CHAPTER 1

ASSESSING THE ENVIRONMENT
POLITICAL, ECONOMIC, LEGAL, TECHNOLOGICAL

LECTURE OUTLINE

General Outline

Opening Profile: India Becoming a Crucial Cog in the Machine at I.B.M.
The Global Business Environment Management in Focus: A Small Company, A Global Approach
Regional Trading Blocks Comparative Management in Focus: Opening Economy Revitalizes India
Information Technology
The Globalization of Human Capital
The Global Manager’s Role
The Political and Economic Environment
The Legal Environment
The Technological Environment
Chapter Discussion Questions
Application Exercises
Experiential Exercise
End-of-Chapter Case Study: Under Pressure, Dubai Company Drops Port Deal
Additional Cases: India: The Employment Black Hole? Mecca Cola
Student Stimulation Questions and Exercises

Opening Profile: India Becoming a Crucial Cog in Machine at I.B.M.

The opening profile reports on the growing importance of India as a source of low-cost services in the IT market. The Indian labor market is attractive not only due to its low wages, but also because of the scientific and managerial talent found in the country. IBM’s Indian facility in Bangalore is now the company’s second largest worldwide operation. While IBM has laid off thousands of workers in the United States, its Indian operation has greatly increased employment. Some of IBM’s competitors have also begun to move their operations to India. The opening profile raises the question of the strategic importance of India to IBM and other companies.

Country Information: India. Interesting information on Indian business and culture can be seen at: http://www.stylusinc.com/business/india/business_india.htm

I. The Global Business Environment

A. Global management is the process of developing strategies, designing and operating systems, and working with people around the world to ensure sustained competitive advantage.

1. Globalism

a. “Global competition characterized by networks that bind countries, institutions and people in an interdependent global economy.”

2. Evidence/Indicators of Globalism

a. The growth rate of the trade of goods has grown faster than the world production of goods. The European Union has now caught up with the United States to share the position of the world’s largest investor.

3. Globalism Strategy

a. Global companies are becoming less tied to specific locations and their operations and allies are spreading around the world as they source and coordinate resources and activities wherever needed. Companies that desire to remain competitive will have to develop a cadre of experienced international managers.

4. Small companies are also affected by and, in turn, affect globalism. They play a vital role in contributing to their national economies through new job creation and employment, development of new products and services, and international operations such as exporting.

Discussion Question: Evaluate the statement by Thomas Friedman that the world is flat. What does he mean by this statement?

|Teaching Resource: For the latest statistics, have your students visit one of the following |
|websites: |
|World Trade Organization – www.WTO.org |
|Financial Times – www.ft.com |
|CEO Express – www.ceoexpress.com |

Management in Focus: A Small Company, A Global Approach

Gayle Warwick Fine Linens is an example of a small company that is a player in the global marketplace. With only a full-time staff of two the company sells high-end linens in Europe and the United States and sources its material from other parts of the world, including Vietnam.

B. Regional Trading Blocks--the TRIAD

1. Most of the world trade occurs in TRIAD markets. The TRIAD market consists of three major free trade areas—Europe, Asia, and North America—grouped around their three dominant currencies (the Euro, the yen, and the dollar).

2. European Union (EU)

a. EU refers to the 27 nations who created an economic union among its member nations. Thirteen of the nations have a common currency – the Euro. b. The EU expanded in 2004 from its original 15 members to include Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. Romania and Bulgaria joined in 2007 making the total twenty seven. The pact as it now stands creates a market with over 500 million consumers. Croatia and Turkey also hope to join the EU.

|Teaching Resources: |
|There is an excellent video on the European Monetary Policy, entitled |
|“The history of the European Monetary Policy,” available from Films for the Humanities |
|and Sciences. |
|The websites http://europa.eu.int and http://www.eurunion.org/contain information on |
|all aspects of the European Union as well as links to the country sites of member nations |
|and prospective member nations. |

c. The EU represents challenges to global managers:

1. How to deal with the possibility of a market closed to outsiders (“fortress Europe”). 2. How to deal effectively with multiple sets of national cultures, traditions, and customs within Europe.

3. Asia

a. Japan and the Four Tigers of Singapore, Hong Kong, Taiwan and South Korea—each of which has abundant natural resources and labor—provide most of the capital and expertise for Asia’s developing countries. ASEAN is negotiating a free trade agreement and moving towards a common market. b. The Chinese market offers huge opportunities for companies in the regions, however, political considerations must be managed when doing business in China. c. China has enjoyed the fastest growing economy of the world and attracts a constant flow of capital. Many foreign firms have established manufacturing facilities and joint ventures in China to capitalize on low labor costs. d. South Asia has also developed a trade block that includes Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, and Sri Lanka.

4. The Americas

a. The NAFTA free-trade agreement between the U.S., Canada, and Mexico has created a trading bloc—“one America”—with 421 million consumers, making the Northern Hemisphere the largest market in the world. Foreign companies have invested billions in Mexico since 1988. b. The U.S.-Central America Free Trade Agreement (DR-CAFTA) has passed Congress and includes five countries in Central America and the Dominican Republic. The agreement is seen as a stepping stone to the Free Trade Area of the Americas (FTAA) to include 34 countries in the Americas. Cuba is excluded from the proposed agreement. c. Already known as “Detroit South,” the car industry in Mexico is taking over increasing amounts of factory production for the Big Three automakers in the US in order to take advantage of lower Mexican wages.

|Teaching Tip: Challenge your students to think about the “threat” associated with |
|“free trade.” Ross Perot once suggested that NAFTA would create a giant sucking |
|sound, drawing jobs away from the US. A discussion question to raise those issues |
|might be, “If NAFTA is sucking away important U.S. jobs, why has unemployment |
|in the US been at record low levels since NAFTA came into effect?” |

C. Other Regions in the World

1. Sweeping political, economic, and social changes around the globe represent new challenges to international managers. The worldwide move away from communism, for instance, has had an enormous influence on the world economy.

|Teaching Tip: Ask your students, “Can a country be successful if it has economic freedom but not political freedom?” |

2. The Russian Federation — Russia is making good progress in its transition towards capitalism, however, political concerns remain. The arrest of the Russian oil oligarch Mikail Khodorkovsky and its effect on Yukos worry international investors. About two dozen Russian companies have come under the control of the Kremlin in the last few years.

3. Less-developed Countries—Change in less-developed countries (LDCs) is occurring as they struggle with low GNP and low per capita income, as well as the burdens of large, relatively unskilled populations and high international debt. Firms willing to take economic and political risks are likely to find considerable potential for international business in the LDCs. India has emerged as an especially attractive country for international business.
Comparative Management in Focus: Opening Economy Revitalizes India

With economic liberalization continuing in India, the economy is making good economic gains. Advances in information technology (IT) have changed the way business is conducted around the world. Geographical barriers are becoming less relevant. While India is still mired in poverty, a sense of optimism prevails, fueled in great part by the ability of Indians to excel in information technology.

D. Information Technology

1. Of all the technological development propelling international business today, the one that is transforming the international manager’s agenda probably more than any other is information technology.

2. The speed and accuracy of information transmission are changing the nature of the international manager’s job by making geographic barriers less relevant. Information can no longer be centrally or secretly controlled by government barriers, and cultural barriers are being gradually lowered by the role of information in educating societies about one another.

|Teaching Tip: The Financial Times has a regular monthly special section on information technology. |

3. The explosive growth of information technology is both a cause and an effect of globalism. The information revolution is boosting productivity around the world. Such technology also permits managers around the world to hold videoconferences and teleconferences with one another, facilitating instant consultations and decisions and alleviating the necessity for travel.

E. The Globalization of Human Capital

1. Major changes are occurring in the world labor force, including:

a. Increased movement across borders for all types of workers b. Increased offshoring of jobs to lower wage countries c. Increased offshoring of white-collar jobs

F. The Global Manager’s Role

1. The rules of the game for global managers are set by each country and its political and economic agenda, its technological status and level of development, its regulatory environment, its comparative and competitive advantages, and its cultural norms.

See Exhibit 1-3: An Open Systems Model: The Contingency Role of the Global Manager

II. The Political and Economic Environment

A. Proactive global firms maintain an up-to-date profile of the political and economic environment of the countries in which they maintain operations. Countries can be evaluated along a continuum of economic systems, from those which operate according to market forces, (e.g., US) to those that use central planning for resource allocation (e.g., China).

B. Political risk

1. Political risks are any governmental actions or politically motivated events that adversely affect the long-run profitability or value of firms doing business.

2. An important aspect of the political environment is the phenomenon of ethnicity – a driving force behind the political instability around the world. Managers must understand the ethnic and religious composition of the host country in order to anticipate situations of political and general instability.

3. Nationalization refers to the forced sale of the MNCs assets to local buyers, with some compensation to the firm. Expropriation occurs when the local government seizes the foreign-owned assets of the MNC, providing inadequate compensation, if any at all.

4. Macropolitical risk events are those that affect all foreign firms doing business in a country or region; e.g., terrorism, the use or threat of use of anxiety inducing violence for political purposes. Micropolitical risk events are those that affect one industry or company or a few companies. Terrorism now poses a severe and random political risk.

5. Seven typical political risk events common today are: a. a. Expropriation without prompt and adequate compensation b. Forced sale of equity to host country nationals, usually at or below depreciated book value c. Discriminatory treatment against foreign firms in applying laws and regulations d. Barriers to repatriation of funds (profits or equity) e. Loss of technology or intellectual property rights f. Interference in managerial decision-making g. Dishonesty by government officials

C. Political risk assessment.

1. Global companies must commit some form of political risk assessment in order to manage their exposure to risk and to minimize financial losses.

2. Risk assessment by multinational corporations usually takes two forms: the use of experts or consultants and the development of internal staff and in-house capabilities. Both means may be used. The focus must be on monitoring political issues before they become headlines. The ability to minimize negative effects on the firm or to be the first to take advantage of opportunities is greatly reduced once developments have been reported in the news.

|Teaching Resource: The website http://money.cnn.com/ covers developments in Europe, Asia, Australia, and the Americas. Students |
|can track issues by industry, region, or country. The CIA World Factbook provides country information at |
|https://www.cia.gov/cia/publications/factbook/index.html , as well as the State Department’s Web site at http://www.state.gov. |

3. An additional technique for assessing political risk is the use of computer risk modeling. The in-house staff at American Can, for example, uses the PRISM system (Primary Risk Investment Screening Matrix), which creates an index of desirability based on feedback from overseas managers and consultants on over 200 variables. The countries with the most favorable PRISM indices are then considered by American Can for investment.

4. To analyze their data on potential risks, some companies attempt to quantify variables into a ranking system among countries as input to investment decisions. Scores are based on criteria including the political and economic environment, domestic economic conditions, and external economic relations.

Teaching Tip: The U.S. State Department issues travel warnings when it decides, based on all relevant information, to recommend that Americans avoid travel to a certain country. Have students compare the travel warnings with current country risk ratings. Warning and other travel information can be found on the web at: http://travel.state.gov/. One drawback to these quantitative systems is that they rely on information based primarily on past events. Still another method that is designed to be more rapidly responsive to and to predict political changes is an early warning system. The early warning system technique of assessing risk involves the use of lead indicators to predict possible political dangers, such as riots, pending import-export restrictions, etc.

6. For autonomous international subsidiaries, most of the impact from political risks will be at the level of ownership and control of the firm. For global firms, the primary risks are likely to be from restrictions (on such things as imports, exports, and currency) with the impact of the local level of the firm’s transfers of money, products, or component parts.

D. Managing political risk

1. After assessing the potential political risk of investing or maintaining current operations in a country, managers face perplexing decisions on managing political risk. On one level, they can decide to suspend their firm’s dealings with a certain country at a given point – either by the avoidance of investment or by the withdrawal of current investment (by selling or abandoning plants and assets). On another level, if they decide that the risk is relatively low in a particular country or that a high-risk environment is worth the potential returns, they may choose to start (or maintain) operations there and to accommodate that risk through adaptation to the political regulatory environment. That adaptation can take many forms, each designed to respond to the concerns of a given local area.

2. Taoka and Beeman suggested these means of adaptation:

a. Equity sharing includes the initiation of joint ventures with nationals to reduce political risks. b. Participative management refers to actively involving nationals, including those in labor organizations or government, in the management of the subsidiary. c. Localization of the operation by modifying the subsidiary’s name, management style, and so forth, to suit local tastes. Localization seeks to transform the subsidiary from a foreign firm to a national firm. d. Development assistance includes the firm’s active involvement in infrastructure development (foreign-exchange generation, local sourcing of materials or parts, management training, technology transfer, securing external debt, and so forth).

3. In addition to avoidance and adaptation, two other means of risk reduction available to managers are dependency and hedging.

a. Dependency - keeping the subsidiary and host nation dependent on the parent corporation. It can be maintained with four methods:

1. Input control - parent controls the key inputs. 2. Market control - parent controls means of distribution. a. Position control - key positions in the hands of expatriate or home office managers. b. Staged contribution strategies - parent announces planned increased investment in the host country for successive years. c. Hedging - (minimizing losses associated with political events) can take place through: 1. Political risk insurance - an insurance policy offered in most industrialized countries 2. Local debt financing - firm can withhold debt repayment in lieu of compensation for losses incurred to political risk factors.

E. Managing Terrorism Risk

1. Companies have developed a number of techniques for managing the risk of terrorism, including developing a benevolent image through charitable contributions to the local community; minimizing publicity in host countries; maintaining a low profile; putting together teams to monitor patterns of terrorism around the world; and increasing security measures abroad and at home. No longer is the threat of terrorism confined to foreign lands.

Teaching Tip: A number of firms offer political risk consulting services. You could have your students search the web for some of these firms and report back the methodology that they employ.

F. Economic risk

1. A country’s level of economic development generally determines its economic stability and therefore its relative risk to a foreign firm.

2. A country’s ability or intention to meet its financial obligations determines its economic risk. The economic risk incurred by a foreign corporation usually falls into one of two main categories; its investment in a specific country may become unprofitable (1) if the government abruptly changes its domestic monetary or fiscal policies or (2) if the government decides to modify its foreign-investment policies. The latter situation would threaten the ability of the company to repatriate its earnings and would create a financial or interest-rate risk.

3. The risk of exchange-rate volatility results in currency translation exposure to the firm when the balance sheet of the entire corporation is consolidated and may cause a negative cash flow from the foreign subsidiary.

Teaching Tip: Ask students to choose a country and use the website www.reuters.com (click investing, and then currencies) to find out how much of that country’s currency they would receive if exchanging $20. Then ask them to find out the cost of some basic items such as the cost of a Combo Meal at McDonald’s, a movie ticket, and a Coca-Cola. How far does the money go there?

4. Currency translation exposure occurs when the value of one country’s currency changes relative to another.

5. The four primary methods of analyzing economic risk (recommended by John Mathis, senior financial policy analyst for the World Bank), of a country’s creditworthiness, are: quantitative, qualitative, combination of both, and the checklist approach.

6. The quantitative method attempts to statistically measure a country’s ability to honor its debt obligation by assigning different weights to economic variables to produce a composite index used to monitor the country’s creditworthiness over time. The qualitative approach evaluates a country’s economic risk by evaluating the competence of its leaders and by analyzing the types of policies they are likely to implement.

|Teaching Resource: CNN financial networks world financial markets - of particular interest is their real-time update of stock |
|market indices from every major market in Africa, Asia, Europe and Latin America. http://www.cnnfn.com/markets/world_markets.html|

7. The checklist approach relies on a few easily measurable and timely criteria believed to reflect or indicate changes in a country’s creditworthiness. Vulnerability indicators are developed that categorize a country in terms of its ability to withstand economic volatility.

III. The Legal Environment

A. The prudent international manager consults both local and headquarters’ legal services in order to comply with host country regulations and to maintain cooperative long-term relationships in the local area.

B. While the regulatory environment for the international manager consists of the many local laws and the court systems in those countries in which he or she operates, certain other legal issues are covered by international law. International law is the law that governs relationships between sovereign nations. The United Nations Convention on Contracts for the International Sale of Goods (CISG) applies to contracts for the sale of goods between countries that have adopted the convention. C. The manager of the foreign subsidiary or operating division will normally comply with a host country’s legal system. There are three types of legal systems in the world: common law, civil law, and Islamic law.

1. Under common law, used in the U.S. and 26 other countries of English origin, past court decisions act as precedents to the interpretation of the law. 2. Civil law is based on a comprehensive set of laws organized into a code. About 70 countries, predominantly in Europe, use civil law. 3. Islamic countries use Islamic law, which is based on religious beliefs, is used in 27 countries and combines in varying degrees, civil, common and indigenous law.

D. Contract law

1. A contract is an agreement by the parties concerned to establish a set of rules to govern a business transaction.

2. International managers recognize that they will be preparing a contract in a very different legal context from their own.

|Teaching Resource: The Willamette University College of Law Library has a foreign law collection on the web at |
|http://www.willamette.edu/law/longlib/forint.htm The site provides dozens of links allowing students to explore business legal |
|issues. |

3. A contract in international business reflects the local legal system and political and currency risks in the country involved – legal consul in such matters is highly recommended.

E. Other regulatory issues

1. Countries often impose protectionist policies, such as tariffs, quotas, and other trade restrictions, to give preference to their own products and industries.

2. Tax systems influence the attractiveness of investing in a given country and affect the relative level of profitability for the MNC. Tax issues include: foreign tax credits, holidays and exemptions, depreciation allowances, and profit or value added tax rates. Definitions of key items such as income and profit vary across countries, as do reporting requirements.

3. The level of government involvement in the economic and regulatory environment varies a great deal among countries and has a varying impact on management practices.
Teaching Resource: Electronic Embassy—The Electronic Embassy provides information on all of the embassies in Washington, D.C., with links to embassy Web sites. The site also includes an online newspaper, Embassy Flash, and an International Business Center for sponsors. This program also provides assistance to embassies and other international organizations in getting their information on the Web. http://www.embassy.org/

IV. The Technological Environment

A. In a global information society, it is clear that corporations must incorporate into their strategic planning and their everyday operations the accelerating macro-environmental phenomenon of technoglobalism, in which the rapid developments in information and communication technologies (ICTs) are propelling globalization and vice-versa. Investment-led globalization is leading to global production networks, which results in global diffusion of technology to link parts of the value-added chain in different countries.

B. The Internet is propelling electronic commerce around the world. In fact, the ease of use and pervasiveness of the Internet raises difficult questions about ownership of intellectual property, consumer protection, residence location, taxation, and other issues.

C. New technology specific to a firm’s products represents a key competitive advantage to firms and challenges international businesses to manage the transfer and diffusion of proprietary technology, with its attendant risks. Whether it is a product, a process, or a management technology, an MNCs major concern is the appropriability of technology—that is, the ability of the innovating firm to profit from its own technology by protecting it from competitors. Especially difficult is managing the transfer of technology to venture partners who might become future competitors.

D. An MNC can enjoy many technological benefits from its global operations. Advances resulting from cooperative research and development (R&D) can be transferred among affiliates around the world, and specialized management knowledge can be integrated and shared. However, the risk of technology transfer and pirating is considerable and costly.

E. Although firms face few restrictions on the creation and dissemination of technology in developed countries, less developed countries often impose restrictions on licensing agreements, royalties, and so forth, and have other legal constraints on patent protection.

F. The most common methods of protecting proprietary technology are through patents, trademarks, trade names, copyrights, and trade secrets. The International Convention for the Protection of Industrial Property, often referred to as the Paris Union, is adhered to by over 80 countries for protection of patents.

G. One of the risks to a firm’s intellectual property is the inappropriate use of the technology by joint-venture partners, franchisees, licensees, and employees (especially those who move to other companies).

H. Global managers will want to evaluate the appropriateness of technology for the local government - especially in less developed countries. Studying the possible cultural consequences of the transfer of technology, managers must assess whether the local people are ready and willing to change their values, expectations, and behaviors at work and to use new technological methods.

I. Global E-Business is an important aspect of the changing technological environment. E-Business is the integration of systems, processes, organizations, value chains, and entire markets using Internet-based and related technologies and concepts. It enhances global competitiveness by providing efficiencies throughout the value chain. For instance, with a global portal, businesses can contact and negotiate with suppliers and buyers worldwide. The Internet and E-Business provide a number of advantages in global business such as: 1. Convenience in conducting business worldwide 2. Access to an electronic meeting and trading place 3. Ability to communicate quickly and cheaply 4. Consumer power by providing access to more choices and information 5. Efficiency in distribution for many products and services

While most of media attention has focused on e-commerce and the end consumer, greater opportunities exist in B2B (business-to-business) transactions.

Teaching Tip: Web sites like Forrester Research (www.forrester.com) and E-marketer (www.emarketer.com) provide regular updates on all facets of Electronic Commerce including statistics on the current state of B2B transactions online. Students can visit online or request updates delivered to their email accounts.

Teaching Resource: A web site of interest to students of international management is http://globaledge.msu.edu. The site contains a wealth of information and can be assigned with specific questions in mind.

Chapter Discussion Questions

1. Poll your classmates about their attitudes towards “globalization.” What are the trends and opinions around the world that underlie those attitudes?

Opinions and comments will vary concerning the issue of globalization, and it is important that the differing opinions be allowed to be expressed. There is a concern that globalization destroys cultures, benefits only wealthy countries, is bad for the environment, and lowers wage rates. Each of these issues could be addressed in a discussion of student opinions concerning globalization.

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

Micropolitical risk is the risk of loss of assets or income that is specific to one company or one industry. For example, a McDonald’s restaurant is destroyed in Indonesia as the result of a fundamentalist uprising against American companies. Other micropolitical risks can occur in more vulnerable industries such as mining and extraction in which locals may feel that the MNC is stealing their natural resources. The recent political events in Venezuela focused attention on a Coca-Cola bottling plant where army officials took control of the planet and distributed products to local residents. This occurred under the eye of the Venezuelan government. Only one firm (Coca-Cola) was victimized. In another case, the government of Venezuela announced that it will expropriate foreign businesses operating in the energy sector. After a relatively safe period of operating in foreign environments, international business is now faced with an increasingly hostile political environment. One of the additional cases found in this chapter of the Instructor’s Manual discusses Mecca Cola and the increasingly hostile political environment facing international marketers. With political risk appearing to be increasing in the world it is even more important that managers be able to accurately assess political risk and to take appropriate steps to manage this risk.

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

Political risk assessment techniques include: issues monitoring systems; use of experts or consultants; consultation with internal staff; computer modeling; quantification of variables into ranking systems; and use of consulting ratings. These assessment techniques have varying effectiveness, depending on the region of the world involved and the extent to which subjective, rather than objective, data must be used and interpreted. The track record of political risk assessment has been variable, however, some improvements have been made in predictability. Analysts should remember to distinguish between systems that are based on past events rather than current assessments of key stakeholder conflicts. A look at Euromoney magazine’s political risk index can give a good idea of countries in which political risk might be considered too high. While high political risk may cause some to avoid a country, additional profit potential may entice others to enter those markets. Recently some countries in Latin America and the Middle East have become more risky and may no longer be of interest to risk adverse businesses. In particular, Venezuela, Bolivia, Peru, and even Chile have experienced recent political events that many may view as unfavorable to international business. With the continuing unpopularity of the Iraqi war, especially among Middle Eastern countries, a number of countries in the region may also be viewed as more risky, especially Iran.

4. Can political risk be “managed”? If so, what methods can be used to manage such risk, and how effective are they? Discuss the lengths to which you would go to manage political risk relative to the kinds of returns you would expect to gain.

Political risk cannot be managed in the sense of closely controlling it, but it can be anticipated and accommodated through such techniques as adaptation (equity sharing, participative management, localization of the operation, and development assistance), and through dependency and hedging. Political risk cannot be eliminated through analytical techniques, but much can be done to increase the decision-making rationality of international managers. Ultimately the decision comes down to a firm’s risk aversion. Students will probably have differing opinions and recommendations concerning the ability to manage political risk and the lengths they would go to in order to deal with it. Risk aversion is also a personal preference, as well as a choice for a MNC.

5. Explain what is meant by the economic risk of a nation. Use a specific country as an example. Can economic risk in this country be anticipated? How?

The economic risk of a nation is determined by its degree of economic development, and hence, stability. There is an inverse correlation between economic stability and risk. Economic risk is greatest in lesser developed countries, such as those in Africa and Latin America, which are plagued by inflation problems and forms of political corruption. Some developing countries in Asia also possess economic risk. In the case of Burma, the political situation has caused the government of the United States and the European Union to place economic sanctions on the country. The placement of these sanctions has greatly reduced the performance of the economy and lead to even greater instability of the economy and its government. Economic risks can be anticipated, but not controlled, through the use of quantitative, qualitative, and checklist techniques. These techniques combine both objective and subjective analysis and data to produce some sort of index used to monitor the country’s creditworthiness.

6. Discuss the importance of contracts in international management. What steps must a manager take to ensure a valid and enforceable contract.

Because international managers must operate in a variety of cultures and under a variety of legal systems, it is imperative that they prepare contracts carefully through consulting with experts in international law. Contracts reflect the local legal system and political and currency risks in the country involved, so allowances should be incorporated into foreign contract agreements to take account of the social and business culture and the country’s international reputation. The warranties or guarantees that a company offers with its products should be carefully designed and limited to conditions under its control. The firm must either incorporate political risk assumptions into the contract or make appropriate contingency plans.

7. Discuss the effects of various forms of technology on international business. What role does the Internet play? Where is this all leading? Explain the meaning of “appropriability of technology.” What role does this play in international competitiveness? How can managers protect the proprietary technology of their firms?

Firms have globalized their supply chain, creating a higher level of inter- connectedness. This results in and creates a greater flow of technology transfer. At the same time, information technology has produced a more time- sensitive environment for international managers. The Internet has become a pervasive force in accelerating communications to and among businesses and consumers. E-Commerce creates a global market opportunity for smaller companies. Appropriability of technology concerns the ability of the innovating firm to profit from its own technology by protecting it from competitors. Many legal clashes have come from disputes about the appropriability of technology, such as the battle between Texas Instruments and Fujitsu. The increased use of technology is moving us towards a faster, and in some cases, more fragmented marketplace. The most common methods of protecting proprietary technology are through patents, trademarks, trade names, copyrights, and trade secrets. The International Convention for the Protection of Industry Property, often referred to as the Paris Union, is adhered to by over 80 countries for protection of patents.

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

Terrorism (the use or threat of use of anxiety-inducing violence for political purposes) is on the rise internationally, particularly in the form of kidnapping of business executives. The most common means of combating terrorism involve the use of political risk techniques and the implementation of contingency plans. Most firms operating abroad today, as well as many domestic firms, must plan for possible terrorism events and how the firm will be able to respond to its customers and employees in the event of such an event. Most students will probably identify Middle Eastern countries as most- likely sources of terrorism activity. While this may be true, a significant internal threat exists in the United States and Europe as well.

Application Exercises

1. Technology is influencing global business as never before, and the rate is change is not expected to diminish any time soon. Technology is increasing the speed and quantity of information. Information can be sent instantly to almost any part of the world, and employees and customers have unprecedented access to information about companies. Technology has caused some convergence of tastes and preferences, making the marketing of products internationally easier. Increases in information and logistical abilities have made geographic borders less relevant. All of these advancements have propelled globalization. At the same time, the Internet has created the potential for a more democratic world, in which anyone with Internet access can express their opinions and voice their concerns. The increasing use of blogs has been a source of concern to some companies as disgruntled employees and customers have been able to negatively influence the public image of some companies. Companies are finding it necessary to manage this information flow and to take steps to counter these negative public listings.

2. The political and economic situation in Russia is troubling to many international managers, especially the recent political developments. Beginning with the Yukos action, confidence in the transparency and honesty of the Russian government has been called into question. The situation has only been made worse by recent allegations of misdeeds by the current government, including the murder of political opponents and critics. The energy resources of the country have allowed the government to act in a more aggressive manner, and it is anticipated that those resources will continue to allow such aggression for some time. It is prudent that international managers continually assess the political situation and take steps to avoid adverse actions. With the exception of the energy sector, Russia may not appear to be a good investment at this time. In some cases, partnering with reputable and powerful local businesspeople or businesses may be an acceptable means of reducing political risk. However, it is critical that the potential return from such investments match the increasing risk.

A good source of information on political risk, and an example of a company that assesses political risk can be found at: http://www.prsgroup.com/.

Experiential Exercises

There is no “right” answer to this exercise. It may be useful to begin a discussion of the benefits of a “China plus one strategy.” Using this framework, China is selected as a manufacturing location, but an additional Asian country is selected as protection against political risk. China is fast becoming the manufacturing hub of the world, however, China has had a long history of political and social disruption, especially when income disparity rises. The current disparity between urban and rural incomes is a source of concern. Rising costs in China are also a concern to potential investors. The emerging economies of Southeast Asia represent a desirable option. For example, recently Dell made a decision to invest $1B in Vietnam instead of China due to Vietnam’s lower wage levels.

End-of-Chapter Case: Under Pressure, Dubai Company Drops Port Deal

A state-owned company in Dubai, DP World, sought to manage a number of American ports but withdrew its bid for the operations after much political backlash. The case highlights the important part politics can play in international business transactions.

Case Questions:

1. Discuss the role that political factors – both in the U.S. and in Dubai – played in the reversal of the Ports deal?

The decision to withdraw from the deal was entirely based on political factors. Political factors in both the U.S. and in Dubai caused this international business transaction to be reversed. In the United States the increased concern over homeland security and the increasing suspicion of Middle Eastern countries doomed the deal. In Dubai, one of the seven emirates of the United Arab Emirates, government officials didn’t want to create a political confrontation. In addition, they wanted to allow President Bush to save face in order to maintain good relations with the U.S. government. The decision to withdraw from the ports deal was not an economic decision but a political one.

2. How did the concerns of the U.S. public result in a business decision by a Dubai company?

The political issues raised in the ports deal caused DP World to disengage in order to avoid further conflict. When Americans became aware of the possibility that an Arab company would be managing some of their ports it caused fear and anxiety. This in turn caused American politicians, who were capitalizing on this fear factor, to call for a rejection of the deal. Whether one agrees with the outcome or not, it does show the democratic process can be mobilized for the preferences of the people. The likelihood that the ports deal would not be allowed by Congress caused the government of Dubai to withdraw from the deal. Additionally, Dubai wants to maintain good relations with the United States and perhaps saw this situation as a possible source of conflict in the future.

3. Do you agree with the decision, accepting that transportation takes place through a global network of companies?

Opinions will differ on this matter and should be considered valid. One could argue on both sides of the debate. On the side of refusing the deal, it should be remembered that Americans are still very much affected by the events of 9-11. As a result of this terrorist attack on the United States, Americans have become hyper-sensitive to possible threats to the security of their country. America’s ports represent the weak link in homeland security. At the same time, however, one should remember that Dubai is a friendly country and has been a partner with the United States in its war on terror. The issue isn’t Arab country management of a port, it is the need for increased port security nationwide.

4. What are the implications of DP World’s withdrawal for global business and investment?

The implications of this political intervention are not good for future international business and investment. This case sends a message to the world that the United States does not welcome foreign investment, especially from Arab countries. When the ports were managed by a British company, no one raised any concerns. The sudden need to restrict ownership to American firms may now be seen as discriminatory. The UAE is a modern and progressive country in the Middle East and this decision sends the message that even pro-Western Arab countries are not welcome in the United States.

Additional information on the Dubai port deal can be found in this article: http://www.usatoday.com/money/industries/2007-02-15-dubai_x.htm

Additional Case

India: The Employment Black Hole?

After independence from Great Britain in 1947, India established a socialist oriented government that discouraged foreign investment. Major industries were state-owned and government heavily regulated private businesses. Westerners viewed India as a very poor country with little to offer the international business community. In 1991, India experienced a currency crisis and was forced to fly its remaining stock of gold to London as collateral for an IMF loan. Faced with a very difficult situation, India then began to reform its economy. Since the early 1990s the Indian economy has transformed itself into a very competitive global competitor. With an abundance of workers and very low wage levels, India is attractive to international companies for low-end manufacturing and service delivery. Of special interest is the recent outsourcing of service jobs that can be performed over satellite and fiber optics communication channels.

India produces over 3 million college graduates a year. With high unemployment, companies have no difficulty in finding young college graduates who are content to handle customer service for American and European companies, at a fraction of the cost of their American and European counterparts. Typical of this new approach is AOL which now employs 1,500 people in India to answer its calls for customer service. Even though AOL is not available in India, AOL customers in the U.S. and elsewhere call an 800 number and may never realize that they are talking with someone half way around the world. AOL reports much lower operating costs, and lower turnover in its Indian call center than it experiences in the United States. Costs are lower even though training costs are higher, and the company must provide employees with transportation to and from work.

Like AOL, other well-known American companies have beaten a path to India to outsource their back-office services. Recently, Microsoft announced that it was moving some of its customer service jobs to India. Microsoft joins a long list of American companies already operating back-office operations in India, such as: Oracle, IBM, Intel, and HP. Lloyds TSB, the UK’s fourth-largest bank, has announced the closing of its call center in England, and its movement to India. Lloyds TSB call center workers earn on average ten times the wages to be paid to their Indian substitutes. Even the World Bank has moved its accounting function from Washington to India. American businesses are realizing that almost any back-office or service job can be moved overseas.

While the call center and other lower-level service jobs which have moved to India are becoming commonplace, India is also embarking on a much more ambitious approach to job creation. India has attracted work from the United States and Europe in software development, chip design, IT consulting, financial services, and drug research. An estimated 20,000 U.S. tax returns were prepared in India last year, and the number is expected to skyrocket to 200,000 this year. The returns are prepared by Indian accountants familiar with the U.S. tax code and are signed by CPAs in the United States. Indians now process mortgage applications, do legal and medical transcription, and book travel reservations. The management consulting firm, McKinsey, now outsources to India the design of its PowerPoint presentations that it shows its clients.

The skill level of jobs being outsourced is increasing. GE has established the Jack Welch Technology Center in India and employs 1,800 engineers, many with doctoral degrees, to conduct basic research. The relatively new center has already earned 95 patents in the United States. India has an abundance of well-trained engineers and scientists, and MNCs are beginning to realize the potential of this human capital. According to the managing director of the Welch Center, it isn’t about saving money on labor costs. “The game here really isn’t about saving costs but to speed innovation and generate growth for the company.” Nevertheless, a top of the line electrical engineer in India earns only about $10,000 USD a year, a fraction of the salary of an American or European with the same qualifications.

While GE may not be primarily concerned with cost-savings, most companies moving, or establishing operations in India are doing so because of the labor rate differential. One UK travel agency has put a different spin on the outsourcing concept. Ebookings is moving both its work, and workers to India. The London-based travel agency is not only moving the jobs of selling and booking travel, but also moving workers to India, and paying the prevailing Indian wage level. Ebookings is selling the idea of living in India as an adventure and a way to sell the world. The firm’s employees in India, both European and Indian will be paid about $6,000 USD a year, resulting in a significant cost savings to the company. While most companies that have moved their back-office operations to India are American or British, India is seeking additional jobs from other English speaking countries such as Australia, and non-English speaking countries in which customer service is conducted in English.

India has the advantage of having an educated workforce that can speak English and is willing to work for a fraction of the wage level of developed country workers. India, however, does have a number of disadvantages to consider when companies decide to outsource work. India has experienced very impressive economic growth in the years since economic liberalization; however, India is still very much a less developed country. An estimated one-third of the population is illiterate and only the higher classes speak English well. The official language of India is not English but Hindi. And India still possesses a very poor infrastructure with unreliable power sourcing and frequent flooding. Government bureaucracy is still very much a factor in business activity, and presently India’s fiscal deficit is running at over 10% of GDP. While India has made great strides in eliminating excessive government, much improvement needs to be made. In addition to concerns over budget deficits, political tensions are also troublesome. India has an uneasy relationship with its neighbor, Pakistan, and the tension between Muslims and Hindus produces violent conflict at times.

While educated Indians speak English, it is considered to be the “Queens English” and has a different accent from American English. Although many Indians are enrolling in accent reduction classes, some American customers have complained about the ability to communicate with Indian customer service personnel. Indians tend to speak rapidly, averaging 180 words a minute, compared to 120 for Americans and 90 for the British. Dell recently announced that it was moving its call center operations out of Bangalore, India and back to Texas because it “had issues with differing Indian accents.” GE, while investing heavily in research in India, nevertheless, moved its appliance call center from India back to the United States. GE had discovered that many Indian employees could not relate well to the concerns of GE’s customers because many did not own, or were not familiar with the appliances they were discussing.

At the present time, India is the lead country in attracting service outsourcing, however, other countries are now beginning to compete with India. Like India, the Philippines is an English speaking country with a low wage level. Unlike India, the Philippines, a former colony of the United States, is closer to the U.S. in language and culture. While the number of jobs outsourced to the Philippines is currently much lower, estimated to be around 30,000, the number is expected to grow rapidly. Currently, Filipinos work in the Philippines for American companies doing medical and legal transcription, answering call centers, and providing technical support. In addition to the Philippines, a number of Eastern European countries may rival India for job outsourcing. One indication is the bidding process on a web site for programmers called Rent-A-Coder. Companies, mostly small and medium sized firms from the United States and Europe, post jobs for free-lancing software developers. Indians still are able to solicit most of the programming jobs from the site, however, Romania is the second most popular country for this outsourcing. Under Soviet domination, Romania like many Eastern European countries emphasized science, math, and engineering instruction and now has an abundance of technically qualified people who are willing to work at low wage levels. Like Romania, the Czech Republic has an abundance of technically qualified workers who are available at a lower wage level. The Czech Republic also has the advantage of impeding membership in the European Union. Recently, DHL announced a 500 million euro investment that will employ Czechs to track shipments, provide customer service, and perform billing operations. The Czech republic has a strong telecommunication infrastructure, workers who are proficient in many languages, and a skilled and inexpensive labor force.

An additional factor which may slow the growth of outsourcing to India is political backlash caused by job loss in the United States and Great Britain. In the United States, the state of Indiana recently cancelled a $15 million contract with the software arm of large Indian company, Tata Group, over fears of unemployment in the United States. Protection of domestic jobs is a very strong political motive and one that will likely be raised as more and more jobs are outsourced to India. Many will argue the costs and benefits of overseas outsourcing. A study by the McKinsey Global Institute found that for every dollar invested in overseas outsourcing, $1.25 returned to the United States. Supporters of foreign outsourcing argue the benefits of free trade and comparative advantage, while critics argue that foreign workers are taking jobs and potentially destroying the country’s technical competitive advantage.

Sources: Andress, M. (2003). You’re Speaking to Prague. Financial Times, November 19; Angwin, J. (2003). AOL’s Tech Center in India is Money Saver. Wall Street Journal, August 7; Delaney, K. (2003). Outsourcing Job and Workers to India. Wall Street Journal, October 13; Fox, M. (2003). Where Your Job is Going. Fortune, November 24; Gomes, L. (2003). Romanians Become Latest Tech Rivals for Off-Shore Jobs. Wall Street Journal, November 17; Hagenbaugh, B. (2003). Moving Work Abroad Tough for Some Firms. USA Today, December 2; Kripalani, M. and P. Engardio. (2003). The Rise of India. Business Week, December 8; Luce, E. and K. Merchant. (2003). Dell Cuts Back Indian Customer Service Center.; Financial Times, November 26; Merchant, K. (2003). India’s Call Centers Drop Fake Accents. Financial Times, December 8; Slater, J. (2001). Back-Office Bonanza. Far Eastern Economic Review, August 30; Teves, O. (2003). A Faraway Wakeup Call. Miami Herald, December 9; Vina, G. and T. Mudd. (2003). Call Centers Migrate to India, and North of England Loses Jobs. Wall Street Journal, November 5.

Teaching Note

India: Employment Black Hole

The case includes three discussion questions, and additional questions and analysis can be performed as seen appropriate. Some suggestions are made for the discussion questions; however, flexibility is needed in discussing these questions.
As is often the situation in this type of case, there are no clearly right or wrong answers. The value of the discussion questions lies in developing critical thinking skills. Discussion Questions

1. From the perspective of American and European companies, analyze the advantages and disadvantages of outsourcing work to India.

Most of the advantages and disadvantages of outsourcing to India are discussed in the case. The purpose of this question isn’t to have students recite these advantages and disadvantages but rather to explore each, and perhaps to elaborate on these and any others they may discover in further investigation of the case.

2. What would you recommend to Indian government officials to ensure continued job creation?

Indian government officials can help maintain the competitive edge of India in both the lower end clerical work and high-end engineering and technical work. In order for Indian contractors to continue to be competitive in the call service operations, it would be helpful for the Indian government to encourage contractors to work on accent reduction and train workers. Perhaps tax credits could be provided to encourage training. There may not be much the government can do to ensure competitiveness in these low-end jobs; however, public policy can enhance the ability of India to expand into more high-end work. Continued support of education, and perhaps increases in the budget for education will help India to further develop its human capital. Also, an improvement in the telecommunication infrastructure would be helpful in developing a competitive advantage for India in the increasingly important IT industry. Essentially the India government has the responsibility to make sure that India is seen as business friendly. Business friendly in this case means continuation of economic reforms, and building an infrastructure suitable to business in the 21st century.

3. Is it fair to workers of developed countries when companies shift work to lower wage countries? Explain.

This question will produce differing responses from students, particularly influenced by the country in which the case is used. For example, one would expect a different response from Indian students than students in the United States. Use of the case in the U.S. has produced a majority of responses indicating that foreign outsourcing is unfair to American workers. It is important that students be allowed to express their views, however, the analysis should not end with an expression of opinions. There are a number of important concepts that should be addressed, including property rights and the theories of absolute and comparative advantage.

The issue of property rights should include a discussion of stakeholders. While employees are important stakeholders, other stakeholder interests must be considered. It can be argued that management has a right, in fact a duty, to manage capital efficiently. Efficient capital management involves reducing operating expenses, including labor costs. It is not always the best strategy to select the lowest wage workers, but rather to select the highest quality workers at the best price. MNCs must determine if foreign outsourcing of work is in the best interests of the organization. As in the case of Dell and GE mentioned in the case, it may be most beneficial to locate back-office operations in the domestic country. A discussion of this question, perhaps the most interesting of the three questions, should include a multiple stakeholder perspective. This approach should also include the communities in which the company operates, both foreign and domestic.

This question should also provoke a discussion of the theory of comparative advantage. As David Ricardo explained in his expansion of Smith’s absolute advantage theory, countries should specialize in goods and services in which they possess a relative advantage. It could be argued that countries like the United States with advanced economies should be focusing on higher-value added components of the value chain.

Outsourcing clerical work to countries in which this work can be done more cheaply, it can be argued, is in the best interests of the United States. Political attempts to stop foreign outsourcing are similar to the attempt to stop the introduction of the automatic loom in the early days of the industrial revolution. As in the case of the automatic loom, employment increased, rather than decreased after its introduction. The theories of absolute and comparative advantage would indicate that the United States and countries in Western Europe should outsource work that can be performed more efficiently elsewhere.

