated 2.82 billion over the period 2010 to 2019. Moreover, social media usage is expected to reach 3.09 billion by 2021.13 In China, for example, roughly 708 million people use social media, which is very popular because it is less likely to be monitored by the govern- ment.14 In 2019, Chinese consumers spent an estimated 6 hours and 39 minutes with media daily, of which 3 hours, 54 minutes involved digital (i.e., 58.8% of time spent with media), which includes inter- net activities as well as non-internet activities on mobile devices.15 There is no Facebook or Twitter. In spite of the complexities and challenges, the sheer numbers of users present considerable opportunity for marketing across the globe.

FIGURE 4-1 Social Media

Source: arrow/Fotolia

Cultural communications are deeper and more complex than spoken or written messages. The essence of effective cross-cultural communication has more to do with releasing the right responses than with sending the “right” messages.16

Hall and Hall

118 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

As the opening profile suggests, communication in all its forms is a critical factor in the cross- cultural management issues discussed in this book, particularly those of an interpersonal nature, involving motivation, leadership, group interactions, and negotiation. Culture is conveyed and perpetuated through communication in one form or another. Culture and communication are so intricately intertwined that they are, essentially, synonymous.17 By understanding this relation- ship, managers can move toward constructive intercultural management. Nardon et al. point out that although global managers cite multicultural communication as a serious challenge, at the same time, it can open up important sources of business opportunity. “It is through communica- tion that relationships are formed, conflicts are resolved, and innovative ideas are created and shared.”18

Managers doing business around the world invariably complain that cross-cultural com- munication challenges have led to lost business, unintended offenses, and embarrassment—in particular in countries where it is crucial to develop relationships and trust. Communication, whether in the form of writing, talking, listening, or through the Internet, is an inherent part of a manager’s role and takes up the majority of a manager’s time on the job. Studies by Mintzberg demonstrate the importance of oral communication; he found that most managers spend between 50 and 90 percent of their time talking to people.19 The ability of a manager to communicate ef- fectively across cultural boundaries will largely determine the success of international business transactions or the output of a culturally diverse workforce. It is useful, then, to break down the elements involved in the communication process, both to understand the cross-cultural issues at stake and to maximize the opportunities to establish common meaning among the parties communicating.

THE COMMUNICATION PROCESS The term communication describes the process of sharing meaning by transmitting messages through media such as words, behavior, or material artifacts. Managers communicate to coordi- nate activities, to disseminate information, to motivate people, and to negotiate future plans. It is of vital importance, then, for a receiver to interpret the meaning of a particular communication in the way the sender intended. Unfortunately, the communication process (see Exhibit 4-1) in- volves stages during which meaning can be distorted. Anything that undermines the communica- tion of the intended meaning is typically referred to as noise.

The primary cause of noise is that the sender and the receiver each exists in a unique, pri- vate world thought of as her or his life space. The context of that private world, largely based on culture, experience, relations, values, and so forth, determines the interpretation of meaning in communication. People filter, or selectively understand, messages consistent with their own expectations and perceptions of reality and their values and norms of behavior. The more dis- similar the cultures of those involved, the greater the likelihood of misinterpretation. In this way, as Samovar, Porter, and Jain state in their book, Understanding Intercultural Communication, cultural factors pervade the communication process:

4-1. To recognize the com- munication process and how cultural differences can cause noise in that process

Feedback

Receiver Decodes Meaning

Sender Encodes Meaning

Medium Message

Noise

Culture

ExHIBIT 4-1 The Communication Process

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 119

Culture not only dictates who talks with whom, about what, and how the communication proceeds, it also helps to determine how people encode messages, the meanings they have for messages, and the conditions and circumstances under which various messages may or may not be sent, noticed, or interpreted. In fact, our entire repertory of communicative behaviors is dependent largely on the culture in which we have been raised. Culture, con- sequently, is the foundation of communication. And, when cultures vary, communication practices also vary.20

Communication, therefore, is a complex process of linking up or sharing the perceptual fields of sender and receiver; the perceptive sender builds a bridge to the life space of the re- ceiver.21 After the receiver interprets the message and draws a conclusion about what the sender meant, he or she will, in most cases, encode and send back a response, making communication a circular process.

The communication process is rapidly changing, however, as a result of technological devel- opments; therefore it is propelling global business forward at a phenomenal growth rate. These changes are discussed later in this chapter.

Cultural Noise in the Communication Process

In Japanese there are several words for “I” and several words for “you” but their use depends on the relationship between the speaker and the other person. In short, there is no “I” by itself; the “I” depends on the relationship.22

Because the focus in this text is on effective cross-cultural communication, it is important to understand what cultural variables cause noise in the communication process. This knowl- edge of cultural noise—the cultural variables that undermine the communication of intended meaning—will enable us to take steps to minimize that noise and so improve communication.

When a member of one culture sends a message to a member of another culture, intercultural communication takes place. The message contains the meaning the encoder intends. When it reaches the receiver, however, it undergoes a transformation in which the influence of the decoder’s culture becomes part of the meaning.23 Exhibit 4-2 provides an example of intercultural communication in which the meaning got all mixed up. Note how the attribution of behavior differs for each participant. Attribution is the process by which people look for an explanation of another person’s behavior. When they realize that they do not un- derstand another person, they tend, say Hall and Hall, to blame their confusion on the other’s “stupidity, deceit, or craziness.”24

In the situation depicted in Exhibit 4-2, the Indian employee becomes frustrated and resigns after experiencing communication problems with his manager. How could this outcome have been avoided? We do not have much information about the people or the context of the situation, but we can look at some of the variables that might have been involved and use them as a basis for analysis.

THE CULTURE–COMMUNICATION LINK The following sections examine underlying elements of culture that affect communication. The degree to which one is able to communicate effectively largely depends on how similar the other person’s cultural expectations are to our own. However, cultural gaps can be overcome by prior learning and understanding of those variables and how to adjust to them.

Trust in Communication Effective communication, and therefore effective collaboration in alliances across national boundaries, depends on the informal understandings among the parties that are based on the trust that has developed between them. However, the meaning of trust, and how it is developed and communicated, varies across societies. In China and Japan, for example, business transactions are based on networks of long-standing relationships based on trust rather than on the formal contracts and arm’s-length relationships typical of the United States. When there is trust between parties, implicit understanding arises within communications. This understanding has numerous

4-2. To appreciate the cultural variables that affect com- munication for both the sender and the listener

120 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

benefits in business, including encouraging communicators to overlook cultural differences and minimize problems. It allows communicators to adjust to unforeseen circumstances with less conflict than would be the case with formal contracts, and it facilitates open communication in exchanging ideas and information.26 From his research on trust in global collaboration, John Child suggests the following guidelines for cultivating trust:

• Create a clear and calculated basis for mutual benefit. There must be realistic commit- ments and good intentions to honor them.

• Improve predictability: Strive to resolve conflicts and keep communication open.

• Develop mutual bonding through regular socializing and friendly contact.27

Behavior Attribution

Manager: “What can be done to make Manager: I am giving him some responsibility. sure this project is completed on time?”

Employee: Doesn’t he know what to do? He is the boss. Why is he asking me?

Employee: “I don’t know. What do you Manager: Can’t he take responsibility? suggest?”

Employee: I asked him for instructions. Manager: “You know the scheduling Manager: I want to train him to make some

and staffing situation here decisions. better than me.”

Employee: What kind of manager is he? Well, he expects me to say something.

Employee: “I’ll hire another worker, then Manager: One more worker is totally insufficient; we should be ready in two weeks.” he doesn’t know how to schedule

properly. I need a definite deadline commitment—not “should be ready.”

Manager: “Hire three workers and give Manager: I offer a contract. them a deadline of three weeks. Are we agreed on that deadline?”

Employee: These are my orders: three weeks.

The manager returned to his office in Munich, confident that the project would be completed on time and the order delivered on schedule, which he conveyed to the client. After four weeks, the customer called to complain that he had not received the order. The German VP immediately called the Indian employee:

Manager: “Why hasn’t the order been Manager: I am holding him responsible for sent out as we agreed?” our agreement.

Employee: He wants to know why it is not ready. Employee: “It will be completed next week.” (Both attribute that it is not ready.) Manager: “But you told me it would be Manager: I must teach him to take responsibility

sent out in three weeks.” for deadlines. Employee: This person does not know how to

manage; it was not possible to complete the project in three weeks. I am going to get another job where the boss knows how to manage!

ExHIBIT 4-2 Cultural Noise in International Communication25 The vice president for operations of a German manufacturing company headquartered in Munich became concerned about satisfying an important client in France with an order that he had outsourced to a subsidiary in India. He decided to visit the local manager and confirm the importance of delivering the order on time. The following is what transpired in his interaction with the local production manager in India.

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 121

What can managers anticipate with regard to the level of trust in communications with peo- ple in other countries? If trust is based on how trustworthy we consider a person to be, then it must vary according to that society’s expectations about whether that culture supports the norms and values that predispose people to behave credibly and benevolently. Are there differences across societies in those expectations of trust? Research on 90,000 people in 45 societies by the World Values Study Group provides some insight on cultural values regarding predisposition to trust. When we examine the percentage of respondents in each society who responded that “most people can be trusted,” we can see that the Nordic countries and China had the highest predis- position to trust, followed by Canada, the United States, and Britain, whereas Brazil, Turkey, Romania, Slovenia, and Latvia had the lowest level of trust in people.28

Trust in the Digital Age Many leading communications, media and technology companies recognize the dual impor- tance of building digital trust* both as a company, and as an enabler of the overall digital economy, making it critical for all companies in these industries to act now or be left behind.29

www.accenture.com

The global consulting firm Accenture defines digital trust as “the confidence placed in an organization to collect, store, and use the digital information of others in a manner that bene- fits and protects those to whom the information pertains.” The digital age has reshaped the way companies communicate with customers around the world. In order to communicate effectively, companies have leveraged digital technologies that have increased the volume and speed with which companies and customers now share data. Accenture stresses four pillars of digital trust in order to develop trust with consumers regarding a brand: Security (e.g., virus protection and data encryption); Accountability (e.g., global and regional data standards); Privacy (e.g., company data policies and third-party data sharing); and Benefit/Value (e.g., customer value, brand value, and loyalty).30

The GLOBE Project Results from the GLOBE research on culture, discussed in Chapter 3, provide some insight into culturally appropriate communication styles and expectations for the manager to use abroad. GLOBE researchers Javidan and House make the following observations.31 For people in societ- ies that ranked high on performance orientation—for example, the United States—presenting objective information in a direct and explicit way is an important and expected manner of com- munication; this contrasts with people in Russia or Greece—societies that ranked low on perfor- mance orientation—for whom hard facts and figures are not readily available or taken seriously. In those cases, a more indirect approach is preferred. People from countries ranking low on as- sertiveness, such as Sweden, also recoil from explicitness; their preference is for much two-way discourse and friendly relationships.

People ranking high in the humane dimension, such as those from Ireland and the Philippines, make avoiding conflict a priority and tend to communicate with the goal of being supportive of people rather than of achieving objective results. This contrasts with people from France and Spain, whose agenda is achievement of goals.

The foregoing provides examples of how to draw implications for appropriate communica- tion styles from the research findings on cultural differences across societies. Astute global man- agers have learned that culture and communication are inextricably linked and that they should prepare themselves accordingly. Most will also suggest that you carefully watch and listen to how your hosts are communicating and then follow their lead.

Cultural Variables in the Communication Process On a different level, it is also useful to be aware of cultural variables that can affect the commu- nication process by influencing a person’s perceptions; some of these variables have been identi- fied by Samovar and Porter and discussed by Harris and Moran and others.32 These variables are as follows: attitudes; social organization; thought patterns; roles; language (spoken or written); nonverbal communication (including kinesic behavior, proxemics, paralanguage, and object lan- guage); and time. Although these variables are discussed separately in this text, their effects are interdependent and inseparable—or, as Hecht, Andersen, and Ribeau put it, “Encoders and

122 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

UNDER THE LENS Communicating in India—Language, Culture, Customs, and Etiquette

FACTS AND STATISTICS Location Southern Asia, bordering Bangladesh, 4,053 km; Bhutan, 605 km; Burma, 1,463 km; China, 3,380 km; Nepal, 1,690 km; and Pakistan, 2,912 km

Capital New Delhi

Climate Varies from tropical monsoon in south to temperate in north

Population 1.354 billion (as of 2018)34

FIGURE 4-2 Map of India

decoders process nonverbal cues as a conceptual, multichanneled gestalt.”33 Understanding com- munication and cultural differences can be instrumental in developing strong business relation- ships throughout the world. In the discussion that follows, we seek to gain an appreciation for the context of communicating and managing in India, as outlined in the feature, “Under the Lens: Communicating in India—Language, Culture, Customs, and Etiquette.”

Source: Bardocz Peter/Shutterstock

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 123

FIGURE 4-3 Indian Flag

Source: Malgorzata Kistryn/Fotolia LLC

Ethnic Makeup Indo-Aryan, 72%; Dravidian, 25%; Mongoloid and other, 3% (2000) Religions Hindu, 79.8%; Muslim, 14.2%; Christian, 2.3%; Sikh, 1.7%; other groups, including Buddhist, Jain, and Parsi, 2.0% (2011 census) Government Federal republic

LANGUAGES IN INDIA

The different states of India have different official languages, some of them not recognized by the central government. Some states have more than one official language. Bihar in east India has three official languages—Hindi, Urdu, and Bengali—that are all recognized by the central gov- ernment. But Sikkim, also in east India, has four official languages, of which only Nepali is rec- ognized by the central government. Besides the languages officially recognized by central or state governments are other languages that don’t have this recognition, and their speakers are waging political struggles to obtain this recognition. The central government decided that Hindi was to be the official language of India, and therefore, it also has the status of official language in the states.

INDIAN SOCIETY AND CULTURE Doing Business in India

India has quickly become a leading global startup hub; many entrepreneurs from both local and multinational corporations have given rise to a burgeoning tech scene. Add to that the increasing number of multinational companies already doing business there or attempting to expand there directly or by joining with local Indian companies, it is clear that managers need to prepare themselves with a better understanding of life in India - its people, its culture, and how to do business there. A few points below can help managers to prepare.

Hierarchy • The influences of Hinduism and the tradition of the caste system have created a culture that

emphasizes established hierarchical relationships.

• Indians tend to be conscious of social order and their status relative to other people, whether family, friends, or strangers.

(Continued)

124 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

• All relationships involve hierarchies. In schools, teachers are highly respected and viewed as the source of knowledge. The patriarch, usually the father, is considered the leader of the family. The boss is seen as the source of ultimate responsibility in business. Every relationship has a clear-cut hierarchy that must be observed for the social order to be maintained.

The Role of the Family • People typically define themselves by the groups to which they belong rather than by their

status as individuals. Someone is deemed to be affiliated to a specific state, region, city, family, career path, religion, and so on.

• This group orientation stems from the close personal ties Indians maintain with their family, including the extended family.

• The extended family creates a myriad of interrelationships, rules, and structures. Along with these mutual obligations comes a deep-rooted trust among relatives.

Just Can’t Say No • Indians do not like to express “no,” whether verbally or nonverbally.

• Rather than disappoint you, for example, by saying something isn’t available, Indians will offer you the response that they think you want to hear.

• This behavior should not be considered dishonest. An Indian would be considered terribly rude if he did not attempt to give a person what had been asked.

• Because they do not like to give negative answers, Indians may give an affirmative answer but be deliberately vague about any specific details. This will require you to look for nonverbal cues, such as a reluctance to commit to an actual time for a meeting or an enthusiastic response.

Etiquette and Customs in India Meeting Etiquette

• Religion, education, and social class all influence greetings in India.

• This is a hierarchical culture, so greet the eldest or most senior person first.

• In social settings, when leaving a group, each person must be bade farewell individually.

• Shaking hands is common, especially in the large cities among the more educated who are ac- customed to dealing with Westerners.

• Men may shake hands with other men, and women may shake hands with other women; how- ever, there are seldom handshakes between men and women because of religious beliefs. If you are uncertain, wait for him or her to extend his or her hand.

Naming Conventions Indian names vary based on religion, social class, and region of the country. The following are some basic guidelines to understanding the naming conventions.

FIGURE 4-4 Indian engineering students with their university professor

Source: CRS PHOTO/Shutterstock

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 125

Hindus

• In the north, many people have both a given name and a surname.

• In the south, surnames are less common, and a person generally uses the initial of his or her father’s name in front of their own name.

• The man’s formal name is their name s/o (son of) and the father’s name. Women use d/o to refer to themselves as the daughter of their father.

• At marriage, women drop their father’s name and use their first name with their husband’s first name as a sort of surname.

Muslims

• Many Muslims do not have surnames. Instead, men add the father’s name to their own name with the connector “bin,” so “Abdullah bin Ahmed” is “Abdullah, the son of Ahmed.”

• Women use the connector binti.

• The title Hajji (m) or Hajjah (f) before the name indicates that the person has made his or her pilgrimage to Mecca.

Sikhs

• Sikhs all use the “Singh” name. It is either adopted as a surname or as a connector name to the surname.

Gift-Giving Etiquette • Indians believe that giving gifts eases the transition into the next life.

• Gifts of cash are given to friends and members of the extended family to celebrate life events such as birth, death, and marriage.

• It is not the value of the gift, but the sincerity with which it is given, that is important to the recipient.

• If invited to an Indian’s home for a meal, it is not necessary to bring a gift, although one will not be turned down.

• Do not give frangipani or white flowers because they are used at funerals.

• Yellow, green, and red are lucky colors, so try to use them to wrap gifts.

• A gift from a man should be said to come from both him and his wife, mother, sister, or some other female relative.

• Hindus should not be given gifts made of leather.

• Muslims should not be given gifts made of pigskin or alcoholic products.

• Gifts are not opened when received.

Dining Etiquette • Indians entertain in their homes, restaurants, private clubs, or other public venues, depending

on the occasion and circumstances.

• Although Indians are not always punctual themselves, they expect foreigners to arrive close to the appointed time.

• Take off your shoes before entering the house.

• Dress modestly and conservatively.

• Politely turn down the first offer of tea, coffee, or snacks. You will be asked again and again. Saying no to the first invitation is part of the protocol.

There are diverse dietary restrictions in India, and these may affect the foods that are served:

• Hindus do not eat beef, and many are vegetarians.

• Muslims do not eat pork or drink alcohol.

• Sikhs do not eat beef.

• Lamb, chicken, and fish are the most commonly served main courses for nonvegetarian meals because they avoid the meat restrictions of the religious groups.

(Continued )

126 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Table manners are somewhat formal, but this formality is tempered by the religious beliefs of the various groups.

• Much Indian food is eaten with the fingers.

• Wait to be told where to sit.

• If utensils are used, they are generally a tablespoon and a fork.

• In social settings, guests are often served in a particular order; the guest of honor is served first, followed by the men, and the children are served last. Women typically serve the men and eat later.

• You may be asked to wash your hands before and after sitting down to a meal.

• Always use your right hand to eat, whether you are using utensils or your fingers.

• In some situations, food may be put on your plate for you, whereas in other situations, you may be allowed to serve yourself from a communal bowl.

Business Etiquette and Protocol in India Relationships and Communication

• Indians prefer to do business with those they know.

• Relationships are built on mutual trust and respect.

• In general, Indians prefer to have long-standing personal relationships prior to doing business.

• It may be a good idea to go through a third-party introduction. This gives you immediate credibility.

Business Meeting Etiquette • Be aware of India’s cultural diversity; be cautious about making generalizations.

• If you will be traveling to India from abroad, it is advisable to make appointments at least one month and, preferably, two months in advance.

• It is a good idea to confirm your appointment one week ahead and then again that morning be- cause meetings can be cancelled at short notice.

• The best time for a meeting is late morning or early afternoon. Reconfirm your meeting the week before and call again that morning; it is common for meetings to be cancelled at the last minute.

• Keep your schedule flexible so that it can be adjusted for last-minute rescheduling of meetings.

• You should arrive at meetings on time because Indians are impressed with punctuality.

• Small talk at the beginning of a business meeting is fairly common and may include questions about your family.

• Always send a detailed agenda several days in advance of your meeting. Send back-up materials, charts, and other data as well. This allows everyone to review and become comfortable with the material prior to the meeting.

• Follow up a meeting with an overview of what was discussed and the next steps.

• When entering a business meeting, it is appropriate to greet the most senior person first.

Business Negotiating • Indians are nonconfrontational. It is rare for them to disagree overtly, although this is begin-

ning to change in the managerial ranks.

• Decisions are reached by the person with the most authority.

• Decision making is a slow process.

• If you lose your temper, you lose face and prove you are unworthy of respect and trust.

• Delays are to be expected, especially when dealing with the government.

• Most Indians expect concessions in both price and terms. It is acceptable to expect concessions in return for those you grant.

• Never appear overly legalistic during negotiations. In general, Indians do not trust the legal system, and someone’s word is sufficient to reach an agreement.

• Do not disagree publicly with members of your negotiating team.

• Successful negotiations are often celebrated by a meal.

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 127

Dress Etiquette • Business attire is conservative.

• Men should wear dark-colored, conservative business suits.

• Women should dress conservatively in suits or dresses.

• The weather often determines clothing. In the hotter parts of the country, dress is less formal, although dressing as previously suggested for the first meeting will indicate respect.

Titles • Indians revere titles such as Professor, Doctor, and Engineer.

• Status is determined by age, university degree, caste, and profession.

• If someone does not have a professional title, use the honorific title “Sir” or “Madam.”

• Titles are used with the person’s name or the surname, depending on the person’s name. (See Social Etiquette for more information on Indian naming conventions.)

• Wait to be invited before using someone’s first name without the title.

Business Cards • Business cards are exchanged after the initial handshake and greeting.

• If you have a university degree or any honor, put it on your business card.

• Use the right hand to give and receive business cards.

• Business cards need not be translated into Hindi.

• Always present your business card so the recipient may read the card as it is handed to him or her.

Sources: Updated and adapted from https://businessculture.org/indian-business-culture/business- meeting-etiquette/, August 19, 2020; https://www.aii.unimelb.edu.au/blog/20-essential-tips-for- doing-business-with-india/; https://www.forbes.com/sites/ajayyadav/2016/08/18/how-startup-culture- in-india-differs-from-the-u-s/#5cd439b1bedb; www.kwintessential.co.uk/resources/global-etiquette/ India-country-profile.html, September 5, 2011. Used with permission of www.kwintessential.co.uk.

ATTITUDES We all know that our attitudes underlie the way we behave and communicate and the way we inter- pret messages from others. Ethnocentric attitudes are a particular source of noise in cross-cultural communication. In the incident described in Exhibit 4-2, both the employee and the manager are clearly attempting to interpret and convey meaning based on their own experiences of that kind of transaction. The manager is probably guilty of stereotyping the Indian employee by quickly jump- ing to the conclusion that he is unwilling to take responsibility for the task and the scheduling.

This problem, stereotyping, occurs when a person assumes that every member of a society or subculture has the same characteristics or traits. Stereotyping is a common cause of misun- derstanding in intercultural communication. It is an arbitrary, lazy, and often destructive way to find out about people. Astute managers are aware of the dangers of cultural stereotyping and deal with each person as an individual with whom they may form a unique relationship.

SOCIAL ORGANIZATIONS Our perceptions can be influenced by differences in values, approach, or priorities relative to the kind of social organizations to which we belong. These organizations may be based on one’s nation, tribe, or religious sect, or they may consist of the members of a certain profes- sion. Examples of such organizations include the Academy of Management and the United Auto Workers (UAW).35

THOUGHT PATTERNS The logical progression of reasoning varies widely around the world and greatly affects the communication process. Managers cannot assume that others use the same reasoning processes, as il- lustrated by the experience of a Canadian expatriate in Thailand, related in a book by Harris and Moran.

128 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

While in Thailand a Canadian expatriate’s car was hit by a Thai motorist who had crossed over the double line while passing another vehicle. After failing to establish that the fault lay with the Thai driver, the Canadian flagged down a policeman. After several minutes of seemingly futile discussion, the Canadian pointed out the double line in the middle of the road and asked the policeman directly, “What do these lines signify?” The policeman replied, “They indicate the center of the road and are there so I can establish just how far the accident is from that point.” The Canadian was silent. It had never occurred to him that the double line might not mean “no passing allowed.”36

In the Exhibit 4-2 scenario, perhaps the manager at the head office did not realize that the local production manager had a different rationale for his time estimate for the job. Because the local employee was not used to having to estimate schedules, he just took a guess, which he felt he had been forced to do.

ROLES Societies differ considerably in their perceptions of a manager’s role. Much of the difference is attributable to their perceptions of who should make the decisions and who has responsibil- ity for what. In the Exhibit 4-2 example, the manager of the firm which is outsourcing the production assumes that his role as manager is to delegate responsibility, to foster autonomy, and to practice participative management. He prescribes the role of the employee without any consideration of whether the employee will understand that role. The local employee’s frame of reference leads him to think that the manager is the boss and should give the order about when to have the job completed. He interprets the manager’s behavior as breaking that frame of refer- ence, and therefore he feels that the boss is “stupid and incompetent” for giving him the wrong order and for not recognizing and appreciating his accomplishments. The manager should have considered what behaviors the local workers would expect of him and then either should have played that role or discussed the situation carefully, in a training mode.

LANGUAGE Spoken or written language, of course, is a frequent cause of miscommunication, stemming from a person’s inability to speak the local language, a poor or too-literal translation, a speaker’s failure to explain idioms, or a person missing the meaning conveyed through body language or certain symbols. Even among countries that share the same language, problems can arise from the subtleties and nuances inherent in the use of the language, as noted by George Bernard Shaw: “Britain and America are two nations separated by a common language.” This problem can exist even within the same country among different subcultures or subgroups.37

Many international executives tell stories about lost business deals or lost sales because of communication blunders.

When Pepsi Cola’s slogan “Come Alive with Pepsi” was introduced in Germany, the company learned that the literal German translation of “come alive” is “come out of the grave.”

A U.S. airline found a lack of demand for its “rendezvous lounges” on its Boeing 747s. They later learned that “rendezvous” in Portuguese refers to a room that is rented for prostitution.38

More than just conveying objective information, language also conveys cultural and social understandings from one generation to the next. Examples of how language reflects what is im- portant in a society include the 6,000 Arabic words that describe camels and their parts and the 50 or more classifications of snow the Inuit, the Eskimo people of Canada, use.

Inasmuch as language conveys culture, technology, and priorities, it also serves to separate and perpetuate subcultures. In India, 14 official and many unofficial languages are used, and more than 800 languages are spoken on the African continent.

Because of increasing workforce diversity around the world, the international business manager will have to deal with a medley of languages. For example, assembly-line work- ers at the Ford plant in Cologne, Germany, speak Turkish and Spanish as well as German.

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In Malaysia, Indonesia, and Thailand, many of the buyers and traders are Chinese. Not all Arabs speak Arabic; in Tunisia and Lebanon, for example, French is the language of commerce.

International managers need either a good command of the local language or competent interpreters. The task of accurate translation to bridge cultural gaps is fraught with difficulties: Joe Romano, a partner of High Ground, an emerging technology-marketing company in Boston, found out on a business trip to Taiwan how close a one-syllable slip of the tongue can come to torpedoing a deal. He noted that one is supposed to say to the chief executive “Au-ban,” mean- ing “Hello, No. 1. Boss.” Instead, he accidentally said “Lau-ban ya,” which means “Hello, wife of the boss.” Essentially, Mr. Romano called him a woman in front of 20 senior Taiwanese ex- ecutives, who all laughed; but the boss was very embarrassed because men in Asia have a very macho attitude.39

Even the direct translation of specific words does not guarantee the congruence of their meaning, as with the word “yes” used by Asians, which usually means only that they have heard you, and, often, that they are too polite to disagree. The Chinese, for example, through years of political control, have built into their communication culture a cautionary stance to avoid persecution by professing agreement with whatever opinion was held by the person questioning them.40

Sometimes even a direct statement can be misinterpreted instead as an indirect expression, as when a German businesswoman said to the Algerian counterpart, “My partner would love something like that watch your friend was wearing last night. It was fascinating.” The next day the Algerian gave her a box with the watch in it as a gift to her partner. She realized she needed to be careful how she expressed such things in the future—such as asking where that kind of jewelry is sold.41

In much of the world, politeness and a desire to say only what the listener wants to hear cre- ate noise in the communication process. Often, even a clear translation does not help a person understand what is meant because the encoding process has obscured the true message. With the poetic Arab language—replete with exaggeration, elaboration, and repetition—meaning is attrib- uted more to how something is said than to what is actually said.

For the manager and the local employee cited in Exhibit 4-2, it is highly likely that the man- ager could have picked up some cues from the employee’s body language that probably implied problems with the interpretation of meaning. How might body language have created noise in this case?

Second Language Use A large number of business professionals speak more than one language. As a result, there are circumstances in which they will communicate with their counterparts in a nonnative language, in particular the English language. English is used frequently as a language for business professionals. Learning a second language—especially English—offers many chal- lenges along the way. The English vocabulary is rich—full of many synonyms, as well as words that are spelled and pronounced the same with distinct meanings (e.g., crude), and words that are spelled differently, pronounced the same, yet have distinct means (e.g., for and four).42 When communicating with a business professional who is less skilled at speak- ing a second (or third) language, the native language speaker needs to communicate without complex terms. Indeed, a culturally intelligent individual will adapt their language—word choice and style—to the level of the nonnative speaker.43 Some best practices for speaking with a non-native speaker include:44

• Pronounce words clearly

• Avoid slang

• Use shorter sentences

• Distribute written summaries of a presentation

• Use more pauses and take more breaks

• Repeat important information—even with different words to explain the same point

• Encourage nonnative speakers to repeat concepts to ensure comprehension

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Both native and non-native English speakers must accept responsibility for their utterances, and ensure that they are speaking as clearly and concisely as possible.

B. Clark, Aviation English Research Project, 2017

Language experts have estimated that for each person speaking English as a native language, four people speak it as a second or third language. Even more, most English communications that take place across the globe—whether professional or personal—involve nonnative speak- ers.45 Nowhere is English speaking more prevalent, and perhaps more important, than in the airline industry where pilots must communicate in controllers on international flights. In a report authorized by the UK Civil Aviation Authority, native English speakers tend to talk too fast, use metaphors excessively, and lack understanding of the challenges of communicating in a nonna- tive language.46 Although the report focused on the airlines industry, comprehension problems for non-native English speakers also occur with British, Australian, and American speakers. For example, business professionals have informed researchers that conference calls in English were progressing well until “a Canadian or New Zealander came on to the line,” as emphasized in the quote above.47 Indeed, imprecise use of the English language can cause misunderstanding even among native English speakers, as noted by George Bernard Shaw’s quote “The British and the Americans are two great peoples divided by a common tongue.” The following “Under the Lens” elaborates on the perceptions of native and non-native English speakers.

UNDER THE LENS Native English Speakers Must Learn How They Come Across48

The last time I wrote about the widespread use of English, a reader commented that those who didn’t speak it as a first language often struggled at work.

“Non-native speakers are at their biggest disadvantage when emotions come into play,” the reader wrote. “In a heated debate, those able to use cynicism, sarcasm or other weapons requiring lin- guistic mastery have an unfair advantage - and I have seen such unfair advantage being used many times. It can determine the course of corporate careers. Like mine.”

The comment reminded me of two leaders who had made similar points about native English speakers’ advantages.

The first was Steve Biko, the apartheid-era South African student leader, who split from white lef- twing students because he believed blacks needed to develop self-reliance.

Biko, who died in police custody in 1977, spoke excellent English, but it was not his mother tongue. He was acutely aware of being at a disadvantage in English-speaking company. He spoke before his death of the frustration of talking to articulate, intelligent, native English speakers.

“You may be intelligent, but not as articulate,” he said. In these conversations, a non-native speaker could start to feel intellectually inadequate. “You tend

to feel that that [English-speaking] guy is better equipped than you mentally,” he said. A very different leader, Percy Barnevik, the founding chief executive of ABB, the Swedish-Swiss

company that adopted English as its corporate language, also spoke of the danger of “mistaking facility with English for intelligence or knowledge”.

But does it follow, as the Financial Times reader asserted, that English speakers use their linguistic mastery to dominate discussions deliberately, inserting sarcasm where necessary?

I asked two non-native English-speaking FT readers who have emailed me in the past what they thought. “Actually, I would tend to say the opposite,” Quentin Toulemonde, a Frenchman working in finan-

cial services in London, told me. “In an argument, I can pretend not to understand - to force my inter- locutor to rephrase, which can perturb him.

“Furthermore, foreigners have a more limited vocabulary which allows them to use stronger and almost tactless words, and to be excused for that.”

Ivan Tejeda, a Spanish reader who has worked in the UK, Italy and France, said he had made strenu- ous efforts to learn about the local culture as a way of improving his ability to talk to colleagues at work. In the UK, this included watching comedy television programmes such as Fawlty Towers and The Office.

He had to make an effort in non-English speaking environments too. When he worked in Italy, he kept up with the local football news as it often came up in office conversation.

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 131

He did not think native English speakers dominated work discussions on purpose. “I think what your reader is describing is more related to the empathy process than the deliberate use of sarcasm by English speakers.”

Both these readers’ English is excellent, so they are perhaps not representative of most people in international companies who have to work in the language.

I have certainly seen English-speaking holidaymakers try to use the language to bludgeon waiters, bus drivers or hotel receptionists into giving them what they wanted.

I do not think I have ever seen it work. And I have never seen such bullying in a business environ- ment. What I have seen is English speakers not being understood because their language is too quick, too garbled or overly colloquial.

Of all the communication and public speaking skills, talking to non-native English speakers is one of the most under-appreciated.

It does not come naturally to most English speakers, but, like all skills, it can be learnt. Rephrasing points in different ways helps. So do avoiding complex metaphors and watching people’s faces to see whether you are being understood.

Because so few native English speakers speak another language these days they have little idea how hard it can be to operate in one.

A failure to understand how you are coming across diminishes your impact, and can lead some to believe you are being cruel and sarcastic.

Source: © Financial Times Limited 2016.

Nonverbal Communication Clearly, as explained by Roger Axtel in his book Essential Do’s and Taboos,49 the nonverbal signal that, in the United States, is interpreted as “okay” is absolutely not “okay” in many coun- tries. Axtel gives the example of when Vice President Richard Nixon flew to Brazil in an attempt to improve relations between the two countries. As reported in the newspapers, when Nixon stepped off the plane in Sao Paulo, he gave the “A-okay” sign—with both hands! The crowd at the airport booed—of course—given the meaning in Brazil (a private part of a woman’s body); not surprisingly, photos of this incident were in the paper the next day!

Behavior that communicates without words (although it often is accompanied by words) is called nonverbal communication. People will usually believe what they see over what they hear—hence the expression, “A picture is worth a thousand words.” Studies show that these subtle messages account for between 65 and 93 percent of interpreted communication.50 Even minor variations in body language, speech rhythms, and punctuality, for example, often cause mistrust and misperception of the situation among cross-national parties.51 The media for such nonverbal communication can be categorized into four types: (1) kinesic behavior, (2) proxemics, (3) paralanguage, and (4) object language.

The term kinesic behavior refers to communication through body movements—posture, gestures, facial expressions, and eye contact, as illustrated in the accompanying “Under the Lens: Communicating Italian Style” feature. Although such actions may be universal, often their meaning is not. Because kinesic systems of meaning are culturally specific and learned, they cannot be generalized across cultures. Most people in the West would not correctly in- terpret many Chinese facial expressions; for example, sticking out the tongue expresses surprise, a widening of the eyes shows anger, and scratching the ears and cheeks indicates happiness.53 Research has shown for some time, however, that most people worldwide can recognize displays of the basic emotions of anger, disgust, fear, happiness, sadness, surprise, and contempt.54

As illustrated previously, visitors to other countries must be careful about their gestures and how they might be interpreted. For example, people in Japan may point with their middle finger, which is considered an obscene gesture to others. To Arabs, showing the soles of one’s feet is an insult; recall the reporter who threw his shoe at President Bush in late 2008 during his visit to Iraq. This was, to Arabs, the ultimate insult.

Many businesspeople and visitors react negatively to what they feel are inappropriate facial expressions, without understanding the cultural meaning behind them. In his studies

132 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

of cross-cultural negotiations, Graham observed that the Japanese feel uncomfortable when faced with the Americans’ eye-to-eye posture. They are taught since childhood to bow their heads out of humility, whereas the automatic response of Americans is, “look at me when I’m talking to you!”55

Subtle differences in eye behavior (called oculesics) can throw off a communication badly if they are not understood. Eye behavior includes differences not only in eye contact but also in the use of eyes to convey other messages, whether or not that involves mutual gaze. For example, during speech, Americans will look straight at you, but the British keep your attention by look- ing away. The British will look at you when they have finished speaking, which signals that it is your turn to talk. The implicit rationale for this is that you can’t interrupt people when they are not looking at you.56

It is helpful for U.S. managers to be aware of the many cultural expectations regarding pos- ture and how they may be interpreted. In Europe or Asia, a relaxed posture in business meetings may be taken as bad manners or the result of poor upbringing. In Korea, you are expected to sit upright, with feet squarely on the floor, and to speak slowly, showing a blending of body and spirit.

Proxemics deals with the influence of proximity and space on communication—both per- sonal space and office space or layout. Americans expect office layouts to provide private space for each person and, usually, a larger and more private space as one goes up the hierarchy. In much of Asia, the custom is open office space with people at all levels working and talking in close proximity to one another. Space communicates power in both Germany and the United States, evidenced by the desire for a corner office or one on the top floor. The importance of

UNDER THE LENS Communicating Italian Style52

When traveling around Europe, you will probably notice that Italians use the most body lan- guage when communicating; they seem to be walking down the street mumbling while their hands are going all over wildly, typically while on their telefonini. In fact, it is difficult for

the person listening on the phone to interpret sometimes because the speaker’s hand gestures and other nonverbal signals are invisible. Their hands convey much meaning, and Italians commonly make about 250 gestures when talking and doing other things simultaneously such as conversing on the cell phone. Examples are that of wagging the hands downward, meaning “come here”; slowly drawing a circle with the hand, meaning “whatever”; pressing a finger into the cheek, meaning that something tastes good; and brushing the back of the hand outward across the chin meaning “I don’t give a damn.” Gestures can convey that the person feels pride, or shame, or desperation, or fear, giving more meaning than the words alone. Of course, gestures are culture-specific (varying also according to the area within Italy, those in the south tending to be louder and more effusive than those in the north) so you should be care- ful to be aware that their meanings may differ significantly around the world and may cause offense. Women should realize that flirtatious behavior from Italian men is common and part of their culture. This behavior, along with the close-talking nature of Italians, including sitting close and perhaps lightly touching the arm of the other person, can make it uncomfortable for women who are used to more per- sonal space in communicating.

Italians tend to be gregarious and loud but interrupt one another anyway. They are uncomfortable with silence but do not seem to lack interesting subjects to discuss, such as their architecture and art, Italian history and football, and especially their families.

Italians’ dress is conservative and chic and formal for business meetings. One is expected to use formal titles and last names until requested to do otherwise; and women use their maiden names in busi- ness. Present your business cards face up, and be sure to read theirs before putting them away.

One is expected to shake hands with everyone present when arriving and when leaving, and it is customary to kiss friends on both cheeks, left first. Eye contact is essential when talking to an Italian; otherwise, you would be viewed as unfriendly and perhaps untrustworthy. Italians do not observe per- sonal space when conversing, so one should expect close contact and much hand movement even with business contacts. People from reserved cultures such as the British will likely be perceived as disinter- ested by Italians since they tend to be very emotionally engaged with the conversation.

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French officials, however, is made clear by a position in the middle of subordinates, communi- cating that they have a central position in an information network, where they can stay informed and in control.57

Do you ever feel vaguely uncomfortable and start moving backward slowly when someone is speaking to you? This is because that person is invading your bubble—your personal space. Personal space is culturally patterned, and foreign spatial cues are a common source of misinter- pretation. When someone seems aloof or pushy, it often means that she or he is operating under subtly different spatial rules.

Hall and Hall suggest that cultural differences affect the programming of the senses and that space, perceived by all the senses, is regarded as a form of territory to be pro- tected.58 South Americans, southern and eastern Europeans, Indonesians, and Arabs have high-contact cultures, preferring to stand close, touch a great deal, and experience a close sensory involvement. Latin Americans, for example, have a highly physical greeting such as putting their arms around a colleague’s back and grabbing him by the arm. On the other hand, North Americans, Asians, and northern Europeans have low-contact cultures and pre- fer much less sensory involvement, standing farther apart and touching far less. They have a distant style of body language. In France, a relationship-oriented culture, good friends greet members of the opposite sex with a peck on each cheek; a handshake is a way to make a personal connection.

Interestingly, high-contact cultures are mostly located in warmer climates, and low-contact cultures in cooler climates. Americans are relatively nontouching, automatically standing at a distance so that an outstretched arm will touch the other person’s ear. Standing any closer than that is regarded as invading intimate space. However, Americans and Canadians certainly expect a warm handshake and maybe a pat on the back from closer friends, though not the very warm double handshake of the Spaniards (clasping the forearm with the left hand). The Japanese, con- siderably less haptic (touching), do not shake hands; an initial greeting between a Japanese busi- nessperson and a Spanish businessperson would be uncomfortable for both parties if they were untrained in cultural haptics. The Japanese bow to one another—the depth of the bow revealing their relative social standing.

Imagine the smartphone app that would ask your identity, the identity of the other greeter, where you both are and how many times you have greeted each other. It would then propose a compromise—a namaste followed by a handshake, perhaps, or a bow punctuated by a slap on the back.59

When considering high- and low-contact cultures, we can trace a correlation between Hofstede’s cultural variables of individualism and collectivism and the types of kinesic and prox- emic behaviors people display. Generally, people from individualistic cultures are more remote and distant, whereas those from collectivist cultures are interdependent; they tend to work, play, live, and sleep in close proximity.60

The term paralanguage refers to how something is said rather than the content—that is, the rate of speech, the tone and inflection of voice, other noises, laughing, or yawning. The cultur- ally aware manager learns how to interpret subtle differences in paralanguage, including silence. Silence is a powerful communicator. It may be a way of saying “no,” of being offended, or of waiting for more information to make a decision. There is considerable variation in the use of si- lence in meetings. Whereas Americans become uncomfortable after 10 or 15 seconds of silence, Chinese prefer to think the situation over for 30 seconds before speaking. The typical scenario between Americans and Chinese, then, is that the American gets impatient, says something to break the silence, and offends the Chinese by interrupting his or her chain of thought and comfort level with the subject.61

The term object language, or material culture, refers to how we communicate through material artifacts, whether architecture, office design and furniture, clothing, cars, or cosmetics. Material culture communicates what people hold as important. In the United States, for example, someone wishing to convey his important status and wealth would show guests his penthouse office or expensive car. In Japan and China, a businessman presents his business card to a new contact and expects the receiver to study it and appreciate his position. The cards are called name cards in China and are an essential aspect of doing business—a way to build networks. The

134 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

exchange of cards occurs as soon as you meet, and visitors should be careful to get an appropri- ate translation for their cards.62 In Mexico, a visiting international executive or salesperson is advised to take time out, before negotiating business, to show appreciation for the surrounding architecture, which Mexicans prize. The importance of family to people in Spain and much of Latin America would be conveyed by family photographs around the office and, therefore, an expectation that the visitor would enquire about the family.

TIME Another variable that communicates culture is the way people regard and use time (see also Chapter 3). To Brazilians, relative punctuality communicates the level of importance of those involved. To Middle Easterners, time is something controlled by the will of Allah.

To initiate effective cross-cultural business interactions, managers should know the differ- ence between monochronic time systems and polychronic time systems and how they affect com- munications. Hall and Hall explain that in monochronic cultures (Switzerland, Germany, and the United States), time is experienced in a linear way, with a past, a present, and a future, and time is treated as something to be spent, saved, made up, or wasted. Classified and compart- mentalized, time serves to order life. This attitude is a learned part of Western culture, probably starting with the Industrial Revolution. Monochronic people, found in individualistic cultures, generally concentrate on one thing at a time, adhere to time commitments, and are accustomed to short-term relationships.

