Global Strategy and Management

MOTIVATIONS FOR INTERNATIONAL MARKET ENTRY

There are significant challenges facing firms that want to move into an interna- tional market. When SAP entered the U.S. market, for example, it determined that to be competitive it had to offer stock options to top management, an action it had not contemplated before. For software companies in the U.S., this was the norm and to attract talent, SAP knew it would have to adapt. This was a shock to the German firm’s culture. Historically, wages in most German firms also fall in a narrower range between the average worker’s salary and top management’s compensation (including stock options), compared with U.S. firms. However, ultimately SAP was successful with its move into North America. It decided that for SAP to properly compete in the ‘‘war for talent’’ in the challenging North American information technology industry, it had to offer stock options.iii

Most European firms entering the United States are not nearly as successful as SAP. An estimated three-quarters of European firms’ efforts to enter the U.S. market through mergers and acquisitions have been unsuccessful.iv If this is the case, why do firms continue to pursue international expansion efforts? European firms are encouraged to enter the United States by the same factors that encourage all firms to expand internationally, including:

• seeking increased market share • obtaining economics of scale • improving return on investment (ROI) • intellectual property concerns • looking for favorable locations

Increased Market Share Firms can gain market share by expanding internationally. The impact of increased market share can affect a firm in several ways, including offering new sales when the firm’s existing market is saturated. In the above example, SAP was at one time principally focused on the continental European market. Although SAP had some sales in the U.S. market, it had not developed a network to support or create large sales in this country. However, SAP realized that the European market was satu- rated and offered limited growth. The U.S. market offered the greatest potential; it was a large and expanding market with the most advanced information technology sector. There were competitors in the market, but SAP felt it could compete.

The example above of China’s Chery automobile is also an instance of a temporarily saturated market with much overcapacity—this time in China. The U.S. auto market is competitive, but Chery feels it may offer some excellent opportunities, particularly at the low price point for which it can deliver its small cars. Thus, firms can see new sales opportunities even when it appears the market they are moving into is competitive.

Economies of Scale Alternatively, a firm may determine that additional sales are needed to allow efficient use of the firm’s existing production capability, the addi- tional sales coming from international sales. The Japanese auto industry suffered a decline in the domestic market in the early 1970s, which left most Japanese firms with over-capacity in their domestic production facilities. The Japanese firms real- ized they needed international sales to be able to operate those plants at the most efficient scale. As a result, they moved aggressively into the U.S. auto market.

But in other industries a single market may not be large enough to support the capital outlay needed to conduct an activity, so a firm must consider international entry to obtain the necessary economies of scale. For example, consider Airbus.

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Developing, building, and testing new aircraft is expensive. Airbus was initially created as a French–German consortium in 1970. Later it was joined by CASA of Spain and British Aerospace to create a truly European firm. The markets in each country of the firms that combined to create Airbus were not large enough to justify the capital outlay to design and build advanced aircraft. Instead, the Euro- pean firms combined to serve all of Europe, and eventually determined that the European market was not large enough. Today, Airbus must look to worldwide markets to sell its planes and secure commitments from airlines for new planes that are still being designed. The capital outlay required for large commercial passenger aircraft is so large that there are effectively only two strong competitors worldwide in this industry—Boeing and Airbus.1

ROI Firms may also choose to enter international markets because the potential for profit is greater in that market. In perfectly efficient markets, there are no above- par profits. In mature markets, such as Europe and the U.S., there is great com- petition and typically the closest approximation to the perfect competition that economists discuss. Thus, for many firms, it is difficult to generate excess profits.

However, as firms expand internationally, the number of unfilled markets and the potential for greater profit increase. Consider our earlier example of KFC, which is part of Yum! Brands, a spin-off from Pepsico that includes Pizza Hut, Taco Bell, and KFC. The firm initially was called Tricon for the three (thus ‘‘tri’’) brands it represented. The company is now called Yum! and includes a variety of other restaurant concepts, such as Long John Silver’s and A&W Restaurants (the beverage A&W Root Beer is owned by another corporation). Yum!’s market in the U.S. was mature; it had steady profits, but not much potential for growth. Interna- tional markets, specifically in Asia, offered the firm great potential growth and profits. Though you only occasionally see an A&W restaurant in the U.S., they are more common in some Asian markets. The demand is also high for KFC. The reason for KFC’s success is not only good management, but also that chicken is a principal source of protein in the region. Thus, by entering China, KFC has been able to increase its ROI. In fact, the international operations of Yum! will soon represent the greatest percentage of the firm’s revenues and, ultimately, its profits.

Intellectual Property Weak patent protection in some countries encourages firms to expand overseas rapidly in order to preempt imitators or secure patent protection in those major, foreign markets. If a firm is not active in those markets, its product can be copied more easily. The copies, in fact, may be of poor quality and can harm the firm’s brand. Countries such as Russia, China, and India have very weak protection of intellectual property. For example, it is estimated that almost all computers in Russian businesses and government are running illegally copied software. Illegal copies of many movies appear for sale on the streets of Moscow even before the film has opened in theaters within the country. Street copies are made from the original movies before they are shipped to a Russian theater or from an original version in another country, where the movie has already opened. Thus the illegal copies on Russian streets were not only inexpensive, but were of good quality.

The film and entertainment industry has recognized this problem. Now major studios place a small identification code on every original motion picture copy that

1This may change as new competitors loom on the horizon. Canadian firm Bombardier and Brazilian firm Embraer are gaining market share at the low end of commercial jet travel with 100-seat planes. If they are able to move up-market with lower-cost jets, they will pose a threat to Boeing and Airbus.

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is sent to theaters. As a result, if it is copied, the studios can trace and prosecute those responsible for not safeguarding the movie. However, the movie industry has also dealt with the reality that a movie that is sold in the United States for $20 is not affordable in countries such as Russia and China, where annual per capita incomes are well under $10,000. Thus, film and TV studios and their distributors employ discriminatory pricing so that movies are sold at different prices in differ- ent markets. These firms might prefer not to be in a market such as Russia, but they realize they must or their product will be there illegally. The creation of region-specific DVD players is a partial solution. DVDs and DVD/CD players have technology to make it difficult for cheaply sold movies from Russia or other markets to be played on a DVD player in North America or Europe.

Location Advantages Firms can also choose to expand internationally to obtain location advantages with that international market. Location benefits are typically of three types:

• lower costs are obtained for inputs such as labor • vital inputs to their product are secured, such as in the oil industry • a specific market is accessed

Cheaper Inputs To illustrate why a firm may enter an international market, recall from Chapter 4 the discussion of the value chain. A firm may internationalize as part of an effort to manage its value chain effectively, particularly with respect to minimizing costs. For example, consider that up to a 70 percent cost savings can be gained by having software programming done in a lower-cost location, such as India or Russia, where quality engineering talent is abundant. In manufacturing, the labor cost in some lesser-developed countries is not measured in dollars per hour, but in dollars per day. Thus, there can be significant cost savings in moving production to a lesser-developed country.

INTERNATIONAL RETAILERS AND INDIA

The motives to enter a market can be illustrated by the Indian economy, which has been booming with over 7.5 per- cent growth for the last three years. It is predicted that for the next decade, at least, the economy will continue to grow at 6 percent or better. In this expanding economy, consumers have shown a ten- dency to spend more than those in other emerging economies. For example, in India, consumption as a percentage of the GDP is over 60 percent compared to 40 percent in China. At this time the market is also very fragmented and relatively poorly served. For example, only 4 percent of the 15 million retailers in India have retail space of over 500 square feet. Thus, the national retailing market of over $250 billion is served by very small

stores with a very limited selection of stock and relatively high prices.

The result is that the Indian retailing environment appears very appealing to international retailers, such as Wal- Mart, Tesco of Britain, and Carrefour of France. However, these firms’ ability to enter the market was prohibited until 2006, when the Indian government said that international firms could enter through a joint venture in which they could hold 51 percent ownership. How- ever, a retailer could handle only a single brand. Thus, a shoe store could only sell Nike shoes, or a grocery store could only sell its own brand—obvi- ously excluding most major retailers from competing in the Indian market.

This liberalization was strongly opposed by India’s Communist party,

which is supported by India’s large num- ber of small retailers. The party has opposed any effort to liberalize the retail sector. However, international firms such as Wal-Mart continue to lobby the gov- ernment for greater liberalization. The big international retailers see significant opportunities in India, similar to what was found in Mexico and China. Wal- Mart’s goal is to be able to enter and compete in India freely. To do so, Wal- Mart is willing to operate through a joint venture. Wal-Mart has also committed to significantly increasing their local pur- chases and offering employees manage- rial training and ownership opportuni- ties, much as they have done in Mexico, China, and other emerging economies.

Coming to market. (2006, April 15). The Economist, pp. 65–67.

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When considering the potential to obtain low-cost inputs, managers must recognize that while items like labor costs may be lower, other costs may be higher. China is a good example of this conundrum. It is not necessarily cheaper to produce all items in China than in Europe or other developed regions of the world. Although hourly labor costs are approximately U.S. 80 cents in China, worker productivity is significantly lower. The costs of parts and other inputs are also often higher, monitoring and quality-control costs are higher, and trans- portation of raw materials and finished product adds further to the cost. For this reason, a firm must carefully consider what product it is manufacturing, where it is producing the product, what shipping costs are from the place of production to the point of the sale, and what other benefits and costs it faces by manufacturing in a foreign location. Thus, the decision is more complex than simply assessing the cost of labor or some other input is cheaper in a given location.

Secure Inputs Firms frequently enter an international market to secure inputs or raw materials. An international firm, such as the French tire firm Michelin, could not produce tires without raw materials that come from outside France. Global energy companies, such as Shell from the United Kingdom and Holland and Exxon-Mobil from the United States, have to be active in foreign markets to obtain their major inputs (petroleum, natural gas, and other chemicals). Neither Shell’s nor Exxon- Mobil’s home market can supply a significant part of inputs that are needed by the firm. Thus, firms may expand internationally to secure access to crucial inputs.

Access a Market Firms may enter a foreign country to gain access to that market. Many firms enter China not only because of the low cost of labor, but also to gain access to its growing market. Firms recognize that China has the world’s largest population along with the fastest-growing economy. They acknowledge that they will need to be in that market as it matures. The companies enter today, not as much for immediate profit, but to build a presence in China over time so that they can take advantage of its future growth.

The United States attracts consistently one of the highest, if not the highest, amount of foreign direct investment (FDI) in the world. (In 2006, FDI into the U.S. was $177 billion, the U.K. $169.8 billion, China $71 billion, France $88.4 billion, Singapore $31.9 billion, Russia $28.4 billion, and India $9.5 billion.)v Part of the reason firms invest so heavily in the United States, which has some of the world’s highest labor costs, is that they want easier access to the world’s largest market for many different types of goods. Thus, these firms are expanding into the U.S. not to achieve cost advantages, but to gain access to consumers.

The desire for market access can be driven by a belief that the best manner in which to serve a market is to be located there. However, such location choices can also be made to overcome trade barriers erected to imports. As noted in Chapter 1, trade barriers in the form of tariffs have dropped significantly in recent years. In fact, there are now efforts to create tariff and code harmonization internationally so that they have the same standards for products and how they are treated in regard to tariffs. However, significant levels of tariffs still exist in some countries, which discourages imports. For example, India had tariffs of over 150 percent as recently as 1990, which made it difficult for firms to import even a personal computer—a process that was both expensive and time consuming. And it was nearly impossible for individuals in India to buy a PC. After India largely turned its back on socialism and started economic reforms in 1991, tariffs have gradually fallen, and were 24 percent in 2000.vi However, India still has the third highest level of tariffs for major countries worldwide and significant restrictions remain in some sectors. In fact, Indian information technology executives like to remind observers that one of the main reasons the Indian IT sector was able to develop so quickly was that government officials and politicians did not understand it and were not

Harmonization Efforts between nations to have the same code of standards for products and how they are treated in regards to tariffs.

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able to interfere.vii Therefore, firms often choose to open facilities in India so they do not have to pay to import goods into the country. A nation may also have non- tariff barriers. For example, Japan and Korea have both been accused of excessive requirements for an imported product to be approved for sale there. These require- ments include excessive product testing and proof of the product’s ability to do what it claims. Therefore, firms may choose to expand into those countries through acquisition as a means to overcome such non-tariff trade barriers.

Another means used occasionally to overcome trade barriers that merits mention is indirect imports. Although these are slowly going away, many countries still have import barriers that limit the quantity of a product from a particular country. A prime example of this is in the garment industry. It was common for developed economies, such as those in the EU or the U.S., to limit garment imports from China, Hong Kong, and other textile-producing economies. The more developed economies wanted to protect their domestic producers from low-cost competitors from developing econo- mies that might come to dominate the industry and put domestic producers out of business. The old trade treaty on quotas, the Multifiber Agreement, was so strict that it was almost impossible to mail even a single shirt from Hong Kong to the U.S. as a gift for a relative—even a hand-me-down shirt. So while many garments might be sewn predominantly in China, they would be shipped to Vietnam, the Philippines or smaller places, such as the Maldives in the Indian Ocean, for production completion. The garment would have a label saying that it was produced in Vietnam, the Philippines, or the Maldives, and would be counted in import quotas as an import from that particular country, not from China, even though most of the value added occurred in China. The effect of indirect imports was to raise the cost of garments. A new agree- ment on Textiles and Clothing was signed in 1995, which dismantled the Multifiber Agreement with all protections finally expiring in 2005. The expected result was that in garment sectors such as socks, China would dominate world production, as a great many of the world’s socks are produced around Shanghai in the Yangtze River delta. The rapid increase in Chinese-made garments entering western countries soon moti- vated politicians in the EU and the United States to seek bilateral agreements limiting Chinese garment imports, despite possible violation of WTO rules. Ultimately separate agreements were reached to delay free trade in garments several more years. The effect was to encourage the continuation of such indirect imports. However, in the future as free trade continues to expand, the effect of indirect imports should decline.2

ENTERING INTERNATIONAL MARKETS

Just as there are many reasons firms would like to go international, there are also a number of ways in which firms can enter an international market. In this section we see four major means of internationalization, and some of these means then have different underlying methods. The first is export, or shipping a good from a home market to markets outside the home country. Exporting is still the dominant type of international activity for many firms because it requires the least invest- ment overseas. The next way to enter an international market is through an alliance with a firm in that country. We looked at one of the major types of alliances—joint ventures—earlier. Other types of alliances that we will look at in depth here are informal alliances and franchises. A firm may also enter an interna- tional market by purchasing a firm in that country. Finally, a firm may want to have a stand-alone operation in a country that it builds itself. This is called a

2A specialized type of indirect import is used by some firms to circumvent government rules. For example, laws prohibit trade between the U.S. and Cuba, and the U.S. and Iran. Some firms circumvent these rules by selling to entities in other countries that re-export to Cuba or Iran. We do not focus on this type of indirect export because it is relatively rare and ethically questionable.

Non-tariff trade barriers A barrier to free trade that takes a form other than a tariff, for instance quotas or inspection requirements for imported products such as VCRs, automobiles and dairy products.

Indirect import Goods may have most of the value added in one country but due to trade barriers the product is shipped to another country where final production on the good occurs, with the good then being listed as an export from that country.

Export The shipping of a good from the home market to markets outside the home country.

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greenfield investment. These different methods can be visualized as having differ- ent levels of commitment and cost to the internationalization effort. The method with the least commitment and cost is exporting to a given nation. Alliances typically involve more risk and costs but less than a merger or acquisition. The risk with a merger or acquisition is greater, and the cost typically associated with a greenfield venture is greatest, although whether risk is higher is not always clear. Thus, a firm has to balance the cost of each type of entry with the goals it hopes to accomplish. This section will introduce the methods and discuss how firms bal- ance those costs and risks with the needs of the firm. Each of the internationaliza- tion methods will now be examined in greater detail. (See Chapter 4 for more details about mergers and acquisitions and some types of alliances.)

Export The most immediate way to internationalize a firm is to directly export goods to a market outside your home country. Typically, this occurs when a firm or person contracts with a firm that is currently focused on its home market; the foreign firm then pays to ship the given good to its home country. This is the most typical form of internationalization because it requires the least commitment of resources.

Typically, exporting begins when there are direct sales and the firm is directly contacted by customers. However, this is not a very efficient means to build a large international effort, so such direct sales are usually not a major source of revenues for a business. But as a firm gains international experience, it will often move from waiting for contacts from international customers to hiring an interna- tional representative (rep) or dealer. A manufacturer’s rep will often handle several firms’ products that typically do not compete with each other, such as a variety of IT gear. A dealership is similar, though typically the relationship between the two firms will be closer than with the manufacturer’s rep, and a dealership could be an exclusive one, only selling the one firm’s products. In either case, the business does not have to establish an international sales force of its own because the rep or dealer will handle promotion and sales in their local country. Many products and services are delivered in this way. For example, the well- known Hong Kong restaurant firm Maxim’s is the local dealer for Starbucks and

Exporting goods to a market outside a firm’s home country is the most typical form of internationalization since it requires the least commitment of resources.

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has an exclusive right to open Starbucks coffee shops in Hong Kong. Starbucks has different licensee dealers in Singapore and Taiwan. Many Japanese electronics firms work entirely through dealers in Hong Kong for the sales and service of their products. Ultimately, a firm may choose to export its product, which is produced in its home country, but will sell directly through its own sales force or even open sales offices in international locations.

Alliances A firm may wish to commit further to internationalization and, as a result, will seek to have operations in foreign markets. The next strategic step typically is to move from purely exporting to pursuing an alliance with a firm in the desired markets.viii In an alliance, a firm moves into a market in association with other firms. In general, the parties involved have less control than if they were to own the firm outright but they also have less risk, because now the two firms share the risk. This pattern of tradeoff between control and risk is one constant in interna- tionalization: when a firm has more control, it assumes more of the risk. There are a number of different types of alliances, and each will be reviewed briefly.

Informal Alliances The least formal method by which to enter an international market is an informal alliance. This typically does not even have a signed docu- ment, but is simply a statement by one firm to another along the lines of, ‘‘If you help me sell my product in your market, I will help you sell yours in my market.’’ In this situation, there is little investment, and the least control by a firm. Thus, informal alliances would not involve equity investments by either party.

With such informality, nonequity alliances can be difficult to document because there is little written evidence associated with them. For example, in Southeast Asia, the dominant economic power is people who are colloquially called ‘‘Overseas Chinese.’’ These individuals are ethnic Chinese whose families emigrated from China at different times over the past few hundred years.ix The largest migration occurred in the 1600s when China’s Manchu rulers moved the population in its southern coastal provinces approximately 15 miles back from the coast so they could better control trade. The result was that many people, mostly fisherman and traders from China’s southeast coastal regions, simply left to find better opportunities in Formosa (Taiwan) and Southeast Asia.x

The Overseas Chinese have come to dominate the economies of Southeast Asia.xi

For example, in Indonesia the Overseas Chinese make up only about 3 percent of the population, but they control large numbers of the publicly traded firms and many productive assets, and they are very influential in government.3 In large measure, the Overseas Chinese communities were successful because of informal alliances, developed as individuals speaking the same Chinese dialect stayed in contact throughout the Pacific Rim. China has a common written language, but there are 7 major and 200 minor dialects in the country that pronounce the written language differently. Thus, someone speaking the southern Cantonese dialect cannot be understood by a listener who only speaks the Shanghai dialect, although they can communicate by writing or by speaking Mandarin—China’s national language. Communication can also be difficult since Chinese pictographs are more difficult and take much more time to learn than alphabetic language systems. While it is fairly easy to represent all the sounds of Chinese using the Latin alphabet, it is rather difficult to faithfully reproduce the many sounds of English or most other languages by using Chinese characters to ‘‘spell out’’ or transliterate the word.xii

3There are disputes about the percentage of publicly owned firms controlled by Overseas Chinese in Indonesia and in other parts of Southeast Asia, but most agree that they exercise a significant influence over business in Indonesia, vastly greater than their small population would normally confer.

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The ensuing difficulties in communication were a factor in leading different dialect groups to cluster in different cities around the Pacific Rim: the Hokkien people in Singapore, the Cantonese in Penang (in Malaysia), the Hakka in Taiwan and Singapore, the Teochew in Bangkok (Thailand), and the Zhang Shan people in Hawaii. They also led to each dialect group specializing in a particular trade. In Singapore, for example, the Hokkien people dominated the grocery stores, the Cantonese and Hakkas (traditionally a more nomadic people in China) were in the medicine retailing, the Teochews and Foochows were in fishing, pawnshops, and lunch restaurants, respectively, while Shanghainese dominated tailoring and gar- ments. To some extent these patterns still prevail today.xiii

Such informal alliances fostered within dialect groups facilitated global business, going back to the eighteenth and nineteenth centuries. Among individuals with the same dialect, a merchant could deposit gold with a jewelry shop in the Philippines, carry a certificate of gold deposit overseas, and receive that same amount of gold (less a small fee) in Singapore from another gold and jewelry merchant, most likely someone from that same dialect group. This informal network, based on trust and internal sanctions and controls, developed an early banking system that strongly aided the development of commerce among the Overseas Chinese.xiv

Today, informal alliances such as those of the Overseas Chinese are less important than in the past, though many of the old professional patterns prevail.xv

However, in many emerging markets, such informal alliances can still be critical assets in trying to penetrate environments where the rule of law is still developing. Such alliances allow a firm, as it begins to enter a market, to have connections with individuals that will advise the firm and support its efforts. Thus, while the level of risk and commitment of resources by either party is typically low in such informal alliances, these arrangements can be very powerful assets in some settings.

Licensing A more formal type of alliance that still has limited financial commitments by a firm entering an international market is a licensing arrangement. In such an agreement, a company outside a particular country agrees to pay a firm within the country for the right to either manufacture or sell its product. The firm selling the right to this product typically loses the right to control various aspects of the product when manufactured or sold by the licensee. Thus, there is an alliance between two firms when there is licensing, but it tends to be much less coordinated than in a joint venture or franchise. For example, there is commonly an agreement between the parties, but the contract only specifies what is to be sold and for what price. As a result, a firm that licenses its goods typically takes on limited risk itself. Instead, most of the risk is borne by the organization obtaining the license. However, the firm has limited control over what happens and the return, in this situation, is typically lower than if the firm had done more than given another party the right to sell its product.

Licensing can have strategic value to a firm as it seeks to enter a market. For example, in the videocassette recorder (VCR) battle between Sony with its Beta- max technology and JVC with its VHS technology, licensing played a major role in deciding which technology eventually won the battle of technology standards. Betamax was introduced nearly 18 months before VHS, and Sony was then a larger and stronger company than JVC. Most analysts agreed that Sony’s Betamax technology was better than JVC’s on most criteria except the recording time, which was longer on JVC’s VHS. JVC, however, actively licensed its VHS technology to firms around the world, such as Philips, Hitachi, and Telefunken, to promote VHS and speed its expansion. In contrast, Sony did not license its Betamax technology because it wanted to maintain complete control over the standard and the rev- enues to be earned from its technology. Therefore, despite the fact that it was not the first to market and probably did not have the better technology, JVC with its VHS video standard proved to be the winner, in large part due to its aggressive and early international licensing alliances.xvi

Licensing agreement A firm agrees to pay a firm for the right to either manufacture or sell a product. The firm selling the right to this product typically loses the right to control various aspects of the product when manufactured or sold by the licensee.