Additional case

Mecca Cola: Building a Protest Brand in an Increasingly Anti-American Environment

In November 2002 French political activist, Tawfik Mathlouthi began selling a new brand of cola in France. Mathouthi called his cola Mecca, after the city in Saudi Arabia when Muhammad was born. While some religious leaders question the use of Islam’s holiest city for a brand name, not many people are questioning the brand’s success. Mecca, the site of the Great Mosque and the yearly hajj, or pilgrimage, holds a very significant meaning to followers of Islam. Mathlouthi hopes the name can have an equally significant meaning for consumers of soft drinks. Mathlouthi is capitalizing on the rising tide of anti-Americanism in the Arab world and beyond. He has fashioned his product on Zamzam Cola, an Iranian Coca-Cola substitute sold in Iran, Saudi Arabia, and Bahrain. Mecca Cola sponsored a large peace rally in London to promote opposition to America’s war in Iraq and the Mecca brand. The company gave out 36,000 bottles of Mecca Cola, and 10,000 shirts with the Mecca logo and the words “Stop the War” and “Not in my Name.” The product uses phrases such as “No more drinking stupid” and “Drink with commitment” to sell the brand and makes no apologies for its political position. Mathouthi, who was born in Tunisia and moved to Paris in 1997 to start a radio station admits that his product is political in nature. He states that it is an attempt to fight “American imperialism and Zionism by providing a substitute for American goods and increasing the blockade of countries boycotting American goods.” A particularly strong appeal of the product for some consumers appears to be the fact that twenty percent of the company’s net profit goes to charities, including ten percent to Palestinian charities. One consumer in Paris, Youssef, age 26 states “The product is very good too. It has a taste somewhat between Coke’s and Pepsi’s.” In certain markets it appears that Mecca Cola has begun eating into Coca-Cola’s popularity. A storeowner in a Muslim part of Paris states, “Since I started selling Mecca Cola, consumption of Coca-Cola has fallen 80%. People are attracted to the idea of supporting the Palestinians.” Mathlouthi defends the charge that the company may be funding terrorism by claiming that money is not given directly to the Palestinians, but rather, the company provides the Palestinians with food, clothing, and the construction of buildings. Mecca Cola also uses proceeds from its sales to support some European non-government organizations (NGOs). Mecca Cola (the packaging which looks much like the product it is attempting to replace) is now sold in over 28 countries, including a number of Western European countries. At first the product was only sold in small ethnic shops in Muslim areas, however, the product can now be found in large grocery stores in the Arab world and in France, Britain, Italy, Spain, Belgium, and Germany. Mathlouthi purports to be filling orders for two million bottles a month in England alone. Mecca Cola plans on a rapid expansion of Europe and even into the United States market. As the popularity of Mecca Cola increases, Mathlouthi has set his sights on other products. He plans on introducing Halal Fried Chicken (HFC) and Mecca Coffee soon.

Discussion Questions

1. If you saw Mecca Cola on a store shelf would you consider purchasing it? Why or why not?
2. What should be the response of Coca-Cola to the Mecca brand?
3. Will Mecca Cola and the other protest products do long-term harm to American brands?

Sources
Anonymous. (2002). Mecca Cola to Finance Palestinian Charity Work. Arabic News. October 5.
Anonymous. (2003). Mecca Cola Gaining Ground. Monday Morning. www.mmorning.com. Accessed March 31, 2003.
Britt, B. (2003); Coca-Cola Mimics Coke. AdAge. February 24.
Hood, J. (2003). US Companies Need to be Locally Minded Overseas. PRWeek. February 24.
Murphy, V. (2003). Mecca Cola Challenges US Rival. BBC News. January 8.

Teaching Note

Mecca Cola

This case can be interesting for class discussion in that it is timely and probably will generate much discussion. The case is of interest to students studying international business, marketing, strategy, or general business. The case shows how the political environment can effect the business environment.

Discussion Questions

1. If you saw Mecca Cola on a store shelf would you consider purchasing it? Why or why not?

This question can get at the issue consumer motives for purchase decisions. While in the United States, the majority of students may indicate that they would not purchase the product for political reasons, some students may feel differently. A controlled debate could be interesting and useful. Additionally, other motives for purchasing a product such as quality and cost could be addressed. A discussion could lead to issues of why a product is purchased and how a product can become an extension of one’s personality. We purchase products for a number of reasons, some rational and some emotional. Certainly the Mecca Cola purchase falls into the emotional realm for many of its consumers.

2. What should be the response of Coca-Cola to the Mecca brand?

Some students may suggest that Coca-Cola attempt to sue Mecca for trademark infringement since the branding is similar. While Coca-Cola may be successful in this endeavor, the political costs may outweigh the gains. This approach would need serious study in that a political backlash against Coca-Cola could result in the product being removed from certain countries.

Coca-Cola could attempt to beat Mecca Cola on the basis of price, and certainly Coca-Cola has the financial ability to do so, however, if the primary buyer motive is emotional, this strategy may not be effective. Coca-Cola could continue to promote its product effectively and locally, tapping into other buyer motives. Additionally, Coca-Cola could continue to diversify its product line and continue to target specialty drinks tailored for local markets. Consumers may not as readily identify the link between these specialty drinks and the company.

3. Will Mecca Cola and the other protest products do long-term harm to American brands?

Of course the answer to this question is difficult to predict. There is reason to believe that, at least in the short-run, that sales will be adversely affected. Some well-known American brands experienced declining demand during the latter part of 2002 and into 2003, in certain parts of the world. Some brands are more vulnerable than others, and even some brands, which are not American, experienced some of the political backlash such as the Swiss company Nestle that was perceived to be American.

While there is little American companies can do to change the political landscape, things like product innovation, savvy marketing, and localization can be effective in reducing the impact of the rising tide of anti-Americanism.

Student Stimulation

Group or Class Learning Activities

1. Students are often unaware of the physical distances involved in global business. A simple quiz or game can be an effective class exercise. Ask students to compare the distances between sets of US cities and sets of international destinations.

a. Which is the greater travel distance: New York to San Francisco OR Hong Kong to Singapore? Miami to St. Louis OR Paris to Moscow? Portland, Maine to Portland, Oregon OR Seoul, Korea and Hong Kong?

b. Which city is further south? Monterey, Mexico OR Tampa, Florida? Mexico City OR Singapore? Paris OR New York?

2. Branding and Ethnocentrism: Ask your students to identify the national origin or a variety of products/brands. After they have written their answers, show the correct ones. Ask why they thought certain brands came from the countries they originally named.

Some effective brands for this exercise include: Disney (US) Michelin (France) Bayer (Germany) Shell Oil (Netherlands) Nestle (Switzerland) Outback Steakhouse (US) Burger King (UK) Yoplait (US) SAAB (Sweden) Volvo (US – Ford) Jaguar (US – Ford)

3. Experiencing currency translation exposure: Ask students to imagine that they are employed by an American MNC in Europe. They are paid in Euros but in a few days they will be sent home to the US and will need to change their earnings into $. Check the exchange rates on “payday” and again on the day they will “return home.” Did the rate change during those days? Did it benefit or harm the students in terms of the amount of $ they were able to get in exchange for their Euros?

4. Assessing political risk activity: Assign students three countries in relatively close proximity to each other (e.g., India, Pakistan, Nepal; or Thailand, Malaysia, and Singapore). Have the students use the format from Ex. 1.2 to develop a risk comparison of their three countries for presentation in the next class period. Discussion questions should probe learning experiences from both the process and the outcomes. In terms of process: To what extent was the information you desired readily available? Did the criteria allow you to differentiate between the countries? Could you envision other criteria that might also be important (students may mention terrorism, personal safety of executives)? In terms of content: Which country was the least risky? Most risky? Is risk alone an adequate criteria for foreign investment? How likely is it that the profile of the country you have chosen will be the same next year? Over the next five years?

Additional Stimulation Discussion Questions

1. A major issue in global business is the protection of intellectual property rights. Have you used websites like audiogalaxy.com or morpheus.com? Are such uses a violation of intellectual property rights? Why or why not? How might such issues become relevant to global business?

2. What are some things you can do to prepare yourself for a business career involving international assignments?

3. What advantages does a bilingual or multilingual manager have over someone who is monolingual?

4. How might the computer revolution and other forms of information technology make it easier for companies to compete globally?

5. Do you feel prepared to work in a multicultural environment? Why or why not?

6. Do you see any advantages for small companies when competing against larger companies on a global scale?

7. If you had the opportunity to work abroad after graduation and could choose any country, which would you choose and why?

8. Would you be willing to accept a “plum” promotion overseas if it entailed possible exposure to terrorist activities, either directly or indirectly? What incentives and other inducements would an international company have to provide you in order for you to work in a politically unstable region?

9. Study Ex. 1.2: Country risk ratings. What conclusions can you draw about the relationships between economic performance and political risk?
10. What do you think would be some of the main difficulties of operating a Western company in an Islamic country under Muslim law? Would you be comfortable working in such a situation if you held what you considered to be an ideal job?

CHAPTER 2

MANAGING INTERDEPENDENCE

SOCIAL RESPONSIBILITY AND ETHICS

LECTURE OUTLINE

General Outline
Opening Profile: In Enron, a Verdict on an Era
The Social Responsibility of MNCs
MNC Responsibility Towards Human Rights Comparative Management in Focus: Doing Business in China-The Human Rights Challenge
Ethics in Global Management Management in Focus: CEO Speaks Out: Ethics Abroad
Managing Interdependence
Managing Subsidiary-Host-Country Interdependence
Chapter Discussion Questions
Application Exercise
Experiential Exercise
End-of-Chapter Case Study: Nike’s CSR Challenge
Additional Case: Sewing for Millionaires
Student Stimulation Questions and Exercises

Opening Profile: In Enron, a Verdict on an Era

This opening profile discusses the fall of Enron and the reasons for the company’s demise. The profile explains that not only was Enron suffering from questionable ethical behavior, it was also a poorly managed company. The profile also explains that other American companies during the 1990s were behaving badly as well.

I. The Social Responsibility Of MNCs

A. Global interdependence is a compelling dimension of the global business environment, creating demands on international managers to take a positive stance on issues of social responsibility and ethical behavior, economic development in host countries, and ecological protection around the world. Managers today are usually quite sensitive to issues of social responsibility and ethical behavior because of pressures from the public, interest groups, legal and governmental concerns, and media coverage. It is less clear where to draw the line between socially responsible behavior and the corporation’s other concerns, or between the conflicting expectations of ethical behavior among different countries.

B. As seen in the opening profile, multinational corporations continue to be the center of debate regarding the benefits versus harm wrought by their operations around the world. Because of their size and economic power, MNC will be held to a higher standard of performance. Balancing the interests of the varied stakeholders is an important consideration of top managers.

C. Issues of social responsibility continue to be those of poverty and lack of equal opportunity around the world, the environment, consumer concern, and employees’ safety and welfare. Multinational corporations constitute a powerful presence in the world economy, and often have more leadership and capacity to induce change than do many governments. Many argue that MNCs should play a proactive role in handling worldwide social and economic problems and should be concerned with host-country welfare.

D. The concept of international social responsibility is the expectation that MNCs concern themselves about the social and the economic effects of their decisions regarding activities in other countries.

E. The opinions on the level of social responsibility that a domestic firm should demonstrate range from two extremes — one is that the only responsibility of a business is to make a profit, and the other that companies should anticipate social needs and try to solve them. Exhibit 2-1 shows that managers are faced with not only considering stakeholders in host countries, but also with weighing their rights against the rights of domestic shareholders.

F. With the growing awareness of the interdependence of the world’s socioeconomic systems, global organizations are beginning to recognize the need to reach a consensus on what should constitute moral and ethical behavior around the world. Some think a consensus is forming due to the development of a global corporate culture — an integration of the business environments in which firms currently operate.

G. Corporate Social Responsibility (CSR) – an integration of the business environments in which the firm operates. Although it is very difficult to implement a generalized code of morality and ethics in individual countries, such guidelines do provide a basis of judgment regarding specific situations. Bowie used the term moral universalism to describe a moral standard that could be accepted by all cultures. Under the ethical approach of ethnocentrism, a company would apply the morality used in its own home country. A company subscribing to ethical relativism would take the local approach to morality appropriate in whatever country it is operating.

H. MNC Responsibility Toward Human Rights

1. What constitutes “human rights” is clouded by the perceptions and priorities of people in different countries. While the U.S. often takes the lead in the charge against what they consider human rights violations around the world, other countries point to the homelessness and high crime statistics in the U.S.

2. The best chance to gain some ground on human rights around the world would be for large MNCs and governments around the world to take a unified stance. A number of large image-conscious companies have established corporate codes of conduct for their buyers, suppliers and contractors, and have instituted strict procedures for auditing their imports. Reebok has audited all of its suppliers in Asia. Levi announced this corporate policy: “We should not initiate or renew contractual relationships in countries where there are pervasive violations of basic human rights.”

Comparative Management Focus: Doing Business in China – the Human Rights Challenges

China has experienced rapid economic growth in recent years and is fast becoming the manufacturing location of choice for many of the world’s companies. While China has low wage levels and other benefits, workers in China are often treated badly by management. Excessively long work days, forced overtime, and below minimum wages are not uncommon labor practices in China. In addition, other human rights issues such as freedom of speech are currently lacking in China.

Country/Culture – China: An interesting and useful Web site for additional information about China is: http://www.internationalist.com/business/China.php.

Teaching Tip: An interesting movie to explore Chinese culture is the Chinese produced Beijing Bicycle (2001) directed by Wang Xiaoshuai.

I. Codes of Conduct

1. A considerable number of organizations have developed their own codes of conduct; some have gone further to group together with others around the world to establish standards to improve the quality of life for workers around the world. Companies such as Avon, Sainsbury Plc., Toys ‘R’ Us and Otto Versand have joined with the Council on Economic Priorities (CEP) to establish SA8000 (Social Accountability 8000, on the lines of the manufacturing quality standard ISO9000). Their proposed global labor standards would be monitored by outside organizations to certify if plants are meeting those standards, among which are the following:

a. Do not use child or forced labor b. Provide a safe working environment c. Respect workers’ rights to unionize d. Do not regularly require more than 48-hour work weeks e. Pay wages sufficient to meet workers’ basic needs.

Teaching Tip: Send your students on an electronic scavenger hunt. Ask students to find firms’ statements on ethics or codes of conduct from corporate websites. To make it more interesting for students you may choose companies with operations near your school or those companies that produce your students’ favorite brands. Have students assess the codes of conduct given the guidelines in Exhibit 2-2.

Teaching Resource: Have students visit the web site of Social Accountability International www.cepaa.org to learn more about the SA 8000 standards.

2. There are four international codes of conduct that provide some consistent guidelines for multinational enterprises (MNEs). These codes were developed by the International Chamber of Commerce, the Organization for Economic Cooperation and Development, the International Labor Organization, and the United Nations Commission on Transnational Corporations. Getz has integrated these four codes and organized their common underlying principles, thereby establishing MNE behavior toward governments, publics, and people. This synthesis of guidelines is shown in Exhibit 2-2.

II. Ethics in Global Management

A. Globalization has multiplied the ethical problems facing organizations. While domestic American companies may use general guidelines for appropriate behavior based on federal law and the value structure rooted in the nation’s Judeo-Christian heritage, such guidelines are not consistently applicable overseas.

B. International business ethics refers to the business conduct or morals of MNCs in their relationships to all individuals and entities. Such behavior for MNCs is based largely on the cultural value system and the generally accepted ways of doing business in each country or society. Those norms are based on broadly accepted guidelines in religion, philosophy, professions, and the legal system.

C. The American approach is to treat everyone the same by making moral judgments based on general rules. Managers in Japan and Europe tend to make such decisions based on shared values, social ties, and their perception of obligations.

D. The biggest single problem for MNCs in their attempt to define a corporate-wide ethical posture is the great variation of standards of ethical behavior around the world. U.S. companies are often caught between being placed at a disadvantage in doing business in some countries by refusing to go along with accepted practices, or being subject to criticism at home for going along with them to get the job done. Exhibit 2-3 provides a conceptual model explaining important elements of this challenge.

E. Transparency International, a German organization, conducted research on the level of corruption among public officials and politicians in various countries as perceived by business people, academics, and risk analysts. The 2002 Corruption Perceptions Index is provided in Exhibit 2-4.

Teaching Resource: Have students visit the web site of Transparency International www.transparency.org and have them find out how the corruption index is determined.

F. Whereas the upper limits of codes of ethics for international activities are set at any given time by the individual standards of certain leading companies, it is more difficult to set the lower limits of those standards. Laczniak and Naor explain: The laws of economically developed countries generally define the lowest common denominator of acceptable behavior for operations in those domestic markets. In an underdeveloped country or a developing country, it would be the actual degree of enforcement of the law that would, in practice, determine the lower limit of permissible behavior.

G. Questionable Payments

1. A specific ethical issue for managers in the international arena is that of questionable payments. These are business payments that raise significant questions of appropriate moral behavior either in the host nation or in other nations. Such questions arise out of differences in laws, customs, and ethics in various countries, whether the payments in question are political payments, extortion, bribes, sales commissions, or “grease money”—payments to expedite routine transactions. For the sake of simplicity, the text categorizes all these different types of questionable payments as some form of bribery. Exhibit 2-4 shows the Global Corruption Barometer for 2005. This reports the degree to which businesses and other sectors of a country are seen as being corrupt.

2. The dilemma for Americans operating abroad is how much to adhere to their ethical standards in the face of foreign customs, or how much to follow local ways in order to be competitive.

3. Americans must be able to distinguish between harmless practices and actual bribery, between genuine relationships and those used as a cover-up. To help them make this distinction, the Foreign Corrupt Practices Act (FCPA) of 1977 was established, which prohibits U.S. companies from making illegal payments or other gifts or political contributions to foreign government officials for the purposes of influencing them in business transactions. The goal was to stop MNCs from contributing to corruption in foreign government and to upgrade the image of the U.S. and its companies operating overseas. The penalties include severe fines and sometimes imprisonment.

4. There are three questions to ask of ethical corporate actions:

a. Is it legal? b. Does it work (in the long run)? c. Can it be talked about?

Bribery fails each test.

5. Many MNCs have decided to confront concerns about ethical behavior and social responsibility by developing worldwide practices that represent the company’s posture. Among those policies are the following:

a. Develop worldwide codes of ethics b. Consider ethical issues in strategy development c. Given major, unsolvable, ethical problems, consider withdrawal from the problem market d. Develop periodic “ethical impact” statements

H. Making the Right Decision

1. What is the right decision for a manager operating abroad when faced with questionable circumstances of doing business? The first step would be to consult the laws of both the home and host countries. If legal consultation does not provide you with a clear answer, you should consult the company’s code of ethics. When the situation is not clear-cut, ask yourself what are the rights of the various stakeholders involved and how those rights should be weighed. In the end, follow your own conscious and try to operate with integrity.

Teaching Tip: Remind students of some of the basic tests for making ethical decisions: Would you be comfortable saying what you did 1) in a widely broadcasted television interview? 2) to colleagues in your company? 3) to your parents or grandparents?

Management in Focus – CEO Speaks Out

Richard Rhodes discusses the ethical issues he has faced with his business, Rhodes Architectural Stone, Inc. as he conducts business in Africa, China, India, and Indonesia. He explains that his business has had to clearly establish “black and white” operating principles and the company will not pay bribes. This sometimes requires walking away from a deal. Rhodes offers the following advice when pondering an ethical situation: 1) Who am I?, 2) How do I fell about this situation, 3) Can I sleep at night if I engage in this behavior?

III. Managing Interdependence

A. Because multinational firms (or other organizations, such as the Red Cross) represent global interdependency, their managers at all levels must recognize that what they do, in the aggregate, has long-term implications for the socioeconomic interdependence of nations. Simply to describe ethical issues as part of the general environment does not stress the fact that managers need to control their activities at all levels for the long-term benefit of all concerned. The powerful long-term effects of MNC activities should be considered as an area for managerial planning and control, not as haphazard side effects of business.

B. Foreign Subsidiaries in the USA

1. Much of the preceding discussion has related to U.S. subsidiaries around the world. However, to highlight the growing interdependence and changing balance of business power globally, we should also consider foreign subsidiaries in America.

2. The number of foreign subsidiaries in the United States has grown and continues to grow dramatically; foreign direct investment (FDI) in the United States by other countries is in many cases far more than U.S. investment outward. Americans are thus becoming more sensitive to what they perceive as a lack of control over their own country’s business.

3. Things look very different from the perspective of Americans employed at a subsidiary of some overseas MNC. Interdependence takes on a new meaning when people “over there” are calling the shots regarding strategy, expectations, products, and personnel. Often, resentment by Americans over different ways of doing business by “foreign” companies in the United States inhibits cooperation, which gave rise to the companies’ presence in the first place.

C. Managing Subsidiary-Host Country Interdependence

1. When managing interdependence, international managers must go beyond general issues of social responsibility and deal with specific concerns of the MNC subsidiary-host country relationship.

2. Most criticisms of MNC subsidiary activities, whether in less developed or more developed countries, are along these lines:

a. MNCs raise capital locally. b. The majority of the venture’s stock is usually held by the parent company. c. MNCs usually reserve key management positions for expatriates. d. The transfer-in of inappropriate technology e. MNCs concentrate their R&D at home. f. MNCs give rise to demand for luxury goods in economies that are not meeting demands for necessities. g. MNCs start their operations by purchasing existing firms rather than developing new productive facilities in the host countries. h. MNCs dominate major industrial sectors. i. MNCs are not accountable to the host government but respond the home country.

Exhibit 2-5 summarizes the benefits and costs to host countries of MNCs in three areas: Capital market effects, technology and production effects, and employment effects.

3. Numerous conflicts arise between MNC companies or subsidiaries and host countries, including conflicting goals (both economic and non-economic) and conflicting concerns, such as the security of proprietary technology, patents, or information. Overall, the resulting tradeoffs create an interdependent relationship between the subsidiary and the host government, based on relative bargaining power.

Teaching Tip: Special interest groups often wield more power than individuals. Ask students to consider what special interest groups exist in a particular country and how those interests might conflict with those of the MNC.

Teaching Resource: The Progressive Directory of the Institute for Global Communications – IGC’s five online communities of activists and special interest organizations: PeaceNet, EcoNet, LaborNet, ConflictNet, and WomensNet, are gateways to articles, headlines, features, and weblinks on progressive issues. http://www.igc.org/igc/

4. MNCs run the risk of their assets becoming hostage to host control, which may take the form of nationalism, protectionism, or governmentalism. Under protectionism, the host institutes a partial or complete closing of borders to withstand competitive foreign products by using tariff and non-tariff barriers. In governmentalism, the government uses its policy setting role to favor national interests rather than relying on market forces.

5. There are several recommendations for MNCs operating in, and doing business with, developing countries:

a. Do no intentional harm b. Produce more good than harm for the host country c. Contribute by their activity to the host country’s development d. Respect the human rights of the employees e. To the extent that local culture does not violate ethical norms, MNCs should respect the local culture and work with it f. Pay their fair share of taxes g. Cooperate with the local government in developing and enforcing just background institutions

E. Managing Environmental Interdependence

1. International managers can no longer afford to ignore the impact of their activities on the environment. Effectively managing environmental interdependence includes the need to consider ecological interdependence as well as economic and social implications of MNC activities.

3. MNCs have to deal with the various approaches of different countries as to their policies and techniques for environmental and health protection.

Teaching Resource: The video, “Bhupal: The Second Tragedy,” provides an excellent overview of the environmental and physical damage caused by the industrial accident at the Union Carbide plant in Bhupal, India as well as the social responsibility of the Indian and American governments in providing for the victims.

3. In recent years, the export of hazardous wastes from developed countries to less-developed ones has increased considerably.

4. According to Graedel and Allenby, the path to truly sustainable development is for corporations to broaden their concept of industrial ecology: An industrial system must be viewed in concert with surrounding systems so as to optimize the total materials cycle from virgin material to ultimate disposal.

5. It is clear that MNCs must take the lead in dealing with ecological interdependence by integrating those factors with strategic planning. At least MNC managers must deal with the increasing scarcity of natural resources in the next few decades by (1) looking for alternate raw materials; (2) developing new methods of recycling or disposing of used materials; and (3) expanding the use of by-products.

Chapter Discussion Questions

1. Discuss the concept of international social responsibility. What role does it play in the relationship between a company and its host country?

International social responsibility is the expectation that MNCs concern themselves with the social and the economic effects of their decisions regarding activities in other countries. A MNC’s stance on international social responsibility determines how harmonious and productive its long-term relationships with host countries will be. By taking an open-systems perspective on CSR it is more likely that the MNC will be taking the right action relevant to all stakeholders.

2. Discuss the criticisms which have been levied against MNCs in the past regarding their activities in less-developed countries. What counter-arguments are there to those criticisms?

MNCs have been criticized for disrupting the social, technological, and political climates in host nations. Governments often have a “love-hate” relationship with MNCs because they want the economic advantages produced by the presence of MNCs, but they regret the negative impacts MNCs often have on the political and social environments. MNCs can defend themselves by pointing out that, without their presence, host nations would not have as many jobs or trade opportunities, as well as opportunities to appropriate technology. MNCs have also been accused of destroying local culture through globalization. While MNCs have increased the degree of globalization, and in some cases made some aspects of local culture disappear, differences in culture remain strong and deep.

3. What does moral universalism mean? Discuss your perspective on this concept. Do you think the goal of moral universalism is possible? Is it advisable?

This means to address the need for a moral standard that is accepted by all cultures. Class discussion is likely to be divided on this issue. Some students will argue that there are or should be moral absolutes. Others will argue that morals are culturally driven and will, therefore, need to reflect differences in cultures. Some students may note that communication and technology are creating a greater cultural interaction, which may result in a universalism over a long period of time. To some extent it is desirable for agreement on what is right and wrong. Enforcement of ethical standards and laws would be enhanced by some convergence of viewpoints. It doesn’t seem likely that a high level of moral universalism will prevail anytime soon.

4. What do you think should be the role of MNCs toward human rights issues in other countries—for example, China or South Africa? What are the major human rights concerns at this time? What ideas do you have for dealing with those problems? What is the role of corporate codes of conduct in dealing with these concerns?

MNCs must be very careful not to become instruments of political change or policy making, because they are economic institutions. However, where MNCs can unite with the international community in opposing human rights violations, the legitimate policies of sovereign states can be benefited through MNC cooperation. Current issues will vary from class to class. At the time this book was being developed, Amnesty International had accused the United States of violating human rights by having a repressive and racist prison policy. The U.S. has also come under attack for its treatment of prisoners at the military facility in Cuba. Students will vary broadly in their prescriptions for corporate involvement. A corporate code of conduct can be beneficial in guiding multinational managers in these difficult areas. The code of conduct can act as a guide to corporate values concerning human rights issues and reduce much of the ambiguity and uncertainty found in this area.

5. What is meant by international business ethics? How does the local culture affect ethical practices? What are the implications of such local norms for ethical decisions by MNC managers?

International business ethics refers to the business conduct or morals of MNCs in their relationships to all individuals and entities with whom they come into contact. Since local business practices differ substantially between regions of the world, it is difficult to find ethical standards subscribed to by all MNCs and their managers. Generally, codes of ethics prescribe only the lower level of limits on ethical behavior; there is widespread disagreement on the upper level limits. While managers must be sensitive to local customs, they must also adhere to the values of their organizations. While it may be custom to hire children to work fulltime in some culture, the international manager must be responsive to the ethical orientation of the organization.

6. As a manager in a foreign subsidiary, how can you reconcile local expectations of questionable payments with the corporate code of ethics and the Foreign Corrupt Practices Act? What is your stance on the problem of “payoffs”? How does the degree of law enforcement in a particular country affect ethical behavior in business?

Managers must be able to distinguish between harmless practices and actual bribery, between genuine relationships and those used as a cover-up. The fact of the matter is many business people are willing to engage in bribery as an everyday part of meeting their business objectives. The Foreign Corrupt Practices Act attempts to provide some guidelines for distinguishing between a bribe and a facilitating business. Ultimately, it will be up to the local manager to make the call. Students will likely have a range of opinions on the issue of enforcement. Some will note that if the law is not being enforced by the host country, then it is probably less important to the host. They will argue for a broader range of acceptable business activities. Others may note that character and ethics should be independent from enforcement. (In the words of one author, character is who you are when no one is looking).

7. Explain what is meant by managing interdependence in the global business arena. Discuss the “love-hate” relationship between MNCs and host countries.

Since multinational firms represent global interdependency, managers at all levels must recognize that what they do in the aggregate has long-term implications for the socioeconomic interdependence of nations. Host country governments tend to have a “love-hate” relationship with MNCs because they want the economic benefits (jobs and technology) provided by MNCs, but do not want the social and political disruptions that often accompany the presence of MNC business activity.

8. What do you think are the responsibilities of MNCs toward the global environment? Give some examples of MNC activities which run counter to the concept of ecological interdependence and environmental responsibility.

The management of environmental interdependence includes the need to consider ecological interdependence, as well as economic and social implications of MNC activities. Examples of problem areas in environmental interdependence include the export of hazardous wastes from developed countries to less-developed ones and the exporting of pesticides. The environmental problems left in Ecuador by Texaco also are an example of ecological interdependence.
9. Discuss the ethical issues that have developed regarding the use of IT in cross-border transactions. What new conflicts have developed since the printing of this book? What solutions can you suggest?

Information technology has increased the ability of firms to engage people throughout the world. While most of this engagement is seen as positive, such as increasing consumer choice, some has been seen by some as negative. Of significant concern to the United States and Western Europe is the issue of off-shoring of jobs. The development of an information technology superhighway has allowed firms to contract out work previously done at home to foreign workers. Many jobs have been off-shored to India, the Philippines, and to Eastern Europe. Students can be encouraged to discuss the ethical issues involved in this off-shoring process.

Application Exercises

This is an interesting and instructive exercise. It would be perhaps most useful if students could select two companies from the same industry for comparison. If this isn’t possible, it will still be useful to see the differences in codes of conduct across industries and to have them comment on the usefulness of those codes.

Experiential Exercise

This exercise will require students to address a difficult and relevant situation concerning questionable payments. Since this is not an American company, the Foreign Corrupt Practices Act (FCPA) does not apply. Even if it was an American company, it is unclear if the purchasing manager is really a government official. If he is not, then the FCPA also will not apply. The exercise highlights the cultural differences in the perception of the legitimacy of bribe paying. In many cultures it is a normal and acceptable practice. The exercise should cause a discussion of the differing views of ethics and which is most appropriate in this situation. If the CEO wants to avoid this situation from occurring again, he must institute a policy against such behavior, inform employees in the policy, and have penalties for violation of the policy.

End-of-Chapter Case: Nike’s CSR Challenge

Discussion Questions

1. What are the challenges regarding corporate social responsibility that companies in the apparel industry face in its supply chains around the world?

The apparel industry is perhaps particularly vulnerable to issues of social responsibility. The industry is still somewhat labor intensive and operates in a low wage environment. The industry is sometimes referred to as a “suitcase industry” in that it frequently moves from one low wage country to the next, constantly seeking the lowest wage level. The industry also has a lot of contract manufacturing in which a foreign firm is contracted to do all the production for the firm owning the brand. Frequently there is little oversight and control over the foreign manufacturer. All of this can lead to the problems we see in this case.

2. Discuss the meaning and implications of the statement by a Nike representative that “consumers are not rewarding us for investment in improved social performance in supply chains.”

While this statement may appear to sound socially irresponsible, it is probably true. Nevertheless, it isn’t a good excuse for not “doing the right thing.” While competitors may be engaging in unethical practices, and consumers may not care about the working conditions of foreign employees, it is still not a justifiable situation to engage in socially irresponsible actions. In the case of Nike, the company is not competing with the low end of the market, and one would assume that the premium pricing of the brand could allow for improvements in wages and working conditions. It should be pointed out that consumer perceptions and concerns can change and a firm can find itself dealing with a successful PR campaign directed towards its practices. Consumer “rewarding” can change and make such companies vulnerable due to their foreign employment practices.

3. What does it mean to have an industry open-systems approach to social responsibility? What parties are involved? Who are the stakeholders??

An open-system approach to social responsibility means that the organization views its actions in terms of the effect it has on the larger social system. In addition to being socially responsive to internal stakeholders such as domestic employees, the organization also views its impact on suppliers regulators, investors and communities, irregardless of their location.

4. What is meant by “leadership beyond borders?”

Leadership beyond borders means that leadership moves beyond borders or barriers created by others. Leaders in the apparel industry for example would attempt to extend their influence beyond the company borders in order to deal with the CSR issues discussed in the case. Leadership beyond borders also seeks to be transformational in its orientation; to engage people and to seek collective action and goals.

5. Is it possible to have “a compatibility of profits with people and planet?” Whose responsibility is it to achieve that state?

It is certainly possible to achieve a profit and to engage in socially responsible actions. A number of companies have proven this point (The Body Shop, Levi Strauss and Company, Ben & Jerry’s, etc.). It is the responsibility of top management to set the direction for the organization and that direction includes social responsibility.

Additional Case

Sewing for Millionaires

A two-hour drive from the capital of San José, Costa Rica, sits the small community of Turrialba where mostly young workers sit and sew baseballs destined for Major League Baseball teams. Rawlings Sporting Goods Company moved its baseball manufacturing operations from Haiti in 1986 when the political landscape of the country began to change. Rawlings selected the town of Turrialba due to the incentives offered the company by the Costa Rican government. Rawlings was awarded a free-trade zone in which the company would be allowed to operate duty-free in the country. Rawlings pays no import tariffs on the goods it imports to manufacture its baseballs, and the finished product can be shipped duty-free into the United States under the Caribbean Basin Imitative. The Turrialba region was hard hit economically in the 1980s when a major highway from the capital bypassed the town. Since travelers no longer stopped in Turrialba, the Costa Rican government wanted to develop the local area through foreign investment. Rawlings found the potential workforce better educated, and more disciplined than its workers in Haiti. The country was also well known for being very politically stable. With few employment opportunities in the area, Rawlings had no difficulty in securing dedicated and motivated employees. Although Costa Rica is the wealthiest country in Central America, per capita income is still only about $4,200 a year. Costa Rica has an unemployment rate of 6.7% nationwide, however, the rate can vary from region to region. With the completion of the new highway and declining employment opportunities in the coffee and sugarcane industries, many local residents of Turrialba were eager to find stable employment. Most Rawlings employees in Costa Rica are engaged in sewing operations. In the plant, 300 employees sit in rows of high back chairs and sew baseballs. Many employees break the boredom of the work by listening to music on their headphones. The plant employs a total of 575 workers. At one time Rawlings employed approximately 1,900 workers at the Costa Rican plant, however, employment fell when the Company shifted production of its lower quality baseballs to China. The Rawlings plant takes a baseball core and wraps it in yarn. The product is then covered with cowhide and sewn by hand. Baseballs must be sewn by hand in order to achieve the quality level demanded by the Major Leagues. Each worker sews 108 perfect stitches using a long needle and thread. The balls are then inspected, cleaned, and stamped with the MLB logo and the signature of the commissioner of baseball. The balls are then packed and shipped to the port city of Limón where they are loaded onto a ship bound for Port Everglades, Florida. The baseballs are then trucked to Rawlings’ Springfield, Missouri facility, and then onto Major League teams or retail stores. Rawlings has been the exclusive supplier of baseballs to the Major Leagues since 1977. The Costa Rican facility produces approximately 2.2 million baseballs a year, with 1.8 million of those going to Major League Baseball. The remaining balls are sold to minor league and college baseball teams, or sold to the public through retail stores or the websites of MLB and Rawlings. While Rawlings refuses to disclose the price of the baseballs paid by MLB, the baseballs retail on the Company’s website for $12.99 per unit. Employees are paid $1.21 per hour and receive the value of 67 cents an hour in benefits, or about thirty cents per ball produced. Workers can go home early in the week if they complete their production quotas. Rawlings workers earn about 14% above the Costa Rican minimum wage. In addition to their wages, Rawlings employees in Costa Rica must be paid for eleven holidays, receive two weeks of paid vacation a year, and receive a Christmas bonus equal to one month’s pay. The Company must also pay into a retirement and medical plan and provide four months of maternity leave when needed. A 2004 New York Times article questioned the pay and working conditions of the Rawlings plant in Costa Rica. The article accused Rawlings and MLB of running a sweatshop in Costa Rica where workers were underpaid and worked in an unhealthy environment. Consumer advocate Ralph Nader joined in the criticism by writing a letter to Bud Selig, MLB Commissioner and the Executive Director of the MLB Player Association. In the letter Nader condemned the two men for allowing baseballs to be manufactured in what he considered to be poor conditions. Portions of the letter follow:

“Your respective organizations must not ignore their roles in this exploitation and abuse of worker rights committed under Major League Baseball and Player Association product sourcing and licensing agreements.”

“ American consumers and baseball fans currently have no guarantee that any licensed Major League Baseball products are not being made under sweatshop conditions that violate basic human and worker rights standards.”

Major League Baseball consumer products vice president, Howard Smith, responded to the rising complaints by stating: “I can assure you that there is no company we do business with that knowingly goes into a factory with sub-par working conditions.” Not everyone agrees with Mr. Smith. Maribel Alezondo Brenes worked at the Rawlings plant for seven years before her doctor told her to stop working there for health reasons. Carpal tunnel syndrome has been noticed in the Rawlings employees due to the repetitive nature of the work. Dr. Carlos Guerrero who worked at the Rawlings plant as company physician says that up to 90 percent of Rawlings employees may have experienced pain from the work, from minor cuts to disabling injuries. Others feel that the plant has been a good addition to the region, including Warny Gomez, who worked at the Rawlings facility for four years and made enough money to attend college and to become a teacher. With average pay for Major League Baseball players close to $2.3 million a year, some Rawlings employees feel that their compensation is unjust. Many, however, feel like Alan Cascante, an eight-year employee of the baseball factory: “We can live on that (Rawlings wages). We never made that working in the fields.” Plant manager, Ken West agrees with Cascante, by saying “The best thing’s the pay. We’re a good place to work.” The debate over pay and working conditions of employees who supply MLB with its products appears to be growing in some quarters. People like Kenneth Miller; a self-appointed champion of sweatshop workers takes his message to the fans by camping outside ballparks. He tells potential consumers of MLB products that the baseball player bobble head doll they are about to purchase was made by a Chinese worker who works 20 hour shifts for very little pay. Miller states that he often finds indifference among consumers. Some tell him: “Why are you trying to interrupt our nice day at the ballpark?” Miller and a handful of others are pressuring MLB to take greater control over the working conditions of its suppliers, such as Rawlings. As the debate continues in the United States over the working conditions and pay of the Costa Rican employees and others, baseballs are sewn in Turrialba with pictures of Alex Rodriquez, Mike Piazza, and other baseball players hanging on the walls of the factory. Rawlings’ employees, however, are too busy sewing baseballs for the millionaire players, to even notice the pictures hanging above them.

Discussion Questions:

1. In your opinion, is Rawlings exploiting its Costa Rican employees? Explain your answer. 2. Is it fair to compare the salary of Major League Baseball players to that of employees who sew baseballs? 3. If you were the CEO of Rawlings Sporting Goods’ parent company (K2, Inc.) what action would you take, if any, given the present situation?

Sources: Hersh, P. (2003). The sport of baseball has little popularity in Costa Rica, but big-league baseballs are produced here. Chicago Tribune, July 15; Jones, D. (2004). Baseball assailed for using sweatshops. Pittsburgh Post-Gazette, October 16; Moore, C. (2004). Baseball striking out in human rights league. Western Catholic Reporter, March 1; Sloane, G. (2003). Babe Ruth organizers eye world series try. AM Costa Rica, February 17; Weiner, T. (2004). Costa Rica: Low wage workers make baseballs for millionaires. New York Times, January 25; www.state.gov. Country background notes – Costa Rica. Accessed on May 13, 2005.

Teaching Note
Sewing for Millionaires

All baseballs used in the Major League are produced by the Rawlings Sporting Goods Company in their Costa Rican factory. Workers earn about thirty cents per baseball and slightly above the minimum wage of Costa Rica. Recently, employee rights activists have questioned the pay and working conditions of the plant, and shown the disparity of pay between these workers and the salaries of Major League players. This case explores the ethical issues involved in the argument.

The case seeks to begin a discussion on the ethical issues raised when MNCs from wealthy countries employ workers in developing countries under conditions that are less favorable than found at home. Or stated otherwise, what are the responsibilities of a MNC to the local workforce? The case also seeks to put the student in the role of decision maker when facing environmental threats.

Discussion Questions

Different opinions will be expressed concerning the ethical nature of Rawlings’ employment practices in Costa Rica. The answers that are provided below simply reflect one opinion, that being of the author of the case.

1. Is Rawlings exploiting the Costa Rican employees?

A case could be made for exploitation in that the wage level is not much above the minimum wage of the country. While the skill level needed to sew baseballs is not great, it does, nevertheless, involve training and skill development, and comes with some potential health hazards. Especially in the long run, a worker is more vulnerable to repetitive motion injury. Some may argue that since few employment opportunities exist in the area, Rawlings is able to get employees to work for a low wage and disregard their health concerns. On the other hand, Rawlings is by local standards a good employer. The pay is better than other opportunities in the area, and the work is stable. One could argue that Rawlings is simply paying what the labor market will bear, and could in fact get an even lower cost of labor by moving the operation to China.

2. Is it fair to compare wage levels with MLB players?

This is not a fair comparison and really has little relevance. While a MLB player may be able to command a salary many, many times greater than that of the average employee in the baseball factory, the comparison must include skills and labor availability. Very few people have the skills necessary to be employed in the Major Leagues. The availability of people to sew baseballs is abundant. While it is tempting to compare salaries, this comparison is meaningless. However, one could still make an argument for increased wages and better working condition for the factory workers.

3. As CEO, what actions would you take, if any?

The correct answer here is not to ignore the issue. The problem needs to be taken seriously, and without attention may get worse. Baseball manufacturing for the Major Leagues has high visibility and the potential for increased public scrutiny. It would be better to handle the situation before it becomes even more public. The negative public relations problem is only one of many potential problems. While Rawlings has had an exclusive contract with MLB for some time, the contract could be terminated if MLB felt its image was being harmed by its association with Rawlings. In addition, the increased scrutiny by the media causes more visitors to the plant and the homes of workers, and increases the perception that employees of Rawlings are being exploited. Labor and quality issues may become more prevalent with this increased questioning. It certainly is possible that the issue will blow over, however, it appears that some reasonable concerns have been raised and should be addressed. Most importantly is the concern of possible long-term health issues. The current plant manager, Ken West has been quoted as saying that it is not an issue at the plant, however, it is likely that in fact it is a problem. Investigation into possible ways of minimizing this risk should be a high priority. Additionally, while Rawlings could move the operation to China and save on labor expense, the cost of labor in Costa Rica is not very high and the disruption of operations and training of new workers may not be in the best interests of the company. It could be argued that paying more than 14% above the minimum wage rate would go a long way to combating some of the problems Rawlings is facing in this case.

Student Stimulation

Group or Class Learning Activities

1. Environmental Policies: Ask teams to choose two firms. They should then find the environmental policies for these firms on the company website. Working in teams, have students evaluate the policies. Consider these issues when evaluating the policies: a) what impact do you think the environmental policy of each firm has on its bottom line; b) do you think there is a cultural link between the nature of the environmental policy and the home country of each corporation? c) to what extent does each firm “market” its environmental policy to end consumers?

2. Code of Ethics: Working in teams, develop a code of ethics and social responsibility for your college or university in regard to its foreign students. Your ethics code should cover such areas as recruiting, degree completion times, scholarship availability, work study issues, language, culture, on-site versus off-site instruction and any other issues you feel are important. After each team presents its ethics code, you may wish to ask the following discussion questions:

a. What ethical issues do you see in cross-border education? b. In what ways is a university that is involved in international education different than an MNC that is involved in international business? c. In what ways is a university that is involved in international education similar to an MNC that is involved in international business? d. How would you change a university to make it more socially responsible? e. Provide the teams with copies of your University’s actual code of ethics. How does it compare to the ones your students developed already? Does it contain all the areas students feel are relevant given the University’s impact on various stakeholders?