In contrast, polychronic cultures tolerate many things occurring simultaneously and em- phasize involvement with people. Two Latin friends, for example, will put an important con- versation ahead of being on time for a business meeting, thus communicating the priority of relationships over material systems. Polychronic people—Latin Americans, Arabs, and those from other collectivist cultures—may focus on several things at once, be highly distractible, and change plans often.63

The relationship between time and space also affects communication. Polychronic people, for example, are likely to hold open meetings, moving around and conducting transactions with one party and then another, rather than compartmentalizing meeting topics, as do monochronic people.

The nuances and distinctions regarding cultural differences in nonverbal communication are endless. The various forms are listed in Exhibit 4-3; wise intercultural managers will take careful account of the role that such differences might play.

What aspects of nonverbal communication might have created noise in the interactions be- tween the manager and the Indian employee in Exhibit 4-2? Undoubtedly, some cues could have been picked up from the kinesic behavior of each person. It was the responsibility of the manager, in particular, to notice any indications from the employee that could have prompted him to change his communication pattern or assumptions. Face-to-face communication permits the sender of the message to get immediate feedback, both verbal and nonverbal, and thus to have some idea as to how that message is being received and whether additional information is needed. What aspects of the Indian employee’s kinesic behavior or paralanguage might have been evident to a more cultur- ally sensitive manager? Did both parties’ sense of time affect the communication process?

• Facial expressions • Body posture • Gestures with hands, arms, head, etc. • Interpersonal distance (proxemics) • Touching, body contact • Eye contact • Clothing, cosmetics, hairstyles, jewelry • Paralanguage (voice pitch and inflections, rate of speech, and silence) • Color symbolism • Attitude toward time and the use of time in business and social interactions • Food symbolism and social use of meals

ExHIBIT 4-3 Forms of Nonverbal Communication

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Context East Asians live in relatively complex social networks with prescribed role relations; attention to context is, therefore, important for their effective functioning. In contrast, westerners live in less constraining social worlds that stress independence and allow them to pay less attention to context.64

Richard E. Nisbett

A major differentiating factor that is a primary cause of noise in the communication process is that of context—which actually incorporates many of the variables discussed earlier. The context in which the communication takes place affects the meaning and interpretation of the interaction. Cultures are known to be high- or low-context cultures, with a relative range in between.65 In high-context cultures (Asia, the Middle East, Africa, and the Mediterranean), feelings and thoughts are not explicitly expressed; instead, one has to read between the lines and interpret meaning from one’s general understanding. Two such high-context cultures are the South Korea and Arab cultures. In such cultures, key information is embedded in the context rather than made explicit. People make assumptions about what the message means through their knowledge of the person or the surroundings. In these cultures, most communication takes place within a context of extensive information networks resulting from close personal relationships. See the following “Management in Action” feature for further explanation of the Asian commu- nication style.

In low-context cultures (Germany, Switzerland, Scandinavia, and North America), where personal and business relationships are more compartmentalized, communication media have to be more explicit. Feelings and thoughts are expressed in words, and informa- tion is more readily available. Westerners focus more on the individual and therefore tend to view events as the result of specific agents, whereas Easterners view events in a broader and longer-term context.66

In cross-cultural communication between high- and low-context people, a lack of under- standing may preclude reaching a solution, and conflict can arise. Germans, for example, will expect considerable detailed information before making a business decision, whereas Arabs will base their decisions more on knowledge of the people involved—the information is present, but it is implicit. People in low-context cultures, such as those in Germany, Switzerland, Austria, and the United States, convey their thoughts and plans in a direct, straightforward communication style, saying something like, “We have to make a decision on this today.” People in high-context cultures, such as in Asia and, to a lesser extent in England, convey their thoughts in a more in- direct, implicit manner; this means that someone from Germany needs to have more patience and tact and be willing to listen and watch for clues—verbal and nonverbal—about his or her colleagues’ wishes.

People in high-context cultures expect others to understand unarticulated moods, subtle gestures, and environmental clues that people from low-context cultures simply do not pro- cess. Misinterpretation and misunderstanding often result.67 People from high-context cul- tures perceive those from low-context cultures as too talkative, obvious, and redundant. Those from low-context cultures perceive high-context people as secretive, sneaky, and mysterious. Research indicates, for example, that Americans find talkative people more attractive, whereas the Koreans—a high-context people—perceive less-verbal people as more attractive. Finding the right balance between low- and high-context communications can be tricky, as Hall and Hall point out: “Too much information leads people to feel they are being talked down to; too little information can mystify them or make them feel left out.”68 Exhibit 4-4 shows the relative level of context in various countries.

The following “Management in Action” discusses miscommunications that can arise when speaking or hearing a nonnative language. As it explains, the nuances of speakers’ and listeners’ cultural tendencies (e.g., high versus low context) can be extremely important to (mis)under- standing cross-border communications.

The importance of understanding the role of context and nonverbal language to avoid mis- interpretation is illustrated in the accompanying feature, “Comparative Management in Focus: Communicating with Arabs.”

136 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

High

Low

(high context/implicit)

(low context/explicit)

Japan Middle East Latin America Africa Mediterranean England France North America Scandinavia Germany Switzerland

Low Explicitness of communication High Co

nt ex

t

ExHIBIT 4-4 Cultural Context and Its Effects on Communication

Source: Based on information drawn from E. T. Hall and M. R. Hall, Understanding Cultural Differences (Yarmouth, ME: Intercultural Press, 1990); and Martin Rosch, “Communications: Focal Point of Culture,” Management International Review 27, No. 4 (1987).

MANAGEMENT IN ACTION A Guide to (Mis)communication69

In the UK, it is important to finish meetings by summing up key points; but in France they can end with an ambiguous “Et voila!”

I n recent months, a wry little document called the “Anglo-Dutch translation guide” has been tossed between the email boxes of bankers, diplomats, business people and journalists. This lists phrases that are commonly - and completely - misunderstood when English and Dutch people talk to each other. Take the expression “with all due respect.” If you are British, you interpret this as a polite way

to say, “I think you are wrong.” But if you are Dutch, used to blunt speech, you think it means, “You are listening to me!” Similarly, “That is an original point of view”: to English ears this subtly suggests “That’s a stupid idea!”; a Dutch listener thinks, “They like my ideas!” Or again, “I am sure it’s my fault” to British ears means “It’s not my fault”; to the Dutch, it’s quite the opposite.

So far, so amusing, and none of these examples will surprise any British or Dutch people who have ever shared an office. But what is fascinating is not simply that these linguistic gaps remain widespread today - but also how widely they tend to be ignored, in the office or anywhere else. For as the world becomes more global - “a starburst of interconnections. . . a hum of interconnected voices,” as Christine Lagarde, head of the IMF, recently put it - it is easy to fall prey to the illusion that you can communicate with almost anyone in the seemingly neutral sphere of the internet, particularly since so many compa- nies use English as a lingua franca. But ironically, the more that institutions become globalised, using that lingua franca, the more these subtle distinctions in speech patterns matter.

To get a sense of this, it is worth taking a look at an amusing new book called The Culture Map by Erin Meyer, a professor at Insead business school. It draws on theories that Edward Hall, an American anthropologist, developed in the mid-20th century to interpret the dizzy network of modern cross- cultural (mis) communications.

The starting point is Hall’s observation - made after living among Navajo and Hopi native Americans for many years - that human speech varies depending on whether there is a “high” or “low” level of assumed shared cultural context. In the former, people speak with a narrower vocabulary and more ambiguous style, since they do not need lots of words to clarify their meaning; in the latter, vo- cabularies are far wider and the intentions of speakers are clearly spelt out.

Social groups can vary on this spectrum within a single culture (long-married couples have a high shared context). But different cultures vary radically too. Meyer thinks, for example, that the US, Australia, Canada and Israel have extreme “low-context” speech patterns, followed by the Netherlands and Germany.

In those countries people are expected to speak clearly or they will appear dishonest, incompetent or simply ineffective.

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 137

But countries such as Japan, Korea, India, Singapore and France are “high context”. There is as- sumed to be a high level of shared knowledge and thus less verbal clarity: everyone just “reads the air”, as the Japanese say. Spain, Brazil and Argentina lie halfway between. The UK is deemed to be lower context than France but higher context than Holland. Hence that wry internet guide.

Interestingly, these distinctions persist even when everyone is speaking English. And Meyer ar- gues that they affect numerous aspects of institutional life: how managers give feedback to their staff, exercise authority, express dissent or build trust. Thus in some countries it is normal to use “upgrader” (reassuring) comments when delivering criticism; in others, not. In places such as the US and UK, it is important to finish meetings by clearly summing up the key points; but in France meetings can just end with an ambiguous “Et voila!”. “I couldn’t help wonder, ‘but voila what?” Meyer quotes a British inves- tor saying after one such occasion in Paris. “My French colleagues simply know what has been decided without going through all the levels of clarification that we are used to in the UK.”

And the miscommunications worsen in mixed teams, with, writes Meyer, “Americans who recap incessantly and nail everything down in writing, Japanese who read the air, the French who speak at the second degree [with secondary meanings], the British who love to use deadpan irony as a form of humour and the Chinese who learn as young children to beat around the bush”.

Is there any solution? Meyer suggests managers at multinational companies should use matrix plan- ners that plot the position of different cultures on the “context” spectrum, to help them interpret each other. She also argues that everyone needs to keep international communication ultra “low context” - ie to spell everything out, as clearly as you can.

Source: © Financial Times Limited 2014.

Comparative Management in Focus Communicating with Arabs

In the Middle East, the meaning of a communication is implicit and interwoven and, consequently, much harder for Americans, accustomed to explicit and specific meanings, to understand.

Arabs are warm, emotional, and quick to explode: sounding off is regarded as a safety valve. In fact, the Arabic language aptly communicates the Arabic culture, one of emotional extremes. The language contains the means for overexpression, many adjectives, words that allow for exaggeration, and metaphors to emphasize a position. What is said is often not as important as how it is said. Eloquence and flowery speech are admired for their own sake, regardless of the content. Loud speech is used for dramatic effect.

At the core of Middle Eastern culture are friendship, honor, religion, and traditional hospitality. Family, friends, and connections are very important on all levels in the Middle East and will take precedence over business transactions. Arabs do business with people, not companies, and they make commitments to people, not contracts. A phone call to the right person can help to get around seem- ingly insurmountable obstacles. An Arab expects loyalty from friends, and it is understood that giving and receiving favors is an inherent part of the relationship; no one says no to a request for a favor. A lack of follow-through is assumed to be beyond the friend’s control.70

Because hospitality is a way of life and highly symbolic, a visitor must be careful not to reject it by declining refreshment or rushing into business discussions. Part of that hospitality is the elaborate system of greetings and the long period of getting acquainted, perhaps taking up the entire first meet- ing. Although the handshake may seem limp, the rest of the greeting is not. Kissing on the cheeks is common among men, as is handholding between male friends. However, the Arab social code strictly forbids any public display of intimacy between men and women.

While women have started to play an increasing role in business, the Middle East is still pri- marily a male-dominated society, and it is impolite to inquire about women. Other nonverbal taboos include showing the soles of one’s feet and using the left (unclean) hand to eat or pass something. In discussions, slouching in a seat or leaning against a wall communicates a lack of respect.

The Arab society also values honor. Harris and Moran explain, “Honor, social prestige, and a se- cure place in society are brought about when conformity is achieved. When one fails to conform, this is considered to be damning and leads to a degree of shame.”71 Shame results not just from doing some- thing wrong but from others finding out about that wrongdoing. Establishing a climate of honesty and trust is part of the sense of honor. Therefore, considerable tact is needed to avoid conveying any con- cern or doubt. Arabs tend to be quite introverted until a mutual trust is built, which takes a long time.72

(Continued )

138 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Arabian Sea

Palestine

E R I T R E A

E G Y P T

S U D A N

Y E M E N

J O R D A NI S R A E L

LEBANON S Y R I A

I R A Q

S A U D I A R A B I A

UNITED ARAB EMIRATES

OMAN

O M A N

O

I R A N

QATAR

BAHRAIN

KUWAIT

Mecca

Medina Ash Shaqra

Riyadh

Jeddah

Dubayy

Ajman Ash Shariqah

Muscat

Ra’s al Khaymah

Umm al Qaywayn Al Fujayrah

Abu Dhabi Gulf of Oman

Persian Gulf

Red Sea

Mediterranean Sea

Emirates

Major cities

0 400 mi

0 400 km

MAP 4-1 Saudi Arabia and the Arabian Peninsula

FIGURE 4-5 Westerner Meeting with Arab Businessman

Source: Hi Brow Arabia/Alamy

In their nonverbal communication, most Arab countries are high-contact cultures. Arabs stand and sit closer and touch people of the same sex more than Westerners. They do not have the same concept of public and private space or, as Hall puts it, “Not only is the sheer noise level much higher, but the piercing look of the eyes, the touch of the hands, and the mutual bathing in the warm moist breath during conversation represent stepped-up sensory inputs to a level which many Europeans find unbearably intense. On the other hand, the distance preferred by North Americans may leave an Arab suspicious of intentions because of the lack of olfactory contact.”73

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 139

The Muslim expression Bukra insha Allah—“Tomorrow if Allah wills”—explains much about the Arab culture and its approach to business transactions. A cultural clash typically occurs when an American tries to give an Arab a deadline. “‘I am going to Damascus tomorrow morning and will have to have my car tonight,’ is a sure way to get the mechanic to stop work,” explains Hall, “because to give another person a deadline in this part of the world is to be rude, pushy, and demanding.”74 In such in- stances, the attitude toward time communicates as loudly as words.

In verbal interactions, managers must be aware of different patterns of Arab thought and communi- cation. Compared to the direct, linear fashion of American communication, Arabs tend to meander. They start with social talk, discuss business for a while, loop around to social and general issues, then back to business, and so on.75 American impatience and insistence on sticking to the subject will cut off their loops, triggering confusion and dysfunction. Instead, Westerners should accept that considerable time will be spent on small talk and socializing, with frequent interruptions, before getting down to business.

Exhibit 4-5 illustrates some of the sources of noise that are likely to interfere in the communication process between Americans and Arabs, thereby causing miscommunications and misunderstandings.

For people doing business in the Middle East, the following are some useful guidelines for effective communication.

• Be patient. Recognize the Arab attitude toward time and hospitality—take time to develop friendship and trust because these are prerequisites for any social or business transactions.

• Recognize that people and relationships matter more to Arabs than the job, company, or contract—conduct business personally, not by correspondence or telephone.

• Avoid expressing doubts or criticism when others are present—recognize the importance of honor and dignity to Arabs.

• Adapt to the norms of body language, flowery speech, and circuitous verbal patterns in the Middle East and don’t be impatient to get to the point.

• Expect many interruptions in meetings, delays in schedules, and changes in plans.76

Context Cultural values, expectations, norms

Display Rules

N O I S E

Decoding Feedback medium Encoding

Physical distance/cold

directness; impatience;

monochronic time system

Dissonance in low/ high contact

and time/logic; friendship and

loyalty not established

Hospitality and honor offended; intended message cut off

Polychronic time system; hospitality;

open meeting dissonance

Demonstrative flattery/flowery

and indirect language;

close contact

Verbal/ nonverbal

incongruence; high-to-low

contact; events “if Allah wills”

Sender AMERICAN

Receiver

Receiver ARAB Sender

Encoding Medium/message Decoding

Misunderstood message

Impatience; frustration;

honor misunderstood

ExHIBIT 4-5 Miscommunication between Americans and Arabs Caused by Cross-Cultural Noise

140 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Communication Channels In addition to the variables related to the sender and receiver of a message, the variables linked to the channel itself and the context of the message must be taken into consideration. These vari- ables include fast or slow messages and information flows as well as different types of media.

INFORMATION SYSTEMS Communication in organizations varies according to where and how it originates, the channels and the speed at which it flows, whether it is formal or informal, and so forth. The type of or- ganizational structure, the staffing policies, and the leadership style will affect the nature of an organization’s information system.

As an international manager, it is useful to know where and how information originates and the speed at which it flows, both internally and externally. In centralized organizational struc- tures, as in South America, most information originates from top managers. Workers take less responsibility for keeping managers informed in a South American company than in a typical company in the United States, where delegation results in information flowing from the staff to the managers. In a decision-making system in which many people are involved, such as the ringi system of consensus decision making in Japan, the expatriate needs to understand that there is a systematic pattern for information flow.

Context also affects information flow. In high-context cultures (such as in the Middle East), information spreads rapidly and freely because of the constant close contact and the implicit ties among people and organizations. Information flow is often informal. In low-context cultures (such as Germany or the United States), information is controlled and focused and thus does not flow so freely.77 Compartmentalized roles and office layouts stifle information channels; infor- mation sources tend to be more formal.

It is crucial for an expatriate manager to find out how to tap into a firm’s informal sources of information. In Japan, employees usually have a drink together on the way home from work, and this becomes an essential source of information. However, such communication networks are based on long-term relationships in Japan (and in other high-context cultures). The same information may not be readily available to outsiders. A considerable barrier in Japan separates strangers from familiar friends, a situation that discourages communication.

Americans are more open and talk freely about almost anything, whereas Japanese will disclose little about their inner thoughts or private issues. Americans are willing to have a wide public self, disclosing their inner reactions verbally and physically. In contrast, the Japanese pre- fer to keep their responses largely to their private self. The Japanese expose only a small portion of their thoughts; they reduce, according to Barnlund, “the unpredictability and emotional inten- sity of personal encounters.”78 In intercultural communication between Americans and Japanese, cultural clashes between the public and private selves result when each party forces its cultural norms of communication on the other. In the American style, the American’s cultural norms of explicit communication impose on the Japanese by invading the person’s private self. The Japanese style of implicit communication causes a negative reaction from the American because of what is perceived as too much formality and ambiguity, which wastes time.79

Cultural variables in information systems and context underlie the many differences in com- munication style between Japanese and Americans. Exhibit 4-6 shows some specific differences. The Japanese ningensei (human beingness) style of communication refers to the preference for humanity, reciprocity, a receiver orientation, and an underlying distrust of words and analytic logic.80 The Japanese believe that true intentions are not readily revealed in words or contracts but are, in fact, masked by them. In contrast to the typical American’s verbal agility and explicit- ness, Japanese behaviors and communications are directed to defend and give face for everyone concerned; to do so, they avoid public disagreements at all costs. In cross-cultural negotiations, this last point is essential.

The speed with which we try to use information systems is another key variable that needs attention to avoid misinterpretation and conflict. Americans expect to give and receive informa- tion very quickly and clearly, moving through details and stages in a linear fashion to the con- clusion. They usually use various media for fast messages—IMs, emails, Skype, faxes, social media, and familiar relationships—to give all the facts up front. In contrast, the French use the slower message channels of deep relationships, culture, and sometimes mediators to exchange information. A French written communication will be tentative, with subsequent letters slowly

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 141

building up to a new proposal. The French preference for written communication, even for infor- mal interactions, echoes the formality of their relationships—and results in slowing a message transmission down that often seems unnecessary to Americans.81

In short, it behooves Americans to realize that, because much of the world exchanges business information through slower message media, it is wise to schedule more time for trans- actions, develop patience, and learn to get at needed information in more subtle ways—after building rapport and taking time to observe the local system for exchanging information.

We have seen that cross-cultural misinterpretation can result from noise in the actual trans- mission of the message—the choice or speed of media. Interpreting the meaning of a message can thus be as much a function of examining the transmission channel (or medium) as it is of examining the message itself.

INFORMATION TECHNOLOGY: GOING GLOBAL AND ACTING LOCAL

All information is local; IT systems can connect every corner of the globe, but IT managers are learning they have to pay attention to regional differences.82

Computerworld

Using the Internet as a global medium for communication has enabled companies of all sizes to develop a presence quickly in many markets around the world—and, in fact, has enabled them to go global. However, their global reach cannot alone translate into global business. Those compa- nies are learning that they have to adapt their e-commerce and their enterprise resource planning (ERP) applications to regional idiosyncrasies beyond translation or content management issues; for example, even asking for a name or an email address can incur resistance in many countries where people do not like to give out personal information.83 Although communication over the Internet is clearly not as personal as face-to-face, cross-cultural communication, those transac- tions must still be regionalized and personalized to adjust to differences in language, culture, local laws, and business models as well as differences in the level of development in the local telecommunications infrastructure. Yet, if the Internet is a global medium for communication,

ExHIBIT 4-6 Sources of Potential Miscommunication among Japanese and North Americans

Sources: E. T. Hall and M. R. Hall, Understanding Cultural Differences (Yarmouth, ME: Intercultural Press, 1990; W. Gudykunst, L. Stewart, and S. Ting-Toomey, Communication, Culture, and Organizational Processes (Sage Publications, 1985); G. Hofstede, Culture’s consequences: International differences in work-related values (Sage, Beverly Hills, CA (1980); Ikushi Yamaguchi, “Influences of organizational communication tactics on trust with procedural justice effects: A cross-cultural study between Japanese and American workers, International Journal of Intercultural Relations Vol. 33, 1, January 2009, pages 21–31; R. G. Linowes, “The Japanese Manager’s Traumatic Entry into the United States: Understanding the American- Japanese Cultural Divide,” Academy of Management Executive 7, 4 (1993), p.24; A. Goldman, “The Centrality of ‘Ningensei’ to Japanese Negotiating and Interpersonal Relationships: Implications for U.S.-Japanese Communication,” International Journal of Intercultural Relations 18, 1. (1994).

Japanese North-American

Purpose/Style Focus toward relationships; implicit, soft, gentle, humility and understatement.

Focus on task; analytic, explicit, direct, assertive, self-confident.

Non-verbal High context; tacit understanding, based on trust, nuances, face-saving, silence, sensitivity to others.

Low context; outspoken; bold; goal-oriented; confrontational; pointed messages, impersonal.

Negotiations and Decision-making

Communicate with group for consensus and trust. Delay decisions; prefer private venue for decisions; Long-term orientation/cautious, protective of group/ company. Tentative discussions/inferred meanings; avoids disagreements.

Individualistic. Prefer decisions at the table; risk-taking; straight-forward; short-term orientation for career and profit motive. May exert pressure; specific linear presentations; impersonal.

4-3. To be aware of the impact of IT on cross-border communications

142 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

why do so many U.S. companies treat the web as a U.S.-centric phenomenon? Giving preference to some geographic regions, languages, and cultures is “a short-sighted business decision that will result in diminished brand equity, market share, profits and global leadership.”84

When Baidu.com—China’s leading search engine—made a business decision in July 2011 to partner with Microsoft to offer web search services in English, it had clearly realized that it needed to go beyond Chinese. Back in 2011, former Baidu executive, Kaiser Kuo stated, “More and more people here are searching for English terms.” In October 2018, Baidu announced a new artificial intelligence (AI) tool that can translate English into Chinese and German with virtu- ally no delay, which was a strategic response to Google. Voice technology is considered a major growth segment for technology multinationals such as Apple, Amazon, and Google.85

For its part, Microsoft’s expansion of Bing in China—albeit a temporary block in January 2019—gave it access to the world’s largest Internet population of more than 772 million users.86 Both companies realized that the English-language search results would be censored (as hap- pened to Google, which pulled out of the mainland and went to Hong Kong), and it is reported that Microsoft is cooperating with China’s government on censorship rules regarding the content that can be accessed.87 Beijing requires Internet companies operating on the mainland to censor results the government considers threatening, including references to human rights issues and dissidents.88 Clearly, both going global and acting local can be fraught with difficulties.

It seems essential, then, for a global online strategy also to be multilocal. The impersonal nature of the web must somehow be adapted to local cultures to establish relationships and create customer loyalty. Effective technological communication requires even more cultural sensitivity than face-to-face communication because of the inability to assess reactions and get feedback or, in many cases, even retain contact. It is still people, after all, who respond to and interact with other people through the medium of the Internet, and those people interpret and respond accord- ing to their own languages and cultures as well as their local business practices and expectations. In Europe, for example, significant differences in business cultures and e-business technology have slowed e-business progress there. However, some companies are making progress in pan- European integration services, such as leEurope, which aims to cross language, currency, and cultural barriers. Specifically, leEurope is building a set of services “to help companies tie their back-end e-business systems together across European boundaries through a series of mergers involving regional e-business integrators in more than a dozen countries.”89

MANAGING CROSS-CULTURAL COMMUNICATION Steps toward effective intercultural communication include the development of cultural sensitiv- ity, careful encoding, selective transmission, careful decoding, and appropriate follow-up actions.

Developing Cultural Sensitivity When acting as a sender, a manager must make it a point to know the receiver and encode the message in a form that will most likely be understood as intended. On the manager’s part, this requires an awareness of his or her own cultural baggage and how it affects the communication process. In other words, what kinds of behaviors does the message imply, and how will they be perceived by the receiver? The way to anticipate the most likely meaning that the receiver will attach to the message is to internalize honest cultural empathy with that person. What is the cul- tural background—the societal, economic, and organizational context—in which this communi- cation is taking place? What are this person’s expectations regarding the situation, what are the two parties’ relative positions, and what might develop from this communication? What kinds of transactions and behaviors is this person used to? Cultural sensitivity (discussed in Chapter 3) is really just a matter of understanding the other person, the context, and how the person will re- spond to the context. Americans, unfortunately, have a rather negative reputation overseas of not being culturally sensitive. One not-for-profit group, called Business for Diplomatic Action, has the following advice for Americans when doing business abroad, in its attempts to counteract the stereotypical American traits such as boastfulness, loudness, and speed.

• Read a map. Familiarize yourself with the local geography to avoid making insulting mistakes.

• Dress up. In some countries, casual dress is a sign of disrespect.

4-4. To learn how to manage cross-cultural business communications successfully

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 143

• Talk small. Talking about wealth, power, or status—corporate or personal—can create resentment.

• No slang. Even casual profanity is unacceptable.

• Slow down. Americans talk fast, eat fast, move fast, live fast. Many cultures do not.

• Listen as much as you talk. Ask people you’re visiting about themselves and their way of life.

• Speak lower and slower. A loud voice is often perceived as bragging.

• Religious restraint. In many countries, religion is not a subject for public discussion.

• Political restraint. Steer clear of this subject. If someone is attacking U.S. politicians or policies, agree to disagree.90

Careful Encoding In translating his or her intended meaning into symbols for cross-cultural communication, the sender must use words, pictures, or gestures that are appropriate to the receiver’s frame of ref- erence. Of course, language training is invaluable, but senders should also avoid idioms and regional sayings (such as “Go fly a kite” or “Foot the bill”) in a translation, or even in English when speaking to a non-American who knows little English.

Literal translation, then, is a limited answer to language differences. Even for people in English-speaking countries, words can have different meanings. Ways to avoid problems are to speak slowly and clearly, avoid long sentences and colloquial expressions, and explain things in several ways and through several media if possible. However, even though English is in common use around the world for business transactions, the manager’s efforts to speak the local language will greatly improve the climate. Sometimes people from other cultures resent the assumption by English-speaking executives that everyone else will speak English.

Language translation is only part of the encoding process; the message also is expressed in nonverbal language. In the encoding process, the sender must ensure congruence between the nonverbal and the verbal message. In encoding a message, therefore, it is useful to be as objective as possible and not to rely on personal interpretations. To clarify their messages fur- ther, managers can hand out written summaries of verbal presentations and use visual aids such as graphs or pictures. A good general guide is to move slowly, wait, and take cues from the receivers.

Selective Transmission The type of medium chosen for the message depends on the nature of the message, its level of importance, the context and expectations of the receiver, the timing involved, and the need for personal interaction, among other factors. Typical media include instant messaging (IM), email, letters or memos, reports, meetings, telephone calls, teleconferences, videoconferences, or face-to-face conversations. The secret is to find out how communication is transmitted in the local organization—how much is downward versus upward or vertical versus horizontal, how the grapevine works, and so on. In addition, the cultural variables discussed earlier need to be considered: whether the receiver is from a high- or low-context culture, whether he or she is used to explicit or implicit communication, and what speed and routing of messages will be most effective.

For the most part, it is best to use face-to-face interaction for relationship building or for other important transactions, particularly in intercultural communications, because of the lack of familiarity between parties. Personal interactions give the manager the opportunity to get im- mediate verbal and visual feedback and make rapid adjustments in the communication process.

International dealings are often long-distance, of course, limiting the opportunity for face- to-face communication. However, personal rapport can be established or enhanced through tele- phone calls or videoconferencing and through trusted contacts. Modern electronic media and social networks can be used to break down communication barriers by reducing waiting periods for information, clarifying issues, and allowing instant consultation, such as through Skype, for one-on-one or group video-chat. Ford Europe uses videoconferencing for engineers in Britain and Germany to consult about quality problems. Through the video monitors, they examine one another’s engineering diagrams and usually find a solution that gets the factory moving again in a short time.

144 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Careful Decoding of Feedback Timely and effective feedback channels can also be set up to assess a firm’s general communica- tion about the progression of its business and its general management principles. The best means for getting accurate feedback is through face-to-face interaction because this allows the manager to hear, see, and immediately sense how a message is being interpreted. When visual feedback on important issues is not possible or appropriate, it is a good idea to use several means of attaining feedback, in particular by employing third parties.

Decoding is the process of translating the received symbols into the interpreted message. The main causes of incongruence are because (1) the receiver misinterprets the message, (2) the receiver encodes his or her return message incorrectly, or (3) the sender misinterprets the feed- back. Two-way communication is thus essential for important issues so that successive efforts can be made until an understanding has been achieved. Asking other colleagues to help interpret what is going on is often a good way to break a cycle of miscommunication.

Perhaps the most important means for avoiding miscommunication is to practice careful de- coding by improving one’s listening and observation skills. A good listener practices projective listening, or empathic listening—listening, without interruption or evaluation, to the full message of the speaker; attempting to recognize the feelings behind the words and nonverbal cues; and understanding the speaker’s perspective.

At the multinational corporation (MNC) level, avenues of communication and feedback among parent companies and subsidiaries can be kept open through telephone calls, regular meetings and visits, reports, and plans, all of which facilitate cooperation, performance con- trol, and the smooth running of the company. Communication among far-flung operations can be managed best by setting up feedback systems and liaison people. The headquarters people should maintain considerable flexibility in cooperating with local managers and allowing them to deal with the local context as they see fit.

Follow-Up Actions Managers communicate through both action and inaction. Therefore, to keep open the lines of communication, feedback, and trust, managers must follow through with action on what has been discussed and then agreed upon—typically a contract, which is probably the most impor- tant formal business communication. Unfortunately, the issue of contract follow-through is a particularly sensitive one across cultures because of the different interpretations regarding what constitutes a contract (perhaps a handshake, perhaps a full legal document) and what actions should result. Trust, future communications, and future business are based on such interpreta- tions, and it is up to managers to understand them and follow through on them.

The management of cross-cultural communication depends largely on a manager’s personal abilities and behavior. Behaviors that researchers indicate to be most important to intercultural communication effectiveness (ICE) are listed here, as reviewed by Ruben.

• Respect (conveyed through eye contact, body posture, voice tone, and pitch)

• Interaction posture (the ability to respond to others in a descriptive, nonevaluative, and nonjudgmental way)

• Orientation to knowledge (recognizing that one’s knowledge, perception, and beliefs are valid only for oneself and not for everyone else)

• Empathy

• Interaction management

• Tolerance for ambiguity

• Other-oriented role behavior (one’s capacity to be flexible and adopt different roles for the sake of greater group cohesion and group communication)91

Researchers have established a relationship between personality traits and behaviors and the ability to adapt to the host-country’s cultural environment.92 What is seldom pointed out, however, is that communication is the mediating factor between those behaviors and the relative level of adaptation the expatriate achieves. The communication process facilitates cross-cultural adaptation, and, through this process, expatriates learn the dominant communication patterns of the host society. Therefore, we can link personality factors shown by research to ease adaptation with those necessary for effective intercultural communication.

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 145

Kim has consolidated the research findings of these characteristics into two categories: (1) openness—traits such as open-mindedness, tolerance for ambiguity, and extrovertedness— and (2) resilience—traits such as having an internal locus of control, persistence, a toler- ance of ambiguity, and resourcefulness.93 These personality factors, along with the expatriate’s cultural and racial identity and the level of preparedness for change, comprise that person’s potential for adaptation. The level of preparedness can be improved by the manager before his or her assignment by gathering information about the host country’s verbal and nonverbal communication patterns and norms of behavior. However, we must remember the practicali- ties of situational factors that can affect the communication process—variables such as the physical environment, time constraints, the degree of structure, and feelings of irritability or overwork, among others.

CONCLUSION Effective intercultural communication is a vital skill for international managers and domestic managers of multicultural workforces. Because miscommunication is much more likely to occur among people from different countries or racial backgrounds than among those from similar backgrounds, it is important to be alert to how culture is reflected in communication—in par- ticular through the development of cultural sensitivity and an awareness of potential sources of cultural noise in the communication process. A successful international manager is thus attuned to these variables and is flexible enough to adjust his or her communication style to address the intended receivers best—that is, to do it their way.

Cultural variables and the manner in which culture is communicated underlie the pro- cesses of negotiation and decision making. How do people around the world negotiate? What are their expectations and their approach to negotiations? What is the importance of understanding negotiation and decision-making processes in other countries? Chapter 5 ad- dresses these questions and makes suggestions to help the international manager handle these important tasks.

■ Communication is an inherent part of a manager’s role, taking up the majority of the manager’s time on the job. Effective intercultural communication largely determines the success of international transactions or the output of a culturally diverse workforce.

■ Culture is the foundation of communication, and communication transmits culture. Cultural variables that can affect the communication process by influ- encing a person’s perceptions include attitudes, social organizations, thought patterns, roles, language, non- verbal language, and time.

■ Language conveys cultural understandings and social norms from one generation to the next. Body lan- guage, or nonverbal communication, is behavior that communicates without words. It accounts for 65 to 93 percent of interpreted communication.

■ Types of nonverbal communication around the world are kinesic behavior, proxemics, paralanguage, and object language.

■ Effective cross-cultural communication must take into account whether the receiver is from a country with a monochronic or a polychronic time system.

■ Variables related to channels of communication include high- and low-context cultures, fast or slow messages and information flows, and various types of media.

■ In high-context cultures, feelings and messages are im- plicit and must be accessed through an understanding of the person and the system. In low-context cultures, feelings and thoughts are expressed, and information is more readily available.

■ The effective management of intercultural communica- tion necessitates the development of cultural sensitiv- ity, careful encoding, selective transmission, careful decoding, and follow-up actions.

■ Certain personal abilities and behaviors facilitate adap- tation to the host country through skilled intercultural communication.

■ Communication through the Internet must still be lo- calized to adjust to differences in language, culture, local laws, and business models.

■ Take extra precautions about comprehension when business professionals are speaking a nonnative language.

■ Don’t assume that all native speakers of a language communicate in the same manner. For example, mis- communications can arise among British, North Americans, Australians, and New Zealanders.

Summary of Key Points

146 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

4-1. How does culture affect the process of attribution in commu- nication? Can you relate this to some experiences you have had with your classmates?

4-2. What is stereotyping? Give some examples. How might people stereotype you?

4-3. What is the relationship between language and culture? How is it that people from different countries who speak the same language may still miscommunicate?

4-4. Give some examples of cultural differences in the interpreta- tion of body language. What is the role of such nonverbal communication in business relationships?

4-5. Explain the differences between high- and low-context cul- tures, giving some examples. What are the differential ef- fects on the communication process?

4-6. Discuss the role of information systems in a company, how and why they vary from country to country, and the effects of these variations.

Discussion Questions

4-7. Invite some students who are from other countries to your class. Ask them to bring photographs, slides, and so forth of people and events in their native countries. Have them explain the meanings of various nonverbal cues such as gestures, dress, voice inflections, architecture, and events. Discuss with them any differences between their explana- tions and the attributions you assigned to those cues.

4-8. Interview a faculty member or a businessperson who has worked abroad. Ask him or her to identify factors that fa- cilitated or inhibited adaptation to the host environment. Ask whether more preparation could have eased the transition and what, if anything, that person would do differently be- fore another trip.

Application Exercises

Italy’s D & G in China: Fashion Show Canceled in Shanghai Following Scandal

CASE STUDY

On Wednesday, November 21, the WeChat account of the official People’s Daily issued a statement believed to be from the Ministry of Culture and Tourism; the Dolce & Gabbana (D&G) fashion show in Shanghai had been cancelled. The move to cancel the fashion show was due to an outcry over a se- ries of promotional videos posted by D&G titled “Eating with Chopsticks” and subsequent insulting posts made by Stefano Gabbana, the co-founder of the D&G brand, in a private Instagram chat. As a result, the Italian fashion house was forced to withdraw its products from Chinese e-commerce sites amid calls to boycott the brand, possibly eliminating years of brand building in the Chinese market.

The videos, which were posted on Dolce & Gabbana’s website, were promotion for the company’s new campaign D&G Loves China, billed as a Tribute to China. The clips featured a Chinese model dressed in a red sequined D&G dress, giggling as she clumsily used a pair of chopsticks to eat pizza, spaghetti, and traditional Sicilian cannolo. A male voiceover in a rather suggestive tone asks the actress “Is it too big for you?”94 Social media posts on Instagram were quick to label the ads as stereotypical, racist, culturally insensitive, and disrespectful toward Asian females. The three clips were originally posted on Weibo, one of the most popular micro- blogging websites in China, and were promptly deleted after the outrage over the brand’s social media posts. However, the story did not end there, and Stefano Gabbana went on to defend their actions on Instagram by saying, “the whole world knows that the Chinese eat with chopsticks and westerners with a fork.”95

An online spat ensued between Stefano Gabbana and a London-based fashion blogger, Michaela Tranova, who accused him of being racist. Messages from his Instagram account went

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 147

viral before being quickly deleted, but these messages remained on Tranova’s account. In an exchange with Tranova, Gabbana commented that the videos were deleted from Chinese social media “because my office is stupid as the superiority of the Chinese . . . it was my will I never cancel the post.”96 The post turned nasty when he referred to “China Ignorant Dirty Smelling Mafia.”97 The comments were accompanied by some rude looking emojis which were not very complimentary of China. The blogger captured a screen shot of the conversation and posted it on her own account.

Customers, activists, and celebrities took to social media at warp speed to express criticism on their social media sites. The crisis blew into arguably its worst public nightmare ever. Fans of D&G were stunned and shocked that a brand they cherished would actually refer to their cul- ture as “ignorant” or “dirty smelling.” One social media user renamed the brand Dead and Gone (D&G). Unfortunately for Gabbana, the rapid escalation into a public relations disaster, fuelled by social media trolls, enabled people to vent their anger in quick time.

It was not clear who was the target audience of the video, a Chinese or western audience. Some social media users alleged the fashion house was mocking Chinese culture by featuring an instructional video on how to use chopsticks to eat foreign food, as stereotyping, portraying them as ignorant, unrefined, and lacking culture, people who do not know how to eat non-Chinese food, people ignorant of other cultures. The tone was patronising. The irony was certainly not lost in translation. Many posts on social media claimed the videos were misinformed and dis- tasteful. The lack of cultural sensitivity in the promotional videos shook the Chinese national pride to the core. Reactions were strong and swift with most people expressing disdain for the hurtful content and at the same time declaring their pride at being Chinese.

A comment on the Stefano Gabbana Instagram account claimed it had been hacked, adding, “I love China and Chinese culture. I’m sorry for what happened.”98 A parody of the D&G video showed a white man trying to eat Chinese food with a fork and knife. The brand’s Ambassador for the Asia Pacific region, singer Karry Wang, was quick to react to the snowballing effect of the fallout by ending her contract with the company. She said in a statement, “The motherland is above everything. We are deeply proud and confident about Chinese culture and spiritual aes- thetics. No doubt you are the best.”99 “Crouching Tiger, Hidden Dragon” star Zhang Ziyi also used social media to say she would boycott the brand after “they had disgraced itself.”100 Estelle Chen, a well-known Chinese model, posted on Instagram her outrage at the events of the day. “China is rich yes, but China is rich in its values, its culture and its people and they won’t spend a penny on a brand that does not respect that.”101

Later that day Dolce & Gabbana posted on Twitter:

Our dream was to bring to Shanghai a tribute event dedicated to China which tells our history and vision. It was not simply a fashion show, but something that we created especially with love and passion for China and all the people around the world who loves D&G. What happened today was very unfortunate not only for us, but also for all the people who worked day and night to bring this event to life. From the bottom of our hearts, we would like to express our gratitude to our friends and guests.102

Social media users felt it was a lukewarm explanation at best but not an apology. The dam- age was done. The posts on his Instagram site were seen as more damaging than the videos. Others felt that no one in China would attend the show in Shanghai, thus it was cancelled. Most posts berated the company D&G for making money in China yet treating the locals like idiots. Another post on Weibo urged D&G to go someplace else as there is no money for them in China.

Chinese music bands were quick to get in on the act, and Wang Zixin, the leader of CD Rev, a nationalist rap band, remarked that companies who do not respect China do not deserve China’s respect and encouraged people not to forget about the actions of the company for a long time to come. Shaun Rein, founder and managing director of China Market Research Group in Shanghai, posted that Dolce & Gabbana could expect a real tough time over the next six to 12 months in the Chinese market.

The ruling Communist Party’s People’s Daily newspaper weighed in on the debate on Weibo: “China has always been friendly to foreign businesses. But it does not mean there’s no bottom line. There is a deal only when there is respect.”103 A comment on the WeChat account of the offi- cial People’s Daily requested caution: “If one is not willing to understand China, eventually it will lose the China market and the benefits arising from China’s growth.”104 The Central Committee

148 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

of the Communist Youth league demanded D&G “respect Chinese people”105 as the basic prin- ciple of foreign enterprises investing in China. Mr Rein, founder and managing director of China Market Research in Shanghai, said it is a big mistake when “westerners come up with creative content but do not understand how the campaigns will be received by Chinese consumers.”106

D&G is the latest multinational company to get in trouble for marketing campaigns that an- gered customers not only in China but around the world. The local consumers cannot be blamed for feeling slighted by foreign brands. In 2018, Mercedes-Benz were forced to apologise to Chinese customers for an Instagram post showing one of its luxury cars along with a quote from exiled Tibetan spiritual leader Dalai Lama, whom Beijing consider a dangerous activist. In April 2018, the Civil Aviation Administration of China demanded that 36 foreign airlines list Taiwan as a region of China. Later, in May 2018, Gap, A US clothing retailer, had to apologise and pull a T-shirt featuring a map of China that left out territories claimed by the country.

In China, previously tolerated actions such as the ones mentioned may have gone unchecked but multinationals are noticing an increase in the case of companies been reprimanded for failing to take China seriously. There is a growing need for luxury brands to build trust in the region, especially at a time when the Chinese government is not encouraging spending money on luxury items. Most companies have offered appropriate apologies and in the case of Taiwan, referred to it as Taiwan, China. Fear is growing as companies are double-checking their own websites as well as those of their suppliers to check they comply and do not cause offense.

The backlash comes at a time what many observers note there is a trend in rising nationalism compounded by increasing competition and complex challenges in the luxury retail market. The Chinese market is reported to be worth 30% of the whole luxury market, with increasing growth expected yearly by 6% according to a study by Boston Consulting. James Robinson, a consultant at the Shanghai office of APCO, said in May 2018, “Companies are facing a new type of ‘geo- commercial’ risk as they become more entangled in competing geo-political and geo-economic agendas.”107 Cultural ignorance is no longer an excuse for breaking culture codes. Many multi- nationals fear intervention and increased assertiveness by the Chinese government, making trade with China more complicated. In a globalised competitive luxury market companies need more than ever to be able to navigate cultural nuances to survive.108 Foreign luxury brands have expe- rienced a two-thirds growth in demand for luxury items in China. China hosts some high fashion events like Victoria’s Secret show in Shanghai, cementing its importance for luxury retail.