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Joint Venture Joint ventures were briefly reviewed in Chapter 4, but because they are one of the major means for international market entry, they are revisited here in more detail. Recall that joint ventures are formal agreements between two or more firms where a new separate entity is created for the purpose of producing or distributing goods and services. In joint ventures, two or more firms contribute equity to form a new third organization. The level of equity can vary from small amounts to multimillion-dollar investments. Thus, the level of commitment and risk to these formal, equity alliances is considerably higher than in informal alliances developed for exporting or licensing purposes.xvii

The nature of the joint venture agreement established between parties is critical to how the joint venture is managed and how long it can survive. A joint venture commonly has detailed agreements covering what each party is to provide, what each can expect, and how each is to operate within the joint venture. Most agree- ments will have a finite time during which the joint venture will exist as a going concern. After that time, each firm can decide whether to continue the venture. However, there are typically clauses in the agreement that allow one firm or the other to leave the joint venture if it is unhappy with the outcome. The analogy of a family is helpful. A couple marries and then may have kids—a joint venture. A joint venture between two firms can have some of the same growing pains as do children, and present the parent firms with difficulties similar to raising children. Childrearing pressures may even cause some parents to end their marriage. The same can be true in joint ventures. Therefore, managing the joint venture is more than simply following a contract. It takes active management for the relationship to survive.

To overcome some of the difficulties in managing a joint venture, both parties must be clear as to what they wish to accomplish and why. An agreement on how the venture is managed and what each is to provide and obtain is part of this process. A joint venture agreement is typically quite long, and the common advice is that considerable discussion needs to occur between the parties prior to establishing the agreement. Agreements are only for as long as the parties believe in the joint venture. This belief is developed through mutual understanding and commit- ment. Just as individuals need to get to know each other prior to marriage, firms need to undergo a similar process before establishing a joint venture in order to determine their compatibility. (Figure 6-2 summarizes the biology analogy of a joint venture.)

This discussion of a joint venture has been approached as if a long life is the desired goal for a joint venture because that is the most common desire. However, in some cases, firms enter into a joint venture not seeking a long-term relationship. Instead they wish to learn a specific process, technology, or market from their partner and do not see the joint venture as long term. This is a legitimate and strategic approach to an alliance. Such a joint venture can still be successful for both parties as long as they both approach it in this manner. However, too often one party wishes to learn from the other over the short-term, but the other party wishes a long-term relationship. As a result, the short-term party ends up happy when the relationship ends, but the other party rates the joint venture as a failure.

Joint VentureFIGURE 6-2

A B

C

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Sometimes, in such cases, the party with a short-term focus becomes a competitor to the party with a long-term focus. Situations where either party is surprised can be avoided if both parties actively conduct strong due diligence and learn about each other before forming the joint venture.

Franchising Franchising is a type of formal equity alliance that was not reviewed in Chapter 4 extensively so we will examine it in more detail here. A franchise agreement is a contract established between a parent (franchisor) and an individ- ual who actually buys an individual business unit (franchisee) to sell a given product or conduct business under its trademark. An estimated 40 percent of U.S. retail business is conducted through franchisors, and the success of franchis- ing in the U.S. has resulted in a rapid expansion of the concept around the world.

A franchisor typically provides the franchisee with extensive direction on how to operate the business. Effectively, a franchisor is selling a formula on how to operate the business. This will include items, such as how products are to be prepared, how services should be provided, how the firm hires its employees, and how the business is to be physically arranged. In addition, a franchisor will normally develop account- ing and finance applications for the franchisee to use, and assist in marketing and promotion. The result of these efforts is that a franchised small business is more likely to be successful than a small business that is trying to do all of those activities on its own, learning from its mistakes as it goes forward.

However, a franchise contract also commonly sets standards for behavior by the franchisee that, if not followed, can result in the loss of the franchise. The franchisor

BP JOINT VENTURE IN RUSSIA

Joint ventures are not without significant risk. One key element in picking a joint- venture partner is that you need a firm that understands the local market and the local power structure. In many emerging markets, the government is a critical factor in the ultimate success of a busi- ness. Russia is one emerging economy where relationships with the government are critical. Unfortunately, changes in the political environment can result in your joint-venture partner being ideal at one stage but a liability at another.

British Petroleum (BP) is a worldwide energy producer. BP entered into a joint venture with Russian firm TNK in 2003. Three Russian billionaires controlled this local Russian firm. The joint venture looked ideally suited to help BP navigate the turbulent economic waters of Russia when the deal was signed. However, a number of Russian billionaires around this time also began to have political ambitions and actively supported politi- cal partiesopposed to President Putin.As a result, the government became more aggressive on tax issues with the busi- nesses associated with those individuals.

The most notable of these aggressive tax prosecutions is the famous Yukos case where billionaire Arkady Dvorkovich was arrested, charged with tax evasion, and his oil firm, Yukos (at the time of his arrest one of the 15 largest oil firms in the world), sold at auction to pay delinquent taxes.

In 2004, the BP-TNK joint venture was charged with not paying 4 billion rubles in taxes, or approximately $120 million. In 2005, the joint venture was hit with another tax bill for $770 million for unpaid taxes. In 2005 it appeared as if the billionaire joint venture part- ners of BP were not helping it navigate the turbulent waters of Russia, but instead had fallen out of political favor to the point where they were attracting problems for the joint venture.

However, by 2008 the billionaires had become closer allies to President Putin. The result was not to lower the government’s pressure on the BP-TNK joint venture. Instead, the billionaires began to argue that the joint venture was being managed too much to bene- fit BP. They were then joined in their

arguments by the nation’s largest gas producer, Gazprom. This firm, while technically private, is closely associated with the Russian government. The BP- TNK joint venture by 2008 was the largest oil producer in Russia. If it were to become associated with Gazprom, the government would then have both the largest gas and oil producers.

Thus, allies initially brought to the joint venture by BP did not at first provide much protection from the gov- ernment since they were not allied with it. But once the Russian partners did become allied with the govern- ment, they then joined with those in the government to seek to limit, if not expel, BP from the venture. This helps to illustrate the critical role of partner selection in joint ventures.

White, G. L., & Chazan, G. (2005, April 12). Russian heaps new claim for taxes on BP ven- ture. Wall Street Journal Europe, pp. A1, A12. Kishkovsky, S. (2008, May 30). Standoff grows over Russia-BP venture. International Her- ald Tribune. http://www.iht.com/articles/ 2008/05/30/business/ruble.php?page¼1 (accessed October 5, 2008).

Franchising A type of alliance where a contract is established between the parent (franchisor) and the individual who actually buys the business unit (franchisee) to sell a given product or conduct business under its trademark.

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wants to ensure that the product’s quality is consistent across all of the units. Thus, a McDonald’s restaurant is largely the same anywhere in the world. The franchisor will also require the franchisee to pay not only an initial fee to buy the franchise, but also a continuing royalty. In addition, most inputs used by the franchisee must be bought from the franchisor. The continuing royalty and sale of inputs is actually how the franchisor makes its money, so the goal of the franchisor is to help make the franchisee successful so that there is a continuing stream of revenue. For McDo- nald’s, for example, the corporation makes money every time it sells items such as hamburger wrappers, salt packets, and ketchup packets to franchisees.

Here, franchises are classified as alliances because each side of the venture is dependent upon the other. A franchisor makes its money principally when the franchisee is successful and continually purchases the franchisor’s goods. Thus, from our McDonald’s example, the franchisor wants its franchisees to sell large numbers of burgers so it can sell the supplies for those burgers. A franchisee is dependent on the franchisor to develop a good support package to the small business. This support should not end once the franchise is purchased. Typically, a franchisee is also dependent on the franchisor for marketing, which is critical to success.

There are two types of businesses that franchise internationally. The first is a firm that already franchises in a mature economy such as the U.S. Yum! Brands (the parent of Kentucky Fried Chicken, Pizza Hut, Taco Bell, A&W, and Long John Silver’s) franchises in the U.S. and has numerous franchises in other countries as well. Many times, such franchising is conducted in a manner similar to the franchising activities in the mature economy. Thus, a firm such as Dunkin’ Donuts’ entry into Poland is likely to follow the same model as in the United States.

Not all franchisors apply the same model when approaching franchising interna- tionally. In the U.S. franchisees are typically individuals who own one to five stores in a given area. The classic nature of franchising is that it provides excellent entrepre- neurial opportunities in mature markets, such as the U.S. In other parts of the world a firm such as Yum! Brands often seeks out well-established individuals in the com- munity to franchise its product. For example, in Thailand, KFC restaurants are franchised principally to a single entrepreneur. This individual is part of a wealthy family that is also one of the major food processors in the country, specifically chicken processors. This approach to franchising helps to limit Yum! Brands’ risk because the

SONY BMG MUSIC: TROUBLES BETWEEN PARTNERS IN A JOINT VENTURE

Problems arising in a joint venture can destroyaventure that hasgreatpotential. The second largest music company in the world is Sony BMG Music. The company is a joint venture between the Japanese firm Sony and the German firm Bertels- mann. Ownership of the joint venture is divided evenly between the two multina- tionals. Each firm also appoints half of the board. The CEO, however, is deter- mined by Sony. Details regarding this situation were negotiated in the joint- venture agreement.

In 2005, Bertelsmann indicated publicly they wanted the CEO of the joint venture, American Andrew Lack,

replaced. However, the CEO of Sony was just as publicly committed to keep- ing Lack as CEO. Sony’s CEO and Lack had been co-workers together at Viacom. The chief operating officer at the time of the formation of the joint venture was someone in whom Bertels- mann had great confidence, but that individual announced he was leaving the firm. This left Bertelsmann seeking to convince Sony to replace the CEO, with the campaign to replace the CEO largely being run through the public media.

Each firm thought it had negotiated an excellent and detailed agreement

for the joint venture. It is highly unlikely that either expected to be conducting a public discussion of the CEO of the joint venture a few years after its development. How- ever, legal agreements cannot cover every potential contingency.

Kafka, P. (2005,October10). Sony’sStringer defends music boss lack. Forbes.com. http:// www.forbes.com/2005/10/10/sony-bmg- lack-cx_pak_1010autofacescan10_print. html. Duhigg, C. (2005, October 11). Sony CEO backs Sony BMG chief. Latimes.com. http://www.latimes.com/business/la-fi-lack 11oct11,1,5086457.story?coll¼la-headlines- business&ctrack¼1&cset¼true.

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franchisee in this case is well connected politically and very sophisticated in his or her business understanding, although the model differs significantly from that of the U.S.

Another type of firm that franchises internationally is one that prefers to franchise regionally and will not open many franchises in a mature markets. This limits its international exposure, while allowing it to gain experience in smaller, less-lucrative, less-visible markets. Singapore, for example, has a number of smaller, regional franchisors that are well known in Southeast Asia and some other smaller markets, but that have a very limited presence in North America or Europe. Thus, firms, such as the restaurant Fish and Co., or Starbucks competitor Coffee Bean and Tea Leaf, have carefully employed this expansion strategy as they have moved abroad.

On a general note, it is worth noting that franchising is a great entrepreneurial opportunity that students should investigate if they desire to start a business. Consider the franchisors who were fortunate enough to buy the initial franchise rights to several McDonald’s in medium-sized markets and thus were able to get those franchises relatively cheaply. Today these individuals are very wealthy and the value of their franchises has increased dramatically. Today there are many opportunities internationally in similar medium-sized markets for franchises. For example, the higher-end fast food chain Carl’s Jr. wants to open hundreds of restaurants in East Asia over the next decade, which will present significant oppor- tunities for franchising in that region. It is interesting to note that when McDonald’s was initially expanding, it had a policy of providing matching funds to individuals who worked for a franchise store for a period of time, and it would gradually sell that person rights to own a franchise. As a result, in the U.S. and Canada, many franchisees are individuals who started out flipping burgers and earning minimum wage; the same is increasingly true in Asia. Today, many of these individuals are multimillionaires because of the opportunity McDonald’s gave them to buy one or multiple franchises and become successful small business owners.

Franchising is also useful if individuals wish to enter a market where they need greater support. Today in the U.S. many hotel and motel franchisees are Indian nationals from the western Indian state of Gujarat. The ability to buy a franchise aided these individuals as they sought to establish businesses in a country in which they were unfamiliar with all of the cultural and business intricacies neces- sary to be successful. They were also able to bring family members to the U.S. to work in their new properties, often saving money in labor costs and supervision.

Mergers and Acquisitions One of the most common means by which to enter a new market is through mergers and acquisitions. Mergers and acquisitions were discussed in Chapter 4. Recall that a merger is a transaction involving two or more corporations in which only one permanent corporation survives. An acquisition, on the other hand, is the purchase of a company that is completely absorbed as a subsidiary or division of the acquiring firm. Mergers and acquisitions are not mere linkages between firms—they create permanent changes to the structure of the firms involved.

The control an acquiring firm obtains in a merger and acquisition is far greater than in an alliance because there are no partners that must be consulted. However, the fact that the firm is acquiring an ongoing entity results in pre-established structures, policies, procedures, and culture also being obtained. Thus, an acquisition can act as a turnkey operation—that is, the firm can enter the market immediately with a ready-made operation. However, if the firm wishes to change its structures, policies, culture, prod- ucts, etc., it will take time and considerable effort. Government regulations may not allow large numbers of employees to be laid off, so changes in the firm can be difficult to obtain, particularly changes in its culture. As has been noted before, culture in a business can be particularly hard to change. For example, if an existing firm has had difficult relationships with workers and their union, those ill feelings will not disappear with the

Turnkey When a firm can enter the market immediately with a ready-made application that allows the firm to start doing business immediately.

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merger or acquisition. In fact they often get worse. Thus, a firm has great control, but is limited by the pre-existing nature of the acquired firm. In summary, recall from Chapter 4 that most mergers or acquisitions are not successful even when both of the merging firms are from the same country. An international merger or acquisition adds another complication that must be overcome by the merging parties—consider the Daimler-Chrysler merger that was wrought with problems for years before ultimately failing.

Greenfield Ventures A firm that builds a wholly owned subsidiary from the ground up is building a greenfield venture. This type of venture is the most difficult to pursue, but gives a firm the greatest control because it is able to design every detail of the business. In a greenfield venture a firm inherits nothing that it does not want; contrast this to a merger and acquisition where an acquiring firm inherits the acquired firm’s structure, culture, policies, and procedures. The fact that a firm develops the project from the ground up means that it builds its own culture and structure.

It is difficult to build a greenfield venture because a firm must do everything on its own. Typically, the cost of such development is quite high and the venture also has greater risk since it must enter a country and build its brand and various stakeholder relationships. But there are times when it can be useful. For example, if a firm were to enter a transition economy like Poland or Bulgaria it might use a Greenfield venture since the business will likely need to buy a former state enter- prise that is being privatized. This existing firm may have a brand with value, but the factory itself is most likely old and outdated. In addition, employees have a culture nurtured in a socialist environment that might be difficult to change. If there is a union like Solidarity in the facility at the time of purchase, employees cannot be laid off without the union’s involvement through negotiation. By con- trast, it would typically be easier to create and grow a business in a transition economy through a greenfield manner. A prime example of a firm that has done this quite successfully is the French firm Carrefour, the second largest retailer in the world. Carrefour entered the Polish market by establishing a new wholly- owned venture, and now is the second largest grocery chain in Poland. (Carrefour has since bought 27 supermarkets in 2001 and 13 hypermarkets in 2005, but its initial entry into Poland was as a greenfield venture. It built a knowledge base and organizational systems in the country before pursing mergers and acquisitions.)

The keys to success for a greenfield venture are patience and adequate support by a corporation. The firm will have no one else to call on for support, and the building process will take time. Thus, a firm must have the resources and the commitment necessary to build a business over the long term. This approach will allow a firm to have strong control over a venture and to establish the new business to precise specification.

Wholly Owned Subsidiary In addition to understanding the different means to enter a market, a concept that also needs to be understood is the organizational outcome of some of these efforts. Organizationally when a firm moves into a new international market through a merger or acquisition or a greenfield venture, it can make the resulting entity part of the existing firm. Alternatively, a firm may wish to create a wholly owned subsidiary. A wholly owned subsidiary is an organizational form that focuses strictly on the country in which the organization has entered.

Where to Enter A firm may be clear about which benefits it wishes to achieve but it still may have a wide variety of nations to choose from. As a result, the firm may look to other economic concerns in making its decision. These include:

Greenfield venture A firm may choose to establish itself in a given country without the aid of a partner.

Wholly owned subsidiary An organization form where the parent owns the local firm completely; typically the organization would focus only on the country in which it had entered.

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• Transportation costs: Transportation requires the presence of an infrastructure so that a firm can ship products produced from an international facility. Thus, whether roads or shipping are readily available can affect not only cost but timeliness of the delivery of the good. A related issue therefore is the location of major customers that the international facility will service.

• Tax and government incentives: Taxes can play a critical role in the profitability of a firm. Governments often offer firms not only hard assets, such as land, but also concessions, such as tax reductions, if a firm locates in that nation. Governments do this because attracting a new firm will create job opportunities for their citizens. As noted in the discussion of transfer pricing in Chapter 5, the tax rate can in fact be a major factor in choosing where to locate a facility. A good example Microsoft, which has located its major European operations in Ireland. The Irish tax rate is 12 percent on profits versus the European average of 25 percent. The European Union assures equal access to all of Europe so Microsoft’s Irish location assures a much higher profitability for the firm. Microsoft is not unique in using Ireland in this manner; other technology-intensive firms, such as Intel and Johnson & Johnson’s Janssen Pharmaceuticals unit, have also located there, in part due to the tax incentives.

• Labor quality: Labor quality around the world can vary widely. Simply because someone is called an electrical engineer does not mean that he or she has the skills that a typical graduate in North America or Europe may have. At the same time, in some settings, labor is both much cheaper and as well trained as in the United States or Europe. Therefore, in selecting a location, a firm must understand the true qualifications of a country’s workforce and whether the labor supply will be sufficient. To illustrate, there has been an explosion of auto manufacturing in Slovenia. The workers are very well trained and motivated, and there was a tremendous cost savings for firms moving there. However, there are now far too many firms chasing too few well-trained workers in Slovenia. The result is a labor shortage of workers with the necessary skills and rising wage costs for those workers that can be hired.

Organizational Learning Firms may want to locate in a country or region from which they can learn from excellent suppliers or demanding customers. Fish and Co., the Singapore franchisor of ‘‘seafood in a pan’’ restaurants around Asia, plans to open a

A greenfield venture—a wholly owned subsidiary built from the ground up—is the most difficult type of venture to pursue but also offers the greatest control.

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single restaurant in New York’s Times Square. While it is a bit unconventional for a franchisor to open just a single restaurant in a country—franchisors typically benefit from promotion and scale of economies that accrue from regional concentration—Fish and Co. seeks to learn from the large and dynamic casual dining market in the U.S. The founder, Mr. Ricky Chew, has stated that he recognizes the U.S. as the leader in casual dining, particularly in terms of a restaurant’s abilities to deliver quality service from entry-level employees along with a good quality of food and environment. He also points out that U.S. consumers are very discerning about mid-range priced casual dining and will handsomely reward a quality restaurant chain—or effectively demolish the reputation of a firm that fails to provide value or gives poor service. Chew wants to learn from the toughest customers and compete with the best competitors in casual dining, such as Panera Bread, Red Lobster, Olive Garden, and many other specialty restaurants.

Overall, the selection of a country in which to locate is a balancing of a firm’s various concerns. The difficulty is ensuring the firm makes a thorough and complete analysis of the tradeoffs involved and matches them with the firm’s goals. The firm, in conducting such an analysis, must recognize that its bargain- ing power to obtain any benefits from the government, such as training of employees or tax abatements, are at peak levels when the firm is thinking of locating there. Once a firm makes a major investment in capital assets, its ability to leave is reduced, as is its negotiation ability.

INTERNATIONAL ENTRY CYCLE

We discussed previously that a risk–reward relationship is present in interna- tionalization, just as it is in all other business activities. As risk goes up so does the potential reward. Early research in international management argued that most firms go through a progression of steps as they move to become

DOING BUSINESS IN MYANMAR

Firms must decide if they are willing to enter and do business in a nation even if the nation is not considered a good member of the world community. Myanmar was formerly known as Burma. That country’s elected leaders were overthrown in 1962 by a group of generals who wanted to form a distinctive Burmese path to socialism. Since that time, Burma has been ruled by a repressive military dictatorship, and the generals in charge have enriched themselves while brutally suppressing any effort by the people to return to democracy. There are widespread accusations of the use of slave labor and suppression of minor- ities. Democracy demonstrations in the late 1980s were sup- pressed with thousands killed. In 2007, the poverty and repres- sive totalitarian leadership contributed to another round of large protests demanding the loosening of political and eco- nomic controls. The Myanmar government responded by killing a large number of protesters and even brazenly shooting a Japanese journalist—a killing that was witnessed by tens of millions on international television and over the Internet.

Opposition to the military dictatorship is led by Aung San Suu Kyi. Her father was one of the founders of modern Burma, so her status and high profile has allowed her to avoid the most repressiveactionsof thegovernment, but SuuKyi hasbeenunder

house arrest for much of the past two decades. In 1991, she was awarded the Nobel Peace Prize for her efforts to peacefully return Myanmar to democracy.

Today, there are widespread prohibitions against U.S. firms conducting business in Myanmar. The result has been that almost all U.S. firms have now withdrawn from the country. But European companies are only limited from investing in a few state-owned enterprises. Myanmar has many valuable natural resources. Firms from Mainland China are actively investing in Myanmar because China’s government has few prohibitions and, in fact, encourages its firms to locate there.

The difficulty for a European firm is that there appear to be many business opportunities there. Additionally, although the laws do not prohibit investment in Myanmar, some reg- ulations discourage full activity there. However, Myanmar’s government is clearly a repressive one whose human rights abuses are notorious and numerous. The difficulty for a firm therefore becomes how to balance these non-quantifiable concerns as it considers entering a market. As firms increas- ingly expand to emerging markets, such concerns become more widespread and paramount to determine.

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international. A firm starts as a domestic firm and slowly builds up to being a truly international competitor. (This is an idealized model, as a number of firms go international quite early based on the demands of its industry to seek the needed labor and clients.) At each step, as a firm gains more confidence about its ability to operate successfully in different international markets, it takes on more risk and accordingly has the opportunity for more reward. Next, we will cover the typical steps in the internationalization process.

Firm Starts Only in a Domestic Market Most firms based in large continental markets, such as the United States or Brazil, will focus on the domestic market and not pursue any international sales. Even large multinational firms, such as Cisco, began with a focus on selling their products in the domestic U.S. market. Focusing on only the domestic market is less common in areas like Europe. The European Union has resulted in most individuals thinking of themselves as European and less as citizens of a given country. Thus, firms in Europe frequently start with a broader vision of who they are and where they need to compete. The manner in which Europeans define where they compete is also affected by the fact that nations in Europe are geographically close to each other. For example, it is less than an hour’s train ride from Bratislava, the capital of Slovakia, to Vienna, the capital of Austria. Thus, conceptualizing a business in Europe is often not done with a given national market in mind.