Additional Stimulation Discussion Questions

1. Do you feel profit is a sufficient goal for companies that operate across national borders?

2. To what extent do you feel codes of ethics and social responsibility are culturally-derived?

3. Should MNCs have lower standards of ethics and social responsibility in developing nations, given that developing nations need jobs so badly and have lower standards of living? In other words, to what extent do you feel ethical standards are a function of economic development?

4. Given that there are no agreed upon universal codes of ethics in international business, should companies follow the adage, “When in Rome, do as the Romans do”?

5. What do you feel should have the highest priority over the ethical actions of U.S. corporations: U.S. law or the laws of host nations where U.S. subsidiaries operate?

6. Students from different cultures may have different perceptions of university “honor codes.” For instance, in Thailand, students often feel that the greater honor is to aid one’s fellow students rather than to allow them to fail. Thus, a Thai student would break the honor code by failing to assist his or her classmates. In the US, we would perceive the aid to be cheating and a violation of the honor code. If you were in a study abroad program in Thailand, which honor system would you utilize? Why? If a Thai student were studying in your school, which honor system should they operate under? Can someone comfortably change systems given its connection to our personal ethical values?

CHAPTER 3

UnDERsTANDING THE ROLE OF CULTURE

LECTURE OUTLINE

General Outline
Opening Profile: Adjusting Business to Saudi Arabian Culture
Culture and Its Effects on Organizations
Cultural Variables Management Focus: China Issues New Restrictions Aimed at Protecting its Culture
Cultural Value Dimensions
The Internet and Culture
Developing Cultural Profiles Comparative Management in Focus: Profiles in Culture
Culture and Management Styles Around the World
Chapter Discussion Questions
Application Exercises
Experiential Exercises
End-of-Chapter Case Study: Moto: Coming to America from Japan
Additional Case: Canada Timber: Negotiating with the Japanese
Student Stimulation Questions and Exercises

Opening Profile: Adjusting Business to Saudi Arabian Culture

Some Western businesses have had difficulty in Saudi Arabia. Many though have been successful by adapting to the culture. Since the culture of Saudi Arabia and most Western nations is quite different, it is necessary to fully understand the culture before entering this market. Significant differences exist with respect to gender roles, religious activities, and ways of conducting business. The opening profile shows how some companies have adapted successfully to Saudi culture by allowing for prayer areas in their shops, separating male and female customers, and changing products and signs that may offend their Saudi customers.

I. Culture and Its Effects on Organizations

A. A critical skill for managing people and processes in other countries is cultural savvy; that is, a working knowledge of the cultural variables affecting management decisions.

B. Cultural sensitivity (cultural empathy) is a sense of awareness and honest caring about another individual’s culture. Such sensitivity requires the ability to understand the perspective of those living in other (and very different) societies and the willingness to put oneself in another’s shoes.

Teaching Tip: Have your students break into small groups and take no more than five minutes to identify three questions they could ask people from other cultures that would boost their cultural savvy. Ask each group to identify their best questions. Ask students to visit websites or chat rooms to learn the answers to their questions for a culture of their choice.

C. This cultural awareness enables managers to develop appropriate policies and to determine how differently to plan, organize, lead, and control in a specific international setting.

D. Company reports and management studies make it clear that a lack of cultural sensitivity costs businesses money and opportunities. In a synthesis of the research on cross-cultural training, Black and Mendenhall found that up to 40 percent of expatriate managers leave their assignments early because of poor performance or poor adjustment to the local environment. About half of those who do remain are considered only marginally effective. Further, they found that cross-cultural differences are the cause of failed negotiations and interactions, resulting in losses to U.S. firms of over $2 billion a year for failed expatriate assignments alone.

E. There is research evidence to support that cross-cultural training is effective in developing skills and enhancing adjustment and performance. In spite of the evidence, little is done in U.S. firms to take advantage of cross-cultural research in their corporate training programs.

F. The culture of a society comprises the shared values, understandings, assumptions, and goals that are learned from earlier generations, imposed by present members of a society, and passed on to succeeding generations. Culture results in a basis for living grounded in shared communication, standards, codes of conduct, and expectations.

Exhibit 3-1 depicts the variables affecting management functions. These differences result from the societal, or sociocultural, variables of the culture, such as religion and language, in addition to prevailing national variables, such as economic, legal, and political factors. National and sociocultural variables thus provide the context for the development and perpetuation of cultural variables. These cultural variables, in turn, determine basic attitudes toward work, time, materialism, individualism, and change. Such attitudes affect an individual’s motivation and expectations regarding work and group relations, and they ultimately affect the outcomes that can be expected from that individual.

Teaching Tip: Ask students from different regions to share sociocultural differences they have identified. Some common examples include foods that are popular in different areas of the U.S., as well as the use of slang and different accents.

G. Which organizational processes are most affected, and how, is the subject of ongoing cross-cultural management research and debate. Convergence describes the phenomenon of shifting individual management styles to become more similar to one another. The convergence argument is based on the belief that industrialization and worldwide coordination and competition tend to factor out differences in organizational level processes, such as choice of technology and structure. Redding and Martyn-Johns found the opposite—that the individual manager’s cultural beliefs affect management functions such as planning and organizing.

The effects of culture on specific management functions are particularly noticeable when we attempt to impose our own values and systems on another society. Exhibit 3-2 gives some examples of the values typical of U.S. culture, compares some common perspectives held by people in other countries, and shows which management functions might be affected.

H. The first step toward cultural sensitivity is for the international manager to understand his or her own culture. This awareness helps to guard against adopting either a parochial or ethnocentric attitude. Under parochialism, one expects those from or in another country to automatically fall into patterns of behavior common in their own country. Ethnocentrism describes the attitude of those who operate from the assumption that their ways of doing things are best— no matter where or under what conditions they are applied.

I. The manager’s next step toward establishing effective cross-cultural relations is to develop cultural sensitivity. Managers must appreciate cultural diversity and understand how to build constructive working relationships anywhere in the world.

II. Cultural Variables and Dimensions

A. One way for managers to anticipate the probable effects of an unfamiliar culture on an organization’s outcomes and processes is to develop a cultural profile.

B. Managers should never assume that they can successfully transplant America’s, or Japan’s, or any other country’s styles, practices, expectations, and processes. Instead, they should practice contingency management. Contingency management requires managers to adapt to the local environment and people and to manage accordingly.

C. Subcultures

1. Managers should recognize, of course, that generalizations in cultural profiles will produce only an approximation, or stereotype, of national character. Many countries also comprise diverse subcultures whose people conform only in varying degrees to the national character.

2. Good managers treat people as individuals, and they consciously avoid any form of stereotyping.

3. A national profile is a good starting point to help managers develop some tentative expectations with which to manage in a specific international setting.

Teaching Tip: Break your class into teams of four to five students each. Give the students 15 minutes to identify as many subcultures at the university as they can. Have the groups share their list with the class. Based on the list, ask the class to describe the characteristics of a sub-culture.

D. Cultural Variables

1. Universal cultural variables, found in most societies, make up unique clusters and provide a snapshot of the overall character of a specific group. While there are countless individual variables, one approach to categorizing interdependent variables is given by Harris and Moran, who identified eight categories that form the subsystems in any society: kinship, education, economy, politics, religion, associations, health, and recreation.

a. A kinship system is one adopted by a given society to guide family relationships. b. The formal or informal education in a culture greatly affects expectations of people in the workplace, recruitment and staffing practices, training programs and leadership styles. c. A nation’s economic system is a powerful influence on such organizational processes as sourcing, distribution, incentive systems, and repatriation of capital. d. The system of government in a society imposes varying constraints on the organization and its freedom to do business. e. The spiritual beliefs of a society are often so powerful that they transcend other cultural aspects. Religion commonly underlies both moral and economic norms. f. Many and varied types of social associations arise in cultures out of formal and informal groups. g. The system of health care in a country affects employee productivity, employee expectations of who is responsible for their health programs, and attitudes toward physical fitness. h. Recreation is the manner in which people use their leisure time and attitudes toward leisure.

Management Focus – China Issues New Restrictions Aimed at Protecting its Culture

China’s Propaganda Department has issued new regulations that keep additional foreign broadcasters from entering the Chinese market and strengthens restrictions on current operators. The Ministry of Culture is clamping down on foreign influence to Chinese culture by increasing regulation of books, newspapers, television, and theatre in an effort to maintain its culture. All of these regulations are being imposed at a time when China is opening its economic markets. Government control over what its people think is still very much alive in China.

Teaching Tip: Have students visit the Web page: http://english.peopledaily.com.cn/ for news about China and the Chinese perspective on their culture.

III. Culture Value Dimensions A. Cultural variables result from unique sets of shared values among different groups of people. Values are a society’s ideas a about what is good and bad, right or wrong. Values will influence people to likely behave differently under similar circumstances.

B. Project GLOBE Dimensions

1. The GLOBE Project team is comprised of 170 researchers who have collected data over seven years on cultural values and practices and leadership attributes from 18,000 managers in 62 countries. The team identified 9 cultural dimensions, which distinguish one society from another:

a. assertiveness b. future orientation c. performance orientation d. humane orientation e. gender differentiation f. uncertainty avoidance g. power distance h. institutional collectivism versus individualism i. in-group collectivism The descriptions and selected results are presented in Exhibit 3-3.

2. The first four are distinctive from values identified in Hofstede’s research and are presented next. The remaining five are discussed in conjuction with the material on Hofstede.

a. Assertiveness refers to how much people in a society are expected to be tough, confrontational, and competitive, versus modest and tender. b. Future orientation refers to the level of importance a society attaches to future-oriented behaviors such as planning and investing in the future. c. Performance orientation measures how important performance improvement and excellence are in society and whether people are encouraged to strive for continuous improvement. d. Humane orientation is the extent to which a society encourages and rewards people for being fair, altruistic, generous, caring, and kind.

C. Cultural Clusters

Gupta, et al have developed a cultural typology that places cultures into clusters. Exhibit 3-4 shows the countries and their cluster.

D. Hofstede’s Value Dimensions

1. One useful framework for understanding how basic values underlie organizational behavior was proposed by Hofstede, the result of research on over 116,000 people in 50 countries. Hofstede proposes four value dimensions: power distance, uncertainty avoidance, individualism, and masculinity.

a. Power distance is the level of acceptance by a society of unequal distribution of power in institutions. The extent to which subordinates accept unequal power is socially determined. b. Uncertainty avoidance refers to the extent to which people in a society feel threatened by ambiguous situations. In a business context, this value results in formal rules and procedures designed to provide more security and more career stability. c. Individualism refers to the tendency of people to look after themselves and their immediate family only and neglect the needs of society.

Hofstede’s findings indicate that most countries scoring high on individualism have both a higher gross national product and a freer political system than those scoring low on individualism. d. Masculinity refers to the degree of typical “masculine” values, such as assertiveness, materialism, and lack of concern for others. Femininity in a society emphasizes concerns for others, relationships with others, and quality of life.

Teaching Tip: Have students visit the web site www.geert-hofstede.com to generate further interest in the Hofstede mode. Students can also be asked to select two countries and to compare and contrast their cultural profiles from the site.

D. Trompenaar’s Findings

1. Fons Trompenaar also researched the values dimension over a ten year period with 15,000 managers from 28 countries representing 47 national cultures.

2. Looking at Trompenaar’s dimension of Universalism versus Particularism: the universalistic approach applies rules and systems objectively, without consideration for individual circumstances, whereas the particularistic approach puts the obligation towards relationships first and is more subjective.

3. In the Neutral versus Affective dimension, the focus is on the emotional orientation of relationships. People tend to be either specific or diffuse when it comes to involvement in relationships. Managers in specific-oriented cultures separate work and personal issues and relationships; they compartmentalize their work and private lives, and they are more open and direct. In diffuse-oriented cultures, there is spillover from the work into the personal relationships, and vice-versa.

4. In the Achievement versus Ascription dimension, the question is what is the source of power and status in society. In an achievement society the source of status and influence is based on individual achievement—how well one performs the job and what level of education and experience one has to offer.

Teaching Tip: To help students understand the differences between Ascription and Achievement cultures, ask how they feel about special treatment for athletes in your university. Students are often very aware of perceptions that athletes have unfair academic and financial aid in university systems because of the value they provide to profitable and popular university sports teams.

5. It is clear, then, that a lot of work behavior can be explained by differences in people’s innate value systems, as described by Hofstede and Trompenaar, based on their research. Awareness of such differences and how they influence work behavior can be very useful to you as a future international manager.

E. Critical Operational Value Differences

1. Some specific culturally based variables which cause frequent problems for Americans in international management are time, change, material factors, and individualism.

a. Time: To Americans, time is a temporal value (as opposed to eternal/permanent), making it something to be saved, scheduled, and spent with precision so that it is not wasted. In many parts of the world, people view time from different perspectives, often based on religious beliefs.

b. Change: The value of change varies greatly across cultures. An accepted Western attitude toward change is that an individual can exert some control over the future and can manipulate events, particularly in business. Individuals feel they have some internal control. In many non-Western societies, control is considered external, and people generally believe in destiny or the will of Allah. They therefore adopt a passive attitude and may have negative attitudes toward change.

c. Material factors: Americans consume resources at a far greater rate than the rest of the world. The attitude of Americans toward nature is that it is there to be used for their benefit. This differs from the attitudes of Indians and Koreans, who worship nature as a part of their religious beliefs.

d. Individualism: In general, Americans tend to work and conduct their private lives independently, valuing individual achievement, accomplishment, promotion, and wealth above group goals. In other countries, this individualistic attitude is not valued, and a greater emphasis is placed on such things as conformity, cooperation, and the strength of the family or community.

2. International managers often face conflicts in the work situation as a result of unexpected behaviors arising from differences in values held about time, change, materialism, and individualism. These differences in values have important implications for organizational behavior in such areas as communication, work organization and scheduling, incentive systems, and attitudes toward work in general. An example of these operational differences between Japanese and Mexican cultures is shown in Exhibit 3-5.

IV. The Internet and Culture

A. The pervasive use of the Internet is affecting many social variables, including associations, education, and the economy. For instance, in South Korea, the desire for technology is driving the economy as well as daily habits. People surf online at Internet cafes – there are more than 20,000 in Seoul alone. Even the latest refrigerators offer Internet connections on a monitor in the door panel!

B. In addition, culture is affecting how the Internet is used. One of the most critical issues is the attitude toward information privacy – the right to control information about oneself.

V. Developing Cultural Profiles

A. Managers can gather considerable information on cultural variables from current research, personal observation, and discussions with people. From these sources, managers can develop cultural profiles of various countries — composite pictures of working environments, people’s attitudes, and norms of behavior.

B. It is relatively simple to pull together a descriptive profile for American culture, even though there are regional and individual differences, because we know ourselves and because researchers have thoroughly studied American culture. The results of one such study by Harris and Moran are shown in Exhibit 3-6, which provides a basis of comparison with other cultures on ten dimensions and thus suggests the likely differences in workplace behaviors. It is not so easy, however, to pull together descriptive cultural profiles of peoples in other countries unless one has lived there and has been intricately involved with those people. But managers can make a start by using what research and literature is available on a comparative basis.

Teaching Resource: Concerned about protocol? Business Netiquette International is a web site devoted to cross cultural business etiquette. http://www.bspage.com/1netiq/Netiq.html
Another interesting site is International Addresses and Salutations. This page provides resources for everybody that corresponds internationally and provides the correct address formats and appropriate personal salutations for each and every country. http://www.bspage.com/address.html

Comparative Management in Focus: Profiles in Culture

1. Japan

a. Much of the Japanese culture—and the basis of working relationships—can be explained by the principle of wa, meaning peace and harmony. This principle, embedded in the value attributed to amae (indulgent love), probably originated in the Shinto religion. b. Japan’s cultural roots have produced a very homogeneous managerial value system, with strong middle management, strong working relationships, a strong seniority system that stresses rank, and an emphasis on looking after subordinates. c. The principle of wa places emphasis on participative management, consensus problem solving, and decision-making within a patient, long-term perspective. Low emphasis is given to open expression of conflict. Figure 3-7 describes the American-Japanese Cultural Divide

Teaching Resources: Two excellent videos are broadly available through university libraries or through PBS Video. American Game, Japanese Rules - A descriptive look at Japanese Society through the way baseball is played; and American Japanese Culture Clash - examines differences in U.S. and Japanese culture. The movie Mr. Baseball is a fun way to explore the cultural differences between the United States and Japan.

d. Anecdotal evidence suggests some convergence taking place between western business cultures and Japan. Focus on the group, lifetime employment, and pensions have given way to a more competitive business environment with no guaranteed job security and an emphasis on performance-based pay. Corporate Japan is changing from an era of cultural consensus and groupthink, to one of personal responsibility.

2. Germany

a. The reunited Germany is naturally fairly culturally diverse, since the country borders several nations. Based on Hofstede, Germans rank high on individualism (though less individualistic than the U.S.), high on uncertainty avoidance and masculinity, and have a relatively small need for power distance. These cultural norms manifest themselves in German’s preferences for being around familiar people and situations and, also, in their propensity to do a detailed evaluation of business deals before committing themselves. b. Christianity dominates German culture—96% are either Protestant or Catholic. This may be why Germans prefer rule and order in their lives. Germans are assertive in business but not aggressive; they have a very strict sense and use of time and follow hierarchical organizational structures with power at the top. In negotiations, Germans want detailed information before and during discussions.

Teaching Resources: Two Web sites provide great information on Germany. Deutsche Welle—the Deutsche Welle Webserver provides international and German news, analyses and programming information on Deutsche Welle international broadcasting. Useful links to other news servers are also provided. Includes a complete schedule of their worldwide broadcasts in English and German. http://www.dw-world.de/

Teaching Resources: The German Information Center provides full text press releases and articles on current events in Germany. http://www.germany-info.org/

3. South Korea

a. Koreans rank high on collectivism and pragmatism, fairly low on masculinity, moderate on power distance and quite high on uncertainty avoidance. In Korea, priorities are family, respect for authority, formality, class, and rank. Koreans are aggressive and hardworking, friendly, and hospitable. b. Business is based on honor and trust; most contracts are oral. c. The section concludes with an excerpt from a letter from a Korean Professor who has lived in the U.S. for 20 years. The letter is to a friend thinking of immigrating to the U.S. and describes U.S. culture from a Korean perspective.

For information on doing business in Korea visit the Web page: http://www.buyusa.gov/korea/en/doingbusinessinkorea.html. The site provides essential information including cultural material.

VI. Culture and Management Styles Around the World

As an international manager, it is useful then to apply information to develop an understanding of the expected management styles and ways of doing business that predominate in that region, or with that type of business setting. Two examples are presented—that for Saudi Arabia, and that for Chinese Small Family Businesses.

A. Saudi Arabia

1. The Arab culture is intertwined with the pervasive influence of Islam. Even though not all Middle Easterners are Arab, the Arab culture and management style predominates in the Gulf region. Islam “permeates Saudi life—Allah is always present, controls everything, and is frequently referred to in conversation.”

Exhibit 3-8 gives some social actions and nonverbal behaviors that may offend Arabs. The relationship between cultural values and norms in Saudi Arabia and managerial behaviors is illustrated in Exhibit 3-9.

B. Chinese Small Family Business

1. As put forth by Chen, the philosophy and structure of Chinese businesses comprises paternalism, mutual obligation, responsibility, hierarchy, familialism, personalism, and connections. Autocratic leadership is the norm, with the owner using his or her power, but also with a component of caring about other people, which may predominate over efficiency.

Exhibit 3-11 provides a general framework for comparing western and Chinese cultures and shows the resulting differences in Chinese attitudes and behavior, along with the implications for managers.

2. Guanxi means connections – the network of relationships the Chinese cultivate through friendship and affection. It entails the exchange of favors and gifts to provide an obligation to reciprocate favors. This is a critical aspect of business transactions in China.

3. As Chinese firms in many modern regions in the Pacific Rim seek to modernize and compete locally and globally, there is a tug of war between the traditional Chinese management practices and the increasingly “imported” Western management styles. This struggle is encapsulated in the different management perspectives of the old and young generations.

Chapter Discussion Questions

1. What is meant by the culture of a society, and why is it important for international managers to understand it? Do you notice cultural differences among your classmates? How do those differences affect the class environment? Your group projects?

The culture of a society comprises the shared values, understandings, assumptions, and goals that are learned from earlier generations, imposed by present members of a society, and passed on to succeeding generations. It is important for managers to understand the cultural variables because these determine basic attitudes toward work, time, materialism, individualism, and change. Such attitudes affect an individual’s motivation and expectations regarding work and group relations, and ultimately affect the outcomes that can be expected as a result of those work and group relations. Many international business failures can be traced back to a lack of cultural understanding on the part of management.

Students will have differing perceptions of their international classmates. It is important to foster an appreciation of those differences early in the semester. The answers to this question may uncover stereotypes that need correction. Even if all the students in the class are domestic students, there may still be cultural difference (subculture) and these differences may manifest themselves in the class environment on in group projects.

2. Describe the four dimensions of culture proposed by Hofstede. What are the managerial implications of these? Compare the findings with those of Trompenaars and the Globe project team.

Hofstede’s research identified the four value dimensions of power distance, uncertainty avoidance, individualism, and masculinity. Power distance is the level of acceptance by a society of unequal distribution of power in institutions, and it determines the extent to which subordinates accept unequal power. Uncertainty avoidance refers to the extent to which people in a society feel threatened by ambiguous situations. In a business context, this value results in formal rules and procedures designed to provide more security and greater career stability. Individualism refers to the tendency of people to look after themselves and their immediate family only and neglect the needs of society. Countries scoring high on individualism have both a higher gross national product and a freer political system. Masculinity refers to the degree of typically “masculine” values, such as assertiveness, materialism, and lack of concern for others that prevail in a society. By comparison, femininity emphasizes concerns for others, relationships with others, and quality of life. These four value dimensions have a profound impact on organizational behavior and the kinds of management activities needed to productively manage workers within a given cultural setting. For example, a manager coming from a low power distance culture may attempt to implement more participative management approaches, however, these may not be effective in a high power distance culture.

While there is some overlap with Hofstede, Fran Trompenaars provided the additional dimensions of universalism v. particularism, neutral v. affective, specific v. diffuse, and achievement v. ascription. These additions provide a good supplement to Hofstede’s model. Cultures can be compared on the basis of how universal principles are applied in the cultures, the differences in blending work and play, the use of emotion, and the way in which a society grants status. The Globe project identified nine cultural dimensions, some of which overlap with the previous models of Hofstede and Trompenaars. The Project added such variables as assertiveness, future orientation, performance orientation, and humane orientation. The overlap found in different models gives confidence that the researchers have identified consistent cultural dimensions.

3. Discuss the types of operational conflicts that could occur in an international context because of differences in attitudes towards time, change, material factors, and individualism. Give examples relative to specific countries.

Differences in cultural attitudes toward time may create a number of workplace dilemmas, such as the amount of stress placed on timeliness in appointments and numbers of hours worked. Cultures that have a lax attitude toward time (the “manana attitude”) are less likely to be concerned about timely appointments and getting every bit of productivity possible out of the workday. Western cultures tend to view change as a positive business opportunity, particularly regarding the introduction of new products and services into the marketplace. Muslim cultures do not embrace change willingly, because of the alterations it often brings with it in such areas as gender roles and religious practices. Materialistic cultures, such as the United States, often place a low priority on conserving natural resources, while many Asian cultures actually worship nature and its natural resources. Highly individualistic cultures, such as those in the West, expect business professionals to be aggressive and self-promoting. Group-oriented cultures, such as those in Asia, place a higher premium on group cooperation and teamwork.

4. Give some examples of countries in which the family and its extensions play an important role in the workplace. How are managerial functions affected and what can the manager do about this influence?

Throughout Latin America the family is of central importance, and loyalty and commitment to the family frequently determines employment, promotion, and contract choices. Ideals, emotions, and intuition often take precedence over objective information in making decisions. As a result, managers must show that they are firmly in control (the “macho” mystique). Managers must be very careful not to expect family oriented employees to work overtime or to spend long periods of time away from family members. The practice of hiring relatives can also be an issue in some Latin cultures. It is not uncommon to be asked to hire the relatives of current employees. These expectations may produce difficulties that the international manager must address.

5. Discuss collectivism as it applies to the Japanese workplace. What managerial functions are affected?

The principle of wa in Japan places a supreme emphasis on peace and harmony in the workplace and among social relationships. The Japanese have disdain for rugged individualism, stating that “The nail that stands out gets hammered down.” The Western idea of individual praise and promotion do not generally fit well into Japanese culture. The system of wa causes a great emphasis to be placed on harmonious working relationships on teams. This leads to an emphasis on participative management, consensus problem-solving, and decision-making within a patient, long-term perspective. Conflict is avoided along with “loss of face.” Japanese employees are more likely to sacrifice for the good of the group.

6. Discuss the role of Islam in cross-cultural relations and business operations.

Muslims believe in the Five Pillars of Islam. These are 1) declaration of faith, 2) almsgiving, 3) prayer (5 times daily), 4) fasting, and 5) pilgrimage to Mecca. Managers may need to accommodate these beliefs by providing time for Muslim employees to pray and offering a prayer room, by using flexible holidays to accommodate different religious holidays and the opportunity for employees to make a pilgrimage. In addition, because Muslims do not eat pork or drink alcohol, dietary preferences should be taken into account at business dinners. Islamic banking and finance also have some unique qualities since the payment of interest is prohibited by Islamic law. The opening segment on Saudi business also provides advice on business practices in Islamic cultures. Recently relations between Christian and Muslim countries have become strained. Additional understanding on the part of both groups will go a long way in improving these cross-cultural relations.

Application Exercises

1. This exercise requires students to do a significant investigation into different aspects of the culture of the selected targeted country. In addition to a Google search, another good source of material is the web site www.executiveplanet.com.

2. When comparing the list of selected countries, most have the following characteristics relative to the United States: higher power distance, more collectivist, and greater uncertainty avoidance. The United States would be classified as low power distance, strongly individualistic, masculine, and low uncertainty avoidance. Significant difference in managerial style and tasks results from these cultural differences. In high power distance cultures the use of more participative management techniques is generally not as effective. Employees in those cultures expect managers to make decisions and may be confused by invitation to participate. In collectivist cultures, the group is the most important unit of analysis. The use of teams can have a greater impact and the lack of individual recognition is expected. In cultures with high uncertainty avoidance, employees will expect direction and will not be so favorably inclined towards change. Many of the “modern” management techniques employed in the United States will have limited application in those cultures.

For a more detailed assessment of the targeted cultures visit Geer Hofstede’s Web site at www.geert-hofstede.com.

Experiential Exercises

1. When a deal does not go through it is often difficult to come up with a reason or reasons for its failure. While Fred did have some understanding of German culture, it is possible that his use of humor was not well received by his German audience. Humor often does not translate well and offers potential to offend, this may be particularly true in Germany.

2. Bill should not be upset by the either the “lateness” of his meeting or the fact that others were present in the room. Saudi Arabia is a polychronic culture with a relaxed sense of time. People in Saudi Arabia prefer to do a number of things at one time, as compared to the monochronic culture of the United States. The fact that the Saudi government official wanted to engage him in “meaningless talk” was just his way of social introduction. Most cultures allow for more social engagement before discussing business than is typically found in the U.S.

3. Tom should have realized that the “retired” grandfather still possessed much power and influence in the operations of the business. This may be especially true relative to the maintenance of tradition. In a culture with high respect for age, Tom should have given the grandfather more importance and instead of arguing his point, made the necessary adjustments to accommodate the desires of the grandfather.

End-of-Chapter Case: Moto: Coming to American from Japan

Discussion Questions

1. What was Moto’s purpose and agenda for the first meeting with Crowell? How does he try to implement his agenda?

The purpose of the first meeting was simply to develop a social relationship. In many cultures, including Japan, social relations come before business. Moto wanted to establish a good relationship with Crowell and to present a positive first impression. He did this through the use of his business acrd and the presentation of the gift from Japan.

2. What communication problems were there between Moto and Crowell?”

There were a number of communication problems. To begin with, Crowell’s handshake was too aggressive for the Moto, especially coming from a culture in which people bow instead of shake hands. The importance of the business card was also an issue. Crowell did not take time to study the card and to give it the respect that Moto felt it deserved. Crowell created a bit of tension in the communication between the two men by his misunderstanding of Japanese names. Many of the problems concerning communication resulted in the differences between a high-context and low-context culture. Japan is a high-context culture and much communication is in the context of the process. Crowell is from a low-context culture in which the meaning is in the written or verbal message, and little importance is attached to contextual factors.

3. What was the significance of the dolls? What went wrong?

The gift of dolls was misunderstood. Crowell assumed that they were for a child and thus stated that his daughter would enjoy them. The dolls are not a child’s toy and are very special. Crowell did not understand the significance of the gift. He also should not have opened the gift in front of Moto. This produces a possible loss of face if the receiver does not appreciate the gift as much as the giver expects. Crowell should have thanked Moto and opened the gift later, He should then thank Moto after learning more about Japanese dolls.

4. Why did Crowell’s remarks about Allmack threaten a loss of face from Moto’s perspective?

Crowell was engaging in self-promotion. Such behavior is considered ill-mannered by the Japanese. Moto had done his research on the company and already knew of its qualities. By explaining the virtures of the company, Crowell made moto appear to have not done his homework on the company and to be unprepared for the meeting.

5. How did Moto feel about Kubushevsky’s behavior early on? How did their relationship change?

In the beginning, Moto felt that Kubushevsky was a loud, rude, and disloyal individual. His cross-cultural understanding was low and he may have been perceived as someone with low social standing. His abrupt manner and unwillingness to engage Moto on a proper social basis created tension in the relationship. Over time, the two men got to know each other better (especially with the help of alcohol) and their relationship greatly improved. In the end, both men developed greater respect and understanding of each other, especially Moto’s respect and understanding of Kubushevsky and American culture. While Moto had read about America and had a teacher, his “in-field experience” was valuable to his total understanding of American culture.

Additional Case

Canada Timber: Negotiating with the Japanese

Tim Wilder, CEO of Canada Timber, was excited as he hung up the telephone in his office in Vancouver, British Columbia. Tim had just received a call from Akiko Morita, who represented the Japanese furniture manufacturer, Bonsai. Morita informed Tim that Canada Timber was being considered as a major supplier to Bonsai. He told Tim that Canada Timber’s reputation as a supplier of quality hardwoods was of interest to Bonsai. Canada Timber exported its products to the United States, Mexico, and several European countries; however, the company did not have customers anywhere in Asia. Tim was excited about the prospect of exporting to Asia. After several long-distance telephone calls and several more faxes, it was decided that Tim and two of his associates would travel to Japan in order to close an initial sales contract. In addition, Tim asked his brother-in-law, Johnny Sharkey - an attorney, to accompany them, and to act as their legal representative. The two associates Tim selected to join him on the trip were a production supervisor from Canada Timber and another member of the management team. Bill Hudak, production supervisor was a long-term employee of Canada Timber. His knowledge of hardwoods and the production procedures of Canada Timber made him an obvious choice for inclusion on the negotiating team. Tim also asked Kevin Peterson, a regional salesperson, to go along as well since Kevin was married to a woman of Japanese descent, and Tim felt he would make a good impression on the Japanese. None of the Canada Timber employees, or Johnny, spoke Japanese. Kevin knew a few words in Japanese and was somewhat familiar with Japanese culture. The Japanese had faxed a number of documents to Tim concerning the meetings. Tim was very impressed with the degree of detail provided by the Japanese, including the names and qualifications of the people they would meet during their visit to Japan. A detailed agenda was provided, and the Japanese made all the arrangements for transportation and lodging for the Canadians. After an exhausting flight, the Canadians arrived in Japan and were greeted by Akiko Morita and other representatives of Bonsai. The Japanese bowed and handed Tim their business cards. Tim, exhausted from the flight, took the business cards from each Bonsai representative and quickly stuffed them into his shirt pocket. After a brief conversation, the Bonsai employees took the Canadians to their hotel to rest. They would be back in the morning to escort them to Bonsai headquarters. The Canadians were very tired but excited to be in Japan. They rested a bit, and then spent the rest of the afternoon and early evening walking the streets of Tokyo. When Tim and his associates arrived at Bonsai headquarters they were presented with a gift from the company president, Mr. Ono Kusushi. John was unsure if he should open the gift or not, so he decided to thank Mr. Kusushi for the gift and to stuff it into his briefcase. Once again a number of business cards were presented to John and the others, and at this point, Tim remembered that he had forgotten to bring his business cards along. He apologized for the oversight and once again quickly collected the cards from the Japanese. The meeting began with Mr. Kusushi asking, through an interpreter, how the Canadians liked Japan so far. Tim and the others expressed an appreciation for being in the country and pointed out that Kevin had been to Japan previously while visiting the family of his Japanese wife. The Japanese remained silent as the Canadians told of how they had explored the city the night before and commented on how crowded the city was compared to Vancouver. Tim, who is a very tall man, stated that he felt like a “giant among men in Japan.” It appeared to Tim that the Japanese were very interested in the Canadians’ perceptions of the country, and that they would begin to discuss business if he would offer some compliments. Tim thought about the situation and offered some positive comments on the food and drink they had enjoyed in their hotel. Tim then quickly began to discuss business, pointing out how Canada Timber was a quality leader in supplying hardwood products to several countries. He went on at great length about the positive attributes of his company and how it would be a good business decision to select Canada Timber as a supplier. Bonsai had faxed some preliminary estimates of their wood needs and Tim had prepared a detailed report, which he presented at the meeting. At the end of the report, Tim provided details on costs, and then asked Mr. Kusushi if the numbers were acceptable. A long period of silence began. Tim and the other Canadians began to feel a bit nervous after a few moments had passed and he again asked, through the interpreter, if the price was acceptable. Mr. Kusushi smiled and laughed a bit without saying a word. He then looked at one of the members of the Japanese negotiating team and the two spoke in Japanese without the conversation being translated. At this point Tim interrupted by saying that perhaps the price could be a bit lower if needed. More silence followed and Tim became increasingly nervous. He began to speak, this time addressing the translator and asking if anything could be done to “seal the deal today.” He pulled a contract out of his briefcase, lowered the price by 10% and asked Johnny to explain the important points of the sales contract. Mr. Kusushi sat quietly as Johnny explained the details of the contract to the Japanese. Tim and Johnny were concerned that Mr. Kusushi did not say much and that he never made good eye contact with them. After the details of the contract were explained, one of the more senior Japanese representatives suggested that the group take a short break. Tim thought this was a good sign and agreed. He stood up to shake the hand of each Japanese employee as they left the room. When he approached Mr. Kusushi, he gave an especially firm handshake and a pat on the shoulder. He told Mr. Kusushi, referring to him as Kenichi, that he was certain the two could work out a favorable arrangement, and that Canada Timber was prepared to do whatever was necessary in order to become a Bonsai supplier. When the meeting resumed, Tim was informed that he and his associates were invited to tour one of Bonsai’s manufacturing plants, which was located a few hours from Tokyo. Tim happily accepted the invitation, and the Canadians were off to the plant. After much formality once arriving at the plant, the Canadians were given an extensive tour. Tim and Bill Hudak asked many questions about the operation and they felt that they now had a better understanding of the material requirements needed by Bonsai. After the plant tour, the Canadians were taken back to their hotel and told that a Bonsai representative would pick them up in the morning and bring them back to company headquarters. That evening the four men discussed what had happened during the day and how they should proceed. Kevin felt that everything was on schedule for the Japanese and that it would simply take more time in order to close the deal. He explained that silence was a negotiating tactic of the Japanese, and that Tim should not make any more concessions on price. Tim agreed that the price was already low and that not much profit would be made. However, he felt that if he could get the Japanese to sign a contract, and that if they liked the product, they would be able to do further business under better financial conditions. The four men generally agreed that they should seek a commitment from the Japanese in the morning. The following day, however, would be no more successful for Tim and his team. After many hours of explaining once again how Canada Timber was the right choice, and that the price was very low, Tim was beginning to get frustrated. He felt that the Japanese were holding out for a lower price, and so he decided to offer a 15% reduction in order to end the negotiations. After the offer Tim slouched down in his chair and decided that he would use silence to his advantage. Tim sat silently and stared at Mr. Kusushi. It seemed like an eternity to the Canadians before someone from the Japanese side finally spoke. One of the senior Japanese employees suggested that the negotiations end for the day and that they resume the following morning. He further suggested that all members of the two teams go out in the evening to experience Japanese culture. At first Tim thought that he could take no further delays, but he then reasoned that he might be able to reach an agreement with the Japanese in a more informal setting. During dinner Tim continued to press Mr. Kusushi for a decision. Mr. Kusushi politely said that he thought Canada Timber would be a good partner for Bonsai, yet made no commitment. After dinner, the Japanese took the Canadians to a very popular bar in Tokyo and all participants drank heavily. After a few hours Tim moved close to Mr. Kusushi, put his arm around his neck and told him that he was his new friend. Tim told Mr. Kusushi that he was going to give his new friend the best price he possibly could and that meant that he was going to make a final offer of a price reduction of 20%, if he would agree to the deal right now. Mr. Kusushi laughed and responded in English “yes.” Tim was finally convinced that the team had closed the deal and that a contract would be signed in the morning. On the following morning, Tim had Johnny prepare a revised sales agreement with the discounted price. Although the price was much lower than Tim had hoped for, and near his break-even point, Tim, nevertheless, felt that a long-term association with Bonsai and the potential for additional sales in Asia would be beneficial to the company. He was also happy to be able to return to Canada soon. Once again the Canadian team was met at the hotel and driven to Bonsai’s headquarters. Tim entered the meeting room surprised not to find Mr. Kusushi present. When he asked the whereabouts of Mr. Kusushi, he was told that he had been called out of town unexpectedly and offered his apologies. Tim was told that Mr. Kusushi would return tomorrow. Tim immediately approached Akiko and told him that Mr. Kusushi had agreed to the terms listed in the sales contract he was holding in his hand. He asked if someone could sign the agreement so that he and his associates could return home. Tim was told that Mr. Kusushi would need to approve any supplier agreements and that it was impossible to do so today. Tim was very upset and it showed. His face was red. He believed that the Japanese were stalling in order to gain additional concessions. Tim moved very close to Akiko and told him that an agreement had been reached and that he should immediately telephone Mr. Kusushi to confirm. After raising his voice, Akiko telephoned Mr. Kusushi and told him of the situation. Upon his return, Akiko said, “Please excuse, Mr. Wilder-san, but we will probably need to wait just one more day.” Tim, feeling as if were being manipulated, stormed out of the office, and, along with his negotiation team, headed for the airport.

Discussion Questions:

1. Evaluate the selection of negotiators from Canada Timber. Were any mistakes made in the selection? 2. What differences in culture between the Japanese and Canadians can be found in this case? 3. What could have been done differently in order to produce a more desirable outcome?

Sources: D. Engel and K. Murakami, Passport Japan. Novato, CA: World Trade Press, 2000; J. Scarborough, The Origins of Cultural Differences and Their Impact on Management. Westport, CT: Quorum, 2000; and R. Sanyal, Upper Saddle River, NJ: Prentice Hall, 2001.

Teaching Note

Canada Timber: Negotiating with the Japanese

In this case Tim Wilder, CEO of Canada Timber, goes to Japan to discuss a contract with Bonsai, a Japanese Furniture manufacturer regarding the possibility of becoming a supplier of hardwood to that company. It was decided that Tim, along with three associates would travel to Japan to close an initial deal. The morning after their arrival the Canadians were taken to Bonsai headquarters. The Japanese they met ceremoniously presented business cards. Tim had forgotten his own business cards beginning a series of cultural gaffes. Canada Timber had a detailed proposal, which was presented to Bonsai at that time. The Japanese responded with silence. Tim then lowered the proposed price. The Japanese suggested a short break. When the meeting resumed the Canadians were invited to tour a distant plant. Tim interpreted this positively. The next day nothing much was accomplished from Tim’s perspective as the Japanese seemed in no hurry to finalize a deal. The two negotiating teams spent that evening out in Tokyo experiencing Japanese culture. After dinner they went to a popular Tokyo nightclub and all drank heavily. Tim then obtained what he felt to be a firm commitment from the CEO of Bonsai, Mr. Kushushi, after again lowering his price. The next morning the Canada Timber team came to Bonsai headquarters with a new contract. Tim was very surprised when he found that Mr. Kushushi was not there as he had unexpectedly been called out of town. No contract could be signed without him and Tim was advised to “wait one more day”. Tim was visibly upset and felt the Japanese were stalling for a better deal. The Canadians, feeling they were being manipulated, stormed out and headed for the airport.

Discussion:

Tim Wilder went to Japan unprepared for the cultural reality he would face there. He was almost entirely lacking in knowledge of the country and its business culture. He made a mistake in not including someone who was knowledgeable about Japan, its business culture and its language. Although he did select someone who was married to a wife of Japanese ancestry, this was not enough. Many differences between the Canadian and Japanese cultures can be seen in this case. The failure of Canada Timber to send a list of participants with their backgrounds began their series of mistakes. Tim didn’t have business cards available and stuck the business cards of the Japanese executives in his pocket. In Japan business cards are exchanged with some ceremony. After the negotiations began Tim attempted to get “right down to business” and found himself becoming frustrated with the Japanese who desired to get to know them better as individuals first. The executives of Bonsai didn’t know how to respond to the forward nature of the Canadians. When pressed to make a commitment they responded with silence. The Canadians interpreted this as discomfort of the price. Tim responded to this silence by lowering the price, multiple times. No doubt the Japanese noted this and used it to their advantage. It is not unusual for Japanese businessmen to socialize over dinner and to drink a lot on these occasions. Drinking in Japan is viewed as an opportunity to relax normal formalities and speak frankly without risk of being inappropriate. In this situation it probably was not inappropriate for Tim to press home his request for a commitment by Bonsai. However, the agreement that Mr. Kushashi made at that time may have been more of an effort to be polite than real agreement. What Tim Wilder didn’t realize is that agreement in a Japanese business context is more an evolutionary process than a single instant in time. Tim Wilder’s happiness at sealing the deal should have been more tempered. The next day Mr. Kushashi wasn’t available, ostensibly having been called out of town suddenly. This may or may not have been true. Perhaps Mr. Kushashi was too embarrassed to face them after being cornered into an agreement, perhaps not. The problems faced by Tim Wilder and Canada Timber in negotiating with the Japanese was foreseeable. The Canadians should have obtained guidance in Japanese business practices prior to leaving for Japan. They should have brought an expert with them. They certainly should have been more patient and willing to “go with the flow”.
They certainly should not have stormed out, but rather they should have given the deal the time needed to bring two sets of strangers together in a Japanese business context.

Student Stimulation

Group or Class Learning Activities

1. Becoming Japanese: A stimulation exercise to help students appreciate how cultural values are acquired. Divide the students into three teams, one each from Japan, Germany, and Korea. Each team should receive the following challenge:

Imagine that you are parents in the country of _____________ (Japan, Germany, Korea). You have one male and one female child. You want to raise your children with an appreciation of their national heritage. Using your knowledge of the culture from the text, and from Hofstede’s research, identify the values you would expect your children to develop. Please describe some of the formal and informal activities you would want your children to experience to assure that they would be raised with your cultural heritage.

|Age |Formal Experiences |Informal Experiences |
| | | |
|Pre-school | | |
|Elementary school | | |
|Teen years | | |
|Early adulthood | | |

Discuss the experience of your children. How was the experience different for the male versus female child? How was their experience different from your own childhood experiences? In what ways might culture have influenced your children’s future choices?