D&G opened its first store there in 2005 and has 44 boutiques around the country, so it is not a newcomer to the Asian market. It is not clear why D&G did not demonstrate a better un- derstanding of the Chinese market and ensure that marketing material is vetted by staff with a knowledge of the local market, especially as this was not D&G’s first controversy in China. Last year’s promotional DG Loves China videos featured models with taxi drivers, garbage collectors and street vendors, a campaign that Chinese consumers felt highlighted the negative side of the country rather than portraying a modern China. Many multinationals fail to realise that market- ing in China has to be approached differently from marketing in the west.

Lundquist srl, a Milan-based digital communication consultancy company, ranked D&G 70th in a ranking of Italian listed and non-listed companies. The focus of the study was to analyse how companies are communicating to investors and other stakeholders and examine the ability of corporate communication to support competitiveness and to inspire trust. Joakim Lundquist, CEO and founder of Lundquist srl, said the scandal should be a wake-up call for the company be- cause they can no longer “ignore stakeholder expectations for transparency, openness, account- ability and dialogue.”109 He warned that such companies need a structured strategy in place which builds trust and is not over reliant on celebrity individuals who may be caught up in the moment in a hyper connected digital age. However, he feels not all is lost and D&G has an op- portunity to redeem itself by doing the right thing by its customers by encouraging positive social behaviour change, improve brand image, build trust. D&G needs to build transparency specially to cater to the needs of Gen Y and X; studies have indicated these generations in particular are indicating higher ethical brand choices than previous generations. Enthused by the # Me Too movement these digital natives are active on social media and not scared to call out gender mal- practice on social media sites.

In the wake of mass consumer boycotts and China’s online retailers pulling products from their websites, shoppers returning D&G articles, D&G begged for forgiveness to stem the global outcry. A solemn looking Domenico Dolce and Stefano Gabbana, speaking in Italian, sitting

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side-by-side against a back drop of a red wall, went on camera to apologise to the Chinese people in an 85-second video with Chinese subtitles. The forgiveness video was posted on the Chinese platform, Weibo. Following is the transcript of the apology video by Dolce and Gabbana.110

Over the past few days we have thought long and hard with sadness about everything that has happened and what we have caused in your country and we are very sorry. Our families have always taught us to respect the various cultures in the world and this is why we want to ask you for your forgiveness if we have made mistakes in interpret- ing yours. We also want to apologise to all of the many Chinese people throughout the world. We take this apology very seriously as well as this message we have always been in love with China. We have visited it and seen many of its cities, we love your culture and we certainly have much to learn, this is why we are sorry if we have made mistakes in the way we expressed ourselves. We will never forget this experience and it will cer- tainly never happen again. In fact we will work to do things better. We will respect the Chinese culture in every way possible from the bottom of our hearts we ask for forgive- ness. Sorry (in Mandarin).

The video with the apology demonstrates the growing importance of the Chinese luxury retail market and the risks of operating in it. This is not only a worry for the company but also stakeholders who are interested in performance and good returns. Competition is vying for mar- ket share in this growing luxury market.

The message from China is clear: do not mess with the Chinese consumer; the tiger has awoken and is starting to show its teeth. Many brand experts feel it will be a long road back for the company to gain a level of acceptance in the country they had previously enjoyed a measure of success. D&G’s behaviour has broken a kind of culture code resulting in a loss of trust and eventually brand damage. The resulting loss of revenue will shake up a company that could see up to 30% wiped off their revenue weakening its competitive position and risking elimination. For this reason alone, the apology from the bottom of their hearts was necessary because without the Chinese market, the company will be humbled.

Case Questions

4-11. D&G faced a consumer backlash in China after the video scandal. List the main reasons why you think this happened.

4-12. Using the information above and the cultural dimensions explored in Chapters 3 and 4, discuss whether Chinese consumers should forgive D&G’s misunderstanding of their culture.

4-13. Fashion houses often use edgy ads to promote products. Such edgy campaigns attract attention and can cross the line to cause disrespect in global markets. How can multinational companies ensure advertising content does not antagonize local consumers?

4-14. Discuss the risk of using humor when advertising across borders. 4-15. Multinational is not necessarily multicultural. What do companies need to consider when advertis-

ing in the Chinese luxury market?

Source: Christina Neylan. © Lucerne University of Applied Sciences and Arts Business School. Used with permission.

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152

5-1. To become familiar with the role of negotiation in implementing a firm’s strategy and the various stakeholders who must be considered

5-2. To learn the stages of the negotiation process and how to prepare for cross-cultural business negotiations

5-3. To gain insight into the various types of negotiating styles around the world

5-4. To recognize that managing negotiation requires learning about the culturally based behavioral differences, values, and agendas of the negotiating parties and how to build trust for successful negotiations

5-5. To appreciate the variables in the decision-making process and understand the influence of culture on decision making

Cross-Cultural Negotiation and Decision Making

O B J E C T I V E S

5 C H A P T E R

Opening Profile: Hitachi Looks for Deal with ABB on Power Grids Business1

Japan’s Hitachi is in discussions to buy part or all of ABB ‘s power grids business, a division that analysts have said may be worth around $13bn.

According to people close to the matter, the two sides have been talking privately and the negotiations are at a fairly developed stage.

However, those people cautioned that a deal was not assured and they declined to disclose the valu- ation for the unit being discussed or the exact structure of a potential agreement.

One person said ABB might retain a minority stake in the unit, which makes products that channel electricity over long distances. The two companies declined to comment.

Shares in ABB climbed 1.5 per cent on Friday (November 16, 2018) to SFr20.06 after Reuters reported that the Swiss company was in talks with three Asian suitors, including Hitachi and Japan’s Mitsubishi Electric, over a deal for the unit.

Another person close to the situation confirmed that at least one Japanese industrial conglom- erate was in discussions with ABB about a large asset purchase, but stressed that nothing had been decided.

Any transaction would add to the record pace of outbound dealmaking by Japanese companies in 2018, which has seen them so far agree nearly $160bn in deals, according to data from Dealogic.

For Hitachi, the talks come as the group has aggressively sold less profitable divisions to expand its core businesses, including its power and energy operations. Hitachi, which has a joint venture with ABB to supply equipment for Japan’s energy grids, has said it wants to increase grid-based revenue 60 per cent to ¥120bn ($1bn) in three years.

ABB mulled divesting its power grids arm two years ago after pressure from Cevian Capital, the European activist fund that holds a 5 per cent stake.

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 153

A strategic review at the time concluded it was best kept under ABB’s umbrella. Since then, the division’s performance has improved. Power grids reported pre-tax operating profits of $972m last year on revenues of $10.4bn.

The proposed transaction would significantly expand Hitachi’s power sector business outside Japan while freeing up ABB to focus on its robotics, digital industry and automation businesses.

Analysts have said the unit could be worth as much as $13bn including debt, although people close to the deal hinted at a lower figure.

ABB, which has worked with Hitachi in Japan since 2014, said yesterday it was “in discussions with Hitachi to expand and redefine the existing strategic power grid partnership between the two companies”.

The Swiss group gave no further details and warned “there can be no certainty that any transaction will occur”. But people close to the talks said the deal was likely to involve Hitachi acquiring a majority stake in the ABB unit, with the Swiss company keeping a minority position.2

The proposed transaction would significantly expand Hitachi’s power sector business outside Japan while freeing up ABB to focus on its robotics, digital industry and automation businesses.

Analysts have said the unit could be worth as much as $13bn including debt, although people close to the deal hinted at a lower figure.

ABB, which has worked with Hitachi in Japan since 2014, said yesterday it was “in discussions with Hitachi to expand and redefine the existing strategic power grid partnership between the two companies”.

Toshiaki Higashihara, Hitachi’s chief executive, has sought to catapult the Japanese group into the ranks of global industrial players such as General Electric and Siemens.3

Source: © The Financial Times Limited 2019.

As illustrated in the opening profile, global managers negotiate with parties in other countries to make specific plans for strategies—for example, exporting, joint ventures, acquisitions, and divestitures—as well as for continuing operations. Even as cross-cultural negotiations offer added complexity for a firm’s negotiators, those negotiators may also encounter the need to negotiate with government-owned companies.

Managers must prepare for strategic negotiations. Next, the operational details must be negotiated—staffing key positions, sourcing raw materials or component parts, and repatriating profits, to name a few. As globalism burgeons, the ability to conduct successful cross-cultural negotiations cannot be overemphasized. Failure to negotiate productively will result at best in confusion and delays and at worst in lost potential alliances and lost business.

During the process of negotiation—whether before, during, or after negotiating sessions— all kinds of decisions are made, both explicitly and implicitly. A consideration of cross-cultural negotiations must therefore include the various decision-making processes that occur around the world. Negotiations cannot be conducted without making decisions.

This chapter examines the processes of negotiation and decision making as they apply to international and domestic cross-cultural contexts. The objective is a better understanding of successful management.

NEGOTIATION Implementing strategy depends on management’s ability to negotiate productively—a skill widely considered one of the most important in international business. In the global arena, cultural differences produce great difficulties in the negotiation process. Ignorance of native bargaining rituals, more than any other single factor, accounts for unimpressive sales efforts.4 Important differences in the negotiation process from country to country include (1) the amount and type of preparation for a negotiation, (2) the relative emphasis on tasks versus interpersonal relationships, (3) the reliance on general principles rather than specific issues, and (4) the number of people present and the extent of their influence.5 In every instance, managers must familiarize themselves with the cultural background and underlying motivations of the negotiators—and the tactics and procedures they use—to control the process, make progress, and therefore maximize company goals.

5-1. To become familiar with the role of negotiation in implementing a firm’s strategy and the various stakeholders who must be considered

154 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

The term negotiation describes the process of discussion by which two or more parties aim to reach a mutually acceptable agreement. For long-term positive relations, the goal should be to set up a win–win situation—that is, to bring about a settlement beneficial to all parties concerned. This process, difficult enough when it takes place among people of similar backgrounds, is even more complex in international negotiations because of differences in cultural values, lifestyles, ex- pectations, verbal and nonverbal language, approaches to formal procedures, and problem-solving techniques. The complexity is heightened when negotiating across borders because of the greater number of stakeholders involved. These stakeholders are illustrated in Exhibit 5-1. In preparing for negotiations, it is critical to avoid projective cognitive similarity—that is, the assumption that others perceive, judge, think, and reason in the same way when, in fact, they do not because of differential cultural and practical influences. Instead, astute negotiators empathically enter the private world or cultural space of their counterparts while willingly sharing their own view of the situation.6

THE NEGOTIATION PROCESS The negotiation process comprises five stages, the ordering of which may vary according to the cultural norms (in any event, for most people, relationship building is part of a continuous process): (1) preparation, (2) relationship building, (3) the exchange of task-related information, (4) persuasion, and (5) concessions and agreement.7 Of course, in reality, these are seldom distinct stages but rather tend to overlap; negotiators may also temporarily revert to an earlier stage. With that in mind, it is useful to break down the negotiation process into stages to discuss the issues relevant to each stage and what international managers might expect so that they might man- age this process more successfully. These stages are shown in Exhibit 5-2 and discussed in the following sections.

Stage One: Preparation The importance of careful preparation for cross-cultural negotiations cannot be overstated. To the extent that time permits, a distinct advantage can be gained if negotiators familiarize themselves with the entire context and background of their counterparts (no matter where the meetings will take place) in addition to the specific subjects to be negotiated. Because most negotiation prob- lems are caused by differences in culture, language, and environment, hours or days of tactical preparation for negotiation can be wasted if these factors are not carefully considered.8

To understand cultural differences in negotiating styles, managers first must understand their own styles and then determine how they differ from the norm in other countries. They can do this by comparing profiles of those perceived to be successful negotiators in different countries. Such profiles reflect the value system, attitudes, and expected behaviors inherent in a given society. Other sections of this chapter describe and compare negotiating styles around the world.

Negotiating Teams It is particularly important to consider the teams of people from both parties who will be negotiating. Clearly, lack of thought or planning regarding teams can jeopardize the deal at any point. Selection of the home team must take into account the expectations of the other

5-2. To learn the stages of the negotiation process and how to prepare for cross-cultural business negotiations

Firm negotiators

Home (HQ)

country Host

country

Investors Alliance partners Contractors

Host government Distributors Expatriate employees

Host local employees Host consumers

Headquarters (HQ) employees Suppliers Home government

Home consumers All citizens Special interest groups

ExHIBIT 5-1 Stakeholders in Cross-Cultural Negotiations

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 155

firm’s counterparts as far as the number and experience of team members and their rela- tive hierarchy in their positions. In most Asian countries, senior, older, managers represent their team, so they expect the foreign team to reflect that composition; a senior Japanese or Chinese manager, for example, is likely to be insulted if one of the lead team members from your firm is young and lower on the career ladders, rendering all other preparations a waste of time and money. Another recommendation is to have managers on the team who have already established relationships with counterparts; given the extreme focus that is placed on trust in many countries, existing relationships give the negotiating process a head start, some information about the motivations of the counterparts, and who has the power to seal the deal.

After developing thoughtful profiles of the other party or parties, managers can plan for the actual negotiation meetings, at the same time remaining open to realizing that specific people may not fit the assumed cultural prototype. Prior to the meetings, they should find out as much as possible about the kinds of demands that might be made and whether conflicts might occur. After this, the managers can gear their negotiation strategy specifically to the other side’s firm, allocate roles to different team members, decide on concessions, and prepare an alternative action plan in case a negotiated solution cannot be found.9

Following the preparation and planning stage, which is usually done at the home office, the core of the actual negotiation takes place on-site in the foreign location (or at the manager’s home office if the other team has decided to travel there). In some cases, a compromise on the location for negotiations can signal a cooperative strategy, which Weiss calls “Improvise an Approach: Effect Symphony”—a strategy available to negotiators familiar with each other’s culture and willing to put negotiation on an equal footing. Weiss gives the following example of this negotiation strategy:

For their negotiations over construction of the tunnel under the English Channel, British and French representatives agreed to partition talks and alternate the site between Paris and London. At each site, the negotiators were to use established, local ways, including the language . . . thus punctuating approaches by time and space.10

In this way, each side was put into the context and the script of the other culture about half the time.

The next stage of negotiation—often given short shrift by Westerners—is that of relation- ship building. In most parts of the world, this stage usually has already taken place or is concur- rent with other preparations.

Variables in the Negotiation Process Adept negotiators conduct research to develop a profile of their counterparts so that they know, in most situations, what to expect, how to prepare, and how to react. Exhibit 5-3 shows some of the variables to consider when preparing to negotiate. These variables can, to a great degree, help managers understand the deep-rooted cultural and national motivations and traditional processes underlying negotiations with people from other countries.

Preparation

Relationship building

Exchange of task-related information

Persuasion

Concessions and agreement

ExHIBIT 5-2 The Negotiation Process

156 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Stage Two: Relationship Building Relationship building is the process of getting to know one’s contacts in a host country and building mutual trust before embarking on business discussions and transactions. This process is regarded with much more significance in most parts of the world than it is in the United States. U.S. negotiators are, generally speaking, objective about the specific matter at hand and usually want to waste no time getting down to business and making progress. This approach, well under- stood in the United States, can be disastrous if the foreign negotiators want to take enough time to build trust and respect as a basis for negotiating contracts. In such cases, American efficiency interferes with the patient development of a mutually trusting relationship—the very cornerstone of an Asian business agreement.11

Nontask Sounding Five minutes of nontask sounding in the United States can translate into five days, weeks, or even months of nontask sounding in Shanghai, Lagos, Rio de Janeiro, or Jeddah. There is no other way because in such countries real business cannot be conducted until a good interper- sonal relationship has been established.12

In many countries, such as Mexico, Saudi Arabia, and China, personal commitments to individu- als, rather than to the legal system, form the basis for the enforcement of contracts. Effective negotiators allow plenty of time in their schedules for such relationship building with bargain- ing partners. This process usually takes the form of social events, tours, and ceremonies along with much nontask sounding—general, polite conversation and informal communication before meetings—while all parties get to know one another. In such cultures, one patiently waits for the other party to start actual business negotiations, aware that relationship building is, in fact, the first phase of negotiations.13 It is usually recommended that managers new to such scenarios use an intermediary—someone who already has the trust and respect of the foreign managers and who therefore acts as a relationship bridge. Middle Easterners, in particular, prefer to negotiate through

1. Approach to negotiation process: Competitive or problem-solving 2. Composition of negotiating team: Number and experience of team members. Relative

hierarchy in position. Relationships with counterparts. Decision-making power of team members. Motivated by individual, company, or community goals.

3. Method of reaching decisions: By individual determination, by majority opinion, or by group consensus.

4. Purpose of negotiations: One-time contract. Joint venture or other alliance. Long-term relationship-building.

5. Negotiation process: Behavioral expectations, typical procedures. 6. Communication context used by teams: Low context, explicit; high-context, implicit;

nature of surroundings. 7. Nature of persuasive arguments: Factual presentations and arguments, accepted

tradition, or emotion. 8. Bases of trust: Relationships, past experience, intuition, or rules. 9. Risk-taking propensity: Level and methods of uncertainty avoidance in trading

information or making a contract. 10. Value and uses of time: Attitude toward time. Use of time in scheduling and proceed-

ing with negotiations; use of time to pressure for agreement. 11. Form of satisfactory agreement: Based on trust (perhaps just a handshake), the

credibility of the parties, commitment, or a legally binding contract.

ExHIBIT 5-3 Variables in the Negotiation Process

Source: Based on excerpts from S. E. Weiss and W. Stripp, Negotiation with Foreign Business Persons: An Introduction for Americans with Propositions on Six Cultures (New York University Faculty of Business Administration, February 1985).

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 157

a trusted intermediary, and for them as well, initial meetings are only for getting acquainted. Arabs do business with the person, not the company; therefore, mutual trust must be established.

In their best seller on negotiation, Getting to Yes, Fisher and Ury point out the dangers of not preparing well for negotiations.

In Persian, the word “compromise” does not have the English meaning of a midway solution which both sides can accept, but only the negative meaning of surrendering one’s principles. Also, “mediator” means “meddler,” someone who is barging in uninvited. In 1980, United Nations Secretary-General Kurt Waldheim flew to Iran to deal with the hostage situation. National Iranian radio and television broadcast in Persian a comment he was said to have made upon his arrival in Tehran: “I have come as a mediator to work out a compromise.” Less than an hour later, his car was being stoned by angry Iranians.14

As a bridge to the more formal stages of negotiations, such relationship building is followed by posturing—that is, general discussion that sets the tone for the meetings. This phase should result in a spirit of cooperation. To help ensure this result, negotiators must use words such as respect and mutual benefit rather than language that would suggest arrogance, superiority, or urgency.

Stage Three: Exchanging Task-Related Information In the next stage—exchanging task-related information—each side typically makes a presenta- tion and states its position; a question-and-answer session usually ensues, and alternatives are discussed. From an American perspective, this represents a straightforward, objective, efficient, and understandable stage. However, negotiators from other countries continue to take a more indirect approach at this stage. Mexican negotiators tend to be wary of motives and so less direct and somewhat evasive with their presentations. French negotiators enjoy debate and conflict and will often interrupt presentations to argue about an issue even if it has little relevance to the topic being presented. The Chinese also ask many questions of their counterparts and delve specifically and repeatedly into the details at hand; conversely, Chinese presentations contain only vague and ambiguous material. For instance, after about 20 Boeing officials spent six weeks presenting masses of literature and technical demonstrations to the Chinese, the Chinese said, “Thank you for your introduction.”15

The Russians also enter negotiations well prepared and well versed in the specific details of the matter being presented. To answer their (or any other side’s) questions, it is generally a good idea to bring along someone with expertise to answer any grueling technical inquiries. Russians also put a lot of emphasis on protocol and expect to deal only with top executives.

Adler suggests that negotiators should focus not only on presenting their situation and needs but also on showing an understanding of their opponents’ viewpoint. Focusing on the entire situ- ation confronting each party encourages the negotiators to assess a wider range of alternatives for resolution rather than limiting themselves to their preconceived, static positions. She suggests that to be most effective, negotiators should prepare for meetings by practicing role reversal.16

Stage Four: Persuasion In the next phase of negotiations—persuasion—the hard bargaining starts. Typically, both par- ties try to persuade the other to accept more of their position and to give up some of their own. Often, some persuasion has already taken place beforehand in social settings and through mutual contacts. In the Far East, details are likely to be worked out ahead of time through the backdoor approach (houmani). However, the majority of the persuasion generally takes place over one or more negotiating sessions. International managers usually find that this process of bargaining and making concessions is fraught with difficulties because of the different uses and interpreta- tions of verbal and nonverbal behaviors. Although variations in such behaviors influence every stage of the negotiation process, they can play a particularly powerful role in persuasion, espe- cially if they are not anticipated.

Studies of negotiating behavior have revealed the use of certain tactics, which skilled ne- gotiators recognize and use, such as promises, threats, and so on. Other, less savory tactics are sometimes used in international negotiations. Often called dirty tricks, these tactics, according to Fisher and Ury, include efforts to mislead “opponents” deliberately.17 Some negotiators may give wrong or distorted information or use the excuse of ambiguous authority—giving conflicting

158 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

impressions about who in their party has the power to make a commitment. In the midst of hard bargaining, the prudent international manager will follow up on possibly misleading information before taking action based on trust.

Other rough tactics are designed to put opposing negotiators in a stressful situation physi- cally or psychologically, so that their giving in is made more likely. These include uncomfortable room temperatures, too-bright lighting, rudeness, interruptions, and other irritations. International negotiators must keep in mind, however, that what might seem like dirty tricks to Americans is simply the way other cultures conduct negotiations. In some South American countries, for ex- ample, it is common to start negotiations with misleading or false information.

The most subtle behaviors in the negotiation process—and often the most difficult to deal with—are usually the nonverbal messages: the use of voice intonation, facial and body expres- sions, eye contact, dress, and the timing of the discussions. Nonverbal behaviors, discussed in previous chapters, are ingrained aspects of culture people use in their daily lives; they are not specifically changed for the purposes of negotiation. Among those behaviors affecting negotia- tions is the direct communication style, such as with Germans, compared with the indirect style, such as with Japanese. Clearly, also, the individualism–collectivism cultural dimension is one that greatly guides negotiation because of the relative motivation of personal self-interest in in- dividualistic societies such as the United States; this compares with the group interest in Asian cultures, so that Asian negotiators will likely give more importance to their social obligations and the needs of the group.18

Although persuasion has been discussed as if it were always a distinct stage, it is really the primary purpose underlying all stages of the negotiation process. In particular, persuasion is an integral part of the process of making concessions and arriving at an agreement.

Stage Five: Concessions and Agreement In the last stage of negotiation—concessions and agreement—tactics vary greatly across cul- tures. Well-prepared negotiators are aware of various concession strategies and have decided ahead of time what their own concession strategy will be. Familiar with the typical initial posi- tions that various parties are likely to take, they know that Russians and Chinese generally open their bargaining with extreme positions, asking for more than they hope to gain, whereas Swedes usually start with what they are prepared to accept.

Research in the United States indicates that better results are attained by starting with ex- treme positions. With this approach, the process of reaching an agreement involves careful tim- ing of the disclosure information and of concessions. Most people who have studied negotiations believe that negotiators should disclose only the information that is necessary at a given point and that they should try to obtain information piece by piece to get the whole picture gradually without giving away their goals or concession strategy. These guidelines will not always work in intercultural negotiations because the American process of addressing issues one at a time, in a linear fashion, is not common in other countries or cultures. Negotiators in the Far East, for example, approach issues in a holistic manner, deciding on the whole deal at the end, rather than making incremental concessions.

Again, at the final stage of agreement and contract, local practices determine how these agreements will be honored. The sanctity of contracts has not traditionally been as respected a concept in Russian business as in American business. The Japanese, on the other hand, consider a formal contract to be somewhat of an insult and a waste of time and money in legal costs, since they prefer to operate based on understanding and social trust.19

UNDERSTANDING NEGOTIATION STYLES When negotiating in emerging markets, remember that everything in these countries is dynamic, and no deal is ever really 100% final.

Erin Meyer, HaRvaRd business RevieW, December 2015

For global managers negotiating joint ventures, acquisitions, outsourcing agreement or supplier contracts, it is reasonable to assume that the norms of communication will vary from country to country. As a result, what gets the manager to “Yes” in one culture may lead to a “No” in a different culture.20 In cross-border negotiations, it is critical to gauge the reactions of the other negotiator.

5-3. To gain insight into the various types of negoti- ating styles around the world

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 159

However, when managers from different parts of the globe engage in negotiations, it is common to misread unspoken signals, draw incorrect conclusions, and undermine the intended goals.

When communication styles differ between negotiators, Erin Meyer, an international negotiations researcher, developed some best practices to recognize signals and alter perceptions and actions.21

1. Alter the way you disagree. In some countries, open disagreement is normal and may be an invitation to engage in a spirited discussion. In other countries, the same response may adversely affect the business relationship.

2. Know when to contain your emotions and when to use them. In some cultures, it is normal to express emotions and even touch your counterpart (e.g., on the arm). In other cultures, such emotion and contact may be viewed as unprofessional, intrusive, and inappropriate.

3. Learn how your counterparts establish trust. Some cultures value cognitive trust, which is based on the how confident one is with the counterpart’s accomplishments, capa- bilities, and dependability. Alternatively, some cultures value affective trust, which stems from a sense of emotional attachment, empathy, and relational strength.

4. Refrain from asking yes or no questions. Some cultures have a difficult time saying “no.” Other cultures may say “no” as a means to debate the issues.

5. Exercise caution about written agreements. In some countries, a contract signifies a deal has been reached. In other countries, a contract indicates a non–legally binding com- mitment to do business or simply the beginning of a business relationship.

Harvard Business School professor James Sebenius stressed that negotiators need to recog- nize differences in the decision-making process when negotiating abroad. Specifically, he urges negotiators to seek answers to three questions.

1. Who are the players? When it comes to the players, there may be senior executives, share- holders, and certain regulatory institutions that influence a particular deal in the United States. However, in other countries such as Germany, the labor union has representation on the board of directors and wields considerable influence. In China, for example, local gov- ernment officials play an important role even for deals involving privately owned firms.

2. Who makes certain decisions? Understanding who makes certain decisions begins with the roles played by various stakeholders. For example, in countries where labor influences board membership, a single shareholder may face voting restrictions. In addition, expec- tations based on one’s home country culture (e.g., relationship-oriented rather than task- oriented) may make it difficult to ascertain who possesses formal decision-making rights.

3. What informal factors can undermine a negotiation? In terms of information influences, there are countries in which networks of influence can exert more power than a particular company. For example, in South Korea, the keiretsu consist of a group of industrial companies linked together by business ties, cross-holdings of debt and equity, and financial institutions.

Sebenius recommends adapting the negotiating process based on whether the counterpart’s culture embraces decision making that is top down, consensus, or coalition building. In cultures with top-down decision making, negotiators may encounter the principal decision maker who avoids delegating major responsibility. Even in those instances, less-influential agents of the company may be involved. In these circumstances, the negotiators need to refrain from reveal- ing key information and making concessions to those agents. In cultures such as Japan, in which consensus building is the norm, there is a tendency to experience unrelenting requests for infor- mation. Moreover, the very nature of consensus building can be time intensive because relation- ship building often takes precedent over the deal. That is, the deal makers will want to learn about the negotiators and their firm before proceeding with any negotiations. Consensus building also requires extensive intra-company interactions so that all stakeholders feel their concerns have been addressed satisfactorily. In cultures that emphasize coalition building, agreement is not of a particular individual or of all stakeholders, but rather a subset of stakeholders who can effec- tively exert pressure on or navigate around individuals or stakeholders with dissenting opinions.

Global managers can benefit from studying differences in negotiating behaviors (and the under- lying reasons for them), which can help them recognize what is happening in the negotiating process.

160 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Exhibit 5-4 shows some examples of differences among North American, Japanese, and Latin American styles. Brazilians, for example, generally have a spontaneous, passionate, and dynamic style. They are very talkative and particularly use the word no extensively—more than 40 times per half-hour, compared with 4.7 times for Americans and only 1.9 times for the Japanese. They also dif- fer markedly from Americans and the Japanese by their use of extensive physical contact.22

The Japanese are typically skillful negotiators. They have spent a great deal more time and effort studying U.S. culture and business practices than Americans have spent studying Japanese practices, and many have been to business school in the United States. However, differences in philosophy and style between the two countries reflect past feelings of betrayal in trade nego- tiations. John Graham, a California professor who has studied international negotiating styles, says that the differences between United States and Japanese styles are well illustrated by their respective proverbs; the Americans believe that “The squeaking wheel gets the grease,” and the Japanese say that “The pheasant would not be shot but for its cry.”23 The Japanese are calm, quiet, patient negotiators; they are accustomed to long, detailed negotiating sessions. Whereas Americans often plunge straight to the matter at hand, the Japanese instead prefer to develop long-term, personal relationships. The Japanese want to get to know those on the other side and will spend some time in nontask sounding.

Japanese North American Latin American

Emotional sensitivity highly Emotional sensitivity not Emotional sensitivity valued highly valued valued Hiding of emotions Dealing straightforwardly Emotionally passionate

or impersonally Subtle power plays; Litigation not so much Great power plays; conciliation as conciliation use of weakness Loyalty to employer; Lack of commitment to Loyalty to employer employer takes care employer; breaking of ties (who is often family) of employees by either if necessary Face-saving crucial; decisions Decisions made on a cost- Face-saving crucial in often on basis of saving some- benefit basis; face-saving decision making to one from embarrassment does not always matter preserve honor, dignity Decision makers openly Decision makers influenced Execution of special influenced by special by special interests but interests on decision interests often not considered ethical expected, condoned Not argumentative; quiet Argumentative when right Argumentative when right when right or wrong, but impersonal or wrong; passionate What is down in writing Great importance given to Impatient with must be accurate, valid documentation as evidential documentation as

proof obstacle to understanding general principles

Step-by-step approach to Methodically organized Impulsive, spontaneous decision making decision making decision making Good of group is the Profit motive or good of What is good for group ultimate aim individual is the ultimate aim is good for the individual Cultivate a good emotional Decision making impersonal; Personalism necessary for social setting for decision avoid involvements, conflict good decision making making; get to know of interest decision makers

ExHIBIT 5-4 Comparison of Negotiation Styles: Japanese, North American, and Latin American

Source: Pierre Casse, Training for the Multicultural Manager: A Practical and Cross-cultural Approach to the Management of People (Washington, D.C.: Society for Intercultural Education, Training, and Research, 1982), used with the permission of the Society for Intercultural Education, Training and Research, 2012.

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 161

In negotiations, the Japanese culture of politeness and hiding of emotions can be disconcerting to Americans when they are unable to make straightforward eye contact or when the Japanese maintain smiling faces in serious situations. It is important for Americans to understand what is polite and what is offensive to the Japanese—and vice versa. Americans must avoid anything that resembles boasting because the Japanese value humility, and physical contact or touching of any sort must be avoided.24 Consistent with the culture-based value of maintaining harmony, the Japanese are likely to be evasive or even leave the room rather than give a direct negative answer.25 Fundamental to Japanese culture is a concern for the welfare of the group; anything that affects one member or part of society affects the others. Thus, the Japanese view decisions carefully in light of long-term consequences; they use objective, analytic thought patterns; and they take time for reflection.26

Further insight into negotiating styles around the world can be gained by comparing the North American, Arab, and Russian styles. Basic cultural values often shed light on the way information is presented, whether and how concessions will be made, and the general nature and duration of the relationship. For North Americans, negotiations are businesslike; their factual appeals are based on what they believe is objective information, presented with the assumption that it is understood by the other side on a logical basis. Arabs use affective appeals based on emotions and subjective feelings. Russians employ axiomatic appeals—that is, their appeals are based on the ideals generally accepted in their society. The Russians are tough negotiators; they stall until they unnerve Western negotiators by continually delaying and haggling. Much of this approach is based on the Russians’ different attitude toward time. Because Russians traditionally do not subscribe to the Western belief that time is money, they are more patient, more deter- mined, and more dogged negotiators. They try to keep smiles and other expressions of emotion to a minimum to present a calm exterior.27

In contrast to the Russians, Arabs are more interested in long-term relationships and are, therefore, more likely to make concessions. Compared with Westerners, Arabs have a casual ap- proach to deadlines, and the negotiators frequently lack the authority to finalize a deal.28

Successful Negotiators around the World Following are selected profiles of what it takes to be a successful negotiator as perceived by peo- ple in their home countries. These are profiles of American, Indian, Arab, Swedish, and Italian negotiators, based on selections from the work of Pierre Casse, and give some insight into what to expect from different negotiators and what they expect from others.29

AMERICAN NEGOTIATORS According to Casse, a successful American negotiator acts as follows:

• They are respectful, courteous, and honest in negotiations but operate from a firm stand from the beginning, without revealing the options that are open to negotiation.

• They are generally well-versed in the issues at hand and how to time the interactions and so wait for the other party to make the first move in negotiating.

• They are explicit about their position and will only reveal their compromises when nego- tiations have come to a stalemate.

INDIAN NEGOTIATORS Indians have traditionally followed Gandhi’s approach to negotiation, which Gandhi called saty- agraha, “firmness in a good cause.” This combines strength with the love of truth. Therefore, a successful Indian negotiator acts as follows:

• They are humble and truthful and act in good faith, at the same time trusting that the op- ponent will act similarly.

• They act with self-control and attempt to come to a win-win outcome for all parties, in the spirit of satyagraha, thus putting the negotiation process on a spiritual level.

• They respect the other parties, are very patient in explaining and negotiating, do not insult others, and keep the big picture in mind.

• They will meditate and trust their instincts to consider the opponents’ viewpoints, do not keep secrets, and are willing to change their minds.

162 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

ARAB NEGOTIATORS Many Arab negotiators, following Islamic tradition, use mediators to settle disputes. Successful Arab mediators act in the following way:

• They possess a level of respect, trust, and prestige to be able to be a mediator.

• They maintain “face” for all the parties by respecting their dignity, minimizing conflicts among opponents, and avoiding situations that would make any party feel inferior.

• They use persuasive techniques such as referring to other respected people and what those people would want, and use conferences to mediate issues.

• They retain their impartiality and look for honorable solutions for all parties.

SWEDISH NEGOTIATORS Swedish negotiators are:

• Polite, punctual, serious, and thoughtful, though tend to be overcautious.

• They run meetings efficiently with little apparent emotion, and like to get straight down to business.

• They can be quite flexible but are wary of confrontations and take time to react to new ideas from the other parties in negotiations.

ITALIAN NEGOTIATORS Italians value negotiators who act as follows:

• They are dramatic, do not hide emotions, and use and read nonverbal gestures—typical of the Italian culture.

• They use flattery in negotiation communications and—always mindful of creating a good impression (the bella figura)—are helpful and simpatico to keep up their reputation.

• They are tactful in handling confrontations and tend not to be opinionated, but they also are creative in finding ways to come out ahead of the opponents in negotiations.

BRAZILIAN NEGOTIATORS Good Brazilian negotiators30:

• Emphasize preparation and planning.

• Tend to have, as well as sound judgment and intelligence, product knowledge, and competitive spirit.

• Value an ability to think during pressure situations.

• Tend to be verbally expressive during negotiations.

• Tend to have an ability to perceive and exploit power during negotiations.

Comparing Profiles Comparing such profiles is useful. Indian negotiators, for example, are humble, patient, respect- ful of the other parties, and very willing to compromise compared with Americans, who are firmer about taking stands. An important difference between Arab negotiators and those from most other countries is that the negotiators are mediators, not the parties themselves; hence, direct confrontation is impossible. Successful Swedish negotiators are conservative and careful, dealing with factual and detailed information. This profile contrasts with Italian negotiators, who are expressive and exuberant but less straightforward than their Swedish counterparts.

MANAGING NEGOTIATION Skillful global managers must assess many factors when managing negotiations. They must un- derstand the position of the other parties concerning their goals—whether national or corporate— and whether these goals are represented by principles or specific details. They should have the

5-4. To recognize that manag- ing negotiation requires learning about the cul- turally based behavioral differences, values, and agendas of the negotiat- ing parties and how to build trust for successful negotiations

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 163

ability to recognize the relative importance attached to completing the task versus developing interpersonal relationships. Managers also must know the composition of the teams involved, the power allotted to the members, and the extent of the teams’ preparation. In addition, they must grasp the significance of personal trust in the relationship. As stated earlier, the culture of the parties involved affects their negotiating styles and behavior and thus the overall process of negotiation. However, whatever the culture, research by Tse, Francis, and Walls has found person-related conflicts to “invite negative, more relation-oriented (versus information-oriented) responses,” leading them to conclude that “[t]he software of negotiation—that is, the nature and the appearance of the relationship between the people pursuing common goals—needs to be carefully addressed in the negotiation process.”31

This is particularly true when representatives of individual-focused cultures (such as the Americans) and group-focused cultures (such as the Chinese) are on opposite sides of the table. Many of these culture-based differences in negotiations came to light in Husted’s study on Mexican negotiators’ perceptions of the reasons for the failure of their negotiations with U.S. teams.32 The Mexican managers’ interpretations were affected by their high-context culture, with the characteristics of an indirect approach, patience in discussing ideas, and maintenance of dignity. Instead, the low-context Americans conveyed an impatient, cold, blunt communicative style. To maintain the outward dignity of their Mexican counterparts, Americans must approach negotiations with Mexicans with patience and tolerance and refrain from attacking ideas because these attacks may be taken personally. The relationships among the factors of cross-cultural ne- gotiation discussed in this chapter are illustrated in Exhibit 5-5.

The successful management of intercultural negotiations requires a manager to go beyond a generalized understanding of the issues and variables involved. As discussed earlier, she or he must find out as much specific information about the counterparts as possible and consider in advance how to use that information to create a positive climate that will result in a win–win situa- tion. Research has shown that a problem-solving approach is essential to successful cross-cultural negotiations, whether abroad or in the home office, although the approach works differently in various countries.33 This problem-solving approach requires a negotiator to treat everyone with

Negotiating styles: objective/subjective/axiomatic

Negotiating behavior: defense/attack/trust

deception/pressure/concessions Verbal and nonverbal behavior

Attitudes toward time/scheduling

Goals National/corporate

Principles versus specific details

Composition of teams Level of preparation

Task versus interpersonal relationships

Trust level and duration

relations

Culture

Culture

ExHIBIT 5-5 Cross-Cultural Negotiation Variables

164 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

respect, avoid making anyone feel uncomfortable, and refrain from criticizing or blaming the other parties in a personal way that may make someone feel shame—that is, lose face.

Research by the Huthwaite Research Group reveals how successful negotiators, compared to average negotiators, manage the planning process and their face-to-face behavior. The group found that during the planning process, successful negotiators consider a wider range of options and pay greater attention to areas of common ground. Skillful negotiators also tend to make twice as many comments regarding long-term issues and are more likely to set upper and lower limits regarding specific points. In their face-to-face behavior, skillful negotiators make fewer ir- ritating comments—such as, “We’re making you a generous offer”—make counterproposals less frequently, and use fewer reasons to back up arguments. In addition, skilled negotiators practice active listening—asking questions, clarifying their understanding of the issues, and summarizing the issues.34

Dealing with Translators Sometimes, it is necessary for negotiators to employ a translator for a cross-border negotiation. Translation adds a layer of complexity to a negotiation, so negotiators need to consider this as another key element of managing negotiations. International negotiations expert Jeswald Salacuse developed four basic rules for using a translator that can help facilitate cross-border negotiations.

1. Avoid using your counterpart’s interpreter; select your own. Use independent sources (e.g., a consulate) to determine the translator’s linguistic ability.

2. Brief the translator prior to the negotiation. A translator may have sound linguis- tic skills, but more likely than not, lacks familiarity with a firm and its industry. Also, Salacuse urges clarifying whether word-for-word translations are required, or simply a summary.

3. Monitor the translator’s agenda. Translators—because of personal agendas or simply ego—may try to take charge of a negotiation or inject some bias. This situation may arise if the translator has a conflict of interest—seeking future business prospects that flow from the current negotiated deal.

4. Speak in short segments and pause frequently. It is important to give the translator the opportunity to accurately translate statements. Inexperienced members of a negotiating team who use lengthy statements and avoid pauses may contribute to inaccurate transla- tions to the counterpart.35

Using the Internet to Support Negotiations Modern technology can provide support for the negotiating process, though it can’t take the place of the essential face-to-face ingredient in many instances. A growing component for elec- tronic commerce is the development of applications to support the negotiation of contracts and resolution of disputes. Web applications can provide support for various phases and dimensions, such as “Multiple-issue, multiple-party business transactions of a buy–sell nature; international dispute resolution (business disputes, political disputes); and internal company negotiations and communications, among others.”36

Negotiation support systems (NSS) can provide support for the negotiation process in the following ways:

• Increasing the likelihood that an agreement is reached when a zone of agreement exists (solutions that both parties would accept)

• Decreasing the direct and indirect costs of negotiations, such as costs caused by time de- lays (strikes, violence), and attorneys’ fees, among others

• Maximizing the chances for optimal outcomes37

One Web-based support system—called INSPIRE—developed at Carleton University in Ottawa, Canada, provides applications for preparing and conducting negotiations and for rene- gotiating options after a settlement. Users can specify preferences and assess offers; the site also has graphical displays of the negotiation process.38

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 165

E-NEGOTIATIONS The advantages of electronic communications are well known: speed, less travel, and the ability to lay out much objective information to be considered by the other party over time. The disad- vantages, however, might kill a deal before it gets off the ground by the inability to build trust and interpersonal relationships over time before getting down to business. In addition, nonverbal nuances are lost, although videoconferencing is a compromise for that purpose.

Rosette et al. noted that “opening offers may be especially aggressive in e-mail as com- pared to face-to-face negotiations because computer-mediated communications, such as e-mail, loosen inhibitions and cause negotiators to become more competitive and more risk seeking. The increase in competitive and risky behavior occurs because e-mail does not communicate social context cues in the same way as does the presence of another person.”39

Managing Conflict Resolution Much of the negotiation process is fraught with conflict—explicit or implicit—and such conflict can often lead to a standoff, or a lose–lose situation. This is regrettable, not only because of the situation at hand, but also because it probably will shut off future opportunities for deals between the parties. Much of the cause of such conflict can be found in cultural differences between the parties—in their expectations, in their behaviors, and particularly in their communication styles—as illustrated in the following “Comparative Management in Focus: Negotiating with the Chinese” feature.

Comparative Management in Focus Negotiating with the Chinese

The Chinese way of making decisions begins with socialization and initiation of personal guanxi rather than business discussion. The focus is not market research, statistical analysis, facts, Power-Point presentations, or to-the-point business discussion. My focus must be on fostering guanxi.40

Sunny Zhou, General Manager of Kunming Lida Wood and Bamboo Products

With the increasing business being conducted in China (see Map 5-1) or with Chinese allies or other companies, business practices there are now showing more similarity to those in the West. However, when Westerners initiate business negotiations with representatives from

the People’s Republic of China, cultural barriers confront both sides. At the same time, we should rec- ognize that there are regional cultural differences as well as regional economic differences that may af- fect negotiation; some examples of regional differences are noted below as researched by Tung et al. In addition, there are considerable generational differences, in particular with those younger people who have been educated in the West and are more familiar with Western ways and languages, in contrast with the older generation, which holds to more traditional culture and negotiation strategies.41

• Beijing (capital) “Political, bureaucratic, educated, diversified, high relationship orientation, more direct, high ‘face.’”42

• Shanghai (commercial center) “Business savvy, focus on details, bottom line, career- oriented younger people, materialistic, confident.”43

• Guangzhou/Shenzhen (south, near Hong Kong) “Entrepreneurial, hard-working, manufac- turing center, outside the norm, more risk-taking, like Hong Kong, more informal.”44

• Western China (Chengdu/Chongqing) “Traditional ‘People’s’ mentality, less experience with international business/negotiations, socializing importance.”45

For the most part, the negotiation process the Chinese use is mystifying to most Westerners. For instance, the Chinese put much greater emphasis than Americans and Europeans on respect and friendship, on saving face, and on group goals. Long-term goals are more important to the Chinese than the specific current objectives typical of Western negotiators. Even though market forces now have more influence in China, political and economic agendas are still expected to be considered in negotiations. Economic conditions, political pervasiveness, and the influence that political and state

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166 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Bay of

Bengal South China Sea

Pacific Ocean

East China Sea

Yellow Sea

Sea of Japan

PHILIPPINES

0 600 mi

0 600 km

Hong Kong

NEI M ONGGOL

GANSU

ZHEJIANG

GUANGDONG

FUJIAN

JIANGXI

GUANGXI

GUIZHOU HUNAN

ANHUI

JIANGSU

HUBEI SICHUAN

YUNNAN

HEBEI TIANJIN

SHANDONG

SHAANXI

SHANXININGXIA QINGHAI

XIZANG

HENAN

LIAONING

JILIN

HEILONGJIANG

XINJIANG

HAINAN

RU SSIA

TAIWAN

C H I N A

M O N G O L I A

R U S S I A

KYRGYZSTAN

KAZAKHSTAN

NORTH KOREA

SOUTH KOREA

JAPAN

VIETNAMMYANMAR (BURMA) LAOS

THAILAND

BANGLADESH

BHUTAN NEPAL

I N D I A

Beijing

MAP 5-1 China

agencies have on the negotiating parties in China are key practical factors that, added to cultural fac- tors, make up the context affecting Chinese negotiations.