Firm Becomes Aware of International Opportunities During this stage, sales will arise internationally without a firm’s active effort. The firm does not seek out sales, but if the product is good, individuals from other nations will approach the firm and ask to buy it. For example, the first Volkswagen cars came to the United States with returning military families in the 1950s. As other individuals became familiar with the cars, they actively sought out Volkswagens. Thus, an international demand developed for the car initially. The risks to an internationaliz- ing firm at this stage are low—the payment check may not clear from a foreign party, or the product may be lost in shipping. However, consistent with the low risk, the returns are not high. The return on a given product that is sold internationally at this stage may be high but the quantity typically remains quite low.

Firm Enters a Market in a Small Way As demand increases, a firm begins to try to serve that demand. The first means is typically through licensing. Risk at this stage remains low because the firm has limited liability if things go wrong. A party in an international market pays a licensing fee and has total control of the product. The danger for the firm licensing the product is that it may be used or sold in some manner that is not consistent with the firm’s strategic posture. However, the licensing firm gets money from the license and has limited liability if the person or firm buying the license fails. Thus, the risk is increased for the firm, but the amount of revenue typically also increases. For example, the 7-Eleven brand of convenience stores is a common brand in Japan and many other countries and offers an interesting illustration of licensing. A Japanese firm bought the license for 7-Eleven’s nameplate relatively cheaply. Today 7-Eleven operates more than 10,000 stores in Japan and Hawaii, and has approx- imately 7,000 other stores in other areas outside of North America. In an interesting twist, today the 7-Eleven Corporation in the United States, which originally pro- vided the license to the Japanese firm, is now majority held by Seven & I Holdings Co., a wholly owned subsidiary of Japan-based retailer Ito-Yokado Co., Ltd.

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Firm Builds International Confidence and Commits More Resources Typically, as sales increase, a firm will next try to export goods through an alliance, such as a joint venture. In this setting, a firm has greater initial investment and the joint venture cannot be abandoned without incurring some costs. There are also costs to arrange and fund a venture. However, a joint venture affords a firm more opportunity for export. The firm, for the first time, has individuals on the ground in an international location that understand the market. This should lead to sales and profit increases for the firm. In the prior stage of licensing, the fee earned is the same if the party who buys the license sells a lot or a little. But now the firm expanding internationally will directly benefit from increased sales in a joint venture. Thus, the firm is making a greater commitment to the international market and taking on greater risk, but should also be reaping greater value.

A firm, after having had success exporting through a joint venture, may choose to build manufacturing facilities through another joint venture. This will involve greater investment than a marketing joint venture but there is a benefit to the firm from increasing sales, since the firm now has the ability to take better advantage of the local demand faster and will be closer to those consumers.

Wal-Mart today is the largest retailer in the world. It is also one of the largest international retailers in China. It is estimated that by 2010 the firm will have 150,000 employees in its stores and warehouses in China alone. Wal-Mart has pursued much of this expansion in China through joint ventures, though this may change with the recent relaxing of China’s retail regulations allowing foreign retailers to own their own stores.

Firm Builds Own International Facilities Once a firm has had success in an international market from an international joint venture, it may try to develop its own network of distributors and market its goods itself. However, it is likely that the firm will ultimately face increasing levels of competition. In all market economies, even inefficient ones, such as those in transition economies, success draws other firms seeking to do the same thing. (Recall the earlier discussion of sustainable competitive advantage in Chapter 4.) As a result of this competition, the firm often seeks to open production facilities and other operations in these markets in order to serve those markets. This market presence will also typically allow the firm to cut costs because, at a minimum, there are no shipping costs. However, if labor costs are considerably lower in that given market, this may also allow absolute costs to be cut.

Initially, a firm will staff its business with individuals from the home country, but often it will quickly put in place individuals from that country in an effort to save costs. As a firm builds more operations in foreign markets and staffs them at senior levels with locals, it moves closer to becoming truly international. The costs and risks likely will increase as the firm’s international commitment rises but so will the rewards. It is for this reason in mature markets of the west that the greater the international diversification of a business, the greater its profitability. For example, Samsung builds its own facilities around the world and employs a wholly owned subsidiary model as it expands across the world today. Samsung Electronics India is a wholly owned subsidiary of Samsung Electronics.

Firm Becomes Transnational Many businesses develop international aspects but few businesses move to become a special category of international business that management professors Bartlett and Ghoshal called a transnational firm in their 1989 book titled Managing

Transnational firm In this type of firm the business assets are highly specialized, but interdependent with the other assets of the firm. The contribution of each nation is integrated with the worldwide network of businesses to provide to the whole the benefits of that nation. Knowledge developed in any unit is shared worldwide within the business.

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across Borders: The Transnational Solution. This type of firm has a high degree of internationalization and all the various assets of the business are interdependent. In this setting, each nation’s contribution is integrated with the worldwide net- work of businesses to provide a rich set of benefits to the firm. Knowledge developed in any unit is shared worldwide within the business. Thus, a firm is not just internationalized, but coordination among the various units across borders has reached a far higher level than most businesses ever achieve.

One distinguishing characteristic of a transnational firms is its large size and the large number of countries in which it is active. To achieve the integration that typifies a transnational firm, a business must draw on resources from many countries and units. General Electric typifies a transnational firm, with revenues that are more than the national incomes of all firms in sub-Saharan Africa com- bined, except for South Africa. The top 300 largest transnational firms control over 25 percent of the world’s productive assets. Transnational corporations, as a group, control an estimated 90 percent of the world’s patents. Thus, transnational corporations are a major force in the world economy. To illustrate how diverse such firms can be, examine Figure 6-3, which lists the various products of the Swiss firm Nestlé and the markets in which it is active.

Because of their size and influence, many countries and individuals look to transnational corporations for high levels of corporate social responsibility. For example, CFCs are pollutants associated with damage to the ozone layer. CFCs were commonly used in air conditioning coolant units. The Treaty of Montreal called for the elimination of these pollutants and they are now largely unavailable. Prior to that treaty, E.I. DuPont de Nemours and Co. produced an estimated 25 percent of the world’s CFC pollutants. As a result, DuPont was an active target and participant concerning CFC elimination. After DuPont developed a substitute for CFCs, it was willing to support the treaty, which was enacted. The 20 largest pesticide corporations control 94 percent of that world market. As a result, these 20 firms are a regular target by activists concerned with pesticides.

Overview of Classic Internationalization Model A firm takes small steps in moving into an international market. It learns more at each stage about that market and how to compete in the market. As it learns more, the firm begins to assume more and more risk and do more of the activities itself. Figure 6-4 summarizes the typical steps in the internationalization process.

A Born Global Business Some firms start out doing business internationally and do not follow the pattern outlined above. Often these are technology-focused firms, where global demand for the firm’s products is so small that if it relies on any single national market, there is insufficient demand for the firm to survive. Thus, these firms have to enter the global marketplace. This specialized set of entrepreneurial firms are called born global because these entrepreneurial firms are global from day one.

Such a firm does not build an understanding of international markets over time. Instead it establishes the firm with different activities occurring in different coun- tries. For example, in the computer hardware industry, a global firm may choose to have its production facilities in China, its research and design operation in the U.S., and its marketing in Europe. The firm does this from the first day of its operation. The growth of born global businesses has increased in recent years. The ability to communicate instantly has tremendously aided in this process, as has the establish- ment of services such as overnight shipping. For many technological domains, the life cycle of businesses and market demand is such that the firms need to instantly

Born global Entrepreneurial firms that are global from their inception.

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reach all potential customers. These customers may be small in number, but will pay a premium to obtain the product quickly to be on the cutting edge of the change.

MARKET ENTRY EXECUTION

A firm, as it selects in which manner it wants to enter the market, will need to operationalize those plans. A variety of issues affect operationalization. Many of these concerns are discussed in more detail later, but they deserve some mention here. These concerns include planning for the entry, timing the entry, integration

Various Nestlé BrandsFIGURE 6-3

Country Category Products or services

Australia Appliances/ Electronics

Coffee-capsule machines

Belgium Food Chocolate bars, coffee, cereal, chocolate, candy, ice cream, toppings

Belgium Equipment Coffee makers

Spain Food Water, baby food, chocolate bars, coffee, cereal, chocolate, ice cream, pasta, prepared dishes, salsa, soup, yogurt

Spain Miscellaneous Pet food

Spain Equipment Coffee-capsule machines

United States Appliances/ Electronics

Coffee-capsule machines

United States Groceries Baby food, cereal, chocolate bars, chocolate, coffee, cooked food, ice cream, pasta, sauce, soup, water, yogurt

United States Miscellaneous Pet food

France Food Chocolate bars, coffee, coffee grain, cereal, delicatessen, chocolate, candy, mineral water, melted cheese, ice cream, cooked ham, milk, sauce, prepared dishes, fruit, sausage, popsicles, yogurt

France Various Pet food

France Equipment Coffee-capsule machines

Italy Food Vinegar, water, juice and soda, toast, cocoa and chocolate, coffee, caramel, cereal, ice cream, baby food, snacks, pasta, frozen dinners, salsa, vegetables, yogurt

Italy Various Pet food

Italy Appliances/ Electronics

Coffee-capsule machines

United Kingdom Appliances/ Electronics

Coffee-capsule machines

United Kingdom Groceries Baby food, cereal, chocolate bars, chocolate, coffee, cooked food, ice cream, pasta, sauce, soup, water, yogurt

United Kingdom Miscellaneous Pet food

Switzerland Food Chocolate bars, coffee, cereal, chocolate, candy, ice cream, sauce

Switzerland Equipment Coffee-capsule machines

Source: Transnational.org (http://www.transnationale.org/fiche/-160548548.htm)

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of merger and acquisition firms, and special issues for the implementation of joint ventures. Each of these concerns is discussed in detail in the following few sections. There would be a high degree of overlap in all types of entry-mode implementation if each were discussed specifically.

Planning Entry Planning plays a critical role in the success of any market-entry attempt. The planning process will be more successful if it involves greater numbers of individ- uals throughout an organization. These individuals should not only address what is needed to make the market entry successful, but how the market entry will be conducted and why the market entry is necessary. A bias of the strategic manage- ment perspective employed in this book is the belief that involving more individ- uals in conceptualizing and thinking about problems and situations that face the firm generates more insight into the problem.

This process will also generate organizational commitment by managers in the acquiring firm. Success in market entry is often the result of the process pursued, rather than whether the strategy was correct. If incumbent managers in an acquir- ing firm do not believe that the market entry is a good strategy, they may withhold support and not be fully committed to it. This does not mean the managers will be actively trying to sabotage the market-entry effort. Instead, if they are not fully educated about and committed to the process, individuals can act in subtle, unconscious ways that detract from a venture’s success and that ultimately can lead to its failure. Therefore, planning for a market entry can help educate man- agers as to why the venture is critical, how it will affect their given unit, and develop ways that the organization can ensure the venture’s success.

Accurate planning also helps from the perspective of those in the acquiring firm. Before an acquisition, the acquiring firm needs to consider how things such as the compensation system, retirement plan, and health care will be handled. To illustrate, it is difficult for a firm to maintain multiple retirement systems with different salary percentages going into the retirement system. But changing the retirement system can have a big impact on the long-term plans of individual employees. Similarly, it is stressful for an acquired firm’s employees to wonder what might happen after the merger or acquisition goes through. If a firm cannot relieve the stress among employees quickly on these issues, such hostility and opposition to the acquisition may build up among employees of the acquired firm that the poisoned environment will prevent its ultimate success. Planning can help overcome such problems.

Internationalization ProcessFIGURE 6-4

Establishment of international

production facilities

Joint ventureLicensing

Some international sales without specific

efforts by the firm Transnational firm

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An acquiring firm also needs to identify which employees it wishes to retain in the acquired or merged firm and what their authority will be in the new entity. One of the key resources in a business is its employees. However, the best employ- ees in almost any situation have multiple job opportunities. If an acquiring firm cannot quickly relieve these employees’ concerns, they may seek other employ- ment rather than face the risk of losing their jobs. Thus, the international firm can find that it has lost some of its key people if a plan to reassure those key employees was not put in place.

Often, in a merger or acquisition, there are layoffs and restructuring in the firm that is taken over. As noted before, in many nations these layoffs require the permission of the government. A firm should analyze what restructuring is required and obtain government approvals before sealing the deal. Often a gov- ernment is willing to approve such restructurings if a firm is on the verge of closing (or if the government is privatizing its firms). However, once an interna- tional firm invests its money, it has less negotiating power and less ability to obtain quick approval from the government.

The planning process ultimately creates parameters that are the bases for judging the progress and success of a merger or acquisition. Careful planning can help to eliminate many potential problems that can arise in a merger or acquisition on both sides of the venture. Here we have discussed the benefits of planning in terms of mergers or acquisitions. However, these same benefits apply to all types of market entry. The tendency of many managers is to focus on finalizing the deal. However, thorough planning before, during, and after finaliz- ing the deal in all types of market entry is what produces success for the firm. The American Motors (AMC) and Beijing Jeep joint venture example (see the vignette at the beginning of this chapter) is instructive regarding a firm failing to plan carefully for a market entry, particularly into a complex market such as China’s. There were several problems with American Motors’ planning for that venture. First, the venture was rushed as they wanted to announce it quickly. This gave American Motors’ stock a very healthy boost at that time, but the two joint venture partners failed to agree on a number of key terms up front, hoping that they would somehow be worked out over time.xviii

For example, AMC wanted to use China as a low-cost production base to export around the East Asian region, as well as capturing market share in China’s emerging auto market, while its partner, Beijing Auto Works, sought to learn AMC’s Jeep technology and produce a new Jeep for China’s People’s Liberation Army (PLA). A number of human resource issues were also left unresolved by the initial planning and JV agreement. For example, the division of powers for Beijing Jeep was not well specified, and the costs and living arrangements for the North American expatriates were not well planned or understood. When AMC account- ants back at headquarters in Wisconsin could not figure out why clothing cleaning bills were so high, the expatriate staff explained that they were sending clothes for hotel dry cleaning. The accountants countered that surely somewhere in Beijing there must be a Laundromat, but in actuality, there were almost no laundromats in Beijing in 1983, nor probably anywhere else in the country at that time.xix Beijing Auto Works also insisted that its management get the same salaries as the AMC managers, but the money would not be paid directly, because it was being diverted to a special fund for distribution by the Chinese partner as they saw fit. AMC did not plan for other issues, such as import and export permits, hard currency shortages, and problems with local government officials and Communist party cadres, who interfered regularly with company operations. As noted earlier, the venture was saved only through intervention at the highest levels of the Chinese government. Firms hoping to enter emerging economies today have learned much about the planning and preparation required and about problems with supplies, labor markets and government officials, although spectacular

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oversights continue to be made by firms from developed economies that have failed to study and learn from these case histories.xx

Timing of Entry A key part of planning an entry is considering the position of competitors. There are benefits to entering a market earlier rather than later. The first firm into an area is typically referred to as a first mover. Alternatively, sometimes they are referred to as pioneers. This term applies whether a firm is the first into a new geographic area or country, or has a new product that is the first in a domestic market.

A first mover is able to develop an understanding of a market before any other firm. It is also able to connect with distributors, suppliers, and customers and develop relationships that may be difficult to replicate. For example, almost all the leading Internet firms today were the first significant firms in the domain. Amazon was one of the first and is the dominant Internet book retailer. If you go to a search engine like Google and plug in ‘‘books,’’ you will find thousands of firms that sell books online. How has Amazon been able to maintain its position? The fact that Amazon was the first major online bookseller allowed it to be established in custom- ers’ minds as synonymous with Internet book sales. The very fact that there are so many other firms that sell books actually helps Amazon, because the greater the clutter, the easier it is for customers to simply go with the firm they know, Amazon.

Those that come after a first mover are called second movers or fast followers. Typically those that quickly follow a first mover and those that enter the market at a much later date are differentiated. There are times when moving quickly into a market after the first mover, called a fast second, is the preferable position.xxi A first mover may need to educate consumers about the product extensively, and this cost may make it impossible for the firm to move and take advantage when the market begins to develop.

For example, consider containerized cargo, which is loading and offloading a whole ‘‘truck container’’ rather than individual boxes to and from trucks and trains. This is the method used by almost all shipping companies today. Cargo is packaged at a factory into containers that can be pulled by the semi trucks that are on the highways of most countries. Large cranes at a dock then load these contain- ers onto a ship. Then the containers are unloaded by cranes at the port of arrival and transported by truck to their destinations. Prior to the development of this

NEGOTIATIONS AND MEETINGS IN DIFFERENT SETTINGS

The AMC Jeep example highlights the importance of reach- ing an understanding with your partners and not leaving too many key issues unresolved. But reaching such an understanding can be difficult in many situations because business meetings may not operate in the same manner as could be expected in North America.

Business people from North America may be surprised to find that meetings in Latin America or the Middle East can be interrupted a number of times by local managers taking phone calls, or people coming and going. The indi- vidual’s view in these settings is that their time and attention are not limited to the individuals in the meeting with them. It could be said that the individuals are interrupted because they are so busy. This same attitude will affect individuals shopping for a major purchase. A salesperson will be visit- ing with the customer when suddenly another customer will

walk up and start talking to the same salesperson, interrupt- ing and stopping, for the time being, the first customer’s discussions with the sales clerk. The interruption does not mean the meeting or sales effort is over, but is seen as simply a temporary interruption.

One means to overcoming this difficulty in the Middle East is to meet the person you want to talk to in one of the many high-quality hotel lobbies. The lobby will have numer- ous large comfortable chairs and sofas on which to sit. You should also be able to order tea and light appetizers. This setting can gain the person’s full attention (perhaps apart from their mobile phone interruptions). You also have a more relaxed environment for your discussions. Note that in ordering drinks, it is best to order tea or soft drinks, as observant Muslims do not drink alcohol, nor is it readily available in many Middle Eastern countries.

First mover The first firm into an area, whether a product or national market. Sometimes multiple firms can enter a product market within the same year and are usually considered multiple first movers.

Second movers Those that follow the first movers into a market.

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method, loading and unloading goods onto a ship was performed by human labor, and was expensive, dirty work. Losses of goods at shipping docks were extensive and organized crime was notoriously active in these areas because criminals had access to so many goods with ample opportunity to steal them. The advent of containerized cargo significantly limited the amount of shrinkage (the loss of goods due to stealing or breakage) and made the process literally 20 times more efficient than it was in the 1960s, significantly driving down the cost of shipping and facilitating global trade.xxii Today, large cranes loading containers on and off ships are standard. The ships they load, in fact, often look more like floating platforms rather than our traditional image of a cargo ship.

While containerized cargo was a great innovation, the firm that was the first mover and pioneered the concept went bankrupt and was never able to take full advantage of the development of the industry that it helped to create. The firm spent all its efforts educating individuals about the potential and helping to set up the system that exists today. It was the fast seconds that took advantage of the industry as it developed.

Some firms enter a market after others are established. These firms are called followers or late entrants. Typically this is not a profitable place to be in an industry. However, if customers have low low brand loyalty and primarily are driven by price, a late entrant can have a desirable position. A late entrant can take advantage of the technological progress that has already occurred and manufac- ture a product in the most efficient manner, since it builds its production and distribution on prior learning from other competitors. To illustrate, in many emerging economies the average income is still quite low. Many Western firms have gone into these markets quickly as first movers and established effective product markets based typically on charging a premium price for their goods. A late entrant, however, is able to come in, learn from the first movers, and sell goods at lower prices. This is true in a variety of industries, such as computers, in which firms such as Dell historically were not active in emergent markets but have lately begun to expand aggressively in some of those markets. Figure 6-5 summarizes the benefits and risks of different timing strategies for international market entry.

Different Market-Entry StrategiesFIGURE 6-5

Entry strategy

Description Benefits Risks

First movers, pioneers

Those firms that are first into the industry or nation.

Those industries and nations that have high customer loyalty. The ability to build relation- ships with suppliers and customers can be highly valuable and result in a defendable competitive advantage.

Those industries or nations with low customer loyalty. The customers will shift to lower-priced competitors quickly once they enter the mar- ket. Thus, your costs of establishing the market are hard to recover.

Costs of education about the product can be so high that a firm does not have the cash to actually be able to then reap the benefits of customer demand when it arises.

Early followers

Those firms that follow on the heels of the first mover.

An early follower can benefit from the educa- tion of the market done by the first mover.

Additionally, an early follower can learn from the mistakes of the first mover and avoid the cost associated with those mistakes.

If customer loyalty is very high, critical rela- tionships may be established and a barrier to entry into the market already established.

Late entrants

Those firms that enter the market— whether it be a nation or product market—after it has become established.

A late follower has a low risk due to market uncertainty.

Competition is based on cost and it may be difficult to be profitable.

Shrinkage Loss of goods due to stealing or breakage, often in a retail store.

Late entrants Firms that enter a market after others are clearly there.

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It is important to note that, as in the case of differentiation and low-cost business-level strategies, it is possible to have successful first movers and late entrants in the same industry and in the same international market. These are not mutually exclusive concepts for success. Instead, firms must identify the appropriate market entry strategy for the firm and its products.

Integration M&A An entry issue specific to a merger and acquisition is integration of the two firms. A firm must act quickly to blend the two organizations. It was noted before that planning is critical. In planning for an M&A, a firm must perform extensive due

THE BEER INDUSTRY IN CHINA

The entry cycle must consider the goals of firms at different stages of an internationalization effort. It was noted that firms often start with limited actions in a given foreign country and then, as they learn about that country, they invest more and more in it. The Chinese beer market demonstrates the risks of not pursuing such a step-by- step learning process in a foreign market. The beer industry around the world is very mature with rather slow growth. However, in China it is growing steadily. Between 2005 and 2006, beer consumption was up an estimated 15 percent in China. Yet Chinese people drink, on a per capita basis, less than 20 percent of the beer that Americans do annually, and even less than Europeans, arguing for even more opportunity in the China market. The potential market growth is even greater if you consider that beer con- sumption along the coast is twice as high as it is in central and western China. In addition, consumption in urban areas is four times the average consumption in rural areas. Thus, as the Chinese society grows richer and there is greater dispersion of income, it is likely that beer consumption could expand significantly, particularly in the poor (but growing) western regions of the country.

Today, the beer industry is highly fragmented in China. Unlike mature mar- kets, where consolidation has resulted typically in a few major companies in each country, China’s beer market has over 800 breweries, with the top 25 brewers having less than 50 percent of the market. Contrast this with South Korea, where the top three firms control

99% of the market. But China is a patchwork of local breweries where local brands dominate. This highly frag- mented market has attracted many inter- national brewers into China.

In the early 1990s, manymajor beer brands sought to enter the China market and build a national presence. The result was that by 2000, major brands active in China included Anheuser-Busch, Hei- neken, SAB, Carlsberg Interbrew, San Miguel, Kirin, Lion Nathan, and Foster’s. Each believed that its economies of scale and superior technology would allow it to dominate the market quickly. The only firm that turnedout tobehighly successful was Anheuser-Busch, which for $1/2 billion and 10 years of effort was able to build Budweiser as China’s high-end beer, amuchdifferent position than it has the U.S., where it is a mid-market beer. Others largely failed because China’s distribution system is so arcane. Individu- als from small stores or restaurants come to the factory on a bicycle wanting to buy a case or two. There are no mass distri- bution channels that work well with mass production. In addition, individuals are loyal to their local brands. Anheuser- Busch overcame these problems by mov- ing early into major cities and selling aggressively in hotels and higher end restaurants, while avoiding the smaller stores. This was quite consistent with its high end positioning strategy—A-B does not want Budweiser’s brand diluted by selling outside of higher end stores, hotels, and restaurants.