2. Watch the movie “GungHo” in class or assign it as a homework assignment. Then discuss the following questions. 1) What basic cultural differences existed between the Americans and the Japanese? 2) Were there cultural characteristics that each group envied about the other group? What were they? 3) What created the impetus for the two groups to work together in the end? How could managers utilize such a unifying force early in the formation of a multi-cultural team?

3. The Power of Stereotypes: Divide students into four groups based on the type of music they prefer: 1) Country, 2) Classic Rock, 3) Classical, 4) Jazz (for large classes, Hip Hop, Rap, or Top 40 could be used to create more groupings). Each group (each representing a type of music) should then list the adjectives, activities, and characteristics they associate with each of the OTHER music types. Once the groups are done, have them share their lists with the others.

4. Comparing Clusters: An exercise to familiarize students with the similarities and differences in cultural models.

A. Understanding Ronen and Shenker. Divide the students into small groups. Have the students study the clusters developed by Ronen and Shenker. What similarities exist within groups (e.g., shared language groups, religious beliefs, physical borders, etc.)? What differences exist between the groups?

B. Comparison. How the clusters in Exhibits 3-5 compare with the clusters in Ronen and Shenker. Discuss your findings.

5. New student orientation session: Divide the class into small groups. Each team is informed that their school has just accepted a several hundred new transfer students from Asia. Their team has been assigned the responsibility of developing an orientation program. What things should these foreign students learn to help them be culturally savvy about US American college life?

6. Variations of above: Assign the same basic task to each group except that the age of the foreigners varies, e.g., Asian elementary school students, Asian adults, etc.

Additional Stimulation Discussion Questions

1. If someone you knew outside the United States wanted to pick up a quick education in American cultural savvy, what would be the most important things for you to tell them about our contemporary culture? a. What norms would you need to explain? b. What rituals? c. What myths?

2. Identify five stereotypes that foreigners typically hold about Americans. Why do you think they might hold these stereotypes? Identify five cultural stereotypes that you hold.

3. Characterize your own personal management style based on the four value dimensions developed by Hofstede: power distance, degree of uncertainty avoidance, degree of individualism, and masculinity versus femininity.

4. While waning in its popularity, Finnish business people sometimes hold business meetings in the sauna much as Americans may take care of business on the golf course. How might you adjust to such cultural norms as a global business person?

CHAPTER 4

Communicating across Cultures

LECTURE OUTLINE

General Outline
Opening Profile: On Keeping One’s Foot Safely Out of One’s Mouth
The Communication Process
Cultural Noise in the Communication Process
The Culture-Communication Link Management Focus: Oriental Poker Face: Eastern Deception or Western Inscrutability? Comparative Management in Focus: Communicating with Arabs
Information Technology – Going Global and Acting Local
Managing Cross-Cultural Communication
Chapter Discussion Questions
Application Exercises
Experiential Exercise
End-of-Chapter Case Study: Elizabeth Visits GPCs French Subsidiary
Additional Case: Anne Burn’s Personal Jihad
Additional Experiential Exercise: Cultural Filters in Communication

Opening Profile: “On Keeping One’s Foot Safely Out of One’s Mouth”

This article describes the cross-cultural communication and negotiation blunders and experiences of a businessman abroad. Students should find this humorous and informative.

I. The Communication Process

I. A. Communication

1. Communication: The process of sharing meaning by transmitting messages through media, such as words, behavior, or material artifacts.

2. Mintzberg notes most managers spend 50-90% of their time on interpersonal communication.

3. Communication is a critical factor in cross-cultural management, particularly when dealing with interpersonal issues: motivation, leadership, group interactions and negotiation. Culture is conveyed and perpetuated through communication

4. Unfortunately, the communication process shown in Exhibit 4-1 involves stages during which meaning can be distorted.

Anything that serves to undermine the communication of the intended meaning is typically referred to as noise. Noise stems from the fact that the sender and receiver each exist in a largely private world called his or her life space, which is based largely upon each person’s culture. The more dissimilar the culture of the sender and receiver, the greater the noise in the communication process.

Teaching Tip: Ask students to identify forms of noise that interfere with communication. You may even ask for noise present during the lecture today. Ask students to think of experiences in which noise was present due to differences in the sender and receiver’s respective “perceptual fields.”

Samovar, Porter and Jain note that cultural factors pervade the communication process.

Communication is therefore a complex process of linking up or sharing the perceptual fields of sender and receiver.

B. Cultural Noise in the Communication Process

1. Because we are concerned with cross-cultural communication, we are concerned with cultural noise; noise introduced into the communication process as a result of cultural differences between sender and receiver.

2. When a member of one culture sends a message to a member of another culture, intercultural communication takes place.

Teaching Tip: If you have international students or students who have lived abroad, they may be willing to share their experiences at failing to communicate. Often the stories they tell are quite humorous and usually quite illustrative of the noise problem in intercultural communications.

3. Attribution is the process by which people look for the explanation of another person’s behavior. According to Hall and Hall, when people do not understand each other, they tend to blame their confusion on the other person’s stupidity, deceit or craziness.

Exhibit 4-2 depicts an example of cultural noise. In it, the Greek employee gets frustrated and resigns after experiencing communication problems with his American boss.

II. The Culture – Communication Link

II. A. Trust in Communication

1. Effective communication depends upon the parties ability to understand each other. This in turn depends upon trust. The meaning of trust and how it is developed and communicated varies across societies.

2. Trust provides many benefits including minimizing problems caused by cultural differences, adjusting to unforeseen circumstances with less conflict, and facilitating open communication. John Child suggests the following guidelines in cultivating trust: a. Create a clear and calculated basis for mutual benefit. b. Improve predictability by striving to resolve conflicts and keeping communication open. c. Develop mutual bonding through regular socializing and friendly contact.

Research by the World Values Study Group studied 90,000 people in 45 societies.

3. The GLOBE Project

a. The GLOBE Project provides insight into culturally-appropriate communication styles and expectations for managers. Here are the key observations: 1. People in societies ranked high on performance orientation present objective information in a direct and explicit way. However, dealing people low on performance orientation (e.g., Russia or Greece), use a more indirect approach. 2. When communicating with people low on assertiveness, use a friendly approach. 3. For those high on the humane dimension, avoid conflict and communicate in a supportive manner.

C. Cultural Variables in the Communication Process

1. Cultural variables that can influence a person’s perceptions have been identified through research. The cultural variables are: attitudes, social organization, thought patterns, roles, language (spoken of written), non-verbal communication (including kinesic behavior, paralanguage, proxemics and object language) and time.

a. Attitudes: Ethnocentric attitudes are a particular source of noise in cross-cultural communications. b. Stereotyping: When a person assumes that every member of a society or subculture has the same characteristics or traits. This is contrasted with a sociotype. c. Sociotype: A means of accurately describing members of a group by their traits, which is useful to provide some initial basis for understanding people in a new encounter. d. Social organization: Our perceptions can be influenced by differences in values, approach or priorities relative to the kind of social organizations to which we belong.

Teaching Tip: Ask students to share their perceptions of those who belong to Greek organizations on campus versus those who do not.

e. Thought patterns: The logical progression of reasoning varies across cultures. f. Roles: Societies differ considerably as to what they consider the role of a manager. g. Language can be a barrier to communication when one party has difficulty understanding the other’s language, when there is a lack of understanding of local idioms through a failure to understand body language, or from using poor or faulty translations.

More than just conveying information, language also conveys cultural and social understandings from one generation to the next. Examples of how language reflects what is important in a society include the 6,000 different Arabic words used to describe camels and their parts and the 50 or more classifications of snow used by the Inuit Eskimos.

International managers need a good command of the local language or competent interpreters. The direct translation of specific words does not assure the conveyance of meaning. For example, in Asian culture the word “yes” means only that I have heard you. Politeness, the desire to say only what the listener wishes to hear, adds noise to the communication process.

Teaching Resource: U.S. government agencies publish handbooks/guidelines for conducting business in differing cultures. Your students can access these guides via the web. Country Studies/Area Handbook Program sponsored by the Department of the Army. http://lcweb2.loc.gov/frd/cs/cshome.html

Teaching Tips: Refer students to the CIA World Factbook country listing http://www.odci.gov/cia/publications/factbook/ and the U.S. State Department background notes on countries at http://www.state.gov/www/background_notes/index.html

h. Non-verbal communication (Body language): Behavior that communicates without words. Studies have shown that subtle non-verbal messages account for 65-93% of interpreted communication. The media for non-verbal communication can be categorized into four types: (1) kinesic, (2) proxemics, (3) paralanguage, (4) object language. (See Exhibit 4-3)

1. Kinesic behavior refers to body movements—posture, gestures, facial expressions and eye contact. While such gestures may be universal, their meanings are culturally specific.

Oculesics refers to the behavior of the eyes during communications. Subtle differences in eye behavior can throw off a communication badly if they are not understood. For example, during speech Americans will look right at you, while the British will look away.

2. Proxemics deals with the influence of proximity and space on communication – including personal space and office space or layout.

Teaching Tip: Have students pair off and hold a conversation at a distance of 3 feet. Then have them hold a conversation standing no more than 6 inches apart (preferably closer). Ask the students to describe their feelings during each encounter (they will tell you they were uncomfortable). See if they can tell you why they feel that way. Students can discover that they have a clearly delineated private space, but they don’t know when or how they developed it.

High-contact and low-contact cultures: High-contact cultures prefer a close sensory involvement; e.g., prefer to stand close and touch a great deal. Low-contact cultures prefer less sensory involvement. High-contact cultures are mostly located in warmer climates. There is a correlation between Hofstede’s measure of individualism and cultural contact: low-contact cultures are more individualistic, high-contact cultures are more collectivist.

3. Paralanguage is the meaning conveyed by how something is said as a result of the rate of speech, the tone and inflection of voice, other noises, laughing or yawning, etc.

4. Object language (or material culture) refers to how we communicate through material artifacts or design.

Teaching Tip: CD covers are interesting artifacts. Ask students to bring in 5 or 6 CDs to class. Divide the class into groups of 4-5 students and have them answer the questions, “If you knew nothing about this music, what message(s) would the cover convey to you? Could you have been able to understand these messages if you were from a different culture?” 0136143288

i. Time: The way people regard time is a variable that communicates culture. In monochronic time systems, time is linear. Time has a past, present and future. In monochronic systems, which are generally found in individualistic cultures, people generally concentrate on one thing at a time, adhere to time commitments and are accustomed to short-term relationships.

The attitude is a learned part of Western culture and probably began with the industrial revolution. In monochronic systems time is to be spent, saved, made up or wasted. Time is classified and compartmentalized. Time serves to order life.

Polychronic time systems, in contrast to the above, are non-linear systems of time where people tolerate the simultaneous occurrence of many events. In polychronic cultures, there is a priority of relationships over material things, plans change often, people may be highly distractible, people are likely to hold open meetings and have uncompartmentalized or unstructured meetings.

D. Context

1. The context in which the communication takes place affects the meaning and the interpretation of the message. In high-context cultures (Asia, the Middle East, Africa and the Mediterranean), feelings and thoughts are not explicitly expressed—one has to read between the lines to get the message.

2. In low-context cultures (Germany, Switzerland, Scandinavia and North America), where business and personal relationships are more separated, communication media have to be more explicit. 3. Cross-cultural communication between high- and low-context peoples is especially difficult. People in high context cultures expect others to understand unarticulated moods and perceive that people from low context cultures are too talkative.

Exhibit 4-4 summarizes the effects of cultural context on communication.

Management Focus: Eastern Deception or Western Inscrutability?

The opening incident compares American perceptions of Asian communications with Asian perceptions of Americans. In particular, two expressions that are offensive are noted, “Oriental poker face” and “idiotic Asian smile.” Westerners are concerned that these two diametrically opposed expressions prevent them from extracting needed information in the communication process. This stereotype is then contrasted with offensive communication strategies employed in the West, especially direct questions about personal matters. Asian communication is characterized as listening-centered. Asians may then view Americans as overly talkative and lacking in the ability to listen.

Every culture has its unique set of modus operandi for communication. Western culture, for instance, tends to emphasize the importance of direct communication. Asians, however, find direct communication unnerving. In many social interaction situations, they avoid direct eye contact. To a great extent, Asian communication is listening-centered, and is more important than the ability to talk. To someone unskilled in reading such cultural nuances, an inscrutable face represents no more than a menacing or amusing mask.

Teaching Tip: An interesting movie for cross-cultural communication involving Japan is Mr. Baseball (1992) directed by Fred Schepisi.

Comparative Management in Focus: Communication with Arabs

In the Middle East the concept of communication is more implicit and interwoven, and, therefore, harder for Americans to understand. The Arabic language supports a broad emotional range. Eloquence and flowery speech are admired for their own sake. At the core, the culture values friendship, religion, and hospitality. Friends and family are very important, as is the concept of honor. Women have very little role in business or entertainment. Most Arab countries are high contact cultures.

Their business culture is better understood when one understands “bukra insha Allah”—tomorrow if Allah wills. Arab logic is less linear; they are more likely to meander toward a solution.

Some useful suggestions for doing business in the Middle East are:
1. Be patient—take the time needed to build relationship and trust
2. Relationships matter more than the job
3. Avoid expressing doubts or criticism when others are present.
4. Adapt to the norms of body language.
5. Expect many interruptions in meetings, delays in schedules and changes in plans.

See Exhibit 4-5
Teaching Resource: Arab cinema provides great insights into its culture. This site identifies available Arab films with English subtitles. Some video clips are available. http://www.arabfilm.com/

E. Communication Channels

1. In addition to the variables of the sender and receiver of the message, there are also variables associated with channel choice (including fast or slow messages and different types of media).

2. Information systems: Communication within organizations varies according to where and how it originates, the speed at which it flows and whether it is formal of informal. In high context cultures, information may spread rapidly and freely because of the frequent close contact and implicit ties between people in the organization.

3. Americans are very self-disclosing—they will talk about anything. This is not so with the Japanese, who employ a more implicit communication style. The Japanese also value a ningensi (“human beingness”) style of communication that encompasses humanity, reciprocity and an underlying distrust of words and analytic logic. Exhibit 4-7 presents some intercultural communication conflicts between Americans and Japanese. Exhibit 4-6 presents differences in Japanese and American communication styles.

Teaching Resource: Japan Information Network—The Japan Information Network Home Page offers an unprecedented variety of information of Japanese society and culture and provides links to servers throughout Japan, thereby becoming the place to go for comprehensive access to information on Japan. http://www.jinjapan.org/

III. Information Technology—Going Global and Acting Local

A. The global reach offered by the Web does not automatically translate into global business. Effective companies will adapt to regional idiosyncrasies and become multi-local.

B. Communication over the web is not as personal as face to face. Companies must account for differences in language, local laws, business models, as well as local telecommunications infrastructure. Effective technological communication may be more challenging across cultures since it is still people who apply their own cultural response to more impersonal web communication.

C. Experts predict a 70% annual growth rate of non-English sites and usage, putting English in the minority on the Internet by 2003. LeEurope, for example, is a Pan-European integration service that aims to cross language, currency, and cultural barriers. An example of a bricks and mortar company who has successfully established a multi-local e-strategy is Manheim Auctions, Inc.

IV. Managing Cross-Cultural Communication Effectively

A. Steps in the development of effective intercultural communication include the development of cultural sensitivity, careful encoding, selective transmission, careful decoding and appropriate follow-up.

B. Developing Cultural Sensitivity

1. When acting as a sender, a manager must make it a point to know the receiver and to decode the message in a form that will most likely be understood as intended. This requires an awareness on the manager’s part of his or her own cultural baggage.

2. Cultural sensitivity (discussed in Chapter 3) is really just a matter of understanding the other person, the context, and how the person will respond to the context.

C. Careful Encoding

1. In translating his or her intended words into symbols for cross-cultural communication, the sender must use words, pictures or gestures that are appropriate to the receiver’s frame of reference. Senders should avoid idioms and regional sayings (e.g., go fly a kite). Literal translation is only a limited answer to language differences. Language translation is only a part of the encoding process; the message is also expressed non-verbally.

D. Selective Transmission

1. The type of medium chosen for the message depends on the nature of the message, its level of importance, the context and expectations of the receiver, the timing involved and the need for personal interaction, among other factors.

2. For the most part, it is best to use face-to-face interaction for relationship building or for important transactions. Personal interactions give the manager the opportunity to get immediate verbal and visual feedback and to make rapid adjustments in the communication process.

E. Careful Decoding of Feedback

1. Checking the decoded message by feedback is essential to ascertain whether the intended message has gotten across.

2. Decoding is the process of translating the received symbols into the interpreted message. The main causes of incongruence are (1) the receiver misinterprets the message, (2) the receiver encodes his of her return message incorrectly, or (3) the sender misinterprets the feedback.

F. Follow-up Actions

1. Managers communicate both through action and inaction. To keep open lines of communication, managers must follow through with action on what has been discussed and then agreed upon—typically a contract, which is probably the most important formal business communication.

2. The management of cross-cultural communication depends largely on a manager’s personal abilities and behavior. The behaviors associated through research with intercultural communication effectiveness are listed below:

a. Respect b. Interaction posture c. Orientation to knowledge d. Empathy e. Interaction management f. Tolerance for ambiguity g. Other-oriented role behavior.

Teaching Tip: A good movie for understanding cross-cultural issues, including empathy issues is City of Joy (1992) directed by Roland Jeffe.

Teaching Tip: Often, diplomats display outstanding communication skills when communicating with each other (and not when posturing for the home country audience). You can see them in action at the United Nations via their webcast program at http://www.un.org/av/. Have your students observe 20 minutes of dialog and see which of the seven characteristics above are put into action.

3. Certain behaviors facilitate effective intercultural communication; these abilities help the expatriate adapt to the host country and enable productive working relations to develop in the long run. Researchers have developed a relationship between personality traits and behaviors and the ability to adapt to the host culture’s environment. Communication is the mediating factor between those factors and the relative level of expatriate adaptation.

a. Kim has consolidated the research findings on these characteristics into two categories: (1) openness and (2) resilience. Openness includes traits such as open-mindedness, tolerance for ambiguity and extrovertedness. Resilience includes traits such as having an internal locus of control, persistence, a tolerance for ambiguity and resourcefulness.

b. Kim notes three aspects of adaptive change: 1) increased functional fitness, 2) psychological health and 3) intercultural identity. These have been identified as direct consequences of prolonged communication-adaptation experiences in the host society.

Teaching Resource: Several excellent videos are available commercially or through inter-library loan, including the following:
Beyond Culture Shock—Describes the psychological process of adjustment that can occur in a cross-cultural sojourn. Copeland-Griggs Films - 415-668-4200.
Hell Camp—Shows a training session for Japanese managers who are taught to spare no effort and feel no shame, except at failure. Available from Films for the Humanities and Sciences.
Tongues of Men—Two-part PBS - NOVA series. Part one, Disaster at Babel, explores similarities and differences of languages. Part two covers the quest for a world language. Both films are broadly available (check a local video store that carries Nova materials, or contact PBS).
Transnational Managers as Intercultural Communicators—An older tape (1981) that reviews some of the principle issues in cross-cultural communication, especially non-verbal communication. Available from Gulf Publishing, PO Box 2608, Houston, TX 77001.

Chapter Discussion Questions

1. How does culture affect the process of attribution in communication?

Cultural differences induce additional noise into the communication process. A sender’s message contains the meaning intended by the encoder. When the message reaches the receiver, it undergoes a transformation which is influenced by the receiver’s culture. Perception and attribution influence the communication process in the sense that we often see what we expect to see. If we make certain assumptions about another when communicating we introduce noise into the communication process.

2. What is stereotyping? Give some examples. How might people stereotype you? How does a sociotype differ from a stereotype?

Stereotyping occurs when a person assumes that every member of a society or subculture has the characteristics or traits. Students might be stereotyped based on their race, gender, appearance, affiliations (Greek, jock), major area of study (accountant, techno-geek), ethnic heritage, religion or other attribute. A sociotype is a means of accurately describing members of a group by their traits—which is useful to provide some initial basis for understanding people in a new encounter.

3. What is the relationship of language and culture? How is it that people from the same language may still mis-communicate?

Language conveys culture, technologies and priorities. Language is inseparable from culture; language cannot be interpreted without an understanding of culture. Language indicates the important variables found within a culture. For example, languages differ in their use of the formal and informal means of addressing others. In English we have one word for “you.” In Spanish the word you is expressed as ud or tu, depending upon the degree of association between the parties. Many cultures have special ways of addressing older members of that society as well. Within a given language group are many sub-cultures that have their own interpretations of certain words or phrases, or who may have their own idioms or regional expressions.

4. Give some examples of cultural differences in the interpretation of body language. What is the role of such non-verbal communication in business relationships?

Americans look straight at you when communicating, whereas the British keep your attention by looking away. Arabs prefer to touch and stand very close when communicating. Koreans speak more loudly to emphasize a point; Americans speak loudly when they are angry. Improper non-verbal communication can add a significant level of noise to the communication process. The listener may attribute meaning to the noise that might damage the business relationship. Non-verbal communication plays a large role in a business relationship. Much of what isn’t said is communicated in other ways. This is especially true in high-context cultures.

5. Explain the differences between monochronic and polychronic time systems. Use some examples to illustrate their differences and the role of time in intercultural communication.

Monochronic time systems have a linear system of time with a past, present and future. People in monochronic systems generally concentrate on one thing at a time. Polychronic time systems are a non-linear system of time where people tolerate the simultaneous occurrence of many events. In the United States we tend to prefer to do one thing at a time and generally do not like interruptions. In Saudi Arabia on the other hand, people have a preference for doing multiple things at once, and interruptions are considered normal.

6. Explain the differences between high and low-context cultures, giving some examples. What are the differential effects on the communication process?

In high-context cultures, the context in which the communication takes place is vital to the communication of the message—the message is implicit. In low-context cultures, the context in which the communication takes place is secondary to the communication—the message is explicit. In the United States, communication is low-context. The spoken or written word is most important. In China, a low-context culture, people are always looking for the spoken cues to understand others. Things like facial expressions and tone of voice are interpreted to have significant meaning.

7. Discuss the role of information systems in a company, how and why it varies from country to country and the effects of these variations.

Communication in organizations varies according to where and how information originates and the channels and speed at which information flows internally and externally. One example of how cultures vary is on the importance of the source of information. Some cultures prefer important information to originate only from the top of the hierarchy.

Application Exercises

1. This exercise can reveal perceptual insights into cultural stereotypes. Students should be asked to justify the stereotypes they are attributing to each group and reference should be made to the ecological fallacy in which people from a particular cultural group all are viewed as being the same.

2. This interesting exercise can generate a lot of interest in cross-cultural understanding. It gives a more “real world focus” to what students can read about in the text and other sources. If possible, a sampling of food from different cultures can make the experience more interesting and enjoyable.

3. As with the previous exercise, this approach give a more personal focus to cultural differences and will be remembered longer by students.

Experiential Exercise

JUAN PERILLO AND JEAN MOORE

1. What went wrong for Jean in Puerto Rico? Could this have been avoided? What should she have done differently?

Jean used a classic American style in her communications with Juan. She did not take proper time to establish trust and rapport with Juan. When it came time for working on the production schedule, she also did not include Juan in the decision-making process. Rather she informed him of the goals she and Fred had already discussed. It is not surprising that Juan accepted a goal he likely knew was unrealistic given the style of communication that Jean used.

2. Replay the roles of Jean and Juan during their conversation, establishing a more constructive communication and management style than Jean did previously.

Revised Script

Scene 1: February 15, San Juan, Puerto Rico

Juan: Welcome back to Puerto Rico, Jean. It is good to have you here in San Juan again. I hope that your trip from Dayton was a smooth one. Jean: Thank you, Juan. It is nice to be back here where the sun shines and Fred sends his regards. How is your family? I hope everyone is doing well. Juan: My wife is doing very well, but my daughter, Marianna, broke her arm and has to have surgery to repair the bone. We are very worried about that because the surgeon says she may have to have several operations. It is very difficult to think about my poor little daughter in an operating room. She was out playing with some other children when it happened. You know how roughly children sometimes play with each other. It’s really amazing that they don’t have more injuries. Why, just last week, my son . . . [here Jean should allow Juan to tell the story about his son]. Jean: Of course, I am very sorry to hear about little Marianna. I do hope everything will go well with her surgery. Please let me know if I can do anything to ease the situation for you. Juan: Thank you for your kind words, Jean. Your understanding means a lot. Now, shall we begin our planning for the new production schedule? Jean: Yes, we must get started on that. Fred feels it is very important that we work out a firm production schedule for the next three months. We would like to aim for June 1st as the cutoff date for the first phase of the production schedule. This schedule should be based on production of the new 100 A-type computers. What do you feel is a reasonable goal for production by June 1st? We know that you have some new assemblers whom you are training and that there have been some problems in the past with getting parts from suppliers. Are those issues still affecting production or are they all worked out? Juan: Yes, we do have new employees. Training is going well, but you know how difficult it can be to handle unexpected problems. How many A-type computers do you need ready by June 1st? Jean: Fred and I would like 100 in the first production cycle? Is that possible? Juan: Will we also maintain production on our usual number of Z-type computers too? Jean: Oh yes. Your regular production schedule would remain the same as it has always been. The only difference is that you would also be producing the new A-type computers too. You have the new employees and manufacturing equipment to produce the same products as we do in Dayton now. Juan: Yes, that is true. We have the new equipment and we’ve just hired a lot of new assemblers who will be working on the A-type computer. I think that it is important we be realistic about the first production run given the new equipment and employees. I would suggest a lower guaranteed amount by June 1st or the full number by July 1st. We can of course try to meet the goal of 100 by June 1st, but it is wise to be cautious when dealing with so many new variables. Jean: Great, great. I’ll tell Fred. He’ll be delighted.

Scene II: May 1, San Juan, Puerto Rico

Jean: Hello, Juan. How are things here in Puerto Rico? I’m glad to have the chance to come back and see how things are going. How is your daughter doing? I remember she had to go to Houston to see the medical experts. Juan: Welcome, Jean. It’s good to have you here. Marianna did have to go to Houston for additional consultations and therapy. Her arm didn’t mend properly. It is still causing us great worry as we work with the therapists. Jean: I’m so sorry your family has had to go through that. I hope it hasn’t been additional stress to focus on the new production schedule. Juan: We are moving along well with the new schedule. We will not meet the goal of 100 A-type computers by June 1st, but we should have 50 at that point, and 100 by July 1st. Jean: Great. We just got a big order from the Defense Department for 50 A-type computers. If you have 50 ready, we can ship them direct to Washington.

End-of-Chapter Case: Elizabeth Visits GPC’s French Subsidiary

Discussion Questions

1. What can Elizabeth Moreno do to establish a position of power in front of French managers to help her accomplish her assignment in five days? Explain.

The French tend to regard authority as residing in the role and not the person; Elizabeth will need to find subtle ways to accentuate her expertise, her advanced degree in Chemistry, and her role as Vice President. Further, she will need to demonstrate an intellectual flexibility while allowing the French to show their ability to grasp complex issues and evaluate solutions.

2. What should Elizabeth know about “high-context” vs. “low-context” cultures in Europe? Explain.

Countries in Europe do not share the same cultural context; France is more high-context than Germany. As a result, Elizabeth should pay especially close attention to the cultural context of the communication including: the medium, the source, the setting, proxemics, paralanguage and object language.

3. What should Elizabeth include in her report so that future executives and scientists avoid communication pitfalls?

Elizabeth could help her peers by noting communications processes that worked and noting which processes failed. She should provide as much information about the communication context as possible.

4. How can technical language differ from everyday language in corporate communications?

Technical language is often shared across cultures (the Arabic word for computer is “computer”). Technical language is communicated through its own communication channels—papers, proceedings and journals. These journals are often, though not always, prepared in English. While technical jargon creates a common or shared language on some levels, it does not eliminate the problems associated with cross-cultural communication.

Additional case

Anne Burn’s Personal Jihad

Anne Burns, a forty-five year old American woman who started a number of businesses in the United States, was hired by a recently established non-profit organization called ExportJordan. Working with a grant from USAID, ExportJordan’s mission was to further develop local businesses in Jordan in order to capitalize on the recently signed free trade agreement with the United States. Having just sold her last business, and having her two grown children out of the house, Anne and her husband, Don, decided to forgo their empty nest and strike out on a new adventure in the Middle East.

Anne and Don did not need to work since the businesses they had created, and sold, provided more than a comfortable living for them. Having many productive years ahead of them, they sought out a unique challenge. Jordan was to be that new challenge.

Jordan

Jordan is a constitutional monarchy based on heredity. Male descendants of the dynasty of King Abdullah bin al Hussein inherit the throne and rule the country without opposition. The country now called Jordan was created at the end of World War I when the League of Nations gave the territory to the United Kingdom to rule. The UK created a semi-autonomous jurisdiction called the Emirate of Transjordan. In 1946 Transjordan became an independent country and changed its name in 1950 to the Hashemite Kingdom of Jordan. The country is presently ruled by King Abdullah II, a western educated and progressive leader who has strong ties to the United States. King Abdullah has moved for a free press, democratic reform, and women’s rights. King Abdullah’s father ruled Jordan through much of its independence. As King Abdullah has moved for even more reforms than his father, both the United States and the European Union have rewarded Jordan with free trade agreements. Jordan is a member of the World Trade Organization. The close ties between Jordan and western nations, coupled with the King and his wife’s desire to advance the status of women helped create ExportJordan. ExportJordan was charged with helping to create an entrepreneurial spirit among Jordan’s female citizens, and to help them develop and export products. Currently Jordan is successful in exporting clothing, food products, phosphate, and some pharmaceuticals. With the new free trade agreements it was hoped that additional areas could be developed for export.

Trouble from the Start

It was a spirit of adventure and a genuine desire to help others that lead Anne and her husband to Jordan. They were both impressed with the young King and his views for leading his country into the 21st Century. They had hoped to find a cooperative environment, but that hope was somewhat challenged from the start.

When Anne arrived at the offices of ExportJordan for the first time, she met Hayat Maani. Hayat was a western educated young woman with passion. She was deeply concerned with the plight of women in her country and was involved in a number of social causes throughout Jordan. She welcomed Anne and gave her a tour of the offices, explaining what the organization did and what Anne’s role would be in the new venture. Anne would work closely with Hayat in helping small businesses owned by Jordanian women to find international buyers for their products. The mission of ExportJordan was to promote all Jordanian products, but Anne would mainly be involved in helping female entrepreneurs. On the initial office tour and series of introduction, Anne met Jafar Faqir, a middle-aged man who worked in the export finance division of the organization. Hayat introduced Jafar to Anne. Jafar did not extend his hand when Anne initiated a handshake and she thought this a bit odd, but quickly forgot about it when Jafar asked her “how do you find Jordan.” Anne explained that she had only been in the country a short time but that she was very impressed with the King and his approach to the advancement of women. The look on Jafar’s face told Anne that he did not like her response. Hayat told Jafar that Anne would be responsible for promoting women entrepreneurs and Jafar told her to remember these words, “The eye cannot raise above the eyebrow.” Hayat shouted to Jafar something in Arabic and Jafar left without saying another word. When Anne asked what had just happened, Hayat simply said that unfortunately not all Jordanian men were supportive of equality for women. Anne would find that this would not be her only negative encounter with Jafar.

The rest of the day went smoothly for Anne as she continued to meet more people associated with the organization. She noticed that all of the women in the offices wore a hejab or headscarf, except for Hayat. Anne noticed other interesting cultural dimensions, such as the common response “Inshallah” or God willing.” Many of the people she met seemed very interested in her and asked many questions, such as how many children she and her husband had, especially boys. Anne and her husband had two girls and when she told this to one of her male colleagues, he responded with “Oh, I’m so sorry.” Anne knew that it was going to be a very different and interesting experience living in the Middle East.

Progress Begins

Anne and Don settled into their life in Jordan and apart from the normal difficulties of living abroad, the couple didn’t feel as if they experienced too much difficulty adjusting. Although there were no other Westerners at ExportJordan, Anne and Don met other American and British expatriates and enjoyed their company and they all enjoyed sharing their experiences living in Jordan. Don kept busy looking for business opportunities for himself and helping Anne with her assignment.

After two months it became clear to Anne that she was in need of an assistant to help her with the preliminary analytical work she was doing. Anne suggested to Hayat that Don be hired to help her. Hayat told her that she didn’t think that would be possible, however, she would find someone else to help her. After a few days, Hayat introduced Anne to Karim Dabbas, a young Jordanian man who was hired as her assistant. Karim spoke English well, yet his youth and inexperience gave Anne some concern.

With the help of Karim, Anne completed her initial analysis and was ready to begin to do her fieldwork. Anne had planned on hosting seminars for women around Jordan explaining the possibilities of the export market and finding women with whom she could personally consult about their businesses. Karim would be helpful in the fieldwork, acting as both a driver and interpreter.

The first seminar was planned for Amman and was heavily promoted. Although Anne and Hayat had hoped for a very large audience, they were not unhappy with the few women who attended, because among the attendees were some good prospects for the export market. With Anne’s expertise in creating business plans and her knowledge of the U.S. market, Anne and Hayat began helping three women who produced crafts which were felt had international appeal. Additional seminars were planned for other cities in Jordan in the future, and Anne was convinced that she would be able to make a contribution to ExportJordan.

Warnings from Jafar

During the next two weeks Anne and Karim worked with the three women from the seminar on their business plans and creating ways of making their products more appealing to the global marketplace. Anne had not seen Hayat for a few days but she and Karim were busy, and she really didn’t need any help from Hayat at that time. One of the female entrepreneurs introduced Anne to two other women who were seeking help with their businesses and so Anne now had five clients to assist. With the increasing workload, Anne began to turn more responsibility over to Karim. Karim was not confident that he could do the work requested by Anne, but she tried to reassure him that he was capable and there would not be any problems.

Karim made slow progress and frequently asked Anne for help with his work. Anne became increasingly frustrated by the slow pace of Karim’s work and his constant need for assurances. She developed a nickname for him, “worn sole,” meaning that he was wearing out the bottom of his shoes running back and forth from his office to hers asking questions. His nickname appeared appropriate as well to her in that Karim was constantly worried and thus was developing a “worn soul.” Karim took the puns in stride but, nevertheless, didn’t seem to change his behavior.

One particular incident involving Karim produced difficulties for Anne. She was standing in the hallway talking to another ExportJordan employee when Karim came running down the hall, again looking for her. She mentioned to her coworker “here comes old worn sole again.” She continued to tell the coworker about Karim’s weaknesses and as she discussed these weaknesses she noticed that Jafar was near and listening. Anne and Jafar did not have much contact with each other, yet the relationship between the two was strained. When they passed in the hall Jafar would not even look at Anne. After once again giving Karim clarification on his task, Anne turned to Jafar and asked him if he needed anything from her. He stared at her for what seemed like a very long time and then muttered, “Just remember this – the family knife does not cut.” At this point Anne had had enough with Jafar and his sayings and so she decided to confront him. Jafar turned and went back to his office and Anne followed him. Anne asked Jafar, in a loud voice, “what is it with you and all of these bullshit sayings.” Jafar’s eyes got big as he pointed his finger towards her and told her that she should be very careful in her “American ways.” With no intention of letting this go, Anne sat down in the chair in front of Jafar’s desk and propped her feet up on his desk. She told Jafar to sit down, as they needed to talk. Jafar refused to sit down and asked her leave. Anne began to explain to Jafar that she was in Jordan to help the Jordanian people and that by helping women to develop their businesses she was helping all people in Jordan. It appeared to Anne that Jafar was not listening to a word she was saying. After a long silence Anne stood up and walked out of the office. As she was leaving Jafar said to her “Don’t you want to know what happened to your friend, Hayat?” When she turned in surprise, Jafar closed and locked the door.

Anne hadn’t seen Hayat for a number of days and was curious where she was but now she was concerned. Anne immediately found Karim and asked him if he knew where Hayat was, and he responded that he didn’t. He also didn’t know if she still worked at ExportJordan. Anne began to ask others in the offices if they knew what happened to Hayat, and it seemed that no one did. One of her colleagues, Mania told her that she thought that Hayat had been fired and that Jafar had something to do with it. Already upset with Jafar, Anne decided that it was time to confront him again. She went to his office and found the door unlocked this time. She barged in and demanded to know what he meant by his statement about Hayat and what happened to her. At first Jafar denied knowing much about the situation and told her that he was only in charge of financing arrangements and that he had no authority over Hayat. Anne losing her temper shouted to Jafar, “Goddamn it Jafar, tell me the truth about Hayat.” At that moment it appeared that a calm had come over Jafar. He put his head down and stared at the floor. He then raised his head and told Anne that he wanted her to tell him about “the truth of America’s plan to eliminate Palestine.” Anne could see that this conversation was not going well and decided just to leave Jafar’s office. Before she could go, Jafar approached her, stood very close, and looking into her eyes announced, “Muslim Brotherhood will prevail.” Anne felt frightened and threatened as she left the office.

Meeting with the Director

Anne made it straight to her office and felt comfort there. She composed herself and began thinking about what she should do. The organizational structure of ExportJordan was very unstructured and Anne really did not have a supervisor. Hayat acted in some ways as her manager, however, Hayat really did not have formal authority over Anne, and Anne also was not sure whom Jafar reported to as well. Anne decided that perhaps she should schedule an appointment with Dr. Massimi, director of ExportJordan. She felt a bit uncomfortable approaching him directly, but since there really wasn’t any formal organizational structure (at least that she knew), she reasoned that it would not be improper. She had met Dr. Massimi on a number of occasions and he appeared to be a very kind and understanding man. She hoped that a meeting with him would clear up what happened to Hayat and resolve the tensions with Jafar.

Anne asked Karim to call and schedule an appointment for her with Dr. Massimi. Karim appeared very nervous and didn’t appear to want to talk. He said he would do it as soon as he returned from a meeting. Anne wasn’t aware of any meeting involving Karim and he wasn’t forthcoming about the details. Anne decided to do some work to get her mind off the Jafar incident. Later in the afternoon Anne came out of her office to check on Karim. He was nowhere to be found. Anne asked if anyone knew where Karim was and was told by one of her colleagues that he was with Jafar. Surprised by this information, Anne went back in her office and decided to call Dr. Massimi herself. Dr. Massimi answered the telephone directly and Anne told him that she needed to see him as soon as possible. He told her that she could come to his office immediately.

Anne entered the office and immediately asked Dr. Massimi what happened to Hayat. Dr. Massimi sat in his chair and without answering, asked her how she was enjoying Jordan. Anne told him that she liked most of the people but that she was having a problem with Jafar. At that moment an assistant brought a tray of tea into the office and offered a cup to Anne. She was too upset to drink tea, she told the assistant. Dr. Massimi took a cup and told Anne to take a cup and that it would calm her. Anne still refused the tea. As Dr. Massimi enjoyed his tea, Anne began to tell him about Jafar. He listened a bit and then asked Anne about her family. Anne told him that they were fine and then preceded to again explain her situation with Jafar. Dr. Massimi listened a bit more and then interrupted Anne again by telling her about his family and told her that his son was studying in the United States. He explained that his son had some difficulties adjusting to American culture. Anne told Dr. Massimi that she and her husband were adjusting well but that she was having problems with her job. Dr. Massimi then began telling a story about his first international job in Iran. He went into great detail about the problems he experienced. Anne listened but wondered if Dr. Massimi was just avoiding her questions.

Anne decided to take another approach. When Dr. Massimi finished his story, Anne told him how happy she was to be able to help Jordanian women and that she was hoping that she could be more successful in her job. Dr. Massimi told her that she was providing a very important service to Jordan and that her work was appreciated. When Anne started to mention Jafar again Dr. Massimi interrupted her to ask if she had visited Petra. When she said that she had planned a visit but had not yet had time, Dr. Massimi began to tell her the history of this ancient city and its importance. Visitors to the office interrupted the history lesson. Three men from the Jordanian Ministry of Tourism stopped by to see Dr. Massimi. He invited them in and introduced them to Anne. Dr. Massimi told the men that he was just talking about Petra and the four men began a discussion about tourist sites in Jordan, and more tea was brought in the office. The four men discussed many things, sometimes in Arabic and sometimes in English, as Anne sat looking at her watch. Getting impatient Anne got up and told Dr. Massimi that she would come back and talk to him “when he could give her his full attention.”

Returning to her office, Anne decided that she should compose an email message to Dr. Massimi explaining what she was not able to explain in his office. She explained the situation with Jafar, asked for clarification on Hayat, and told him that she was confused by the structure of the organization.

As Anne was ready to leave for home she checked her email one last time. There was a response from Dr. Massimi. As she anxiously opened the message expecting to get clarification on all the issues, she was shocked to see the response was “Yes, Mrs. Burn, Jordan is a complex country.” He did invite her to come to see him again so that they could discuss her situation. Anne muttered as she turned off her computer “What’s the use.” She set out for home with the intention of telling her husband that they should look for another opportunity, one not in the Middle East.

Sources

Kelly, R. (2003). Countrywatch Jordan Report.
Nydell, M. (2003). Understanding Arabs. Yarmouth, ME: International Press. www. Countrywatch.com www.odci/cia/publications/factbook/geos/jo.html www.state.gov

Additional Experiential Exercise

Cultural Filters in Communication

Purpose: The purpose of this exercise is to generate a discussion on the influence of culture on one's perception and communication.

Procedure: Read the paragraph below and count the number of times the letter "F" appears in the paragraph. Write the number of F's down.

The instructor will only allow 20 seconds for you to read the paragraph and write down your answer.

Paragraph:

FINAL FOOTAGE OF THE FILM CAME FROM THE COPY OF THE MASTER PRODUCTION AND OF THE ADDITIONAL FILM RESERVES FOUND IN THE ARCHIVES.

Instructor’s Note: This exercise works best if the class contains students that speak another language as their primary language. Students who speak English will most likely answer that there are 6 Fs in the paragraph. Students who speak another language will usually answer that there are 9 Fs. English speakers will miss the Fs in the word “of” frequently.

This exercise can then be used for a discussion of how language shapes what we perceive.

CHAPTER 5

Cross-cultural NEGOTIATION AND DECISION MAKING

LECTURE OUTLINE

General Outline
Opening Profile: Art of the Deal Meets the China Syndrome
The Negotiation Process
Understanding Negotiation Styles
Managing Negotiation Management Focus: A Middle East Equity Giant with a Small Global Footprint Comparative Management in Focus: Negotiating with the Chinese
Decision-making
Comparative Management in Focus: Decision-making in Japanese Companies
Chapter Discussion Questions
Experiential Exercise
End-of-Chapter Case: Negotiations between Alcatel of France and Lucent of U.S. Finally Result in a Deal in 2006
Additional Case: Red Dragon Enterprises
Student Stimulation Questions and Exercises
Additional Experiential Exercise: Cross-Cultural Negotiations

Opening Profile: Art of the Deal Meets the China Syndrome

The profile explains how a deal with the Chinese isn’t always a deal. Executives of Millicom International Cellular thought they had a finalized a deal with China Mobile Communications for $3.5B but at the last minute the Chinese backed out of the deal. The handling of the exit raised questions about the sincerity and trustworthiness of the Chinese. The incident shows that the Chinese can be tough negotiators and that they are very cautious in their deal-making.