Businesspeople report two major areas of conflict in negotiating with the Chinese: (1) the amount of detail the Chinese want about product characteristics and (2) their apparent insincerity about reaching an agreement. In addition, Chinese negotiators frequently have little authority, frus- trating Americans who do have the authority and are ready to conclude a deal.46 This situation arises because many Chinese companies report to the government trade corporations, which are involved in the negotiations and often have a representative on the team. Often, the goals of Chinese negotiators remain primarily within the framework of state planning and political ideals. Although China has become more profit-oriented, most deals are still negotiated within the confines of the state budget allocation for that project rather than because of a project’s profitability or value. It is crucial, then, to find out which officials—national, provincial, or local—have the power to make, and keep, a deal. According to James Broering of Arthur Andersen, who does much business in China, “companies have negotiated with government people for months, only to discover that they were dealing with the wrong people.”47

Research shows that for the Chinese, three cultural norms greatly affect the negotiation process: their ingrained politeness and emotional restraint, their emphasis on social obligations, and their be- lief in the interconnection of work, family, and friendship. Because of the Chinese preference for emotional restraint and saving face, aggressive or emotional attempts at persuasion in negotiation are likely to fail. Instead, the Chinese tendency to avoid open conflict will more likely result in negative strategies such as discontinuing or withdrawing from negotiation.48 The concept of face is at the heart of this kind of response—it is essential for foreigners to recognize the role that face behavior plays in negotiations. There are two components of face—lien and mien-tzu. Lien refers to a person’s moral character; it is the most important thing defining that person, and without it, one cannot function in society. It can only be earned by fulfilling obligations to others. Mien-tzu refers to one’s reputation or prestige, earned through accomplishments or through bureaucratic or political power.49 Giving others one’s time, gifts, or praise enhances one’s own face. In negotiations, it is vital for you not to make it obvious that you have won, because that means that the other party has lost and will lose face. One must, therefore, make token concessions and other attempts to show that respect must be demon- strated, and modesty and control must be maintained; otherwise, anyone who feels he or she has lost face will not want to deal with you again. The Chinese will later ignore any dealings or incidents that caused them to lose face, maintaining the expected polite behavior out of social consciousness and

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 167

concern for others. When encountering an embarrassing situation, they will typically smile or laugh in an attempt to save face, responses that are confusing to Western negotiators.50

It is critical that you give face, save face and show face when doing business in China.51

Generally, Westerners tend to feel that the Chinese negotiators are not truthful with them and do not give them straight answers. In turn, the Chinese sense that tension and feel a lack of trust in the Westerners.52 Research by Chua emphasized the need for Western negotiators to develop their Chinese counterparts’ trust in their competence and capability; without that trust, there will not be a construc- tive long-term relationship.53 The emphasis on social obligations underlies the strong orientation of the Chinese toward collective goals. Therefore, appeals to individual members of the Chinese negotiat- ing team, rather than appeals to benefit the group as a whole, will probably backfire. The Confucian emphasis on the kinship system and the hierarchy of work, family, and friends explains the Chinese preference for doing business with familiar, trusted people and trusted companies. Foreign negotiators, then, should focus on establishing long-term, trusting relationships, even at the expense of some im- mediate returns.

Deeply ingrained in the Chinese culture is the importance of harmony for the smooth functioning of society. Harmony is based primarily on personal relationships, trust, and ritual. After the Chinese establish a cordial relationship with foreign negotiators, they use this relationship as a basis for the give-and-take of business discussions. This implicit cultural norm is commonly known as guanxi, which refers to the intricate, pervasive network of personal relations that every Chinese carefully cultivates. It is the primary means of getting ahead, in the absence of a proper commercial legal system.54 In other words, guanxi establishes obligations to exchange favors in future business activities.55 Even within the Chinese bureaucracy, guanxi prevails over legal interpretations. Although networking is important any- where to do business, the difference in China is that “guanxi networks are not just commercial, but also social, involving the exchange both of favor and affection.”56 Firms that have special guanxi connections and give preferential treatment to one another are known as members of a guanxihu network.57 Sunny Zhou, general manager of Kunming Lida Wood and Bamboo Products, states that when he shops for lumber, “The lumber price varies drastically, depending on whether one has strong guanxi with the local administrators.”58 Western managers should thus anticipate extended preliminary visiting (relationship building), in which the Chinese expect to learn more about them and their trustworthiness. The Chinese also use this opportunity to convey their deeply held principles. They attach considerable importance to mutual benefit.59

Americans often experience two negotiation stages with the Chinese: the technical and the com- mercial. During the long technical stage, the Chinese want to hammer out every detail of the proposed product specifications and technology. If there are two teams of negotiators, it actually may be several days before the commercial team is called in to deal with aspects of production, marketing, pricing, and so forth. However, the commercial team should sit in on the first stage to become familiar with the Chinese negotiating style.60 The Chinese negotiating team is usually about twice as large as the Western team; about a third of the time is spent discussing technical specifications and another third on price negotiations, with the rest devoted to general negotiations and posturing (see Figure 5-1).61

The Chinese are among the toughest negotiators in the world. American managers must antici- pate various tactics, such as their delaying techniques and their avoidance of direct, specific answers; they use both ploys to exploit Americans’ known impatience. The Chinese frequently try to put pres- sure on Americans by shaming them, thereby implying that the Americans are trying to renege on the friendship—the basis of the implicit contract. Whereas Westerners come to negotiations with specific and segmented goals and find it easy to compromise, the Chinese are reluctant to negotiate details. They find it difficult to compromise and trade because they have entered negotiations with a broader vision of achieving development goals for China, and they are offended when Westerners don’t internalize those goals.62 Under these circumstances, the Chinese will adopt a rigid posture, and no agreement or contract is final until the negotiated activities have actually been completed. Successful negotiations with the Chinese depend on many factors. Research by Fang et al. found the top success factors to be sincerity on behalf of the Western team, their team’s preparation, technical expertise, patience, knowledge of PRC (People’s Republic of China) business practices, and good personal relationships.63 Generally speak- ing, patience, respect, and experience are necessary prerequisites for anyone negotiating in China. For the best outcomes, older, more experienced people are more acceptable to the Chinese in cross-cultural negotiations. The Chinese want to deal with the top executive of an American company, under the as- sumption that the highest officer has attained that position by establishing close personal relationships and trust with colleagues and others outside the organization.64 During introductions, the Western group should line up according to seniority and greet the most senior Chinese representative first. He or she may be greeted with applause, in which case, he or she should applaud back.65 Use full names and titles

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168 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

until invited to do otherwise. “To beckon a Chinese person, face the palm of your hand downward and move your fingers in a scratching motion. Never use your index finger to beckon anyone.”66

Western delegation practices are unfamiliar to many Chinese, and they are reluctant to come to an agreement without the presence of the Chinese foreign negotiator.67 From the Western perspective, confusing jurisdictions of government ministries hamper decisions in negotiations. Americans tend to send specific technical personnel with experience in the task at hand; therefore, they have to take care in selecting the most suitable negotiators. In addition, visiting negotiating teams should realize that the Chinese are probably negotiating with other foreign teams, often at the same time, and will use that setup to play one company’s offer against the others. On an interpersonal level, Western ne- gotiators must also realize that, although a handshake is polite, physical contact is not acceptable in Chinese social behavior, nor are personal discussion topics such as one’s family. However, it is cus- tomary to give and take small gifts as tokens of friendship. Keep in mind the following tips.68

• Some time before the trip, establish a contact in China who will act as a reference; be your interpreter; and navigate you through the bureaucracy, legal system, and local business networks.

• Be very prepared before doing business in China. The Chinese plan meticulously and will know your business, and possibly you, inside out.

• Send some literature about your company in advance and convey a set agenda before each meeting. Be punctual, or you will insult them before you start; begin with small, polite social talk but avoid politics.

• Expect initial meetings to involve long, convoluted discussions that are really intended to get to know one another, establish trust, and find out the actual goals of your team.

• The Chinese are not confrontational and will not say “no.” You will need to be observant and recognize that perhaps those items are not negotiable.

• Practice patience. Introducing delays and obstacles is a Chinese negotiating tactic. They will wait until the deadline has passed and demand another concession, knowing that the Westerners are focused on their deadline for departure, so let them know your schedule is open and keep calm.

• Expect prolonged periods of stalemate; hang loose and don’t say anything about the point in question. Try to change the momentum by, say, suggesting going to dinner.

• Refrain from exaggerated expectations and discount Chinese rhetoric about future prospects.

• Remember at all times to save face for everyone and keep in mind the importance of trust and guanxi in negotiations.

China’s rapidly changing business environment is apparent in more professionalism in the negotia- tion process. At the same time, research by Fang et al. shows that “one should not underestimate the impact of culture on Chinese business negotiations. Western companies that seek to succeed in China need to demonstrate sincerity and commitment in conducting business in order to gain the Chinese partner’s trust as this appears to be the ultimate predictor for success of business relations in China.”69

FIGURE 5-1 Chinese-Western negotiation teams

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CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 169

Context in Negotiations As discussed in Chapter 4, much of the difference in communication styles is attributable to whether you belong to a high-context or low-context culture (or somewhere in between, as shown in Exhibit 4-4). In low-context cultures such as that in the United States, conflict is handled directly and explicitly. It is also regarded as separate from the person negotiating—that is, the negotiators draw a distinction between the people involved and the information or opinions they represent. They also tend to negotiate based on factual information and logical analysis. That approach to conflict is called instrumental-oriented conflict.70 In high-context cultures, such as in the Middle East, the approach to conflict is called expressive-oriented conflict—that is, the situation is handled indirectly and implicitly, without clear delineation of the situation by the person handling it. Such negotiators do not want to get into a confrontational situation because it is regarded as insulting and would cause a loss of face, so they tend to use evasion and avoidance if they cannot reach agree- ment through emotional appeals. Their avoidance and inaction conflict with the expectations of the low-context negotiators who are looking to move ahead with this matter and arrive at a solution.

The differences between high- and low-context cultures that often lead to conflict situa- tions are summarized in Exhibit 5-6. Most of these variables were discussed previously in this chapter or in Chapter 4. They overlap because the subjects, culture, and communication are inseparable and because negotiation differences and conflict situations arise from variables in culture and communication.

So, how can a manager from France, Japan, or Brazil, for example, manage conflict situa- tions? The solution, as discussed previously, lies mainly in one’s ability to know and understand the people and the situation to be faced. Managers must be prepared by developing an under- standing of the cultural contexts in which they will be operating. What are the expectations of the persons with whom they will be negotiating? What kinds of communication styles and negotiat- ing tactics should they expect, and how will they differ from their own? It is important to bear in mind one’s own expectations and negotiating style as well as to be aware of the other parties’ expectations. Managers ought to consider in advance what it will take to arrive at a win–win so- lution. Often it helps to use the services of a host-country adviser or mediator, who may be able to help defuse a conflict situation early.

DECISION MAKING Negotiation actually represents the outcome of a series of small and large decisions. The deci- sions include those each party makes before actual negotiations start—for example, in deter- mining the position of the company and what fallback proposals it may suggest or accept. The decisions also include incremental decisions, made during the negotiation process, about how to react and proceed, when to concede, and on what to agree or disagree. Negotiation can thus be seen as a series of explicit and implicit decisions, and the subjects of negotiation and decision making become interdependent.

5-5. To appreciate the vari- ables in the decision- making process and understand the influence of culture on decision making

Low-Context High-Context Conflict Area Conflict Area

Explicit and direct; verbal; linear Implicit, indirect discussion and presentation of facts, rationale, decision-making; non-verbal; may be analysis. circular logic.

Individualistic; tend to be Collective; group motivations and short-term-oriented. decisions by consensus.

Task-oriented. Up-front, impatient, Tend to be long-term-oriented. sometimes confrontational; action and “Face” and relationship-oriented; solution directive. indirect, non-confrontational, patient.

ExHIBIT 5-6 Negotiation Conflicts between Low-Context and High-Context Cultures

Source: Based on W. Gudykunst, L. Stewart, and S. Ting-Toomey, Communication, Culture, and Organizational Processes (Sage Publications, 1985).

170 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

For instance, sometimes just the way a decision is made during the negotiation process can have a profound influence on the outcome, as this example from a book by Copeland and Griggs shows.

In his first loan negotiation, a banker new to Japan met with seven top Japanese bankers who were seeking a substantial amount of money. After hearing their presentation, the American agreed on the spot. The seven Japanese then conferred among themselves and told the American they would get back to him in a couple of days regarding whether they would accept his offer or not. The American banker learned a lesson he never forgot.71

The Japanese bankers expected the American to negotiate, to take time to think it over, and to consult with colleagues before giving the final decision. His immediate decision made them suspicious, so they decided to reconsider the deal.

There is no doubt that the speed and manner of decision making affect the negotiation pro- cess. In addition, how well negotiated agreements are implemented is affected by the speed and manner of decision making. In that regard, it is clear that the effective use of technology is play- ing an important role, especially when dealing with complex cross-border agreements in which the hundreds of decision makers involved are separated by time and space.

The role of decision making in management, however, goes far beyond the finite occasions of negotiations. It is part of the manager’s daily routine—from operational-level, programmed decisions requiring minimal time and effort to those decisions not programmed, of far broader scope and importance, such as the decision to enter into a joint venture in a foreign country.

The Influence of Culture on Decision Making It is crucial for international managers to understand the influence of culture on decision- making styles and processes. Culture affects decision making both through the broader context of the nation’s institutional culture, which produces collective patterns of decision making, and through culturally based value systems that affect each individual decision maker’s per- ception or interpretation of a situation.72 It is also crucial to understand how the political and business environment affects a firm’s strategic decisions and negotiations as illustrated in the following “Under the Lens” feature in which Ryanair pursues various deals and wrestles with ownership rights in a cloud of uncertainty about the fate of the relationship between the UK and EU, going into 2019.

UNDER THE LENS Ryanair Secures UK Licence in Preparation for No-Deal Brexit73

Low-cost carrier Ryanair has secured a UK operating licence, meaning the London-listed and Dublin-based airline can continue domestic flights in the country and flights from Britain to outside the EU in the event of a no-deal Brexit.

Juliusz Komorek, Ryanair’s chief legal and regulatory officer, warned that the risks of a no-deal Brexit were rising and called for the UK and EU to agree a transition deal to avoid disruption to holidays in the summer.

The airline applied for the air operating certificate in late 2017. Its UK domestic routes accounted for only 1 per cent of capacity in 2018, according to its annual

report, but it also flies from the UK to non-EU destinations, including Morocco and Norway. Hungary’s Wizz Air obtained a UK operating licence in May 2018 for the same reason, while easy-

Jet, a UK-based company, has been granted an Austrian operating licence to ensure European flights in the region can continue.

Ryanair is facing ownership problems around Brexit too. Under existing rules, airlines must prove they are 50 per cent EU owned and controlled to qualify

for operating licences. Ryanair has tried to respond to the problem by preparing plans to take away voting rights from its

non-EU shareholders to ensure it reaches the threshold. In November, Ryanair stirred anger among some of its pilots as it started to recruit for a UK subsid-

iary, established to protect the company against a no-deal Brexit.

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 171

The extent to which decision making is influenced by culture varies among countries. For example, Hitt, Tyler, and Park have found a “more culturally homogenizing influence on the Korean executives’ cognitive models” than on those of U.S. executives, whose individualistic tendencies lead to different decision patterns.74 The ways that culture influences an execu- tive’s decisions can be studied by looking at the variables involved in each stage of the rational decision-making process. These stages are (1) defining the problem, (2) gathering and analyz- ing relevant data, (3) considering alternative solutions, (4) deciding on the best solution, and (5) implementing the decision.

One of the major cultural variables affecting decision making is whether a people tend to assume an objective approach or a subjective approach. Whereas the Western approach is based on rationality (managers interpret a situation and consider alternative solutions based on objec- tive information), this approach is not common throughout the world. Latin Americans, among others, tend to be more subjective, basing decisions on emotions.

Another cultural variable that greatly influences the decision-making process is the risk tol- erance of those making the decision. Research shows that people from Belgium, Germany, and Austria have a considerably lower tolerance for risk than people from Japan or the Netherlands— whereas American managers have the highest tolerance for risk.75

In addition, an often-overlooked but important variable in the decision-making process is the manager’s perception of the locus of control over outcomes—whether that locus is internal or external. Some managers feel they can plan on certain outcomes because they are in control of events that will direct the future in the desired way. In contrast, other managers believe that such decisions are of no value because they have little control over the future—which lies in the hands of outside forces, such as fate, God, or nature. American managers believe strongly in self-determination and perceive problem situations as something they can control and should change. However, managers in many other countries, Indonesia and Malaysia among them, tend to be resigned to problem situations and do not feel that they can change them. Obviously, these different value systems will result in a great difference in the stages of consideration of alterna- tive actions and choice of a solution, often because certain situations may or may not be viewed as problems in the first place.

Yet another variable that affects the consideration of alternative solutions is how manag- ers feel about staying with familiar solutions or trying new ones and about how receptive local customers will be to a company’s offerings, which was the case for Spotify as it sought to expand globally using licensing agreements in various countries—especially Latin America, as illustrated in the following “Management in Action: Spotify’s Plan to Beat Apple: Sign the Rest of the World.”

Pilots said the salaries offered at the subsidiary undermined Ryanair’s claims about how much they earn — which the airline has insisted would not be lower than those of pilots flying for the parent group and can be up to €200,000 (£178,000).

The news about its UK licence came as Ryanair faced three days of strikes in January 2019 from its Spanish cabin crew.

Unions SITCPLA and USO have scheduled industrial action on January 8, 10 and 13 after failing to reach an agreement with Ryanair on employing its members under local law, rather than Irish, as the airline does at the moment.

The unions said the airline’s behaviour was “absurd and childish”. Ryanair did not respond to a request for comment on the Spanish strikes.

The carrier has been engaged in negotiations with its unions since agreeing to recognise them in late 2017 after a rostering failure and staff shortage led to thousands of cancellations.

It faced several days of strikes last summer, causing the cancellation of thousands of flights. Ryanair has been making gradual progress in resolving its industrial relations problems. At the end of November (2018), it signed a framework agreement with its German pilots ahead of

a collective labour agreement early next year, and it has reached collective labour agreements with cabin crew in Germany, Belgium and Italy.

Source: © The Financial Times Limited 2019.

172 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

MANAGEMENT IN ACTION Spotify’s Plan to Beat Apple: Sign the Rest of the World76

Few could be happier about the synergy between music streaming and Latin America than Spotify — whose stock price, and arguably its future, depend on repeating the same trick in new markets.

Spotify needs to keep adding subscribers to make Wall Street happy as it battles Apple, one of the richest companies in the world, to dominate how people listen to music. There is a finite amount of affluent 20-somethings in western cities to pay Spotify $10 a month for its services. However, after growing at a torrid clip in Europe and the US, investors are betting that Spotify can sign up hundreds of millions of people in what the Swedish company bluntly calls the “Rest of the World”.

So far Latin America is the only emerging market where the Spotify model has worked meaningfully — a phenomenon that caught senior executives by surprise when it entered Mexico six years ago. Spotify became the dominant paid streaming service in Latin America with minimal effort; to this day a few dozen employees working out of a Miami WeWork office run the operation for the whole continent.

. . .“Chile is now one of our fastest-growing markets, and we’ve never even sent an employee there,” says Will Page, Spotify’s director of economics, who expects Mexico and Brazil to overtake the UK and Germany in subscriptions.

Emboldened by the results in Latin America, founder Daniel Ek is convinced that he can replicate this across the globe...Mr Ek made grand proclamations about the billions of smartphone owners across the world who do not yet use his music app. “We’re working on launching in some of the biggest mar- kets in the world, places like India, Russia and Africa,” he said.

Spotify has made strides: in November (2018) it debuted in the Middle East, while last year it also entered South Africa, Israel, Vietnam and Romania.

In the US, the biggest music market, Apple recently ousted Spotify from its throne to become the most popular paid music streaming service. And Spotify has hit a large speed bump in its quest for global domination: India. The country has become a bargaining chip in the jockeying between the tech company and the music industry.77

Spotify launched in India — a crucial market — on Wednesday [27 February 2019] despite a copy- right lawsuit filed by Warner Music Group. Warner Music Group, one of the three big record labels, has gone to the High Court of Mumbai to seek an injunction to prevent Spotify from using its music, claim- ing in a statement earlier this week that the service had “falsely asserted a statutory license” in India.78

The court has deferred Warner’s application for an injunction, paving the way for Spotify’s launch in the country.

Spotify is available for free in India with a premium service priced at Rs119 ($1.67) a month. It is offering its service in multiple languages and has customised Bollywood playlists.

...Music executives in places such as Canada and Japan were hesitant to trust Spotify, resulting in years of painstaking negotiations to launch in those countries.79

... Spotify launched in Mexico in 2013, and then Brazil a year later. The service was available in all of Latin America before it entered Canada. The company had a lot of wind in its sails: half the popula- tion in Latin America is under 30, which is Spotify’s core audience; a rising middle class was growing, so there were more people able to pay the fee; and the Latin market is radio-driven, which lent itself well to Spotify’s style of inundating users with playlists and suggested songs.

While CDs were restricted by geography — they had to be pressed and then delivered to shops and online retailers — anyone with a data plan can participate in the global music industry. Just by scoop- ing up the initial group of people in populous countries such as Brazil or Mexico who are wealthy, have credit cards and had heard of Spotify, it was enough to generate a user base on par with that of small European countries. Mexico has grown into Spotify’s largest user base, ahead of the US and UK. For many of the biggest western stars, such as Adele and Radiohead, Mexico City is their number one mar- ket on Spotify.80

There are local challenges that make India a difficult market for western companies, from Amazon to Walmart. In India, Spotify would compete with Apple, Amazon and YouTube, in addition to local players such as Hungama, Gaana and Saavn. None of these services has had success in persuading people to pay for music in India. Although 216m people were using streaming services in the country at the end of 2017, only 1m of them actually paid for them, according to Midia. ...In India, Spotify’s licensing negotiations reached a stalemate as the major labels pushed back on Spotify’s requests to offer free trials for several months in the country, according to people briefed on the talks. In China, Spotify last year exchanged equity stakes with Tencent Music to gain a foothold in the fastgrowing market.81

Source: © The Financial Times Limited 2019.

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 173

Approaches to Decision Making In addition to affecting different stages of the decision-making process, value systems influence the overall approach of decision makers from various cultures. The relative level of utilitarian- ism versus moral idealism in any society affects its overall approach to problems. Generally speaking, utilitarianism strongly guides behavior in the Western world. Research has shown that Canadian executives are more influenced by a short-term, cost–benefit approach to decision making than their Hong Kong counterparts.

Another important variable in companies’ overall approach to decision making is that of autocratic versus participative leadership. In other words, who has the authority to make what kinds of decisions? A society’s orientation—whether it is individualistic or collectivist (see Chapter 3)—influences the level at which decisions are made. In many countries with hierar- chical cultures—Germany, Turkey, and India, among others—authorization for action has to be passed upward through echelons of management before final decisions can be made. Most employees in these countries simply expect the autocrat—the boss—to do most of the decision making and will not be comfortable otherwise. Even in China, which is a highly collectivist society, employees expect autocratic leadership because their value system presupposes the su- perior to be automatically the most wise. In comparison, decision-making authority in Sweden is very decentralized. Americans talk a lot about the advisability of such participative leader- ship, but in practice, they are probably near the middle between autocratic and participative management styles.

Arab managers have long traditions of consultative decision making, supported by the Qur’an and the sayings of Muhammad. However, such consultation occurs more on a person- to-person basis than during group meetings and thus diffuses potential opposition.82 Although business in the Middle East tends to be transacted in a highly personalized manner, the top leaders make the final decisions and feel that they must impose their will for the company to be successful. In comparison, in cultures that emphasize collective harmony, such as Japan, participatory or group decision making predominates, and consensus is important. The best-known example is the bottom-up (rather than top-down) decision-making process used in most Japanese companies, described in more detail in the accompanying ‘‘Comparative Management in Focus” section.

One final area of frequent incongruence concerns the relative speed of decision making. A country’s culture affects how fast or slow decisions tend to be made. The relative speed may be closely associated with the level of delegation, as just discussed—but not always. The pace at which decisions are made can be very disconcerting for outsiders. North Americans and Europeans pride themselves on being decisive; managers in the Middle East, with a different sense of temporal urgency, associate the importance of the matter at hand with the length of time needed to make a decision. Without knowing this cultural attitude, a hasty American would insult an Egyptian; a quick decision, to the Egyptian, would reflect a low regard for the relationship and the deal.

Exhibit 5-7 illustrates, in summary form, ways in which the variables just discussed can affect the steps in the decision-making process.

Consideration of alternative solutions

Data gathering

DecisionProblem definition

Implementation

Internal/external locus of control

Objective/subjective perspective

Past/future orientationRisk tolerance

Culture

Individualism/collectivism Locus of decision making

Utilitarianism/moral ideals

ExHIBIT 5-7 Cultural Variables in the Decision-Making Process

174 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Comparative Management in Focus Decision Making in Japanese Companies

The length of the decision-making process is one of the most common complaints of anyone who works with or for Japanese organizations.83

Rochelle Kopp, Managing Principal, Japan Intercultural Consulting

Japanese companies are involved in joint ventures throughout the world, especially with U.S. com- panies. The GM–Toyota joint venture agreement process, for example, was the result of more than two years of negotiation and decision making; in similar alliances, Americans and Japanese

are involved in decision making at all levels on a daily basis. The Japanese decision-making process differs greatly not only from the U.S. process but also from that of many other countries—-especially at the higher levels of their organizations.

An understanding of the Japanese decision-making process—and indeed of many Japanese man- agement practices—requires an understanding of Japanese national culture. Much of the Japanese culture and, therefore, the basis of Japanese working relationships, can be explained by the principle of wa, meaning “peace and harmony.” This principle is one aspect of the value the Japanese attribute to amae, meaning “indulgent love,” a concept probably originating in the Shinto religion, which fo- cuses on spiritual and physical harmony. Amae results in shinyo, which refers to the mutual confi- dence, faith, and honor required for successful business relationships. The principle of wa influences the work group, the basic building block of Japanese work and management. The Japanese strongly identify with their work groups, where the emphasis is on cooperation, participative management, consensus problem solving, and decision making based on a patient, long-term perspective. Open ex- pression of conflict is discouraged, and it is of utmost importance to avoid embarrassment or shame— to lose face—because of not fulfilling one’s obligations. These elements of work culture generally result in a devotion to work, a collective responsibility for decisions and actions, and a high degree of employee productivity. It is this culture of collectivism and shared responsibility that underlies the Japanese ringi system of decision making.

In the ringi system, the process works from the bottom up. Americans are used to a centralized system, where major decisions are made by upper-level managers in a top-down approach typical of individualistic societies. The Japanese process, however, is dispersed throughout the organization, relying on group consensus.

The ringi process is one of gaining approval on a proposal by circulating documents to those concerned throughout the company. It usually comprises four steps: proposal, circulation, approval, and record.84 Usually, the person who originates the written proposal, which is called a ringi-sho, has already worked for some time to gain informal consensus and support for the proposal within the section and then from the department head.85 The next step is to attain a consensus in the company from those who would be involved in implementation. To this end, department meetings are held, and, if necessary, expert opinion is sought. If more information is needed, the proposal goes back to the originator, who finds and adds the required data. In this way, much time and effort—and the input of many people—go into the proposal before it becomes formal.86

Up to this point, the process has been an informal one to gain consensus; it is called the nema- washi process. Then the more formal authorization procedure begins, called the ringi process. The ringi-sho is passed up through successive layers of management for approval—the approval made official by seals. In the end, many such seals of approval are gathered, thereby ensuring collective agreement and responsibility and giving the proposal a greater chance of final approval by the presi- dent. The whole process is depicted in Exhibit 5-8.

The ringi system is cumbersome and very time-consuming prior to the implementation stage, although implementation is facilitated because of the widespread awareness of and support for the proposal already gained throughout the organization. However, its slow progress is problematic when decisions are time-sensitive. This process is the opposite of the Americans’ top-down decisions, which are made quite rapidly and without consultation, but which then take time to implement because un- foreseen practical or support problems often arise.

Another interesting comparison is often made regarding the planning horizon (aimed at short- or long-term goals) in decision making between the American and Japanese systems. The Japanese spend considerable time in the early stages of the process, defining the issue, considering what the issue is all about, and determining whether there is an actual need for a decision. They are more likely

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 175

N em

aw as

hi P

ro ce

ss (in

fo rm

al c

on su

lta tio

n)

Ri ng

i (f

or m

al a

ut ho

ri za

tio n

pr oc

ed ur

e)

4. Record

3. Approval

2. Circulation

1. Proposal

President/top management (final approval)

Levels of management (seals of approval)

Formal proposal (ringi-sho) (problem and details of plan for solution)

Department consensus attained

Additional information/documents requested from initiator

Experts/specialists consulted

Department heads, section chiefs, supervisors meet to discuss

Initiator works to gain informal consensus on proposal in section and department

ExHIBIT 5-8 Decision-Making Procedure in Japanese Companies

than Americans to consider an issue in relation to the overall goals and strategy of the company. In this manner, they prudently look at the big picture and consider alternative solutions instead of rushing into quick decisions for immediate solutions, as Americans tend to do.87

The challenge for Japanese companies today is that the quickening rate of technological prog- ress is leading to radically shortened product lifecycles and rapidly emerging opportunities.88

Rochelle Kopp

Of course, in a rapidly changing environment, quick decisions are often necessary—to respond to competitors’ actions, a political uprising, and so forth—and it is in such contexts that the ringi sys- tem sometimes falls short because of its slow response rate. However, the Japanese culture does not regard time as such a valuable commodity as those in the West; they feel that a good outcome requires a thorough and consensus-building decision. The system is, in fact, designed to manage continuity and avoid uncertainty, which is considered a threat to group cohesiveness.89

CONCLUSION It is clear that competitive positioning and long-term successful operations in a global market require a working knowledge of the decision-making and negotiating processes of managers from different countries. These processes are complex and often interdependent, and are deeply in- grained into their culture. Although managers may make decisions that do not involve negotiating, they cannot negotiate without making decisions, however small, or they would not be negotiating. In addition, managers must understand the behavioral aspects of these processes to work effec- tively with people in other countries or with a culturally diverse workforce in their own countries.

With an understanding of the environment and cultural context of international management as background, we move next, in Part 3, to planning and implementing strategy for international and global operations.

176 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

■ The ability to negotiate successfully is one of the most im- portant in international business. Managers must prepare for certain cultural variables that influence negotiations, including the relative emphasis on task versus interper- sonal relationships, the use of general principles versus specific details, the number of people present, and the ex- tent of their influence.

■ The negotiation process typically progresses through the stages of preparation, relationship building, ex- change of task-related information, persuasion, and concessions and agreement. The process of building trusting relationships is a prerequisite to doing busi- ness in many parts of the world.

■ Culturally based differences in verbal and nonverbal negotiation behavior influence the negotiation pro- cess at every stage. Such tactics and actions include promises, threats, initial concessions, silent periods, interruptions, facial gazing, and touching; some par- ties resort to various dirty tricks.

■ The effective management of negotiation requires an un- derstanding of the perspectives, values, and agendas of other parties and the use of a problem-solving approach.

■ The Internet is used increasingly to support the ne- gotiation of contracts and resolution of disputes. Websites that provide open auctions take away the personal aspects of negotiations, though those aspects are still essential in many instances.

■ Translators can be an important part of cross-border negotiations. To ensure their effectiveness, negotia- tors need to hand-pick them and use independent ref- erences. Also, negotiators need to brief them before the negotiation and gauge their self-interest during the negotiation. Lastly, negotiators need to speak in short segments and pause frequently so translators can inter- pret and communicate effectively with counterparts.

■ Decision making is an important part of the negotia- tion process as well as an integral part of a manager’s daily routine. Culture affects the decision-making pro- cess both through a society’s institutions and through individuals’ risk tolerance, their objective versus sub- jective perspectives, their perceptions of the locus of control, and their past versus future orientations.

Summary of Key Points

5-1. Discuss the stages in the negotiation process and how cultur- ally based value systems influence these stages. Specifically, address the following. • Explain the role and relative importance of relationship-

building in different countries. • Discuss the various styles and tactics that can be involved

in exchanging task-related information. • Describe differences in culturally based styles of persuasion. • Discuss the kinds of concession strategies a negotiator

might anticipate in various countries. 5-2. Discuss the relative use of nonverbal behaviors, such as si-

lent periods, interruptions, facial gazing, and touching, by

people from various cultural backgrounds. How does this behavior affect the negotiation process in a cross-cultural context?

5-3. Describe what you would expect in negotiations with the Chinese and how you would handle various situations.

5-4. What are some of the differences in risk tolerance around the world? What is the role of risk propensity in the decision- making process?

5-5. Explain differences in culturally based value systems rela- tive to the amount of control a person feels he or she has over future outcomes. How does this belief influence the decision-making process?

Discussion Questions

Multicultural Negotiations

Goal To experience, identify, and appreciate the problems associated with negotiating with people of other cultures.

Instructions (Note: Your professor will give out additional instruction sheets)

1. Eight student volunteers will participate in the role-play. Four represent a Japanese automobile manufacturer, and four represent a U.S. team that has come to sell micro- chips and other components to the Japanese company. The remainder of the class will observe the negotiations.

2. The eight volunteers will divide into the two groups and then separate into different rooms if possible. At that point, they will be given instruction sheets. Neither team can have access to the other’s instructions. After dividing the roles, the teams should meet for 10 to 15 minutes to develop their negotiation strategies based on their instructions.

3. While the teams are preparing, the room will be set up, using a rectangular table with four seats on each side. The Japanese side will have three chairs at the table with one chair set up behind the three. The American side of the table will have four chairs side by side.

Experiential Exercises

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 177

4. Following these preparations, the Japanese team will be brought in so they may greet the Americans when they arrive. At this point, the Americans will be brought in, and the role-play begins. Time for the negotiations should be 20 to 30 minutes. The rest of the class will act as observers and will be expected to provide feedback during the discussion phase.

5. When the negotiations are completed, the student par- ticipants from both sides and the observers will com- plete their feedback questionnaires. Class discussion of the feedback questions will follow.

Feedback Questions for the Japanese Team 1. What was your biggest frustration during the negotiations? 2. What would you say the goal of the American team

was? 3. What role (e.g., decider, influencer) did each member

of the American team play? Mr. Jones Mr./Ms. Smith Mr./Ms. Nelson Mr./Ms. Frost

4. How would you rate the success of each of the American team members in identifying your team’s needs and ap- pealing to them? Mr./Ms. Jones, Vice President and Team Leader Mr./Ms. Smith, Manufacturing Engineer Mr./Ms. Nelson, Marketing Analyst Mr./Ms. Frost, Account Executive

5. What strategy should the American team have taken?

Feedback Questions for the American Team 1. What was your biggest frustration during the negotiations? 2. What would you say the goal of the Japanese team was? 3. How would you rate the success of each of the American

team members? Mr. Jones, Vice President and Team Leader Mr./Ms. Smith, Manufacturing Engineer Mr./Ms. Nelson, Marketing Analyst Mr./Ms. Frost, Account Executive

4. What would you say the goal of the American team was?

5. What role (e.g., decider, influencer, etc.) did each member of the Japanese team play? Mr. Ozaka Mr. Nishimuro Mr. Sheno Mr. Kawazaka

6. What strategy should the American team have taken?

Feedback Questions for the Observers 1. What was your biggest frustration during the negotiations? 2. What would you say the goal of the Japanese team was? 3. How would you rate the success of each of the American

team members? Mr./Ms. Jones, Vice President and Team Leader Mr./Ms. Smith, Manufacturing Engineer Mr./Ms. Nelson, Marketing Analyst Mr./Ms. Frost, Account Executive

4. What would you say the goal of the American team was? 5. What role (e.g., decider, influencer, etc.) did each member

of the Japanese team play? Mr. Ozaka Mr. Nishimuro Mr. Sheno Mr. Kawazaka

6. What strategy should the American team have taken?

Note: Your professor will give the instructions from the Instructor’s Manual for this exercise.

Source: E. A. Diodati, in C. Harvey and M. J. Allard, Understanding Diversity (New York: HarperCollins Publishers, 1995). Used with permission.

CASE STUDY India’s Ecommerce Crackdown Upends Big Foreign Players90

Saifuddin Bhanpurawala is one of dozens of shopkeepers on a dusty Mumbai back street that bustles with customers buying everything from tobacco to perfume.

But Mr Bhanpurawala’s mobile phone shop is going through hard times, selling as few as two handsets in a bad week. He says the reason is obvious: the huge discounts available online at Amazon and Walmart-owned Flipkart, the two biggest players in India’s fast-growing ecommerce sector.

“If we sell something at Rs5,000 [$70], they might sell it at Rs2,500 — we don’t understand how it’s possible,” said Mr Bhanpurawala, 28. He argued that the Indian government’s tolerance of such practices has demonstrated its lack of concern for small businesses: “The rich are getting richer and the poor are getting poorer.”

178 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

With a general election just four months away, prime minister Narendra Modi is moving to address such complaints. Amazon and Flipkart have been given until the end of this month to comply with new restrictions, announced in late December, that sharply restrict the use of their hefty balance sheets to boost sales on their virtual marketplaces.

But while the move is intended to strengthen the government’s credentials among India’s millions of small retailers, it has sparked alarm for two of the country’s biggest outside investors. Walmart’s $16bn buyout of Flipkart last year was the biggest foreign direct investment in Indian history, while Amazon has committed $5bn in capital to its Indian operation.

“A sudden change in rules is not helpful,” said Mukesh Aghi, president of the US-India Strategic Partnership Forum, which works to build economic ties between the countries. “It sends a message to groups that the environment is not transparent.”

‘Behave like a marketplace’ When India opened its economy to foreign capital in the 1990s, it was careful to maintain protection for small retailers. Foreign investment was allowed in single-brand but not multi-brand retail—allowing clothing labels, for example, to open stores but keeping out the foreign supermarket chains that were feared by many shopkeepers.

As ecommerce took off, New Delhi updated these rules for the internet age. Foreign-backed companies would be allowed to run virtual “marketplaces”—platforms enabling independent sellers to connect with customers. But they were barred from selling goods themselves, stopping them from functioning as online supermarkets.

The vague wording of the rules, however, meant that Amazon and Flipkart—backed with billions in capital from foreign investors led by US fund Tiger Global—quickly found ways to use their balance sheets to turbo-charge growth, outraging peers in the industry.

“We were flabbergasted all the while at the blatant violations of the FDI policy,” said Sanjay Sethi, chief executive of ShopClues, one of the largest rivals to the dominant duo. “We started doubting ourselves—are we not interpreting these rules correctly?”

Partnering a fund controlled by Narayana Murthy, co-founder of IT services group Infosys, Amazon formed a joint venture that in turn owned Cloudtail India, a new company that would sell products ranging from electronics to breakfast cereal. Cloudtail is by far the biggest seller on Amazon’s Indian marketplace, with revenue of $1bn in the last financial year ending March 2018.

Flipkart pursued a different tack. Instead of forming directly controlled sellers, it supplied many of them through a huge wholesale distributor, named Flipkart India. The distributor’s rev- enue has far outstripped that of the online marketplace entity, while incurring heavy losses.

In the last financial year, Flipkart India made a net loss of $293m on sales of $3bn. That dwarfed the revenue of Flipkart Internet, the marketplace business, which booked sales of $398m, mostly on commissions charged to sellers.

From 2016, Amazon also dramatically increased the scale of its wholesale operation. In the last financial year, that business had revenue of $1.7bn, up from $458,000 two years before.

“They would strike a large deal with a brand and buy in bulk,” claimed one rival ecommerce executive, alleging that the wholesaler would then supply the goods at low prices to certain “con- trolled sellers”. The sellers would then offer the products on the marketplace at steep discounts from the prices available in offline shops.

“This was compliant with the letter of the law, but not the spirit,” the person said. But the new rules, announced in December (2018), strike hard at such practices. They stipu-

late that no seller on foreign-funded online marketplaces can source more than 25 per cent of its inventory from a wholesaler linked to the marketplace—banning sellers set up to shuttle goods between the two. They also state that no entity may sell on these marketplaces if any of its equity is owned by the marketplace or by any of the latter’s “group companies”.

“The government is saying: ‘You’re a marketplace, so behave like a marketplace,’” said Rajiv Chugh, a partner at EY.

Crackdown to benefit big Indian retailers Amazon said it had “always operated in compliance with the laws of the land” and was “evalu- ating the new guidelines to engage as necessary with the government to gain clarity so that we remain true to our commitment”.

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 179

Flipkart said it hoped “to be able to work with the government to promote fair, pro-growth policies that will continue to develop this nascent sector”, adding that it would “ensure our com- pliance with all Indian laws”.

But privately, the companies are lobbying the government to allow them more time to comply with the new rules, arguing the January 31 deadline will cause huge disruption to their businesses.

“There are a lot of sellers who buy from our wholesale entity—it will be hard for them to diversify the supply base so quickly,” said a person with knowledge of Flipkart’s position. “Such a massive impact so suddenly will leave capacity under-utilised.”

Amazon-backed Cloudtail, meanwhile, will be faced with “huge losses” from hundreds of millions of dollars’ worth of inventory that it will be unable to sell by January 31, warned Sanchit Vir Gogia, founder of retail research firm Greyhound Knowledge Group.

Some analysts have also questioned the motives behind the government’s new rules. Arvind Singhal at Technopak, a consultancy, noted that the crackdown on foreign-backed ecommerce companies would benefit big Indian retail groups that are not subject to the new rules.

By far the biggest of these is Reliance Industries, controlled by Mukesh Ambani, Asia’s rich- est person. While most of its revenue in recent years has come from oil products, Reliance also includes the country’s biggest retail chain, and is now eyeing large-scale growth in ecommerce, after its $30bn mobile internet venture Jio signed up more than 250m users. Jio was among the local groups that took part in government consultations on ecommerce policy last year, to which Amazon and Flipkart were not invited.

By imposing restrictions on foreign-backed groups but not on locally owned conglomerates, New Delhi has signalled “that international companies will not have a level playing field”, said Mr Aghi at USISPF.

But the measures will prove in the interest of Indian consumers, said Kunal Bahl, co-founder of Snapdeal, which bills itself as an even-handed online marketplace for small vendors. While shoppers may lose out on short-term discounting, he argued, they will enjoy a more competitive market in the long run.

“If they were providing great pricing while generating a profit, it would be a different con- versation,” he said. “But everyone knows that these companies are haemorrhaging cash while giving out all these promotions, and at some point they’ll want to pull this back. They’re not charitable organisations.”

Source: © The Financial Times Limited 2019.