Today, firms producing beer have reversed their strategy of building national brands and are instead put- ting together portfolios of local brands. In some situations, brewers will own

the local firm and in others they simply partner with the firm. For example, SABMiller is the world’s second-largest brewer. It started out as South African Brewing but now is listed on the Lon- don Stock Exchange and owns brands such as Miller and the Czech-made Pilsner Urquell. Today, SABMiller has relationships with 30 local breweries in China. These relationships all vary as to the extent of ownership and the impact SABMiller has on operations. In some situations, SABMiller controls the firm outright through its ownership and others are joint ventures.

Inbev, the large Belgium brewer, has pursued a similar strategy. It is now the third-largest brewer in China, with a portfolio of brands that give it 9 percent of the market. These activities include joint ventures with Zhujiang Brewery (the largest in south China), effective control of KK Brewery in Ningbo, and half ownership of Lion Group.

Thus, on the whole, when brewers initially tried to enter China with large operations that mimicked their opera- tions in the more developed econo- mies, they failed. Instead, when they began to enter the market in small steps, viewing the market as a series of smaller markets and strategic posi- tions where greater flexibility was required, they became successful.

Kahn, G., Bilefsky, D., & Lawton, C. 2004. ‘‘Another round: Burned once brewers return toChina.’’Wall Street Journal.March10:A1. Ewing, J. & Webler, J. 2004. ‘‘The beer wars come to a head.’’ Business Week. May 25, issue 3884: 68. Xinhua’s China Economic Information Service. 2005. ‘‘China’s beer output up 15 percent in 2004.’’ March 30.

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diligence on the business being acquired. It needs to have the plan in hand about what individuals, systems, and activities are to be blended and how. A timeline for accomplishing this activity needs to be established. Manulife of Canada, one of the most successful acquirers in the financial sector in Asia, has clear timelines and understandings of how each step is to be accomplished before entering negotiations with another firm. Because of such detailed planning, Manulife believes that it can then take the time to ensure that qualitative things, such as organizational culture, which cannot be necessarily planned and arranged, are focused on. If a firm has not done its planning, it will have to spend time after the merger to focus on things like which retirement system to keep. Through planning, those items can be worked out beforehand and issues such as culture can be focused on after the merger. Key points in implementing a merger or acquisition can be summarized as:

• defining clear objectives • establishing an implementation team • establishing lines of authority for the implementation • identifying key employees and teams to ensure they are part of the transition

and remain with the firm • planning for information system integration • developing a plan for blending the cultures

Joint Ventures Implementation There are also a few unique differences in the implementation of joint ventures that should be mentioned. Most of these differences center on the fact that the two parties are joining together of their own free will and that within the confines of their agreement, the parties can also leave that arrangement. Therefore, typical implementation concerns include:

• ensuring that the parties to the joint venture have shared goals for the joint venture

• making sure there are no ambiguities in the relationship—the time to talk about those issues are before the agreement is signed, not afterwards

• making sure each firm’s strategic position is such that the firm can fulfill its commitment to the joint venture—if a partner firm comes under strategic stress, it may focus less on the joint venture and withdraw its support for the venture

• ensuring intellectual property is protected because a partner today may be a competitor tomorrow

SUMMARY

International market entry is a major decision for firms. A variety of motivations can encourage a firm to move into an international market, including increasing market share; obtaining greater return on investment; protecting intellectual property; obtaining location advantages; or securing access to labor, raw materials, and mar- kets. Any one or multiples of these motivations may be present for a firm. A firm then must determine how it wishes to move internationally—through a greenfield ven- ture, merger or acquisition, joint venture, franchise, license, consortium, outsourcing, or some informal alliance. Each of these has benefits and drawbacks. In a manner consistent with most things in a capitalist society, as the risk of a firm increases so does the reward. Thus, firms will typically start out with a low-risk method of entering a market, such as licensing, and as the firm grows more confident, it may move on to greenfield ventures as the highest-risk, highest-reward type of venture.

A firm must also determine if it wishes to be a first mover, follower, or late entrant. Again, each has it benefits and risks, with an earlier entrant having the

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highest risk/reward potential. Last, a firm needs to choose how deeply it wishes to move into international activities, whether it is a multinational, global, interna- tional, or transnational firm.

All of these choices have their own risks and benefits. However, what is clear from this chapter is that there are a wide variety of choices for a firm. The key in each of these situations is for the firm to make those choices based on its strategic goals and core competencies. Ultimately it must find the right mix for that firm.

MANAGERIAL GUIDELINES

As noted before, many types of market-entry strategies, such as merger and acquisitions, are more likely to fail than they are to succeed. In pursuing market entry, managers are more likely to be successful when they consider the following:

1. Planning is critical to the success of the market entry. The plan becomes a road map a firm should follow in the market entry process. The plan needs to be developed in an interactive manner with a wide range of parties in the organization. This plan will need to be adapted as the setting changes, but it will help the firm not only think of a wide variety of dimensions of the market entry, but also to build organizational support for the market entry.

2. The form of market entry chosen by a firm should match the firm’s tolerance for risk, control, and cost. The different choices of entry represent trade-offs among these three items. A firm should find the right balance for its needs and abilities.

3. Firms will choose market-entry methods that require greater costs and carry greater risks as they develop confidence about competing internationally. Firms should not expect to become transnational overnight.

4. Good preparation is essential for market entry, particularly via joint venture. However, proper preparation is doubly important for entering emerging mar- kets where the rule of law and commercial traditions are not in place.

Many firms are entering emerging economies such as China, Russia, and India. There are clear risks and benefits to entering such markets and Table 6-1 summa- rizes many of those risks and benefits relative to mature markets. In entering such environments, a firm will wish to balance its level of commitment against the risks and expected level of return.

TABLE 6-1 Managerial Guidelines for Market Entry in Mature versus Emerging Economies

Considerations Mature Economy Emerging Economy

Amount of government control Can be high but rules are typically clear Can vary widely but rules are typically not clear

Restrictions on foreign investment

Typically none Can be high and the rules can change rapidly

Availability of lower-cost labor, key inputs, or growing local markets

Growing markets will typically be in high technology domains; other product markets are mature with limited ability to obtain low-cost labor or key inputs.

Demand is typically in domains other than high technology. Market growth in these domains can be very high as individuals obtain basic products for the first time. The cost of inputs and labor is typically much lower than in mature markets.

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TABLE 6-1 (Continued)

Considerations Mature Economy Emerging Economy

Choosing specific locales

• Access to markets

• Availability of transporta- tion and electricity

• Ease of access by interna- tional employees

Cost structures in most firms are such that costs are closely monitored. Additionally, large firms with high economies of scale dominate in many domains. The result is that gaining access to markets can be restricted. Government is typically less of an impediment for most products. Transportation is readily available with trucking, railroads, and air carriers. Elec- tricity is typically readily available at com- petitive rates. Travel and communication are typically only limited by differences in time zones.

Distribution of products tends to be far more fragmented and less rationalized. There are far more points of contact that need to be maintained and serviced, which can make the costs high. The role of gov- ernment can be quite high and can limit access to markets. Transportation can be very difficult with poorly developed highway systems and railways that are typically poorly main- tained. Electricity is often in short supply. Travel and communication are often diffi- cult. Often employees will consider being posted in the nation to be a hardship and even travel to the nation is often resisted.

Production Consideration Increasingly, firms are moving to a global pro- duction framework in which parts of products are produced in different countries and then assembled in another. Mature economies, communication, and transportation support this model. Quality can be as good as in any other location in an emergent market.

Production is typically centered in the given country with as much as possible of a product produced there because of diffi- culties in shipping and integration with production in other countries. Quality can be as good as any other location in a mature market.

Customers Consumers typically have high levels of consumption and low levels of savings.

Consumers typically have low levels of con- sumptionandhigh levels of savings. However, increasingly firms recognize that due to large numbers of consumers being underserved, entering the pyramid at the bottom with lower- cost products can be very profitable.

CULTURE AND DOING BUSINESS IN POLAND

Poland is the second-largest country in Central Europe, after Germany, with a population of about 38 million. Prior to 1990, Poland was a satellite of the Soviet Union, with a communist government and socialist economic system. Since 1990, Poland has developed a vibrant democratic system of government and a free-market economy. Poland joined NATO in 1999 and the European Union in 2004.

The country that exists today was largely reconstructed after World War II. The victorious Allied powers determined that the war had partly been caused by having ethnic minor- ities in different countries. One of Hitler’s excuses for invad- ing Poland, the act that touched off WWII in Europe, was to protect the German minority in the country and return the largely German city of Danzig (Gdansk) to German control. Thus, after the war, the Allies designed Poland to contain all the Poles and few minorities. This involved shifting large amounts of land and many people between countries, with

the result that Poland is now 97 percent ethnically Polish. Poland is also largely Catholic—the Polish identity is closely connected to Catholicism . Thus, in doing business in Poland, there is a need to be sensitive to the importance of Catholi- cism there (Pope John Paul II was from Poland and students still gather outside the window in which he last appeared in Krakow, and say prayers and sing songs at the hour in which he passed away.)

Polish business culture is conservative with individuals being well dressed when they do business. The use of formal titles is also the norm, as it is in most of Northern and Central Europe. The impact of this conservatism is that relationships are very important in business. Individuals need to develop strong relationships in order to conduct business. One side effect of Poland’s communist past is that the government bureaucracy is very strong. Thus, building good relationships with regulators and government officials is advisable for most businesses.

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ADDITIONAL RESOURCES

Carey, D., Aiello, R. J., Watkins, M. D., Eccles, R. G., & Rappaport, A. (2001). Harvard Business Review on Mergers and Acquisitions. Boston: Harvard Business School Press. Galpin, T., & Herndon, M. (1999). The Complete Guide to Mergers and Acquisi- tions: Process Tools to Support M&A Integration at Every Level. San Francisco: Jossey-Bass. Lees, S. (2003). Global Acquisitions: Strategic Integration and the Human Factor. New York: Palgrave-MacMillan. Sherman, A. J., & Hart, M. A. (2007). Mergers & Acquisitions from A to Z. New York: AMACOM/American Management Association. Travis, T. (2007). Doing Business Anywhere: The Essential Guide to Going Global. New York: John Wiley. Yan, A., & Luo, Y. (2001). International Joint Ventures: Theory and Practice. Armonk, NY: ME Sharpe.

EXERCISES Opening Vignette Discussion Questions

1. Why did Chrysler (Jeep‘s current owner) pay relatively so little attention to the joint venture initially?

2. The joint venture initially relied heavily on its relationships with the govern- ment, and it seemed to bring benefits to the firm. Was it wrong to focus on such relationships or should the firm have approached these relationships differently?

3. Based on your understanding of China today, do you think government relationships are as critical as they were initially for Chrysler?

4. What are some of the implementation issues that Chrysler could have focused on early to avoid the problems that arose?

DISCUSSION QUESTIONS

1. What do you think of the pressures brought on transnational firms for issues like pollution? Is it is ethical for political groups to target only those firms or is it done because targeting these firms is politically expedient? Are the concepts of political expedience and ethical business practice mutually exclusive?

2. Over 75 percent of FDI from transnational corporations goes to Asia (partic- ularly China) but only approximately 1 percent of FDI goes to Africa. Is it appropriate to compel transnational corporations to spread their investment more evenly to areas such as Africa?

3. Why do you think born global firms are a recent phenomenon? Will such firms become the standard in international startups?

4. Is there a first mover advantage in most retail businesses?

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IN-CLASS EXERCISES

1. Separate into teams. Half the teams are to envision themselves as technology companies from a mature western economy such as the United Kingdom. They need to negotiate a joint-venture agreement with a Chinese firm to manufacture goods in China. The other teams are to perceive themselves as the Chinese manufacturer.

a. Identify the issues that are of concern to each side of the negotiation. b. Match up a ‘‘Western team’’ and a ‘‘Chinese team.’’ Attempt to come to

agreement on three major issues that each team has agreed are critical.

2. Separate into teams. Assume that half of the teams are representatives of a transnational corporation such as Wal-Mart. The other half of the teams are NGOs.

The NGOs are concerned about the treatment of workers in plants that supply soccer balls (footballs outside the United States). They have found most of the balls are produced by children as young as 5 years old and typically less than 14 years old. Children’s dexterity is much better than adults, so they can produce the stitching needed to make a better ball. The children are paid approximately $1 a day. Wal-Mart says that it simply buys the ball from a wholesaler and is not responsible to do more than provide low-cost goods because the children are not the firm’s employees. The NGO believes Wal- Mart should do more for the children. Prepare arguments for your side and then meet with a team from the other side of the issue. See if there are compromise situations.

3. From the material you covered in Chapter 2 on culture, write down how the management of joint ventures in China, Russia, Poland, and Venezuela might differ. How should a corporation establish common standards for the corpo- ration but allow for such differences to be addressed? Be prepared to present your answers to the class.

4. It was noted that first movers often have a competitive advantage when it concerns Internet businesses. Assume you are an entrepreneur in Latin Amer- ica and wish to start a new Internet book-selling business. How would you be able to differentiate your business and be successful? Write down three ways. Be prepared to present your ideas to the class.

TAKE-HOME EXERCISES

1. Pick a country outside of your own. Identify a franchise available in that country that you potentially would like to own in your country. Does this franchise have many differences from a franchise you know in your home country?

2. Research a firm that you believe is a transnational firm. How many products and countries is it involved in? Has it had a major difficulty in one of those countries that appeared in news reports that would appear to be a culture clash between the culture in that country and the dominant national culture of the firm?

3. Research a firm that has recently announced a joint venture in India or China. What is the nature of the firm’s partner in the joint venture? Why do you think this firm was chosen as a joint venture partner?

4. Research an international merger or acquisition that has been criticized as ultimately not being successful. (If you go to a search engine and put in terms like international merger acquisition failure you will get lots of potential firms to look at.) Why do you think the merger or acquisition failed? Is there any way to have prevented the problems?

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SHORT CASE QUESTIONS The Beer Industry (p. 189)

1. What are the implications for other businesses of the concentration of the wealth in China in coastal urban areas?

2. What will be the implications for businesses such as SAB as the China market matures?

3. Why do you think that international brands such as Foster’s Beer were not more successful in their market entry?

195International Market Entry

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7 MOTIVATION

Overview

Prior chapters addressed the overall elements of a firm, such as its industry and the culture in which it is was located. But now it is time to start to examine how a firm manages people in different settings. Important among these issues is motivation, which encourages people to reach high levels of work performance. Motivation is problematic in international settings because how people are motivated can vary by region of the world. For example, recall from Chapter 2 that culture affects basic issues, such as whether individuals place more emphasis on financial rewards or their lifestyle. This fundamental difference will in turn affect what motivates individuals.

This chapter will review the major theories of motivation, their implementation, and effect. These theories were primarily developed in North America and are reviewed from that setting. We then explore how motivation changes as we apply those ideas in a international setting. The theories will be separated based on whether they princi- pally see motivation as something internal to the individual (content theories) or as part of process (process theories). This chapter examines:

• content (need) theories of motivation:

Maslow’s hierarchy of needs Alderfer’s ERG Herzberg’s extrinsic and intrinsic motivators McClelland’s theory of learned needs

• process theories of motivation

expectancy equity goal setting

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Previous chapters looked at outside factors that affect a business internationally. We now begin to look internally at issues a firm must deal with as it manages in an international setting. The most difficult tasks in international management concern people. One of the key areas firms must focus on as they internationalize is motivating a wide range of people in different settings to do their work well. In

Attribution error Occurs when people try to determine cause and effect in their lives and make incorrect assumptions about what actions led to particular situations.

VIRGIN ATLANTIC, RICHARD BRANSON, AND WHAT WORKERS WANT

Richard Branson did not graduate from a university. Yet today he is one of the richest people in the United Kingdom, and his business interests include over 250 different compa- nies. Best known are his music retailer, Virgin Music; his telecommu- nications firm, Virgin Mobile; his insurance, financial planning, and credit card retailers, Virgin Money; and the second largest airline in the United Kingdom, Virgin Atlantic.

In each of these firms, Sir Branson (who was knighted by Queen Eliza- beth II for his business accomplish- ments) has often overcome critics who said he could not be successful. A key part of the success is Branson himself; he is the quintessential entre- preneur and will do whatever is nec- essary to make each of his efforts suc- cessful. For example, Branson donned a wedding dress to promote the start of the bridal retailer Virgin Brides. However, another key success factor is his employees and their motivation in working for the companies.

Branson has always seen people as critical to his success. He stated:

Convention dictates that a company

should look after shareholders first,

its customers next and worry last

about its employees. Virgin does the

opposite. For us, employees matter

most. It just seems common sense that

if you start with a happy, well moti-

vated work force you’re much more

likely to have happy customers. In

due course the resulting profits will

make your shareholders happy. 1

One of the key ways that Branson has tried to motivate employees at his

firms is to provide them with ample flexibility and make the work both challenging and interesting. Once he empowers employees, he also gives them room to fail. For example, an executive once made a bad choice and lost the firm a large amount of money. When the employee came to Branson’s office he expected to be fired. Instead, Branson fired at the employee with a water pistol, then told him to get back to work. That day the executive, and the entire firm, learned to take risks and learn from them, because a failure did not neces- sarily mean termination.

Often it is assumed that employ- ees are only motivated by money. However, this has not proven to be the case for Branson. His workers want interesting and challenging sit- uations where they can make a visible contribution, an environment that Branson has tried to create for them. A body of research in the West sup- ports the view that money is not a primary motivator for many employ- ees. These studies from a variety of work settings, ranging from heavy manufacturing to computer engineer- ing, consistently find that employees rank appreciation of work and being involved in work as the most impor- tant motivating factor.

It should be noted that in these sur- veys, when asked what they thought workers wanted, supervisors consis- tently ranked extrinsic motivators, such as salary and working conditions, among the highest motivators, and intrinsic motivators as lowest. Interest- ingly, in the same surveys, employees also indicated they thought coworkers were most interested in salary.

This situation reflects an extrinsic bias that can be traced to an attribution error. An attribution error occurs when people try to make sense out of events in their lives and make assumptions about the issues involved. For exam- ple, when asked to assess themselves on driving skill, nearly everyone says they are an above average driver. No one considers himself or herself a below average driver.i Thus, perhaps managers assume everyone is inter- ested in money because they them- selves are interested in money.

Managers need to be careful that they do not make a fundamental attri- bution error in assuming that all their employees only want more money. Richard Branson has found a way for his organizations to motivate peo- ple. It should be noted that, while Branson puts a premium on creating situations that empower managers, he also says often that he is in the busi- ness of creating millionaires. Thus, Branson does not hesitate to motivate individuals who are successful when they perform. Managers cannot assume that the method of motivation they have in their own countries, or motivation methods people like Bran- son have used, will work in other set- tings. It is doubtful that Branson’s sys- tem will work in an African, Malaysian, or Kuwaiti firm because those countries have a different cultural setting. The sys- tem Branson created is unique to those entrepreneurial ventures and the cul- tures in which Branson operates those businesses. There are many ways to motivate employees and colleagues. Firms need to find those that offer the best opportunity for the firm in that setting.

1Broad, M. (2003, February 18). Richard Branson. Personnel Today.

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large measure, this difficulty comes from the fact that what motivates people in one region of the world may be much different in another region. For example, in many parts of Africa it is not uncommon for wages to be partly determined by the size of the employee’s family, because motivation comes less from the level of the wage than the approval of the family, tribe, or village. Contrast this with North America, where salary is the primary motivator for performance and no one would even consider the size of someone’s family to determine pay. An interna- tional firm with operations in both North America and Africa may find that transplanting its focus on pay as a motivator from North America to Africa may actually work to reduce motivation, because it may place the person receiving the monetary reward in conflict with his or her reference group at the company. Thus, culture is important in discussing motivation in international settings because employees in various cultural settings have different values that affect their needs and how they might be motivated. This chapter lays out the component parts of motivation and how motivation can differ in various international settings. Figure 7-1 summarizes the flow of the material we will examine in this chapter.

MOTIVATION COMPOSITION

Motivation is an internal state or condition that activates a person’s behavior and gives it direction toward accomplishing a task. Motivation energizes and directs goal-oriented behavior as well as the intensity and direction of behavior. Motiva- tion is based on emotion, particularly on the search for positive emotional experi- ences and the avoidance of negative ones. Motivation is important because it determines an individual’s effort toward performing a task. Thus, if an individual is motivated he or she will extend high levels of effort toward achieving the organization’s goals. A person’s level of effort will in turn be affected by the organization’s capacity to satisfy that individual’s needs and life interests, plus the person’s ability to achieve the desired outcome.2 Motivation can be represented by this conceptual expression:

Motivation ¼ Ability� Values� Life Interests and Goalsii

In Chapter 2 we discussed Hofstede’s well-known model of cultural values, including power distance, uncertainty avoidance, masculinity, individualism, and long-term orientation. An individual’s cultural values will affect what motivates

Chapter 7 Conceptual FlowFIGURE 7-1

• Employee interests• Process theories

- Expectancy theory

- Equity theory

- Goal setting

• Content theories

- Needs theory

- Alderfer’s ERG

- Motivation/Hygiene

- Learned needs

2Life interests (sometimes called job interests) represent work activities that one might prefer to do, such as working with numbers or doing influencing and selling. This topic is discussed later in the chapter.

Motivation The driving force behind an individual’s actions that energizes and directs goal-oriented behavior.

198 Motivation

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that individual. For example, employees who are more individualistic may be motivated by a need to have jobs that allow them to express themselves or that provide them with some personal space. Employees higher on the collective scale would be more motivated by jobs that permit social interaction and working in teams. You will recall that Hofstede also discussed the masculine feminine dimen- sion of culture. Cultures that had high masculine or production-orientation scores placed more emphasis on money and title, while those with a feminine or rela- tional orientation were motivated more by lifestyle concerns, such as free time, holidays, and company social activities.

Thus, what motivates employees cannot be assumed without first asking questions.iii To illustrate some difficulties a firm may face, consider the hotel industry. Hotel employees in China are strongly motivated by bosses’ public recognition of a job well done. In contrast, hotel staff in Australia stated they were motivated by a flexible work week. They did not mind working long hours sometimes, but they preferred options to work three days per week, so they could be off the other four days. In a collective-focused society, such as China’s, peer pressure and peer recognition exercise strong influence on people, partic- ularly in a work setting. In contrast, Australians typically value a work–life balance. That Chinese employees could be motivated by something as simple as recognition and praise in front of their coworkers came as a complete surprise to their Western managers, as well as the fact that the staff may become upset if supervisors fail to provide such public praise. Similarly, employees in parts of Asia may expect employee housing, which can be scarce and very expensive.iv

Firms in Latin America have also reported that housing can be a useful motivator.v

One outcome of globalization and increasing cultural diversity in the work- place is that identifiying what motivates employees has become increasingly important. However, just as there are a number of motivators, there are also numerous different ways to classify and understand motivations. This chapter will look at a wide variety of these different perspectives on motivation. To do this we break the different views on motivation into categories. First, we look at the ‘‘content’’ theories of motivation. This perspective focuses on employees’ needs, and there are four specific theories in this perspective. Next we will examine the process perspective of motivation. This perspective accepts the impor- tance of needs yet focuses on the dynamics of motivation by which needs are examined and fulfilled; three specific theories will be examined. For each of these seven theories we initially look at the basic understanding of the theory that was primarily developed and tested in North America. We then examine the theories’ implications and applications in international settings. Next, we address how an international firm can use these diverse theories in developing their own systems to motivate employees.