I. Negotiation

A. The planning process depends on management’s ability to negotiate productively. In the international arena, cultural differences produce great difficulties in the negotiation process. Important differences in the negotiation process from country to country include: (1) the amount and type of preparation for a negotiation; (2) the relative emphasis on tasks versus interpersonal relationships; (3) the reliance on general principles rather than specific issues; (4) the number of people present and the extent of their influence.

B. Negotiation is a process of discussion between two or more parties aimed at reaching a mutually acceptable agreement. For long-term positive relations, the goal of negotiating should be to set up a “win-win” situation, bringing about results that are beneficial to all parties.

C. It is critical that negotiators avoid projective cognitive similarity—assumptions that others perceive, judge, think, and reason in the same way despite cultural differences. Exhibit 5-1 presents the stakeholders in the negotiation process.

Teaching Resource: A Mexican-U.S. cross-cultural simulation based on a JV negotiation between a U.S. and Mexican firm is available from CIBER, College of Business and Management, University of Maryland, College Park, MD 20742.

II. The Negotiation Process

A. The negotiation process consists of five stages: (1) preparation, (2) relationship building, (3) exchange of task-related information, (4) persuasion, and (5) concessions and agreements. (This sequence is presented in Exhibit 5.2).

B. Stage One: Preparation

1. A distinct advantage can be gained if negotiators familiarize themselves with the entire context and background of their counterpart negotiators, in addition to the specific subjects to be negotiated.

2. To understand differences in negotiating styles of people from other cultures, managers first need to understand their own styles and then determine how their style differs from the norm in other countries.

3. Adept negotiators do some research to develop a profile of their counterparts so that they are prepared for various situations as they arise. Managers should find out as much as possible before hand about 1) the demands that might be made, 2) the composition of the opposing team, and 3) the relative authority the members possess. Managers can then gear negotiation strategy toward the other side.

Teaching Resource: Doing Business Internationally—The cross cultural challenges. This video focuses on the effects of culture on cross-border negotiations. Available from Multimedia, Inc.

4. Comparing these profiles is useful. An important difference between Arab negotiators and those from most other countries is that they are mediators, not the parties themselves, thereby avoiding confrontation. Successful Swedish negotiators are conservative and careful in dealing with factual and detailed information. Indian negotiators are generally humble, patient, respectful of the other parties, and very willing to compromise. Exhibit 5-3 shows 12 variables to consider when preparing to negotiate.

C. Stage Two: Relationship Building

1. The process of relationship building is regarded with much more significance in most parts of the world than it is in America. In many countries, such as Mexico and China, it is personal commitments to individuals that form the basis for enforcement of contracts, rather than the legal system, as used in America.

2. It is usually recommended that those new to negotiating should use an intermediary—someone who already has the trust and respect of the foreign managers involved.

3. Posturing can be used as a bridge between the more formal stages of negotiating and the stages of relationship building. This phase should result in a spirit of cooperation. To help ensure this result, negotiators must use words like “respect” and “mutual benefit” rather than language that would suggest arrogance, superiority, or urgency.

D. Stage Three: Exchanging Task-related Information

1. In the next stage, exchanging task-related information, each side typically makes a presentation and states its position; a question-and-answer session usually ensues, and alternatives are discussed. From an American perspective, this represents a straightforward, objective, efficient, and understandable stage. However, Copeland and Griggs point out that negotiators from other countries continue to take a more indirect approach at this stage.

2. Adler suggests that negotiators should focus not only on presenting their situation and needs but also on showing an understanding of their opponents’ viewpoints. Focusing on the entire situation confronting each party encourages the negotiators to assess a wider range of alternatives for resolution, rather than limiting themselves to their preconceived, static positions. She suggests that to be most effective, negotiators should prepare for meetings by practicing role reversal.

E. Stage Four: Persuasion

1. In the next phase of negotiations, persuasion, the hard bargaining starts. Typically, both parties try to persuade the other to accept more of their position and to give up some of their own. Often, some persuasion has already taken place beforehand in social settings and through mutual contacts.

2. Studies of negotiating behavior have revealed the use of certain recognizable tactics, which skilled negotiators recognize and use. The results indicate that the Japanese and the Americans tend to be more alike in the use of these behaviors, whereas the Japanese and the Latin Americans are less alike. For example, the Latin Americans use fewer promises and commitments than the Japanese or the Americans (only half as many), but they use commands far more often.

3. Dirty tricks may be used in the persuasion stage of negotiation, including rough tactics designed to put negotiators in a stressful situation physically or psychologically.

4. The more subtle behaviors in the negotiation process, and the most difficult to deal with, are nonverbal messages. Nonverbal behaviors are ingrained aspects of culture used by people in their daily lives; they are not specifically changed for the purposes of negotiation. In a comparative study of the nonverbal negotiating behaviors of Japanese, Americans, and Brazilians, Graham assessed the relative frequency of the use of silent periods, conversational overlaps, facial gazing (staring at people’s faces), and touching.

F. Stage Five: Concessions and Agreements

1. In the last stage of negotiation, tactics vary greatly across cultures. Well-prepared negotiators are aware of various concession strategies and have decided ahead of time what their own concession strategy will be.

2. Research in the United States indicates starting with extreme positions attains better end results.

3. Again, at the final stage of agreement and contract, cultural values determine how these agreements will be honored. Whereas Americans take contracts very seriously, Russians often renege on their contracts. The Japanese, on the other hand, consider a formal contract to be somewhat of an insult and a waste of time and money in legal costs, since they prefer to operate on the basis of understanding and social trust.

Teaching Resource: Two excellent books on negotiation are broadly available. They are: Fisher and Ury, Getting to Yes: Negotiation Agreement Without Giving In; and Brislin, R.W., Cross Cultural Encounters: Face to Face Interaction, (especially Chapter 6, “The Analysis of Situations”), New York: Pergamon Press,1981.

III. Successful Negotiators Around the World

A. International managers can benefit from studying differences in negotiating behaviors (and the underlying reasons for them) that can help them recognize what is happening in the negotiating process. The Japanese are typically skilled negotiators who have spent a great deal more time and effort studying American culture and business practices than Americans have studied Japanese business practices. Exhibit 5-4 shows some examples of differences among North American, Japanese, and Latin American styles.

Many aspects of Japanese negotiating style can be disconcerting and confusing to Americans. The Japanese want to get to know those on the other side and will spend more time in non-task conversation.

B. For North Americans, negotiations are businesslike; they are based on factual appeals—what the negotiators believe is objective information, presented with the assumption that it is understood logically by the other side. Arabs use affective appeals based on emotions and subjective feelings. Russians employ axiomatic appeals based on ideas generally accepted in their society. Basic cultural values often shed light on the manner in which information is presented, whether and how concessions will be made, and the general nature and duration of the relationship.

Teaching Tip: Ask if students have been in other countries and had to bargain for a price on something. Use this as a starting point to discuss the different profiles of negotiators.

C. American Negotiators: 1. Know when to compromise 2. Take a firm stand at the start of negotiations 3. Refuse to make concessions beforehand 4. Keep cards close to the chest 5. Accept compromises only when negotiations are deadlocked 6. Set up the general principles and delegate detail work to associates 7. Keep a maximum of options open before negotiation 8. Operate in good faith 9. Respect the opponents 10. State position clearly 11. Knows to move on 12. Are fully briefed on the issues 13. Have a good sense of timing and consistency 14. Make the other party reveal position while hiding their own as long as possible 15. Let the other negotiators come forward first

D. Indian Negotiators: 1. Look for and speak the truth 2. Are not afraid of speaking up and have no fear 3. Exercise self-control 4. Seek solutions that will please all parties 5. Respect the other party 6. Do not use violence or insults 7. Are ready to change mind 8. Put things into perspective 9. Are humble and trusting 10. Are able to withdraw, use silence, and learn from within 11. Are self-reliant 12. Appeal to other party’s spiritual identity 13. Are tenacious, patient and persistent 14. Learn from the opponent and avoid the use of secrets 15. Go beyond logical reasoning and trust instincts

E. Arab Negotiators: 1. Protect everyone’s honor, self-respect and dignity 2. Avoid direct confrontations 3. Are respected and trusted by all 4. Do not put the parties in a situation of weakness or defeat 5. Have the necessary prestige to command attention 6. Are creative enough to come up with honorable solutions for all parties 7. Are impartial and understanding of each position 8. Are able to resist pressure and negotiating tactics 9. Use references to highly respected people in order to persuade opponents 10. Can keep secrets and gain confidence of others 11. Control temper and emotions 12. Can use conferences as mediating devices 13. Know that the opponents will have problems carrying out decisions made in negotiations 14. Are able to cope with the Arab disregard for time 15. Understand the impact of Islam on opponents who believe they possess the truth, follow the “right path,” and will win because of a just cause

F. Swedish negotiators have these traits: 1. Quiet and thoughtful 2. Punctual 3. Polite 4. Straightforward 5. Eager to be productive and efficient 6. Down to earth and cautious 7. Flexible 8. Good at controlling emotions 9. Slow to react 10. Informal and familiar 11. Conceited 12. Perfectionists 13. Afraid of confrontation 14. Private

G. Italian Negotiators: 1. Have a sense of drama 2. Do not hide emotions 3. Read non-verbals 4. Do not trust 5. Are concerned about making a good impression 6. Believe in individual initiative rather than teamwork 7. Are good at being friendly and obliging 8. Are always on the lookout 9. Never embrace definite opinions 10. Are able to come up with new ways to win negotiations 11. Handle confrontations of power with tact 12. Have a flair for intrigue 13. Know how to use flattery 14. Can involve other negotiators in complex combinations

Management Focus: A Middle East Equity Giant with a Small Global Footprint

Arif Masood Naqvi wants to compete with the likes of Citigroup and Goldman Sachs. His plan is to create a one-stop financial services firm to serve the Middle East. Goldman Sachs and Citigroup are beginning to do business there, however, Mr. Naqvi feels he can compete with the international giants on the basis of his contact in the area and knowledge of the region. With high capital inflows into the region, the Middle east is becoming an increasingly desirable market for banking and finance.

IV. Managing Negotiation

A. Successful management of cross-cultural negotiation necessitates the manager to understand the position of the other parties in regard to goals and whether these goals are represented by principle or specific details. He also needs to know the composition of teams involved, the power allotted to members, and the extent to which teams are prepared.

Teaching Resource: The Institute for International Mediation and Conflict Resolution, a Washington DC based non-profit, promotes the use of conflict resolution techniques. It has held five international symposia for students and young professionals in over 50 countries. http://www.iimcr.org/

B. Whatever the culture, person-related conflicts have been found by research done by Tse, Francis, and Walls, to “invite negative, more relation-oriented (versus information-oriented) responses,” leading them to conclude that:

1. “The software of negotiation—that is, the nature and the appearance of the relationship between the people pursuing common goals—needs to be carefully addressed in the negotiation process.”

Exhibit 5-5 describes Mexican managers’ perceptions of the causes of failure of negotiations with Americans. Husted interprets that many of the perceived differences in negotiation style relate to the typical differences found between high-context and low-context cultures.

The relationships among the factors of cross-cultural negotiation discussed in this chapter are illustrated in Exhibit 5-6.

C. Cross-Cultural Negotiation Variables

1. Successful management of cross-cultural negotiation necessitates a manager’s going beyond generalized understanding of issues to 1) gain specific knowledge of the parties in an upcoming meeting, 2) prepare accordingly to adjust and control the situation, and 3) be innovative.

2. A problem solving approach is essential to successful cross-cultural negotiations, requiring that a negotiator treat everyone with respect, avoid making anyone feel uncomfortable, and assuring that no one loses face. Skillful negotiators also tend to make twice as many concessions regarding long term issues and are more likely to set upper and lower limits regarding specific points. They practice active listening and use fewer reasons to back-up arguments. D. Using the Web to Support Negotiations

1. Modern technology can provide support for the negotiating process. As web applications develop, they may provide support for such things as multiple party business transactions, international dispute resolutions, internal company negotiations and communications.

2. Negotiation support systems can support the negotiation process by: 1) increasing the likelihood that an agreement is reached when a zone of agreement exists (acceptable solutions for both parties); 2) decreasing the direct and indirect costs of negotiations, such as costs related to delays and attorney fees; and 3) maximizing the chance for optimal outcomes.

Teaching Resource: Visit INSPIRE – the Web-based Negotiation site at Carleton University. http://interneg.org/inspire/

3. E-Negotiation is becoming increasingly important as the negotiation process is carried out through e-commerce. Samsung’s e-Chaebol is one example.

E. Comparative Management in Focus: Negotiating With the Chinese

See Exhibit 5-7

1. The negotiation process employed by the Chinese is dramatically different from that of Americans. Chinese put much greater emphasis than Americans on respect and friendship, on maintaining “face,” and on group goals.

2. Business people report two major areas of conflict in negotiating with the Chinese—the amount of detail the Chinese want about product characteristics, and their apparent insincerity about reaching an agreement. In addition, Chinese negotiators frequently have little authority, frustrating Americans who do have the authority and are ready to conclude a deal.

3. Research shows that for the Chinese, the negotiation process is greatly affected by three cultural norms: their ingrained politeness and emotional restraint; their emphasis on social obligations; and their belief in the interconnection of work, family, and friendship.

4. Because of the Chinese preference for emotional restraint and saving face, aggressive or emotional attempts at persuasion in negotiation are likely to fail. Instead, the Chinese tendency to avoid open conflict will more likely result in negative strategies, such as discontinuing or withdrawing from negotiation. At the heart of this kind of response is the concept of face—a concept so important that it is essential for foreigners to understand it to recognize the role that face behavior plays in negotiations.

a. There are two components of face—lien and mien-tzu.

1. Lien refers to a person’s moral character, the most important thing defining that person, without which one cannot function in society. It can only be earned by fulfilling obligations to others.

2. Mien-tzu refers to one’s reputation or prestige, earned through accomplishments, bureaucratic or political power.43 Giving others one’s time, gifts, or praise enhances one’s own face. In negotiations, it is vital that you do not make it obvious that you have “won” because that means that the other party has “lost” and will lose face.

5. Americans often experience two negotiation stages with the Chinese—the technical and the commercial. During the long technical stage, the Chinese want to hammer out every detail of the proposed product specifications and technology. If there are two teams of negotiators, it may be several days before the commercial team is actually called in to deal with aspects of production, marketing, pricing, and so forth. However, the commercial team should sit in on the first stage to become familiar with the Chinese negotiating style. The Chinese negotiating team is usually about twice as large as the Western team; about a third of the time is spent discussing technical specifications, and a third is spent on price negotiations.

6. The Chinese are among the toughest negotiators in the world—American managers must anticipate various tactics, such as their delaying techniques and their avoidance of direct, specific answers, both ploys used to exploit the known impatience of Americans.

Pye offers the following additional tips to foreigners conducting business with the Chinese:

a. Practice patience b. Accept prolonged periods of stalemate c. Refrain from exaggerated expectations and discount Chinese rhetoric about future prospects d. Expect the Chinese will try to manipulate by shaming e. Resist the temptation to believe that difficulties may have been caused by one’s own mistakes f. Try to understand Chinese cultural traits, but realize that a foreigner cannot practice them better than the Chinese

F. Managing Conflict Resolution

1. As discussed in Chapter 4, much of the difference in communication styles is attributable to whether you are part of a high-context or low-context culture. In low-context cultures such as that in the U.S., conflict is handled directly and explicitly, and also is regarded as separate from the person negotiating—that is, the negotiators draw a distinction between the people involved and the information or opinions they are representing. They also tend to deal on the basis of factual information and logical analysis. That approach to conflict is called instrumental-oriented. In high-context cultures, such as in the Middle East, the approach to conflict is expressive-oriented—that is, the situation is handled indirectly and implicitly and there is no clear delineation of the situation from the person handling it.

The differences between high- and low-context cultures that often lead to conflict situations are summarized in Exhibit 5-8.

V. Decision Making

A. Negotiation can be seen as a series of explicit and implicit decisions—negotiation and decision-making are interdependent.

B. There is no doubt that the speed and manner of decision-making affects the negotiation process. The role of decision making in management, however, goes far beyond the finite occasions of negotiations. It is part of the manager’s daily routine—from operational-level, programmed decisions requiring minimal time and effort to those non-programmed decisions of far broader scope and importance, such as the decision to enter into a joint venture in a foreign country.

Teaching Tip: Have your students work in small teams to discuss how they reached a decision on which college to attend. Ask them to consider all the influences they faced. Did they disagree with their parents? If so, how was that conflict resolved? In what ways did the decision follow the model described in the text?

C. The Influence of Culture on Decision-Making

1. Culture affects decision-making through the broader context of the nation’s international culture and through culturally based value systems which affect each individual decision-maker’s perception or interpretation of what is going on. The extent to which decision-making is influenced by culture varies among countries. The ways that culture influences an executive’s decisions can be studied by looking at the variables involved in each stage of the rational decision making process. These stages are: (1) defining the problem, (2) gathering and analyzing relevant data, (3) considering alternative solutions, (4) deciding on the best solution, and (5) implementing the decision.

2. One of the major cultural variables affecting decision-making is whether a country assumes an objective approach or a subjective approach. Another cultural variable that greatly influences the decision making process is the risk tolerance of those making the decision. One important variable in the decision making process is the manager’s perception of the locus of control over outcomes—whether that locus is internal or external. Some managers feel that they can plan on certain outcomes because they are in control of events that will direct the future in the desired way. In contrast, other managers believe that such decisions are of no value because they have little control over the future—which lies in the hands of outside forces, such as fate, god, or nature.

D. Approaches to Decision-Making

1. Value systems influence the overall approach that decision makers from various cultures take to their task. The relative level of utilitarianism versus moral idealism in any society affects its overall approach to solutions.

2. Another important variable to the overall company approach to decision-making is that of autocratic versus participative leadership and decision-making style. A country’s orientation (e.g., individualistic vs. collectivist) influences the level at which decisions are made.

Exhibit 5-9 illustrates how all the variables described in this section can affect the steps in the decision-making process.

E. Comparative Management in Focus: Decision Making in Japanese Companies

See Exhibit 5-10

1. Japanese companies are involved in joint ventures throughout the world, especially with American companies. An understanding of the Japanese decision-making process requires an understanding of their national culture.

2. Much of the culture in Japan, and therefore the basis of working relationships, can be explained by the principle of wa, meaning peace and harmony. This principle is one aspect of the value they attribute to amae, meaning “indulgent love,” a concept probably originating in the Shinto religion, which focuses on spiritual and physical harmony. Amae results in shinyo, which refers to the mutual confidence, faith, and honor required for successful business relationships.

3. In the ringi system of Japanese decision-making, the process works from the bottom up. The ringi process is one of gaining approval on a proposal by circulating documents to all those affected. The nemawashi process begins the formal authorization procedure of the ringi process.

Although the ringi system is time consuming, the final decision can be rapidly implemented because of the widespread awareness of and support for the proposal already gained throughout the Japanese organization.

Chapter Discussion Questions

1. Discuss the stages in the negotiation process and how culturally-based value systems influence these stages. Specifically, explain the role and relative importance of relationship building in different countries. Discuss the various styles and tactics that can be involved in exchanging task-related information. Describe differences in culturally-based styles of persuasion, and discuss the kinds of concession strategies a negotiator might anticipate in various countries.

The five interrelated phases in the negotiation process are: preparation, relationship building, exchange of task information, persuasion, and concessions and agreement. Relationship building, the second stage, is more important in other parts of the world than it is in the U.S. In many countries, the personal relationship forms the basis for the enforcement of contracts. In exchanging task-related information, each side typically makes a presentation and states a position. Then there is a question and answer session and then alternatives are discussed. Americans are generally direct at this stage but many other countries tend to take an indirect approach. Persuasion too has cultural differences in the methods used. Promises, threats, commitments, and commands are some tactics possible. For instance, the Japanese and Americans tend to be similar on the use of these tactics but quite different from the Brazilians who use fewer promises and commitments. Americans and Japanese are also more likely to use threats than the Brazilians. Exhibit 5-4 provides the complete list of tactics and the variations among these three cultures.

Finally, concession strategies will vary too. Russians and Chinese typically start with extreme positions and research suggests that this is associated with better results. However, cultures like the Swedish prefer to start at the level they are prepared to accept. Overall, all stages will vary widely in different cultural settings based on the importance negotiators in a particular culture place on such things as objective information versus emotional appeals; getting down to business versus building relationships; using pressurized means of persuasion; and whether or not a short-term versus long-term perspective is assumed throughout the process.

2. Discuss the relative use of non-verbal behaviors, such as silent periods, interruptions, facial gazing, and touching by people from various cultural backgrounds. How does this affect the negotiation process in a cross-cultural context?

Non-verbal behaviors are the most subtle part of the negotiating process and the most difficult for most managers to deal with because of widely varying cultural differences. Negotiators must be aware of their own non-verbal agendas, as well as those of the other party. Particular attention should be placed on determining which non-verbal behaviors make the other party comfortable and uncomfortable.

In comparing the Japanese to Americans, the use of silence is viewed differently. The Japanese frequently have periods of silence, usually for reflection. In many cases Americans may assume that negotiations are not going well and offer concessions. This misunderstanding of non-verbal communication can be costly to American negotiators. Cultures also differ in terms of the desirability of physical touching. North Americans (as well as other such as Latin Americans, Arabs, etc.) are more likely to appreciate physical touch, whereas the Japanese deem it inappropriate.

3. Describe what you would expect in negotiations with the Chinese and how you would handle that situation.

The Chinese place much greater emphasis than Americans on respect and friendship, on maintaining face, and on group goals. Two major areas of conflict in negotiating with the Chinese involve the amount of detail the Chinese want about product characteristics and their apparent insincerity about reaching an agreement. Research shows that the Chinese are greatly affected by three cultural norms: their ingrained politeness and emotional restraint, their emphasis on social obligations, and their belief in the interconnection of work, family, and friendships. Appeals to individual members of the Chinese negotiating team, rather than to the group as a whole, will probably backfire. Those negotiating with the Chinese should focus on establishing long-term, trusting relationships, even at the expense of immediate returns. As we have seen in the opening profile, the Chinese can also be extremely cautious when negotiating as well.

4. What are some of the differences in risk tolerance around the world? What is the role of risk propensity in the decision making process?

According to research, people from Belgium, Germany, and Austria have a considerably lower tolerance for risk than people from Japan or the Netherlands. American managers appear to have the highest tolerance of risk. The extent to which negotiators tolerate risk will have a major impact on how bold they are in the negotiating process. People from high risk cultures may be more dramatic in their proposals and more prone to quick action. Again, as we saw in the opening profile, the Chinese appear to be more cautious and risk averse.

5. Explain how objective versus subjective perspectives influence the decision-making process. What role do you think this variable has played in all of the negotiations and decisions between Iraq and the United Nations.?

People from Western nations generally take a very rational approach to decision-making, stressing the role of information heavily. This is in contrast with Latin Americans, for example, who are more subjective and emotional. Objectives versus subjective perspectives involve the extent to which information versus emotion are major variables in the decision making process.

Iraq, as a Middle Eastern country, likely handles negotiations using expressive-oriented styles. That means that the situation is handled indirectly and implicitly and there is no clear delineation of the situation from the person handling it. In such a case, the negotiators try to avoid confrontations and if they cannot reach agreement through emotional appeals, they will use evasion and avoidance. This has likely been frustrating for the U.N., which must follow a low-context, instrumental-oriented style of basing decisions on factual and logical analysis.

6. Explain differences in culturally-based value systems relative to the amount of control a person feels they have over future outcomes. How does this belief influence the decision-making process?

Locus of control refers to the extent to which the manager feels that he/she can plan on certain outcomes because he/she is in control of events that will direct the future in the desired way. American managers tend to have a very strong locus of control, in contrast with managers from Muslim nations who believe more in the concept of “fate.” If a person has a strong internal locus of control, they may be more motivated to take quick action, whereas a person with an external locus of control does not see the value in such behavior.

Experiential Exercise

Multicultural Negotiations by Egidio A. Diodati

Administration Instructions

Goal: To allow students to experience the frustrations resulting from, and what must be termed, a clash of cultures and to appreciate the problems associated with negotiating with people of other cultures.

The Japanese team instructions are clear that they must remain almost completely stoic in the face of anything that these American barbarians may do or say. This, they believe will, in the long run get them the best deal. The American team is here to close the deal in record time. Each member of the American team has a personal (career driven) and corporate investment in closing this deal as soon as possible.

The results of this clash, if the role does not break down, will be that the American team will know exactly what most Americans have learned about international negotiations – a lack of knowledge about the other’s culture will put you at a distinct disadvantage.

Time Required: With some advance planning, this exercise can usually be completed in about an hour.

Materials: Copies of instructions for the American and Japanese teams from the instructor’s manual, feedback sheets and student instructions, pencils, pens, a rectangular table with 8 chairs and name tags for the American and Japanese team members.

Instructions:

1. In order to minimize the time needed, the room should be set up for the negotiation session in advance, using a rectangular table with four seats on each side. The Japanese side should have three chairs at the table with once chair set up behind the three. The American side of the table should have four chairs side-by-side. 2. At the beginning of the exercise, ask for eight volunteers from the class. The eight people will role play two negotiating teams, while the remainder of the class observes the negotiations. The role play takes place at the headquarters of a Japanese automobile manufacturer. The American team has come to sell microchips and other components to the Japanese company. 3. The volunteers should be divided up into two teams of four and separated into two rooms if possible. (If not, they should, at least, be out of hearing range of each other). They are then given the instructions sheets. Neither team can have access to the other’s instructions sheets. After dividing up the particular roles, the teams should meet for 10-15 minutes to develop their negotiating strategy. 4. After the preparation time is over, the Japanese team should enter the room first, since they must greet the Americans when they arrive. At this point, the Americans should be brought in and the role play begins. Time for the negotiations should be 20-30 minutes. The rest of the class should be told that their role is to observe, and their observations will be part of the discussion of the responses.

Some things which are critical to the exercise are:

➢ Competing teams must not have any knowledge of the instructions of the other team

➢ Both teams must be convinced to stay “in role” in order to maximize the benefits of the exercise.

➢ The American team must be convinced that they are there to champion the interests of their nation (economically), company (financially), and their own careers.

➢ The Japanese team must be convinced that although they are dealing with barbarians, they must be polite to them.

5. After the role play, the members of each team and the observers complete the feedback sheets in the text.

At this point it is very beneficial to record the responses on the board. Since the questions are similar on each of the feedback sheets, the differences in the responses will be driven by the students’ different positions in the role play and should highlight the degree of cultural diversity.

End-of-Chapter Case: Negotiations between Alcatel of France and Lucent of the U.S. Finally Results in Deal in 2006

Discussion Questions

1. What conditions and negotiations pushed forth the merger in 2006 that were not present in 2001?

The case is a bit weak on providing details to answer this question. It might be assumed (as it is somewhat implied in the reading) that the French decided that they would be equal partners in the deal instead of simply acquiring the American firm. Another motive could have been that the two firms realized that a merger was in their best interests in order to be truly global. The merger extends the reach of the new firm and provides significant cost savings.

2. Research the status of the merged company at the time of your reading of this case. What has happened in the industry since the merger, and how is the company faring?

At the time of the writing of the Instructor’s Manual the company appeared to be doing well. A search of Yahoo and Google news, as well as Hoovers did not point to any significant problems, however, students should repeat the process at the time of the case analysis for any late developments.

3. Evaluate the comment that the merger is “a giant transatlantic experiment in multicultural diversity.” What evidence is there that the company has run into cross-cultural problems since the merger took place in 2006?

In some ways the statement is true. There are significant differences between French and American culture. At the same time, other French-American partnerships and mergers have been successful. One of the difficulties that the new company has experienced since the merger is resistance to lay-offs. When Alcatel-Lucent announced in early 2007 that it planed to reduce its workforce by 12,500, French unions and the French government took note. Workforce reduction in France may not be as easy as in the U.S. and the company has met with the European Works Council and the French government in an attempt to move ahead with its downsizing. Students can research the latest developments at the time of the case analysis.

Additional Case

Red Dragon Enterprises

Rex Adams is about to leave China and may never return. He has experienced difficulties that he never imaged he would find in a foreign joint venture. His company, Batrionics hoped that China would provide a source of lower cost manufacturing; however, what he found was corrupt government officials, dishonest managers, and poor quality products.

China

The Chinese called their country the “middle kingdom,” meaning that China was at the center of the world. For centuries China was in fact the world’s leading civilization and sought to keep foreigners out by building a wall thousands of miles long. Although China is officially a communist state, since 1979 the country has been moving towards a capitalistic economy and now eagerly invites foreigners into its economy. The “iron rice bowl,” where all workers in China were guaranteed a job, is being replaced by a market-driven system. Although China still has many state-owned enterprises, economic reform is moving rapidly as China becomes a major player in the global marketplace. China became a member of the World Trade Organization in 2001. Having the largest population of any country, with over 1.3 billion, China is often seen as a country with enormous market potential. The cost of labor in many parts of China represents some of the lowest labor costs in the world. China represents the fasting growing economy in the world and many foreign companies have invested in the country in recent years. The large population, and the hope of tapping into that market, as well as those who are looking for a low cost manufacturing location lure many investors. While many investors have found success in China, a number of foreign investors have experienced great difficulties. Batrionics was one those companies which experienced difficulties.

Batrionics

The company was established in 1984 by two Australians as a small manufacturer of laptop computer batteries. Batrionics produced replacement laptop batteries at a cost lower than the original manufacturer and quickly became successful. The batteries were first produced in Australia, and then in Taiwan. When one of the founders died of a sudden heart attack, the remaining founder, Rex Adams, took total control of the business. He expanded the product line into a number of different types of industrial batteries. The industrial battery market is a very competitive one; a market where small price differentials make all the difference. Early in the business the founders learned that if they hoped to be competitive, they would have to move their manufacturing operations out of Australia. Taiwan proved to be a good choice, having much lower production costs and an ability to produce a quality product. The wholly-owned operation in Taiwan was satisfactory for a number of years, however, increased price sensitivities in the market caused Rex to consider other manufacturing locations. An obvious choice was China. Rather than completely shutting down the manufacturing operations in Taiwan and moving them to China, Rex decided to enter into a joint venture agreement with a Chinese manufacturer, and to gradually reduce the company’s operations in Taiwan.

Red Dragon Enterprises

After doing some investigation, Rex discovered a small manufacturer of batteries and related industrial products in China called Red Dragon Enterprises. In addition to producing small batteries for the consumer market, Red Dragon also manufactured automotive batteries, watch batteries, switches, timers, electrical cords, smoke alarms, and air purifiers. The company was eager to find a foreign partner who could provide capital for expansion and help the company improve its quality. Red Dragon was considered a quality producer in China, but its products were not of a high enough quality to be sold outside China, with a few exceptions. The owner of Red Dragon was Tsang Wai. Tsang was a self-made man. After the death of Mao Zedong in 1976, Tsang saw an opportunity in China. With the death of the communist leader he began to manufacturer small electrical products at home, using scrap material from the state-owned factory where he worked. Although this practice was strictly illegal at the time, Tsang did not let that stop him. He moved his manufacturing operations out of his small home when the Chinese government began to allow small businesses to operate legally. At that point he was able to hire workers and expand the product line. Tsang’s sales and profits grew rapidly, and being very frugal, he was able to put much money back into the business and grow the company even more. Red Dragon was a respected brand in China but the company had not been successful in exporting its products to the United States and Europe. Some of Red Dragon’s products, such as the smoke detectors and water purifiers were sold in some Southeast Asian countries. The company’s batteries, however, were not seen as being competitive against international brands. Rex Adams heard about Red Dragon and was interested in the company because of its experience in producing some of the batteries his company sold. While he was aware of the problems of poor quality, Rex felt that he could install new procedures in the company and improve the company’s ability to produce quality batteries. He wanted to find a company that was struggling, and where improvements could be made, because he felt that he could leverage his company’s knowledge and skill against the joint venture partner. When Rex approached Tsang, he found a highly motivated and energetic man who was very interested in expanding his operations and becoming a global player. Rex at first referred to Tsang Wai as Mr. Wai, forgetting that in China, the family name comes first and that Tsang Wai would really be Mr. Tsang. The two men got along well, even though Tsang’s English proficiency was limited. Tsang had a young assistant who spoke English and who helped him to communicate with Rex. The young assistant would never make eye contact with Rex, and at times, Rex wondered if he was really translating correctly. At one point Rex put his arm around the young man and asked if he was being fair in his translating. His level of discomfort made Rex wonder even more about the translation.

An Agreement is Reached

After a number of trips to China, and many days spent negotiating, the terms of the joint venture were agreed upon. When Rex asked Tsang to sign a contract, he refused. He told Rex that the entire relationship should be based upon trust, and that a contract only represented “paper trust,” and would be meaningless. Rex was going to be investing a significant amount of money in the joint venture and felt very uncomfortable doing so without a formal agreement. He told this to Tsang and finally Tsang replied, “OK, we put dragon blood on paper.” Not really sure what he meant, Rex felt that this implied that a contact would be created. After still more discussion, and at times argument, the two men agreed to have a simplified document drafted, one which was much more general and open-ended than Rex had planned. He had heard that the Chinese did not like contracts, and that business relationships in China were based on trust and “face” more than legal documents. Although feeling very uneasy about the lack of a detailed formal contract, Rex nevertheless signed what amounted to a general letter of intent. Tsang told Rex that he had recently visited a fortuneteller and that she told him that the joint venture was going to be a “big success.” Tsang told Rex that his future in China was bright and that the joint venture would bring both of them good fortune. At the insistence of Tsang, the joint venture was named Red Dragon Enterprises. Rex had reservations concerning the name, feeling that this would create confusion and not clearly separate the joint venture from Tsang’s business. Tsang insisted on the name, telling Rex that the name brought good luck to him and anything else would “encourage evil spirits.” The manufacturing operations were located in Nanjing and the agreement would have to be approved by local government officials, or so Rex was told. After Rex had his bank in Australia wire his company’s investment to China, Rex and Tsang went to see the government official. Rex was pleased that the government official, Lee Yi, spoke English well. She explained some conditions that would have to be met in order for Batrionics to operate in China. The conditions appeared reasonable to Rex and the meeting went smoothly. Official approval of the joint venture would be made by a committee, Rex was told, and would probably take a few weeks. Rex felt that he was on his way to securing a low cost base of manufacturing. After two weeks, Rex became concerned when there was no word yet about the government approval of the joint venture. Rex had stayed in China waiting for approval and was getting anxious. Tsang had already begun to spend some of the capital Rex had provided for the partnership, and it was an uncomfortable feeling having the money spent without official approval of the project. Tsang told Rex that there would not be any problems and that the two should continue to plan for expansion. After four weeks of being in China and still no approval, Rex demanded that he and Tsang go to the government official and see what was causing the delay. When they were finally able to get an appointment with Ms. Lee, her disposition did not appear to be as pleasant as before. She told Rex that sometimes these approvals take longer than expected and she felt that the problem with approval was an inadequate level of infrastrure at Red Dragon. When asked for details, Lee told the men that the electrical and water systems of the manufacturing facility were not acceptable, based on government standards. She recommended that Rex hire a contractor to make improvements to these two systems. Rex was concerned that this would delay expansion even further, but Lee told him that she had the name of someone who could do the job quickly and get the plant approved. Rex asked for the name and made the necessary arrangements. Minor improvements were made to the Red Dragon facility, yet the costs appeared not to be minor. Rex agreed to pay the entire costs of the improvements yet he felt that the joint venture was being exploited by the local government. After another week of waiting, official approval came for the joint venture. Rex was very happy and Tsang commented that although Rex thought it took a long time, it really was expedited because he, Tsang, had “guanxi’ or connections. Rex didn’t think the process went very quickly and dismissed the guanxi claim. Over the next couple of months Rex made many trips to China and brought managers from Taiwan with him from time to time to consult with the managers at Red Dragon. Additional equipment was purchased, and it finally began to appear that the venture was moving ahead. Tsang informed Rex that the joint venture would need additional capital soon. This came as a complete surprise to Rex as he had planned on not providing any more capital at all for the project. Tsang explained that costs had been higher than expected and that unless additional capital was provided, the quality improvements Rex had demanded could not be achieved. Rex reluctantly agreed to provide more capital With a business to oversee in Taiwan, Rex left China and spent the next three months between Taiwan and Australia. He left Tsang in charge of the Chinese operation. Tsang made regular reports to Rex, and the reports were always very favorable. Production was increasing, quality was improving, and Red Dragon was about to embark on an international sales drive. Rex began to plan a reduction in the Taiwanese operations as he was going to soon be receiving batteries from China. One of most trusted managers from Taiwan, Chen Wah was asked to visit the Chinese facilities and to measure the progress Red Dragon was making in being able to supply Batrionics with the needed batteries. It was planned that when the facilities in Taiwan were phased out, Chen would still be employed by Batrionics and would help manage the Chinese joint venture.

Bad News from China

Chen traveled to China and made a shocking report to Rex. He had found that the batteries being produced by Red Dragon for Batrionics were not being made of sufficient quality and that production levels were well below what Tsang had reported. Chen also reported that Tsang told him that the joint venture was again almost out of money and would need an additional capital infusion. Rex told Chen to stay in China and to find out all he could about what was happening there. After another week, Chen reported back to Rex that inventory was missing and that he felt some of the managers at Red Dragon had been stealing the product and selling it through Chinese distribution channels. Chen confirmed that the bank account of the joint venture contained almost no funds. Rex decided that he would have to go back to China and see the problems for himself. When Rex arrived in China, he met with Chen who provided him with the facts that clearly showed that much of the joint venture’s inventory was missing. Chen did some checking and found that the products had been sold inside China. It was easy to identify the products made by the joint venture because the products were produced using the new equipment and the equipment left an identifying mark. When Rex presented Tsang with these facts, he said that employees had stolen some of the inventory and that they had all been fired. When asked what happened to the funds in the joint venture bank account, Tsang replied that mistakes had been made in accounting and that he would be investigating what had happened to the money. Rex was very unhappy with the answers provided by Tsang and he lost his temper. He accused Tsang of stealing the money and dealing with him in bad faith. Tsang said nothing and simply looked towards the floor. Rex decided that it was time for legal or governmental action. Making an appointment with an official at the office of the Commission for Foreign Economic Relations and Trade, Rex hoped to get Chinese governmental help in solving his problems with Tsang. Rex and Chen visited the office of Mr. Wu, who listened to what the two had to say about the situation and he reviewed the joint venture agreement between Batrionics and Red Dragon. He seemed sympathic; however, he offered little advice. After a long period of silence he suggested that Rex hire a consultant, a former official from the Commission to help solve the problems. Rex told Mr. Wu that he was done hiring people recommended by Chinese government officials and that he was going to seek legal assistance in the matter. Both Chen and Mr. Wu recommended against legal action, telling Rex that the joint venture agreement was too weak to be enforced in his favor. Rex left the government offices wondering how he had ended up in this situation. He knew that other foreign firms were operating in China, and he assumed that they were not experiencing all of these problems, so he wondered why he had such difficulties. Rex had to decide if he should cut his losses and leave China for good, or if he should try to work with Tsang and attempt to salvage the situation.

Sources
Ahlstrom, D. M. Young, and A. Nair. (2002). Deceptive Managerial Practices in China: Strategies for Foreign Firms. Business Horizons, November-December.
Harris, P., R. Moran, and S. Moran. (2004). Managing Cultural Differences. Burlington, MA: Elsevier.
Li, J. (2000). Passport China. Novato, CA: World Trade Press. www.worldfactsandfigures.com/countries/china Instructor’s Note: This case can be used to show the differences and difficulties of negotiating with the Chinese. The case can be used to show an application of the material found in this chapter of the text.

Student Stimulation

Group or Class Learning Activities

1. Negotiation Planning: The following exercise will provide your students with the opportunity to test their newly learned concepts in cross-border acquisitions. Divide the class into an equal number of teams. The teams will represent their countries in a negotiation exercise. Five different countries can be represented in a bilateral negotiation; one each for the U.S., India, Saudi Arabia, Sweden and Italy.

The teams are asked to prepare for a negotiation session. At issue: Country “A” wishes to have a military air base in their country, country B. The local populations in each are not excited about a greater military presence, but have not categorically ruled out country A’s involvement.

Using the information about negotiation styles in the chapter, students need to develop a plan for 1) how they will conduct the negotiation, and 2) what issues the negotiation will likely address. They do not need to actually negotiate, only plan for the negotiation.

|Country A |Country B |
|(seeks new military base) |(potential host) |
|U.S. |Italy |
|U.S. |Saudi |
|Saudi |Sweden |
|India |Saudi |
|Sweden |Italy |

Have the students present their plans for critique by their peers. Discussion issues include: a. In what ways did the process need to change to accommodate national cultural differences? b. How did your plans (group A) differ from those of group B? c. In your opinion, what would play a larger role in the success of the negotiations: the significance of the issues, or the relative appropriateness of the negotiation?

Additional Stimulation Discussion Questions

1. Describe the negotiating style you would be most likely to use in a business setting. Describe your style, as best you know it, along the lines of the following dimensions: (1) how aggressive and demanding you would be; (2) how impatient you would be; (3) the extent to which relationships would be important to you before you got down to business; (4) whether you would tend to have a short-term or long-term perspective; and (5) whether you would tend to stress information or emotion more at bargaining crunch time. Now classify these characteristics into strengths and weaknesses of your personal negotiation style. How do these characteristics relate to your personal experiences and upbringing? To your culture? What can you do to become a better negotiator?

2. The text points out the importance of “saving face” in Asian cultures and in particular, for Chinese. Discuss how this concept of “saving face” affected U.S. negotiations for return of the U.S.-owned spy plane after it landed in China following a collision with a Chinese plane.

3. Do you think the use of “dirty tactics” in the negotiating process is fair or unfair? (Does the phrase “All is fair in love and war” also apply to business negotiating?)

4. Look at the profile of American negotiators shown at the beginning of the chapter. To what extent do you reflect these characteristics yourself?

5. Based on the description of negotiating styles, with which nation would you be most comfortable holding negotiations: India, an Arab country, Sweden, or Italy? Why?

6. To what extent are you an emotional, impatient decision-maker? Would you be more comfortable in the typical American corporation that uses an autocratic decision-making style, or in the consensus-oriented Japanese corporation with its use of the ringi system?

Additional Experiential Exercise

Cross-Cultural Negotiations

Purpose: The purpose of this exercise is to develop more familiarity and skill in assessing the impact of culture on the negotiation process.

Procedure: Read the background notes that follow and then assemble into two negotiating teams. Your instructor will assign your team to either the Alpha or Beta culture. The exercise works best if team members only read the cultural characteristics of their assigned culture. In other words, if you are assigned to the Alpha culture, only read the Alpha segment that follows. If you are assigned to the Beta culture, only read the Beta segment that follows. Each team will have 3-5 members that conduct the actual negotiations, and additional members can be present, acting as observers.

Background Note:

A company from Alpha, is visiting Beta, in order to discuss the possibilities of arranging a contract to manufacture shoes. The Alpha company wants to find a low cost, yet reliable source of production. The Beta company is in a country with inexpensive labor and is interested in gaining the manufacturing contract.
The purpose of the meeting today is to see if a contract can be negotiated between the two parties. The negotiations should result in an agreement concerning basic issues such as price per shoe, quality assurances, and delivery, and any additional items either team decides is important. Each team will have a chief negotiator and two or three assistants.