Case Questions

1. Arash Massoudi, “Hitachi Looks for Deal with ABB on Power Grids Business,” Financial Times, November 19, 2018, https:// search-proquest-com.libweb.lib.utsa.edu/businesspremium / d o c v i ew / 2 1 6 6 4 3 4 3 4 1 / B 8 D 8 6 A B 5 4 E 1 C 4 0 F 3 P Q / 6 ?accountid=7122 (accessed February 14, 2019).

2. Ibid.

Endnotes

3. Ralph Atkins, “Hitachi Lines up Deal for ABB Grids Unit: Industrials Japanese Group Targets Foreign Growth as Swiss Engineer Refocuses,” Financial Times, December 13, 2018, https://search-proquest-com.libweb.lib.utsa.edu/businesspremium/ docview/2166434341/B8D86AB54E1C40F3PQ/6?accountid=7122 (accessed February 14, 2019).

5-6. Who are the stakeholders in this situation, and what is at stake for each of them? (refer to ex. 5-1) 5-7. Discuss the negotiations and decisions among those parties that have been going on in this chang-

ing retail landscape. (refer to ex 5-2). What does the outcome mean at this stage for foreign companies like Amazon and Flipkart?

5-8. What negotiating power do foreign retail companies have with the Indian government? 5-9. What are the implications for companies like Amazon and Flipkart to expand into other develop-

ing countries? 5-10. Research updates to this retail situation in India.

180 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

4. John Pfeiffer, How Not to Lose the Trade Wars by Cultural Gaffes. Smithsonian 18, No. 10 (1988), pp. 145–156.

5. Nancy J. Adler, International Dimensions of Organizational Behavior, 4th ed. (Boston: PWS-Kent, 2002), 208–232.

6. Philip R. Harris and Robert T. Moran, Managing Cultural Differences, 3rd ed. (Houston: Gulf Publishing, 1991).

7. John L. Graham and Roy A. Herberger, Jr., Negotiators Abroad—Don’t Shoot from the Hip. Harvard Business Review (July–August 1983), pp. 160–168; Adler; John L. Graham, A Hidden Cause of America’s Trade Deficit with Japan. Columbia Journal of World Business (Fall 1981), pp. 5–15.

8. Phillip D. Grub, Cultural Keys to Successful Negotiating. in Global Business Management in the 1990s, F. Ghader et al., eds. (Washington, DC: Beacham, 1990), pp. 24–32.

9. R. Fisher and W. Ury, Getting to Yes (Boston: Houghton Mifflin, 1981).

10. S. Weiss, Negotiating with ‘Romans.’ Sloan Management Review (Winter 1994), pp. 51–61.

11. John A. Reeder, When West Meets East: Cultural Aspects of Doing Business in Asia. Business Horizons (January–February 1987), pp. 72.

12. John L. Graham and William Hernandez Requejo, Managing Face-to-Face International Negotiations. Organizational Dynamics 38, No. 2 (2009), pp. 167–177.

13. Adler, 197. 14. Fisher and Ury. 15. Lennie Copeland and Lewis Griggs, Going International (New

York: Random House, 1985), 85. 16. Adler, 197–98. 17. Fisher and Ury. 18. Jeanne M. Brett, Negotiating Globally (San Francisco, CA: John

Wiley and Sons, 2001). 19. G. Fisher, International Negotiation: A Cross-Cultural

Perspective (Chicago: Intercultural Press, 1980). 20. E. Meyer, “Getting to Sí, Ja, Oui, Hai, and Da,” Harvard Business

Review (December 2015), 74–80. 21. Ibid. 22. Pfeiffer. 23. John L. Graham, Brazilian, Japanese, and American Business

Negotiations. Journal of International Business Studies (Spring– Summer 1983), pp. 47–61.

24. T. Flannigan, Successful Negotiating with the Japanese. Small Business Reports 15, No. 6 (1990), pp. 47–52.

25. Graham, 1983; Boye De Mente, Japanese Etiquette and Ethics in Business (Lincolnwood, IL: NTC Business Books, 1989).

26. Robert H. Doktor, Asian and American CEOs: A Comparative Study. Organizational Dynamics (Winter 1990), p. 49.

27. Harris and Moran, 461. 28. Adler, 181. 29. These profiles are based on selections from Pierre Casse,

Managing Intercultural Negotiations: Guidelines for Trainers and Negotiators (Washington, DC: Society for Intercultural Education, Training, and Research, 1985).

30. J. Graham, Brazilian, Japanese and American Business Negotiations. Journal of International Business Studies 14 (1983), pp. 47–56.

31. D. K. Tse, J. Francis, and J. Walls, Cultural Differences in Conducting Intra- and Inter-Cultural Negotiations: A Sino- Canadian Comparison. Journal of International Business Studies (3rd quarter 1994), pp. 537–555.

32. B. W. Husted, Bargaining with the Gringos: An Exploratory Study of Negotiations between Mexican and U.S. Firms. International Executive 36, No. 5 (1994), pp. 625–644.

33. Nigel Campbell, John L. Graham, Alain Jolibert, and Hans Meissner, Marketing Negotiations in France, Germany, the United Kingdom, and the United States. Journal of Marketing 52 (1988), pp. 49–63.

34. Neil Rackham, The Behavior of Successful Negotiators (Reston, VA: Huthwaite Research Group, 1982).

35. J. Salacuse, The Global Negotiator: Making, Managing, and Mending Deals around the World in the Twenty-First Century (Palgrave MacMillan, 2003).

36. J. Teich, H. Wallenius, and J. Wallenius, World-Wide-Web Technology in Support of Negotiation and Communication. International Journal of Technology Management 17, Nos. 1/2 (1999), pp. 223–239.

37. Ibid. 38. Ibid. 39. A. Rosette, Jeanne Brette, Zoe Barsness, and Anne Lytle, When

Cultures Clash Electronically: The Impact of E-mail and Culture on Negotiation Behavior. The Dispute Resolution Research Center, Northwestern University, accessed February 9, 2009.

40. J. A. Pearce II and R. B. Robinson Jr., Cultivating Guanxi as a Foreign Investor Strategy. Business Horizons 43, No. 1 (January 2000), pp. 31.

41. Rosalie L. Tung, Verner Worm, and Tony Fang, Sino-Western Business Negotiations Revisited—30 Years after China’s Open Door Policy. Organizational Dynamics 37, No. 1 (2008), pp. 60–74.

42. Tung, 2008. 43. Ibid. 44. Ibid. 45. Ibid. 46. Joan H. Coll, Sino–American Cultural Differences: The Key

to Closing a Business Venture with the Chinese. Mid-Atlantic Journal of Business 25, No. 2–3 (December 1988/January 1989), pp. 15–19.

47. M. Loeb, China: A Time for Caution. Fortune (February 20, 1995), pp. 129–130.

48. O. Shenkar and S. Ronen, The Cultural Context of Negotiations: The Implications of Chinese Interpersonal Norms. Journal of Applied Behavioral Science 23, No. 2 (1987), pp. 263–275.

49. Tse et al. 50. J. Brunner, teaching notes, the University of Toledo. 51. www.kwintessential.co.uk/etiquette/doing-business-china.html

(accessed September 15, 2011). 52. Kam-hon Lee, Guang Yang, and John L. Graham, Tension

and Trust in International Business Negotiations: American Executives Negotiating with Chinese Executives. Journal of International Business Studies 37, No. 5 (2006), p. 623.

53. Roy Y. J. Chua, Building Effective Business Relationships in China. MIT Sloan Management Review (Summer 2012).

54. J. M. Banthin and L. Stelzer, ‘Opening’ China: Negotiation Strategies When East Meets West. Mid-Atlantic Journal of Business 25, No. 2–3 (December 1988/January 1989).

55. Brunner. 56. Pearce and Robinson. 57. Ibid. 58. Ibid. 59. C. Blackman, An Inside Guide to Negotiating. China Business

Review 27, No. 3 (May 2000), pp. 44–45. 60. Boye De Mente, Chinese Etiquette and Ethics in Business

(Lincolnwood, IL: NTC Business Books, 1989), pp. 115–123. 61. S. Stewart and C. F. Keown, Talking with the Dragon: Negotiating

in the People’s Republic of China. Columbia Journal of World Business 24, No. 3 (Fall 1989), pp. 68–72.

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62. Banthin and Stelzer, “‘Opening’ China.” 63. Tony Fang, Verner Worm, and Rosalie L. Tung, Changing

Success and Failure Factors in Business Negotiations with the PRC. International Business Review 17 (2008).

64. www.ediplomat.com, accessed May 1, 2015. 65. Ibid. 66. Ibid. 67. Blackman. 68. “Doing Business in China,” www.kwintessential.com, accessed

October 2, 2011; “Avoiding Pitfalls, and Forging Success, in East-West Contract Negotiations,” International Herald Tribune, January 24, 2011; Lucian Pye, Chinese Commercial Negotiating Style (Cambridge, MA: Oelgeschlager, Gunn, and Hain, 1982).

69. Fang et al., 2008. 70. W. B. Gudykunst and S. Ting Tomey, Culture and Interpersonal

Communication (Newbury Park, CA: Sage Publications, 1988). 71. L. Copeland and L. Griggs, Going International (New York:

Random House, 1985), p. 80. 72. M. A. Hitt, B. B. Tyler, and Daewoo Park, “A Cross-Cultural

Examination of Strategic Decision Models: Comparison of Korean and U.S. Executives,” in Best Papers Proceedings of the 50th Annual Meeting of the Academy of Management (San Francisco, CA, August 12–15, 1990), pp. 111–115; G. Fisher, International Negotiation: A Cross-Cultural Perspective (Chicago: Intercultural Press, 1980); G. W. England, “Managers and Their Value Systems: A Five-Country Comparative Study,” Columbia Journal of World Business 13, No. 2 (1978); W. Whitely and G. W. England, “Variability in Common Dimensions of Managerial Values Due to Value Orientation and Country Differences,” Personnel Psychology 33 (1980), pp. 77–89.

73. J. Spero, “Ryanair Secures UK Licence in Preparation for No- Deal Brexit,” Financial Times, January 4, 2019, p. 18, https:// search.proquest.com/businesspremium/docview/2175187435 /5571BC3764F64635PQ/11?accountid=7122 (accessed February 21, 2019).

74. Hitt, Tyler, and Park, p. 114. 75. B. M. Bass and P. C. Burger, Assessment of Managers: An

International Comparison (New York: Free Press, 1979), p. 91.

76. Excerpts taken from A. Nicolaou, “Spotify’s Plan to Beat Apple: Sign the Rest of the World,” Financial Times, January 2, 2019, p. 7, https://search.proquest.com/businesspremium/docview /2175184031/372A80B9CE134958PQ/3?accountid=7122 (accessed February 21, 2019).

77. Ibid. 78. S. Findlay, “Spotify Launches in India despite Warner Music

Suit Share on Twitter,” Financial Times, February 27, 2019, https://www.ft.com/content/82fd2710-3a6e-11e9-b72b -2c7f526ca5d0?shareType=nongift (accessed February 27, 2019).

79. Excerpts taken from A. Nicolaou, “Spotify’s Plan to Beat Apple: Sign the Rest of the World.”

80. Ibid. 81. Ibid. 82. Copeland and Griggs; M. K. Badawy, Styles of Mideastern

Managers. California Management Review 22 (1980), pp. 51–58.

83. Rochelle Kopp, Managing Principal, Japan Intercultural Consulting, “The Decision-Making Process in Japan,” www . japanintercultural.com, April 2, 2012.

84. N. Namiki and S. P. Sethi, “Japan,” in Comparative Management—A Regional View, R. Nath, ed. (Cambridge, MA: Ballinger Publishing, 1988), pp. 74–76.

85. De Mente, Japanese Etiquette, 80. 86. S. Naoto, Management and Industrial Structure in Japan (New

York: Pergamon Press, 1981); Namiki and Sethi. 87. Harris and Moran, 397. 88. Rochelle Kopp, 2012. 89. S. P. Sethi and N. Namiki, “Japanese-Style Consensus Decision-

Making in Matrix Management: Problems and Prospects of Adaptation,” in Matrix Management Systems Handbook, D. I. Cleland, ed. (New York: Van Nostrand, 1984), pp. 431–456.

90. S. Mundy, “India’s Ecommerce Crackdown Upends Big Foreign Players,” Financial Times, January 14, 2019, www.ft.com /content/6dd8188a-14c2-11e9-a581-4ff78404524e. Accessed February 20, 2019.

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P A R T 2 : Comprehensive Cases

Andreas added, “Information security and privacy have be- come board-level challenges as well as issues; we need to act now.”

Andreas had James Wu, Head of the IT at DeltX, on a teleconference.

“Hi James, the team are all gathered this morning,” Andreas reassured. “The information systems and the cyber defense teams need to work closer together and pay more at- tention to the situation to contain it, especially as attacks are becoming more frequent and causing more damage.”

James admitted, “The virus is believed to be ransomware – one of these pieces of software that shut down a computer sys- tem, and the perpetrators have already demanded a huge sum of money to fix the problem. We need to act quickly.”

Eunice asked, “Do we know who is behind the latest at- tack? Our American and British analysts believe the attack ear- lier this month was carried out by North Korea.” Andreas said, “We don’t know yet, but one thing is for sure: we need to come up with a smart solution.”

After an hour, the team, which was made up of software experts mostly Eunice’s age, had come up with a solution to prevent the cyber thieves siphoning off any more personal in- formation and they were able to put the new measures in place. The problem was fixed for now.

Andreas was not convinced. “Our promise is to deliver real lasting benefits for our clients, so we need to reduce the likeli- hood of it happening again.”

Eunice was head-hunted for the job because of her ex- perience managing a diverse international team on a number of security projects in Singapore. Cybot had a good reputa- tion as firms go; it fosters a collaborative culture for people to work in as well as an innovative and dynamic environ- ment. Andreas convinced her the move to Zurich is a good career move offering a great opportunity to work in a cutting- edge state-of-the-art company, with a talented team of young professionals from around the world. Yet, she was only too aware the move to Zurich meant she would be far away from Singapore, her family, and friends. Eunice was one of the youngest project managers in her company, and for a woman to reach that position so early on in her career was highly unusual. Her parents were her role models and encouraged her to strive for perfection. Her colleagues were not surprised when she landed the job. Eunice had always displayed a pro- fessional work ethic as well as strong analytical and prob- lem-solving skills. At the age of five, she had won the junior

Case 3 Cross-Cultural Challenges for a Singaporean Expatriate in Zurich

From her office, Eunice catches a glimpse of the 11.45 A380 bound for Singapore; needless to say, it’s on time – a typical Swiss cliché. Like the Singapore Airlines campaign slogan, no detail is too small, Cybot, a leading cybersecurity firm, is committed to innovation. Eunice is new in her role as Project Manager at Cybot, one of the big four leaders in the European marketplace with over 50 cybersecurity specialists staffing thou- sands of client engagements around Europe. She accepted the job in Zurich because it offered great professional opportunities. She relished the challenge of starting in a new city on her own, even though it was difficult saying goodbye to family and friends in Singapore. Four years ago, she moved to San Francisco to do a master’s in cybercrime at the University of Southern California. Now, Eunice is experiencing homesickness for the first time and she is not sure why this move is proving so complicated.

“The meeting is about to start, Eunice.” Her assistant’s voice snapped her out of her daydream. This

morning’s emergency meeting was called in the aftermath of a cyberattack on one of their biggest clients. The massive cyberat- tack brought down multiple sites and business units from gov- ernment offices to shopping centres, even local banks. Andreas and Sam were huddled together in deep conversation when she entered the meeting room. Perhaps sensing her hesitation, Andreas, the CEO of Cybot, motioned to her to take a seat.

“DeltX has been hacked with personal details and credit card numbers at risk. We are not sure yet, but it looks like accounts from in excess of 500 customers were potentially accessed by hackers in the last few hours.”

“This is the second such attack in four months; it’s serious,” said Sam, Cybot’s Swiss COO, who shifted uncomfortably in his chair.

She sensed Sam’s anxiety, which added to her own. Sam was distant, which made her nervous around him. On the other hand, Andreas liked her; he hired her because of her experience in the cybercrime industry, and her knowledge of the Asian market and her fluency in Chinese. Andreas has long-term plans to open a new office in Singapore but had not shared this information with anyone on his team. He offered Eunice a fair relocation package, including a generous salary. Tim, another member of staff, had applied for Eunice’s job but had been turned down; Andreas wanted someone who spoke Chinese.

Andreas was stressed. “DeltX, one of the three major con- sumer credit reporting agencies in Europe, is our biggest cus- tomer; they will go public with this information in an hour and we need to come up with a plan quickly.”

This case study was written by Christina Neylan, lecturer of intercultural management at Lucerne University of Applied Sciences and Arts.1

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superficial, too many fake smiles or “Wow” or “Great” com- ments. At home, she had lots of friends, both professional as well as childhood friends. She resented having to start all over to make new ones. Looking around the table she was unsure how many of them she would honestly befriend if the scene was set in Singapore rather than Zurich. In was not that she disliked meeting new people, or that she had a problem mak- ing friends; people from work talk shop. Yet, the reality was sobering: after three months in the country, she had not made any friends. She consoled herself by blaming the late hours at work and the language barrier.

Join the Club

In the first week, Sarah, the HR assistant, introduced her to all the events related to Diversity and Inclusion (D&I) organ- ised by the company, emphasising the importance placed on ensuring people felt at home and part of the company. Sarah did not mention that executives are evaluated based on whether they reach diversity targets or not. Sarah said enthusiastically, “We have lots of great events organised to help our new em- ployees get to know people; in no time you will forget about Singapore.”

Eunice doubted it. Sarah spoke enthusiastically, “Yes, we have sports

events, Meet and Lunch, the Alumni, Online further educa- tion, Mentoring, Women’s networking group, and the Culture Evenings, something for everyone.”

Eunice smiled; it was, after all, her choice to move to Switzerland. Within six weeks she had practically ticked off the list of D&I tools of things to do.

The sports programme consisted of a yoga class before work, a body toning class at lunch, and football after work. Not one for sport and sweating, Eunice shuddered at the idea of being stuck in a room with colleagues all sweating it out together.

Then there was a business network group meeting, which she attended once, but most of the others just lapsed into Swiss German after the polite introductions.

“Learn German as soon as possible; it’s essential to sur- vival,” was Andreas’s advice. She planned to do it during the winter but had not got around to finding a convenient class.

The hiking trip was a disaster because she did not have the proper shoes and could not keep up with the group. In the end, she turned back.

The Thursday after-work football game was the most pop- ular activity, as most of the guys in her section headed off to the football pitch.

John had teased her and said, “Come and join in the kick around.”

Eunice said, “Oh leave it, John, I am useless at ball sports.”

John mimicked her by shaking his head. John did not give up. “At least come down to the pub for a

drink; we go to Pickwick’s after football practice.” She winced at the idea of waiting around for the guys to

come in and talk about football; it was not for her, she reminded herself.

Singapore Mathematical Olympiad, a prestigious national maths competition, beating thousands of other children. Her parents were so pleased all the extra tutoring had paid off. Her father harboured high hopes for his only child. He knew, she enjoyed a challenge; when she was very young she spent hours playing Animal Chess, a child’s Chinese chess, where animals are used instead of pawns, kings, and other chess pieces. She loved showing her father she had grit.

Her phone vibrated on the table; it was a text from Lydia, her best friend back home. She attached a picture of Tan’s wed- ding. Tan, her oldest school friend, got married at the weekend. Tan was the last of her school friends to marry; Eunice was the only unmarried one. The picture showed the groom fetch- ing Tan from her house, an old tradition where the groom and groomsmen picked up the bride at her house, but before they could enter the brides’ sisters would prepare a series of chal- lenges for them. It looked like they were eating mooncake or “Fat Mama” as it is known locally, a pie usually, eaten to cel- ebrate Mid-Autumn Festival on October 4.

“Are you joining us for lunch?” John asked. His voice made her jump. She looked around the office and realised the others had already trickled out of the meeting room.

“No, sorry, can’t today. I have signed up for “Lunch and Meet.”

“What’s that?” John asked. “Oh, it’s just lunch in the canteen with some newcomers.

Sarah from HR organised it to help us meet new people within the company.”

“But you can come and talk to me,” John replied. She was not sure how to take his comments; his charm-

ing and friendly Irish ways disarmed her. She noticed he was friendly with everyone, so it probably did not mean anything. Everyone in the office said John is full of blarney, an Irish col- loquialism which meant he was good at flattery.

Before heading out to lunch, she checked her emails, as she looked around the large empty open office, which was quiet now. But normally it was unbelievably loud; Eunice sometimes wore earplugs to block out the noise. The office was ultra- modern, a hybrid style office space with no desk allotments; everyone sat where he or she wanted. She felt sure she could never get used to this style of open plan. The clean desk policy took some getting used to.

Lunch and Meet

“So, you are suggesting we take up football,” joked one of the newcomers seated at the table specially reserved for the group.

Eunice laughed and joined in the banter. She wanted to say she would start playing football too if that is what it takes to make new friends. The animated discussion resounded throughout the canteen; ten new staff members were hav- ing lunch together. It was one of only a number of events organised by HR for new recruits. Eunice thought to her- self, they were really a lonely bunch sharing stories across a salad. Immediately, she berated herself for thinking like that; in fact, she reminded herself she should be happy not to be eating alone. She had met most of the new employees at previous events. It was not really her scene; it was all a bit

CASE 3 • CROSS-CULTURAL CHALLENGES FOR A SINGAPOREAN EXPATRIATE IN ZURICH PC2-3

She arranged the food in beautiful colourful bowls and folded down the napkins in the shape of little butterflies. She glanced at the food, wondering if there would be enough for everyone. Slowly her colleagues arranged their food beside her dishes, even in between the dishes; soon various cakes and pies covered up the countertop. Eunice realised most of the others had used Betty Bossi cake mixes, a popular Swiss purveyor of recipes and ready-to-make cake mixtures. John had brought a bottle of Bailey's Irish. Suddenly, she felt bad; she began to wonder if she had overdone it a bit. It seems if she misunder- stood the brief and had gone a bit over the top compared to the others. Something less extravagant would have done. She got lots of praise from her colleagues. She even felt bad for the oth- ers who had made food but did not get half the praise.

Walking back into the kitchen, Eunice was shocked to see her colleagues eating the food with spoons and even fingers; few had used the chopsticks she had conveniently placed beside the dishes.

There were lots of compliments. Even Mandy, who never had a polite word to say about anything, said,

“Eunice, this Chinese food is delicious. Where did you buy it? Oh, you made it yourself? Great! You must give me the recipe.”

More compliments followed. Within 30 minutes the place looked as it if had been hit by a tornado and everyone started to pack up.

Anna said, “Eunice, thank you for the food; have a nice weekend.”

She stood to the side and felt devastated. Slowly she packed up her expensive dishes and got ready to go home. At that moment John walked in.

John grinned, “Hey, Eunice want to come to the pub with us?” Normally, she would politely decline, but she felt so

wretched she surprised herself by agreeing to go. She replied, “Great, meet me downstairs in 5 minutes.”

Unleashing the Tears

After her third gin and tonic in the Pickwick Pub, she felt a bit tipsy. The pace of the rounds was too fast; she was not used to drinking so quickly, and the alcohol made her more talkative than usual. Only John and herself were left in the pub; all the others had made excuses to leave to go home to the family or had other plans.

Eunice said almost in tears, “Why can’t I make friends? What is wrong with me?”

Now she could not stop the tears. She sobbed, “All my at- tempts have failed. All the Swiss colleagues go home early; they are very friendly in the office but do not wish to do any- thing after work.”

John replied, “You can always hang out with me.” Eunice replied, “But all you English do is go to the pub.” John said firmly, “That’s not true; you have been invited

out many times, but you have never once come along. You have only yourself to blame.”

Eunice was almost hysterical. “John, you don’t get it. I miss my family, I have no friends here, I spend every weekend alone. Yes the job is great, I have a lovely apartment, and the salary is super, but there must be more to life.”

John put his arm around Eunice and led her over to a quiet corner of the pub.

Cultural Evening

The sign caught her attention in the company kitchen. It read Cultural Evening. Before she could finish reading it, Anna came up behind her and said,

“Hey Eunice, we are having drinks and food from different countries in the office after work. Do you want to bring something from Singapore?”

Taken off guard, she stuttered. Eunice tried to sound enthusiastic, “Oh yes, of course; I’ll

organise something.” That night Eunice was hoping for inspiration as she sat

watching Three Little Wishes, her favourite TV drama about Zhao Chenglong, who was unhappy that his parents were run- ning his life. It had many similarities to Eunice’s own story. Before going to bed she Googled some recipes of traditional food. Finally, she decided it was easier to phone her mother Jasmine to ask advice on what food to bring.

Jasmine was delighted. “Eating is our national pastime and food a national obsession; it’s impossible to pick one dish from the diverse range of ethnic food.”

Her mother inquired, “Will there be Muslims and Hindus at the party? If so, you need to pay special attention to your choice of food, to cater to the various dietary needs based on religious grounds.”

Eunice mumbled that it is not so easy to buy ethnic food in Zurich.

Eunice confessed, “Mum, you know I can’t really cook. As a student, I just ate out in the Hawker centres. Our food courts are the best in the world. Oh how I miss the Maxwell Food Court Centre! there is nothing like it in Switzerland.”

Eunice asked, “Mum, do you remember the great Hainanese chicken rice with chili crab and Laksa we had last time I was home?”

Her mother could detect a sense of homesickness. Jasmine said, “Yes, Eunice, and we’ll have it again on

your next visit. I’ll send you the ingredients for laksa and chili crabs.”

Despite Eunice’s objections, her mother persuaded her it was the best option; she did not want to fight with her mother.

The Party

Eunice could not stop thinking about what she was going to cook for the event, despite how much she tried to focus on work. With the pressure to do a good job, Eunice decided to take Friday off work to cook the chicken rice, chili crabs, and the laksa in her small apartment. Her mother supervised the operation via Skype. Nervously, she arranged the food in the new serving bowls she bought in Globus, an upmarket retail outlet. She wanted to impress her colleagues with some deli- cious Singaporean food. When she arrived at the office, some of her colleagues were having coffee in the kitchen.

Sarah commented, “That smells delicious, Eunice. You must have been cooking all day.” Anna joined in, “So much food, you can feed a parish with what you have prepared there.” She felt maybe she had overdone it, but better to be well pre- pared than underprepared, her mother’s adage.

PC2-4 PART 2 • COMPREHENSIVE CASES

John said, “Eunice, you are putting too much pressure on yourself; enjoy life a bit more.” Eunice just looked at him in disbelief. He has no idea how hard she has worked to get where she is today, and she does not want to throw it all away. What would her mother say if she saw her crying her eyes out and resting her head on the shoulder of an almost complete stranger?

Case Questions

1. Choosing the right person in the first place is key to the success of an overseas assignment. Does Eunice have a global mindset? Use the list of leadership competencies by Bird and Osland (2004) as a basis for your answer.

2. Identify and evaluate the effectiveness of some of the di- versity and inclusion tools mentioned in the case.

3. Roche CEO Severin Schwan said about diversity and inclusion, “I believe that diversity of people enhances innovation. The different ways of thinking foster creativ- ity. But just having diversity is not enough. We have to embrace and appreciate each other’s diversity to trans- late it into novel ideas – that’s why inclusion of people is so important.” Comment.

4. Apply the Mapping Bridging Integrating (MBI) Framework by Professor J. DiStefano and Prof. M. Maznevski to the case.

5. What advice would you give Eunice? Should she give Switzerland another chance or return home to Singapore?

1. Sole responsibility for the content rests with the author. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. This case illustrates the challenges associated with cross-cultural management, diversity and inclusion and adjusting to a new social environment.

© 2018 by Lucerne School of Business, Lucerne, Switzerland, www .hslu.ch. All rights reserved. No part of this publication may be repro- duced, stored in a retrieval system, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner.

Endnotes

Case 4 Anuj Pathak Returns to India

same standards!” he thought. Was his dream of a successful career back in India going to be shattered or could he recover and improve the situation?

Coming Home

When, as an ambitious young man of 22, Pathak had left in June 1997 for postgraduate studies at Monash University in Melbourne, he had not imagined he would become an expatri- ate for nearly twenty years. After completing the programme, he had been thrilled to get his first job with a financial con- sultancy firm in Singapore. Within about four years he moved to a large MNC in the US. Except for about two years with a start-up in the Financial Services sector, he had worked at strategy consultancy firms. He had been thinking off and on of returning to India and had now decided to do so for both per- sonal and professional reasons. In his visits prior to deciding on the move, he had caught up with Chandrashekhar, his old senior in college back in Bhopal, who was now a Managing Director at the Impact Group. Chandrashekhar had given him a glowing picture of the boom in the Indian economy and the developments in the financial services segment, especially the vast potential of the private sector. Pathak’s brother-in-law who worked in one of the new private sector banks in Mumbai had also given him a thumbs-up, speaking highly of the opportuni- ties in India.

Pathak’s parents were living in Indore since his father’s retirement from government service in the state of Madhya Pradesh. Since they were getting older, and his mother had been diagnosed with a serious ailment, it was becoming dif- ficult for them to manage on their own. Pathak was keen to get back to India so as to help them on a day-to-day basis rather than just financially and during his annual, or at best, biannual brief visits. As the only child, he had a nagging sense of guilt that he lived a comfortable life overseas, while his parents aged. He had not meant to be an expatriate all his life. One thing had led to another, and what he had told himself would be a few years, had turned into nearly twenty years away from home.

Having been overseas since the age of 22 and enjoying pro- fessional success in different parts of the world, he felt that he was an Indian at heart. At the same time, his numerous reloca- tions had made him feel that the world was becoming quite flat and professional success knew no borders. He had also been hearing the buzz around Asia. The West was taking special note of the rise of India and China and there was talk of the 21st century as the Asian century. His visits back home had shown him how the older systems were rapidly transforming. He felt

The pleasant February morning had taken a perplexing turn for Anuj Pathak. He had reached the office after a jog at the beach as had become his habit in the last few months in Mumbai. He had barely settled at his desk to review his schedule when the Vice President, HR, Gopalkrishna Pillai, had called him to his office. Pillai had begun with a general question about how Pathak was settling in. “Quite well!” Pathak replied. “I am very confident about showing solid results at the earliest.” But Pillai had looked concerned, and said, “I’m not so sure. What I’m sensing is that people are quite unhappy with your style. I’m not mentioning any names, but some people from your department have even put in requests for transfers to other departments. They say you are standoffish and extremely critical. I am afraid that the lack of rapport with people around you will impact your performance.” Anuj was shocked. “I have a strong track record of performance. And I’m here to succeed! Of course, I know how essential it is to take people along and keep morale high,” he said. “We know your track record and have big expectations from you, but you need to reflect on your style,” said Pillai.

Pathak had been excited about returning to India and mak- ing a mark at Impact Finance Ltd. (IFL). He thought he had been settling in well but Pillai’s words had stopped him in his tracks. He came back to his office, feeling deflated and per- plexed. He couldn’t figure out where this was coming from. “I have consistently proven my leadership qualities and now my style is being questioned!” he thought. Everyone in the head office and in his own division team had seemed welcoming and friendly to him. But all of that seemed questionable now. “Has it all been mere formality or simply duplicitous behav- iour? What have I missed?” He had always found clear and direct communication to be the most effective. “That is why I have been so upfront about my direct style and my democratic way of functioning and involving everyone in decision mak- ing. I have not insisted on hierarchy when it comes to objective thrashing out of ideas. I have been very specific in spelling out the targets and have given clear and explicit feedback so as to get the best out of each person. This is how I have always got the best work out of people and delivered results. Why has it led to such a state now?” What really upset him was the charge of being unfriendly and critical. “If this was true, why would I have had an open door policy, tried to learn their names, and encouraged clear communication?” he wondered. He was baffled by what he could only think of as the strange reaction of people at IFL. He had been slowly realising that settling back in his own country was harder than he had ex- pected it to be. “But it shouldn’t be so different on the profes- sional front! After all, the ways to get results are not affected by geography. And professionals everywhere should have the

Indian Institute of Management Ahmedabad

Prepared by Professor Meenakshi Sharma, Indian Institute of Management, Ahmedabad.1

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PC2-6 PART 2 • COMPREHENSIVE CASES

now was the time to have the best of both worlds – to be with his parents in their old age and give his daughters deeper roots in India, while on the professional front, he could ride the new wave of growth in the country.

About three months later, he felt happy about having moved his parents to Mumbai. He had been given a flat in a posh Mumbai suburb. However, it was a quite an adjustment in terms of everyday life to move from Boston to Mumbai. His daughters, aged seven and five, were finding it most chal- lenging. They had been happy with the idea of coming to India where the grandparents spoiled them and it was all a great holiday. But after about two months, Anuj and his wife were taken aback when the younger one had declared one day, “Okay, this was fun, let’s go home now!” Telling her that this was now home, had unleashed many tears. The girls had now started at a well-known private school. The high fees and the infrastructure of the school were a surprise to him. However, he was happy with it, hoping that this would help make the transition easier for his daughters. He himself had studied at government schools in the small towns his father used to be posted in, and had been surprised to be told that even middle- class people now aspired to send their children to expensive private schools. Numerous such schools catering to rising as- pirations had sprung up all around the country. The girls were still finding their feet in the school and had been behaving uncharacteristically with temper tantrums and whining. But he was sure they would soon make new friends and begin to like the school. He knew it would have been much harder to return when they were older and had become more en- trenched in life in the US. His wife had relatives in Mumbai and had been looking forward to being closer to them. However, a few months into the move she seemed stressed by the challenges that kept cropping up in the smallest of things as she tried to handle the domestic front while he got busy at work. She had worked as a counsellor and psychotherapist after completing a degree in the US, but had decided to take a break before looking for new career opportunities in India. Getting things organised in the new city was taking a lot of time and energy, but she hoped that in a couple more months she would have the home front organised and could turn her attention to her career. Pathak’s mother’s deteriorating health also demanded time and energy from both him and his wife. Although he knew that the doctors here were as competent, if not more, than the ones abroad, his unfamiliarity with the hospital systems and other procedural matters made things somewhat challenging. Fortunately, some of his wife’s rela- tives had stepped in to help out and that had helped consider- ably. He felt things were largely under control at home and he could get going at the office with full energy.

The Organisation

Impact Finance Ltd. (IFL) was one of the top twenty financial consulting firms in India. Set up in 1997, it was part of the Impact Group – a USD 8 billion group of companies in the technology, manufacturing, infrastructure and finance sectors.

The company’s operations were divided into five divisions, namely Retail Finance, Infrastructure Finance, Corporate Finance, Housing Finance and Investment Management. With Retail Finance as the core, the other divisions had been added over the years to harness the synergies in order to best serve the full range of the needs of consumers. The company was headquartered in the Bandra-Kurla Complex in Mumbai, with a country-wide network of offices.

Anuj Pathak Joins

Around the Christmas break of 2013, Pathak had started look- ing for openings in India that would be exciting and rewarding. When the opportunity to work at IFL came up, it seemed like exactly what he was looking for. In his initial meetings with the management team, he felt valued and respected for his stellar track record. He felt comfortable among the capable profes- sionals who had impressive credentials. Being among fellow Indians felt good after years of being in a small minority. He was confident that his successful track record in diverse loca- tions had given him the necessary skills to fit in anywhere. “And, after all, this is home!” he thought.

In October 2014, he accepted the position of Senior Vice President and was made Head of the Housing Finance division. With the departure of the earlier Head who had left after the performance of the new division did not match projections, it was going to be imperative to bring about changes to business strategy as well as to revitalise the team.

On the day he joined, Anuj had a meeting with the top management team. They welcomed him and expressed great confidence in him and an eagerness to benefit from his new ideas. The Senior Managing Director, Prabha Srinivasan, intro- duced him to the team and welcomed him to the Impact family. During the tea that followed the formal part of the meeting, he was happy with the general feeling of bonhomie and warmth. He noticed that people were very courteous and respectful in their behaviour. He put it down to good old Indian traditions. Overall, he felt a good vibe, and concluded that it was going to be a great place to work.

Interactions with Departmental Team and Senior Management

Immediately on joining, Pathak called a meeting to get to know the team and to share the way ahead. As he shook hands, he asked each one how they would like to be addressed. He told them that a very formal style created unnecessary barriers and that they were all to call him Anuj. He stressed that they were going to drive results together and the required revitalisation of the department would mean tough stretch targets. A complete focus on the task would be expected from everyone, including himself. He assured them of his help and support in enabling the best performance from each of them. “I will be always ac- cessible to all of you and will have an open door policy. I am an open-minded person and value direct communication, honest feedback, and critical thinking. I’m sure you don’t need to be

CASE 4 • ANUJ PATHAK RETURNS TO INDIA PC2-7

had never believed in socialising with work colleagues and felt that it was best to keep work and personal life separate. Anyway, he had his hands full in his personal time and had to look after his parents’ needs. He also had to help his wife in handling the girls who were finding it a little challenging to settle in.

Driving the Turnaround Plan for the Division

Within two months of joining, Pathak had drawn up a turn- around plan for the division. His plan had been approved by the President and he was keen to roll it out at the earliest. It was a tough plan and the team would need to be driven hard. But it was unavoidable if they were to come out of the decline in which the division had fallen in the last two quarters. A new way to envision the market and design innovative responses through new analytic tools would involve a sharp learning curve for all involved. There was no denying that some people would find it aggressive and unrealistic but there was no way around it – tough measures were needed in tough times. Pathak recalled it clearly, “I knew it was not going to be easy but I had never shied away from tough decisions and I knew how to show results. I had a very capable team that was technically sound and very hard working. Therefore I was confident that with the right support and a clear direction, they would make a success of the plan. I could not expect everyone to agree with the finer details but I knew they were all committed to improv- ing the division’s performance. As the leader, I had to go ahead and not be slowed down by unrealistically attempting to get everyone on board from the start. I could also not be satisfied with anything short of perfection in the quality of work and in meeting deadlines, however tight.” He felt that he had been making sure to clearly spell out the expectations from the team and provide clear feedback to avoid misspent time and effort. “I was happy to walk around and meet individuals and groups and to not mince my words when it came to critical assessment of performance. Letting people continue with no direction and empty positive words is not going to get results.” Initially he would even stop by the coffee room and try to catch up with people on the progress of the initiatives. “But I found the tone of the interactions quite informal and even casual, with people talking of personal and domestic matters. I could also see that most people interacted with others at similar levels and were uncomfortable in the presence of a senior person. I stopped these visits and began to rely on frequent meetings to get up- dates and to give my feedback.”

However, as weeks passed, he felt that the pace of progress on the tasks he had assigned was not very satisfactory. So he stepped up the uncompromising tenor of his orders and minced no words in his feedback. His experience was that this was es- sential to avoid any ambiguity and provide clear directions to teams who had to execute plans. Although this was proving to be an uphill task, he hoped that the team would soon pick up steam and he would not need to spend so much energy and time in constantly following up and pushing them.

told about the importance of questioning everything rigorously so as to come up with robust ideas,” he told them. Everyone seemed very appreciative and some people came up and told him that they welcomed the breath of fresh air that he had brought in. Anuj felt happy that he had clearly laid out his ex- pectations and preferences and had set the tone for engagement with the team.

As time passed, he could not help noticing that the style of his team did not match the expectations he had laid down so clearly. At departmental meetings, hardly anyone questioned his ideas. In fact, people spoke very little, allowing him to drive the discussion and when they did speak, it was to con- cur with his views. They were respectful and attentive, but if he asked for an opinion, they would demur and wait for him to say something. Invariably, they would go on to agree with his interpretation. On the other hand, whenever he wanted data and information, they would do so very efficiently. He knew they had invaluable experience but he wasn’t sure why they were not more forthcoming with suggestions and assertive in challenging him or being critical of the ideas of each other. He decided that he needed to demonstrate his own critical and di- rect style and people would soon become comfortable using it themselves.

In meetings with other VPs and the MDs, he found ev- eryone to be polite and appreciative of his input. The overall tone of discussions was courteous and there were few disagree- ments. Although he sometimes got the sense that there were some cliques that affected the way people responded to issues, he was not able to get a very clear picture. He observed that people generally did not openly challenge or contradict each other during discussions. He found this surprising as he be- lieved that it was best to discuss matters objectively and treat disagreement and criticism impersonally. Dissension and dis- agreement on tasks or issues, in his experience, were not to be mixed with people’s regard for each other. “There can be no two ways about this – clear and direct communication whether one agrees with the views of others or not, is essential. And so are objective handling of issues and high level of critical rigour. Without these, one would never get the most robust ideas,” he told people from his own division.

On the whole, he noticed that his colleagues in middle management and the technical staff seemed quite deferential towards senior management. He tried to be informal with ev- eryone, hoping to make them comfortable by showing that he did not stand on ceremony. He got to know many by face and tried to remember their names and departments. However, so far he had not been able to get to know any of them very well. Even those in his division did not seem to respond to his at- tempts to make them comfortable at official interactions. On the other hand, he received invitations to family events and informal parties, especially from some of the other VPs and from his divisional colleagues. He assumed it was done sim- ply out of politeness, because he and his family did not per- sonally know them. Moreover, except for Chandrashekhar, he found it not really necessary to see any of them socially. He

PC2-8 PART 2 • COMPREHENSIVE CASES

on the fast track depends on delivered high performance but I am stumped! What am I missing? Is this particular team some- how not gelling with me or has my long stint overseas made me a stranger back home?”

He knew that he needed to gain the trust of people around him and be able to connect with them so as to draw out the best from them in terms of fresh ideas and critical feedback. Perhaps he was wrong in his easy assumption that he was on familiar ground in the swanky office that reminded him of those in overseas locations. He was not sure what he could do to fix things before they got out of hand and the hopes with which he had moved back to India withered away.

Case Questions Develop a written report analyzing the situation, identifying the problem, and answering the questions:

1. What could Pathak have done differently? 2. What could the company have done differently? 3. How can the situation be improved now?

A Sudden Reality Check

However, today’s meeting had brought him to a grinding halt, pushing him to introspect. He wondered what had happened. “Where had the charges of being haughty and unfriendly come from? Why were people misunderstanding my intentions? After all, I have been true to myself and encouraged them to be comfortable. As for being critical, there are no two ways about the fact that objective feedback needs to be shared and as pro- fessionals they should know that!” He was puzzled that proven methods of delivering results by firing up large teams had led to such dissatisfaction and demotivation. Perhaps he had got a team of difficult people. Or perhaps they resented him as some- one who had been brought in laterally. Perhaps he needed to re- attempt rapport-building and enhancing his personal credibility, he tried to tell himself. But before he could do that he would need to understand where his style had backfired. He knew that if this state of affairs continued, his hopes for making a mark with his performance would be seriously jeopardised. He had been inducted at a senior position with high expectations. “How am I to meet these in such a situation? My advancement

Endnotes 1. Cases of the Indian Institute of Management, Ahmedabad, are prepared

as a basis for classroom discussion. They are not designed to present illustrations of either correct or incorrect handling of administrative problems. © 2017 by the Indian Institute of Management, Ahmedabad.

P A R T O U T L I N E

C H A P T E R 6 Formulating Strategy

C H A P T E R 7 Implementing Strategy: Strategic Alliances, Small Businesses, Emerging Economy Firms

C H A P T E R 8 Organization Structure and Control Systems

Formulating and Implementing Strategy for International and Global Operations 3

P A R T

184

6-1. To understand the reasons companies engage in international business

6-2. To become familiar with the strategic formulation process

6-3. To learn the steps in global strategic planning, including assessing entry strategies for different markets

6-4. To understand the need for strategic planning for emerging markets

O B J E C T I V E S

Formulating Strategy 6 C H A P T E R

Opening Profile: Why Ford Is Stalling in China while Toyota Succeeds1

As Chinese workers returned to duty following a Lunar New Year break, the Changan Ford plant in the northeastern city of Harbin remained empty, with staff on an extended vacation until March.

“It’s a much longer break than last year, which was about a week,” said a security guard at the joint-venture plant, which opened in 2017 after a $1.1bn investment and can produce up to 200,000 Focus models a year.