CONTENT (NEED) THEORIES OF MOTIVATION

Most motivation theories recognize that motivation begins with people’s needs. Needs are things or conditions people have that can trigger behaviors to satisfy those needs. Unfulfilled needs create a tension that makes people want to find ways to satisfy those needs. The stronger a need is and the greater the person’s awareness of it, the more motivated that person is to try to satisfy that particular need. This section examines four content theories of motivation that help global managers understand employee needs and how to better motivate their employ- ees (and themselves). Figure 7-2 summarizes these theories and maps their component parts.

Needs Represent things or conditions that people would like to have.

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Needs Theory

One of the best-known content theories of motivation is Maslow’s hierarchy of needs. Outlined by psychologist Abraham Maslow in the 1950s, this theory condenses the innumerable human needs into a hierarchy of five basic needs. (Figure 7-3 summarizes Maslow’s model.) At the bottom of the hierarchy are the physiological needs, which include the need to satisfy basic requirements for food, fresh air, clean water, and shelter. In an organizational setting, such a basic need could be represented by salary—employees have a need for a minimum level of basic salary, apart from the opportunity to earn more later. Next comes the safety need—the need for a secure and stable environment and the absence of illness and threats. In a work setting, this roughly corresponds to employee needs for good working conditions and job security. Maslow’s third need level is belongingness. Belongingness includes the need for social interaction with other people and affection. In an organizational setting, this could include a job that provides some opportunities for teamwork and social activities. The next highest need is self esteem. Self-esteem can be attained both through personal achievement and via recognition from others. Some jobs provide esteem opportunities as a natural part of the job, such as those in the performing arts or the media, while other jobs have to create such opportunities, such as through employee recognition programs and awards. At the top of the hierarchy is self-actualization, which represents the need for self-fulfillment—a sense that a key goal has been accomplished. Many tasks have clear, built-in milestones that can help to fulfill this need, such as working toward a bachelors or masters degree, while other tasks must have intermediate objectives and final goals created for which employees can aim.

Maslow argued that a person’s behavior is motivated primarily by the lowest unsatisfied need at that moment in time. Physiological needs are initially the most important and people are motivated to satisfy them first. Once these most basic needs are filled, the safety need emerges as the strongest motivator. As safety needs are satisfied, the belongingness need becomes most important. In interna- tional settings this theory has led firms to focus on the nature of the local economic setting as the principal indicator of an appropriate employee motivator. Thus, in a poor state like Bangladesh, money might be the principal motivator for most people. Only when a person satisfies a lower-level need does the next higher need, such as job security, become a primary motivator. In the economically advanced

Content Theories of MotivationFIGURE 7-2

Alderfer’s ERG Theory

Maslow’s Hierarchy of Needs

Self- Actualization

Esteem

Belongingness

Safety

Physiological

Growth

Relatedness

Existence

Herzberg’s Hygiene

Motivators

Hygiene Factors

Need for Achievement

Need for Power

Need for Affiliation

McClelland’s Learned Needs

200 Motivation

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countries of Europe, higher-level needs such as self-esteem and self-actualization would be expected to be more common, because food, housing, and employment are easily attained. This progression up the needs hierarchy is known as the satisfaction–progression process. Maslow’s theory predicts that even if a person is unable to satisfy a higher need, he or she will be motivated by the possibility of fulfilling it until it is satisfied.

Maslow’s hierarchy of needs is one of the best-known motivation theories. The model was helpful when initially proposed because it helped firms recognize that employees from different countries may be motivated by different needs. How- ever, today the model is criticized for failing to explain the specifics of employee needs and neglecting job interests. For example, researchers have found that individual needs do not follow the same progression up the scale from lower to higher in the different parts of the world.vi Gratification of one need level does not necessarily lead to increased motivation coming from the need to satisfy the next item in the hierarchy, as proposed by Maslow. Moreover, not all people exhibit all five needs to the same extent. For example, some people may have very little in the way of social needs. They might like to work alone and prefer not going out to numerous company functions and lunches, and, in fact, may be annoyed (and thus demotivated) by repeated requests by col- leagues or the company to attend social events or to socialize after work. This is usually quite acceptable in North American work settings where firms gen- erally do not stress the social aspect of work. However, many South American cultures place great importance on social aspects and, as a result, employees are more likely to be motivated by a system that gives rewards based on social needs, such as having company dinners or weekend retreats. Most Japanese firms also expect employees to attend social functions and go out together after work to restaurants and bars, making it a little uncomfortable for employees who do not want to socialize so regularly. High social needs may also be important in motivating employees in Northern European countries, such as Denmark, Norway, and Sweden, that stress quality of life over masculine production orientation.vii This does not mean that all people in South America or Northern Europe emphasize such needs in the same way, but it is the way the society and its organizations tend to be ordered.

Maslow’s model is helpful because it reminds managers who may be inclined to emphasize money as the sole motivator that there are different employee needs and that people are not motivated by the same things at the same time, with culture being a key factor in generating these different needs. A performance package based on bonuses and/or salary increases that is useful in the United States may not be the road to higher motivation and performance for some of its employees. This, in turn, suggests that managers in international firms should strive to find out what their employees really want and how to account for those needs in a motivation-and-reward system.

Maslow’s HierarchyFIGURE 7-3

Self Actualization – self-fulfillment

Self Esteem – recognition

Belongingness – social interaction

Safety – stable environment

Physiological Needs – food, shelter

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Alderfer’s ERG Theory

The ERG theory was developed by psychologist Clayton Alderfer to overcome problems associated with Maslow’s hierarchy of needs theory.viii The ERG theory groups human needs into three broad categories: existence, relatedness, and

LINCOLN ELECTRIC IN MEXICO

Employees in countries outside of North America may have different needs than those of employees within North America. U.S. manufacturer Lincoln Electric is well known for its effective motivation-and-reward sys- tem based on piecework. With piece- work, a worker is paid a fixed rate for each unit produced or action per- formed. Piecework can be very effec- tive for manufacturing and is widely used in China and in high-production operations in East Asia. It is normally combined with a (low) base salary, similar to a salesperson’s low base pay and commissions. In many of the world’s more developed economies, piecework is staunchly resisted by workers and their unions. Yet Lincoln Electric has maintained a very disci- plined and effective piecework system since its founding in the nineteenth century—a system that has been cop- ied, at least in part, by many firms worldwide.

Lincoln Electric was founded in 1895 to make electric motors. The firm today is known as the world’s leading manufacturer of welding equipment. Lincoln Electric has a long history of human resources innova- tion. The firm introduced its piecework system nearly a century ago, in which employees are paid largely for the number of welding devices and other units they can produce—a sys- tem that has worked well and contin- ues through today. However, at the same time, the firm also introduced employee advisory committees. Each department in the firm created groups of employees to advise the firm, and these employees meet every two weeks. The creation of such labor groups was a radical innovation at the time. The firm later introduced other radical innovations, such as life

insurance for employees, stock owner- ship plans for employees, annual bonuses based on output for the year, and a strong no-layoff commitment.

All of these human resources innovations continue today. However, today additional incentives are included for minimizing defects and teamwork, but Lincoln Electric employees are largely on their own in figuring out how to produce as much as possible. For example, Lincoln Electric allows individ- ual employees leeway in organizing their workspaces and scheduling their work hours, and the annual bonus for each employee can average over $24,000 per year.

Although Lincoln Electric has been very successful in the United States, it has had trouble implementing this sys- tem overseas. As the former CEO, Don Hastings, observed a few years ago in the Harvard Business Review :

‘‘[Lincoln’s] incentive system is trans- ferable to some countries—especially in countries settled by immigrants, where hard work and upward mobi- lity are ingrained parts of the culture. But in many other places, it won’t easily take root. It is especially difficult to install it in a factory that has differ- ent work practices and traditions. For example, even though German fac- tory workers are highly skilled, and in general, solid workers, they do not work nearly as hard or as long as the people in our Cleveland factory. In Germany, the average workweek is 35 hours. In contrast, the average factory workweek in Lincoln’s U.S. plants is between 43 and 58 hours, and the company can ask people to work longer hours on short notice—a flexibility that is essential for the system to work.

The lack of flexibilitywas one reason why our [motivation and reward sys- tem] approach would not work in Europe.’’

The Lincoln Electric employee sys- tem worked very well with the culture of the U.S. But in Mexico the cultural factors, such as lower individualism and less commitment to production, did not fit well with Lincoln Electric’s piece-rate pay system. In addition, the plant in Mexico was unionized and there was a predisposition against workers earning different amounts.

To successfully implement the sys- tem in Mexico, Lincoln Electric decided to introduce it gradually. Lincoln Elec- tric allowed a few select workers to opt into the system, and as they began to do well, other workers requested to be allowed into the piecework system. Although cultural values were impor- tant in suggesting what motivation sys- tem would work, Lincoln Electric was able to overcome any possible hin- drances. It effectively used a system of social learning to gradually influ- ence all the workers to understand how the system benefited them. And benefit them it did. After about two years, all 175 workers in the plant had opted into the incentive system. Workers make more money than before and Lincoln Electric has its pro- ductive system in place. Culture is important in determining what compa- nies can do, but sometimes it is possi- ble to get something done in spite of local culture and traditions, though a system may have to be implemented carefully, as Lincoln Electric did in Mexico.

Hastings, D. (1999). Lincoln Electric’s harsh lessons from international expan- sion. Harvard Business Review 77(3), 162–178.

Piecework A type of work in which a worker is paid a fixed ‘‘piece rate’’ for each unit produced or action performed.

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growth (notice that the theory’s name is based on the first letter of each need). Existence needs include a person’s physiological and physically related safety needs, such as the need for food, shelter, and safe working conditions. Relatedness needs include a person’s need to interact with other people, receive public recog- nition, and feel secure around people (i.e., interpersonal safety). Growth needs consist of a person’s self-esteem through personal achievement as well as the concept of self-actualization presented in Maslow’s model. Alderfer’s existence needs correspond to Maslow’s physiological and safety needs; relatedness needs correspond to Maslow’s belongingness needs; and growth needs correspond to Maslow’s esteem and self-actualization needs.

The ERG theory argues that, different from Maslow, an employee’s behavior is motivated simultaneously by more than one need level. A person might try to satisfy the growth needs of meeting a tough goal even though that person’s relatedness needs are not fully satisfied. Unlike Maslow’s model, the ERG theory includes a frustration–regression process whereby those who are unable to satisfy a higher need become frustrated and regress back to the next lower need level. For example, if existence and relatedness needs have been satisfied, but growth need fulfillment cannot be achieved, an individual will become frustrated and relatedness needs will again emerge as the dominant need and source of motivation.

The ERG theory explains the dynamics of human needs in organizations reasonably well because human needs cluster more neatly around the three cate- gories proposed by Alderfer than the five categories in Maslow’s hierarchy. The combined processes of satisfaction–progression and frustration–regression also provide a more accurate explanation of why employees need change over time. Internationally, the model also suggests how cultures with different values may be motivated by different needs. For example, some people from a collectivist society would be motivated by the need to be part of the group. People in such a society would prefer to work in firms that have social events and in which employees work in teams. Employees from a more collectivist society would also prefer that the firm provide lunches and tea breaks in which all employees can participate. Indeed, in many Asian countries it is common for all offices to close from about 1:00 pm to 2:00 pm so all employees can go to lunch together. This is also true in several European countries, as anyone knows who has tried to find open businesses or government offices during lunchtime. In some countries lunch breaks can go on for two to three hours. Employees from such countries may become demotivated by working alone and not having social opportunities at work. But collectivism is not the only cultural value that affects motivation. There are, in fact, a variety of cultural issues that have an impact on motivation. For example, in countries higher on Hofstede’s dimension of uncertainty avoid- ance, security may be a more motivating factor than Maslow’s highest need of self-actualization growth and thus be a more important need.ix Alderfer’s model allows for greater flexibility than Maslow’s because it also recognizes that people have different needs though they do not move up in a rigid hierarchy as Maslow suggested originally.

Thus, internationally, ERG theory allowed for more complex models of compensation to be developed, which resulted in the recognition that a mixture of needs must be addressed. For example, it suggests that firms in a poor nation, such as Bangladesh, focus on both wages and the need for relatedness as motivators. Maslow’s hierarchy of needs and ERG theory are helpful in remind- ing managers of the various needs of their employees, but these models failed to address a number of specific work-related needs, such as the often-voiced need to be involved with company decisions and other nonmaterial or intrinsic needs.x Subsequent authors sought to address intrinsic needs’ impact on moti- vation in particular.

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Motivation–Hygiene Theory

Management scholar Frederick Herzberg found the basic need theories unsatisfy- ing, and sought to examine extrinsic (external) as well as intrinsic (internal, task- related) motivators. In Herzberg’s formulation, intrinsic motivators include 1) achievement, 2) recognition for achievement, 3) the work itself, 4) responsibility, and 5) growth or advancement. These are all intrinsic in that they are related to the task and the psychological state of the individual. Extrinsic factors include: 1) company policy and administration, 2) supervision, 3) interpersonal relation- ships, 4) working conditions, 5) salary, 6) status, and 7) security.xi Herzberg argued that intrinsic factors tend to be motivators. The more extrinsic, hygiene factors can serve to de-motivate, but not motivate. This model is useful because it breaks the concept of motivation into factors that motivate to take action, and factors that create dissatisfaction and might cause people to avoid doing certain things, but will not motivate them.3 Thus, motivation is not just putting things in place to encourage behavior, it also is concerned with removing things that could discourage desired behaviors.

To clarify Herzberg’s approach to motivation, consider why people may be motivated to travel to a certain city for a holiday. The city-state of Singapore has one of the highest per-capita incomes in the world. Singapore has tight controls over many aspects of life; for example, you cannot buy chewing gum without a doctor’s prescription (to prevent people from dropping it on the street), there is little litter because of strict policing with high penalties if you are caught, and you can be fined if you do not flush a public toilet after use. Singapore is therefore well known for being very clean and orderly, but it was not always that way. People find many Asian cities to be cluttered and disorderly, and previously, Singapore was no exception. However, one of the first things that the ruling People’s Action Party sought to do when Singapore gained its independence from Malaysia in the mid-1960s was to make Singapore much cleaner and more orderly than any other Asian city. The government believed that if Singapore remained dirty, interna- tional business people would be less likely to do business there or travel there for a holiday. As a result of this conscious effort, in the late 1970s Singapore became the cleanest city in Asia and one of the model cities for the world. Thus, the leadership was able to fix a hygiene factor by eliminating those things that would discourage people from traveling to the city.

While a bad hygiene factor may prevent (de-motivate) you from visiting a city, an absence of such factors is not enough to encourage (motivate) people to travel to a city for a holiday. Singapore has since recognized this and knows it has to produce specific reasons to motivate people to come there, as opposed to just removing reasons not to. Singapore has developed an amusement park on Sentosa Island, just off of its coast, and is bringing in gambling casinos and other attrac- tions. Recognizing the interaction of both items—reasons to do things and taking away reasons to not do things—led Herzberg to argue it was necessary to have both motivators and hygiene factors (also called ‘‘dissatisfiers’’) to be successful.

However, while managers need to address both (extrinsic) motivators and (internal) hygiene factors, they will likely address these needs separately. Improv- ing hygiene factors works to minimize job dissatisfaction and employee turnover but does not increase motivation. This separation of issues helps international firms that must address the needs of worldwide organizations. A hygiene factor such as working conditions expected in different settings can vary widely. For example, a furniture factory setting that dissatisfies employees in a rich European country, such as Norway, may gain a dramatically different response in Vietnam.

3Herzberg’s data and research design have been questioned by organizational scholars in recent years, particularly in terms of the narrow sample used (engineers). Nevertheless, it is conceptually useful to discuss needs in terms of motivators and hygiene factors, that is, motivation versus dissatisfaction (demotivation).

Motivators In Herzberg’s motivation-hygiene theory, these are positive influencers, such as job involvement, that are intrinsic to a job and that can push employees to higher levels of performance.

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Firms must recognize these differences and improve hygiene factors that potentially cause dissatisfaction in each setting.

When using the motivator-hygiene model, firms also cannot assume that intrinsic items, such as employee growth opportunities and interesting work, will have the same motivational effect internationally. For example, workers in some countries, such as Japan and Greece, are motivated more by job security than growth opportunities or interesting work.xii Though Herzberg’s work has been criticized because of his methods, particularly using a sample of professionals, his theory does add to our understanding of the needs theories by being more specific about needs and arguing that fulfilling some needs will not necessarily motivate employees to perform better. Employees who are frustrated may say, ‘‘The com- pany is just throwing money at the problem by offering me a raise and covering over the real issue,’’ when in reality the firm needs to fix the situation, possibly by giving the employee more interesting work. Thus, extrinsic needs, such as working conditions and (sometimes) additional money, can actually de-motivate. Perhaps once people feel they are getting a reasonable salary, they would prefer improve- ments in an intrinsic need (such as more interesting work) rather than getting more money for a job they dislike. Recognition of these issues by international firms encouraged them to tailor their motivational systems to a much higher degree than had occurred previously.

Learned-Needs Theory

Harvard psychologist David McClelland studied school children from a very young age and followed them for many years. He found that some factors that motivate individuals are learned from childhood. Particularly, he identified three learned needs that shape their motivation: need for achievement, need for affili- ation, and something not emphasized in the other major need theories—the need for power.xiii Each of these learned needs will be discussed in turn, with their implications for international business discussed at the end of the section.

Need for Achievement (nAch) One widely studied learned need is the need for achievement, or ‘‘nAch.’’ People with a high nAch want to accomplish reasonably challenging goals through their own efforts. They prefer working alone rather than in teams and choose tasks with a moderate degree of difficulty—challenging but achievable. People with a high nAch typically prefer positive feedback and recog- nition for their successes. That positive feedback could be public recognition from the firm and peers, or it could be recognition from the boss.

McClelland argued that the need for achievement explained why some soci- eties are able to produce more than others.xiv Successful entrepreneurs tend to have a high nAch, possibly because they establish challenging goals for themselves and are motivated by testing out different approaches to their goals and then meeting them. To the high nAch person, achieving by completing a task is more important than the financial reward. Corporate and team leaders should have a somewhat lower nAch because they must delegate work and build support through involvement, and thus are likely to have a higher need for power or ’’nPow.’’ Morgan McCall of the Harvard Business School similarly studied indi- viduals with high needs for achievement; he termed them corporate ‘‘high fliers.’’xv McCall found that many were not good team players, as they were motivated more by their own achievements, not the team’s. These individuals did perform well in large companies where they were given considerable inde- pendence, as though they were running their own businesses. However, you may not want such an entrepreneur in a setting where significant administrative expe- rience is needed. The understanding of nAch shapes which managers may work best in different settings. New markets such as China or Russia, when those

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countries were initially opening to investment and there were few organizational supports, would have been best served by an individual with high nAch and an entrepreneurial bent. However, as markets mature and firms grow, it may be better to put someone with administrative (and international) experience in charge. For example, if a manager has to operate a factory with large numbers of employees and deal with established relationships, a high nAch person may not be the right fit. A high need for affiliation or nAff manager may be needed in such a setting. The skills and interests behind factory management today are much different than what was needed earlier, so an individual with lower nAch fits better now.xx

McClelland found need achievement to be relatively common across cultures, although some societies did a better job in training its members to strive for achieve- ment that others.xxi For example, in India, researchers found that entrepreneurs trained in the need for achievement performed better than those who were not train- ed.xxii Managers in New Zealand and in the United States showed similar results.xxiii

Need for Affiliation (nAff) Need for affiliation, or ‘‘nAff,’’ refers to a desire for approval from others, and as a result, it means conforming to their wishes and expectations, and avoiding conflict. People with a strong nAff want to form positive relationships with others; this is much like Maslow’s belongingness need and Alderfer’s relatedness need. They try to build a favorable image of themselves and take steps to get others to like them. Moreover, high-nAff employees actively support others and try to smooth out conflicts that occur in meetings and other social settings. As with nAch, a key difference is that need for affiliation is learned rather than instinctive.

High-nAff employees tend to be more effective than those with a low nAff in coordinating roles, such as helping diverse departments work on joint projects. Because they are motivated more by relationships and gaining success through the group, they are typically more effective in sales positions in which the main task is cultivating long-term relationships with prospective customers. Generally, employees with high nAff prefer working with others rather than alone, tend to have better attendance records, and tend to be better at mediating conflicts.

Although people with a high nAff are more effective in many jobs requiring social interaction, they tend to be less effective at allocating scarce resources and

DOES NEED FOR ACHIEVEMENT VARY BY COUNTRY?

Because need for achievement (nAch) is thought to be a learned need, it may differ across cultures and countries. The United States, possibly drawing on the Protestant work ethic and a long tradition of immigration, has long been thought to inculcate high levels of nAch. Studies examined literature, such as the McDuffy Reader series, that was used to teach children in the U.S. in the 1800s and have found consistently high levels of nAch in the pages of those books. Recent studies have similarly measured higher-than- average levels of nAch in the U.S. Another study reported that nAch, as inferred from literature read primarily by preteens in the U.S., was positively related to the number of patents recorded in the U.S. between 1800 and 1950. Bradburn and Berlew similarly analyzed achievement motives in British school readers and showed a strong correlation of achievement themes with Britain’s industrial growth.xvi Drawing on popular literature in Europe from the Middle Ages, researchers linked increases in apparent

nAch to economic growth. Children’s literature in China also showed a similar emphasis on encouraging achieve- ment. The evidence is compelling: societies that encourage and reward high achievement have more entrepreneurship and higher sustained economic growth.xvii In contrast, soci- eties that do not expect excellence, fail to encourage achievement, and reward idleness while failing to penalize destructive behavior, find that people tend to give them exactly what they are implicitly asking for.xviii Management scholars and psychologists from Maslow onward would agree this is not particularly surprising—organizations and societies do tend to get what they encourage and reward. There are still many employers, though, who continue to reward a less desired performance outcome while hoping that improved performance will somehow still occur. Research suggests that this type of hope for improvement is likely to be in vain.xix A central lesson in motivation is that you most often get the behavior that you reward.

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making other decisions that may require conflict or confrontation. For example, research has found that executives with a high nAff tend to be indecisive and are perceived as less fair in the distribution of resources. People in these decision- making positions must have a relatively low need for affiliation so that their choices and actions are not biased by a personal need for approval, but a manager may be able to use a person with high nAff by giving him or her the special role of challenging key ideas and new business plans for his or her department, sort of a devil’s advocate role. Whereas the high nAff individual may not want to do this on his or her own accord, if given the official sanction, that person may be more likely to take on the task.