(

Alpha Culture

The Alpha company consists of negotiators from a culture which possesses the following characteristics:

high power distance masculine individualistic high uncertainty avoidance low context

Your team will be very aggressive in seeking a shoe price of less than $5 per unit and may suggest methods of increasing efficiency in order to achieve that low price.

(

Beta Culture

The Beta company consists of negotiators from a culture which possesses the following characteristics:

low power distance feminine collectivist low uncertainty avoidance high context

Your team is willing to manufacture each shoe for no less than $8 per unit. While labor costs are generally low in your country, many benefits must be paid to workers which increases the cost of each worker.

CHAPTER 6

Formulating STRATEGY

LECTURE OUTLINE

General Outline
Opening Profile: Wal-Mart Finds that its Formula Doesn’t Fit with Every Culture
Reasons for Going International Management Focus: Mexico’s Cemex Continues its Global Expansion in 2007
Strategic Formulation Process
Steps in Developing International and Global Strategy Mission and Objectives Environmental Assessment Internal Analysis Competitive Analysis Global and International Strategic Alternatives Approaches to World Markets
Global Integrative Strategies
Using E-Business for Global Expansion E-Global or E-Local
Entry Strategy Alternatives Comparative Management in Focus: Strategic Planning for the EU Market
Chapter Discussion Questions
Application Exercises
Experiential Exercise
End-of-Chapter Case Study: There’s Detroit and There’s Trnava: The Strategic Attraction of Eastern Europe
Additional Case: Tiger Surgical Supplies
Student Stimulation Questions and Exercises
Additional Experiential Exercise: Comparative Strategy

Opening Profile: Wal-Mart Finds That Its Formula Doesn’t Fit Every Culture

Wal-Mart has had good success in its international expansion strategy, however, it has also had some setbacks along the way. After trying for nearly a decade to succeed in Germany, the Arkansas-based company finally decided to admit defeat. Wal-Mart’s corporate culture did not fit well with German national culture. Smiling employees and company chants, common in the U.S. didn’t set well with German employees. Wal-Mart also did not understand the German consumer and failed to establish good relations with Germany’s unions. Wal-Mart also experienced problems in South Korea. The Wal-Mart failure in South Korea was related more to a lack of scale. From these failures Wal-Mart has learned to adapt is management approach and to enter markets with significant scale to implement its strategy of everyday low prices.

I. Reasons For Going International

A. Companies “go international” for different reasons, some reactive (or defensive) and some proactive (or aggressive). The threat of their own decreased competitiveness is the overriding reason many large companies adopt a strategy of aggressive globalization.

Exhibit 6-1 lists the top OECD recipients and investors for 2005.

1. Reactive Reasons

a. Global competition b. Trade barriers c. Regulations and restrictions by home country government d. Customer demands e. Solution to logistical problems

2. Proactive Reasons

a. Economies of Scale: One pressing reason for many large firms to expand overseas is to seek economies of scale. These are achieved when higher levels of output result in spreading fixed costs over more units, thus lowering the per-unit cost. b. Growth Opportunities: When expansion opportunities become limited at home, firms are often driven to seek new international markets. A mature product or service with restricted growth in its domestic market often has new life in another country where it will be in an earlier stage of its life cycle.

Teaching Tip: Turn the tables. Ask students to imagine they are president of Volkswagen in the 1960s or Toyota in the 1990s. Why weren’t they satisfied with doing business in their own home markets? In what ways might U.S. businesses in the new millennium be facing the same situations as Volkswagen or Toyota?

3. Resource access and Cost savings: Resource access and cost savings entice many companies to operate from overseas bases. Sometimes the prospect of shifting production overseas improves competitiveness at home.

4. Incentives: Governments in countries seeking new infusions of capital and technological know-how often provide incentives to attract multinational corporations, being an additional proactive reason for them to expand.
Management Focus: Mexico’s Cemex Continues Its Global Expansion in 2007

Mr. Zambrano is a risk-taker. As the C.E.O. of the Mexican cement company, Cemex, he aggressively moved the company into the global marketplace. In 2006 Cemex continued its global expansion by making an unsolicited bid for the Rinker Group of Australia, giving Cemex a stronger position in the U.S. housing market, especially in Florida and Arizona. The acquisition is the largest ever by a Mexican company.

While the global cement and construction materials industry has been consolidating over the last few years, some question the timing of the acquisition. The housing market has weakened in the U.S., especially in Florida. Zambrano, a graduate of the Stanford Business School dismisses the concerns as “manageable risks.” It isn’t the first time that the investment community has questioned Zambrano’s decisions as he has expanded his empire into Britain, the U.S., Spain, and Latin America.

Teaching Tip: Have students visit the web site of Cemex www.cemex.com and report back on their current financial performance.

II. Strategic Formulation Process

A. The strategy formulation planning is necessary both at the headquarters of a corporation and at each of its subsidiaries. One study reported, for example, that 70 percent of 56 American MNC subsidiaries in Latin America and the Far East operated on planning cycles of five or more years.

B. Global strategic planning is more complex than domestic strategic planning because of the incidence of more complex variables, such as difficulty in gaining timely information, diversity of geographic locations, and differences in environmental factors (political, legal, cultural, market, and financial processes).

C. For firms that have not yet engaged in international operations, an ongoing strategic planning process with a global orientation identifies potential opportunities for (1) appropriate market expansion, (2) incremental profitability and (3) new ventures by which the firm can exploit its strategic advantages.

D. The strategic formulation process is part of the strategic management process in which most firms engage, either formally or informally. Strategic planning modes range from a proactive long-range format to a reactive, more seat-of-the-pants method. Exhibit 6-2 displays the strategic management process.

1. The first phase of the strategic management process—the planning phase—starts with the company establishing (or clarifying) its mission and the overall objectives of the firm.

2. The second part of the strategic management process is the implementation phase, which requires the establishment of the structure as well as systems and procedures suitable to make the strategy work.

III. Steps In Developing International Strategy

A. Mission and Objectives

1. The mission of an organization is its overall raison d’être, or the function it performs in society. This mission charts the direction of the company and provides a basis for strategic decision-making.

2. A firm’s global objectives usually fall into the areas of marketing, profitability, finance, production, and research and development (as noted in Exhibit 6-3)

Teaching Tip: Mission Check—ask your students to prepare a one-paragraph mission statement for their career. Have students work in teams to critique each other’s paragraph. Ask the students to comment on the extent to which their mission statement effectively communicates their goals. Alternatively, the class could create or evaluate the mission statement for your business program.

3. Goals for market volume and profitability are usually set higher for international than for domestic operations because of the allowance for greater risk involved. In addition, financial objectives must consider different tax regulations in other countries and exchange rate fluctuations.

B. Environmental Assessment

1. After clarifying the corporate mission and objectives, the first major step in weighing international strategic options is the environmental assessment. This assessment includes environmental scanning and continuous monitoring to keep abreast of variables around the world that are pertinent to the firm and that have the potential to shape its future by posing new opportunities (or threats). Firms must adapt to their environment to survive. How to adapt is the focus of strategic planning.

2. Environmental scanning is the process of information-gathering and forecasting relevant trends, competitive actions, and circumstances that will affect operations in geographic areas of potential interest.

a. Scanning should cover such topics as:

1. Political instability 2. Currency instability 3. Nationalism 4. International competitors

3. International competitor analysis is the most important area for environmental assessment and strategy formulation. The first step in analyzing the competition is to assess the relevant industry structures as they influence the competitive arena in the particular country (or region) being considered. For example, will the infrastructure support new companies in that industry? Is there room for additional competition? What is the relative supply and demand for the proposed product or service? The ultimate profit potential in an industry in a given location will be determined by these kinds of factors.

4. Companies can assess the environment of their competitors by looking into the goals, strategies, strengths, and weaknesses of the competitors.

The firm can also choose varying levels of environmental scanning. The firm should conduct global environmental analysis: multinational, regional, and national. The multinational-level of analysis provides a broad assessment of significant worldwide trends through identification, forecasting, and monitoring activities. At the regional level, the analysis focuses in detail on critical environmental factors to identify opportunities and risks for marketing the company’s products, services, or technology. The national level of analysis focuses on the size and nature of the market, along with any possible operational problems, in order to consider new entry strategy options.

This process of environmental scanning, from the broad global level down to the local specifics of entry planning, is illustrated in Exhibit 6-4 (the Garland, Farmer, & Taylor framework of environmental scanning). The first broad scan of all potential world markets results in the firm being able to eliminate from its list those markets that are closed or insignificant or do not have reasonable entry conditions. The second scan of remaining regions, and then countries, is done in greater detail—perhaps eliminating some based on political instability, for example. Remaining countries are then assessed for competitor strengths, suitability of products, and so on.

C. Sources of Environmental Information

1. The success of environmental scanning depends on the ability of managers to take an international perspective and to ensure that their sources of information and business intelligence are global. In the United States alone, over two thousand business information services are available on computer database, tailored to specific industries and regions; other resources include corporate “clipping” services and information packages. However, internal sources of information are usually preferable—especially alert field personnel who, with first-hand observations, can provide up-to-date and relevant information for the firm.

Teaching Resource: Want your students to investigate opportunities in Europe? Have them visit the Europages—European Business Directory—a good place to look for products, services, contacts or competitors. You can select a single European country or search all of Europe. http://www.europages.com/

D. Internal Analysis

1. After the environmental assessment, the second major step in weighing international strategic options is the internal analysis. This analysis determines which areas of the firm’s operations represent strengths or weaknesses (currently or potentially) compared to competitors so that the firm may use that information to its strategic advantage. The internal analysis focuses on the company’s resources and operations, and global synergies. The strengths and weaknesses of the firm’s financial and managerial expertise and functional capabilities are evaluated to determine what key success factors (KSFs) the company has and how well they can help the firm exploit foreign opportunities.

2. All companies have strengths and weaknesses. Management’s challenge is to identify both and to take appropriate action. Many diagnostic tools are available for conducting an internal resource audit. Financial ratios may reveal an inefficient use of assets that is restricting profitability; a sales-force analysis may reveal that the sales force is an area of distinct competence for the firm.

E. Competitive Analysis

1. The firm’s managers assess its capabilities and key success factors compared to those of its competitors. They must judge the relative current and potential competitive position of firms in that market and location—whether that is a global position or that for a specific country or region.

a. This stage of strategic formulation is often called a SWOT analysis (an acronym for Strengths, Weaknesses, Opportunities and Threats), in which the firms capabilities relative to its competitors is assessed as pertinent to the opportunities and threats in the environment for those firms

2. Most companies develop their strategy around key strengths, or distinctive competencies. Core competencies represent important corporate resources because, as Prahalad and Hamel explain, they are the “collective learning in the organization, especially how to coordinate diverse production skills and to integrate multiple streams of technologies.” Managers must also assess their firm’s weaknesses. Of course, the subjective perceptions, motivations, capabilities, and goals of the managers involved in such diagnoses frequently cloud the decision-making process.

F. Strategic Decision-Making Models

1. The international manager has a choice of strategic models to guide decision-making. The roles and interactions of the models are conceptualized in Exhibit 6-6. The institution-based theory looks at existing and potential risks and influences in the host area. Porter’s industry-based model examines five forces which determine the dynamics within the industry. The resource-based approach identifies a firm’s unique niche or competitive advantage.

2. The fourth major step in the strategic planning process is for managers to consider the advantages of various strategic alternatives in light of the competitive analysis. There are two levels of strategic alternatives that a firm must consider: global and national.

G. Approaches to World Markets

1. Globalization refers to the integration of worldwide operations and the development of standardized products and marketing.

2. The rationale behind globalization is to compete by establishing worldwide economies of scale, offshore manufacturing and international cashflows.

3. The pressures to globalize include increasing competitive clout resulting from regional trading blocs; declining tariffs that encourage trading across borders and open up new markets; the information technology explosion that makes coordination a far-flung operation easier.

4. One of the quickest and cheapest ways to develop a global strategy is through strategic alliances.

5. Globalization is inherently more vulnerable to environmental risk than a regionalization strategy. Global organizations are more difficult to manage because doing so requires the coordination of broadly divergent national cultures. Globalization treats all countries similarly regardless of their differences in cultures and systems: firms must lose some of their home country loyalties and replace them with common corporate values and loyalties.

Teaching Resource: A great source of data on world economic and demographic conditions is the World Bank. You can reach their publications web site at: http://www.worldbank.org.

6. Regionalization (or multi-local) is a strategy in which local markets are linked together within a region and a strategy is formulated for each region, allowing more local responsiveness and specialization.

7. The strategic choice as to where a company should position itself along the globalization-regionalization continuum is contingent upon the nature of the industry, the type of company and its goals and strengths, and the nature of its subsidiaries. In addition, each company’s strategic approach should be unique in adapting to its own environment. Many firms may try to “Go Global, Act Local” to trade off the best advantages of each strategy.

H. Global Integrative Strategies

1. Many MNCs have developed their global operations to the point of being fully integrated—often both vertically and horizontally, including suppliers, productive facilities, marketing and distribution outlets, and contractors around the world. While some companies move very quickly to the stage of global integration—often through merger or acquisition—many companies evolve into multinational corporations by going through the entry strategies in stages, taking varying lengths of time between stages.

I. Using E-Business to Go Global

1. Companies of all sizes are increasingly looking to the Internet as a means to expand their global operations. The benefits of a global B2B strategy are many, as shown in Exhibit 6-7. On the other hand, there are many challenges inherent in the B2B strategy, such as cultural differences, varying business models, governmental wrangling, and border conflicts. 2. Potential problem areas that managers must assess in their global environmental analysis include conflicting consumer protection, intellectual property and tax laws, increasing isolationism among democracies, language barriers, and a lack of tech-savvy legislators worldwide.

3. Global managers must realize that e-business cannot be regarded as just an extension of current businesses. It is a whole new industry in itself, complete with a different pool of competitors, and whole new sets of environmental issues. To assess the potential competitive position of the company, managers must ask themselves:

a. Does the exchange provide a technology solution that helps industry-trading partners to do business more efficiently?

b. Is the exchange known to be among the top 3-5 within its vertical industry?

c. Does the exchange offer industry-specific technology and expertise that gives it an advantage over generic exchange-builders?

E-Global or E-Local?

While the Internet itself is global, companies pursuing global markets using the Internet, must still consider local cultural expectations, differences in privacy laws, government regulations, taxes, and payment infrastructure. The e-global strategy is best for global B2B markets in steel, plastics, and electronics. The e-local strategy is more suited to consumer retailing and financial services. It is best for situations in which production and consumption are regional in scope, when behavior differs across regions, and when supply-chain management is important for success.

Teaching Tip: View Yahoo and eBay from around the world. Ask students to comment on the different strategic focus found at these sites.

J. Entry Strategy Alternatives

1. For a multinational corporation, a more specific set of strategic alternatives focuses on different ways to enter a foreign market. This section examines the various entry and ownership strategies available to firms, including exporting, licensing, franchising, contract manufacturing, turnkey operations, management contracts, joint ventures, and fully owned subsidiaries set up by the firm. These alternatives are not mutually exclusive; several may be employed at the same time.

2. Exporting is a relatively low-risk way to begin international expansion or to test out an overseas market. An experienced firm may want to handle its exporting functions by appointing a manager or establishing an export department. Alternatively, an export management company (EMC) may be retained to take over some or all exporting functions, including: dealing with host country regulations, tariffs, duties, documentation, letters of credit, currency conversion, and so forth.

3. Licensing: International licensing agreements grant rights to a firm in the host country to either produce or sell a product, or both. Licensing is especially suitable for the mature phases of the product life cycle.

Teaching Resource: Have students visit a very interesting web site - Franchise International http://www.franchise-international.net/ to learn more about international franchising.

4. Franchising: Franchising involves relatively little risk. The franchiser licenses its trademark, products and services and operating principles for an initial fee and ongoing royalties. Franchising can be an ideal strategy for small businesses, because outlets require little investment in capital or human resources.

5. Contract Manufacturing: A common means of utilizing cheaper labor overseas is to contract for production of finished goods or component parts, a process called contract manufacturing.

6. Service-Sector Outsourcing: The process of setting up overseas offices, call centers, and research labs to low-wage countries such as India, the Philippines, and China in order to reduce the cost of white-collar employees.

7. Turnkey Operations: In a turnkey operation, a company designs and constructs a facility abroad, trains local personnel, and then turns the key over to local management for a fee.

8. Management Contracts: A management contract gives the rights to a foreign company to manage the daily operations of a business, but not to make decisions regarding ownership, financing, or strategic and policy changes.

9. International Joint Ventures (IJVs): A joint venture involves an agreement by two or more companies to produce a product or service jointly. Ownership is shared, typically by an MNC and a local partner. This strategy facilitates rapid entry into new markets by means of an already established partner who has local contacts and familiarity with local operations.

IJVs are a common strategy for corporate growth around the world; they are also a means to overcome trade barriers, to achieve significant economics of scale for development of a strong competitive position, to secure access to additional raw materials, to acquire managerial and technological skills, and to spread the risk associated with operating in a foreign environment. The IJV also reduces the risks of expropriation and harassment by the host country. Many countries, like Mexico and Japan, stipulate proportions of local ownership and participation. International joint ventures are one of many forms of strategic global alliances further discussed in the next chapter.

10. In countries where a fully owned subsidiary is permitted, an MNC wishing total control of its operations can start its own product or service business from scratch, or it may acquire an existing firm in the host country. This represents the highest level of risk for a firm.

Exhibit 6-8 summarizes the advantages and critical success factors of these entry strategies.

Comparative Management in Focus: Strategic Planning in the EU Market

In May 2004 the EU expanded from its original 15 member states. The addition of 10 new member states, many from Eastern Europe changed the economic landscape of the EU. Further expansion in 2007 brought two new member countries: Romania and Bulgaria. The expansion of the EU brings strength but also greater uncertainty. Managers both internal and external to that market must plan their strategy accordingly. “Foreign” managers, for example, need to develop an action program to ensure that their products have continued access to the EU and to adapt their marketing efforts to encompass the whole EU. Foreign managers must also be aware of the EU’s competition policies and merger control. The failed GE-Honeywell merger was disallowed by the EU Commission. The harmonization of standards inside the EU can also be a barrier to overcome by foreign companies. Managers must be aware of the “citizen of Europe” is a myth; national cultures and tastes cannot be homogenized. UPS discovered just how different some European cultures can be when it found that its French drivers were unhappy with the fact that they could not drink wine with their lunch, or the fact that the brown UPS trucks resembled local hearses in Spain. Companies within the EU can gain great advantages by competing in a continental-scale market and thereby avoiding duplication of administrative procedures, production, marketing, and distribution. The adoption of a common currency, the euro, reduces transaction costs incurred by changing currencies and eliminates foreign currency risk. Opinions differ on the long-term effect of economic integration in Europe, nevertheless, many firms are seeking international joint ventures with European partners.

K. Strategic Choice

1. The choice of one or more entry strategies will depend on (1) a critical evaluation of the advantages and disadvantages of each in relation to the firm’s capabilities; (2) the critical environmental factors; and (3) the contribution that each choice would make to the overall mission and objectives of the company. When it comes down to a choice of entry strategy or strategies for a particular company, there are more specific factors relating to that firm’s situation that must be taken into account. These include: factors relating to the firm itself, the industry in which it operates, location factors, and venture-specific factors, as summarized in Exhibit 6-9.

2. After consideration of these factors, some entry strategies will no longer be appropriate. As described in Exhibit 6-10, managers will decide between equity and non-equity based alternatives. Equity modes may be wholly-owned operations or equity joint ventures. Non-equity modes may be contractual agreements and export.

3. Gupta and Govindarajan propose a hierarchy of decision factors but consider two initial choice levels. The first is the extent to which the firm will export or produce locally. The second is the extent of ownership control over activities that will be performed locally. As shown in Exhibit 6-11, there are many choice combinations available.

4. International strategic formulation requires a long-term perspective. Entry strategies, therefore, need to be conceived as part of a well-designed, overall plan. In addition, strategic choices at various levels often are influenced by cultural factors, such as a long-term versus a short-term perspective. Hofstede found that most people in countries such as China and Japan generally had a longer-term horizon than those in Canada and the United States.

Teaching Tip: Have students visit the web site http://www.business-in-asia.com/vietnam.htm to learn more about business in Vietnam. This site can be useful for the additional case found below.

Chapter Discussion Questions

1. Discuss why companies “go international,” giving specific reactive and proactive reasons.

As a reactive response, companies go international in order to respond to challenges from foreign competitors; to get around restrictive trade barriers; to do something about expensive host government regulations and restrictions; and to respond to consumer demands that may emerge. From a proactive point of view, companies internationalize in order to seek economies of scale; to overcome limited expansion opportunities at home; to gain access to resources and to realize cost savings abroad; and to improve competitiveness at home.

2. Discuss the ways in which managers arrive at new strategic directions—formal and informal. Which is best?

Formally, managers can use formal planning techniques like industry structure analysis leading to a SWOT analysis of the firm. They can carefully screen countries and opportunities to find a match between their resources and opportunities. Informally, they can use their intuition and their network of contacts and employees, to develop and implement venture ideas. Formal planning is by definition more systematic and is, therefore, more likely to uncover weaknesses in the company, threats in the environment, and/or strengths upon which to build and opportunities to exploit.

3. Explain the process of environmental assessment. What are the major international variables to consider in the scanning process? Discuss the levels of environmental monitoring which should be conducted. How well do you think managers conduct environmental assessments?

Environmental scanning is the process of information gathering and forecasting relevant trends, competitive actions, and circumstances that will affect operations in geographic areas of potential interest. Major international variables that are considered in scanning include: political instability, currency instability, nationalism, and degrees of international competition. Environmental monitoring goes on at three levels: multinational, regional, and country. The ability to do a comprehensive environmental scan probably depends on the size of the firm. It is reasonable to assume that smaller firms are not conducting very detailed analysis of any type when they decide on the merits of a particular market. Even with limited resources, small firms can purchase relevant information concerning market potential, political risk, and competitive positioning.

4. How can managers assess the potential relative competitive position of their firm in order to decide on new strategic directions?

Corporate strengths and weaknesses are best assessed through an analysis of distinctive competencies (unique capabilities and resources possessed by the firm) and through analysis of core competencies, which represent the collective learning in the organization. A SWOT analysis is a summary of the external issues (opportunities and threats) and internal resources (strengths and weaknesses) that are most likely to influence the future or intended direction of the firm. In addition, firms can do a gap analysis or value chain analysis to assess their competitiveness relative to competitors. Essentially the firm must determine how its core competency can be leveraged internationally.

5. Discuss the relative advantages of globalization vs. regionalization.

In globalization, firms are able to use standard products and systems. This affords economies of scale that can be turned to more competitive pricing or higher operating profits. Successful regionalization requires firms to be more responsive to local consumer preferences that result from national or cultural differences. If national differences prevail, firms who are successful at regionalization are more likely to prosper. The proper choice of globalization or regionalization is determined somewhat by the product or industry. Some products/industries are more likely to be able to operate on a globalized scale. Where specific tastes and preferences are important, the only viable option is to customize the product offering for the individual markets.

6. What are the relative merits of the entry strategies discussed in this chapter? What is their role in an integrative global strategy?

➢ Exporting: Exporting offers the advantages of being low risk, not having any long-term asset utilization, and being easy in terms of market entry and exit. ➢ Licensing: Licensing offers quick market entry, no ownership risks, and the avoidance of tariff and nontariff barriers. ➢ Franchising: Franchising offers opportunities for small businesses that may not be otherwise available, little investment risk for the franchisor, and fast market entry. ➢ Contract Manufacturing: Contract manufacturing allows the firm to focus on the part of the value chain that has the highest value added (it may not be manufacturing), is limited in terms of commitment, and has a low investment risk. ➢ Service-sector outsourcing: Service-sector outsourcing reduces the cost of “human capital,” offers around the clock service from different time zones, and can supply critically needed services that may be in short supply at home. Factors other than cost must be considered, including potential backlash from customers and communities, and the possible loss of proprietary technology and information. ➢ Turnkey Operations: Turnkey operations allow for greater utilization of skills and technology and may be useful when FDI is restricted. ➢ Management Contracts: Skill specialization and limited risk are the major advantages of management contracts as a mode of entry. ➢ Joint Ventures: International joint ventures allow for insider access to markets, the sharing of costs and risks, and the possibility of leveraging the local partner’s technology and contacts. ➢ Wholly owned subsidiaries: The greatest potential for profit comes from the wholly owned subsidiary entry mode. In addition, it has the advantages of greater economies of scale, strategic coordination, and the possibility of rapid entry into the market through acquisition.

7. Discuss the considerations in strategic choice, including the typical stages of the MNC and the need for a long-term global perspective.

There are three primary considerations in strategic choice: (1) evaluation of the advantages and disadvantages of each entry strategy in relation to the firm’s capabilities; (2) the critical environmental factors; (3) the contribution that each choice would make to the overall mission and objectives of the company. The most typical sequence involved in entry-level strategies starts with a company exporting, then proceeds to assembly abroad, and eventually evolves to full production abroad with the company’s own subsidiaries. International strategic planning requires a long-term perspective, because strategy is the essence of the company’s overall plan.

Application Exercises

1. Students can combine skills acquired in a strategic management class to complete this exercise, assuming they had taken such a class. If not, the chapter provides sufficient detail in order to complete the assignment. Of particular interest to the course is to be able to provide some assessment of country selection. 2. The chapter provides a good summary of the advantages and disadvantages of each entry mode (Exhibit 6-8). While the choice of mode may be somewhat dictated by the business, sufficient flexibility in considering options is useful 3. Students can visit the corporate web sites of different companies, and use search engines such as Google or Yahoo to find articles about the selected company. Hoovers.com also provides some company information and news free of charge, although the detailed information is provided for a fee.

Experiential Exercise

Information that may be helpful to completing this exercise can be found at http://www.buyusa.gov/russia/en/ and at http://www.kpmg.ru/russian/supl/library/taxlegal/Doing_business_in_Russia.pdf. The first web site is the U.S. Commercial Service and the second site is a detailed report of doing business in Russia.

By reviewing the above web sites enough information can be gained to make a recommendation concerning the appropriate entry strategy for Russia.

End-of-Chapter Case: There’s Detroit and There’s Trvana: The Strategic Attraction of Eastern Europe

This case explores the increasing popularity of Central and Eastern Europe as an automotive manufacturing location. In particular, the case discusses the current attractiveness of Slovakia as a manufacturing base.

Discussion Questions

1. What entry strategies are being used by the auto companies discussed in this chapter?

The expansion into Central and Eastern Europe has involved essentially three entry strategies: international joint venture, fully owned subsidiary, and acquisition.

2. Describe and discuss the reasons the companies have for establishing manufacturing in those countries. Why do those companies feel the need to open plants in those countries? Do you agree with the reasons?

There are a number of motives for the movement of manufacturing into the countries mentioned in the case. One of the most significant is perhaps the lower wage levels found in those countries. The case describes the cost differential of engineers and assembly workers in Slovakia to Western employees. Another reason is the market potential of the region. Having lived under a different political and economic system, economic liberalization has opened a new market for the world’s auto makers. Also, many of the countries in Eastern Europe are now members of the European Union and the autos can be exported duty-free into the wealthier markets of Western Europe. While there may be disagreement about the strategic direction and job loss in Western Europe and the U.S. caused by this manufacturing relocation, a strong argument can be made to support the action. The auto companies operate in a very competitive global market and must be constantly assessing location decisions. While a multiple stakeholder approach would consider all relevant parties, including communities and employees, the firm must still be accountable to shareholders and take action to ensure the survivability of the organization. Trade theories such as comparative advantage and international product life cycle also support the strategic direction.

3. What is the impact of this strategy on the strategic planning of those companies that supply and service those companies?

As the manufacturing of automobiles moves “east,” it will be necessary for the suppliers of those companies to also move. With increasingly attention given to efficiency and just-in-time production, keeping existing relationships with suppliers in remote locations seems less likely. In order to be competitive, suppliers will find it necessary to establish locations near the auto manufacturers, in a sense, becoming part of a network supplying input into the main manufacturing facility.

4. What is the impact of these developments on the unions in the west?

The case states that “union leaders are as irate as they are helpless.” With the relocation of manufacturing to lower wage level countries, unions will have a difficult time organizing and achieving high wage levels for lower skilled employees. One option for these unions is to attempt to move with the manufacturing operations. Traditionally this hasn’t been very successful.
One would expect that the effect on unions in the west will be lower memberships and declining sources of income.

5. What is the likely impact on the overall EU economy and growth prospects?

While it is difficult to say with any certainty the likely impact on the EU of automotive manufacturing moving into Central and Eastern Europe, it seems reasonable to predict that the long-term effect will be greater economic development for the European Union. One of the reasons for the formation of an economic union, such as the EU, is efficient use of factors of production and economic growth. While some high wage jobs will be lost in Western Europe, the overall economic development of Europe will allow for the development of other high wage jobs in other sectors of the economy.

6. Discuss the environment for the auto industry at the time of your reading of this case. Is it true that there is a repositioning of the global auto industry? Why is that?

Of course the answer to this question will depend on what is happening in the auto industry at the time the case is being read, it seems likely that the trend towards lower cost locations will continue. Not unlike other industries, the auto industry has become more global and its manufacturing more integrated.

ADDITIONAL CASE

TIGER SURGICAL SUPPLIES:
Pouncing on Doi Moi Opportunities in the Emerging Economy of Vietnam

Bordeaux Plastique Fabriquant, S.A., a French surgical supply company decided in 1994 to establish a production facility in Ho Chi Minh City, Vietnam. The company selected Vietnam as the sight for increased production capacity due to very low labor costs, and the possibility of exporting to Southeast Asian countries. Management of Bordeaux felt that Vietnamese workers would be very motivated and that labor problems would be nonexistent. Bordeaux also concluded that due to Vietnam’s desire to attract foreign capital, establishing a foreign subsidiary in this newly emerging economy would be easy and government relations with the company would be good. Unfortunately for Bordeaux, none of these assumptions would prove to be correct.

Vietnam

Located in South East Asia, Vietnam has attracted the attention of Western governments since at least the 19th Century. In 1858 the French colonized Vietnam. After internal fighting in an eight-year war, the French signed the Geneva Agreement in 1954 that lead to their withdrawal from the country and the division of Vietnam into the communist north and noncommunist south. The Geneva Agreement required elections to be held for unification, however, the government in the south refused the elections and proclaimed itself the Republic of Vietnam. During the late 1950’s conflict escalated between the north and south that led President Kennedy to send U.S. military advisors to Vietnam in 1961. In 1965 President Johnson sent military combat forces to Vietnam. The war in Vietnam escalated, and without a clear sign of victory the American public grew tired of the conflict. In 1973 a peace agreement was reached and the U.S. withdrew its military forces from Vietnam. Within two years the communist government from the north invaded the south and unified the country into the Socialist Republic of Vietnam. With its socialist economic system suffering, Vietnam instituted economic reforms in 1986 referred to a doi moi, indicating that the country was ready to move towards a market economy. With the liberalization of the economy, Vietnam began to experience rapid economic growth. Many Western companies raced into Vietnam due to its low labor costs and the belief that Vietnam was an untapped market. Although the government of Vietnam is still communist, the economy has become more capitalistic. The government, however, still maintains significant control over the economy and operates many state-owned enterprises. Government bureaucracy and corruption are often seen as impediments to further economic growth.

Early Difficulties with the Government

Philippe Desmarest, a ten-year veteran of Bordeaux was placed in charge of all governmental relations for the proposed joint venture. If successful, Philippe would become the chief operating officer of the new facility. Because he had successfully negotiated an international joint venture agreement with Mexican authorities a few years prior to this assignment, Philippe was considered by management to be the best candidate to negotiate with the Vietnamese. . Philippe made several trips to Hanoi to meet with governmental officials, including officials at the Ministry of Planning and Investment (MPI). He knew that it was critical that MPI officials agree to any foreign investment project so he was always well prepared for his meetings. Philippe prepared many reports that showed how a proposed joint venture between Bordeaux and a local partner would benefit Vietnam. Philippe was proposing that Bordeaux and its Vietnamese partner establish a joint venture called Tiger Surgical Supplies (TSS) and that the company produce surgical gloves, protective goggles, and fluid resistant gowns for export to Europe and Asia. If initial production were successful, Tiger would then expand production into other surgical supply areas. While Philippe was assured by his Vietnamese consultants, and by the joint venture partner, that Vietnam was very open to foreign investment, the meetings with the Vietnamese government did not always go smoothly. It appeared to Philippe that the government officials were often confused by what he was proposing, and that they also had some suspicions about the intentions of his company. When negotiations dragged on for months, Philippe became discouraged and decided to recommend to the top management of Bordeaux that the company begin looking for another country in which to locate the plant. When word of this action reached governmental officials at the Ministry of Planning and Investment, the necessary permits for the plant were approved immediately. Philippe decided that a tough approach in dealing with the Vietnamese was the most effective strategy.

A Slow Start Tiger Surgical Supply had purchased a building that was previously a state-owned enterprise. The facilities were in need of much repair, but Philippe felt that with the abundance of extremely low labor costs in Vietnam the building could be brought up to the necessary standards in a short time, and with little expense. After much more time than expected, and at a much greater expense than anticipated, Tiger Surgical Supply was ready for production in the spring of 1997. While the Vietnamese partner had helped with some governmental and construction contacts, the partner’s role in the venture was practically nonexistent. Philippe preferred this passive association. Philippe had selected Nguyen Tam Chien (a French citizen who left Vietnam as a child) to be the founding plant manager for the new joint venture. He had been educated in France and Belgium in economics, business administration, and management and spoke passable Vietnamese. In Vietnam, Chien was called a “Viet Kieu” or “overseas Vietnamese.” He belonged to a large group of Vietnamese who fled the country after the fall of Saigon fearing life under a communist government. Chien’s family first settled in the United States, but after a brief stay, relocated to France. Chien was now very interested in helping his former country achieve economic gains, and he welcomed the opportunity to help start a new business venture in the country. Although returning to Vietnam was a hardship, Chien felt a sense of responsibility to his former homeland. Both Philippe and Chien were surprised by the number of applications that were submitted in response to the advertisement for production positions. Many of the applicants were well educated, and it became difficult to select the few needed from the large mass of applications. Philippe delegated responsibility for employee selection to Chien, and with the help of his assistant, Pham Hi Thi, the two selected what they considered to be the best candidates. One of the criteria for selection was the lack of production experience. Chien felt that if he selected employees with previous experience in production that they would bring the bad habits that they learned under state controlled operations to TSS. He wanted to be able to train the new employees in Western work methods. Production got off to a slow start, and lagged far behind initial expectations. Philippe reasoned that it would take some time for the employees to gain an appreciation for new concepts like productivity and efficiency. Chien was not as patient and was constantly complaining to Thi about the lack of motivation he found among the workers. Chien, who was from what was formerly South Vietnam, blamed the communists for ruining the work ethic of the Vietnamese people. One of the habits that Chien found especially hard to accept was the practice of napping in the afternoon. Chien would find that at times the entire production process would be silent and everyone in the factory would be resting or napping for about an hour. Thi explained to Chien that it was customary in Vietnam to allow an afternoon nap. Although Chien did not see the reason for this practice, he relented with the understanding that employees would not be paid for the time they spent not working. Relations between Chien and many of the workers did not appear to be good. It was obvious to all that Chien often became frustrated with the workers and would openly express his disapproval. It appeared to Philippe that many of the workers did not appear to like Chien, and he wasn’t sure why. Chien was a very dedicated, conscientious, and serious manager, and he had made a personal sacrifice to return to Vietnam to help his former country. He expected much from his employees; however, he had a soft side as well and a true desire to make Vietnam a more prosperous country. Philippe thought that some of the ill will between Chien and the work force came from Chien’s early effort to fire some poor performing employees. Chien had selected 16 employees who consistently performed poorly and gave them one week to improve. Thi cautioned Chien on this move, however, Chien insisted. Without exception all the targeted employees showed no improvement and it was decided that all 16 employees would be fired. It was with great surprise that Chien learned that terminating employment in Vietnam was no simple matter, and that the workers could appeal the decision to the People’s Committee, which they did. The People’s Committee reinstated all the employees, much to the displeasure of Chien. While it was intended that TSS would be staffed by as many locals as possible, Philippe felt that there might be a need for additional expatriates to manage the operation. He considered recruiting managers from Thailand who could help bring a more “business” perspective to the supervision of TSS employees. Chien and Thi disagreed and convinced Philippe that it was important that the management of TSS be “homegrown” in order to gain favor with the Vietnamese government and to help develop a managerial class in Vietnam. Furthermore, they argued, having Vietnamese supervisors would provide incentive for operational level employees to work hard in the hope of gaining an internal promotion. While Philippe finally agreed, he worried that most Vietnamese had been trained in management under the communist system and that it was a very ineffective way of running an organization. He feared that France would soon begin to put pressure on him to improve operations.

Tigers, Horses, Monkeys With an urgent need for organizational efficiency, Philippe decided that TSS needed an incentive plan to increase worker motivation. He instructed Chien to develop a plan that he thought would work. Chien consulted Thi, who recommended against radical change, and recommended instead that wages be based on a piece-rate system. Chien thought that a more systematic approach was needed, and developed a program to revamp the organizational structure. Feeling that it was not practical to attempt to fire more workers, Chien created three different classes of employees. The highest class, the Tiger class would be paid the highest salary and be the only employees eligible for promotion. Tigers would wear red clothing and be given more privileges than the other classes of workers. The second-class employees, the Horses would be paid less than the Tigers, but more than the lowest class of employees, the Monkeys. The Horses would wear black clothing and be eligible for certain limited benefits. The Horse class was seen as average performers who, if they improved, could be placed in the highest class. The poorest performing employees would be placed in the Monkey class and would not be eligible for promotion or overtime assignments, nor any special benefits such as company sponsored dinners and entertainment. Monkeys would wear brown clothing and were expected to pay respect to all employees in the higher classes. Being in the lowest class was intended to punish and humiliate employees who were placed in that class. While the two lowest classes could advance, a general feeling existed that the Monkeys would never be able to move from their position. Philippe noticed that class membership tended to correlate with age, and that the Tigers were generally a younger group of employees. It was hoped that the very visible class structure would motivate employees to either improve or quit the company. The strong desire to save face would be a strong motivator, or so thought Chien. The employees, many of whom refused to wear the appropriate uniforms, immediately challenged the class system of employment. A particularly unpleasant event occurred shortly after the plan was announced. The body of a dead monkey was placed over the opening of the plant gate, wearing a brown shirt, and its face covered with an image resembling that of Chien. Continued tensions existed with the class system, and eventually it deteriorated to the point that the only differences among group members were pay and benefits. The system, with all its problems did; however, appear to raise overall efficiency of the operation. The Tigers who operated in teams were very productive, and many of the Horses were showing signs of improvement. The employees classified as Monkeys continued to perform poorly.

Expansion Plans With some of the initial problems resolved, Philippe was eager to expand production into other areas. The current facility could be expanded and additional workers hired to capitalize on the increased concern over the spreading of the AIDS virus in Asia and the subsequent increase in sales of prophylactics. While Bordeaux did not manufacturer prophylactics, Philippe felt that TSS was in a good position to expand the product line for the company. He suggested to his managers at Bordeaux that they consider expanding the production capacity of TSS. Bordeaux authorized a feasibility study of the market, and the report indicated that a low cost provider could gain a competitive advantage in the Southeast Asian market. With the favorable report Philippe was given the authority to begin expansion plans for TSS. Following the same course that he had followed in the initial approach to establishing the joint venture, Philippe contacted the Vietnamese government officials in Hanoi and informed them of the expansion plans. He felt that the officials would be delighted that TSS was increasing its investment in Vietnam and that the company would be increasing its employment. The Vietnamese officials, however, who appeared uninterested in the expansion plans, did not match his enthusiasm. Philippe was told that he would have to contact Tran Hung, a MPI official in Ho Chi Minh City who he was told may approve the expansion. Hung told Philippe that he had some concerns about the expansion of TSS. Through a translator he told Philippe that it seemed that TSS was “too French” and that the Vietnamese joint venture partner was exercising not enough influence. He recommended that Philippe consider an additional Vietnamese partner, maybe someone in government who could help him with the necessary connections that he would need to expand his facility. It was obvious to Philippe that Hung was suggesting that he be included in the investment. This was completely unacceptable to Philippe, and so he decided to consult Chien and Thi concerning his options. Chien felt that TSS should reject any involvement of government officials in the joint venture, and that Philippe should return to MPI and demand that the expansion plans be approved. Thi did not appear to agree with Chien, but she remained mostly silent. Chien reasoned that after all, it was the threat of withholding investment which was successful in securing the initial permits for the plant. Given the advice offered by Chien Philippe scheduled another appointment with Hung. On his arrival, Philippe was greeted with warm enthusiasm by Hung. Philippe thought that someone in a superior position to Hung must have instructed him to be more cooperative in matter of foreign investment. So it came as a great surprise to Philippe that Hung’s mood shifted dramatically when he was informed by Philippe that no government official would be involved in TSS, and that TSS expected the permission for expansion to be approved as soon as possible. Hung was noticeably upset and informed Philippe that he may be making a big mistake. Philippe informed Hung that the decision was final, and in a loud voice warned Hung that it was he who may be making a big mistake. Philippe threatened Hung with adverse action from his superiors in Hanoi if he didn’t do his part to gain approval for expansion. As Philippe left the office he looked back at Hung who was smoking a cigarette at his desk and smiling.

Cutting the Tall Poppy The following day began with some troubling news from the port from which TSS shipped its products for export. A delivery driver for TSS was phoning to tell Chien that the customs inspectors were not allowing any TSS product to be loaded for shipment. The driver refused to give a reason, and seemed to be confused as to why the action was being taken. Philippe immediately thought of Hung and proceeded to go to his office and confront him about the actions of the customs inspectors. Upon arriving at Hung’s office Philippe was informed that Hung was unavailable for the rest of the day. After three days had passed Philippe was finally able to schedule an appointment with Hung. Frustrated by the delay in seeing Hung, and frustrated by customs problems, Philippe in an angry manner accused Hung of interfering with the export shipments. Using a translator Hung denied any involvement. He did tell Philippe that he had heard that the customs inspectors were concerned about possible black market products leaving the country in TSS containers. Hung told Philippe that he could help him with the problem, and that it would only require the payment of an “inspection fee” of two dollars a container. Philippe felt that he had no choice but to agree to the fee since all of TSS’s exports were pilling up on the loading docks. He told Hung that the inspection fee would be paid, and that he needed Hung to instruct the customs agents to immediately clear the goods for shipment. Philippe returned to his office feeling exploited by the whole experience. His feelings of exploitation were increased when word came from the docks that the goods were still not being loaded. Philippe immediately called Hung who informed him that now the loaders were demanding a loading fee of one dollar a container. Philippe remain silent for a moment and then asked Hung why TSS was being singled out for these additional fees. Hung paused for a moment and then replied in English that “the tall poppies get cut first.” Not sure what he was implying, Philippe told Hung that TSS would pay the additional dollar fee to the loaders. It was at this point that Philippe was questioning his decision to promote Vietnam as a desirable location for a production facility. While the additional fees were small, Philippe didn’t like the idea of paying what essentially amounted to a bribe, and he wondered what else Hung had in mind to punish him for not agreeing to include him in the partnership expansion plans. Philippe wondered if the government would ever approve the expansion, and if he had made a mistake in recommending Vietnam as an investment location.