Ford is one of several carmakers cutting production in China, the world’s largest car market where passenger vehicle sales fell 4 per cent to 23m last year, their first annual decline in almost three decades.

China accounts for 30 per cent of global car sales, and foreign brands make up two-thirds of the mar- ket. That means multinationals’ joint ventures with Chinese carmakers are heavily exposed to the downturn.

But not all have fared badly. Sales at Toyota’s joint venture with Guangzhou Automobile surged nearly 35 per cent last year, while BMW’s venture with Brilliance Auto saw a 20 per cent sales rise.

Their differing fates show a range of factors—from investment in new models, competitive ex- posure to local brands, dealer relations, after sales service, and quality perceptions—can determine a brand’s success or failure in China.

With Beijing unwilling to offer large subsidies to car buyers and analysts forecasting a further de- cline in the market this year, it is crucial for investors to pay attention to factors behind the success and failure of different brands in the downturn.

Ford: slow to bring new models to market

Ford had a late start in China, compared with rivals GM and Volkswagen. Slowed by years of corporate indecision and the impact of the 2008 financial crisis, it did not begin to make a mark on the market until 2012.

Its two joint ventures saw strong demand among consumers for the Escort, Focus and Edge brands. Ford’s China sales in the four years to 2016 doubled to reach more than 1.2m. The Focus and Escort qualified for government subsidies on vehicles with engines of 1.6 litres or below introduced at the end of 2015.

CHAPTER 6 • FORMULATING STRATEGY 185

But sales began to decline at its main joint venture, Changan, in 2017 as the subsidies began to be reduced, and plunged 54 per cent last year after they were eliminated. Analysts said the company was slow to bring new models to the market . . . “Their problem is really the model cycle, the majority of their cars are in year five or six, that’s when the sales drop rapidly,” said Jochen Siebert of consultancy JSC Automotive.

Ford remedied the problem last year, launching new saloon and hatchback versions of the rede- signed Focus car, but by then the market was in a slump, making it harder to attract new buyers.

One consolation is that because of its late entry, China is a much smaller part of Ford’s worldwide sales than for GM and Volkswagen, for which China is their biggest market. Ford’s high-end Lincoln brand has fared less badly, reflecting stronger demand for premium vehicles.

PSA Group: mid-range brand suffers

The French owner of the Peugeot and Citroën brands saw sales at its joint venture with Dongfeng fall 44 per cent last year, with the fastest losses for its 408 and 308 brands.

Peugeot has also suffered from having older models but were also hit by their mid-range price posi- tion during last year’s downturn, analysts said. Less well-off consumers refrained from buying cars or switched to second-hand models last year as subsidies were cut and economic growth slowed.

. . . Analysts said PSA had been squeezed by increasing competition from local brands, such as Geely and BYD, which have moved up the value chain into mid-range cars, selling for about Rmb120,000 ($17,906), hiring teams of overseas designers to make their vehicles more attractive.

“Chinese brands, particularly Geely, are taking market share from the less distinctively defined global brands. We can specifically point to Ford and Peugeot,” said Michael Dunne, an industry analyst and former GM executive. “There’s no doubt the Chinese brands are coming up so the global brands must move upscale or move out.”

. . . “PSA is in the middle of the market and is squeezed by both ends” as premium brands lower prices in the downturn, said UBS analyst Paul Gong, a risk he added applies to other mass-market brands such as VW.

JLR: popularity hit by repeated safety recalls

Britain’s Jaguar Land Rover should have been well placed in a market where sales of more expensive, larger engine vehicles have been strongest. But its sales fell 23 per cent in China last year.

Also a latecomer to the market, locally assembled products such as the Land Rover Evoque and Discovery, and Jaguar models helped the company raise its Chinese sales to 150,000 in 2017. It modi- fied interiors to meet local tastes.

Analysts said JLR’s reputation had suffered from repeated safety recalls in China—reportedly cov- ering more than 100,000 vehicles in 2017. In January it recalled 68,828 vehicles in China over an engine safety hazard.

The brand received a four star rating in a 2018 survey of Chinese customer satisfaction with post- sales service by JD Power, but that compared with peers such as Audi who gained five stars.

When sales began to fall, JLR continued with ambitious production targets, pushing inventory on to dealers who had to make stiff price cuts.

“Some car companies choose to revise down annual targets to help dealers, while others continue to push inventory, which makes dealers suffer,” said Patrick Yuan, an analyst at investment bank Jefferies. “The relationship should be a partnership. They cannot fight each other.”

Toyota: reputation for quality boosts sales

Selling a record 1.5m vehicles in China last year, Japan’s Toyota has defied the downturn, and it is tar- geting 7 per cent growth this year. Its Corolla model, which sells for about Rmb150,000, accounts for the bulk of its sales.

The brand has a strong reputation for quality in China and has consistently brought new products to the market, analysts said.

“Toyota stands out as an exception,” said Mr Dunne. “They consistently deliver high quality prod- ucts, good service, and high resell value. The fundamental things that make Toyota a strong company are standing out in a tough market.”

The overall decline in car sales last year was partly because of consistently rising petrol prices, a trend that has benefited Toyota because of its strong fuel-economy and as consumers become more canny.

(Continued)

186 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

As the opening profile illustrates, companies operating in markets abroad need to develop ef- fective strategies to be successful in those markets. They need to consider the actions of both multinationals and local rivals. Emerging market firms have become more competitive in their home markets, and have made great strides in competing abroad. Nowhere is this competitive trend more pronounced than in the digital economy according to a 2018 Boston Consulting Group report, which indicated that 60 percent of the emerging market leaders are digitally in- tensive compared with only 17 percent in 2012.2 These emerging-market firms have catapulted, or “leapfrogged” past developed-market rivals by developing new digital technology businesses and leveraging existing digital technologies in traditional businesses. These emerging enterprises of all sizes have obtained the requisite digital capabilities through internal investment, strategic partnerships, and acquisitions.

Digital consumption and use among consumers in these countries are widespread and growing fast—much faster than in developed nations.

2018 BCG Global Challengers: Digital Leapfrogs

Emerging-market firms are taking advantage of opportunities brought about by digital technology. The strategies of companies such as Alibaba; China Communications Con- struction Co.; and Tencent of China have placed them atop the list of the strongest emerging multinationals.3 SABIC of Saudi Arabia, a diversified chemical company, joined those three firms because it has innovated effectively and leveraged digital technology in order to compete globally. Although many of the highly competitive emerging MNCs come from China, several African companies have begun to compete on the world stage: Elsewedy Electric of Egypt, Dan- gote Cement of Nigeria, Sasol of South Africa, and Safaricom of Kenya.4 Add these new chal- lengers to the already hypercompetitive arena of global players, and it is clear that managers need to pay close and constant attention to strategic planning in the presence of digital technology opportunities and emerging market threats. Indeed, these emerging multinationals are competing fiercely in many overseas markets. For example, a majority of Tata Consultancy Services’ (India) business comes from international clients. As will be explained in this chapter, corporate strate- gies must change in response to shifting global economic conditions and other environmental and competitive factors. With continuing economic challenges around the world, Tata must consider

“Once you start to replace your second or third car, you probably realise that quality and fuel con- sumption are very important. In this regard Japanese cars do very well,” said Yale Zhang, founder of consultancy AutoForesight.

Mercedes, BMW and Audi: wealthy continue to buy premium brands

About 3m premium vehicles were sold last year, as wealthier consumers have been less affected by the economic slowdown. Beijing Benz, a joint-venture between Daimler, which owns Mercedes-Benz, and BAIC Motor, saw 15 per cent sales growth last year. Volkswagen-owned Audi saw 11 per cent growth to 661,000 vehicles. Top-range brands face almost no local competition.

The premium players have concentrated on China’s wealthiest first-tier cities, where car sales rose last year, whereas mid-range brands may have opened too many dealerships in lower-tier cities, where the market shrank.

“The mass-market brands have tried to have dealerships everywhere and in the end that might be a mistake,” said Mr Siebert. While not all brands can switch to luxury, they can learn from premium brands’ investment, after-sales service and spending on training for dealer staff, he added.

BMW in October said it would take advantage of Beijing’s abolition of joint venture requirements in the car sector in 2021 by buying a majority stake in its partner Brilliance Automotive. Mid-range brands could attempt to follow suit as they try to repeat the success of the luxury groups.

. . . “You could see a world in which Ford says let’s allow the joint-venture to sustain itself, but we will set our sights on going it alone, or getting new partners.”

Source: © The Financial Times Limited 2019.

CHAPTER 6 • FORMULATING STRATEGY 187

how it will respond, but it is strengthened by its geographic diversification. US-based IBM gener- ates about half its revenues from its services business—in particular in emerging markets—and has diversified with a two-track approach. The company is helping US clients to cut costs. In emerging markets, IBM helps customers develop their technology infrastructure.

Because international opportunities—especially in the digital economy—are far more com- plex than those in traditional sectors, managers must plan carefully in order to benefit from them. Moreover, many experienced managers are wary about expanding into politically risky areas or those countries whose government practices they find prohibitive.

The strategic management process refers to the “Full set of commitments, decisions, and actions required for a firm to achieve strategic competitiveness and earn above average returns.”5 The basic means by which the company competes—its choice of business or businesses in which to operate and the ways in which it differentiates itself from its competitors—is its strategy. Strategy requires “intentional, informed, and integrated choices.”6 Almost all successful compa- nies engage in long-range strategic planning, and those with a global orientation position them- selves to take full advantage of worldwide trends and opportunities. Multinational companies (MNCs), in particular, report that strategic planning is essential both to contend with increasing global competition and to coordinate their far-flung operations.

In reality, however, that rational strategic planning is often tempered, or changed at some point, by a more incremental process of strategic decision making by some managers. When a new CEO is hired, for example, she or he will often call for a radical change in strategy. That is why new leaders are chosen carefully, based on what they are expected to do. So, although the rational strategic planning process is presented in this text because it is usually the ideal, inclusive method of determining long-term plans, managers must remember that people are making deci- sions, and their own personal judgments, experiences, and motivations will shape the ultimate strategic direction.

REASONS FOR GOING INTERNATIONAL Companies of all sizes go international for different reasons—some reactive (or defensive), and some proactive (or aggressive). The threat of their own decreased competitiveness is the over- riding reason many large companies adopt an aggressive global strategy. To remain competitive, these companies want to move fast to build strong positions in key world markets with products or services tailored to the needs of increasingly global and diverse sets of customers.

Reactive Reasons GLOBALIZATION OF COMPETITORS One of the most common reactive reasons that prompt a company to go overseas is global com- petition. If left unchallenged, competitors who already have overseas operations or investments may get so entrenched in foreign markets that it becomes difficult for other companies to enter later. In addition, the lower costs and market power available to these competitors operating globally may also give them an advantage domestically. Nor is this global perspective limited to industries with tangible products, as a whole range of services have followed suit, including of- fice functions, engineering, publishing, medical, consulting, media, and so on, facilitated by the Internet. Following the global expansion of banking, insurance, credit cards, and other financial services, for example, financial exchanges have been going global by buying or forming partner- ships with exchanges in other countries, their strategies facilitated by advances in technology.7

Strategic moves by competing global giants prompt countermoves by other firms in the industry to solidify and expand their global presence. Such was the case when U.S.-based Time Warner sought to justify its acquisition of AT&T for U.S. $85 billion. CEO Jeffrey Bewkes ar- gued that Google and Facebook extracted advertising revenues away from television networks while Amazon’s Prime and Netflix were attracting increase viewership. As such, he asserted that the acquisition was a competitive response to the ongoing threats stemming from new digital technology-intensive rivals.8

Another strategic move involves Nokia (Finnish mobile phone company), which has been raising funds in order to breathe new life into its global brands. Underscoring the need to in- novate in a competitive marketplace, an industry analyst stated, “There is no room for sub-scale

6-1. To understand the reasons companies engage in international business

188 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

mobile phone companies any more other than chasing small niches. I see this almost as a com- petitive response to Xiaomi, Huawei, OnePlus and others.”9 These strategic challenges facing Nokia show the growing competitive threat of emerging multinationals as Nokia [and fellow Nordic rival, Ericsson] compete against China’s Huawei as the telecommunication environment prepared to unveil “5G” technology (i.e., the next generation of mobile telecommunications ser- vice), which promises increased speed and connectivity.10 Although Apple and Android played major roles in Nokia’s lackluster performance and dwindling market share, the Finnish firm has struggled to commercialize some innovations and made a strategic miscalculation regarding the transition to smartphones.11

TRADE BARRIERS Although trade barriers have been lessened in recent years by trade agreements that have led to increased exports, some countries’ restrictive trade barriers do provide another reactive reason for companies often switching from exporting to overseas manufacturing. Barriers such as tar- iffs, quotas, buy-local policies, and other restrictive trade practices can make exports to foreign markets too expensive and impractical to be competitive. Toyota, for example, has manufactur- ing plants in the United States to circumvent import quotas. As another example, ZTE—China’s second largest telecom equipment maker and a state-controlled company listed in Hong Kong— moved to Brazil; the purpose was to avoid that country’s high import tariffs, even though it is cheaper to manufacture in China.12

REGULATIONS AND RESTRICTIONS Similarly, a firm’s home government regulations and restrictions can become so expensive that companies will seek out less-restrictive foreign operating environments. For instance, Deutsche Telekom CEO Tim Höttges underscored the burdensome regulatory (and price competition) in Europe compared to the United States (where it owns T-Mobile US) when considering attractive investment decisions. Mr. Höttges stated, “I want to invest patriotically for Europe...We need a superior infrastructure but I see we are falling behind.”13

Home regulations and restrictions contributed to Dyson’s decision to move its headquarters to Singapore as discussed in the following “Management in Action” profile.

MANAGEMENT IN ACTION Why Dyson Is Shifting Its HQ to Singapore14

For someone who has trumpeted Britain’s economic potential on the global stage once it leaves the EU, James Dyson’s decision to move his business headquarters to the other side of the world struck an odd note.

The switch to Singapore comes at a crucial juncture for his company, which is seeking to evolve from a household appliance brand to a manufacturer of electric vehicles. It is nothing short of his great- est gamble, which could secure his legacy or risk his fortune.

The change of HQ would subject Dyson to less rigorous financial disclosure at a time when the company’s profitability is likely to slump because of investments, according to patent experts.

The Brexit-supporting billionaire, famous for his bagless vacuum cleaners, faced accusations of hypocrisy after the announcement that the British success story he has built over a quarter of a century would relocate its corporate head office to the island city-state.

Dyson said it was simply for commercial reasons because most of its customers and all its manufacturing operations are in Asia, and to give management supervision over the construction of a car factory in Singapore that will be its largest investment to date.

Nor were Brexit or reducing its tax bill motivations, the privately owned group stressed. But the timing, just weeks ahead of Brexit, has prompted questions about whether other factors were at play—and what it means for Dyson’s UK operations, as well as high-tech engineering in the country more widely.

Normally no stranger to sharing his views with the media, Sir James was conspicuous in his ab- sence on Tuesday, offering no personal comment and instead leaving chief executive Jim Rowan to contend with a barrage of questions on a call with journalists.

CHAPTER 6 • FORMULATING STRATEGY 189

“This is to do with making sure we future-proof [the company],” said Mr Rowan. “What we’ve seen in the last few years is an acceleration of opportunities to grow from a revenue perspective in Asia.”

Dyson is enjoying strong demand for its high-end hair dryers, air purifiers and lighting products among the region’s burgeoning middle classes. Asia accounts for more than half of the company’s £1.1bn profit, as measured by earnings before interest, depreciation and amortisation, which overall jumped by one-third in 2018.

However, Mr Rowan insisted that the HQ move was not a bad omen for the UK, where Dyson ceased manufacturing in 2003, and pledged it would enlarge its 4,800-strong workforce there.

“We’ll continue to invest in the UK,” said Mr Rowan, pointing out a proposed £350m expansion to one of two research and development centres in Wiltshire, south-west England, for autonomous vehicle testing.

Indeed, the company sought to play down the significance of the Singapore move. Only two execu- tives will transfer to the Asian island country—the chief financial officer and chief legal officer—joining Mr Rowan, who already lives there.

While testament to the international success of the brand, which generates just 4 per cent of its £4.4bn annual sales in the UK, the relocation delivers a symbolic blow to Britain’s prestige as an attrac- tive home for big business.

Another concern is that the UK exchequer may lose out. Total tax borne by Dyson worldwide was £185m in 2017, according to the accounts of its holding company, Weybourne Group, including £61m in UK corporate tax.

The company said that any impact on its overall tax bill would be “negligible” and it would con- tinue to pay tax in Britain. But it declined to say whether the UK proportion of its total global bill would fall at the expense of Singapore.

However, Heather Self, tax partner at Blick Rothenberg, said she did not believe this would happen. “If all they’re doing is moving head office, it will make very little difference to the UK tax bill. If

as they’ve indicated the R&D and technology is remaining in the UK, then that should account for the majority of the UK tax bill in any case,” she said.

Others have pointed out that Singapore has no capital gain or inheritance tax, with individuals only taxed on income earned in the country.

Yet it is far more likely that the move is linked to Dyson’s latest, and boldest, venture—its £2bn drive to break into the automotive arena.

It has developed a UK site to test the vehicles, but also plans to expand its Singaporean research and development facilities, a sign that future vehicle work will take place closer to the manufacturing sites.

The company has always been fiercely secretive. So closely guarded was the HQ move that the UK government was unaware it was even under consideration, despite frequent meetings between officials from several departments and the company, according to several people.

Moving to Singapore, some people suggest, would liberate the business from UK disclosure rules for privately-owned companies, which Sir James has previously criticised as giving too much away to foreign competitors.

Dyson has ruled out raising fresh funds to support the project, but is preparing to enter an industry where even the most experienced carmakers face cost overruns.

The company spreads its intellectual property around the globe, with about 1,500 of its 5,000 pat- ents registered in the UK, according to data from patent research group Cipher.

“Clearly if you have new business like cars that will generate significant IP,” said its chief executive Nigel Swycher.

However, tax experts said it was unlikely that Dyson would move its existing UK patents to Singapore, partly because of the cost, and because Britain gives favourable tax treatment to intellectual property.

A Dyson spokesman said the company had no intention of moving its current UK patents to Singapore.

“IP will not move and our filing strategy will not change. Dyson Technology Ltd [in the UK] owns Dyson IP and that is a British company. Given the majority of IP is held in the UK entity Dyson Technology, the majority of IP/patent-related revenue and profit is taxed in the UK as well.”

But if the company decides to register all future patents in its new homeland, then while Britain will not see a tax fall from the move immediately, it will fail to benefit from the potential growth of the business in the long run.

THE APPEAL OF SINGAPORE IS ZERO TAX

One of Singapore’s strongest appeals for foreign companies is the potential to lower their tax rate to zero per cent.

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190 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

CUSTOMER DEMANDS Operations in foreign countries frequently start as a response to customer demands or as a solu- tion to logistical problems. Certain foreign customers, for example, may demand their supply- ing company to operate in their local region so that they have better control over their supplies, forcing the supplier to comply or lose the business. McDonald’s is one company that asks its domestic suppliers to follow it to foreign ventures. Meat supplier OSI Industries does just that with joint ventures in 17 countries, such as Germany, so that it can work with local companies making McDonald’s hamburgers. Moreover, OSI has acquired Baho Foods (Netherlands) and Flagship Europe in order to broaden its product offerings and better serve European customers vis-à-vis supermarkets.15

Proactive Reasons Many more companies are using their bases in the developing world as springboards to build global empires, such as Mexican cement giant Cemex, Indian drugmaker Ranbaxy, and Russia’s Lukoil, which has hundreds of gas stations in New Jersey and Pennsylvania.16

Careful, long-term strategic planning encourages firms to go international for proactive reasons, some of which are described below.

ECONOMIES OF SCALE One pressing reason for many large firms to expand overseas is to seek economies of scale—that is, to achieve world-scale volume to make the fullest use of modern capital-intensive manufac- turing equipment and to amortize staggering research and development costs when facing shorter product life cycles.17 The high costs of research and development, such as in the pharmaceutical industry (for example, Merck and Pfizer), along with the cost of keeping up with new technolo- gies, can often be recouped only through global sales.

GROWTH OPPORTUNITIES As domestic growth declines in developed markets, opportunities abroad look more attractive, in particular since the Internet now greatly facilitates the ability to link to contacts in other countries quickly. For example, Spotify has sought new customers for its streaming services in India, Russia, Africa, Israel, Vietnam, and Romania among other countries.18 Similarly, several European financial

The headline rate of corporate tax is 17 per cent, a level that the UK will match from 2020, down from 19 per cent at present.

However, a combination of incentive schemes, which include an international headquarters award, can bring the country’s rate down to nothing.

“It is very very rare, but it has happened in the past,” said Chris Woo, tax leader at PwC Singapore. Another corporate tax expert said it was “not impossible” for Dyson to snatch the 0 per cent cor-

porate tax rate given it produces high-end goods that would transfer technology to Singapore; it will probably increase capital expenditure and high-skilled headcount; and it would boost R&D activity in the country—all of which is of interest to Singapore.

Dyson on Tuesday said it would expand its Singapore Technology Centre and that “an increasing proportion” of Dyson’s executive team will be based in the south-east Asian nation given a growing majority of the company’s customers and manufacturing operations are based in Asia.

In addition, the Singapore Economic Development Board offers companies tax exemptions or con- cessionary tax rates of 5 or 10 per cent for up to five years, with the possibility of extension.

To qualify, companies must boost employment, generate investment that spills over to the local econ- omy and commit to developing technology, knowhow and skills in the city state, according to the EDB.

“The EDB must have pulled out all the stops to convince Dyson to relocate its headquarters,” said Eugene Tan, law professor at Singapore Management University.

Kiren Kumar, assistant managing director at the EDB, said: “Singapore and Dyson have enjoyed a strong partnership for more than ten years.

“Dyson has grown from a small team developing motors to 1,100 employees undertaking a variety of functions including supply chain management, advanced manufacturing and R&D”.

Source: © The Financial Times Limited 2019.

CHAPTER 6 • FORMULATING STRATEGY 191

technology companies such as Tandem (app-based bank) and Nutmeg (online wealth management) have begun to enter Asian markets in an attempt to offer new digital payment and wealth manage- ment services in order to disrupt retail banking in those markets. According to Nutmeg CEO Martin Stead, “Asian markets have a large and growing population that is currently under-served and over- charged by the traditional players, and where there is no established wealth tech player either.” In addition, London-based Revolut—an app that provides overseas spending and money transferring services with low fees—has obtained licenses to serve customers in Japan and Singapore.19

The arrival of virtual banks is probably one of the most important developments in recent Hong Kong financial services history.20

Henri Arslanian, FinTech Association of Hong Kong

Whatever their size, companies in developed countries experience a strategic imperative to look for growth opportunities, follow key customers, circumvent trade barriers, and increase cost efficiency, and perhaps to deal with an onerous regulatory environment (i.e., disclosure/taxation issues) at home, as illustrated in the following “Comparative Management in Focus” feature on growth opportunities in Africa.

Comparative Management in Focus Global Companies Take Advantage of Growth Opportunities in Africa

Although many firms see political instability and corruption as obstacles to pursuing oppor- tunities in Africa, optimism abounds with high expectations for digital technology growth, infrastructure demand, and rapid urbanization.21 Indeed, a decline in armed conflicts, new

educational opportunities, and mobile phone–based technology has spurred African business oppor- tunities and entrepreneurship. For example, institutions such as the Nigerian-based Tony Elumelu Foundation have sought to enhance youth entrepreneurship by offering training, financing, and mentor- ing to African youth.22 Furthermore, the signing by over 40 nations of the African Continental Free Trade Area in March 2018 can further elevate Africa’s economic potential. See Map 6-1.

The highest-performing African firms seem to have realized these opportunities, yet dealt with these environmental challenges by: (1) investing in themselves and their partners vis-à-vis vertically integrating and developing their own water and power supplies, as well as offering financing to sup- pliers; (2) developing human capital by investing in training programs, offering internships, and part- nering with universities; and (3) embracing technology through the use of mobile computing, social computing, and big data analysis.

Numerous African companies have expanded within the African continent. For example, Morocco- based Saham Finances, which is led by CEO Nadia Fettah, has embarked on an aggressive expansion within Africa. After becoming a dominant insurance company in Morroco, Ms. Fettah first considered sub-Saharan Africa because of the low penetration rate. Then, she expanded into ten West Africa French- speaking countries. At present, her company operates in 23 African countries. Indeed, Burkina Faso—one of Africa’s poorest countries—has become one of Saham Finances’ fastest growing markets.

Kenyan-based Equity Bank, under the leadership of CEO James Mwangi, has transformed itself from a small building society into a commercial bank spread over six East and Central African coun- tries with more than 12 million clients and US$5 billion in total assets. In 2000, roughly 10 percent of Kenyan adults had bank accounts. Mr. Mwangi sought to make Kenyans comfortable with banking and thus introduced “mobile village banking,” which, simply put, were banking vehicles.

Long before cellphone banking came along, we created minibank branches that could fit in the

back of a Land Rover and rove them from village to village across rural Kenya.23

Mr. James Mwangi, CEO Equity Bank (Kenya)

Growth opportunities are not reserved only for African multinational companies. One non- African country that has an extremely positive long-term view of the continent is China. According to a McKinsey Global Survey, 70 percent of Chinese respondents expect their companies to in- crease the number of African countries in which they operate, compared with 45 percent for all other

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192 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

non-African country respondents. Also, 68 percent of the Chinese respondents expect their orga- nizations to increase the size of their African workforces, compared with 45 percent for all other non-African respondents.

Although South Africa has tended to receive the most visibility from the global business com- munity, Morocco has garnered growing attention from MNCs, which rejoined the African Union in 2017. According to the World Economic Forum Global Competitiveness Index, Morocco ranked 75th

Source: www.cia.gov/library/publications/the-world-factbook/maps/maptemplate_sf.html; Arvind Singh Negi/Red Reef Design Studio/Pearson India Education Services Pvt. Ltd.

MAP 6-1 Africa

CHAPTER 6 • FORMULATING STRATEGY 193

RESOURCE ACCESS AND COST SAVINGS Resource access and cost savings entice many companies to operate from overseas bases. The availability of raw materials and other resources offers both greater control over inputs and lower transportation costs. Lower labor costs (for production, service, and technical personnel)— another major consideration—lead to lower unit costs and have proved a vital ingredient to com- petitiveness for many companies.

Sometimes just the prospect of shifting production overseas improves competitiveness at home. When the Xerox Corporation started moving copier-rebuilding operations to Mexico, the U.S. union agreed to needed changes in work rules and productivity to keep the jobs at home. Lower operational costs in other areas—power, transportation, and financing—frequently prove attractive.

INCENTIVES Governments in countries such as Poland seeking new infusions of capital, technology, and know- how willingly provide incentives—including tax exemptions, tax holidays, subsidies, loans, and the use of property. Because they both decrease risk and increase profits, these incentives are attractive to foreign companies. And, in 2014, Cuba passed a law offering tax breaks for foreign companies planning joint ventures with Cuban companies or the Cuban state. In an attempt to diversify Kuwait’s economy, its government has implemented major reforms to facilitate foreign investment. For instance, foreign investors can have 100 percent equity ownership through Kuwait rather than only in special economic zones. Moreover, the Kuwaiti government has offered tax holidays up to 10 years and customs exemptions. Kuwait is not desperate for capital but instead has chosen to be selective with investments in an attempt to build its digital economy.

out of 140 countries in 2018. There was some variance, however, with the underpinnings of its com- petitiveness ranking. For instance, Moroccan institutions, infrastructure, and macroeconomic stability ranked between 47th and 54th; yet, its ICT adoption—a proxy for technology adoption—ranked 93rd. Morocco’s financial system ranked 44th, but its innovation capability and labor market were ranked 78th and 119th, respectively.24

“Morocco’s bid to join African trade and political unions is part of its strategy to raise its regional profile,” says Elisa Parisi-Capone, vice-president and senior analyst at Moody’s, the rating agency.25

Morocco has been looking south since 2010. With slow growth in post–financial crisis Europe and many Arab economies in disarray following the Arab spring uprisings, Morocco’s government began encouraging local companies to look for opportunities in fast-growing sub-Saharan African nations.

Casablanca Finance City (CFC) was established that year and launched as a centrepiece of this strategy. Its mandate was to attract companies that were keen to use Morocco’s political stability and favorable geo- strategic position between Europe and Africa as a base for expanding their operations south of the Sahara.

The strategy has borne fruit: Morocco’s exports to West Africa tripled between 2006 and 2016. About 90 percent of greenfield foreign direct investment (new projects or expansion of existing ones) out of Morocco between 2010 and 2018 went to sub-Saharan Africa, according to fDi Intelligence, a Financial Times sister publication.26 Ethiopia, Ivory Coast, and Cameroon were the top destinations.

Since its launch, about 160 businesses have acquired the regulatory and fiscal advantages of CFC status including international consultancies such as McKinsey and Boston Consulting Group, insurance market Lloyd’s of London, and law firm Clifford Chance.

Businesses in CFC reap certain fiscal benefits: Morocco’s corporate tax rate of 30 percent drops to zero for the first five years after CFC designation. Employees of those companies, meanwhile, pay reduced rates of tax, and there are no limits on foreign exchange repatriation.

“It’s good by African standards. It offers quite an attractive set of regulations and the ability to hire foreigners—kind of a one-stop shop for administration that is helpful, plus competitive fiscal and tax policy,” says Patrick Dupoux, managing director and head of Africa at Boston Consulting Group, which joined CFC in 2012. Fast approval for visas—which can take months in other African countries—was a big draw, he adds.

While the firm’s Johannesburg office is bigger, Casablanca’s reach is broad. “From Casablanca, primarily we serve Morocco—that’s 50 per cent of our work,” says Mr. Dupoux. “Twenty-five per cent is firms within Africa; the other 25 per cent is multinationals and pan-African companies that want an overall Africa strategy.”

194 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

We’re focusing on investment that helps us to attract new technologies and innovations, and that brings added value to the Kuwait economy. It’s more quality than quantity.27

Sheikh Meshaal Jaber Al-Ahmed Al-Sabah, Director General of the Kuwait Direct Investment Promotion Authority (KDIPA)

However, the practice (called inversion) of U.S.-based companies changing their domicile country to one that offers a lower corporate tax rate, such as Ireland, was coming under consider- able fire in 2015 in the United States because of the loss of taxes and jobs. One such tax haven is Luxembourg, a grand duchy country with 550,000 people, most of whom are in or near the city of Luxembourg (a beautiful city and country, situated between Germany, France, and Belgium, that this author has visited many times). The city has attracted many foreign company head- quarters seeking to be in the middle of Europe but to gain deep discounts on corporate taxes. In February 2015, Fortune carried an article indicating that the reporter had discovered a number of post-office boxes with names of foreign corporations on them, but that was the extent of the companies’ presence there.28

Luxembourg City, Luxembourg

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Challenges When Going International LIABILITY OF FOREIGNNESS (LOF) When a firm operates abroad, it tends to face a liability of foreignness, defined as “all additional costs a firm operating in a market overseas incurs that a local firm would not incur.”29 There are four primary costs associated with the liability of foreignness: spatial costs, unfamiliarity costs, host-country costs, and home-country costs. Spatial costs refer to the additional costs associated with operating geographic distance. Unfamiliarity costs reflect “being a stranger in a strange land” in that the multinational enterprise is unfamiliar with local customers and stakeholders, as well as local best practices, which can lead to costly missteps.30 For example, when U.S.-based Kentucky Fried Chicken entered the Chinese market, its long-standing slogan—“It’s Finger- Lickin’ Good” was translated as “Eat your fingers off.” Unfamiliarity with the cultural, legal, and regulatory environment can lead to costly errors in the due diligence process when expanding abroad. Moreover, local customers and stakeholders are unfamiliar with the foreign firm, which can lead to negative stereotypes and difficulty in gathering local market intelligence in a timely manner simply for being foreign. As the foreign firm accumulates experience and becomes more embedded in local social and business networks in the host country, these costs tend to decline.

Host-country costs reflect the discriminatory treatment incurred by foreign firms (e.g., restric- tions on ownership for foreign firms, impenetrable distribution channels, and unwillingness to pur- chase products of foreign firms). For instance, many multinational enterprises have complained about the difficulty in accessing the Japanese distribution system, which has been described as a complex re- lationship web with many layers of distributors. Also, the discriminatory treatment has been referred to as a home bias in that local stakeholders may prefer to do business with local firms. Home-country costs refer to regulations in the firm’s home that make it difficult to compete or operate in the host country. For example, U.S. firms and their foreign subsidiaries are restricted from transacting with Cuban interests due to a long-standing U.S. trade embargo against Cuba. Concerns have arisen for

CHAPTER 6 • FORMULATING STRATEGY 195

Canadian subsidiaries of U.S. firms that have been prohibited from offering Cuban-made products (i.e., cigars) to the dismay of Canadian consumers and government officials. Although U.S. President Obama relaxed policies with Cuba, U.S. President Trump has sought to reinstate them.

STRATEGIC FORMULATION PROCESS Typically, the strategic formulation process is necessary both at the headquarters of the corpo- ration and at each of the subsidiaries. Most organizations operate on planning cycles of five or more years, with intermediate reviews. However, adjustments are frequently necessary to re- spond to changes in a dynamic global environment, in particular in rapidly changing industries such as those driven by technological developments.

The global strategic formulation process, as part of overall corporate strategic management, parallels the process followed in domestic companies. However, the variables, and therefore the process itself, are far more complex because of the greater difficulty in gaining accurate and timely information; the diversity of geographic locations; and the differences in political, legal, cultural, market, and financial processes. These factors introduce a greater level of risk in stra- tegic decisions. However, for firms that have not yet engaged in international operations (as well as for those that do), an ongoing strategic planning process with a global orientation identi- fies potential opportunities for (1) appropriate market expansion, (2) increased profitability, and (3) new ventures by which the firm can exploit its strategic advantages. Even in the absence of immediate opportunities, monitoring the global environment for trends and competition is im- portant for domestic planning.

The strategic formulation process is part of the strategic management process in which most firms engage, either formally or informally. The planning modes range from a proactive, long-range format to a reactive, more seat-of-the-pants method, whereby the day-by-day decisions of key managers, in particular owner-managers, accumulate to what can be discerned retroactively as the new strategic direction.31 The stages in the strategic management process are shown in Exhibit 6-1.

6-2. To become familiar with the strategic formulation process

St ra

te gi

c Pl

an ni

ng

Pr oc

es s

Im pl

em en

ta tio

n Pr

oc es

s

Define/clarify mission and objectives

Assess environment for threats, opportunities

Assess internal strengths and weaknesses

Consider alternative strategies using competitive analysis

Choose strategy

Implement strategy through complementary structure, systems, and

operational processes

Set up control and evaluation systems to ensure success,

feedback to planning

ExHIBIT 6-1 The Strategic Management Process

196 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

In reality, these stages seldom follow such a linear format. Rather, the process is continuous and intertwined, with data and results from earlier stages providing information for the next stage.

The first phase of the strategic management process—the planning phase—starts with the company establishing (or clarifying) its mission and its overall objectives. The next two steps comprise an assessment of the external environment that the firm faces in the future and an analysis of the firm’s relative capabilities to deal successfully with that environment. Strategic al- ternatives are then considered, and plans are made based on the strategic choice. These five steps constitute the planning phase, which will be further explained in this chapter.

The second part of the strategic management process is the implementation phase. Successful implementation requires the establishment of the structure, systems, and processes suitable to make the strategy work. These variables, as well as functional-level strategies, are explored in detail in the remaining chapters on strategic implementation, organizing, leading, and staffing. At this point, however, it is important to note that the strategic planning process by itself does not change the posture of the firm until the plans are implemented. In addition, feedback from the interim and long-term results of such implementation, along with continuous environmental monitoring, flows directly back into the planning process.

STEPS IN DEVELOPING STRATEGIES In the planning phase of strategic management—strategic formulation—managers need to evalu- ate dynamic factors carefully, as described in the stages that follow. However, as discussed ear- lier, managers seldom consecutively move through these phases; rather, changing events and variables prompt them to combine and reconsider their evaluations on an ongoing basis.

Step 1. Establish Mission and Objectives The mission of an organization is its overall raison d’être, or the function it performs in society. This mission charts the direction of the company and provides a basis for strategic decision mak- ing. It also conveys the cultural values that are important to the company, as contrasted in the following two mission statements:

Sony (a Japanese Company)

Sony’s corporate mission is to be “a company that provides customers with kando—to move them emotionally—and inspires and fulfills their curiosity.32

Siemens (a German Company)

We make real what matters, by setting the benchmark in the way we electrify, automate and digi- talize the world around us. Ingenuity drives us and what we create is yours. Together we deliver.33

Although both mission statements indicate a focus on customers, Sony’s offers them a more enjoyable experience. The notion of kando, which was coined by Sony CEO Kazuo Hirai, means “emotional involvement” or the “power to stimulate emotional response.” This concept is em- bedded deeply in Sony’s successful product development and innovation processes. For instance, Sony’s PlayStation attracts new customers and retains existing ones through emotional connec- tivity derived from the gaming experience.

Siemens’ mission statement aligns with the three pillars of its vision statement—responsibility (ethical actions), excellence (superior performance), and innovation (to achieve sustainable value). Their mission statement is explicit and decisive, typical of German communication; this compares with the more descriptive and implicit statement provided by Sony.34

A company’s overall objectives flow from its mission, and both guide the formulation of international corporate strategy. Because we are focusing on issues of international strategy, we will assume that one of the overall objectives of the corporation is some form of international operation (or expansion). The objectives of the firm’s international affiliates should also be part of the global corporate objectives. A firm’s global objectives usually fall into the areas of mar- keting, profitability, finance, production, research and development, and sustainability, among others, as shown in Exhibit 6-2. Goals for market volume and profitability are usually set higher for international than for domestic operations because of the greater risk involved. In addition,

6-3. To learn the steps in global strategic planning, including assessing entry strategies for different markets

CHAPTER 6 • FORMULATING STRATEGY 197

financial objectives on the global level must take into account differing tax regulations in various countries and the methods to minimize overall losses from exchange rate fluctuations.

Step 2. Assess External Environment After clarifying the corporate mission and objectives, the first major step in weighing international strategic options is the environmental assessment. This assessment includes environmental scan- ning and continuous monitoring to keep abreast of variables around the world that are pertinent to the firm and that have the potential to shape its future by posing new opportunities (or threats). Firms must adapt to their environment to survive. The focus of strategic planning is how to adapt.

The process of gathering information and forecasting relevant trends, competitive actions, and circumstances that will affect operations in geographic areas of potential interest is called environmental scanning. This activity should be conducted on three levels—global, regional, and national (discussed in detail later in this chapter). Scanning should focus on the future in- terests of the firm and cover the major variables such as political and economic risk; major technological, legal, and physical constraints; and the global competitive arena as well as the op- portunities available in different countries. Some generalized areas of risk to consider are shown in Exhibit 6-3.

The firm can also choose varying levels of environmental scanning. To reduce risk in invest- ments, many firms take on the role of the follower, meaning that they limit their own investi- gations. Instead, they simply watch their competitors’ moves and go where they go, assuming that competitors have done their homework. Other firms go to considerable lengths to carefully gather data and examine options in the global arena.

Ideally, the firm should conduct global environmental analysis on three levels: multina- tional, regional, and national. Analysis on the multinational level provides a broad assessment of significant worldwide trends—through identification, forecasting, and monitoring activities. These trends would include the political and economic developments of nations around the world as well as global technological progress. From this information, managers can choose certain appropriate regions of the world to consider further.

Marketing Total company market share—worldwide, regional, national Annual percentage sales growth Annual percentage market share growth Coordination of regional markets for economies of scale

Production Relative foreign versus domestic production volume Economies of scale through global production integration Quality and cost control Introduction of cost-efficient production methods

Finance Effective financing of overseas subsidiaries or allies Taxation—globally minimizing tax burden Optimum capital structure Foreign-exchange management

Profitability Long-term profit growth Return on investment, equity, and assets Annual rate of profit growth

Research and Development Develop new products with global patents Develop proprietary production technologies Worldwide research and development labs

ExHIBIT 6-2 Global Corporate Objectives

198 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

Next, at the regional level, the analysis focuses in more detail on critical environmental factors to identify opportunities (and risks) for marketing the company’s products, services, or technology. For example, one such regional location ripe for investigation by a firm seeking new markets is Asia.

Having zeroed in on one or more regions, the firm must, as its next step, analyze at the national level. Such an analysis explores in depth specific countries within the desired region for economic, legal, political, and cultural factors significant to the company. For example, the analysis could focus on the size and nature of the market, any possible operational problems to consider, and how best to enter the market. In many volatile countries, continuous monitoring of such environmental factors is a vital part of ongoing strategic planning. Another important factor that must be considered in the environmental assessment at all levels is that of how institutions might affect potential opportunities to compete.

INSTITUTIONAL EFFECTS ON INTERNATIONAL COMPETITION35

Various institutions can create opportunities or constraints for firms considering entry into spe- cific global markets. Recently, researchers such as Peng have argued that “firm strategies and performance are, to a large degree, determined by institutions popularly known as the ‘rules of the game’ in a society.”36 Institutions include both formal institutions that promulgate laws, regulations, and rules and informal ones that exert influence through norms, cultures, and ethics (discussed elsewhere in this book).37 Specific ways in which formal institutions affect interna- tional competition are (1) the attractiveness of overseas markets, (2) entry barriers and industry attractiveness, and (3) antidumping laws.38

ATTRACTIvENESS OF OvERSEAS MARKETS

The extent to which countries have institutions to promote the rule of law affects the attractiveness of those economies to outside investors. Specifically, institutions provide a broad framework of liberty and democracy as well as human rights protections. In addition, institutions contribute to a stable environment for firms by creating specific laws such as those protecting property rights. Countries with more developed institutions appear more stable and attractive to foreign firms.39

GLOBAL RISKS Political Turmoil/Wars

Economic and Financial Risk Energy Availability and Prices

Shifting Production & Consumption Currency Wars

Varying Fiscal Strategies

REGIONAL RISKS Regional Instability

Financial & Currency Instability Economic & Fiscal Policies

NATIONAL RISKS Legal Protection

Technology Rights Nationalism/Expropriation

Trade Restrictions Repatriation Policies

Corruption Natural Disasters

ExHIBIT 6-3 Levels of Risk for Strategic Entry Scanning

CHAPTER 6 • FORMULATING STRATEGY 199

ENTRY BARRIERS AND INDUSTRY ATTRACTIvENESS

Institutions create barriers to entry in certain industries and, hence, make those industries more attractive (profitable) for incumbent firms. For example, in the U.S. pharmaceutical industry, the U.S. Food and Drug Administration creates barriers in the form of stringent drug approval requirements. Because new entrants (with potentially cheaper drugs) are restricted, Americans pay double what Canadians and Europeans pay for the same drugs produced in the United States. Indeed, spending on retail and nonretail prescription drugs in the United States was over US$500 billion in 2018, more than Britain, Canada, France, Germany, Italy, and Japan combined.40 In China, the government offers some licenses only to domestic firms. For example, US-based Rackspace sought to host private clouds in its data centers, which required a unique license; however, the licenses were awarded only to domestic firms. Consequently, Rackspace needed a local partner in order to compete in China.41

ANTIDUMPING LAWS AS AN ENTRY BARRIER

Current U.S. antidumping laws illustrate a second example of an entry barrier. They place a foreign entrant at a disadvantage if accused of dumping (defined as selling a product below the cost of producing that product with the intent to raise prices later) because of the extensive legal forms and evidence that the United States requires.42

Clearly, many formal institutions affect international strategy, but what explains successes of companies despite the failure or absence of these formal institutions? China is a common il- lustration of a country in which domestic firms have built competitive advantages despite poorly developed formal institutions. The answer lies in the extensive use of informal institutions or networks of interpersonal connections known in Chinese as guanxi. These networks function as substitutes for the weaknesses of the formal institutions. Research has shown that these informal networks are common in a variety of emerging markets with different cultural traditions and are a response to transitions in many emerging markets where formal institutions are evolving.43

SOURCES OF ENVIRONMENTAL INFORMATION The success of environmental scanning depends on the ability of managers to take a global per- spective and ensure that their sources of information and business intelligence are global. A variety of public resources is available to provide information. In the United States alone, more than 2,000 business information services are available on computer databases tailored to spe- cific industries and regions. Other resources include corporate clipping services and information packages. However, internal sources of information are usually preferable—especially alert field personnel who, with firsthand observations, can provide up-to-date and relevant information for the firm. Extensively using its own internal resources, Mitsubishi Trading Company employs worldwide more than 70,000 people in over 200 offices and subsidiaries located in 90 countries, many of whom are market analysts, whose job it is to gather, analyze, and feed market informa- tion to the parent company.44 Internal sources of information help to eliminate unreliable infor- mation from secondary sources, particularly in developing countries, where even the official data from such countries can be either misleading or tampered with for propaganda purposes, or it may be restricted.45

In summary, this process of environmental scanning, from the broad global level down to the local specifics of entry planning, is illustrated in Exhibit 6-4. The first broad scan of all potential world markets enables the firm to eliminate from its list markets that are closed or insignificant or do not have reasonable entry conditions. The second scan of remaining regions, and then countries, is done in greater detail—perhaps eliminating some countries based on, for example, political instability. Remaining countries are then assessed for competitor strengths, suitability of products, and so on. This analysis leads to serious entry planning in selected countries; managers start to work on operational plans such as negotiations and legal arrangements.