There is evidence that culture can encourage greater nAff values in given locations. For example, East Asian societies emphasize harmony. The Chinese have a saying that ‘‘harmony is the most valuable.’’ The Japanese have a similar saying, as do the Koreans. This reflects the societal organization and influence of these cultures that encourage people to affiliate and create large social and work groups. The drive for group cohesiveness may override an individual’s other learned needs.

The need for nAff can be seen in the way people in Chinese organizations might expect most everyone to go to lunch together. If you do not want to go to lunch with the group at 1:00 pm every day, then some people may wonder why you are upsetting the harmony of the group and its cohesiveness by not joining them. In such settings, it is commonly believed that workers who prefer not to eat with the group do not like their coworkers and are too individually minded. This can obviously be a source of frustration for someone with a low nAff, especially from a culture like that of the United States or Australia, which does not insist that people always do things together in large groups. Such an individual might wonder why his or her coworkers must always have lunch together or hang out together during non-work hours.

International firms relocating managers to a society with a high nAff must prepare that employee to understand that ‘‘work time’’ does not necessarily stop at the end of the day. If after-work drinks and dinner are part of the work ritual, then colleagues will expect the employee to participate. Those high-nAff colleagues will expect that the expatriate have the same nAff as they do, that is, they will project

People with a strong nAff (need for affiliation) want to form positive relationships with others, which means they are often effective at selling and negotiating.

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their high nAff onto others (though having read this textbook, the student should again remember that not everyone will have the same values and to avoid projection). Conversely, firms from societies that value large group activities should also realize that people from individualistic cultures may be uncomfortable in large groups and with the personal questions common in those settings. For many international firms from the West, integrating nAff individuals into their motivation-and-reward systems has been difficult. Increasingly, these firms are building sensitivity training for new expat and local managers into their culture to provide an understanding of nAff. However, efforts to deal with the issue beyond such sensitivity training have been limited.

Need for Power (nPow) Need for power, or ‘‘nPow,’’ refers to a desire to exercise authority over people and resources. People with a high nPow are thus motivated by the opportunity to be in a position of authority. They frequently rely on persua- sive communication (see Chapter 12), make more suggestions in meetings, and tend to publicly evaluate situations more frequently. Some people have a high need for personalized power. They enjoy power for its own sake and use it to advance their career and other personal interests. Power is a symbol of status and a tool to fulfill personal needs, rather than a delicate instrument to serve stakeholders. Others may have a high need for socialized power. These individuals want power as a means to help others, such as improving society or increasing organizational effectiveness.

Corporate and political leaders have a high nPow. However, McClelland argued that effective leaders should have a high need for socialized rather than personalized power. These leaders have a high degree of altruism and social responsibility and are concerned about the consequences of their actions on others. In other words, leaders must exercise their power within the framework of moral and ethical stand- ards. The ethical guidance of their need for power results in trust and respect from employees, as well as a commitment to the manager’s vision. Managers may be able to motivate someone with a high need for power by placing them in authority over some resources, such as giving a custodian responsibility for multiple floors and providing him or her some resources to get the jobs done efficiently.

Applying Learned-Needs Theory McClelland argued that achievement, affiliation, and power needs are learned rather than instinctive, and are thus inculcated by cultures and societies. Accordingly, he argued for developing training programs that strengthen these learned needs. McClelland developed an achievement- motivation program in which trainees practice writing achievement-oriented stories and engaging in achievement-oriented behaviors in business games. Trainees also complete a detailed achievement plan for the next two years and form a reference group with other trainees to maintain their new-found achievement motive style.

These programs have had some success. For example, need-achievement course participants in India subsequently started more new businesses, had greater com- munity involvement, invested more in expanding their existing businesses, and employed twice as many people as non-participants. Similar achievement courses for North American small business owners have also reported increases in the profitability of the participants’ businesses.xxiv

Integrating the Different Content (Needs) Related Theories One of the main points in content theories of motivation is that different people have various needs at different times. Consequently, corporate leaders should not be surprised if distributing the same reward results in different levels of need fulfillment. Rewards that motivate one person may have less effect on someone with different needs. A firm based in a South American culture with a high relational orientation may base its reward system heavily on social activities that the firm provides

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(e.g., employee luncheons, awards dinners, weekend activities, company retreats). If that firm were to come to a more individualistic society in North America and try to provide a similar motivation-and-reward system, the more individualistic employees in that culture would probably not be motivated by such rewards, and might actually try to avoid them. One American employee working for an Argen- tinean multinational organization commented, ‘‘They expect me to work all day, and then hang out with them [the Argentinean coworkers] at night also? If they want to give us some incentives to work hard, they should just give me a gift certificate for the restaurant—I’ll go myself when I feel like going, or perhaps with a colleague but not with the whole department, That’s just a pain.’’ Thus, interna- tional firms need to offer a choice of rewards in different settings. Research on motivation and culture suggests that emerging economies more often have low individualism, higher uncertainty avoidance, high power distance, and a relatively low emphasis on production-orientation.xxv The needs of the extended family are also emphasized over individual needs in many East Asian countries, particularly in the more traditional companies. Activities, commerce, and worship center on the family and maintaining its integrity and prosperity. Businesses are often seen as a family asset and outsiders are not permitted much access to a key aspect of the family’s prosperity. Under these circumstances, firms with an individualistic bent will be seen as troublesome for the family. Organizations in emerging markets are more likely to give group rewards and generally do not encourage risk taking.xxvi

Firms may find it difficult to import a reward system relying heavily on individu- alism and low uncertainty avoidance to societies that value collectivism and risk avoidance.

Content theories of motivation also warn us against relying too heavily on financial rewards as a source of employee motivation. While money does motivate employees to some extent, there are other powerful sources of motivation, such as challenging assignments and interesting work, learning opportunities, some con- trol over one’s workspace and schedule, and praise from colleagues and super- visors. Such needs can be easily met by companies that understand money is not the only motivator, and that pay attention to more intrinsic forms of motivation— needs that do not cost a firm anything to meet, apart from more vigilant and mindful management.xxvii

PROCESS THEORIES OF MOTIVATION

Content theories explain the different needs people have in different situations, whereas process theories describe the processes through which need deficiencies are translated into behavior. Three of the most popular process-motivation theo- ries are expectancy theory, equity theory, and goal setting. Figure 7-4 summarizes the process theories and their component parts.

Expectancy Theory

Expectancy theory is a process-motivation theory based on the idea that work effort is directed toward behaviors that people believe will lead to desired out- comes.xxviii Figure 7-5 summarizes the relationships in expectancy theory. As can be seen, an individual’s effort level depends on three factors: effort-to-performance (E!P) expectancy, performance-to-outcome (P!O) expectancy, and outcome valences (V). Employee motivation is influenced by all three components of the expectancy theory model. If any component weakens, motivation weakens. Each component of the model will be examined in turn.

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E!P Expectancy The effort-to-performance (E!P) expectancy is an individual’s perception that his or her effort will result in a particular level of performance. Expectancy is defined as a probability, and therefore ranges from 0.0 to 1.0. In some situations, employees may believe that they can unquestionably accomplish the task (a probability of 1.0). In other situations, they expect that even their highest level of effort will not result in the desired performance level (a probability of 0.0). For instance, unless you are an expert skier, you probably aren’t motivated to try some of the black diamond ski runs at New Zealand’s Mt. Hutt. The reason is a very low E!P expectancy. Even your best efforts will not get you down the hill feet first! In most cases, the E!P expectancy falls somewhere between these two extremes.

P!O Expectancy The performance-to-outcome (P!O) expectancy is the per- ceived probability that a specific behavior or performance level will lead to specific outcomes. This probability is developed from previous experience or social learn- ing derived from watching others. For example, students learn from experience that missing classes either ruins their chance of a good grade or may have no effect at all. In extreme cases, employees may believe that accomplishing a particular task (performance) will definitely result in a particular outcome (a probability of

SEMCO: CREATIVE MOTIVATION IN BRAZIL

Once the various needs theories are understood, firms can use this knowl- edge tobuildaneffective compensation system. For example, in some interna- tional settings, employees respond to pay for performance coupled with empowerment when properly imple- mented. Semco is a well-known Brazil- ian manufacturer. Its units include:

• the industrial machinery unit, now manufacturing mixing equipment

• Sembobac, a partnership with Bal- timore Air Cooler, making cooling equipment

• Cushman and Wakefield SEMCO, a partnership with Rockefeller prop- erty company Cushman and Wake- field, managing properties in Brazil and Latin America

• Semco Johnson Controls, a partner- ship with Johnson Controls, manag- ing large scale facilities such as air- ports and hospitals

• ERM, a partnership between Semco and Environmental Resources Man- agement, one of the world’s lead- ing environmental consultants

• Semco Ventures, offering high- technology and Internet services

• SemcoHR, a human resources man- agement firm

• Semco-RGIS, an inventory control firm

Semco has used profit sharing effec- tively to help build employee empow- erment and engagement such that employees are interested in furthering their employer’s interest. Brazilian employees have a fairly low individual- ism score and, as in most Latin American countries, are considered to be collecti- vist. This suggests that allowing a group of employees to earn a bonus and col- laborate on its distribution will be effec- tive if the nature of the job is such that work can be shared. Commented Semco president Ricardo Semler:

‘‘Profit sharingwon’tmotivateemploy- ees if they see it as just another man- agement gimmick, if the company makes it difficult for them to see how theirownwork is related toprofits and to understand how those profits are divided . . . Twice a year, we calcu- late 23 percent of after-tax profit on each division income statement and give a check to three employees who’ve been elected by the workers

in their division. These three invest the money until the unit can meet and decide—by simple majority vote— what they want to do with it. In most units, that’s turned out to be an equal distribution . . . The guy who sweeps the floor gets just as much as the divi- sion partner.

One division chose to use the moneyasafundto lendout forhousing construction . . . Some of [the division employees] have already received loans and have begun to build them- selves houses . . . Semco’s experience has convinced me that profit sharing has an excellent chance of working when it crowns a broad program of employee participation, when the profit-sharing criteria are so clear and simple that the least-gifted employee can understand them, and perhaps most important,whenemployeeshave monthly access to the company vital statistics—costs, overhead, sales, pay- roll, taxes, profits.’’

Semlar, R. (1989, September–October). Man- aging without managers. Harvard Business Review, pp. 2–10.

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1.0), or they may believe that this outcome will have no effect on successful performance (a probability of 0.0). More often, the P!O expectancy falls some- where between these two extremes.

One important issue in P!O expectancies is determining which outcomes are most important to us. We certainly don’t evaluate the P!O expectancy for every possible outcome. There are too many of them. Instead, we only think about outcomes of interest to us at the time. One day, your motivation to complete a task may be fuelled mainly by the likelihood of getting off work early to meet friends. Other times, your motivation to complete the same task may be based more on the P!O expectancy of a promotion or pay increase. The point is that your motivation depends on the probability that a behavior or job performance level will result in the outcome that you anticipate.

Outcome Valences The third element in expectancy theory is the valence of each outcome considered. Valence refers to one’s anticipated satisfaction or dissatisfac- tion with an outcome. The number may range from �100 to +100 to reflect the overall value placed on the outcome: a maximum positive valence of +100 would be highly desired, while the lowest valence of �100 would be something that a person would work hard to avoid and a valence of 0 would mean no motivation at all. If you have a strong relatedness (social) need, for example, then you would value group activities and other events that help to fulfill that need. Outcomes that move you further away from fulfilling your social need, such as working from

Expectancy Theory of MotivationFIGURE 7-5

In order for workers to be motivated to perform desired behaviors at a high level . . .

Effort Performance Outcomes

Expectancy must be high. Workers must perceive that if they try hard, they can perform at a high level.

Instrumentality must be high. Workers must perceive that if they perform at a high level, they will receive certain outcomes.

Valence must be high. Workers must desire the outcomes they will receive if they perform at a high level.

Process Theories of MotivationFIGURE 7-4

Expectancy

Effort-to-performance (E P) expectancy

Performance-to-outcome (P O) expectancy

Outcome valences (V)

Equity

Outcome/input ratio

Equity evaluation

Set goal

Outcome

Feedback

Goal Setting

Consequences of inequity

Comparison other

Valence The anticipated satisfaction or dissatisfaction that an individual feels about an outcome.

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home, will have a strong negative valence and you would work to avoid that undesirable outcome.

Notice that some outcomes directly fulfill personal needs, whereas other out- comes indirectly fulfill those needs. You might be motivated to achieve the highest sales in your company in a particular month because ‘‘it feels great.’’ This is the direct outcome of growth-need fulfillment. At the same time, you might want to be the top salesperson because you will be mentioned in the company magazine, thereby indirectly fulfilling your social needs.

Expectancy Theory in Practice One of the appealing characteristics of expect- ancy theory is that it provides clear guidelines for increasing employee moti- vation by altering your E!P expectancies, P!O expectancies, and outcome valences. Because E!P expectancies are based on self-esteem and previous experience, employees should be given the necessary tools and competencies, clear role perceptions, and favorable situational factors to reach the desired levels of performance. This involves properly matching employees to jobs based on their abilities and their job interests, clearly communicating the tasks required for the job, and providing sufficient resources for them to accomplish those tasks.xxix

Even when employees have the capacity and resources to perform the work, they may have low E!P expectancies because of low self confidence. Counseling and coaching may help employees to develop confidence about the skills and knowledge they already have to perform the job. Similarly, E!P expectancies are learned, so positive feedback typically strengthens employee self confidence. Behavior modification and behavioral modeling also tend to increase E!P expect- ancies in many situations.

The most obvious ways to improve P!O expectancies are to measure employee performance accurately and distribute more valued rewards to those with higher job performance. Many organizations have difficulty putting this straightforward idea into practice. Some executives are reluctant to with- hold bonuses for poor performance because they do not want to experience conflict with employees. Other firms fail to measure employee performance very well.

P!O expectancies are perceptions, so employees should believe that higher performance will result in higher rewards. Having a performance-based reward system is important, but this fact must be communicated. When rewards are distributed, employees should understand how their rewards have been based on past (recent) performance. More generally, companies need to regularly com- municate the existence of a performance-based reward system through examples, anecdotes, and public recognition of employee performance.

Increasing outcome valences are affected by those things that are valued by employees. This brings us back to what we learned from the content theories of motivation—namely, that companies must pay attention to the needs and reward preferences of individual employees. Companies should develop more individualized reward systems so that employees who perform well are offered a choice of extrinsic rewards, including bonuses, additional vacation time, or opportunities to travel to conferences and training sessions. It is important not to neglect intrinsic motivators, such as career path and control over resources to accomplish a job, as possible reward outcomes that may be valued by the employee.

Expectancy theory also emphasizes the need to discover performance outcomes that have negative valences, thereby reducing the effectiveness of existing reward systems. For example, peer pressure may cause some employees to perform their jobs at the minimum standard even though formal rewards and the job itself otherwise motivates them to perform at higher levels.

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Expectancy Theory Internationally Expectancy theory offers one of the best models available for predicting work effort and motivation in different cultures. All three components of the model have received much support in past research, and there is particularly good evidence that P!O expectancies influence employee motivation. As suggested by the discussion above, in different countries employ- ees may be motivated by much different outcome rewards. For example, in the United States, employees are more likely to have an individualistic orientation. Most Americans will have no expectations that the company should ‘‘take care of them.’’ Thus, the outcomes are typically focused on monetary rewards. Asian firms that try to reward North American employees partly through company social activities such as lunches and dinner banquets as they would in Asia may be surprised to find that such ‘‘social rewards’’ are not motivating at all to many North Americans, who, on average, do not value group activities as highly as an Asian staff.

In more collectivist cultures, especially those with higher risk avoidance, employees may believe that being taken care of is an obligation of the company, and will be motivated by the offer of additional job security, perhaps in exchange for loyalty or accepting a lower salary. This used to be true in China until the economic reforms of the 1980s and 1990s dismantled the old ‘‘iron rice bowl’’ system that Chairman Mao and his followers promulgated after the end of the Chinese Civil War in 1949. (The Iron Rice Bowl was a concept that the state, through the state-owned enterprises, would meet all of the workers’ needs, includ- ing food, schooling for children, healthcare, and even recreation and holiday facilities for workers.) Thus, historically Chinese workers were to give their firms (and the state) absolute loyalty in return for having their basic needs met.4

Similarly, Brazilians expect that an outcome of their performance will even include being helped with personal financial problems. The personnel depart- ments of larger Brazilian firms typically provide a range of financial assistance to employees. To many Americans this may sound acceptable until they recognize that the firm will also ask a number of personal questions, including ones about home and life plans, which would seem highly intrusive to most North Americans.

For most employees, rewards such as bonuses, additional vacation time, and opportunities for career advancement are as important as a paycheck. Without a clear reward system, motivation and morale can suffer.

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Iron Rice Bowl In China, the idea of the iron rice bowl is that the state meets all workers’ needs. This means not only food, but schools for kids, hospitals, and even vacation locations for workers. These benefits were typically organized around the large state enterprises they served.

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Brazilians accept that these questions are part of the firm’s effort to make sure that employees are getting their health care and retirement plans in order.xxx

Equity Theory

Equity theory explains how people develop perceptions of fairness in the distri- bution and exchange of resources.xxxi As a process theory of motivation, it explains what employees are motivated to do when they feel inequitably treated. This theory is widely accepted in the media and popular culture, but research on equity theory is more cautious about its applicability. There are four main elements of equity theory: outcome/input ratio, comparison other, equity evaluation, and consequences of inequity. Each will briefly be examined in turn.

Outcome/Input Ratio The outcome/input ratio is the value of the outcomes received divided by the value of inputs provided in an exchange relationship. Inputs include skills, effort, experience, amount of time worked, performance results, and other employee contributions to the organization. Outcomes are things that employees receive from an organization in exchange for inputs, such as pay, promotions, recognition or an office with a window. Employees receive many outcomes, so it isn’t always easy to determine the overall values.

For example, a major European retailer opened a number of stores in China in the 1990s, and brought a large back-office operation there in 2000 to function as a regional Asia headquarters. At that time, they brought a number of expatriate staff from Europe and paid them salaries typical for Europe, plus additional hardship pay for relocating to China. The retailer also had a number of local Chinese managers who worked in the back office in positions comparable to the Euro- peans. Although they received comfortable pay by Chinese standards, substantial pay inequity existed between the Chinese managers and the Europeans. Although the firm ordered individuals not to talk about salary, this instruction was ignored, and the European salaries and benefits became known. When the large wage discrepancy between employees doing essentially the same work was discovered, the Chinese managers became quite dissatisfied. This puzzled the European man- agement, because they knew that the Chinese managers’ pay was at the top of the local pay scale for employees with comparable experience and skills. Why would they expect the same money, the Europeans asked? The heart of the difficulty can be seen in equity theory—workers performing basically the same activity but receiving much lower wages.

Both inputs and outcomes are weighted by their importance to the individual. These weights vary from one person to the next. To some people, seniority is a valuable input that deserves more outcomes from the organization. Others con- sider job effort and performance the most important contributions in the exchange relationship, and give seniority relatively little weight. Equity theory recognizes that people value outcomes differently because they have different needs and interests. For example, it accepts that some employees want time off with pay whereas others consider this a relatively insignificant reward for job performance.

As with expectancy theory, equity theory has been criticized for being too calculative and too material-achievement focused, and as such, being mostly relevant to Anglo-American settings. For example, in some cultures, equity in outcome is seen as more important than equality in the equity outcome/input ratio. That is, in many societies some feel that employees of about the same age and experience should be paid about the same, even if there are better performers in the group. If a high-performing employee were to stand out by virtue of a higher salary, then that individual would feel embarrassed. Multinational firms have found this to be common in Japan, though it has reportedly been changing with the younger generation now entering the workforce. Historically, Japanese

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employees valued salaries that were relatively equal, and did not feel comfortable or particularly motivated by being paid more, even if they were productive enough to justify the higher pay. Harmony or ‘‘fitting in’’ with colleagues was more valued than extra pay or promotion.xxxii In the outer resort islands of Hawaii, typically thought of as a more relaxed culture, hotel human resources executives have reported that if they pay out bonuses and extra money for working longer hours, the employees will respond by working less, not more. The employees feel that they only need to work to earn a certain amount of money for the week and after that, they can take it easy and take the rest of the week off. Thus, even in a country like the United States there are exceptions to equity theory reliance on the output/input ratio.

Comparison Other Equity theory states that we compare our situations with a ‘‘comparison other,’’ but the theory does not identify the comparison other. It may be another person or group of people, or even yourself in the past. It may be someone in the same job, another job, or another organization. Most of the time, we tend to compare ourselves with others who are nearby, in similar positions, and with similar backgrounds. A luxury hotel chain in East Asia needed extra hotel workers for the extended Christmas–New Year–Chinese New Year holiday season, so they brought housekeepers from a sister hotel in Vietnam to its resorts in Thailand for short-term assignments. The hotel chain provided room and board along with the wage that was standard in Vietnam, and employees received more money than they would have otherwise. However, the Vietnamese hotel workers stopped comparing themselves to hotel workers back in Vietnam, and instead compared their compensation with the Thai hotel employees in the Thai resort who were getting paid about twice as much. The result was a difficult situation in which the guest workers were very unhappy about what they thought was inequitable pay. Management was confused because they thought they were paying a nice premium to bring the Vietnamese employees over to Thailand for the holiday season. Finally, the hotel workers tried to organize a union and management consented to increase their pay by about 25 percent. The Vietnamese employees still felt underpaid compared to the locals, but they felt more motivated than before.

People in more senior positions, CEOs for example, compare themselves more with counterparts in other organizations because they may not have a direct comparison within the company. Some research suggests that employees fre- quently collect information on several referents to form a ‘‘generalized’’ compar- ison other. For the most part, however, the comparison other varies from one person to the next and is not easily identifiable. As the world continues to global- ize the comparisons are increasingly becoming more standardized for many pro- fessionals. Those professionals who feel that an organization does not match their comparison other may now not only change employers but even change the country in which they are employed.

Equity Evaluation We form an equity evaluation after determining our own out- come/input ratio and comparing this with the comparison other’s ratio. Consider the European retailer situation again. The Chinese managers felt pay inequity because they believed the European managers were receiving higher outcomes (pay) for inputs that they believed were about the same. The over-reward inequity and under-reward inequity is illustrated in Figure 7-6.

In the equity condition, the Chinese managers would believe their outcome/ input ratio to be similar to the European managers. In this particular case, expa- triate managers are providing the same inputs as the local Chinese managers, so they may even feel motivated to improve their performance. Or, they may just feel that they are more experienced, thus more productive and effective in their jobs.

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The Chinese managers would feel inequity and ask for redress, or they would threaten to leave the field (quit) during the Chinese New Year season in January or February.

The equity theory model recognizes that an individual makes more complex equity evaluations when he or she and the comparison other have different out- comes and inputs. By comparing outcome/input ratios, the model states that equity occurs when the amount of inputs and outcomes are proportional. They do not necessarily have the same amount. For instance, we feel equitably treated when we work harder than the comparison other and receive proportionally higher rewards as a result.