Sources

Buchel, B. and T. Lai Xuan. (2001). Measures of Joint Venture Performance from Multiple Perspectives: An Evaluation of Local and Foreign Managers in Vietnam. Asian Pacific Journal of Management, 18(1), 101-111.
Curry, J. and C. Nguyen. (1997). Passport Vietnam. San Rafael, CA: World Trade Press.
Prasso, S. (1999). Vietnam: Welcome Back? Business Week. August, 16.
Triandis, H., Carnevale, P., Gelfand, M., Robert, C., Wasti, D., Chen, X., Kim, U., Dreu, C., Vliert, E., Iwao, S., Ohbuchi, K., and P. Schmitz. (2001). Culture and Deception in Business Negotiations: A Multilevel Analysis. International Journal of Cross Cultural Management, 1(1), 73-90.
Venard, B. (1998). Vietnam in Mutation: Will it be the Next Tiger or a Future Jaguar? Asian pacific Journal of Management, 15(1), 77-95.
Webster, L. (1999). The New Breed. Vietnam Business Journal, 8(4), 1-8. www.state.gov/backgroundnotes/Vietnam. Accessed on June 8, 2002.

Instructors Note: This case can be useful in exploring the difficulties of international expansion into recently industrialized economies. While the prospects may appear to be great, frequently difficulties arise that were not planned. This case attempts to combine cultural dimensions into a look at a strategic choice that went badly. The case can be used equally well in the next chapter as well.

Student Stimulation

Group or Class Learning Activities

1. Visit LandsEnd.com, LandsEnd.de, and LandsEnd.jp. Based on an analysis of the three websites, assess the type of strategy used by Lands End. Is it a regionalization strategy or a globalization strategy? Why or Why not? Has Lands End successfully globalized itself?

2. SWOT Yourself: You have been interviewing for a position with a Fortune 100 company for a position in its international division. If you are successful in attaining the position, you will be given a career opportunity in the country of your choice. Prior to attending your final interviews, the company’s VP of Human Resources asks you to prepare a SWOT analysis on your career potential. Your SWOT analysis will be evaluated by the company based on two criteria: (1) whether you can envision the opportunities that exist in the international arena and whether you have acquired the strengths to meet those opportunities, and (2) the honesty/self-awareness you demonstrate by your assessment of your weaknesses. Each student should work on his or her SWOT analysis individually for 15 minutes. Following that time, the students will meet in small groups to discuss their self-assessment (students are allowed to keep certain information confidential should they so choose). Questions the students might ask each other include:

A. What do you see as the principal opportunities in a career in international business? B. What do you see as your principal strengths that will allow you to take advantage of these opportunities? C. Identify one or two skills that you feel you will need that you don’t already possess? What could you do over the next one or two years to develop those skills.

3. Extending the cola wars: Have your students work in teams on the Pepsi Venezuela case. Pepsi wants to send a one-page proposal that could be sent to every distributor offering them corporate and significant financial support in expanding their system. You have been hired as a consultant to Pepsi. They have asked you to advise them as to whether this is an effective strategy. Should they offer support to every distributor or should they target specific countries? If they target specific countries, what criteria should they use for country selection?

Additional Stimulation Discussion Questions

1. The text clearly states that opportunities will pass companies by unless they are willing to consider the international marketplace. Do you feel this may also be true for business people on a professional basis? That is, do business professionals who consider going into international careers have significant advantages over those who wish to remain only in their home nation?

2. Since strategic planning is no guarantee of corporate success, do you feel companies that strategically plan really have much of a competitive advantage over those that do not?

3. How are the missions and objectives of international firms likely to be more complicated and sophisticated than those of purely domestic firms? Look up the mission statements for several international firms and domestic firms. How do they compare?

4. What opportunities and threats will likely emerge when a firm decides to move from purely domestic operations to global operations?

5. Perform a brief SWOT analysis for your college or university in attracting students from the new market economies of Poland and Russia.

6. Describe the primary indicators that a firm's strategy is working.

7. The Swedish market already has two successful local car companies—Saab and Volvo. Volvo is now partially owned by Ford. What opportunities and threats might Ford have been responding to in making the decision to acquire Volvo?
8. As the Korean population is increasingly able to afford high priced items like cars, this market represents a desirable growth opportunity for Japanese, German, and American car makers. However, the Korean automobile market is dominated by Korean car manufacturers (Hyundai, Ssanyong, and Daewoo). Oftentimes such domination by a domestic manufacturer is blamed on trade barriers, but Korea’s tariffs are among the lowest in the world. Why then do most Koreans drive Korean-made cars? What entry strategy would be most appropriate for accessing this culturally-closed market?

9. Continue Question 8 by performing an environmental scan of the Korean automobile market. Be sure to include all the aspects of environmental scanning.

Experiential Exercise

COMPARATIVE STRATEGY

Purpose: The purpose of this exercise is to develop a better understanding of how organizational strategies differ in Asia, Europe, and the United States.

Procedure: Select one Annual Report from a company headquartered in Asia, Europe, and the United States. In other words, select one Asian, one European, and one American company and find Annual Reports from those companies. Annual Reports can often be downloaded from the company’s web site.

Read through the Annual Reports looking for strategic differences that you feel are culturally based. Differences may be found in the importance of market share, profitability, community responsibility, stakeholders, as well as the importance placed on immediate results. Differences in organizational mission and corporate values may also be found.

After doing the analysis, develop a report that highlights your observations.

CHAPTER 7

Global ALLIANCES AND STRATEGY IMPLEMENTATION

LECTURE OUTLINE

General Outline
Opening Profile: Spanish Companies Flex their Acquisition Muscles
Strategic Alliances
Global and Cross-Border Alliances: Motivations and Benefits
Challenges in Implementing Global Alliances
Guidelines for Successful Alliances Comparative Management in Focus: Joint Ventures in the Russian Federation
Strategic Implementation Managing Performance in International Joint Ventures Knowledge Management in International Joint Ventures Governmental Influence on Strategic Implementation Cultural Influences on Strategic Implementation Management Focus: Mittal’s Marriage to Arcelor Breaks the Marwari Rules
Chapter Discussion Questions
Application Exercises
Experiential Exercise
End-of-Chapter Case Study: Lenovo’s Global Expansion
Additional Case: Ste. Basil Hotel - Moscow
Student Stimulation Questions and Exercises

Opening Profile: Spanish Companies Flex their Acquisition Muscles

Long considered Europe’s sleepy corporate citizen, Spain has awoken and begun a shopping spree of European and American companies. Spanish companies completed deals worth $64.8 billion outside their borders in 2005. The adoption of the euro, a booming real estate market, and a cadre of internationally trained managers is responsible for this international acquisition spree.

Teaching Tip: Have students research the Spanish company Abertis and determine this firm’s competitiveness as a global company. The web site of the company is http://www.abertis.com/en/

I. Strategic Alliances

A. Strategic alliances are partnerships between two or more firms which decide they can better pursue their mutual goals by combining their resources—financial, managerial, technological—as well as their existing distinctive competitive advantages. Alliances—often called cooperative strategies—are transition mechanisms that propel the partners’ strategy forward in a turbulent environment faster than would be possible for each company alone. Alliances typically fall under one of four categories:

1. Joint Ventures: Two or more companies create an independent company. An example is the Nuumi corporation, created as a joint venture between Toyota and General Motors, which gave GM access to Toyota’s manufacturing expertise and provided Toyota with a manufacturing base in the U.S.

2. Equity strategic alliances: Two or more partners have different relative ownership shares (equity percentages) in the new venture—such as 25%, 25%, 50%—such as that between Chrysler and Mitsubishi Motors.

3. Nonequity strategic alliances: Agreements are carried out through contract rather than ownership sharing.

4. Global strategic alliances: Working partnerships were found between companies (often more than two) across national boundaries and increasingly across industries. Alliances are also sometimes formed between a company and a foreign government, or among companies and governments.

Teaching Tip: Students may not be aware of how prevalent strategic alliances have become. Ask students to go to different search engines and to see how many citations they can find from the prior year on global or international strategic alliances.

B. Alliances may comprise full global partnerships—often joint ventures—in which two or more companies, while retaining their national identity, develop a common, long-term strategy aimed at world leadership.

Global and Cross-Border Alliances: Motivations and Benefits

1. To avoid import barriers, licensing requirements and other protectionist legislation 2. To share the costs and risks of the research and development of new products and processes 3. To gain access to specific markets 4. To reduce political risk while making inroads into a new market 5. To gain rapid entry into a new or consolidating industry and to take advantage of synergies

D. Challenges in Implementing Global Alliances

1. In a highly competitive environment, alliances present a faster and less risky route to globalization. It is extremely complex to fashion such linkages, however, especially where many interconnecting systems are involved, forming intricate networks. Many alliances fail or end up in a takeover in which one partner swallows the other.

2. Often, the form of governance chosen for multinational firm alliances greatly influences their success, particularly in technologically-intense fields—pharmaceuticals, computers, and semiconductors. Cross-border partnerships, in particular, often become a “race to learn”—with the faster learner later dominating the alliance and rewriting its terms. In a real sense, an alliance becomes a new form of competition.

3. All too often, cross-border allies have difficulty in collaborating effectively, especially in competitively sensitive areas, creating mistrust and secrecy, which then undermine the purpose of the alliance. The difficulty that they are dealing with is the dual nature of strategic alliances—the benefits of cooperation versus the dangers of introducing new competition through sharing their knowledge and technological skills about their mutual product or the manufacturing process. Some of the trade-offs of the duality of cross-border ventures are shown in Exhibit 7-1.

Teaching Resource: Booz-Allen & Hamilton is one of the leading consulting firms on Alliance formation worldwide. The web page is at http://www.bah.com/index.shtml.

4. The enticing benefits of cross-border alliances often mask their many pitfalls. In addition to potential loss of technology and knowledge-skill base, other areas of incompatibility often arise, such as conflicting strategic goals and objectives, cultural clashes, and disputes over management and control systems.

E. Guidelines for Successful Alliances

1. Some basic guidelines, given below, serve to minimize potential problems, but nothing is as important as having a long “courtship” with the potential partner to establish compatibility strategically and interpersonally, and to set up a “pre-nuptial” plan with the prospective partner.

a. Choose a partner with compatible strategic goals and objectives and one with whom the alliance will result in synergies through the combined markets, technologies, and management cadre.

b. Seek alliances where complementary skills, products, and markets will result. If each partner brings distinctive skills and assets to the venture, there will be reduced potential for direct competition in end products and markets. In addition, each partner will begin the alliance in a balanced relationship.

c. Discuss with the partner how you will each deal with proprietary technology or competitively sensitive information—what will be shared and what will not, and how shared technology will be handled.

d. Recognize that most alliances last only a few years and will probably break up once a partner feels that it has incorporated the skills and information it needs to go it alone. With this in mind, you need to “learn thoroughly and rapidly about a partner’s technology and management: transfer valuable ideas and practices promptly into one’s own operations.”

Comparative Management in Focus: Joint Ventures in the Russian Federation

Foreign companies have experienced difficulty investing in Russia, and recent political moves have increased the level of anxiety of foreign investors. President Putin’s recent political action, especially in Russia’s energy sector, have raised doubts about the long-term viability of Russian investment. Difficulties with Russian international joint ventures, such as the one between General Motors Corporation and Russia’s biggest car maker, OAO Avtovaz have made some investors more careful and less likely to invest in the country. A survey of corporate investors and non-investors expressed major concerns about corruption and weak legislative and enforcement regimes. In spite of these concerns and difficulties, Russia offers a market of growing consumerism, and companies such as Coca-Cola, P&G, and Nestle have found Russia to one of the top growth markets. Established global companies such as Gillette have become accustomed to the political turmoil found in Russia and have stuck to their long-term strategy.

Success requires clearly defined goals, and any proposal must contain solutions to the systemic problems, such as the establishment of efficient supply channels and the repatriation of profits in hard currency.

The following are some suggestions for foreign companies to minimize the risk of doing business in Russia:

➢ Investigate weather a joint venture is the best strategy. ➢ Set up meetings with the appropriate ministry and regional authorities well in advance. ➢ Be sure to be totally above board in paying all relevant taxes to avoid crossing the Russian authorities ➢ Set up stricter controls and accountability systems than usual for the company. ➢ Communicate clearly up front that your firm does not pay bribes ➢ Assign the firm’s best available managers and delegate to them enough authority to act locally ➢ Take advantage of local knowledge by hiring appropriate Russian managers for the venture ➢ Designate considerable funds for local promotion and advertising so as to establish the corporate image with authorities and consumers

Joint ventures in Russia require a long-term financial and commercial commitment from the foreign partner, including the support of Western on-site personnel.

II. Strategic Implementation

Transformational outsourcing when properly implemented can produce gains in efficiency, productivity, quality, and profitability.

Advice on implementation

➢ Examine your reasons for outsourcing – make sure the reasons outweigh the disadvantages

➢ Evaluate the best outsourcing model – choose between your own subsidiary and contracting out the service. How important is control over proprietary technology and processes?

➢ Gain the cooperation of your management staff – open communication is essential to reduce fear, anxiety and uncertainty.

➢ Consult with your alliance partners – consult with the partners and treat them with respect.

➢ Invest in the alliance – plan to invest time and money in training for customer service and quality..

Managing Performance in International Joint Ventures

1. Much of the world’s international business activity involves international joint ventures (IJVs) in which at least one parent is headquartered outside the venture’s country of operation. IJVs require unique controls; ignoring these specific control requisites can limit the parent company’s ability to efficiently use its resources, coordinate its activities, and implement its strategy.

2. The term international joint venture (IJV) control can be defined, according to Schaan, as “the process through which a parent company ensures that the way a joint venture is managed conforms to its own interest.”

3. Most of a firm’s objectives can be achieved by careful attention to control features at the outset of the joint venture, such as the choice of a partner, the establishment of a strategic fit, and the design of the IJV organization. The most important single factor determining IJV success or failure is the choice of a partner.

4. The strategic context and the competitive environment of the proposed IJV and the parent firm will determine the relative importance of the criteria used to select a partner. IJV performance is also a function of the general fit between the international strategies of the parents, the IJV strategy, and the specific performance goals that the parents adopt.

Research has shown that to facilitate this fit the partner selection process must determine the specific task-related skills and resources needed from a partner, as well as the relative priority of those needs. To do this, managers must analyze their own firm and pinpoint any areas of weakness in task-related skills and resources that can be overcome with the help of the IJV partner.

5. Organizational design is another major mechanism for factoring in a means of control when an IJV is started. It is also crucial to consider beforehand the relative management roles each parent will play in the IJV, because such decisions result in varying levels of control for different parties.

6. International joint ventures are like a marriage—the more issues that can be settled before the merger, the less likely it will be to break up.

7. The choice of the IJV general manager, in particular, will influence the relative allocation of control because that person is responsible for running the IJV and for coordinating relationships with each of the parents.

8. Where ownership is divided among several partners, the parents are more likely to delegate the daily operations of the IJV to the local IJV management—a move that resolves many potential disputes. In addition, the increased autonomy of the IJV tends to reduce many common human resource problems: staffing friction, blocked communication, and blurred organizational culture, to name a few, which all result from the conflicting goals and working practices of the parent companies. Regardless of the number of parents, one way to avoid such potential problem situations is to provide special training to managers about the unique nature and problems of IJVs.

a. Various studies reveal three complementary and interdependent dimensions of IJV control: (1) the focus of IJV control—the scope of activities over which parents exercise control; (2) the extent, or degree, of IJV control achieved by the parents; and (3) the mechanisms of IJV control used by the parents. b. We can conclude from two research studies that parent companies tend to focus their efforts on a selected set of activities that they consider important to their strategic goals, rather than attempting to monitor all activities. c. The extent of control exercised over an IJV by its parent companies seems to be primarily determined by the decision-making autonomy the parents delegate to the IJV management. This is turn is largely dependent on staffing choices for the top IJV positions and thus on how much confidence the partners have in these managers.

9. Two pervasive influences on strategy implementation are government policy and culture. F. Knowledge Management in International Joint Ventures

Knowledge management is “the conscious and active management of creating, disseminating, evolving and applying knowledge to strategic ends.” Knowledge management consists of 1) transferring, 2) transforming, 3) harvesting knowledge for a competitive advantage. See Exhibit 7-2. Research shows that successful IJVs encouraged joint learning and coaching.

H. Government Influences on Strategic Implementation

1. There are many areas of influence by host governments on the strategic choice and implementation of foreign firms. The profitability of those firms is greatly influenced, for example, by the level of taxation in the host country and by any restrictions on profit repatriation. Also important influences are government policies on ownership by foreign firms, on labor union rules, on hiring and remuneration practices, on patent and copyright protection, and so on.

2. Unpredictable changes in governmental regulations can be a death knell to businesses operating abroad.

a. While this problem occurs in many countries, Russia and China are of special concern at the moment. Recent political changes in Russia and recent restrictions on foreign investment in China have produced greater uncertainty in those two countries.

b. Political change in itself can, of course, bring about sudden changes in strategic implementation of alliances with host country projects.

I. Cultural Influences on Strategic Implementation

1. Culture is one variable that is often overlooked when deciding on entry strategies and alliances, particularly when we perceive the target country to be familiar to us and similar to our own. However, cultural differences can have a subtle and often negative effect. Exhibit 7-3 shows differences between Hungarian managers and Western expatriates.

2. As Europe’s largest MNCs increase their business in the U.S., there is growing evidence that managing in the United States is not as easy as they anticipated it would be because of their perceived familiarity with the culture. Rosenzweig documents some reflections of European managers on their experiences of managing U.S. affiliates, as given below. Generally, he has found that European managers appreciate that Americans are pragmatic, open, forthright, and innovative. But they also say that the tendency of Americans to

be informal and individualistic means that their need for independence and autonomy on the job aggravates their relationship with the Europeans at or from the head office; Americans simply do not take well to directives from a foreign based headquarters.

3. The impact of cultural differences in management style and expectations is perhaps most noticeable and important when implementing international joint ventures. The complexity of a joint venture requires that managers from each party learn to compromise in order to create a compatible and productive working environment, particularly when operations are integrated. Cultural impacts on strategic implementation are often even more pronounced in the service sector, because of many added variables, especially the direct contact with the consumer.

Management Focus: Mittal’s Marriage to Arcelor Breaks the Marwari Rules

This management focus shows how culture may have an influence in strategic decision-making. The merger of India’s Mittal Steel and Luxembourg’s Arcelor has produced the largest steel company in the world. The merger had to overcome two problems: one strategic and the other cultural. On the strategic front, Lakshmi Mittal, Mittal’s founder had to fight off a Russian company for control of Arcelor. On the cultural front, the merger goes against an Indian ethnic rule of family ownership. Lakshmi Mittal belongs to an ethnic group called Marwari that has traditionally believed that companies should be family owned and managed. Mittal has rejected this tradition and stated : We have to put behind our family interest for the interest of the industry and the shareholders at large.” Through the merger Mittal will give up half of his 90% ownership in Mittal Steel.

I. E-Commerce Impact on Strategy Implementation

1. Many firms decide to implement global e-commerce strategy by outsourcing the necessary tasks to companies that specialize in providing the necessary technology to organize transactions and follow through with the regulatory requirements. These specialists are called e-commerce enablers. They help companies sort through different taxes, duties, language translations, etc. These services allow small and medium-sized companies to go global without the internal capabilities to carry out global e-commerce functions. One such e-commerce enabler, Nextlinx, is the Management Focus.

Chapter Discussion Questions

1. Discuss the reasons that companies embark on cross-border strategic alliances. What

other motivations may prompt such alliances?

The text notes five motives for cross border alliances: 1) to avoid import barriers, licensing requirements and other protectionist legislation; 2) to share the costs and risks of the research and development of new products and processes; 3) to gain access to specific markets; 4) to reduce political risk while making inroads into a new market; and, 5) to gain rapid entry into a new or consolidating industry, and to take advantage of synergies. Each firm is faced with its own environmental conditions and this may prompt a strategic alliance for other reasons. The GM-Toyota strategic alliance resulting in NUMMI was motivated in part by the desire of each firm to learn. GM wanted to learn about the Toyota production process, and Toyota wanted to learn about American labor relations.

2. Why are there an increasing number of mergers with companies in different industries? Give some examples. What industry do you think will be the next for global consolidation?

There are a variety of reasons. In some cases, companies in different industries still can share resources in ways that create operating synergies. In other cases, companies can capitalize on the intangible resources of its new partner—resources like brand names and proprietary processes. Sometimes cross border mergers and acquisitions accompany the deregulation of industry, as it did in telecoms. If so, a likely candidate will be insurance, financial services and banking, all of which are undergoing substantial deregulation in world markets.

3. Discuss the problems inherent in developing a cooperative alliance in order to enhance competitive advantage while incurring the risk of developing a new competitor.

Technology transfer is inevitable in alliance relationship. An alliance partner can quickly learn all it needs to know about a new technology from its partner. Once that happens, it no longer needs its partner in order to conduct business. In essence, the first of the partners to fully learn the other’s technology or business practices obsoletes the venture. The text calls this the “race to learn.” In order to reduce this risk, firms sometimes “rope-off” certain sensitive areas from their partners. A strategic alliance is a difficult concept in some ways – cooperating with a competitor – and this may requires particular action to avoid strengthening the position of the competitor. In the end of chapter case on Lenovo, IBM will need to make sure that the association they maintain with this Chinese company does not compromise proprietary knowledge which is IBM’s competitive advantage.

4. What are the common sources of incompatibility in cross-border alliances? What can be done in order to minimize them?

Differences in culture can cause differences in objectives, leadership style, strategy, governance, control and compensation among other issues. There can also be regulatory differences in the host country that preclude operating the business in the traditional style. Minimizing these difficult areas requires attention paid up front to the problem areas. If the problems are anticipated, it is more likely that they can be resolved in an easier and less costly fashion.
5. Explain what is necessary for companies to successfully implement a global sourcing strategy.

Global sourcing isn’t just about finding lower paid workers. In order to fully benefit from a global sourcing strategy a firm must seek to develop into “transformational outsourcing” in which motives for sourcing are examined and acted on. Some recommendations include: examining your reasons for outsourcing, evaluating the best sourcing model, gaining the cooperation of your management staff, consulting with alliance partners, and investing in the alliance.

6. Discuss the political and economic situation in the Russia Federation with your class. What has changed since this writing? What are the implications for foreign companies to start a joint venture there now?

This area is still struggling to establish a modern market economy and achieve strong economic growth. The economic picture in 2007 is much brighter with a surging trade surplus fueled by rising world oil prices. The arrest of the Yukos CEO, and the political strong-arm tactics of Mr. Putin however, have caused many MNCs to remain cautious. It appears that Russia is feeling the power that its energy resources have given her and is once again threatening parts of the world. The current political and economic climate of Russia makes foreign investment not too desirable, with the possible exception of the energy sector.

7. What is involved in strategic implementation? What is meant by “creating a system of fits’” with the strategic plan?

In order for a strategy to work effectively, there must be a good fit between the company’s structure, systems, and operating processes. This process becomes more complex in an international setting precisely because the fit factors are subject to more cultural and environmental diversity. Further, the cross-cultural communication process discussed in the previous chapters indicates that the feedback needed for strategic adjustments will be more difficult to comprehend. Strategic control procedures, which constitute a continuous process, provide feedback to enable managers to reevaluate strategy so that the company can update and recycle its plans accordingly.

8. Explain how the host government may affect strategic implementation—in an alliance or another form of entry strategy.

There are many areas of influence by host governments on the strategic choice and implementation of foreign firms. The profitability of those firms is greatly influenced, for example, by the level of taxation in the host country and by any restrictions on profit repatriation. Also important influences are government policies on ownership by foreign firms, on labor union rules, on hiring and remuneration practices, on patent and copyright protection. Further, unpredictable changes in governmental regulations can increase the risk of failure in a venture.
9. How might the variable of national culture affect strategic implementation? Use the Mittal Steel example to highlight some of these factors.

National culture influences everything, including strategy implementation. As we have learned from the work of Hofstede and others, management theory and practices do not always travel well across national cultures. Strategy implementation involves managerial practices and human relations. Different approaches to “people management” are needed in different cultures. In the case of Mittal Steel, the issue involved the cultural norms of a particular ethnic group in which the preference was to maintain family ownership of businesses. This concept ran counter to global expansion and the founder, Mr. Mittal decided to attempt to break with these cultural values.

10. Discuss the importance of knowledge management in IVJs and what can be done to enhance effectiveness of that process.

Knowledge management in international joint ventures is critical, especially as we enter a more knowledge-based global economy. The alliance allows for the transfer of knowledge in order to make both firms in the partnership stronger. In order to capitalize on this benefit it is important to overcome cultural differences that may arise. There are essentially three processes which occur in knowledge management of IVJs: transfer, transformation, and harvesting. Successful firms in this area have the personal involvement of the major principles of the parent company and encourage joint learning and sharing.

Application Exercises

1. There are a number of useful Internet sources to help with this exercise. The following links will provide supplemental material useful to guiding students in this application exercise.

Successful Strategies to Russian IVJs: http://www.findarticles.com/p/articles/mi_m1038/is_n6_v38/ai_17743180

Russian Energy IVJ Problems: http://www.forbes.com/markets/2007/02/16/bp-russia-energy-markets-equity_cn_0216markets11.html

Gateway to Russia – Joint Ventures: http://www.gateway2russia.com/st/state_r88.php

2. In the opening profile a number of Spanish acquisitions were mentioned. Since this application exercise is time sensitive it may be useful to encourage students to conduct a Google search, or to use the article retrieval services available at their local universities. Additionally, the following corporate webs sites may be helpful.

Grupo Ferrovial: http://www.ferrovial.com/index.asp

Abertis Infraestructuras: http://www.abertis.com/en/

Telefonica: http://www.telefonica.com/home_eng.shtml

Experiential Exercise

In doing this experiential exercise it is helpful to refer to the Guidelines for Successful Alliances section in the text. The different scenarios can be evaluated relative to the following four guidelines: 1) choose a partner with compatible goals and objectives; 2) seek alliances where complementary skill, product, or markets result; 3) work on how to deal with sensitive information and proprietary technology; 4) recognize that most alliances only last a few years.

1. In your opinion, which one of these scenarios should lead to a long-term successful international partnering relationship? Based on what criteria?

The determination of likely success or failure of each of the three scenarios is somewhat subjective, however, the exercise gives students the opportunity to explore important success factors. In Scenario 1, the companies have compatible cultures and it is unlikely that cultural difficulties will arise. On the other hand, the fact that it appears that top management is actively involved in the venture may reduce its chance for success. In scenario 2, it is unclear what the Israeli partner brings to the alliance. If it is a need skill in software development it may be a fruitful venture. In scenario 3, the alliance suffers from the problem of stability in governmental action. On the other hand, the blending of cable and telephone services may provide some complementary skills.

While there is no correct answer to this question, it appears that perhaps, Scenario 1 may be the most successful, at least in the short-run. Both are experienced companies and it is assumed can bring needed skills to the alliance.

2. In your opinion, which of these scenarios has the least chance of leading to a long-term, successful partnering relationship? Why?

Perhaps Scenario 3 has the least likely chance of success. It is unclear what skills are brought by the Israeli partner and the investment in the enterprise is small. All three cases have potential difficulties, however, the second scenario seems the most likely to fail.

End-of-Chapter Case: Lenovo’s Global Expansion

1. Discuss in depth the reasons for this alliance, from the perspective of both Lenovo and IBM.

Lenovo felt that it needed to establish itself in overseas markets. The Lenovo brand did not have recognition in the major markets of the world and the company was experiencing increased pressure from competitors such as Dell. IBM’s PC division had been a money losing business for many years and the company needed to focus on more profitable segments of the industry. The PC business had become somewhat of a commodity business and IBM’s core competency in the higher-end segment of the industry. The sale of the division to Lenovo made good sense for both parties.

2. What were the industry conditions that made the deal enticing in 2004 when it was not so in 2001?

After Lenovo rejected the IBM offer in 2001, IBM began to reduce costs and make the PC division more attractive. Lenovo experienced increasing competitive pressure from foreign manufacturers after China’s entry into the World Trade Organization (WTO). Both of these conditions made the previously rejected offer more attractive in 2004.

3. What is the track record of Chinese companies going global by acquiring foreign companies?

There has not been a long history in which to determine the success of Chinese acquisitions of foreign firms, especially American firms. The Chinese have made significant acquisitions in recent years and it is expected that this trend will continue. In some cases these acquisitions have been met with resistance, such as in the case of the National Offshore Oil Corporation (Chinese) and its attempt to buy Unocal. In many cases, Chinese firms have acquired American companies that were experiencing financial difficulty such as Huffy. Comparing Chinese with American ownership in these cases is difficult, especially looking at results in the short-term. In the short-term it appears that the Chinese have done reasonably well in their acquisitions.

4. Follow up on the results for Lenovo at the time of your reading of this case. Present your finds to the class.

One source for students to gather information to answer this question is the web site of Lenovo: www.lenovo.com. Additional sources can be found at www.Hoovers.com and the business news services provided by their university libraries. At the time of the writing of the Instructor’s Manual it appeared that Lenovo was doing reasonably well, profits have fallen and the firm is still struggling to establish itself globally. The ability to leverage the IBM purchase may take some time.

Additional Case

Ste. Basil Hotel Moscow: Struggling with Cultural Value in a Post-Communist State

It was a typical October day in Moscow as Greg Hill looked out the window of his office in the Ste. Basil Hotel. As he saw the snow begin to fall he realized that it was going to be a very long, cold winter in Russia and he longed for the sunshine and warmth of his previous assignment in Miami Beach. While the move to Moscow had been a difficult experience, he and his wife had adjusted reasonably well, and Greg felt that the move would position him for advancement in his American company. He felt that the hardship of living in Russia would be offset by advancement opportunity, however, he was now very concerned with about his future. A deeply religious man, Greg began to pray for a solution to his problems.

The Ste. Basil Hotel

The Ste. Basil Hotel of Moscow is a 4-star hotel located in Red Square. The idea for a luxury hotel was conceived by Louis Cunningham, who was the CEO of LCC Properties. LCC owned a number of luxurious hotel properties in the United States, Canada, South America, and Japan. Cunningham developed the idea for a luxury hotel after a visit to Russia in 1994 in which he and his wife toured the former communist state. Cunningham noticed that the quality of hotels in the country was poor, most being old Soviet style in appearance and operations. Cunningham knew that a number of American and European businesspeople were traveling to Russia, and that an opportunity existed for a hotel that matched the level of quality found in the West. On subsequent visits Cunningham spotted an abandoned construction site near St. Basil Cathedral and decided that it would be a prime location for a luxury hotel. The site was owned by the Russian government who agreed to provide the site if LCC would invest the necessary $50 million to develop it into a 4-star property. The Russian government also insisted that LCC create a partnership with the state-owned airline that would take 51% ownership of the operation. Although Cunningham didn’t like the idea of minority interest in the project, he was excited about the location, and even more excited about the prospect of being a pioneering capitalist in a former Communist country. With the fall of the Soviet Union in 1991, Western business began to take in interest in the former Communist state. The reform movement begun by Mikhail Gorbachev would eventually result in the collapse of the Soviet Union, and the satellite states would gain their independence. The early reform movement of glasnost or “openness” resulted in the lifting of censorship, the release of dissidents, and greater tolerance for religious freedom. Glasnost was followed by perestroika or “restructuring” in which the economy was decentralized and privatized. Military spending was cut and free elections were held. As the former Communist superpower turned towards capitalism Western businesses looked for opportunities.

A Luxury Hotel in Moscow Louis Cunningham was one of those seeking this new opportunity. Although Cunningham was extremely excited about the project and had a particular interest in seeing a capitalistic spirit come to Russia, he was forced to delegate most responsibilities for the new venture due to the failing health of his wife. The new hotel was named the Ste. Basil due to its proximity to St. Basil Cathedral. Cunningham chose the abbreviation “Ste.” because he thought it would “add class” and provide the luxury image the hotel sought to project. Cunningham selected Greg Hill to be the general manager of the new hotel and to oversee completion of the construction of the facility. Greg Hill was a 47-year-old general manager of a luxury hotel in Miami Beach, Florida. He had worked for LCC since graduating from a small college in the Midwest with a degree in hospitality administration. Hill and his wife who were raised in St. Louis, Missouri had moved a number of times as Greg gained increasingly responsible positions with LCC. With their two children away at college, the Hill’s felt that moving abroad would be less difficult than it had been when the children were younger. They did enjoy living in Miami and hoped to retire to south Florida at a later date. The opportunity to build and manage a new hotel in a former communist country was an offer that Greg felt he could not turn down. He felt that success in this project could move him into the ranks of upper management at LCC. Mrs. Hill was a teacher in Miami and enjoyed other cultures. She looked forward to living in a foreign country, and in fact often felt that moving to Miami was like living in a different country. The Hill’s were friendly people, and although not considered worldly, they were open to new experiences and adjusted to new situations well. The move to Moscow and the completion of the hotel’s construction provided many unforeseen difficulties, but the Russian partners were helpful in overcoming most obstacles. Greg Hill developed the Ste. Basil into a fine hotel. The hotel stood out in great contrast to the poorly equipped and managed hotels which were remnants of the Soviet era. The Ste. Basil provided its guests with an outstanding restaurant and café, an indoor pool, an exercise facility, a dry cleaning service, satellite television, modem/data portals, conference rooms, currency exchange, a gift shop, and concierge services. The rooms were clean, modern, and spacious. The hotel catered to foreign businesspeople from the United States and Europe and was one of the highest priced hotels in Moscow. Rack room rates ranged from $215-450US per night. Conference facilities could also be rented and the hotel provided a catering service to conference participants. With increasing business between Russia and the West it was felt that the Ste. Basil would be the obvious choice among business travelers.

Recruitment of Employees

The Ste. Basil would have to fill all positions, with the exception of general manager, with local labor. Since Greg Hill was the only American expatriate, he felt that he should be actively involved in the recruitment and selection process. With the help of his Russian partners, Hill placed an advertisement in the Moscow Times for all hotel positions. The advertisement was in English since it had been decided that all employees should be proficient in the English language. Response to the advertisement was overwhelming. Thousands of people arrived to apply for the positions. Many of the people who sought employment at the Ste. Basil were educated beyond job requirements. The Ste. Basil received applications from scientists, attorneys, doctors, professors, writers, as well as recent university graduates. Greg was told that the applicants could make much more money working for an American company than continuing in their present professions. Greg was assisted in applicant screening by his assistant general manager. Victor Popov was appointed by the Russian partners to act not only as the assistant general manager, but also to help Greg with his assimilation and understanding of Russian culture. Victor had a one time been employed in the airline industry as an engineer. He held degrees in engineering, including a master’s degree in radio engineering from the St. Petersburg Electrotechnical University. Victor’s great grandfather had been a pioneer in the development of radio and the family name was well respected in Russia. Victor spoke fluent English and German, in addition to his native Russian. His hotel experience was limited to a short assignment in an East German hotel, and it was never clear to Greg what his responsibilities were in that assignment. Greg and Victor went through each application and began eliminating individuals who were clearly not qualified. Anyone who had previous hotel experience was eliminated from further consideration. It was felt that these employees had acquired bad habits working for state-owned hotels and it would be very difficult to retrain them. The only exceptions would be for critical positions such as chef which required previous experience. Victor strongly suggested that older applicants (over 35 years of age) should also not be selected. Greg was not sure about this request, but he deferred to Victor’s judgment. Greg, however, refused to follow Victor’s advice and eliminate all female applicants with small children. Greg did eliminated anyone who had an advanced degree such as an attorney, scientist, or physician, feeling that such a person would become quickly dissatisfied with the position. After the initial screening applicants were invited for an interview. This proved difficult since many of the applicants did not have a telephone and could not be reached except by mail. Greg decided to eliminate those candidates since the applicant pool was more than sufficient. When word got out that the hotel was interviewing, some of the applicants without telephones walked in and requested interviews. Victor granted some of these applicants interview appointments. The interviewing and selection process took two weeks and included structured and unstructured questions, questions asking applicants to provide their recommendations to hypothetical problems they might experience on the job, a written test of English ability, and a short intelligence test (in English). For the most part Greg was discouraged by the responses of the applicants, especially the responses to the unstructured and situational questions. Many of the applicants proved very short answers or were unable to answer at all. These applicants were eliminated from further consideration. In the end, however, Greg and Victor were able to assemble a workforce which both felt would be satisfactory.

Orientation and Training

A mandatory three-day orientation session was conducted for all employees. The orientation program provided employees with information on LCC Enterprises such as its history and mission, basic training on the importance of customer service, grooming, manners, and company policy. After the three-day orientation program, specific job training was provided. Greg was assisted at this point by a team of six expatriates from LCC who were brought in for the short-term training assignment. Greg had expected that the employees would be very motivated to learn their jobs since their compensation was considerably more than most had previously received in their careers in Russia, and working at a luxury American hotel provided a degree of status. He was disappointed by the responses to the training program. Many of the new employees seemed more interested in asking about compensation, benefits, and how the hotel would benefit them, than specific questions concerning their responsibilities. Greg noticed some of the employees dozing off during the orientation program. In addition, Greg was discouraged by the reactions he received from some of the employees to a gift the hotel gave on the first day of orientation. The hotel provided, as a welcoming gift to each employee, a large basket of toiletries wrapped with a large red ribbon. Some of the employees wanted two or three of the baskets and some asked for money instead. Although this disappointed Greg, many employees appeared grateful for the opportunity to work and seemed motivated to do a good job. Greg was pleased that with the exception of two people, all employees were able to successfully complete their job specific training. With the employees selected and trained, the Ste. Basil Hotel was ready to begin welcoming guests.

A Slow Start

During the first few weeks of operation Greg spent most of his time with external relations. He was busy dealing with suppliers, government officials, and travel industry representatives. Greg delegated much of the day-to-day operations to Victor who would consult with him if a problem arose which he could not handle. Occupancy was very low, as expected, yet the restaurant and café did a brisk business from the start. The low level of occupancy was somewhat beneficial in that it allowed the staff time to continue to learn their duties on-the-job. The American trainers had returned home, and with Greg busy with other matters, Victor made decisions and answered questions from the staff. Although Greg did not have much contact with many of the employees during this time he did notice that in general the employees did not seem to present the warm, hospitable atmosphere that the hotel sought. The employees infrequently smiled and often seemed to be in a bad mood. Greg mentioned this point to Victor who told him that it was “the Russian nature,” but that he would ask the employees to try harder. Greg decided that while he was too busy to intervene, he would try to “catch someone doing it right” and reward him or her with positive reinforcement. On several occasions when he found an employee smiling or presenting the proper attitude he would give them an O.K. sign (thumb and forefinger closed in a circle) as a show of approval. Much to his surprise this provoked a negative reaction in the employees. Greg was also surprised by the frequent use of the Russian word “nyet,” in fact, it seemed to Greg that the “no” word was almost an automatic response to any request.

Trouble with Victor

As time went on Greg was able to devote more of his attention to internal operations. He was beginning to become concerned about Victor’s approach with employees. While Victor was a handsome and confident man, and appeared to be well liked by the hotel’s customers, his approach to employee relations was unattractive. In one particular case a desk clerk was fired in a loud outburst that occurred in front of several guests. It was particularly troubling in that the clerk, Svetlana was a particular favorite of Greg. Svetlana was a divorced mother of two young girls who had been struggling to provide the sole support for her family after her husband left the family. Svetlana was a devout member of the Russian Orthodox Church and Greg considered her to be an honest, conscientious, and faithful employee. Victor informed Greg that he had terminated her for excessive time off. Victor explained that Svetlana had asked for two days off to care for one of her children who was sick and she did not return to work for a week. Victor explained that he had assumed that she had quit, and so he was surprised to see her behind the front desk working. Her attitude was poor according to Victor and she insulted him, and he lost his temper and fired her in front of all parties present. As Greg probed further he was told by Victor that there is an old Russian proverb – “A dog is wiser than a woman. It never barks at its master.” It was clear to Greg that Victor had a low opinion of women and that he was engaging in behavior which was inconsistent with LCC company policy. Greg informed Victor that he was going to contact Svetlana and hear her side of the story. With some difficulty Greg was finally able to contact Svetlana and he asked her to come in to the hotel to discuss the matter. Svetlana told Greg that she did request two days off but that her other child had also become ill and she needed to care for her too. She was fearful to let Victor know that she would not be able to come in for the additional days. Greg was sympathetic and told her that he would reinstate her. When Victor was told of Greg’s decision he just shook his head and said “nyekulturny” and walked away. Greg was not sure what this meant but he was sure it wasn’t favorable. Greg decided that all decisions concerning employee discipline would first have to be approved by him and he issued a memo stating the policy. Victor took the memo very seriously and proceeded to consult Greg on all personnel matters. He did seem genuine in his actions (although Greg was not completely sure of this) but the constant requests for Greg’s approval became a nuisance. Additional difficulties continued to arise with Victor. It concerned Greg that Victor began spending a lot of time in the hotel restaurant with a small group of Russian men. They didn’t appear to ever eat a meal, they only smoked and drank vodka and gave disapproving stares at anyone who came near them. The group appeared to Greg to be a bit rough and not the type of clientele that the hotel sought to attract. After a few weeks Greg decided that it was time to investigate. He began by checking into the amount of money the group was spending in the restaurant and was he shocked to discover that Victor was providing the drinks free of charge to the group. When questioned about this Victor replied that these men were important to the success of the hotel and that the money spent on their drinks was money well spent. Greg was confused by the response and continued to ask about the men. Victor finally stated in a firm tone – “Trust me General Manager, I know what I am doing.” Greg felt that he had better let the issue go for now but that he should keep an eye on the situation.

Attempt at Improvement in Customer Service

With the issues concerning Victor still in his mind, Greg decided that he must begin to address the issue of customer service, and he would probably need to do it without Victor’s assistance. Although business was beginning to increase, customer feedback was indicated that many guests felt that the hotel staff was not on par with what was expected from a 4-star hotel. Guests commented that the staff was “unhelpful,” “uncaring,” “cold,” and “went out of their way to avoid work.” These frequent comments were an embarrassment to Greg and LCC properties so he decided that he should ask for help from the corporate staff to bring the hotel up to standard. With the arrival of two customer service trainers from the United States an ambitious training program was instituted. Every employee including supervisory staff, would be required to complete 20 hours of additional training. The trainers repeated the initial training in guest relations which the employees had experienced when they were first hired, and additional training was conducted in handling problem guests and seeking continuous improvement in customer relations. An incentive program was designed by the trainers in which each guest would be given a card in which they could recommend an employee for recognition for their good service. At the end of each week the hotel would reward the employee who had accumulated the most recommendations with a certificate for a free meal for two in the hotel restaurant. In addition, the employee would have their picture placed at the front desk with the caption “Employee of the Week.” In the next few weeks it did appear that customer service was improving, however, Greg worried that the improvement might be short-lived and that the Ste. Basil would not be able to match the level of service found in other LCC properties. He had heard that some of the employees resented the competitive nature of the incentive.