Competitive Analysis At this point, the firm’s managers perform a competitive analysis to assess the firm’s capabili- ties and key success factors compared to those of its competitors. They must judge the relative current and potential competitive position of firms in that market and location—whether that is a global position or one for a specific country or region. Managers must also specifically assess their current competitors—global and local—for the proposed market. They must ask

200 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

Decision to enter global markets

Select geographic regions to evaluate

Eliminate regions not suitable for product/service

Scan environments for political and economic risk; major technological, legal, physical constraints

Evaluate infrastructure constraints

Narrow choice to suitable countries

Assess investment incentives and market potential in those countries

Narrow choice to select countries

Evaluate local markets for cultural, social, technological suitability

Conduct competitive analysis (MNC and local firms)

Evaluate market attractiveness and competitive potential

Select countries for entry

Consider whether/how much to localize products/services

Assess and decide on entry strategy/strategies

Set timetable for implementation: Negotiations with allies, suppliers, distributors, and so on

Launch entry

Continue environmental scanning process

ExHIBIT 6-4 Global Environmental Scanning and Strategic Decision-Making Process

some important questions: What are our competitors’ positions, their goals and strategies, their resources, and their strengths and weaknesses, relative to those of our firm? What are the likely competitor reactions to our strategic moves? Like a chess game, the firm’s managers also need to consider the strategic intent of competing firms and what might be their future moves (strate- gies). This process enables the strategic planners to determine where the firm has distinctive competencies that will give it strategic advantage as well as what direction might lead the firm into a sustainable competitive advantage—that is, one that will not be immediately eroded by emulation. The result of this process will also help to identify potential problems that can be cor- rected or that may be significant enough to eliminate further consideration of certain strategies.

This stage of strategic formulation is often called a SWOT analysis (strengths, weaknesses, opportunities, and threats), in which a firm’s capabilities relative to those of its competitors are assessed as pertinent to the opportunities and threats in the environment for those firms. In com- paring their company with potential international competitors in host markets, it is useful for

CHAPTER 6 • FORMULATING STRATEGY 201

managers to draw up a competitive position matrix for each potential location. For example, Exhibit 6-5 analyzes a U.S. specialty seafood firm’s competitive profile in Malaysia. The U.S. firm has advantages in financial capability, future growth of resources, and sustainability, but a disadvantage in quickness. It also is at a disadvantage compared to the Korean MNC in im- portant factors such as manufacturing capability and flexibility and adaptability. Because the other firms seem to have little comparative advantage, the major competitor is likely to be the Korean firm. At this point, then, the U.S. firm can focus in more detail on assessing the Korean firm’s relative strengths and weaknesses.

Most companies develop their strategies around key strengths, or distinctive competencies. Distinctive—or core—competencies represent important corporate resources because, as Prahalad and Hamel explain, they are the “collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies.”46 Core competencies are usually difficult for competitors to imitate and represent a major focus for strategic development at the corporate level.47 Honda has used its core competencies related to engine design and quality—or as Honda asserts: “We create intelligent technologies.”48 As a result, Honda produces reliable and durable products “that enrich lives and make the world more fun to move around in—on the road, on the water, in the air and beyond”—for example, automobiles, trucks, generators, lawn- mowers, ATVs, boat motors, aircraft, motorcycles, and scooters.49

Apple, for example, has used its capacity to innovate constantly and apply its technology to new products and services. Firms such as McDonald’s, Disney, the Tata Group, and IKEA, which have established their business models domestically, have successfully transferred them to global markets while also adjusting to local tastes.

Managers must also assess their firm’s weaknesses. A company already on shaky ground finan- cially, for example, will not be able to consider an acquisition strategy, or perhaps any growth strategy. Of course, the subjective perceptions, motivations, capabilities, and goals of the managers involved in such diagnoses frequently cloud the decision-making process. The result is that because of poor judg- ment by key players, sometimes firms embark on strategies that objective information contraindicates.

Porter’s Five Forces Industry-Based Model The firm’s potential competitive position in its industry can be reviewed by using Michael Porter’s industry-based model of five forces that examines the dynamics within an industry, as follows:

• The relative level of global and local competition already in the industry; for example, in computers, social networking sites, and auto manufacturing. A high level of competition presents barriers to entry; firms may then decide on a different entry strategy or be de- terred from that market altogether.

C D E Comparison A B (Local Malaysian (Japanese (Local Malaysian Criteria (U.S. MNC) (Korean MNC) Firm) MNC) Firm)

Marketing capability 0 0 0 0 – Manufacturing capability 0 + 0 0 0 R&D capability 0 0 0 – 0 HRM capability 0 0 0 0 0 Financial capability + – 0 0 – Future growth of resources + 0 – 0 – Quickness – 0 + – 0 Flexibility/adaptability 0 + + 0 0 Sustainability + 0 0 0 –

ExHIBIT 6-5 Global Competitor Analysis

U.S. Firm Compared with Its International Competitors in Malaysian Market

Key: + = Firm is better relative to competition. 0 = Firm is same as competition. - = Firm is poorer relative to competition. Source: Diane J. Garsombke, “International Competitor Analysis,” Planning Review 17, No. 3 (1989), pp. 42–47, used with permission of Emerald Insight.

202 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

• The relative ease with which new competitors may or may not enter the field, which determines the level of threat of new entrants. In other words, if your firm is already com- peting in that industry, what level of protection, or barriers to new entrants, do you have? Toyota, for example, presents huge barriers to entry for new car manufacturers: world- wide scale, volume, alliance partners and suppliers, and reputation.

• How much power the buyers have within the industry; that is, what is the level of bargain- ing power that buyers have to influence competition? Walmart, for example, has a lot of buying power because of the volume of its business and, therefore, has a downward pres- sure on prices. Potential entrants would therefore have to provide some differentiation or innovation to combat that pressure on prices and thus the profitability of the firm.

• The level of bargaining power of suppliers in the industry. High bargaining power would exert pressure on the firm to a potential entrant as well as squeeze profits. Suppliers of raw materials or component parts could disrupt production if alternate sources are not available.

• The level of threat of substitute products or services, including the likelihood of innova- tions.50 Kodak, for example, was put out of business by digital photography even though the company invented it. And, as everyone is aware, the Internet is threatening the survival of music CDs, print newspapers, movie rental stores, the U.S. Post Office, and so on.

Step 3. Analyze Internal Factors After the environmental assessment, the second major step in weighing international strategic options is the internal analysis. This analysis determines which areas of the firm’s operations represent strengths or weaknesses (currently or potentially) compared to competitors, so that the firm may use that information to its strategic advantage.

The internal analysis focuses on the company’s resources and operations and on global syn- ergies. The strengths and weaknesses of the firm’s financial and managerial expertise and func- tional capabilities are evaluated to determine what key success factors (KSFs) the company has and how well they can help the firm exploit foreign opportunities. Those factors increasingly involve superior technological capability (as with Apple and Huawei Technologies) as well as other strategic advantages such as effective distribution channels (Carrefour and Walmart), su- perior promotion capabilities (Disney and Proctor & Gamble), a low-cost production and sourc- ing position (Toyota), a superior patent and new product pipeline (Merck), and so on. These strengths contribute to a firm’s competitive advantages.

All companies have strengths and weaknesses. Management’s challenge is to identify both and then take appropriate action. Many diagnostic tools are available for conducting an internal resource audit. Financial ratios, for example, may reveal an inefficient use of assets that ad- versely affects profitability. A sales-force analysis may reveal that the sales force is a source of competitive advantage for the firm. If a company is conducting this audit to determine whether to start international ventures or to improve its ongoing operations abroad, certain operational is- sues must be considered. These issues include (1) the difficulty of obtaining marketing informa- tion in many countries, (2) the often underdeveloped financial markets, (3) the complexities of exchange rates and government controls, (4) institutional voids in target countries, and (5) poor infrastructure, whether physical or technological.

STRATEGIC DECISION-MAKING MODELS We can further explain and summarize the hierarchy of the strategic decision-making process described here by means of the leading strategic models. Their roles and interactions are concep- tualized in Exhibit 6-6. At the broadest level are global, regional, and country factors and risks previously discussed in Chapter 1 that are part of those considerations in an institution-based theory of existing and potential risks and influences in the host area.51

The below strategic model can provide decision makers with a picture of the kinds of oppor- tunities and threats that the firm would face in a particular region or country within its industry. This assumes, of course, that the locations under consideration have already been pinpointed as attractive and growing markets for the industry. However, that picture would be true for any firm within the particular industry. In other words, all firms within an industry face the same environ- mental and industrial factors; the difference among firms’ performance is because of each firm’s

CHAPTER 6 • FORMULATING STRATEGY 203

own resources, capabilities, and strategic decisions. The factors that determine a firm’s unique niche or competitive advantage within that arena are a function of its own capabilities (strengths and weaknesses) relative to the opportunities and threats perceived for that location. This is the resource-based view of the firm when considering the unique value of the firm’s competencies and that of its products or services.52

Although these models may indicate varying choices, this strategic decision-making process should enable the managers to give an overall assessment of the strategic fit between the firm and the opportunities in that location and so result in a go/no go decision for that point in time. Those managers may want to start the process again toward a different location to compare the relative levels of strategic fit. If a good strategic fit is determined and a decision is made to enter that mar- ket/location, the next step, as indicated in Exhibit 6-6, is to consider alternative entry strategies. A discussion of these entry modes follows after we first examine the elements of strategy, which form the foundation of the “Strategy Diamond.”53

THE ELEMENTS OF STRATEGY: THE “DIAMOND” One way in which to formulate strategy is based on the “Strategy Diamond,” which was devel- oped by Donald Hambrick and James Fredrickson.54 The diamond identifies five elements of a firm’s strategy: (1) Arenas, (2) Vehicles, (3) Differentiators, (4) Economic Logic, and (5) Staging.

Arenas answer the broadly defined question “In what businesses will we compete?” Hambrick and Fredrickson describes arenas with a two-part question: “Where will we be active and with what degree of emphasis?” As such, arenas clarify the product categories it offers, segments that a firm enters, geographic markets it penetrates (e.g., domestic-regional, domestic- national, international-regional-international-worldwide), and customer markets it serves (e.g., retail, wholesale, millennials, high-net-worth individuals). In addition, it is critical to clearly specify the firm’s core technologies and value-adding stages (e.g., product design, manufactur- ing, marketing, servicing) that will be internalized—i.e., remain within the firm rather than being outsourced.

Identify Potentially Attractive Markets

Threats/ Opportunities

Assessment of Market Attractiveness

Strengths/ Weaknesses

Assessment of Strategic Fit

Decide Strategy

FIRM RESOURCES/ COMPETENCIES

• • •

Value Rarity Imitability Organization•

INDUSTRY DYNAMICS • • • •

Rivalry among firms Entry barriers Power of suppliers Power of buyers Substitutes•

INSTITUTIONAL FACTORS • • • •

Political risk Trade barriers Regulatory risk Currency risk Cultural distance•

GO NO-GO

Entry Strategy?

Independent (Non-equity)

Assess other

locations

Await further

developments

Strategic Alliances (Equity)

Fit/No Fit?

ExHIBIT 6-6 A Hierarchical Model of Strategic Decision Making

204 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

Vehicles describe the manner in which the arenas will be served, or as Hambrick and Fredrickson asked, “How will we get there?” Some firms use organic growth to build their own plants. Others use acquisition or strategic alliances to gain access to new markets and capabili- ties. For example, Corning, the U.S. based specialty glass company, has long focused on strategic alliances at home and abroad. Some firms use exporting or franchising to serve and penetrate geographic markets. Indeed, McDonald’s has emphasized franchising in order to be a worldwide leader in the fast food industry. For international expansion, vehicles correspond to the various modes of entry that multinational enterprises can use to serve markets abroad.

Differentiators describe how a firm will succeed in the marketplace. Some firms lever- age one particular attribute (e.g., superior product designs), while others differentiate them- selves through several attributes (e.g., reliability, durability, and superior value for the price). Differentiators tend to be developed in the home market. As such, firms that expand abroad may need to access the scope of its differentiators. In some instances, a multinational enterprise’s reputation for product/service quality—such as Rackspace’s “fanatical customer service”—has spread outside the home base, which is the exception rather than the norm.55 As such, MNEs need to consider carefully the extent to which a differentiator can be leveraged in markets abroad.

Staging captures the pace and sequence of major strategic moves of a firm. It is an over- looked aspect of strategy, especially for multinational enterprises that may confront liability of foreignness in overseas markets and wrestle with breadth versus depth of market penetra- tion of various international markets. For retail firms such as IKEA (Swedish home furnish- ing company), Starbucks (U.S. coffee company), and Jollibee’s (Filipino fast food company), staging decisions may involve balancing reputation enhancement and customers education (i.e., do-it-yourself furniture in India or coffee in tea-drinking cultures) with depth and breadth decisions—sequential market penetration within a particular country, simultaneous market pen- etration across many countries, or a combination of both breadth and depth. MNE manufacturers may face different staging needs related to local sourcing, distribution, and human capital exper- tise, in addition to reputational concerns.

Economic logic stresses how a firm will generate profits. Hambrick and Fredrickson asserted, “The most successful strategies have a central economic logic that serves as the fulcrum for profit creation.” For this reason, they place this element at the heart of the strategic diamond as shown in Exhibit 6-7. Rather than developing exhaustive lists of reasons why customers will pay premium prices or why costs are below those of rivals, some firms may focus specifically on premium prices for unmatched service or product quality. Yet, other firms may focus primarily on cost advantages (e.g., IKEA’s ability to reduce shipping and operating costs for do-it-yourself furniture).

Arenas

VehiclesDifferen- tiators

Staging

Economic Logic

ExHIBIT 6-7 The Strategy Diamond

Based on D. Hambrick & J. Fredrickson. 2001. “Are You Sure You Have a Strategy?” Academy of Management Executive, 15: 48–59.

CHAPTER 6 • FORMULATING STRATEGY 205

Step 4. Evaluate Global and International Strategic Alternatives The strategic planning process involves considering the advantages (and disadvantages) of vari- ous strategic alternatives in light of the competitive analysis. While weighing alternatives, man- agers must take into account the goals of their firms and the competitive status of other firms in the industry. Depending on the size of the firm, managers must consider two levels of strategic alternatives. The first level, global strategic alternatives (applicable primarily to MNCs), de- termines what overall approach to the global marketplace a firm wishes to take. The second level, entry strategy alternatives, applies to firms of any size; these alternatives determine what specific entry strategy is appropriate for each country in which the firm plans to operate. Entry strategy alternatives are discussed in a later section. The two main global strategic approaches to world markets—global strategy and regional, or local, strategy—are presented in the following subsections.

Approaches to World Markets GLOBAL STRATEGY In the past decade, increasing competitive pressures have forced businesses to consider global strategies—to treat the world as an undifferentiated worldwide marketplace.

With global strategies, a firm pursues a low-cost strategy on a global scale and increases profits by achieving cost advantages derived from economies of scale and location economies.

That is, the MNE establishes worldwide operations and develops standardized products and marketing. Many analysts, such as Porter, have argued that globalization is a competitive im- perative for firms in global industries: “In a global industry, a firm must, in some way, integrate its activities on a worldwide basis to capture the linkages among countries. This includes, but requires more than, transferring intangible assets among countries.”56 The rationale behind glo- balization is to compete by establishing worldwide economies of scale, offshore manufacturing where appropriate, and international cash flows. The term globalization, therefore, is as appli- cable to organizational structure as it is to strategy. (Organizational structure is discussed further in Chapter 8.)

The pressures to globalize include (1) increasing competitive clout resulting from regional trading blocs; (2) declining tariffs, which encourage trading across borders and open up new markets; and (3) the information technology explosion, which makes the coordination of far- flung operations easier and increases the commonality of consumer tastes.57 Use of websites has allowed entrepreneurs, as well as established companies, to go global almost instantaneously through e-commerce—either B2B or B2C.58 Examples are eBay, Yahoo!, and Lands’ End. In ad- dition, the success of Japanese companies with global strategies has set the competitive standard in many industries—most visibly in the automobile industry. Even French-based LVMH, which is the world’s largest luxury group by revenues, has adopted a global strategy. “We’ve always been very careful with the way we distribute our products,” said Toni Belloni, LVMH group managing director, “We have a global strategy that’s built around our stores as the best way to access customers and China is no different.”59

One of the quickest and cheapest ways to internationalize is through strategic alliances. Many firms are trying to go global faster by forming alliances with rivals, suppliers, and cus- tomers. The rapidly developing information technologies are spawning cross-national business alliances from short-term virtual corporations to long-term strategic partnerships. (Strategic alli- ances are discussed further in Chapter 7.)

A global strategy is inherently more vulnerable to environmental differences, however, than is a multidomestic (regionalization) strategy. Global organizations are difficult to manage be- cause doing so requires the coordination of broadly divergent national cultures. It also means that firms must lose some of their original identity—they must “denationalize operations and replace home-country loyalties with a system of common corporate values and loyalties.”60 In other words, the global strategy necessarily treats all countries similarly, regardless of their dif- ferences in cultures and systems. Problems often result, such as a lack of local flexibility and responsiveness and a neglect of the need for differentiated products. Many companies, such as Google, now believe that incorporating localization/regionalization allows them to capitalize on local competencies as long as the parent organization and each subsidiary retain a flexible ap- proach to each other. Walmart is one global company that has learned the hard way that it should

206 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

have acted more local in some regions of the world, including Germany and South Korea, where it has had to abandon operations.

LOCALIZATION/REGIONALIZATION Nokia, Nestlé, Google, and Walmart have failed to adjust to the tastes of South Korean consumers.61

For firms in industries in which competitiveness is determined on a country-by-country basis rather than on a global basis, local/regional strategies are more appropriate. The multidomestic strategy (regionalization strategy) refers to a strategy in which a firm increases profitability by customizing the firm’s goods and services to local markets in order to provide a good fit with the customer tastes and preferences in different national markets or regions. In the extreme, a multidomestic strategy involves being “in China for China. . .in Brazil for Brazil. . .in France for France,” such that top managers within each country decide on their own investment locations, product mixes, and competitive positioning. In other words, they run their subsidiaries as quasi- independent organizations. A less extreme approach adopts a strategy that is region-specific— that is, “in South America for South America. . .in Europe for Europe.”

Although there are pressures to achieve global integration/efficiency—such as the need for economies of scale to compete on cost—there are opposing pressures to localize/regionalize, es- pecially for newly developed economies (NDEs) and developing or emerging economies. These localization pressures include unique consumer preferences resulting from cultural or national differences (perhaps something as simple as right-hand-drive cars for Japan), domestic subsi- dies, and new production technologies that facilitate product variation for less cost than before.62 By acting local, firms can focus individually in each country or region on the local market needs for product or service characteristics, distribution, customer support, and so on. U.S. manufacturer Corning has been able to enter the Chinese market by providing its specialty glass for residen- tial and commercial applications in Wuhu, China through its alliance with Youngy Investment Holding Group. However, Corning sees its strategic alliance as a vehicle through which to serve customers in China and other markets, as well as to offer its other glass products. According to Martin Curran, Corning’s executive vice president and innovation officer, “This relationship en- ables us to integrate our advanced glass into high-end commercial buildings and homes in China and other parts of the world. . .This relationship also opens the door for us to explore additional applications for our thin, innovative glass.”63

Ghemawat argues that strategy cannot be decided either on a country-by-country basis or on a one-size-fits-all-countries basis but, rather, that both the differences and the similarities between countries must be taken into account. He bases his perspectives on the cultural, adminis- trative, geographic, and economic (CAGE) distances between countries, for example:

Cultural distance: Differences in values, languages, religion, trust.

Administrative distance: Lack of common trading bloc or currency, difference in regulations and/or enforcement of laws; political hostility, nonmarket or closed economy.

Geographical distance: Remoteness, different time zones, weak transportation or communication links.

Economic distance: Differences in the levels of development and per capita income, natural or human resources, infrastructure, information or knowledge.

He concludes:

A semiglobalized perspective helps companies resist a variety of delusions derived from visions of the globalization apocalypse: growth fever, the norm of enormity, statelessness, ubiquity, and one-size-fits-all. Semi-globalization is what offers room for cross-border strategy to have content distinct from single-country strategy.64

As with any management function, the strategic choice of where a company should position itself along the globalization/regionalization continuum is contingent on the nature of the indus- try, the type of company, the company’s goals and strengths (or weaknesses), and the nature of its subsidiaries, among many factors. In addition, each company’s strategic approach should be unique in adapting to its own environment. Many firms may try to go global but act local to trade off the best advantages of each strategy.

CHAPTER 6 • FORMULATING STRATEGY 207

Transnational Strategies Many MNE firms face pressures to be both globally efficient and locally responsive. In these circumstances, firms develop a transnational strategy, which entails achieving low costs through global efficiency and providing differentiated product/service offerings across geographic mar- kets to account for local customer differences. A transnational strategy can take different forms. For example, a firm may adopt a transnational approach to its value chain–for example, research and manufacturing emphasize standardization, but marketing and sales vary across countries/ regions, thus embracing local responsiveness. Alternatively, a firm may employ a transnational strategy to its business divisions. For example, one division may have strong pressures for global integration, thus emphasizing standardization in order to drive down costs; yet, another division may have strong pressures for local responsiveness, thus focusing on customization in overseas markets. Sometimes, a firm can invoke a transnational strategy on a product-specific basis or country-specific basis. For instance, BRL Hardy (Australian wine producer), like most of its rivals, required a multidomestic approach due to country-specific differences in wine preferences and volume constraints, yet it began to develop global brands for some of its wines. Relatedly, IKEA has long emphasized global integration, but the nuances of the Indian market suggested that it needed to customize its approach in order to best serve Indian customers.

Many MNCs have developed their global operations to the point of being fully integrated— often both vertically and horizontally, including suppliers, productive facilities, marketing and distribution outlets, and contractors around the world. Dell, for example, is a globally integrated company, with worldwide sourcing and a fully integrated production and marketing system. It has factories in Ireland, Brazil, China, Malaysia, Tennessee, and Texas, and it has an assembly and delivery system from 47 locations around the world. At the same time, it has extreme flex- ibility. Because Dell builds each computer to order, it carries very little inventory and, therefore, can change its operations at a moment’s notice. Thomas Friedman described the process that his notebook computer went through when he ordered it from Dell:

The notebook was co-designed in Austin, Texas, and in Taiwan. . . . The total supply chain for my computer, including suppliers of suppliers, involved about four hundred companies in North America, Europe, and primarily Asia, but with thirty key players. (It was delivered by UPS 17 days after ordering.) 65

Although some companies move very quickly to the stage of global integration—often through mergers or acquisitions—many companies evolve into multinational corporations by going through the entry strategies in stages, taking varying lengths of time between stages. Typically, a company starts with simple exporting, moves to large-scale exporting with sales branches abroad (or perhaps begins licensing), then—for a manufacturing company—proceeds to assembly abroad (either by itself or through contract manufacturing), and eventually evolves to full production abroad with its own subsidiaries. Finally, the company will undertake the global integration of its foreign subsidiaries, setting up cooperative activities among them to achieve economies of scale. By this point, the MNC has usually adopted a geocentric orientation, viewing opportunities and entry strategies in the context of an interrelated global market instead of regional or national markets. In this way, alternative entry strategies are viewed on an over- all portfolio basis to take maximum advantage of potential synergies and leverage arising from operations in multicountry markets.66 Whereas Procter & Gamble, for example, took around 100 years to go fully global, many companies more recently are “born global”—that is, they start out with a global reach, typically by using their Internet capabilities and hiring people with interna- tional experience and contacts around the world.

Born globals globalize some aspects of their business—manufacturing, service delivery, capital sourcing, or talent acquisition, for instance—the moment they start up.

. . . Standing conventional theory on its head, start-ups now do business in many countries before dominating their home markets.67

Isenberg notes that successful entrepreneurs can establish multinational organizations from the outset by setting up and managing global supply chains and striking alliances from positions of weaknesses. The major challenges for born globals are those of accessing resources and the physical and cultural distances in their markets and operations.68

208 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

Using E-Business for Global Expansion Companies of all sizes are increasingly looking to the Internet as a means of expanding their global operations. Clearly, the Internet is available to anyone and levels the playing field for small businesses. E-commerce businesses can become global with relative ease; however, many small business owners miss out on opportunities abroad. Some small business owners that have leveraged the power of the Internet have achieved great success, as shown in the quote below by an executive of an e-commerce shipping platform:

We have a customer that sells wallets here in Brooklyn, they opened up the Japanese market and now 70 percent of their revenue comes from Japan.69

Ryan Powell, senior director for North America, Easyship

There are many micro-multinationals such as the one described above and, just as with large companies, they run their businesses using email, web pages, voice-over-Internet phone services, and other Internet technology to serve customers around the globe.

The globalization of the web is evident, as shown in Table 6-1, which compares the statistics between 2014 and 2018. Out of the total number of Internet users as of 2018, Asia already had 49.0 percent of world usage, up slightly from 2014. The penetration rate of users for Asia, for example, of 49.0 percent, is a considerable increase in people using the Internet yet shows the growth opportunities in this region. Nevertheless, of particular note is that Africa’s penetration rate has increased substantially, although still low, which indicates a far greater growth capac- ity than in Europe and North America. In China alone there are more than 800 million Internet users.70 However, in China, as in other countries, the logistics of providing customer service is often a barrier to efficient e-commerce. The growth of express delivery over a broad geographic base has lagged behind the growth of the e-commerce market there.71 Three strategies are recom- mended to deal with the logistics problems in China and elsewhere:

• Build your own internal logistics network.

• Outsource delivery services to third-party providers.

• Form partnerships with or acquire existing logistics companies.72

Many developing nations, in particular, are realizing the opportunities for e-commerce and im- proving their infrastructure to take advantage of those opportunities. Governments and businesses are experiencing pressure to go online, especially those companies that export goods to countries where a significant amount of business is conducted through the Internet, such as the United States. For example, Everest S.A., a family-run business in San Salvador, sold a 69- kilogram lot (152 pounds) of coffee beans from one of its five farms in an Internet auction for a record price of $14.06 a pound.73

As a result, American technology giants and e-retailers such as Amazon are devoting great amounts of money and time to build and develop foreign-language websites and services. “Gone are the days in which you can launch a website in English and assume that readers from around the globe are going to look to you simply because of the content you’re providing.”74

There are many benefits of e-business, including rapid entrance into new geographic markets and lower operational costs, as indicated by respondents to the IDC Internet Executive Advisory

TABLE 6-1 Change in World Internet Usage as of Q2 2018

Regions Usage % of World

Penetration Rates (%)

2018 2014 2018 2014

Africa 11.0 9.8 36.1 26.5

Asia 49.0 45.7 49.0 34.7

Europe 16.8 19.2 85.2 70.5

Middle East 3.9 3.7 64.5 48.3

North America 8.2 10.2 95.0 87.7

Latin America/Caribbean 10.4 10.5 67.2 52.3

Oceana/Australia 0.7 0.9 68.9 72.9

Source: Based on selected data from www.internetworldstats.com, accessed March 9, 2019.

CHAPTER 6 • FORMULATING STRATEGY 209

Council surveys (see Exhibit 6-8). Less touted, however, are the many challenges inherent in a global B2B or B2C strategy. These include cultural differences and varying business models as well as governmental wrangling and border conflicts—in particular the question over which country has jurisdiction and responsibility over disputes regarding cross-border electronic transac- tions.75 Potential problem areas that managers must assess in their global environmental analysis include conflicting consumer protection, intellectual property, and tax laws; increasing isolation- ism, even among democracies; language barriers; and a lack of tech-savvy legislators worldwide.76

Savvy global managers will realize that e-business cannot be regarded as just an extension of current businesses. It is a whole new industry in itself, complete with a different pool of competitors and entirely new sets of environmental issues. A reassessment of the environmental forces in the newly configured industry, using Michael Porter’s five forces analytical model, should take account of shifts in the relative bargaining power of buyers and suppliers, the level of threat of new com- petitors, existing and potential substitutes, and a present and anticipated competitor analysis.77 The level of e-competition will be determined by how transparent and imitable the company’s business model is for its product or service as observed on its website. In addition, competitors may also be other bricks-and-mortar stores as well as their own—such as for Staples or JCPenney.

There is no doubt that the global e-business competitive arena is a challenging one, both strategically and technologically; but many companies around the world are plunging in, fearing that they will be left behind in this fast-developing global e-marketplace.

For companies such as eBay, e-business is their business—services are provided over the Internet for end users and for businesses. With a unique business model, eBay embarked on a global e-strategy. The company has positioned itself to be global and giant: part international swap meet, and part clearinghouse for the world’s manufacturers and retailers.

E-GLOBAL OR E-LOCAL? Although Alibaba’s Chinese e-commerce operations had 636 million active buyers in 2018, the com- pany’s strategy involves expanding in other countries such as South Korea, India, and especially Japan.78

Alibaba Group has a goal to serve two billion consumers, and we hope to partner with Japanese brands and retailers that share an interest to expand their global market presence. Japan is an important market for Alibaba’s globalization strategy, because it offers world- class, high-quality products in popular demand by Chinese consumers . . . we aim to empower Japanese brands and retailers to enter the Chinese and Asian markets with a cross-border e-commerce solution that best serves their interest and needs.79

Alibaba Group CEO Daniel Zhang

Although the Internet is a global medium, a company still faces the same set of decisions re- garding how much its products or services can be globalized or how much they must be localized

Expanded sales channels

Benefits of B2B

Lower operational costs

Better customer service

Rapid entrance into new geographic markets

Improved customer loyalty

Better relationships with distributors/channels

0 10 20 30 40 50 60 70 (Percent)

ExHIBIT 6-8 Benefits of B2B

Source: Data from IDC Internet executive Advisory Council Surveys.

210 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

to national or regional markets. Local cultural expectations, differences in privacy laws, government regulations, taxes, and payment infrastructure are just a few of the complexities encountered in trying to globalize e-commerce. Further complications arise because the local physical infrastructure must support e-businesses that require the transportation of actual goods for distribution to other businesses in the supply chain or to end users. In those instances, adding e-commerce to an existing old-economy business in those international markets is likely to be more successful than starting an e-business from scratch without the supply and distribution channels already in place. However, many technology consulting firms, such as NextLinx, provide software solutions and tools to penetrate global markets, extend their supply chains, and enable new buyer and seller relationships around the globe.

Going global with e-business, as Yahoo! has done, necessitates a coordinated effort in a number of regions around the world at the same time to gain a foothold and grab new markets before competitors do. Certain conditions dictate the advisability of going e-global:

The global beachhead strategy makes sense when trade is global in scope; when the business does not involve delivering orders; and when the business model can be hijacked relatively easily by local competitors.80

This strategy would work well for global B2B markets in steel, plastics, and electronic components.

The e-local, or regional strategic, approach is suited to consumer retailing and financial ser- vices, for example. Amazon and eBay have started their regional approach in Western Europe. Again, certain conditions would make this strategy more advisable.

[The e-local/regional approach] is preferable under three conditions: when production and consumption are regional rather than global in scope; when customer behavior and market structures differ across regions but are relatively similar within a region; and when supply- chain management is very important to success.81

The selection of which region or regions to target depends on the same factors of local market dynamics and industry variables as previously discussed in this chapter. However, for e-businesses, additional variables must also be considered, such as the rate of Internet penetration and the level of development of the local telecommunications infrastructure.

One company that learned the hard way how to localize its e-business is Handango, Inc., of Hurst, Texas—a maker of smartphone and wireless-network software. As Clint Patterson, the company’s vice president of marketing, said while reflecting on its move into Asian markets sev- eral years ago, “We didn’t understand what purchasing methods would be popular or even what kinds of content. We didn’t have a local taste. We realized we needed someone on the street to hold our hand.”82 For example, Handango found it needed a local bank account to do business in Japan because Japanese consumers use a method called konbini to make online payments. This means that when they place their order online, instead of paying with a credit card, they go to a local convenience store and pay cash to a clerk, who then transfers the payment to the online vendor’s account. To adapt to this system, Handango formed an alliance with @irBitway, a local consumer-electronics web portal, which now acts as Handango’s agent in the konbini system and has taken over Handango’s local marketing and translation.83 Handango ran into a similar problem in Germany when it discovered that Germans do not like debt and prefer to pay for their online pur- chases with wire transfers from their bank accounts. To get around this, the company found a local partner to interface with local banks and then adapted its website to the new payment method.84

Step 5. Evaluate Entry Strategy Alternatives For a multinational corporation (or a company considering entry into the international arena), a more specific set of strategic alternatives, often varying by targeted country, focuses on different ways to enter a foreign market. Managers need to consider how potential new markets may be served best by their company in light of the risks and the critical environmental factors associ- ated with their entry strategies. The following sections examine the various entry and ownership strategies available to firms, including exporting, licensing, franchising, contract manufactur- ing, offshoring, service-sector outsourcing, turnkey operations, management contracts, joint ventures, fully owned subsidiaries set up by the firm, and e-business. These alternatives are not mutually exclusive; several may be employed at the same time. They are addressed in order of ascending risk (typically), although e-business is usually low-risk.

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EXPORTING Exporting is a relatively low-risk way to begin international expansion or to test out an overseas market. Little investment is involved, and fast withdrawal is relatively easy. Small firms seldom go beyond this stage, and large firms use this avenue for many of their products. Because of their comparative lack of capital resources and marketing clout, exporting is the primary entry strategy small businesses use to compete on an international level. Many firms from emerging or developing markets use exporting extensively to compete overseas in a narrow product category; an example is the Hong Kong–based Johnson Electric (Johnson), which exports most of the 3 million tiny electric motors it produces per day.

An experienced firm may want to handle its exporting functions by appointing a manager or establishing an export department. Alternatively, an export management company (EMC) may be retained to take over some or all exporting functions, including dealing with host-country regulations, tariffs, duties, documentation, letters of credit, currency conversion, and so forth. Frequently, it pays to hire a specialist for a given host country.

Certain decisions need special care when managers are setting up an exporting system, par- ticularly the choice of distributor. Many countries have regulations that make it very hard to remove a distributor who proves inefficient. Other critical environmental factors include export– import tariffs and quotas, freight costs, and distance from supplier countries.

LICENSING An international licensing agreement grants the rights to a firm in the host country to either produce or sell a product, or both. This agreement involves the transfer of rights to patents, trademarks, or technology for a specified period in return for a fee the licensee pays. Many food-manufacturing MNCs license their products overseas, often under the names of local firms, and products like those of Adidas and Disney appear around the world under various licensing agreements. Like exporting, licensing is also a relatively low-risk strategy because it requires little investment, and it can be a useful option in countries where market entry by other means is constrained by regulations or profit-repatriation restrictions.

Licensing is especially suitable for the mature phase of a product’s life cycle when competition is intense, margins decline, and production is relatively standardized. It is also useful for firms with rapidly changing technologies, for those with many diverse product lines, and for small firms with few financial and managerial resources for direct investment abroad. A clear advantage of licensing is that it avoids the tariffs and quotas usually imposed on exports. The most common disadvantage is the licensor’s lack of control over the licensee’s activities and performance.

Critical environmental factors to consider in licensing are whether sufficient patent and trademark protection is available in the host country, the track record and quality of the licensee, the risk that the licensee may develop its competence to become a direct competitor, the licens- ee’s market territory, and legal limits on the royalty rate structure in the host country.

FRANCHISING Similar to licensing, franchising involves relatively little risk. The franchisor licenses its trademark, products and services, and operating principles to the franchisee for an initial fee and ongoing royalties. Franchises are well known in the domestic fast-food industry; Pizza Hut, for example, operates primarily on this basis. For a large up-front fee and considerable royalty payments, the franchisee gets the benefit of the firm’s reputation, existing clientele, marketing clout, and manage- ment expertise. Pizza Hut is well recognized internationally, as are many other fast-food and hotel franchises, such as Hampton Hotels, along with, for example, MyGym of Mexico, and other ser- vices such as Supercuts and H&R Block. A critical consideration for the franchisor’s management is quality control, which becomes more difficult with greater geographic dispersion. The choice of entry mode for the largest Filipino fast food chain, Jollibee’s, tends to be franchising. With more than 750 stores nationwide, Jollibee’s has been expanding abroad. As of March 2019, Jollibees’s had 80 locations outside the Philippines with 26 locations in the United States, 32 locations in Vietnam, and 11 locations in Brunei among others.85

Franchising can be an ideal strategy for small businesses because outlets require little invest- ment in capital or human resources. Through franchising, an entrepreneur can use the resources of franchisees to expand; most of today’s large franchises started out with this strategy. An entre- preneur can also use franchisees to enter a new business. Higher costs in entry fees and royalties

212 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

are offset by the lower risk of an established product, trademark, and customer base as well as the benefit of the franchisor’s experience and techniques.

Franchising in some countries can be complicated. In China, for example, franchising is a rather new concept. Almost all firms that franchise in China “either manage the operations themselves with Chinese partners (typically establishing a different partner in each major city or region), or sell to a mas- ter franchisee, which then leases out and oversees several franchise areas within a territory.”86 There are considerable problems, including finding suitable franchisees and collecting royalty payments.

CONTRACT MANUFACTURING A common means of outsourcing cheaper labor overseas is contract manufacturing (also com- monly called outsourcing), which involves contracting for the production of finished goods or component parts. These goods or components are then imported to the home country, or to other countries, for assembly or sale. Alternatively, they may be sold in the host country. If managers can ensure the reliability and quality of the local contractor and work out adequate means of cap- ital repatriation, this strategy can be a desirable means of quick entry into a country with a low capital investment and none of the problems of local ownership. Firms such as Nike use contract manufacturing around the world. However, the Boston Consulting Group warned about assum- ing that this strategy would continue to deliver big cost reductions by itself and that it should be considered just one part of a global sourcing strategy.87

OFFSHORING Offshoring is when a company moves one or all of its factories from the home country to another country, as is the case with some of Nissan’s factories in the United States. In fact, more than 40 percent of cars built in the United States are made by Japanese and other foreign companies.88 Offshoring provides the company with access to foreign markets while avoiding trade barriers as well as, frequently, achieving an overall lower cost of production. According to a report by A. T. Kearney, U.S. imports from offshoring countries (e.g., China, Malaysia, India, Vietnam, Thailand, Indonesia, Bangladesh, and Pakistan) have steadily risen from 9.15 percent in 2008 to 12.44 percent in 2017.89

However, some companies attribute their global success to their local connections for part or all of their manufacturing. An example is the BAG shoe company in Italy. Just over half the upper shoe parts are made in low-cost countries such as Serbia and Tunisia. The rest of the up- pers and the soles are made locally. Having such a large part of its shoes made by local suppliers enables BAG’s CEO, Mr. Bracalente, to emphasize the “Made in Italy” label as a big marketing advantage. Moreover, having suppliers close by means production problems are quickly solved. “Our technicians can go and visit the suppliers, often in just half an hour,” says Mr. Bracalente. He feels that splitting the assembly functions between BAG and many outside companies is a strength, not a weakness.90 He argues that this mix of production locations gives the company a vital source of flexibility and the capacity to make rapid changes in shoe style.91

One means of gaining increased efficiencies and therefore lower costs is through clustering, used when contract manufacturing, offshoring, or service-sector outsourcing (explained below). Sirkin et al. note that many companies from emerging market economies—companies that they call challengers—have gained rapid success by clustering:

Challengers are particularly expert at keeping their costs low by clustering—operating in con- centrations of related, interdependent companies within an industry that use the same suppli- ers, specialized labor, and distribution channels.92

Examples of industry clusters are an appliance cluster in Monterey, Mexico, serving the North American market and firms both global and local, and including around two hundred local suppliers; the many manufacturing clusters in China; and service center clusters in India, as dis- cussed elsewhere in this chapter.

RESHORING/NEARSHORING More recently, a number of companies in developed economies have begun reconsidering some or all of their outsourcing strategies and started to relocate some productive facilities to newly pre- ferred locations, or to home—a process called reshoring—or at least closer to home and to major markets, called nearshoring. Reasons for this include the increasing costs of labor as emerging countries enter a new phase of development and rising consumer classes, currency fluctuations, the

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costs of transportation and length of time to market, the risks of long supply chains with multiple stages and parties involved and the difficulty of retaining complete control over the production and supply chains from a long distance, the pressure to consider social responsibility and sustainabil- ity in distant and low-economic venues, and the pressure to bring jobs back home. For example, Hasbro, Inc. added a manufacturing line in Massachusetts—rather than offshoring production—in response to growing demand for its Play-Doh product. Some cases of reshoring suggest corporate patriotism. In response to Walmart’s promise to purchase more U.S.-made products, California Innovations moved overseas production of the Ozark Trail super coolers to Atlanta. Similarly, Dorel Juvenile planned to move the overseas production of its car seats to an Ohio factory.

Add to these the scarcity of skilled labor, the risks of natural disasters and terrorism, and moves by local governments to protect their own interests, and the result seems to have turned the tables somewhat on the advantages of distant outsourcing, yet the trend lost momentum. According to A. T. Kearney, reshoring cases in the United States peaked in 2013 and 2014. However, reshoring declined steadily through 2017.93

SERVICE SECTOR OUTSOURCING According to the 2017 A. T. Kearney Global Services Location Index, traditional offshoring industry— information technology outsourcing (ITO) and business process outsourcing (BPO)—has reached “the beginning of the end.” However, the global labor market for services is still in its infancy.94

Developing nations have long enjoyed the economic benefits of other countries’ offshoring. Now this model is in danger as technology takes over much of business process outsourcing.95

The 2017 Global Services Location Index (GSLI) ranked countries based on three criteria: financial attractiveness, people skills and availability, and business environment. The findings confirm that Asia continues to dominate service sector outsourcing, especially in India, due to its highly educated and English-language staff availability. Latin America as a region has done well, and Central Europe offers mature industry and highly skilled workers.96 As shown in shown in Exhibit 6-9, the top GSLI countries were India, China, Malaysia, Indonesia, Brazil, and Vietnam.

Rank 2017 Country Change in Rank since 2014

1 India 2 China 3 Malaysia 4 Indonesia 5 Brazil 6 Vietnam 7 Philippines 8 Thailand 9 Chile

10 Colombia 11 Sri Lanka 12 Poland 13 Mexico

0 0 0

+1 +3 +6

0 – 2 +4 +33 +5 –1 –9

14 Egypt–4 15 –6 Bulgaria 16 Czech Republic+17 17 0 Germany 18 Romania0 19 +8 UK 20 PeruN.R

ExHIBIT 6-9 A. T. Kearney 2017 Global Services Location Index Ranks

Source: Selections from the A. T. Kearney 2017 Global Services Location Index.