MOTIVATION IN RUSSIAN MANUFACTURERS

While expectancy theory is popular in the individualistically minded U.S. (with low uncertainty avoidance) inter- national application can present chal- lenges. Americans have a ‘‘calculative involvement’’ in their organizations, which employees can readily under- stand. This helps to explain the popu- larity in the U.S. of expectancy theories of motivation, which see employees as generally having a high need for achievement (nAch) and being moti- vated by consciously expected and well-calculated outcomes. In contrast, as in many developing countries, Rus- sia is high on Hofstede’s collectivism dimension and uncertainty avoidance.

Thus, security and social belonging will be highly valued needs in Russian society, particularly given the upheav- als of recent years.

An examination of Russian manu- facturing managers found that employ- ees may respond positively to motiva- tional approaches emphasizing group benefits that reinforce the importance of team contributions. Empowerment should be done sincerely, and must be backed up by actions that reinforce mutual trust. Employees should also have access to information about the business and its performance. Informa- tion about the employees’ own depart- ments or other sub-units is particularly

necessary, as this is the level of per- formance that they can affect.

Thus, in a country such as Russia, motivational approaches focused on the individual are not likely to be elim- inated. However, to be successful, such motivation efforts should be tied to development and mastery of work- related skills. As with many developing countries, excellent educational oppor- tunities that will be prized by the employees include overseas training.

Elenkov, D.S. (1998, Summer). Can Amer- ican management concepts work in Rus- sia? A cross-cultural comparative study. California Management Review, 40(4), 133–156.

Over-reward versus Under-reward InequityFIGURE 7-6

YouReferent

Reward Outcomes

Performance Inputs

Reward Outcomes

Performance Inputs

Over-reward Inequity

Reward Outcomes

Performance Inputs

Reward Outcomes

Performance Inputs

Under-reward Inequity

(demotivating)

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Consequences of Inequity The outcome of the evaluation that inequity exists is that employees will be motivated to take some action. This was seen in the prior example when the Chinese managers tried to reduce the perceived inequity by putting pressure on the European retail firm to increase their pay. There are five possible categories of actions that can be taken to reduce feelings of inequity.

Changing Inputs. Under-rewarded workers tend to reduce their effort and per- formance if these outcomes don’t affect their salary and compensation. Overpaid workers sometimes increase their inputs by working harder and producing more. This effort to increase inputs is similar to the efficiency–wage hypothesis from Nobel Laureate Kenneth Arrow, who theorized that people who knew they were getting paid more than the going market rate would work harder to try to justify that additional pay.xxxiii

Changing Outcomes. Employees who feel they are in an under-rewarded situation might ask for more money to resolve the inequity. If they do not receive the pay raise they may take actions that change the perceived outcomes. For example, these employees may call in sick frequently, steal supplies, or misappropriate company money or facilities. Each of these outcomes provides more benefits to the employees. Outcomes change can also come from some action that hurts or harms a firm; such actions provide a psychological benefit to the employee. This situation is seen in the information technology industry when software engineers insert malicious lines of code into applications, or even bring codes home with them and withhold them from the company if they are unhappy. Numerous computer security incidents in Singapore, for example, were traced to employees who felt they were under compensated by their employers.xxxiv

Changing Perceptions. In an inequity situation that the employee cannot (or prefers not to) change, he or she may feel it necessary to distort inputs and outcomes to restore perceived equity. This is most common in an overpayment situation. Employees who believe they are overpaid may try to convince others that they are worth the money. They do this by emphasizing perceived inputs such as seniority, training, knowledge, teamwork, contribution, and so forth. In more extreme cases, they may try to take credit for their colleagues’ or subordinates’ work to boost their perceived contribution. In more hierarchical organizations, this problem of supervisors improperly taking credit for employee actions is something that man- agers must watch for carefully. It is important for managers not to isolate them- selves and to stay in touch with employees throughout the reporting hierarchy.

Leaving the Field. Some people try to reduce inequity by getting away from the inequitable situation. Equity theory thus explains some instances of employee turnover and job transfer. For example, employee turnover in many large retail operations in Europe can be quite high, sometimes over 200 percent, and inequity is often credited by the individuals who leave.

Changing the Referent. If an employee who is feeling inequity cannot seem to alter the outcome/input ratio, he or she might justify the inequity by replacing the referent with someone having a more comparable outcome/input ratio. As was mentioned earlier, people sometimes rely on a generalized referent, so changing the referent to protect one’s sense of self esteem is easy and common in the absence of other avenues to right the inequity. This outcome is particularly attractive to international firms. This approach can be used by firms as they help employees to establish what potential referents are obtaining. For example, the rapid economic growth of China has been generated in part through employees’ willingness to work for 80 cents per hour, but that same, economic growth has now begun to

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push wages higher, particularly in South China. The government’s control of information and media often results in widespread misperceptions of what wages and benefits other workers are receiving. To overcome misinformation, many firms in South China today are increasingly open about what they are paying and how their pay compares to other firms and industry averages. Firms are seeking to establish a more accurate referent point and comparison for the employee salaries.

Ethics and Equity Workplace inequity extends beyond employee motivation to the organization’s ethical conduct. It particularly relates to the rule of distributive justice mentioned in Chapter 1. Distributive justice asserts that inequality is all right if employees have fair access to resources and opportunity in the firm so that any inequality is the result of effort. Thus, inequalities are ultimately in the best interest of the firm and its employees; talented workers are rewarded commensu- rate with their work and ability to improve the lot of the firm’s stakeholders. Employees in difficult or more risky jobs could be expected to be paid more under distributive justice.

Applying the distributive justice rule is challenging because it is difficult to determine how far ‘‘the least well off’’ benefit is from those who receive higher rewards. Consider what former General Electric CEO Jack Welsh earned. GE rewarded Welsh with a $9 million annual pension, not to mention a number of other perks including a $15 million apartment. He was also given the use of a GE corporate jet and other company resources. Many critics felt Welsh’s employment contract was overly lavish when it finally was made public during his divorce proceedings in 2002. (Welsh agreed to give up some of his benefits after they were made public.)

If Welsh had not stepped in as CEO, it is quite likely that GE would not have done as well as it did. The world of business also learned a lot from GE about restructuring and selecting and training top management. Welch is credited with boosting GE’s market capitalization from $13.9 billion in 1981 to an estimated $490 billion by 2001—an increase of $476.1 billion. He and many other CEOs have argued that with market cap increases in the tens or hundreds of billions of dollars, giving a CEO a few hundred-million dollars is no big deal. However, it is impor- tant to remember that Jack Welsh did not do it all on his own; there are 300,000 employees at GE and decades of history that played a role in creating GE’s market capitalization. GE has had a string of fine leaders over the twentieth century dating back to inventor Thomas Edison himself. Thus, the issue of whether Welsh’s pension and other perks are unethical or otherwise problematic likely depends on a person’s view of distributive justice.

Perceptions of equity change not only with the country and culture, but also with the times. As the world increasingly is open to more market opportunities, equity comparisons that account more fully for someone’s productive input (and not just their salary) may become more accepted.xxxv

International Perspectives and Equity We’ve stressed how managers must be wary of projecting their views and values onto others. It cannot be assumed that everyone shares the same interpretation of equity or that people will get upset if someone is earning more money. Individuals vary in their equity sensitivity—that is, our outcome/input preferences and reaction to various outcome/input ratios. A simple test to determine your own equity sensitivity is at the end of this chapter (see In-class Exercises #1).

At one end of the equity sensitivity scale are the ‘‘Entitleds.’’ The Entitleds feel comfortable in situations in which they receive proportionately more than others. Entitleds know how much everyone else is making, or want to find out. They are highly sensitive to anything they perceive as inequitable, and will regularly talk

Distributive justice Asserts that inequality is acceptable if employees have fair access to resources and opportunities such that they recognize any inequality to be the result of their own effort and not because of favoritism by management.

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about people who did not do anything for them, or organizations that mistreat them. Entitleds might accept having the same outcome/input ratio as others, but would prefer to receive more than others performing the same work. Or they may try very hard to work less while still getting paid—in fact they may spend all their time working less, or scheming to work less while maintaining their income. Those who have read the Pulitzer Prize–winning novel The Good Earth by Pearl S. Buck about village life in China in the early part of the twentieth century will recognize the Entitled character of the lazy uncle.xxxvii He spent most of his time pretending to work or saying that he was going off to work but seldom did, and somehow he ended up well off at the end of the story. For most of the book, the lazy uncle was the happiest character in the novel. Entitleds often talk about what other people get in terms of salary and benefits and whether they are worth it. They often feel that they are unappreciated and underpaid and are willing to share their feelings. Entitleds judge others on what they do for them.

At the other end of the scale are the ‘‘Benevolents.’’ Benevolents are tolerant of situations in which they are under-rewarded. They might still prefer equal out- come/input ratios, but do not mind if others receive more than they do for the same inputs as long as they feel fairly treated. They usually like to see an equal workload, but are more accepting of unequal compensation. Benevolents rarely

MOTIVATION IN CHINA

At nine o’clock in the morning, a leadership and motivation workshop begins as Shanghai executives from one of main- land China’s biggest computer firms start wrestling with a list of progressive management theories. Ten minutes later, a harried senior executive shuffles in. ‘‘Stop everything,’’ someone shouts. The 60 participants are ordered to stand up and hold a minute’s silence to focus their collective corporate thoughts on the error of the colleague that came in late. The offender—who is in China’s top one per cent of earners—bows his head and walks to a corner of the room for his 10-minute dose of shame, while his colleagues go back to discussing the managerial benefits of lateral think- ing over parallel thinking.

Such humiliation is common in Chinese companies for errors in performance. For example, other companies will make employees stand for five minutes, holding their mobile phone aloft if the offending article has rung during a meeting. It is humiliating—but humiliation is a particularly effective motivator in China, human resource managers say, and has long precedent in Chinese commercial culture over the past two centuries, although it runs counter to a lot of modern thinking both in China and the West.xxxvi

Many individuals not familiar with modern China will point to writers like Confucius to argue that managers in China practice a polite managerial method that focuses on saving face. However, modern China draws more on criticism and self-criticism as developed by Mao Zedong than from Confucius’ teachings. Chinese society has trans- formed radically in recent years, but many managerial behaviors still relate to actions, such as the criticism ses- sions, organized by the Communists during Mao’s reign.

For example, many Chinese universities still post notices on bulletin boards about students who are in breach of

campus rules. Some universities will make violators address student gatherings to publicly denounce their own behavior and spell out their reformed ways. Dunce caps are foisted on underachievers in some primary schools, while in others, teachers make the children vote each week for the worst student in class. Staffs from restaurants, beauty salons, and department stores, among other enterprises, are typically made to line up every day outside the premises for a military-style drill. Model employees are commended and those who are thought to have let the team down are loudly chastised.

Recently, outside one of the many high-priced restau- rants in Beijing, a young waitress trembled as her manager screamed at her for spilling something the previous eve- ning. The young lady, who probably earns about 20 Yuan (U.S.$2.30) per day was near tears as her 40-odd col- leagues and dozens of people waiting at a bus stop looked on. ‘‘She won’t be spilling anything today,’’ one onlooker said, nodding in approval.

While the leaders of many mainland (Chinese) compa- nies dislike this approach, many others still use public humiliation because it is often perceived as having a more immediate impact than subtle methods of motivating staff. A human resources manager with a leading mainland domes- tic appliance firm said the firm had dabbled with the idea of introducing more sophisticated motivating techniques, but decided it was more effective to use its own version of the carrot-and-stick approach. ‘‘We don’t dangle any- thing,’’ she said. ‘‘We hit them with both the stick and the carrot.’’

Goff, P. (2003, April 21). Ritual humiliation. South China Morning Post (Hong Kong), p. 11.

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talk about what others are earning and about who ‘‘owes them.’’ This group will be concerned about Entitleds who are not doing their fair share of work and seem to be getting a free ride, but they are not demotivated by inequity situations.

Somewhat in the middle is the third group—the ‘‘Equity Sensitives.’’ Equity Sensitives want their outcome/input ratio to be equal to the outcome/input ratio of the referent other, and even small differences can create emotional tension and demotivation for them. Like Entitleds, they get upset and demotivated if they discover the comparison person is earning more money than they do. But unlike Entitleds, Equity Sensitives generally do not scheme to get out of work and get by with minimal input.

A company’s motivation and reward system needs to account for such differ- ences in people by checking the system, not just for pay equity but for a reasonable balance of workload and other inputs, as well as outcomes. Managers in particular need to identify Entitleds and let them know they are appreciated and that steps are being taken to reward them properly.

Are Entitleds, Equity Sensitives, and Benevolents equally spread around the world? Because equity sensitivity may be based partly on personality, it is possible that different equity-sensitivity behavior is as well distributed around the world as different personality types. However, these differences in distribution are likely due to differences in cultural values. For example, workers in China demonstrate a Benevolent equity orientation when they compare their salaries to what they earned before rather than to what others earn. This may be because of the strong collectivist and high power distance cultural values present in China.xxxviii

Although there is a test instrument to assess where employees stand on this equity scale, you can easily determine this by listening to people talk about salaries and compensation, or their acceptance of workload, agreeableness toward taking on new tasks, or volunteering for work. Equity sensitivity usually is very evident, and managers need to pay attention to this and emphasize fairness for Equity Sensi- tives and growth opportunities for Benevolents who may want to work hard in order to learn.

Equity theory has received support in research and practice. Organizational behavior researchers have applied the equity theory model to explain why pro- fessional baseball players change teams, why employees steal from their employer, and why people become hostile at work. One of the clearest lessons from equity theory is that we need to continually treat people fairly in the distribution of organizational rewards. Recent research has shown that companies maintaining a reasonably equitable pay environment such that the top paid employee (such as the CEO) does not earn more than 50 times the lowest paid full-time employee outperform companies with more inequitable compensation.xxxix

Maintaining feelings of equity is not an easy task. For example, two large surveys, one in Australia and the other in the U.S., reported that about half of all employees feel underpaid. This was true even for over a third of those earning more than $100,000 annually. Major league baseball players in the U.S. reported feeling underpaid and unwanted even when earning millions of dollars per year.xl

Why do so many people feel this inequity? One reason, as we discussed above, is that people have different levels of equity sensitivity, so they may react differently to the same situation. Some people (Benevolents) are generally content to compare themselves with themselves, so if they are doing better this year than last year, they will generally be motivated—at least inequity perceptions will not be a problem for them in this case. Others (Entitleds) are regularly talking about what everyone else earns, and how this or that company exploits its employees and customers. Employees also have differing opinions about which inputs should be rewarded; should age and seniority be rewarded, employee needs, competencies and skills, or pure performance output? Which outcomes are more valuable than others is another factor to consider in developing a motivation-reward system.

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It will be difficult to please all types of employees, but firms have to try to regularly check systems for equity, and then tell their employees that they are doing this. Overall, trying to maintain feelings of equity in the workplace will probably always be challenging, but firms must be proactive about it.

Goal Setting

Another major process theory of motivation is the theory of goal setting. Edwin Locke, Gary Latham, and colleagues have done a great deal of work over the years on the importance of goal setting for motivation and performance. Organizations have discovered that goals can yield very effective results and prevent issues of demoralization. Vague statements such as ‘‘Do your best’’ or ‘‘Our work is really an art and not a science so we cannot have goals’’ have been shown by goal-setting research to be unhelpful—goals can be applied for most endeavors, including sports and education and even less-structured activities like research and devel- opment.xli Goals are identified by setting customer satisfaction objectives or improvements on other key measures, such as a reduction in crime rates for a police force or on-time performance and improved fuel usage for a city bus company.xlii Research has shown that organizations that set goals can enjoy higher performance from their employees. Goals are the immediate or ultimate objectives that employees are trying to accomplish from their work effort. Goal setting is the process of motivating employees and clarifying their role perceptions by establish- ing performance objectives. Goal setting potentially improves employee perform- ance in two ways: first by adding to the intensity and persistence of effort, and then by giving employees clearer roles so that their effort can be directed toward behavior that will improve task performance.

Goal Setting in Practice Internationally Goals must have a measurable outcome and a time or date to determine if that goal has been reached. Failing to set a goal means that the considerable motivational potential of the goal setting will be lost.

ESTONIAN PAY DISCRIMINATION

Estonia is a small Baltic nation that was formerly part of the Soviet Union. It is located across the Gulf of Finland from Finland. Estonia has done very well since its transition from communism. The Estonian and Finnish languages are very close to each other, and there was an easy and relatively quick movement of Finns into Estonia seeking low-cost highly trained individuals. Estonia has a strong technolog- ical foundation and is the home of the founders of Skype, which allows phone calls over the Internet. Estonia has also been blessed with good elected officials who have avoided the corruption that has typified so many transitional econo- mies as they move from communism. The Estonian leaders have also been very innovative, with the nation being one of the first in the world to employ a flat tax where all people pay the same percentage on their income.

Estonia is unique in that approximately 40 percent of its population is ethnically Russian and not Estonian. Since Estonia achieved independence from the Soviet Union, there have been some difficulties in the treatment of the ethnic Russian minority. In general, Estonians feel great

hostility to Russia and believe their country was forcefully incorporated into the repressive Soviet Union. As a result, after gaining statehood, Estonia quickly established the need to speak fluent Estonian as a requirement for citizen- ship, and a large number of individuals whose families lived in Estonia for many years are now officially stateless. This has made travel particularly hard. The official and only language used in schools is Estonian, and discrimination and the overall hostility to Russians has led to several instances of rioting by ethnic Russians.

Research shows that, while at the time of independence there was no discrimination in pay, ethnic Russians, even if they are fluent in Estonian, now receive substantially less pay than ethnic Estonians. The difficulty for international firms who move to Estonia is how to respond to this discrimination. Local Estonians expect to make more than ethnic Russians, so issues of expectancy and equity come into play. But if the firm supports such discrimination, is it acting ethically?

Kroncke, C., & Smith, K. (1999). The wage effects of ethnicity in Estonia. Economics of Transition 7(1), 179–199.

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Vague statements such as ‘‘Do your best’’ are not really goals and are worthless in motivational and performance terms. Instead, behavioral scholars have identified six conditions to maximize task effort and performance: specific goals, relevant goals, challenging goals, goal commitment, participation in goal formation (some- times), and goal feedback. Additionally and perhaps most importantly, goals must be made public. That means for your goal to increase your motivation and ulti- mately your performance, you must be specific about the goal and the date by which you will accomplish it, and you must tell someone about it. Secretly set goals have little or no motivational or performance value. Employees put more effort into a task when they work toward specific goals rather than amorphous targets. Specific goals have measurable levels of change over a specific time, such as, ‘‘Reduce the defect rate by five percent over the next six months.’’ Specific goals communicate more precise performance expectations, so employees can direct their effort more efficiently and reliably.

Many companies apply goal setting through a formal process known as man- agement by objectives (MBO). There are a few variations of MBO programs, but they generally identify organizational objectives and goals. These goals then move down through the organization with each level determining what is necessary to achieve the larger goal. So, if a firm has decided to expand revenue by 10 percent, there must be a wide range of changes in behavior by various departments, from marketing to production. For the actual sales force, expanding revenue by 10 percent means that they will need to expand the number of cold calls, which are calls made to potential customers without a prior appointment. So one of the goals for the sales force may be to make 20 percent more cold calls this quarter. This goal will be discussed with each employee and at the end of the quarter, the employee’s performance will be judged based on that goal. Although MBO has been criticized for creating too much paperwork, it has been effective and is widely applied in business—both domestic-only and international—and is consistent with the empir- ical evidence on goal setting.

Employees report higher levels of motivation and usually perform better when they have set difficult but achievable goals. Challenging goals also fulfill a person’s self-actualization and other intrinsic needs associated with self-efficacy and achievement satisfaction. When employees set their own goals, rather than having the company set goals for them, goals tend to be set somewhat higher. Self-set goals also have the effect of increasing employees’ acceptance of the goal. Yet there are limits to difficult goals, if the goals become so difficult that employees no longer have the ability or tools to reach them. Consistent also with the predictions of expectancy theory, effort and measurable performance on the task falls signifi- cantly, as shown in Figure 7-7. The optimal range of goal difficulty is one in which the employee perceives a goal to be difficult, but achievable, and the believes that a strategy can be crafted to achieve that goal. Leaders in the organization have a key role to play in showing a path by which employees have some control over their work and can both achieve a goal and benefit from its achievement.

Goals must also be relevant to an individual’s job and within his or her control. Telling an employee to work harder without a clear and achievable goal, relevant feedback, and a path to that goal will not motivate him or her and is likely to be confusing. Employees also should be involved in the goal-setting process. Partic- ipation in goal formation tends to increase commitment because employees take ownership of the goals, compared to those that are merely assigned by super- visors. In fact, today’s employees increasingly expect to be involved in goal setting and other decisions that affect them. Participation may also improve goal quality, because employees have valuable information and knowledge that may not be known to those who initially formulated the goal. Thus, participation ensures that employees buy into the goals and have the competencies and resources necessary to accomplish them. Some managers believe that such participation is not expected

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in their region of the world, and managers from China to Latin America report that generating such participation takes time to develop. However, employees ulti- mately want to participate in goal setting.

Feedback is another necessary condition for effective goal setting. In particular, experts emphasize that effective goal setting requires measurable feedback that matches the specific metrics of the goal. As discussed in Chapter 2, feedback is a powerful source of learning. In terms of goal setting, feedback lets us know whether we have achieved the goal or are properly directing our efforts toward it. Feedback is also a vital ingredient in motivation because employees need confirmation of their actions and goals and affirmation that they are doing a good job, as well as some censure if something needs to improve in their actions and performance.

Limitations Goal setting has a few limitations. One problem is that when goals are tied to monetary incentives, many employees may try to ‘‘game the system’’ by selecting easy goals, or negotiating performance goals that are already near com- pletion. Employees with high self-efficacy, self-esteem, and need for achievement tend to set challenging goals whether or not they are financially rewarded for their results, while individuals who are lower on those scales are less likely to set high goals for themselves. Employers must balance these considerations in setting up a reward-and-evaluation system. Similarly, management needs to implement checks and balances on employee goals and behavior. For instance, if there are perform- ance goals for production workers with no controls on the quality of what they produce, some employees may rush so they can produce more and be rewarded accordingly. But this will lead to higher levels of defects and product nonconform- ance, more material wastage, and an increased need for quality control checking and product reworking with all the incumbent costs. So quality control and team- work goals need to be implemented along with production goals to minimize quality problems.

Another limitation is that goal setting cannot be applied to every performance dimension of every task. We can usually find some measurable goals, but many other dimensions of job performance are difficult to measure and have complex and long-term outcomes. The result is that goal setting potentially focuses employ- ees on a narrow subset of short-term performance indicators. The saying ‘‘What gets measured, gets done’’ usually proves accurate. Thus, organizations must be

Effect of Goal Difficulty on PerformanceFIGURE 7-7

High Ta

sk P

er fo

rm a n ce

Low Moderate Challenging Impossible

Area of Optimal

Goal Difficulty

Goal Difficulty

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careful in setting goals and measuring employee output. Apart from such con- cerns, goal setting brings a wealth of well-tested evidence and tools to managers. It is widely supported by research and is generally successful in practice. Goal setting involves measurement of the task, an agreed outcome, and a goal for improving performance.

EMPLOYEE INTERESTS

Recall from the earlier discussion that performance is closely related to motivation, which itself is based on ability, values, and life interests. Life interests indicate whether an employee is likely to be interested in doing the job. Thus, motivation also concerns an employee and what they as individuals like to do. Timothy Butler and James Waldroop at Harvard University identify eight life interests (also called ‘‘job interests’’) that motivate when they fit with an employee’s particular bent to do certain tasks.xliii For example, some people may like managing others (similar to McClelland’s high nAff people). They would do better and be self-motivated (intrinsically motivated) to work on tasks associated with people management, but might not fare well in a job that required them to stare at a computer monitor for eight hours a day, even if they were good at it. Others may enjoy working with numbers or working with technology and would be intrinsically motivated to do that job. Butler and Waldroop give a list of job interests in Figure 7-8, and tasks and vocations that might fit people based on these interests are shown in Figure 7-9. Butler and Waldroop have developed a job-interest inventory that can be viewed at www.careerdiscovery.com, where people can discover their job

NORTH AMERICAN RETAILER: DISCOVERING THE POWER OF SHAME

Goal setting in North America can be a straightforward process and very suc- cessful. But as firms move internation- ally they may need to consider a richer set of motivations than commonly used in North America to be successful. One North American firm, one of the world’s largest retailers, opened its first store in China in the late 1980s. Although it was a global firm, it was slow to enter the rapidly growing Chi- nese market for fear that it would have difficulty understanding the market. A year after entering the market, the firm found that the customers were not that hard to understand. The problem lay with understanding the local workforce and the rules they should impose on it. For example, the retailer was used to trusting employees and giving them a second chance if they were caught stealing. If an employee was caught a second time, only then would the retailer fire the employee and refer the matter to the local police. But the firm

was warned by their local managers that this approach would not work in China, where retailers must be stricter and have zero tolerance for stealing. Local managers also suggested firing the employees and allowing shame to do the rest, but the retailer chose to stick to its global policy.

Not long after the retailer opened one of its first stores in China, the store’s general manager discovered that a local employee had stolen sev- eral small electronics goods. The gen- eral manager decided to follow the firm’s procedures and give the employee his warning, in spite of pro- tests from the local manager, who argued that the employee should be fired at once. Afterward, the general manager asked that the employee be watched carefully. A few weeks later, the general manager learned that the same employee had once again sto- len several more items. He decided to follow procedure, fired the employee,

and referred the case to the local police. The police arrested the employee and held him without trial for several weeks. Later, the general manager learned that the employee had received a twelve- year jail sentence, which seemed harsh for petty theft. After that and several other theft incidents, the retailer tight- ened its security and procedures consid- erably, and changed to a policy of immediately discharging any employee caught stealing anything, even office supplies. It also changed its global pol- icy by deciding not to notify police about a theft unless it was particularly serious. ‘‘Firing an employee and mak- ing the reason public is punishment enough; potentially wayward employ- ees get the message quickly, and we have not had any major incidents in quite a while,’’ the general manager said. ‘‘Anyway, the threat of several years’ imprisonment is always there, though we’d rather not resort to that.’’

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interests, what tasks may be most interesting to them, and why their current job may not be motivating them, irrespective of the money it pays. Bosses may find they can add a task to a job (such as creative production or influence through language and ideas—that is, a sales or corporate communications function) that fits with an employee’s job interests. That new task will motivate the employee to work simply because of his or her interest in the task, even if there is no extra money for doing it. Of course the company must be careful not to overload hard- working employees and should try to take away tasks that those employees do not value.

For example, if you are an accountant, but have an interest in influencing through language and ideas, you may be interested in speaking publicly about the company and its work. That might mean helping in corporate communica- tions, or sales and customer support. It may also mean traveling to university campuses to speak to classes, teaching a seminar, or participating in campus recruiting. Butler and Waldroop’s work suggests that employee motivation largely depends on their being interested in their jobs. What employees want is something that firms, no matter in what nation they are operating, must determine.

SUMMARY

One of the main implications of content motivation theories is that different people have different needs at different times. That implies that to motivate employees (or anyone else, for that matter) we need to learn what their needs are. Some employees, particularly younger employees, are motivated by more money. Yet others may be reasonably satisfied with their current salaries and would like more interesting work or an opportunity to influence decisions in their organization.xliv Need theories remind us not to rely too heavily on financial rewards as a source of employee motivation. Although some scholars argue that content motivation theories are culture-bound, the evidence so far suggests other- wise. Process theories provide a unique perspective of employee motivation. Each looks at different variables in the workplace and the minds of employees. As a new generation of employees enters the workplace and as globalization creates a

The Big 8 ‘‘Life Interests’’FIGURE 7-8

1. Application of Technology – People with these interests are curious about finding better ways to use technology to solve business problems.

2. Quantitative Analysis – Good at running the numbers; they see math as the best, and sometimes the only, way to figure out business solutions. Also see math as fun when others consider it very hard work.

3. Theory Development and Conceptual Thinking – People with this interest can be excited by building business models that explain competition within a given industry or by analyzing the competitive position of a business within a particular market.

4. Creative Production – Some people always enjoy the beginning of projects the most, when there are many unknowns and they can make something out of nothing. These individuals are frequently seen as imaginative, out-of-the-box thinkers. They seem most engaged when they are brainstorming or inventing unconventional solutions.

5. Counseling and Mentoring – Some people really enjoy teaching. In business, this is coaching or mentoring. These individuals are driven by the life interest of counseling and mentoring—guiding employees, peers, and clients to better performance.

6. Managing People and Relationships – Counseling and mentoring is a bit different from managing. Individuals with the managing life interest enjoy dealing with people on a day-to-day basis, but they focus much more on outcomes than do people in the counseling-and-mentoring category.

7. Enterprise Control – Such individuals seem happiest when running projects or teams; they enjoy ‘‘owning’’ a transaction such as a trade or a sale. These individuals also tend to ask for as much responsibility as possible in any work situation.

8. Influence through Language and Ideas – People in this category sometimes feel drawn to careers in public relations or advertising where they can write or communicate regularly. Sales, consulting and political/policy or even education careers are also common.

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more diverse workforce, companies need to examine their motivational practices and check their systems for equity. Pulling these various theories together, an international firm can help to tailor its specific motivation system for a worldwide organization. Meeting employee needs, setting useful goals, and providing employees with work they find interesting and rewarding can all help to create a very motivated workforce, and many of these actions do not require any addi- tional investment. Firms have the tools to motivate employees if care is taken to understand what workers want (see Take-Home Exercise #2).

MANAGERIAL GUIDELINES

1. Recognize employees’ individual needs and job interests. Remember that most people, managers included, have an extrinsic bias when evaluating others’ needs and values while failing to recognize their intrinsic motivators, such as job involvement and autonomy.

Twelve Pairs of Life Interests & Possible Job MatchesFIGURE 7-9

1. Enterprise Control and Managing People: CEOs, presidents, division managers, and general managers who enjoy both strategy and the operational aspects of the position – the CEO who enjoys playing the COO role as well.

2. Enterprise Control and Quantitative Analysis: Investment bankers, other financial professionals who enjoy deal making, partners in Big Six firms, top-level executives in commercial and investment banks, investment managers.

3. Application of Technology and Quantitative Analysis: Individual contributors who have a strong interest in engineering analysis (systems analysts, tech consultants, process consultants); production and operations managers.

4. Creative Production and Influence through Language and Ideas: Advertising executives, brand managers, corporate trainers, salespeople, public relations specialists; people in the fashion, entertainment, and media industries.

5. Counseling and Mentoring and Managing People: Human-resources managers, managers who enjoy coaching and developing the people reporting to them, managers in nonprofit organizations with an altruistic mission.

6. Enterprise Control and Influence through Language and Ideas: Executives (CEOs, presidents, general managers) whose leadership style relies on persuasion and consensus building; marketing managers, salespeople.

7. Application of Technology and Enterprise Control: Managers and senior executives in high technology, telecommunications, biotech, information systems (internally or consulting), and other engineering-related fields.

8. Theory Development and Quantitative Analysis: Economic-model builders, quantitative analysts, ‘‘knowledge base’’ consultants, market forecasters, business professors.

9. Creative Production and Enterprise Control: Solo entrepreneurs, senior executives in industries where the product or service is of a creative nature (fashion, entertainment, advertising, media).

10. Creative Production and Managing People: Entrepreneurs who partner with a professional manager, short-term project managers, new-product developers, advertising ‘‘creatives’’; individual contributors in fashion, entertainment, and media.

11. Quantitative Analysis with Managing People and Relationships: These individual like finance, yet they also enjoy managing people toward goals. Often enjoy corporate finance over investment banking and sometimes venture capital, although less than the Quantitative-Theory life interest combination.

12. Application of Technology with Managing People and Relationships: This is the engineer, computer scientist, or other technically oriented individual who enjoys leading a team, particularly long-running efforts as opposed to temporary project management.

Source: Adapted from Butler, T., & Waldroop, J. (1996). Discovering Your Career In Business. New York: Basic Books.

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2. Give goals and clear feedback to employees. 3. Allow employees to participate in decisions that affect them by letting them set

their own goals and exercise ownership over their jobs by giving them tasks they want to do, and provide stock purchase options where possible.

4. Link rewards and performance (expectancy). 5. Check the system for equity. Some people are more sensitive to equity prob-

lems than others, so managers need to be sure these people feel they are treated equally. Some employees want to see a clear path to promotion; others are motivated by the opportunity to do new things. Each person can be highly motivated if management pays attention to different needs.

6. Improve communication. Most employees like ongoing communication with management and even higher-level employees must keep their bosses informed.

7. Set worthwhile goals. Employees respond well to goals, as well as to job feedback. Public goals and objectives (and small rewards for meeting them) motivate.

8. Facilitate interesting work. Much research on employee satisfaction and per- formance in recent years has emphasized that employees want interesting work they can understand.

9. Communicate the firm’s mission. Excellent leaders motivate by communicat- ing the mission clearly and telling employees the truth about challenges facing the organization.

10. Find out life interests of each employee. Try to put people in jobs or give them tasks that match their life interests.xxxiv

11. On an ongoing basis, look carefully at the extrinsic motivators you have at your disposal and use your knowledge of your team’s values and interests.

12. Motivation can differ with culture and situation. 13. Poorly delivered criticism can be demotivating and significantly harm performance. 14. Link firm mission with motivation system. 15. The motivation or reward system needs to fit the job type.

Table 7-1 is useful to students and practitioners as they seek to analyze how motivation may vary in different areas of the world.

TABLE 7-1 Motivation around the World

Topic Evidence

Motivation and money Money is definitely a useful motivator. Most people want to make pretty good money, and some people are really motivated to make a lot of money. But if someone’s monetary needs are fairly fulfilled, giving him or her the opportunity to earn more money may not work well, and may even hurt that person’s motivation (‘‘This company just likes to throw money at problems instead of addressing the real issues I have.’’). It is important to consider the employee’s interests.

Regions where money may be more important than the average place in motivating

Money is important everywhere. But people in a high-masculine or pro- duction orientation culture may be more motivated by money than those who are not. For example, it is a good bet that people in Hong Kong will be motivated by the opportunity to earn more money. They’ll work overtime or take on extra work. But people in a slower-moving place, such as Hawaii, may be more likely to figure out how much money they need and leave it at that. On average, they would be less likely to be motivated to accept extra work just to make a few more dollars.

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TABLE 7-1 (Continued)

Topic Evidence

Misunderstanding employee needs and demotivation

Correctly understanding employee needs is crucial to motivation. Managers will find that motivating people is difficult if they offer things that employees do not want. For example, not all people are motivated by fulfilling social needs, because they simply do not think it is necessary to meet social needs through work. When a company expends efforts on social activities for its employees, it should be sure that employees actually want and value this; if they do not, it will be a complete waste of money. Managers who value social activities themselves (possibly because they are from cultures with a high feminine or relational-value score) may be surprised that employees from other countries (that may have a higher masculine or production orientation score) don’t share their enthusiasm for social activities. Managers shouldn’t be surprised if employees do not want to participate in company activities.

Motivation across cultures Sometimes managers find that employees will work hard without more money or any other extrinsic motivators, based on the theory of job interests (or life interests).xl A manager may discover that an employee will be willing to take on extra or new tasks simply because he or she enjoys them.

Going against culture Companies must introduce motivation systems into a foreign location carefully. A slow introduction that allows employees to opt in at their own pace might be a good approach. If successful, the motivation system can then be made available to more employees. Offering employees a choice of gifts in a reward system is generally welcomed.

CULTURE AND DOING BUSINESS IN SOUTH AFRICA

South Africa is the richest nation in Africa. Its 44 million citizens have a per capita GDP of $11,000, and its stock market is one of the 10 largest in the world. South Africa is an ethnically diverse country. Widely diverse African tribes lived in the region when Dutch settlers began extensively settling it in 1652. The British seized the Cape of Good Hope area in 1806 and as a result, many of the Dutch settlers (called the Boers) went further north to establish their own republics. The Boers were finally defeated in the Boer War (1899–1902). The resulting Union of South Africa operated under a policy of apartheid, the separate devel- opment of the races. The 1990s brought an end to apart- heid politically and ushered in black-majority rule.

Today South Africa has a wide diversity in its ethnic makeup. However, the country is best seen as a country with distinct ethnic groups rather than an integrated ethnic society, such as the U.S. or the United Kingdom. As a result, doing

business in South Africa will vary depending on which ethnic group you are conducting business with. Individuals of British heritage tend to be quite reserved, while, those of a Boer background are quite blunt and forward. The native African business people typically have a background in the revolution movement that sought to overthrow the white-only rule. They often have far greater international experience than South African whites, because they were often forced into exile dur- ing the revolution. However, their international experience was often with the former communist nations of China and Russia that were supportive of the South Africans’ effort to overturn white-only rule when most Western governments were not.

Networks of business people are particularly important in South Africa, although each of the three ethnic groups— the British, the Boers, and the native African business peo- ple—will have their own networks. Good educational back- grounds are valued by all the different parties.

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ADDITIONAL RESOURCES Butler, T. (2007). Getting Unstuck: How Dead Ends Become New Paths. Boston: Harvard Business School Press. Wilson, T.B. (2002). Innovative Reward Systems for the Changing Workplace (2nd ed.). New York: McGraw-Hill. Waldroop, J., & Butler, T. (1997). Discovering Your Career in Business. New York: Perseus Books Group.

EXERCISES

Opening Vignette Discussion Questions

1. What motivates you? When did you feel most motivated to do something voluntarily? Think about previous jobs or tasks, or a sport or hobby—what was the need that was pushing you to work as hard as you did?

2. Apart from rewards (or punishments), can you think of other things that have motivated you to work hard?

DISCUSSION QUESTIONS

1. Think about your motivation in this class. Which motivation theory best explains it?

2. Motivation is a function of your ability and tools to achieve a certain task, your goals, needs, and interest in the task. Think of a situation in which you were highly motivated. Assess that situation in terms of those four key items. Were all four working well for you?

3. Have you ever been in a situation in which your goals and needs were fulfilled by a job, and you had the right ability and tools but little interest in the work? Describe that situation and how you fixed it.

4. Many people believe that equity theory (inequitable situations) explains a lot of human action. That is, if people make less money than others, they get so upset that they will take tough union action, riot, or even revolt. Recent evidence suggests that equity may not be as important to everyone as was once thought. How upset would you be if you discovered that your friend and coworker, doing essentially the same work, was making more money than you? Suppose that your friend worked for another company. Would you have the same feeling?

5. Why do you think expectancy theory may be most useful in explaining the behavior of major league baseball players? How about highly paid surgeons?

6. In some Latin American countries, employees believe that pay levels should be partly determined by family needs. Their unions insist that those with more children should be paid more, particularly from multina- tional firms. Discuss this idea in the context of the equity theory model. Do you agree? What if you were an international manager of an MNC suddenly confronted with this demand by several workers—what would you do?

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IN-CLASS EXERCISES

1. Equity sensitivity exercise

Measuring Your Equity Sensitivity

This self-assessment is designed to help you to estimate your level of equity sensitivity. Read each of the statements and circle the response that you believe best reflects your position. Then use the scoring key below to calculate your results. This exercise assesses your equity sensitivity. Complete the questionnaire without discussion or help from others.

Strongly Agree Agree Neutral Disagree

Strongly Disagree

1. I prefer to do as little as possible at work while getting as much as I can from my employer.

1 2 3 4 5

2. I am most satisfied at work when I have to do as little as possible.

1 2 3 4 5

3. When I am at my job, I think of ways to get out of work.

1 2 3 4 5

4. If I could get away with it, I would try to work just a little bit slower than the boss expects.

1 2 3 4 5

5. It is really satisfying to me when I can get some- thing for nothing at work.

1 2 3 4 5

6. It is the smart employee who gets as much as he or she can while giving as little as possible in return.

1 2 3 4 5

7. Employees who are more concerned about what they can get from their employer rather than what they can give to their employer are the wise ones.

1 2 3 4 5

8. When I have completed my task for the day, I help out other employees who have yet to complete their tasks.

1 2 3 4 5

9. Even if I received low wages and poor benefits from my employer, I would still try to do my best at my job.

1 2 3 4 5

10. If I had to work hard all day at my job, I would probably quit.

1 2 3 4 5

11. I feel obligated to do more than I am paid to do at work.

1 2 3 4 5

12. At work, my greatest concern is whether or not I am doing the best job I can.

1 2 3 4 5

13. A job that requires me to be busy during the day is better than a job that allows me a lot time for loafing.

1 2 3 4 5

14. At work, I feel uneasy when there is little for me to do. 1 2 3 4 5

15. I would become very dissatisfied with my job if I had little or no work to do.

1 2 3 4 5

16. All other things being equal, it is better to have a job with a lot of duties and responsibilities than one with few duties and responsibilities.

1 2 3 4 5

Source: Sauley, K.S., & Bedeian, A.G. (2000). Equity sensitivity: Construction of a measure and examination of its psychometric properties. Journal of Management 26(5), 885–910.

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Scoring Key for Equity Sensitivity

To score this equity scale, called the Equity Preference Questionnaire (EPQ), complete the three steps below.

Write your circled numbers for the items indicated below (statement numbers are in parentheses) and calculate Subtotal A.

+ + + + + + + ¼ (1) (2) (3) (4) (5) (6) (7) (10) Subtotal A

The remaining items in the EPQ need to be reverse-scored. To calculate a reverse score, subtract the direct score from 6. For example, if you circled 4 in one of these items, the reverse score would be 2 (i.e., 6 – 4 ¼ 2). If you circled 1, the reverse score would be 5 (i.e., 6 – 1 ¼ 5). Calculate the reverse score for each of the items indicated below (statement numbers are in parentheses) and write them in the space provided. Then calculate Subtotal B by adding up these reverse scores.

+ + + + + + + ¼ (8) (9) (11) (12) (13) (14) (15) (16) Subtotal B

Calculate your total score by summing Subtotal A and Subtotal B.

+ ¼ (Subtotal A) (Subtotal B) Total

2. Professional athletes worldwide have seen significant salary increases since the 1970s. Such salary increases could have the dual effect of creating perceptions of inequity in those who have older contracts signed years before and who have thus fallen behind the increasing salary curve, and creating strong motivation in those individuals to improve performance so as to enhance their bargaining positions as they approach the end of their contracts. Indeed, one formal study of major league baseball in the United States showed that prospective free agents (players whose contracts have expired and are free to sign new contracts with any team in the off- season) typically earn less-than-average salaries. And after signing new contracts, they typically move well ahead of the average (Zimbalist, 1992).

Thus the rapid increase of salaries has often rendered a player’s contract uncompe- titive only a few years after it was signed. Differences of hundreds of thousands or even millions of dollars annually among coworkers and peers performing similar tasks in nearly identical organizations are highly unusual. Equity theory would predict that players might feel demotivated under those conditions.

In addition to the equity implications raised by salary differentials, high- guaranteed multiyear contracts signed by a large majority of free agents also raises motivational issues that are addressed by expectancy theory. Upon signing a new contract, will players feel the need to raise their performances to justify their large salaries, consistent with equity predictions? Or will players’ motivation levels be reduced by contracts that are guaranteed regardless of how well they play, reflecting the predictions of expectancy theory?

TAKE-HOME EXERCISES

1. Assume that 20 Chinese managers are coming to your firm’s new regional head- quarters. According to the market, they should be paid about $12,000 per year, which is not a lot by U.S. and European standards, but is a pretty good wage in terms of standard of living (purchasing-power parity) in China. But the Chinese

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managers are asking to be paid the same as your European managers—about eight times more than the planned salary. This would increase your overhead consid- erably, and cause your now profitable China operation to lose money. What should you do about this? Should you just pay (after all, it is not your money, right?) and hope that the local managers will become more productive as a result? Should you convince them that they should not be given such a substantial raise? How would you do that? Or would you just fire everyone and try to recruit and train new local managers, which can be a slow and costly process? New hires might try to demand the same higher salaries as well. Describe your action and its pros and cons.

2. Many managers believe that most employees want higher salaries, followed by good working conditions. What do you think? Is this true for you? Take the ‘‘What Workers Want’’ survey below to find out. Remember to answer as if you are the manager in the first column (what you think your employees might want) then as an employee in the second column (what you want). Be ready to discuss your answers in class.

3. Think of a time when you were really motivated in performing a certain task (such as a sport or a hobby). You felt that you really wanted to wake up early to get at that task. Describe reasons why you felt so motivated. Do you feel this way about your current school work or job? Why or why not?

SHORT CASE QUESTIONS

Lincoln Electric in Mexico (p. 202)

1. How do you think Lincoln Electric would have to adjust its system if they opened a plant in China?

2. Would the result of Lincoln Electric’s efforts have been different if it had tried to introduce its system in a desperately poor domain, such as the Sudan, rather than in a relatively wealthy nation, such as Mexico?

3. Why do you think more firms have not tried to copy a system like Lincoln Electric’s?

What Workers Want Questionnaire (rank from 1 to 10; 1 is highest)*

Needs As a manager, what do you think your

employees might want? As an employee, what do

you want?

Interesting work

Full appreciation of work done

Feeling of being involved

Job security

Very good wages

Promotion and growth in the organization

Very good working conditions

Personal loyalty to employees

Tactful discipline (when needed)

Sympathetic help with personal problems

*Adopted from Kovach, K.A. (1987, September–October). What motivates employees? Workers and supervisors give different answers. Business Horizons, pp. 58–65.

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8 LEADERSHIP

Overview

Leadership is the act of one person guiding others toward the attainment of common goals or objectives. How individuals lead and how people respond to that leadership can vary across cultures. For example, people from egalitarian Northern Europe tend to respond positively to leaders who empower them to take responsibility for their jobs. In a high power-distance country such as India, however, leaders are expected to make decisions with less consultation with lower levels; employees there believe decision making is part of a manager’s role in the workplace.

Managers of multinational enterprises can face difficulty if they mindlessly transfer the leadership style that has worked for them in their home countries to a foreign setting. What works for a leader in one culture may not work at all in another culture. Instead, the culture and institutional environment of that country must be accounted for in the leadership style employed.

This chapter will establish the foundations for international managers to lead in different cultures. The topics that will be covered in this chapter include:

• Primary leadership theories and how culture affects them in different settings.

• How culture and the institutional setting of a multinational enterprise may necessitate changes in leadership style.

• An examination of different traits, competencies, and behaviors that leaders require when working with different cultures and strategic situations.

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