214 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

Colombia and Czech Republic made the most significant improvements relative to the 2014 ranking: Czech Republic (16th; +17) and Colombia (10th; +33).97

Firms that outsource services usually enter overseas markets by setting up local offices, research laboratories, call centers, and so on to use the highly skilled but lower-wage human capital, which is available in countries such as India, the Philippines, and China, as well as the ability to offer global, round-the-clock service from different time zones.

Whether firms use offshoring, reshoring, nearshoring, or onshoring, they must consider the strate- gic aspects of that decision beyond immediate cost savings. In addition to the lack of consideration for factors other than production costs, sending jobs to a particular country is typically a short-term cost- reduction strategy because, at some point, competitive pressures will increase costs there, necessitating moving those jobs again to still lower-cost countries (a transition known as a race to the bottom).

Managers are in fact broadening their strategic view of sending skilled work abroad, now using the term transformational outsourcing to refer to the growth opportunities provided by making better use of skilled staff in the home office and brought about by gains in efficiency and productivity through leveraging global talent.98 The risk of backlash from customers, com- munity, and current employees necessitates careful consideration of the reasons for a company to go offshore. Managers also must consider the risk of losing control of proprietary technology and processes and decide whether to set up the company’s own subsidiary offshore (a captive operation) instead of contracting with outside specialists. Bank of America, for example, split its strategy by opening its own subsidiary in India but also allied with Infosys Technologies and Tata Consultancy Services for 30 percent of its IT resources to be outsourced.99

TURNKEY OPERATIONS In a so-called turnkey operation, a company designs and constructs a facility abroad (such as a dam or chemical plant), trains local personnel, and then turns the key over to local management— for a fee, of course. Critical factors for success are the availability of local supplies and labor, reli- able infrastructure, and an acceptable means of repatriating profits. There may also be a critical risk exposure if the turnkey contract is with the host government, which is often the case. This situation exposes the company to risks such as contract revocation and the rescission of bank guarantees.

MANAGEMENT CONTRACTS A management contract gives a foreign company the rights to manage the daily operations of a business but not to make decisions regarding ownership, financing, or strategic and policy changes. Usually, management contracts are enacted in combination with other agreements, such as joint ventures. By itself, a management contract is a relatively low-risk entry strategy, but it is likely to be short term and provide limited income unless it leads to a more permanent position in the market.

INTERNATIONAL JOINT VENTURES At a much higher level of investment and risk (though usually less risky than a wholly owned business), joint ventures present considerable opportunities unattainable through other strategies. A joint venture involves an agreement by two or more companies to produce a product or service together. In an international joint venture (IJV), ownership is shared, typically by an MNC and a local partner, through agreed-upon proportions of equity. This strategy facilitates an MNC’s rapid entry into new markets by means of an already established partner who has local contacts and fa- miliarity with local operations. IJVs are a common strategy for corporate growth around the world. They also are a means to overcome trade barriers, to achieve significant economies of scale for de- velopment of a strong competitive position, to secure access to additional raw materials, to acquire managerial and technological skills, and to spread the risk associated with operating in a foreign en- vironment.100 For example, Amazon formed a joint venture in India that, in turn, owned Cloudtail India, a new company that has generated the most sales on Amazon’s Indian marketplace.101 Also, Saudi Aramco announced an agreement to set up a joint venture with Norinco Group and Panjin Sincen (China) to develop a refinery and petrochemicals facility in Liaoning province.102

Not surprisingly, larger companies are more inclined to take a high-equity stake in an IJV to engage in global industries and be less vulnerable to the risk conditions in the host country.103 The joint venture reduces the risks of expropriation and harassment by the host country. Indeed, it may be the only feasible means of entry into certain countries, such as Mexico and Japan, which stipulate proportions of local ownership and local participation.

CHAPTER 6 • FORMULATING STRATEGY 215

Many companies have set up joint ventures with European companies to gain the status of an insider in the European Union. IJVs are quite common in India because the government encourages foreign collaborations to facilitate capital investments, import of capital goods, and transfer of technology.104 Most of these alliances are not just tools of convenience but are important—perhaps critical—means to compete in the global arena, in particular to share in the immense costs involved and to share the risk burden. In a joint venture, the partners must work out the level of relative ownership and specific contributions. They must share management and decision making for a successful alliance. The company seeking such a venture must maintain sufficient control, however, because without adequate control, the company’s managers may be unable to implement their desired strategies. Therefore, initial partner selection and the develop- ment of a mutually beneficial working agreement are critical to the success of a joint venture. In addition, managers must ascertain that there will be enough of a fit between the partners’ objectives, strategies, and resources—financial, human, and technological—to make the venture work. Unfortunately, too often the need for preparation and cooperation is given insufficient at- tention, resulting in many such strategic partnerships ending prematurely. About 60 percent of IJVs fail, usually because of ineffective managerial decisions regarding the type of IJV, its scope, duration, and administration as well as careless partner selection.105 IJVs, as well as the many forms of strategic global alliances, are further discussed in Chapter 7.

For companies in emerging markets or developing economies, joint ventures, mergers, and acquisition strategies provide opportunities to internationalize by gaining access to customers, supply networks, technology, local brand image and knowledge, and natural resources. The local alliances also typically provide to the new management a learning curve for manufacturing and management skills and technologies. Further discussion of joint ventures appears in Chapter 7.

FULLY OWNED SUBSIDIARIES In countries where a fully (i.e., wholly) owned subsidiary is permitted, an MNC wishing total control of its operations can start its own product or service business from scratch, or it may ac- quire an existing firm in the host country.

We acquire a company only if it gives us a new technology, new markets, new products, new customer bases or a new product development capability.106

Praveen Kadle, Tata, www.tata.com

Some firms use acquisitions as a means to enter a new country or product market. In 2018, Walmart purchased India’s Flipkart (e-commerce platform) for $16 billion. Others use acquisitions to expand their positions within a particular country or product category. In late 2018, Unilever, the Anglo-Dutch consumer products giant, entered negotiations to acquire GlaxoSmithKline’s nutrition business, which includes its highly coveted Horlicks malted drink brand that is popular in India. In early 2019, Denmark’s Maersk, the world’s largest container shipping company, announced its intention to seek acquisition targets in order to strengthen its logistics operations on land. Reflecting a change in its strategy, the Danish company plans to enrich business unrelated to its oceanic activities, namely trucking and warehousing. According to Soren Skou, CEO of Maersk, “The future will be very much about scaling the land side of the equation... We for sure have to do some acquisitions in the logistics space, primarily to gain capability and scale.”107

Often the decision to acquire foreign companies will reflect financial and economic situa- tions at the time, as with companies that, for tax reasons, keep cash overseas. Microsoft said it used $8.5 billion of offshore cash to acquire Luxembourg-based Internet–phone service Skype Technologies. And in summer 2015 the strong dollar presented favorable exchange rates for overseas acquisitions as well as the opportunities to purchase cheaper supplies.

Such acquisitions by MNCs allow rapid entry into a market with established products and dis- tribution networks and provide a level of acceptability not likely to be given to a foreign firm. These advantages somewhat offset the greater level of risk stemming from larger capital investments, com- pared with other entry strategies. At the highest level of risk is the strategy of starting a business from scratch in the host country—that is, establishing a new wholly owned foreign manufacturing or service company or subsidiary with products aimed at the local market or targeted for export. This strategy exposes the company to the full range of risk to the extent of its investment in the

216 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

host country. As evidenced by events in the Middle East, political instability can be devastating to a wholly owned foreign subsidiary. Add to this risk a number of other critical environmental factors— local attitudes toward foreign ownership, currency stability and repatriation, the threat of expropria- tion and nationalism—and you have a high-risk entry strategy that must be carefully evaluated and monitored. There are advantages to this strategy, however, such as full control over decision making and efficiency as well as the ability to integrate operations with overall company-wide strategy.

Exhibit 6-10 summarizes the advantages and critical success factors of these entry strategies that must be taken into account when selecting one or a combination of strategies, depending on the location, the environmental factors and competitive analysis, and the overall strategy with which the company approaches world markets.

STRATEGIC PLANNING FOR EMERGING MARKETS Complex situational factors face the international manager as she or he considers strategic ap- proaches to world markets along with which entry strategies might be appropriate. Emerging markets present particular complexity and unfamiliarity for managers to evaluate. The World

6-4. To understand the need for strategic planning for emerging markets

Strategy Advantages Critical Success Factors

Exporting Low risk Choice of distributor No long-term assets Transportation costs Easy market access and exit Tariffs and quotas

Licensing No asset ownership risk Quality and trustworthiness of licensee Fast market access Appropriability of intellectual property

Avoids regulations and tariffs Host-country royalty limits

Franchising Little investment or risk Quality control of franchisee and franchise Fast market access operations

Small business expansion

Contract manufacturing/Offshoring Limited cost and risk Reliability and quality of local contractor Short-term commitment Operational control and human rights issues

Service-sector outsourcing Lower employment costs Quality control

Turnkey operations Access to high skills and markets Domestic client acceptance Revenue from skills and technology Reliable infrastructure where FDI restricted Sufficient local supplies and labor

Repatriability of profits Reliability of any government partner

Management contracts Low-risk access to further strategies Opportunity to gain longer-term position

Joint ventures Insider access to markets Strategic fit and complementarity of partner, markets, products

Share costs and risk Ability to protect technology Leverage partner’s skill base, Competitive advantage technology, local contacts Ability to share control

Cultural adaptability of partners

Wholly owned subsidiaries Realize all revenues and control Ability to assess and control economic, political, and currency risk

Global economies of scale Strategic coordination Ability to get local acceptance Protect technology and skill base Repatriability of profits

E-business Rapid entry into (or exit from) Differences in business models, culture, new markets (often through alliance language, and laws regarding intellectual or purchase of local websites); property, consumer protection, and taxes. relatively low-risk

ExHIBIT 6-10 International Entry Strategies: Advantages and Critical Success Factors

CHAPTER 6 • FORMULATING STRATEGY 217

MANAGEMENT IN ACTION Strategic Planning for Emerging Markets

There continue to be many indicators of the increasing business opportunities available for com- panies wanting to set up operations in or export to the emerging markets, in particular in light of the slowdown in growth in many developed economies brought about by economic problems.

In planning for global opportunities for retail businesses, for example, an internationalizing retail company can consider the A. T. Kearney Global Retail Development Index (GRDI); which ranks 30 emerging countries for retail investment based on market attractiveness, country risk, market satura- tion, and time pressure.109 The study shows that overall, India, China, Malaysia, Turkey, and United Arab Emirates rank as the five countries in terms of retail investment. In terms of time pressure for entry, Vietnam ranks highest, followed by China, India, Algeria, and Indonesia. In terms of market attractive- ness, China ranked highest followed by United Arab Emirates, Saudi Arabia, Russia, and Turkey.

The A. T. Kearney report revealed that mobile phones are changing the shopping behavior in de- veloping markets. For example, mobile shopping in India increased by 121 percent from the prior year. In addition, mobile phone shopping grew dramatically in China (192%), Vietnam (151%), and Nigeria (87%).110 In fact, in most developing markets, mobile and online shopping are essentially the same. This growth is forcing retailers to challenge their assumptions about market entry, their roles in the retail value chain, and their influence on shopping behavior. The report further reveals that among the top 30 countries in the GRDI ranking, there are substantial differences in market saturation and country risk, which require retailers to tailor their approaches accordingly and assemble a portfolio of markets to bal- ance short-term risk with long-term growth aspirations.111

In jumping on the bandwagon, firms of all sizes, in particular small businesses, must realize that in- vesting in developing economies usually entails considerably higher levels of risk than they are familiar with—in particular the risks of political turmoil, corruption, and contract enforcement. However, avoiding emerging markets will, over time, make firms less competitive than those who invest there in some form. The question is then how to minimize the risks without losing out to the competition and losing growth opportunities. After going through the steps of the strategic decision-making process as outlined in this chapter, including those operational factors in the institutional context such as infrastructure, availability of suppliers, labor markets, and capital markets (such as the effectiveness of banking and financial institutions), CEOs must then decide whether to enter that market and, if so, decide what needs to be changed. As Harvard Business Review authors Khanna, Palepu, and Sinha recommend, “[D]ecide whether to work around the country’s institutional weaknesses, create new market infrastructures, or stay away because adapting your business model would be impractical and uneconomical.”112 However, as Washburn and Hunsaker note:

Too many companies in mature markets assume that the only reason to enter emerging coun- tries is to pursue new customers. They fail to perceive the potential for innovation in those countries or to notice that a few visionary multinationals are successfully tapping that poten- tial for much needed products and services.113

HaRvaRd business RevieW

In their research, Washburn and Hunsaker have found that forward-thinking global managers (they call them bridgers) have identified and developed innovations in emerging markets (often with the insight of the local managers) and been able to integrate those ideas and improvements into their companies’ product lines.114

In addition, when considering opportunities for firms within emerging markets, we can see that, for example, firms such as Tata, HCL Technologies, and Infosys of India; Alibaba, Hauer, Lenovo and Tencent Holdings of China; and Samsung Electronics of Korea have become prominent players in a number of technology-intensive industries that have traditionally been the domain of firms from the United States, Europe, and Japan.115

Economic Forum report cautions that emerging markets are not a single homogenous group: “They develop differently, have different infrastructural, socio-economic and regulatory challenges, face different environmental and geographical constraints, and, to a certain extent, afford different opportunities for business.” The report further argues that the lack of adequate development in the areas of trade facilitation and trade logistics can curtail the growth for these markets and the world.108 The following “Management in Action” and “Under the Lens” features discuss these challenges and how managers can address them.

218 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

UNDER THE LENS Revolut’s Russian Founder Stirs Up Lithuania’s Fintech Debate116

British digital bank Revolut has been caught in the middle of a deepening political debate in Lithuania over the country’s recent push to challenge the UK as Europe’s financial technology hub.

Revolut secured a banking licence in Lithuania last year, a move that was celebrated as a sign of Vilnius’s success in becoming a leading centre for innovative companies. The four-year-old company is one of Europe’s fastest growing fintechs, and now processes more than $4bn in volumes for about 3m customers each month. . . .

Mr Jakeliunas, a member of the ruling Farmers and Greens Union, said he was worried about Revolut’s large size and rapid growth, its encouragement of cryptocurrency trading and comments from its chief executive about local politics.

Companies are normally screened by a national security commission when applying for licences. But Revolut was investigated a second time after concerns were raised about the source of some of its shareholders’ money. Mr Jakeliunas said he now planned to hold a parliamentary vote for a third probe.

Revolut’s founder Nikolay Storonsky hit back against criticism in Lithuania last month, saying in an open letter that while the country was “making a name for itself” as a fintech hub, “scaremongering campaigns such as this will make foreign investors run in the opposite direction, potentially risking thousands of jobs”.

The tension has been exacerbated by Revolut’s Russian links. Mr Storonsky, who set up Revolut after working for Lehman Brothers, was born in Moscow and the company employs more than 80 engineers and product developers in Russia. Mr Storonsky’s father also works for a division of Russia’s state-owned gas company Gazprom.

In last month’s letter, Revolut denied it had any links to the Kremlin or processed EU customers’ data in Russia. Mr Storonsky wrote that his personal background was “irrelevant”, and said the company came to Lithuania because it had “an incredibly fintech-friendly environment”. . . .

The digital bank is among dozens of western companies that have flocked to Lithuania, which is now Europe’s second-largest fintech centre measured by numbers of regulated companies. More than 80 fintechs are licensed in Lithuania, from start-ups to giants such as Google, which recently received an e-money licence to cover its EU payments operations after Brexit. . . .

Vytautas Valvonis, director of the BoL’s supervision service, acknowledged that “we feel the increasing demand”, but said “we will maintain the bar high: the doors. . . will be open only for innova- tive, reliable and viable businesses”. He pointed to recent steps such as new divisions for supervising payments groups and combating money laundering.

Mantas Katinas, general manager of Invest Lithuania, an agency for encouraging foreign invest- ment, said “we welcome all serious investors in the financial sphere”, and “place trust in the work done by all our government agencies to ensure that all required checks and balances remain in place”.

Fintech executives have previously questioned if Revolut’s systems are vulnerable to criminal abuse. The company discovered a spate of suspected money laundering on its network last year, and lost two heads of compliance in under 12 months. It has attempted to burnish its credentials since, launching new anti-fraud systems and partnering with a specialist regulatory tech company.

A member of the BoL’s board admitted last week that it too had attracted interest from the “shadow economy”. But Mr Valvonis said: “We are fast and effective at granting licences, but rest assured, in case of infringement we might be even faster at taking reactive actions.”

Source: © The Financial Times Limited 2019.

Step 6. Decide on Strategy The strategic choice of one or more of the entry strategies will depend on (1) a careful evaluation of the advantages (and disadvantages) of each in relation to the firm’s capabilities and resources, (2) the critical environmental factors, and (3) the contribution that each choice would make to the overall mission and objectives of the company. Exhibit 6-10 summarized the advantages and the critical success factors for each entry strategy discussed. However, when it comes down to a choice of entry strategy or strategies for a particular company, more specific factors relating to that firm’s situation must be taken into account. These include factors relating to the firm itself, the industry in which it operates, location factors, and venture-specific factors, as summarized in Exhibit 6-11.

CHAPTER 6 • FORMULATING STRATEGY 219

After consideration of those factors for the firm as well as considering what is available and legal in the desired location, some entry strategies will no doubt fall out of the feasibility zone. With the options remaining, then, strategic planners need to decide which factors are more im- portant to the firm than others. One method is to develop a weighted assessment to compare the overall impact of factors such as those in Exhibit 6-11 relative to the industry, the location, and the specific venture—on each entry strategy. Specific evaluation ratings, of course, would depend on the country conditions at a given point in time, the nature of the industry, and the local company.

Based on a study of more than 10,000 foreign entry activities into China, Pan and Tse con- cluded that managers tend to follow a hierarchy-of-decision sequence in choosing an entry mode. They found that the location choice—specifically the level of country risk—was the primary in- fluence factor at the level of deciding between equity and non-equity modes. Host-country gov- ernment incentives also encouraged the choice of equity mode. Managers first decide between non–equity based for high-risk locations and equity based where it is perceived there is lower risk. Then, non-equity modes are divided into contractual agreements such as franchising, licensing, outsourcing, e-business, and exporting; equity modes are split into wholly owned operations, ac- quisitions, offshoring, and equity joint ventures (EJVs) with varying levels of equity investment.118

Gupta and Govindarajan also propose a hierarchy-of-decision factors sequence but consider two initial choice levels. The first is the extent to which the firm will export or produce locally; the second is the extent of ownership control over activities that will be performed locally in the target market.119 There is an array of choice combinations within those two dimensions. Gupta and Govindarajan point out that, among the many factors to take into account, alliance-based entry modes are more suitable under the following conditions.

• Physical, linguistic, and cultural distance between the home and host countries is high.

• The subsidiary would have low operational integration with the rest of the multinational operations.

• The risk of asymmetric learning by the partner is low.

Factor Category Examples

Internal factors Global experience of firm and managers Distinctive competencies, patents, technology Corporate culture and structure Global objectives Long-term strategy Financial assets

External factors Industry globalization Industry growth rate Barriers to entry Level of global competition Opportunities and incentives Extent of scale and location economies Country risk—political, economic, legal Cultural distance Knowledge of local market Potential of local market Competition in local market

Venture-specific factors Value of firm—assets risked in foreign location Ability to protect proprietary technology Costs of making or enforcing contracts with local partners Size of planned foreign venture Intent to conduct research and development with local partners

ExHIBIT 6-11 Factors Affecting Choice of International Entry Mode117

Source: Based on A. V. Phatak, International Management Concepts and Cases, 1997, Cincinnati, OH, Southwestern Publishing Company.

220 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

• The company is short of capital.

• Government regulations require local equity participation.120

Timing Entry and Scheduling Expansions International strategic formulation requires a long-term perspective. Entry strategies, therefore, need to be conceived as part of a well-designed, overall plan. In the past, many companies have decided on a particular means of entry that seemed appropriate at the time, only to find later that it was shortsighted. For instance, if a company initially chooses to license a host-country com- pany to produce a product, then later decides that the market is large enough to warrant its own production facility, this new strategy will no longer be feasible because the local host-country company already owns the rights.

Foreign Direct Investment Decisions under High Uncertainty Political and economic risk in a particular country introduces a high degree of uncertainty and, in turn, raises concerns about the decision to enter by managers of multinational enterprises. In these circum- stances, some managers may be concerned about exiting (i.e., reversing the investment) if local condi- tions do not improve or worsen. The concerns are especially noteworthy when the investment by the multinational enterprise is difficult and costly to reverse (e.g., building a refinery, offshore oil platform, or fabrication plant). When MNE managers face these investment conditions in a particular country, it may be advantageous to delay an investment decision or make the investment more reversible.121

There are two criteria that influence the delayability and reversibility of an investment in a country with high uncertainty: the nature of a firm’s ownership advantages and importance of early mover advantage. Ownership advantages refer to a firm’s ability to deploy its resources and capabilities in order to achieve superior financial performance. Ownership advantages that are deemed monopolistic can be achieved by few if any other firms. Alternatively, non-monopolistic advantages are ones that are replicable by other firms. The importance of early mover advantage describes the incentives to be among the first firms to enter a particular market. An example of high importance is securing the best local suppliers before other entrants. An example of low importance is strategic changes that promote less risky activities.

Figure 6-1 offers potential entry decisions for firms based on the nature of their ownership advantages and the importance of early mover advantage into that particular country. When a

Assume Highly Irreversible Investment

Rivoli & Salorio’s Framework for Foreign Direct Investment under Uncertainty

Importance of Country Early-Mover Advantage

Non- Monopolistic

Monopolistic

Nature of Ownership Advantages

Easy to Delay: Wait for Information to Arrive

Get Toes Wet or Investigate Alternative Mode

Wait for Competitors’ Moves and Follow If They Invest

Cannot Delay: Invest Now!

Low High

FIGURE 6-1

Source: Rivoli and Salorio (1996).

CHAPTER 6 • FORMULATING STRATEGY 221

firm has monopolistic advantages and low importance of early mover advantage, there is value in waiting for more information, so the firm postpones its entry. If a firm has monopolistic advan- tages and assigns high importance to early mover advantage, then there is less value in delaying entry into the high-uncertainty country. However, the firm can still reduce its risk by increasing reversibility, which is best achieved with a sequential investment—that is, a smaller investment and, if successful, a larger subsequent investment. If a firm possesses non-monopolistic advan- tages and it has low importance of early mover advantage, then there is some value to delaying the investment; however, if other firms enter, then it is appropriate to enter the market with the other firms. Lastly, if a firm possesses non-monopolistic advantages and high importance of early mover advantage, then there is no value to waiting or to reducing reversibility.

The Influence of Culture on Strategic Choices It is clear that cultural distance (CD), or at least the perception of it, affects strategic choice. Potential partners and their host counterparts tend to feel more confident about their international allies when they seem culturally attractive, in particular when new to international business. The more similar the culture, the more likely managers are to select that region for investment—for example, between the United States and England. However, often that assumption of similarity leads to problems because preparation and allowance is not made for existing subtle differences. Oded Shenkar gives the examples that the friction between dissimilar cultures is more likely in a merger or acquisition than in an IJV—because there is more interaction among parties in the former—whereas an IJV is set up as a separate entity with less interaction from the par- ent firms.122 Managers armed with such insight might then choose an IJV over other strategic options that necessitate more cross-cultural interaction.

In addition, strategic choices at various levels often are influenced by specific cultural fac- tors, such as a long-term versus a short-term perspective. Hofstede found that most people in such countries as China and Japan generally had a longer-term horizon than those in Canada and the United States.123 Whereas Americans, then, might make strategic choices with a heavy emphasis on short-term profits, the Japanese are known to be more patient in sacrificing short- term results to build for the future with investment, research and development, and market share.

Risk orientation was also found to explain the choice between equity and nonequity modes.124 Risk orientation relates to Hofstede’s uncertainty avoidance dimension.125 Firms from countries where, generally speaking, people tend to avoid uncertainty (for example, Latin American and African countries) tend to prefer nonequity entry modes to minimize exposure to risk. Managers from firms from low–uncertainty avoidance countries are more willing to take risks and are, therefore, more likely to adopt equity entry modes.126

The choice of the equity versus nonequity mode has been found to be related to the level of power distance. According to Hofstede, a high power-distance country (such as Arab countries and Japan) is one where people observe interpersonal inequality and hierarchy.127 Pan and Tse found that firms from countries tending toward high power distance are more likely to use equity modes of entry abroad.128

These are but a few of the examples of the relationships between culture and the choices that are made in the strategic planning and implementation phase. They serve to remind us that it is people who make those decisions and that the ways people think, feel, and act are based on their ingrained societal culture. People bring that context to work, and it influences their propensity toward or against certain types of decisions.

CONCLUSION The process of strategic formulation for global competitiveness is a daunting task in the volatile global arena and is further complicated by the difficulties involved in acquiring timely and cred- ible information. However, early insight into global developments provides a critical advantage in positioning a firm for future success.

When an entry strategy is selected, the international manager focuses on translating strategic plans into actual operations. Often this involves strategic alliances; always it involves functional- level activities for strategic implementation. These subjects are covered in Chapter 7.

222 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

■ Companies expand abroad for many reasons, both pro- active and reactive. Companies that are proactive from their outset in establishing a presence in many countries are referred to as born globals. The Internet is facilitat- ing companies of all sizes to expand around the world within a short time frame—thus leveling the field for small businesses relative to companies with greater resources.

■ International expansion and the resulting realization of a firm’s strategy are the products of both rational planning and responding to emergent opportuni- ties. For example, those opportunities may develop because of economic, competitive, demographic, or political changes in other countries. Firms are increasingly taking advantage of opportunities for ex- pansion into emerging markets such as the BRICs.

■ The steps in the strategic planning process for devel- oping an international strategy comprise: Defining the mission and objectives of the firm, scanning the envi- ronment for threats and opportunities, assessing the internal strengths and weaknesses of the firm, con- sidering alternative international entry strategies, and deciding on strategy. The strategic management process is completed by putting into place the operational plans necessary to implement the strategy and then setting up control and evaluation procedures.

■ Competitive analysis is an assessment of how a firm’s strengths and weaknesses vis-à-vis those of its com- petitors affect the opportunities and threats in the in- ternational environment. Such assessment allows the firm to determine where the company has distinctive competencies that will give it strategic advantage or where problem areas exist.

■ Corporate-level strategic approaches to international competitiveness include globalization and regional- ization. Many MNCs have developed to the point of using an integrative global strategy. Entry and own- ership strategies are exporting, licensing, franchising, contract manufacturing, offshoring and reshoring, out- sourcing services, turnkey operations, management contracts, joint ventures, and fully owned subsidiaries as well as the local level of e-business. Critical envi- ronmental and operational factors for implementation must be taken into account.

■ Companies of all sizes are increasingly looking to the Internet as a means of expanding their global opera- tions, but localizing Internet operations is complex, involving various logistical and cultural challenges.

■ The digital economy has provided growth opportuni- ties and created new threats. Some emerging market firms have had to develop the requisite capabilities in order to compete in the global marketplace.

Summary of Key Points

Discussion Questions

6-1. Discuss why companies go international, giving specific reac- tive and proactive reasons.

6-2. What effects on company strategy have you observed because of the global economic downturn?

6-3. Give examples of the impact of the Internet on small businesses.

6-4. Discuss the ways in which managers arrive at new strategic directions—formal and informal. Which is the best?

6-5. Explain the process of environmental assessment. What are the major international variables to consider in the scanning process? Discuss the levels of environmental monitoring that should be conducted. How well do you think managers conduct environmental assessment?

6-6. Discuss the impact of the rise of emerging-market countries on the strategic planning of firms around the world.

6-7. How can managers assess the potential relative competitive position of their firm to decide on new strategic directions?

6-8. Discuss different international strategies: global, multidomes- tic, and transnational.

6-9. Compare the merits of the entry strategies discussed in this chapter. What is their role in an integrative global strategy?

6-10. Discuss the considerations in strategic choice, including the typical stages of the company and the need for a long-term global perspective.

Application Exercises

6-11. Choose a company in the social media industry or a chain in the fast-food industry. In small groups, conduct a multi- level environmental analysis, describing the major variables involved, the relative impact of specific threats and opportuni- ties, and the critical environmental factors to be considered.

The group findings can then be presented to the class, allow- ing a specific time period for each group so that comparison and debate of different group perspectives can follow. Be pre- pared to state what regions or specific countries you are inter- ested in and give your rationale.

CHAPTER 6 • FORMULATING STRATEGY 223

CASE STUDY

6-12. In small groups, discuss among yourselves and then debate with the other groups the relative merits of the alternative entry strategies for the company and countries you chose in Exercise 6-11. You should be able to make a specific choice and defend that decision.

6-13. For this exercise, research (individually or in small groups) a company with international operations and find out the kinds

of entry strategies the firm has used. Present the informa- tion you find, in writing or verbally, to the class, describ- ing the nature of the company’s international operations, its motivations, its entry strategies, the kinds of implementation problems the firm has run into, and how those problems have been dealt with.

Experiential Exercise

6-14. In groups of four, develop a strategic analysis for a type of company that is considering entry into an emerging market

country. Which entry strategies seem most appropriate? Share your results with the class.

How UK Businesses Are Planning—or Not—for a No-Deal Brexit129

Preparation is patchy and smaller companies face some of the biggest challenges. Lynda and Phil Platts were hoping to move to Italy once they retired: they did not imagine

they might be moving their UK business there instead because of Brexit. But this is one of sev- eral radical options they are having to consider for ACP Solutions, which produces insect repel- lent and bedbug resistant bedding, if Britain crashes out of the EU without a deal. “One option is to effectively pick [our business] up and move it into an EU territory,” said Phil Platts, adding another would be to sell part of ACP to an EU customer, reflecting how the business exports four-fifths of its insect repellent to the bloc.

Phil Platts at ACP Solutions’ factory in Nailsworth, Gloucestershire, is one of a minority of UK companies that have made preparations for how to respond to a no-deal Brexit.

The CBI estimated that one in five British businesses had implemented plans for this out- come, whether by relocating operations overseas, stockpiling goods, cutting jobs, or adjusting supply chains outside the UK. Even though the risk of the UK crashing out of the EU has loomed large ever since Britons voted to leave the bloc in 2016—because prime minister Theresa May insisted for a long time that “no deal is better than a bad deal”—companies’ preparations for this scenario are patchy at best. Many big groups have developed contingency plans to try to cope with cross-border trade potentially being reduced to chaos, but most small companies have not. And there are big differences between sectors: while financial services companies have made extensive preparations, for example, manufacturing businesses have not. “For every company that has done some sort of risk assessment on Brexit preparedness in general, there are two that haven’t,” said Adam Marshall, director-general of the British Chambers of Commerce. “Of those that have, very few will have done it on the basis of a no-deal.” One sector that started its no- deal contingency plans early, straight after the 2016 Brexit referendum, was pharmaceuticals. “We have an integrated European supply chain, so we’ve known from the beginning that any challenges at the border could affect us,” said Mike Thompson, chief executive of the ABPI, the pharma industry’s trade body. He added the sector was now engaged in a range of preparations for a no-deal Brexit—not just stockpiling medicines, but increasing imports of key supplies by aircraft and pushing the government to open up ports on the east coast of England to offset the risk of problems at Dover. Miles Celic, head of the TheCityUK, the business lobby group for financial services, said leaving the EU without an agreement would be “the worst of all out- comes”. “The industry is taking every action to prepare for a no-deal Brexit,” he added, while stressing the sector was reliant on steps being taken by lawmakers and regulators across the EU

224 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

in certain areas. This includes measures to ensure the validity of derivative and insurance con- tracts should the UK leave the bloc without an agreement.

‘JUST IN TIME’ MANUFACTURING FEARS

But the situation is far more acute in relation to manufacturing. A survey commissioned by the EEF, the sector’s trade body, found four out of five companies were not ready for a no-deal Brexit. Two in five said they had no intention of starting preparations. Some of the large car- makers have made contingency plans, according to the Society of Motor Manufacturers and Traders, a trade body. However, overseas carmakers with factories in the UK have warned of the dire consequences for them of a no-deal Brexit, reflecting how they have “just in time” manu- facturing processes reliant on deliveries of components from continental Europe. Toyota said in this scenario that its plants in Deeside and Derbyshire would be on “stop-start” production for weeks or even months. But for many small companies, spending money on preparations for a no-deal Brexit—something that may not happen—cannot be justified. The Federation of Small Businesses estimated just one in seven small companies was making contingency plans for if the UK crashes out of the EU. And calls by the CBI for the government to provide more support for small businesses—by setting up a “one-stop shop” of Brexit advice, for example—have so far been ignored. Allie Renison, head of trade policy at the Institute of Directors, said attempts to prepare for a no-deal Brexit have been hindered by a lack of transparency from the government about its contingency plans. Whitehall departments have shared information with some of the companies most affected, including haulage and parcel delivery businesses, but those privy to it have been made to sign non-disclosure agreements so that it has not been more widely diffused. “For a lot of other businesses and trade associations we are left fumbling in the dark,” said Ms Renison. “There is no clarity about what mitigating actions the government would take if there is a no deal.”

Source: © The Financial Times Limited 2018.

Case Questions

6-15. At the time of this case writing Brexit was unresolved. What has happened since? How has Brexit affected small companies like ACP Solutions?

6-16. What were the main concerns for ACP as Brexit approached? What preparations should the com- pany have made?

Endnotes

1. T. Hancock, “Why Ford Is Stalling in China while Toyota Succeeds,” Financial Times, March 4, 2019, www.ft.com /content/6fd5a4c4-36c1-11e9-bd3a-8b2a211d90d5 (accessed March 12, 2019).

2. www.bcg.com/publications/collections/2018-global-challengers -digital-leapfrogs.aspx (accessed March 13, 2019); M. Meyer, N. Lang, N. Baise, and K. Maggard, et al., 2018 BCG Global Challengers: Digital Leapfrogs (Boston Consulting Group, Inc.).

3. Ibid. 4. Ibid. 5. M. Hitt, R. D. Ireland, and R. Hoskisson, Strategic Management:

Competitiveness and Globalization. p. 6. 6. D. Hambrick and J. Fredrickson, Are You Sure You Have

a Strategy? Academy of Management Executive, 15 (2001): 48–59.

7. A. MacDonald, A. Lucchetti, and E. Taylor, “Long City-Centric, Financial Exchanges Are Going Global,” Wall Street Journal, May 27, 2006.

8. K. Shubber, “Time Warner’s Bewkes Defends AT&T Deal in Court,” Financial Times, April 18, 2018, www.ft.com/content /ae263ea8-4330-11e8-803a-295c97e6fd0b (accessed March 13, 2019).

9. Nic Fildes, “Company Bidding to Revive Nokia Mobile Phone Brand Raises $100m,” Financial Times, May 21, 2018, www .ft.com/content/5190ddc2-5d09-11e8-ad91-e01af256df68 (accessed March 13, 2019).

10. R. Milne, “Ericsson Shares Slide on Restructuring Costs Concern.” Financial Times, January 10, 2019, www.ft.com /content/87befda6-14c0-11e9-a581-4ff78404524e (accessed March 13, 2019).

CHAPTER 6 • FORMULATING STRATEGY 225

11. J. Surowiecki, “Where Nokia Went Wrong,” The New Yorker, September 3, 2013, www.newyorker.com/business/currency /where-nokia-went-wrong (accessed March 13, 2019).

12. Kathrin Hille, “ZTE: Telecoms Manufacturer Makes Move to Latin America,” www.FT.com/Reports, May 20, 2011.

13. N. Fildes, “5G: Can Europe Match the US and China on Mobile Networks?” Financial Times, January 26, 2019, www.ft.com /content/650d3bf8-1e32-11e9-b2f7-97e4dbd3580d (accessed March 15, 2019).

14. M. Pooler, P. Campbell, and S. Palma, “Why Dyson is shifting its HQ to Singapore,” Financial Times, January 23, 2019, www.ft.com/content/02a636d8-1f2f-11e9-b2f7 -97e4dbd3580d?shareType=nongift (accessed March 6, 2019).

15. E. Smith, “Expansion for OSI Group Continues Internationally,” September 5, 2017, https://gazetteday.com/2017/09/expansion -for-osi-group-continues-internationally/ (accessed March 13, 2019).

16. Engardio. 17. A. K. Gupta and V. Govindarajan, Managing Global Expansion:

A Conceptual Framework. Business Horizons (March/April 2000).

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19. E. Dunkley, “Europe’s Fintechs Head East to Challenge Asia’s Traditional Banks,” Financial Times, November 28, 2018, www .ft.com/content/d853c1ec-f2d9-11e8-ae55-df4bf40f9d0d (access- ed March 14, 2019).

20. Ibid. 21. Chironga, M. G. Desvaux, and A. Leke. Rethinking Business

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N. Rustago and A. Lompo (Eds.), Entrepreneurship Growth Strategies for Africa (Delhi, India: Neeraj Publishing House, 2018), pp. 49–68.

23. Chironga, M., G. Desvaux, and A. Leke. Rethinking Business Opportunities in Africa (McKinsey & Company, 2018).

24. 2018 Global Competitiveness Index, www.worldeconomicfo- rum.com (accessed March 18, 2019).

25. A. Klasa, “Casablanca Finance City Offers Hub to Africa-Bound Local and Foreign Business,” Financial Times, January 23, 2019, www.ft.com/content/44728da4-fe38-11e8-b03f-bc62050f3c4e (accessed March 18, 2019).

26. http://www.fdiintelligence.com/Special-Reports2019, accessed March 18, 2019.

27. C. Fingar, “Kuwaiti Economy Needs Foreign Investment to Diversify,” Financial Times, September 10, 2018, http://www .ft.com/content/960fc4c8-67fd-11e8-aee1-39f3459514fd (access- ed March 14, 2019).

28. Vivienne Walt, “Touch Times for a Favorite Tax Haven,” Fortune, February 1, 2015, p. 14.

29. S. Zaheer, “Overcoming Liability of Foreignness,” Academy of Management Journal, 38 (1995), pp. 341–363.

30. L. Eden and S. R. Miller, “Distance Matters: Liability of Foreignness, Institutional Distance and Ownership Strategy,” Advances in International Management, 16 (2004), pp. 187–221.

31. Henry Mintzberg, Strategy Making in Three Modes. California Management Review (Winter 1973), pp. 44–53.

32. http://panmore.com/sony-corporation-vision-statement-mission -statement (accessed March 11, 2019).

33. https://w5.siemens.com/belux/web/en/about/vision/pages / vision-values-strategy.aspx (accessed March 11, 2019).

34. Ibid. 35. This section contributed by Charles M. Byles, Professor, Virginia

Commonwealth University, March 11, 2009. 36. Mike W. Peng, Global Strategy, 2nd ed. (South-Western Cengage

Learning, 2009). 37. Douglass C. North, Institutions, Institutional Change, and

Economics Performance (New York: Cambridge University Press, 1990); W. Richard Scott, Institutions and Organizations (Thousand Oaks, CA: Sage Publications, 1995).

38. Peng, 2009; Mike W. Peng, Denis Y. L. Yang, and Yi Jiang, “An Institution-Based View of International Business Strategy: A Focus on Emerging Economies,” Journal of International Business Studies 39, No. 5 (July–August 2008); Economist, “Order in the Jungle,” March 13, 2008.

39. Economist, 2008. 40. PEW, A look at drug spending in the U.S., February 27, 2018,

www.pewtrusts.org/en/research-and-analysis/fact-sheets /2018/02/a-look-at-drug-spending-in-the-us (accessed March 15, 2019).

41. Interview of Rackspace CEO, Joe Eazor, by Stewart Miller, February 13, 2019.

42. Ibid. 43. Ibid. 44. www.mitsubishicorp.com/jp/en/about/global/, March 21, 2019. 45. Diane J. Garsombke, “International Competitor Analysis,”

Planning Review 17, No. 3 (1989), pp. 42–47. 46. C. K. Prahalad and Gary Hamel, The Core Competence of the

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47. Ibid. 48. www.honda.com/mobility (accessed March 15, 2019). 49. www.honda.com/about (accessed March 15, 2019). 50. M. E. Porter, “Changing Patterns of International Competition,”

in The Competitive Challenge, D. J. Teece, ed. (Boston: Ballinger, 1987), pp. 29–30.

51. P. Ghemawat, Distance Still Matters. Harvard Business Review 79, No. 8 (2001), pp. 137–147.

52. T. Chen, “Network Resources for Internationalization,” Journal of Management Studies 40, pp. 1107–1130.

53. D. Hambrick and J. Fredrickson. Are You Sure You Have a Strategy? Academy of Management Executive, 15 (2001): 48–59.

54. Ibid. 55. Interview of Rackspace CEO, Joe Eazor, by Stewart Miller,

February 13, 2019. 56. Porter, 1987. 57. P. W. Beamish et al., International Management (Homewood,

IL: Irwin, 1991). 58. A. Palazzo, “B2B Markets—Industry Basics,” www.FT.com,

January 28, 2001. 59. H. Agnew and T. Hancock, “How Luxury Learned to Love

Chinese Ecommerce,” Financial Times, October 26, 2018, www.ft.com/content/192bff30-d90e-11e8-ab8e-6be0dcf18713 (accessed March 15, 2019).

60. A. J. Morrison, D. A. Ricks, and K. Roth, Globalization ver- sus Regionalization: Which Way for the Multinational? Organizational Dynamics 19 (Winter 1991).

61. “Wal-Mart Selling Stores and Leaving South Korea,” www . nytimes.com, March 23, 2006.

62. Beamish et al.

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63. Corning Incorporated, “Youngy Group and Corning Form Joint Venture,” September 29, 2017, www.corning.com/worldwide/ en/about-us/news-events/news- releases/2017/09/youngy-group -and-corning-form-joint- venture.html (accessed March 14, 2019).

64. Pankaj Ghemawat, Redefining Global Strategy (Boston: Harvard Business School Publishing, 2007).

65. Thomas Friedman, The World Is Flat (New York: Farrar, Straus, and Giroux, 2005).

66. Yoram Wind and Susan Douglas, International Portfolio Analysis and Strategy: The Challenge of the 1980s. Journal of International Business Studies (Fall 1991), pp. 69–82.

67. Daniel J. Isenberg, The Global Entrepreneur. Harvard Business Review, December 2008.

68. Ibid. 69. Matt D’Angelo, “How to Successfully Expand Your E-commerce

Business Globally,” Business News Daily, May 30, 2018, www .businessnewsdaily.com/5948-how-to-make-your-e-commerce -business-an-overseas-success.html (accessed March 14, 2019).

70. www.internetworldstats.com/ 71. “China’s E-commerce Market: The Logistics Challenges,”

research report, www.atkearney.com (accessed August 12, 2011). 72. Ibid. 73. Bob Tedeschi, “E-Commerce Report: Sensing Economic

Opportunities, Many Developing Nations Are Laying the Groundwork for Online Commerce,” www.nytimes, November 20, 2008.

74. Sorid, 2008. 75. P. Greenberg, “It’s Not a Small eCommerce World, After All,”

www.ecommercetimes.com, February 23, 2001. 76. Ibid. 77. M. Porter, The Competitive Advantage of Nations (New York:

Free Press, 1990). 78. Bruce Einhorn, “How China’s Alibaba Is Surviving and

Thriving,” BusinessWeek, April 9, 2009. 79. Alibaba Group, “Alibaba Kicks off Japan Merchandising

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80. M. Sawhney and S. Mandal, “Go Global,” Business 2.0, May 2000.

81. Ibid. 82. B. Bright, “E-Commerce: How Do You Say ‘Web?’ Planning to

Take Your Online Business International? Beware: E-Commerce Can Get Lost in Translation,” Wall Street Journal, May 23, 2005.

83. Ibid. 84. Ibid. 85. www.jollibee.com.ph/about-us/ (accessed March 15, 2019). 86. U.S. Department of Commerce, “2011 Country Commercial

Guide for U.S. Companies: Doing Business in China,” www .export.gov (accessed September 20, 2011).

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