A Visit by the Krysha

During the following months business improved at the Ste. Basil. As Greg was in his office reviewing the hotel’s revenues and expenses for the past six months a smile grew on his face. While there were still problems with customer service, employee punctuality, and employees showing initiative, Greg felt that LCC would be pleased with the operating results of the hotel. The hotel continued to show strong gains in occupancy. The restaurant and café were doing well, but the conference facilities were still underutilized in Greg’s opinion. Greg’s thoughts were interrupted by a knock on the door. Victor entered and asked if he could speak with him for a moment about a “very important matter.” Greg welcomed Victor in and was surprised to see that Victor was not alone. Behind him were four men that Greg had seen previously in the hotel’s restaurant with Victor. Greg introduced himself and the men remained silent. Victor seemed very uncomfortable as he explained that the men had requested that the hotel hire them for their services. Greg was not sure what Victor meant, but he was developing an uneasy feeling that something was wrong. Victor explained that the men were needed for “security purposes.” Greg realized that Victor did not mean to imply that they were asking for security guard positions and so he asked that the men please step outside the office for a moment. As they did Victor began to explain that the men were members of the Russian mafia and that they wanted protection money. Victor explained that it was quite common in Russia to pay for such a service, but Greg was adamant in his refusal to pay. Greg berated Victor for even bringing the men into his office and questioned why he was meeting with them in the hotel restaurant. Victor stated that he was protecting Greg and the hotel from problems, and that Greg should consider the fact that an American was recently murdered in Moscow by the Russian mafia. Greg told Victor to leave the office and to inform the men that the Ste. Basil did not need their services.

The Russian Cold

As Victor left the office the Greg’s telephone rang. It was Dmitry Puzankov, attorney for the Russian partners. Dmitry explained to Greg that the partners wanted to meet with him to discuss some contract matters. When pressed for an explanation Dmitry explained that the partners wanted to renegotiate the profit distribution of the agreement and some “other changes” including their request that Victor be made “Executive General Manager.” Upon ending the conversation with Dmitry, Greg telephoned down to the front desk as he wanted to meet with Svetlana and he knew that she was scheduled to be working. Greg had come to rely on Svetlana for advice on Russian culture. He was informed that Svetlana had not reported to work due to the illness of one of her children. As Greg watched the snow fall upon the Moscow streets below he wondered about the security of his present position, the personal safety of himself and his wife, and his future with LCC Properties. It seemed to Greg that the temperature of his office had suddenly dropped as a cold chill ran throughout his body.

Sources
Crane, R. (2000). European Business Culture. Harlow, England: Financial Times/Prentice Hall.
Fader, K. (1998). Russia. San Diego, CA: Lucent Books.
Gesteland, R. (1999). Cross-Cultural Business Behavior. Copenhagen: Copenhagen Business School Press.
Mitchell, C. (1998). Passport Russia. San Rafael, CA: World Trade Press.
Morrison, T., Conaway W., and G. Borden. (1994). Kiss, Bow, or Shake Hands. Holbrook, MA: Adams Media.
Munro, R. (2002). Moscow’s Top Hotels Greet the Good Times. The Moscow Times, May 21.
Newman, P. (1997). Economic Terrorism in a Moscow Hotel. Macleans, October 27.
Sears, W. and A. Tamulionyte-Lentz. (2001). Succeeding in Central and Eastern Europe. Woburn, MA: Butterworth-Heinemann.
Smith, B. (1994). The Collaspe of the Soviet Union. San Diego, CA: Lucent Press.
Torchinsky, O. (1997). Cultures of the World: Russia. New York: Marshall Cavendish.

Instructor’s Note: This is a fictional case that can be used to point out some of the difficulties still found in Russian international joint ventures. The case examines problems of corruption, employee motivation, and ownership control. The case could also be used in Chapter 9.

Student Stimulation

Group or Class Learning Activities

1. Alliances—Survivor Style: Ask students to think about the past Survivor episodes. That series often emphasizes the importance of “strategic alliances.” Ask students to think about the following questions: a. How are the alliances formed on Survivor? b. Are they successful? c. Once formed, do the alliances tend to stay in place or are new alliances formed which negate the past ones? d. Do the guidelines for successful alliances presented in the text apply for Survivor alliances? e. What is the role of trust in the success of such alliances?

2. Joint venture negotiation: Divide the class into an even number of teams assigning them to either Group A or Group B. The teams will meet separately for about 15-20 minutes to prepare for a negotiation. The teams will be asked to negotiate a joint venture that they feel will be favorable to them. Each team will be given a negotiating position. Do not let the teams see the other position’s statements. The teams should be given the following information:

Group A: You are a high tech software firm. The competition in your home country is too great for you to meet your sales and profit goals. You have wisely decided to internationalize. You are looking for a venture partner that understands the commercial construction industry (building of large buildings). You have a standard software package you feel can be customized to the construction market. You are hoping a foreign group with experience in the construction services area would benefit from developing the package with you. You feel once you have the knowledge of the construction industry, you can do without a partner. You feel it will take 3-5 years to learn the industry.

Group B: You are a construction services company in Bombay, India. You have been in the industry for ten years. Your region has an abundance of well-educated software professionals, many with graduate degrees. You are hoping to find a U.S. software firm that wants to expand into the Indian construction market. Your long-term goal is to develop a construction software package that you can market on your own without a partner. You feel it will take 3-4 years to learn this technology from a potential partner.

Directions: After the firms have developed their strategy, have them negotiate an agreement (15-20 minutes). After they are done, have the Group A team leaders from each team describe what their goal was in the negotiation (ask group B to remain silent). Then have Group B describe what they thought Group A’s goal was. Then reverse the process and have Group B describe its own goals, etc. Debrief the class by asking them the following questions: 1. How would you define the success of this venture? 2. Which group is most likely to be disappointed? 3. Could you restructure the venture so that both sides could be successful? 4. Did either side have the right partner?

Chapter 9

Staffing, Training, and Compensation for

Global Operations

LECTURE OUTLINE

General Outline
Opening Profile: Training: The “Toyota Way” is Translated for a New Generation of Foreign Managers
Staffing Philosophies for Global Operations
Managing Expatriates
Training and Development Management Focus: Citibank Gives Advice on Career Training
Cross Cultural Training Management Focus: Success! Starbucks’ Java Style Helps Recruit, Train, and Retain Local Managers in Beijing
Compensating Expatriates
Compensating Host-Country Nationals Comparative Management in Focus: IHRM Practices in Australia, Canada, China, Indonesia, Japan, Latin America, South Korea, Taiwan,, and the United States
Application Exercises
Experiential Exercises
Chapter Discussion Questions
End-of-Chapter Case Study: Fred Bailey in Japan: An Innocent Abroad
Additional Case: Polska Pipeworks
Student Stimulation Questions and Exercises
Additional Experiential Exercise: Which Expatriate to Select?
Additional Experiential Exercise: Designing an Expatriate Compensation Package

Opening Profile: Training: The “Toyota Way” is Translated for a New Generation of Foreign managers

Training and corporate values use to be transmitted to employees through word of mouth. Now that Toyota has grown to over 200,000 workers in 27 plants worldwide the task has become more formalized. The Toyota Institute in Japan is the place the company has been using to train its domestic and foreign leaders in the “Toyota way.” Here students from many countries endure 12-14 hour days learning about the Toyota Production System and the philosophy and values that have made the company successful.

I. Staffing Philosophies for Global Operations

A. Alternate philosophies of managerial staffing abroad are known as the ethnocentric, polycentric, regiocentric, and global approaches.

1. Firms using the ethnocentric approach fill key managerial positions with persons from headquarters. They use PCNs—parent company nationals. Using PCNs offers the advantages of maintaining close control. In addition, it is appropriate when high technical capability and/or experience in the parent company is required or when there is a concern for loyalty and protection of proprietary technology. Its disadvantages include the lack of opportunities for local managers (which could result in poor morale), expense, poor adaptation and lack of effectiveness of expatriates.

2. With a polycentric staffing policy, local managers (HCNs—host country nationals) are hired to fill key positions in their own company. This approach is good when a firm is implementing a multinational strategy. It allows the firm to “act local.” In addition, these managers are familiar with the culture, language, and local norms. One disadvantage of a polycentric policy is the difficulty of coordinating activities and goals between the subsidiary and the parent company, including the potentially conflicting loyalties of the local manager.

3. In the global staffing approach, the best managers are recruited from within or outside of the company, regardless of nationality—a practice used for some time by many European multinationals. Recently, as more major U.S. companies adopt a global strategic approach, they are also considering foreign executives for their top positions. Exhibit 9-1 illustrates a global staffing policy as a means of maintaining globalization momentum.

Those firms with a truly global staffing orientation are phasing out the entire ethnocentric concept of a home or host country; and as part of that focus, the term transpatriates is increasingly replacing that of expatriates.

4. In the regiocentric approach to staffing, recruiting is done on a regional basis.

B. Many factors may influence the choice of staffing policy, including the strategy, organizational structure, duration of the operation, types of technology used, and the marketing and production techniques involved. Factors related to the host country may also play a part, such as the level of economic and technological development, political instability, regulations, and the sociocultural setting (See Exhibit 9-2).

II. Global Selection

A. The initial phase of setting up criteria for global selection is to consider which overall staffing approach or approaches would most likely support the company’s strategy. These are typically just starting points using idealized criteria; however, in reality, other factors creep into the process, such as host country regulations, stage of internationalization, and—most often—who is both suitable and available for the position.

B. The selection of personnel for overseas assignments is a complex process. The criteria for selection are based on the same success factors as in the domestic setting, but additional criteria must be considered related to the specific circumstances of each international position. There are five expatriate success factors: 1) job factors; 2) relational dimensions, such as cultural empathy and flexibility; 3) motivational state; 4) family situation; and 5) language skills. The relative importance of each factor is highly situational and difficult to establish.

Teaching Tip: Often students find it difficult to believe there is an international market for their skills. As a homework assignment, have your students use an online job site like Monster.com or Hotjobs.com to search for career opportunities overseas.

C. A more flexible approach to maximizing managerial talent, regardless of the source, would certainly consider more closely whether the position could be suitably filled by a host-country national. This contingency model of selection and training depends on the variables of the particular assignment, such as the length of stay, the similarity with the candidate’s own culture, and the level of interaction with local managers in that job.

D. Most MNCs tend to start out their operations in a particular region by selecting primarily from their own pool of managers. Over time, and with increasing internationalization, they tend to move to a predominantly polycentric or regiocentric policy because of: (1) increasing pressure (explicit or implicit) from local governments to hire locals (or sometimes legal restraints on the use of expatriates); and (2) the greater costs of expatriate staffing, particularly when the company has to pay taxes for the parent-company employee in both countries. In addition, in recent years, MNCs have noted an improvement in the level of managerial and technical competence in many countries, negating the chief reason for using a primarily ethnocentric policy in the past.

A. Expatriation Performance Management

When staffing overseas assignments with expatriates, many other reasons, besides poor selection, contribute to expatriate failure among U.S. multinationals. A large percentage of these failures can be attributed to poor preparation and planning for the entry and reentry transitions of the manager and his or her family. One important variable, for example, often given insufficient attention in the selection, preparation, and support phases, is the suitability and adjustment of the spouse. The following is a synthesis of the factors frequently mentioned by researchers and firms as the major causes of expatriate failure:

1. selection based on headquarters criteria rather than assignment needs 2. inadequate preparation training and orientation for the assignment 3. alienation or lack of support from headquarters 4. problems with spouse or children—poor adaptation, family unhappiness 5. insufficient compensation and financial support 6. insufficient compensation 7. poor programs of career support and repatriation

Exhibit 9-3 shows expatriate performance management from MNCs of five national origins.

III. Training and Development

In earlier discussions, the text noted that reports indicate that up to 40 percent of expatriate managers end their foreign assignments early because of poor performance or an inability to adjust to the local environment. About half of the expatriates who do remain function at a low level of effectiveness. The direct cost alone of a failed expatriate assignment is estimated to be from $50,000 to $150,000. The indirect costs may be far greater, depending on the position held by the expatriate.

Teaching Resource: A great source of materials on training is the American Society for Training and Development (ASTD). It includes a seminar agent that allows you to search over 250,000 training programs. The site is at http://www.astd.org/.

The demands on expatriate managers have always been as much a result of the multiple relationships that they have to maintain as they are of the differences in the host-country environment. Those relations include family relations, internal relations with people in the corporation, both locally and globally, especially with headquarters, external relations (suppliers, distributors, allies, customers, local community, etc.), and relations with the host government. It is important to pinpoint any potential problems that an expatriate may experience with those relationships so that these problems may be addressed during pre-departure training.

The model shown in Exhibit 9-4 shows how the IHRM process can be used to improve the effectiveness of the expatriate assignment.

A. Cross-cultural training

Even though cross-cultural training has proven to be effective, less than a third of expatriates are given such training. In a study by Harvey of 332 U.S. expatriates (dual-career couples) the respondents stated that their MNCs had not provided them with sufficient training or social support during the international assignment. Much of the rationale for this lack of training is an assumption that managerial skills and processes are universal.

The actual process of cross-cultural training should result in the expatriate learning both the content and skills necessary. Trainers should apply social learning theory to this process by using incentives and rehearsal until the trainee internalizes the desired behaviors and reproduces them.

Culture Shock, a state of disorientation and anxiety, is caused by the trauma people experience when dealing with a new and unfamiliar culture. Culture shock usually progresses in 4 stages: 1) honeymoon, 2) irritation and hostility, 3) gradual adjustment, and 4) biculturalism. At the biculturalism stage, the manager and family grow to accept and appreciate the local people and practices. They are able to effectively function in both their home and host cultures. Many never reach the fourth stage.

Sub-culture shock occurs when a manager is transferred to another part of a country – from an area of “majority” culture to one perceived as a “minority” culture. This can occur in one’s home country such as the effects of moving from New York to Texas.

B. Training Techniques

Many training techniques are available to assist overseas assignees in the adjustment process. These techniques are classified by Tung as: (1) area studies; that is, documentary programs about the country’s geography, economics, socio-political history, and so forth; (2) culture assimilators, which expose trainees to the kinds of situations they are likely to encounter that are critical to successful interactions; (3) language training; (4) sensitivity training; and (5) field experiences—exposure to people from other cultures within the trainee’s own country.

Similarly categorizing training methods, Ronen suggests specific techniques, including a field experience called the host-family surrogate, where the MNC pays for and places an expatriate family with a host family as part of an immersion and familiarization program. Exhibit 9-5 shows this and other training methods, some examples of the techniques used for each method, and the purpose of each.

Most training programs take place in the expatriate’s own country prior to leaving. While this is certainly a convenience, the impact of host-country (or in-country) programs can be far greater than those conducted at home because crucial skills, such as overcoming cultural differences in intercultural relationships, can actually be experienced during in-country training rather than simply discussed. Exhibit 9-5 shows various corporate training programs for global managers.

Teaching Tip: For an example of a company that does cultural training for expatriates go to www.culturesense.com.

Management Focus: Citibank Gives Advice on Career Planning

Citibank encourages employees to live and work in other countries to gain a global perspective but points out these alternate routes: Develop a global business outlook, interact with a wide range of customers and work with globally-focused managers, apply solutions to unique problems in different cultures, take on new challenges to stretch and develop your skills. Additionally, employees who are not seeking an international assignment can still accept short-term assignments, jobs that involve cross-border interaction, and jobs working with global team members.

C. Integrating Training with Global Orientation

It is important to remember that training programs, like staffing approaches, be designed with the company’s strategy in mind. Exhibit 9-6 suggests levels of rigor and types of training content appropriate for the firm’s managers, as well as those for host country nationals, for four globalization stages: 1) export, 2) multidomestic, 3) multinational, and 4) global.

D. Training Host-Country Nationals

The continuous training and development of HCNs and TCNs for management positions is also important to the long-term success of multinational corporations. As part of a long-term staffing policy for a subsidiary, the ongoing development of HCNs will facilitate the transition to an indigenization policy. As can be seen in Exhibit 9-7, some factors help and others hinder the integration of staff. Exhibit 9-8 lists the priorities of SME managers in Eastern Europe for e-business development.

Management Focus: Success! Starbucks’ Java Style Helps Recruit, Train, and Retain Local Managers in Beijing

Starbucks Coffee International now has 70 facilities in China. In addition to converting a nation of tea drinkers into coffee lovers, Starbucks had to deal with the problem of finding, training, and keeping local Chinese managers. As part of their training effort, Starbucks sends managers to Tacoma, Washington for three months to learn not only how to make a cup of coffee, but also to learn culture. Chinese managers appreciate a company that invests in their development and treats them with respect.

IV. Compensating Expatriates

The significance of an appropriate compensation and benefit package to attract, retain, and motivate international employees cannot be overemphasized. There must be a “fit” between compensation and the goals for which the firm wants managers to aim.

The premature return of expatriates or the unwillingness of managers to take overseas assignments can often be traced to their knowledge that the assignment is detrimental to them financially, and usually to their career progression.

The high cost of maintaining the expenses and appropriate compensation packages for expatriates has led many companies to cut back on overseas assignments as much as possible.

Teaching Resource: The World at Work is a professional organization for HR/Compensation professionals. Their informative Web site can be found at http://www.worldatwork.org/

To assure that expatriates do not lose out through their overseas assignment, the balance sheet approach is often used to equalize the standard of living between the host country and the home country and to add some compensation for the inconvenience or qualitative loss.

The ability to design and maintain an appropriate package is more complex than it would seem because of the need to consider and reconcile parent and host country financial, legal, and customary practices.

In fairness, the MNC is obliged to make up additional costs the expatriate would incur for taxes, housing, and goods and services. The tax differential is complex and expensive for the company, and generally MNCs use a policy of tax equalization: the company pays any taxes due on any type of additional compensation that the expatriate receives for the assignment; the expatriate pays in taxes only what she or he would be paying at home.

Managing PCN compensation is a complex challenge for companies with overseas operations. Most important, to be strategically competitive, the compensation package must be comparatively attractive to the kinds of managers the company wishes to hire or relocate.

V. Compensating HCNs

There is no one set of solutions that can be applied to the challenge of compensating HCNs. The best solution will vary from country to country.

Comparative Management in Focus: IHRM Practices in Australia, Canada, China, Indonesia, Japan, Latin America, Mexico, South Korea, Taiwan, and the United States

In a comparative long-term study of how IHRM functions are performed around the world, researchers found that some practices are nearly universal while others vary quite a bit. Across most countries HRM practices were found to be linked to training and development and performance appraisal. A growing trend across many countries is to use training and development for building “soft management practices.” The importance of candidate qualifications and selection techniques still differ from country to country. In Japan, for example, a heavy emphasis is placed on a person’s potential and an ability to get along with others. A relatively low value is placed on training and experience. Students can refer to the table insert to see specific differences among the countries.

Teaching Tip: Did you know that the Society for Human Resource Management (SHRM) now offers certification in global HR? Have students visit the web site http://www.shrm.org/education/about.asp for details.

Chapter Discussion Questions

1. What are the major alternative staffing approaches for international operations? Explain the relative advantages of each and the conditions under which you would choose one approach over another.

The ethnocentric approach of filling key managerial positions with persons from headquarters is appropriate where the company has an inadequate supply of managers on the local level of international operations. The ethnocentric approach is preferable where headquarter control is important, and where a high level of technical capability is required or considerable managerial experience in the parent company. Under polycentric staffing, local managers are hired to fill key positions in their own company, which is effective in implementing a global strategy of regionalization. This approach is best when a company wants to "act local." The regiocentric approach recruits managers on a larger regional basis, thus allowing the company to have a specific mix of local, national, and regional managers at its disposal. The global approach hires the best managers regardless of their nationality. This is necessary in sophisticated organizations, which require the very best, most experienced management expertise available.

2. Why is the HRM role so much more complex, and important, in the international context?

Poor IHRM management has been shown by research to be a major determinant of success or failure in international business. Because the human resource requirements for overseas assignments are so highly specialized and demanding, the IHRM role is much more complex and challenging. Not every employee is equipped with the adaptational, language, and technical skills to succeed abroad. Indeed research demonstrates that a very large percentage of expatriate employees are only marginally successful.

3. Explain the common causes of expatriate failure. What are the major success factors for expatriate assignees? Explain the role and importance of each.

Expatriate failure is most frequently linked to the following causes: selection based on headquarters criteria rather than assignment needs; inadequate preparation and training; alienation from headquarters; inability to adapt to local cultures; problems with spouse and children; insufficient compensation; and poor programs for career support and repatriation. Successful expatriate assignments are generally well planned and executed. Employee training is critical in order to give the expatriate with the skills he/she will need when living and working abroad. Compensation is sometimes an issue as well. An adequate compensation plan must be developed in order to insure, that at the least, the expatriate can maintain a comparable life style abroad.

4. Describe the common training techniques for managers going overseas. How should these vary as appropriate to the level of globalization of the firm?

Three critical areas of training include cultural training, language instruction, and familiarity with everyday, practical matters. Tung specifies training in 1) area studies, 2) culture assimilators, 3) language training, 4) sensitivity training, and 5) field experiences. While it is difficult to argue for less training, organizations with less extensive global operations will probably develop less extensive training methods. Generally, however, the higher in the organization the employee is, and the longer the assignment, the greater the expenditure for training.

5. Explain the “balance sheet approach” to international compensation packages. Why is this so important? Discuss the pros and cons of aligning the expatriate compensation package with the host-country colleagues compared to the home-country colleagues.

The balance sheet approach is a compensation technique that strives to equalize the pay package an expatriate manager receives while working abroad in comparison with what he/she would receive at home. Standard of living is a key aspect of the balance. Without attention to balanced compensation problems, many companies would lack adequate incentives for sending people abroad.

While pay equity and perceived fairness may be advantages of aligning expatriate compensation to local standards, the difficulty of finding qualified people for foreign assignments and their happiness in the assignment may ague against such an approach. (Tthe case at the end of this chapter, Polska Pipeworks, addresses this issue and allows for further discussion).

6. Discuss the importance of a complete program for expatriate performance management. What are the typical components for such a program?

While proper selection and training are very important to a successful expatriate assignment, the management of the expatriates performance is also important. Typical components of a performance management program include goal-setting, training, performance appraisal and performance-related compensation.

Application Exercises

1. The reasons students will give for accepting or rejecting a foreign assignment will vary. There may be personal and family reasons for not selecting any foreign assignment at all. The desirability of the country is another consideration. Students may not wish to live in Saudi Arabia or a few years but would jump at the chance to be assigned to Paris. Assignment hardship is generally a consideration. 2. This exercise may be difficult for students in the fact that the material isn’t always made public. The most fruitful approach may be to search the literature for articles or cases that have profiled select companies.

Experiential Exercise

In this situation, the adjustment of Ian’s family may be difficult. The fact that his wife wishes to work in Brazil and they have two teenage children may produce some problems. Typically, employment of a spouse isn’t an easy accomplishment, and teenage children have been known to experience home sickness, especially since they have never lived abroad before. On the other hand, others have succeeded under these circumstances. A good place for students to look for information relevant to this letter writing assignment is http://www.executiveplanet.com/index.php?title=Brazil. This site provides much useful information for expatriates planning on living and working in Brazil.

End-of-Chapter Case: Fred Bailey: An Innocent Abroad

1. What are the problems in this case?

a. Fred's wife is threatening to go home; she is not a happy camper. b. Fred hasn't adjusted either and isn't so thrilled about this assignment.

2. What are the causes of these problems?

a. For Jenny: (1) isolation; (2) inflated expectations regarding a company sales job; (3) lack of predeparture training; and (4) Fred's insensitivity to her problems. b. For Fred: (1) lack of training; (2) unrealistic expectations; (3) lack of skills in the Japanese work culture; (4) stress.

3. What mistakes has Fred made?

a. He failed to notice that there was a division between Japanese and foreign workers. b. He failed to realize that in the first meeting the Japanese felt put on the spot and were not comfortable giving their honest thoughts in that public situation. c. Fred took the John Wayne approach to trying to win a new contract, an approach that was uncomfortable for the Japanese client. d. Fred again failed to realize what a young Japanese research associate really was trying to say, and the situation got worse from there.

Source: G. Oddou, M. Helms, and M. Mendenhall. Instructor's Manual for Mendenhall & Oddou, Readings and Cases in International Human Resource Management, PWS-Kent, 1991.

Additional Case

Polska Pipe Works

Introduction

With the fall of communism in the former Soviet Union and its Eastern European neighbors in the early 1990’s market opportunities opened for Western companies which had not previously been available. The American pipe manufacturer, Stewer Technologies had previously exported in small quantities high-density polyethylene pipes to Poland. These pipes were used in Poland’s major cities for sewer and drainage. With the end of communism and the dawn of a free market economy in Poland, Stewer Technologies took steps to expand its market opportunities in Poland and other Central and Eastern European countries. With the liberalization of foreign joint venture law and its existing business associations, Stewer was able to find a Polish partner to begin the manufacture of polyethylene pipes in the Polish city of Krakow. The market for sewer and drainage pipes was rather limited during the previous fifteen years due to the lack of resources of the Polish government. Recently, the federal government of Poland began an ambitious program of infrastructure improvement in an effort to bring Poland’s major cities up to the standards of Western Europe. Very little high-density polyethylene sewer pipe was manufactured domestically, and the Polish pipe that was produced domestically was considered to be of inferior quality. Most polyethylene pipe used in Poland was imported from the United States and Western Europe. Stewer saw this situation to be an excellent opportunity to produce quality pipe in Poland with lower labor and transportation costs, and the possibility of exporting to neighboring countries such as the Czech Republic, Slovakia, Belarus, Lithuania, and Hungary.

Poland With a population of 38 million, Poland is the largest country in Eastern Europe. Poland is a very homogeneous country with ninety eight percent of its population being Polish. Poles are a Slavic people, proud of their heritage and ability to endure the ravages of many invaders and two world wars. Poland had been under the control of the former Soviet Union since the end of World War II, however, the Polish people did not embrace Soviet ideals, and in the late 1970’s with a Polish Pope providing encouragement, the Polish people began a campaign for freedom. In the early 1980’s Poland’s labor movement flexed its muscles and gained concession from the government. During the decade political tensions ran high with the Polish labor movement, Solidarity making some gains and receiving some setbacks. By the end of the decade free elections were held and Solidarity leader Lech Walesa gained the presidency of the nation. Poland’s post-communist government began an ambitious movement towards free market reform. Privatization of state-owned industry began, and laws were enacted to improve the business climate of the country. The Foreign Investment Act of 1991 encouraged foreign investment, and in most cases allowed up to 100 percent foreign ownership of businesses. Certain restrictions on foreign direct investment remain, however, including restrictions on investment in steel, mining, energy, banking, telecommunications, and broadcasting. Poland has been very successful in attracting foreign investment, with FDI in excess of $8 billion in 1999 and $12 billion in 2000. While the 1991 Act encourages FDI, foreign owned firms are placed at a competitive disadvantage in bidding on government contracts. If the foreign firm establishes a joint venture with a Polish company, however, the company can qualify as a domestic company and avoid the restrictions. This aspect of the law has made international joint ventures popular in Poland.

Stewer Technologies In 1958 Fred Stewer started a small company to supply water and sewer pipes to the city of Chicago. The company grew over the years and in the 1980’s the company began to receive orders for its products from abroad. International sales were not considered important to the company until the middle of the 1990’s when this segment began to increase significantly and domestic sales began to drop. The company realized that the international market was not only more lucrative in most cases, but also that it may be necessary to cultivate it in order for the company to survive. Stewer established an international division in 1995 and began to promote its products through international trade shows and with the help of federal government agencies. Stewer Technologies had been exporting small quantities of polyethylene pipe to Poland since 1989; however, the sales figures were too low for much attention to be paid to the country. All that changed in 1998 when the company was approached by a Polish contractor who proposed that a joint venture be established to supply the Polish government with sewer and water pipes for its large-scale infrastructure renewal program. The idea seemed like a good one in that Polish labor costs were quite low compared to the United States, and the company could avoid transportation costs and tariffs. The potential for export to other Central and Eastern European countries also made the proposal appealing.

Polska Pipe Works and William Zukowski The city of Krakow was chosen from three competing cities in Poland and construction of the plant began in 1999 and was completed in 2000. The joint venture was named Polska Pipe Works. It was decided that an American manager from Stewer Technologies would be chosen as plant manager or Managing Director, but that almost all other employees would be Polish. With a relatively high unemployment rate in Poland it was easy to find workers for the plant. The Polish partner recruited and selected the Polish workforce. The Polish partner also established the organizational structure, created job descriptions, and helped determine compensation and benefits. Most Poles were very happy to be able to work for an American company in that they perceived that the American company would be able to provide job security and higher wages. The wages which were low by American standards were much higher than that offered by similar domestic companies in Poland. American workers at Stewer Technologies were not unionized and the company hoped to keep its Polish operation non-union as well. It was believed that if compensation was set significantly above the standard domestic rate employees would see no advantage to unionization. To supplement the Polish workforce, a temporary team of experienced American workers was selected to work in Krakow in order to help train the Polish workers. William Zukowski, a 19-year veteran of Stewer Technologies was selected to head the Polish operation. Trained in engineering and management, Zukowski had held a number of positions in the company, but this position would be his first opportunity to head an entire facility. Zukowski was considered to be a good candidate for the position in that he had an excellent track record at Stewer, and that he had some understanding of Polish culture. Zukowski’s grandparents had immigrated to Chicago from Poland and he maintained ties with the Polish community of Chicago. Although not fluent in Polish, he did speak some of the language and had visited the country while on vacation in 1996. Zukowski eagerly accepted the assignment for two reasons. Most importantly, he felt that the position offered an excellent opportunity for advancement, and he did have an emotional attachment to the Polish people and felt that it would be important to teach them American methods of management. Zukowski moved to Poland with his wife Sandy and their three children, Stefan, age 14, Elizabeth, age 12, and John, age 8. The family was excited, yet somewhat anxious about the move. It was never very clear how long the family would be living in Poland.

Early Difficulties After the Zukowski family arrived and settled in Krakow, William began to assume his duties at Polska. William felt that employee development was a top priority and that he should spend much of his time in the supervision of employee training programs. Zukowski also decided that he would train some key managers himself. His initial contacts with Polska employees seemed to indicate to him that the employees were very receptive to learning Western business practices. One of the first areas in which Zukowski sought to train workers was in the area of quality management. Zukowski had instructed managers at Stewer in TQM, and he lead a special projects team, which helped the company, achieve ISO 9000 certification. He had attended one of the seminars conducted by the late quality guru Edwards Deming and was fascinated by his approach to management. Zukowski hoped to quickly implement a quality management program and gain ISO 9000 certification for Polska. At first it appeared that the managers who had been selected for the training were motivated to learn. Over time, however, it seemed that the managers kept asking questions unrelated to the training. More and more the managers were asking about compensation and benefits and fewer and fewer questions about the training material. For example, it became very clear that the Polish managers had determined that the American workers who came to Krakow on temporary assignment were being paid much more. The Polish managers were also comparing company benefits and found out that the Americans were receiving more benefits than the Poles. Zukowski tried to answer the questions and respond to the objections as quickly as possible and then to resume his training efforts. Not everyone was satisfied with his answers. One of the more vocal Polish managers, Michal Gorzko was often difficult to silence during the training sessions. He often complained that the American company showed preferential treatment to the Americans. He also expressed his dissatisfaction with the fact that many of the Americans were younger than most of the Polish managers and that they treated the Polish managers as if “they were their children.” Gorzko felt that the older Americans were skilled and experienced workers but that they should not be perceived as being more valuable to the company. Gorzko, a graduate of Warsaw University also seemed to resent the fact that people without a college education would be making more money. Zukowski tried to explain how the Americans were only going to be in Poland temporarily and that they had to be compensated by American cost-of-living standards. Over time it became clear that Gorzko was acting as a spokesperson for the entire group of Polish managers. After this initial training effort Zukowski decided that he should delegate the training function to others. There were also personal difficulties in the early days for William Zukowski. His family was not adjusting well to their new environment. At first the experience seemed exciting for Sandy. Living in a foreign country was always something she had wanted to do and she felt that the experience would be good for the children. Although the children were unhappy from the start, with their mother’s encouragement and understanding, she was able to make the experience less traumatic. The children missed their friends back in Chicago and they were not happy with their new America style school. The children also missed the comforts and recreational activities they had become accustomed to back in the United States. William was very busy at work and was seldom available even on weekends to be with the family. At first Sandy accepted the hardships, but over time she began increasingly to complain about her life in Poland including the lack of friendship, the poor telephone service and roads, and the difficulty of communicating with people who did not speak English. Life was much harder in Poland than she had expected.

Proposed Changes At work, having finally completed the quality training sessions, Jukowski moved on to other areas. He decided to change some of the operational policies which the Polish partner had established for the joint venture. In particular he wanted to reduce the level of bureaucracy, change compensation to a more performance-based system, and institute a participative, teamwork approach to management. Zukowski felt the present system created by Stewer’s Polish partner was too much like old Eastern Bloc management. With the help of a young Polish manager named Tomasz Fusinski, Zukowski began an assessment of the organizational structure of Polska. The two worked out a plan to reduce many administrative positions and save the joint venture considerably on salary expense. However, Fusinski, feeling uneasy about the changes did speak up, providing a prophetic warning. “Mister Director, enjoyment in the summer can come at the expense of comfort in the winter.” Zukowski wasn’t quite sure what the young manager was trying to tell him and he dismissed the advice as some unimportant old Polish lure. The changes were implemented as directed by Zukowski with considerable unhappiness among the entire workforce. The changes meant that not only would positions be eliminated among the office staff, but that production positions would also be cut as well. Outsourcing of some supplies and a reduction in many support positions would make the manufacturing process leaner, and more productive. Ultimately this would allow for more compensation for the remaining employees. Zukowski felt that some employees would resent the layoffs but that most would find the thought of making more money “music to their ears.” Zukowski felt that the workers of Polska were either not motivated, or that they simply didn’t understand modern management practices. He felt that an improved system of financial rewards would give them an incentive to work harder. Zukowski was concerned by the fact that workers routinely left for home at around 4PM, even if the plant had an urgent need for production. Consistent with company policy in Chicago, and previously agreed upon between the partners, all employees at Polska were paid a salary. There were no hourly employees in either company. Although this compensation system seemed to work in the United States, Zukowski wondered if it was appropriate in Poland, given the recent experience with the communist system. He worried that such a plan may be abused by the Polish workers. In response he met with some of the higher-level Polish managers and ask for their advice. The managers who were always very formal, and respectful, failed to give him much guidance. Zukowski, therefore, created a new compensation plan himself and gained its approval from Chicago. The new plan was called “ZlotyShare” using the name of the Polish currency the zloty, and indicating that it was a form of the American practice of gainsharing. The new plan was complex but basically meant that compensation would be tied to worker productivity and cost reductions. Immediately upon announcement of the new compensation program the Polish employees rebelled, including most of Polska’s managers. Although Zukowski explained that the new program was an attempt to allow workers to make more money, few accepted the idea. Zukowski could not understand why the workers would not want the opportunity to earn additional money and all his attempts to explain the program seemed to fall on deaf ears. It occurred to him the reason that he was receiving such resistance to his change effort was that it was too autocratic, and so he began to develop a more participative approach to decision making. Zukowski created a series of committees and appointed several high level Polish managers to head those committees. The purpose of the committees was to force authority down to lower levels of the organizational structure. Because of his past difficulties with Michal Gorzko, Zukowski did not appoint him to any of the committees. Although it appeared that the Polish managers liked the idea of the committees, Zukowski was disappointed in their progress. It appeared that they were only recommending superficial changes, and that they were mainly concerned with holding on to, or increasing, their own power. Frustrated with their success Zukowski disbanded the committees.

After consulting some friends back in Chicago and discussing the ideas with his now trusted Polish advisor Tomasz Fusinski, Zukowski announced a new organizational structure, once again. Productivity and quality had been steadily dropping since the introduction of the ZlotyShare plan and the downsizing effort. Zukowski needed something to work, and work quickly. He announced that young Fusinski was being promoted to the position of Assistant Director and Manager of Special Teams. Fusinski would be supervising the introduction of a production team structure, similar to the one used by Stewer in the United States. It was announced that team leaders would be selected based on interviews by Zukowski and Fusinski, and that the team leaders would receive sizable increases in salary. The positions would be open to all production employees. Present managers could apply, but they would not be assured a team leader position.

Triad of Despair William Zukowski was aware of the anxiety which his changes had produced for the employees of Polska. He did not want to make their work environment difficult, however, he was convinced that some pain was necessary in order to change the Polish mindset which had developed over the many years of Soviet domination. He was prepared to endure some pain himself, however, he was not prepared for the events which would occur on the Monday morning following the week he proposed his latest changes. After a stressful weekend with the family it was decided that Sandy and the children would return to the United States by Christmas, and that William would stay in Krakow for the duration of his assignment. It was a difficult decision, but all family members agreed that it would be best. William would fly home every month to visit and Sandy and the children would resume their life as usual back in Chicago. On the way to work that morning William began to lament his decision to accept the Polish assignment. He was still confident in his ability to make improvements in the operation and to advance his career, however, he did not like the toll it was taking on his family. He also lamented the missed opportunities he had planned to tour Poland with his family and enjoy its rich history. As he continued to work he vowed that he would quickly improve the operating results of Polska and then ask to be returned to Chicago. When Zukowski arrived at the office he was met with very disturbing information. He first noticed that a letter of resignation was on his desk from Tomasz. The letter was very brief and apologetic and offered no reason for the resignation. Zukowski was very surprised and personally hurt by the sudden departure of his trusted young advisor. Not having much time to absorb the resignation, Zukowski was hit again with bad news. His assistant informed him that many of the workers had refused to come to work today and that Michal Gorzko was leading a drive to unionize all plant personnel. Thinking of his family, the loss of his Polish advisor, and the threat of unionization, Zukowski looked out the window of his office and realized that the coming Polish winter may in fact be very uncomfortable.

Sources
Cullen, J. (2002). Multinational Management: A Strategic Approach. Cincinnati: South- Western.
Crane, R. (2000). European Business Cultures. Harlow, England: Financial Times/ Prentice Hall.
Davies, N. (2001) Heart of Europe: A Short History of Poland. Oxford: Oxford University Press.
Heale, J. (1999). Cultures of the World: Poland. New York: Marshall Cavendish.
Johnson, S. (1995). Starting Over: Poland after Communism. Harvard Business Review, March-April.
Kissel, N. (2000). Passport Poland. Novato, CA: World Trade Press.
Mead, R. (1998). International Management. Oxford: Blackwell Publishing.
O’Driscoll, G., Holmes, K. and M. Kirkpatrick. (2001). Index of Economic Freedom. Washington: Hertage Foundation and New York: Wall Street Journal.
Sanyal, R. (2001). International Management. Upper Saddle, NJ: Prentice Hall.
WWW.Countrywatch.Com
WWW.Poland.Pl

Instructor’s Note: This case can be used to discuss expatriate qualifications, training, and compensation. It is clear that there were problems in all three areas. William probably was not the best choice to head the Polish operation and received poor training for his assignment. The issue of host-country/home-country compensation parity should also be discussed when using the case.

Student Stimulation

Group or Class Learning Activities

1. Executive selection: Your company has identified an extraordinary set of opportunities for its products in SE Asia. Unfortunately, you are having difficulty persuading any of your current management team (PCNs) to take the assignment. Your field managers have been unable to identify a host national (HCN) that they feel is qualified to take the position. None of them have the necessary experience to handle this level of responsibility. Your product is very technical and requires a highly educated support staff. Divide the class into and even number of small teams, identified only as team A and team B with the following assignments:

Team A: You are to develop a proposal to management on why using a PCN is the only appropriate course of action open to the company. Make every effort to justify your decision.

Team B: You are to develop a proposal to management on why using an HCN is the only appropriate course of action open to the company. Make every effort to justify your decision. After developing their respective positions, A and B are asked to debate their proposals. Following the debate, ask the sides to reconcile their position and to provide a final recommendation to management. Ask the students to reflect on the learning experience.

2. Executive compensation exercise: Your company has identified an extraordinary set of opportunities for its products in SE Asia. Unfortunately, you are having difficulty persuading any of your current management team (PCNs) to take the assignment. Divide the class into small teams and have them develop an expatriate career package that would make this move more attractive. Ask students to support their ideas with references to the chapter.

Additional Stimulation Discussion Questions

1. Under what circumstances do you feel managers who work abroad in other cultures should actually be paid more than the equivalent amount they would make working within their own culture?

2. On a scale of 1-10, how prepared do you feel you are presently for working abroad in a different culture? Work out a “balance sheet” on yourself, listing your primary assets and liabilities for an international assignment.

3. What career risks would you be taking by accepting an international assignment soon after graduating from college? Do you feel the potential opportunities of an early international assignment would outweigh the potential risks?

4. Would you prefer to tackle an international assignment alone, or with your spouse and family, assuming you were married?

5. Problems with spouse and/or children was identified as one of the primary factors associated with expatriate failure. Why would an international assignment be so taxing on one’s family? How could this pressure be prepared for and/or alleviated by training and benefits provided to expatriate families?

6. Keep a diary of your activities for a few days. What key activities appear on your list? Would you have access to those activities if you lived in another country? How important would that be to you in deciding whether to accept an expatriate assignment? How would it contribute to feelings of culture shock?

7. Examine Exhibit 9-3A. Why do you think Japan has such a high concentration of HCNs? 8. Try to look up the prices of different items in various countries. How much does it cost to purchase a 1) Mercedes, 2) Coke, 3) movie ticket, 3) cup of coffee in various countries? How do these price differentials affect you as a possible expatriate?

Experiential Exercise

WHICH EXPATRIATE TO CHOSE?

Purpose: The purpose of this exercise is to explore skills and abilities useful for expatriate success.

Procedure: Read the job background note and the candidate bios that follow. Assemble into groups and discuss the qualifications of each candidate as they relate to the position. Select the candidate that you feel would make the best choice for the international assignment. Also answer the two questions which follow the employee bios.

Position Background:

Ozarks Fine Furniture, an American company has recently acquired a furniture manufacturer located in a city outside Bucharest, Romania. Ozarks hope to be able to eventually shift some of its more labor-intensive manufacturing to this new plant. The company is planning on sending one of its employees to Romania for a period of three years to oversee the operation and to make recommendations. The selected employee would be given the title of Executive Director and will be the highest ranking employee in the Romanian company. Three employees have expressed an interest in the position.

Employee Bios:

Jim Watson: Jim has been with Ozarks since graduating with a B.S. degree in business administration from the College of the Ozarks. He is currently Vice President of Manufacturing, having risen up the organizational structure. Jim is a highly rated employee. He is viewed as conscientious, hard working, and fair-minded. His performance reviews have always been outstanding Jim is generally seen as a likable and easy-going person. He is 27 years old and married to an elementary school teacher. The Watson’s have one child, age two. Jim enjoys hunting, fishing, coaching Little League baseball, reading, and motorcycles. He speaks only English and has traveled internationally to Canada, Mexico, Jamaica, and England.

Sarah Smith: Sarah has been employed with Ozarks for two years as the Director of Marketing. She reports directly to the CEO of Ozarks and is considered to be a highly intelligent and competent employee. Sarah has an M.B.A. from the University of Arkansas and has previous work experience in advertising and sales. She is seen by her fellow employees as being a nice person, but a perfectionist. Her performance as marketing director has been outstanding. Sarah is 32 years old and married with two children, ages seven and five. Her husband is the owner of a web-based publishing company. She enjoys crafts, computers, skiing, and basketball. Sarah speaks English, French, and Spanish and has traveled internationally to Canada, Mexico, Costa Rica, Venezuela, Chile, Argentina, France, Ireland, and England.

Gus Dinu: Gus has been a production supervisor at Ozarks for the past 12 years. He began with Ozarks on the assembly line and has previous experience in auto repair. Gus, age 48, came to the United States as a teenager when his family emigrated from Romania. He speaks
English and Romanian, and some Russian. Gus enjoys hunting, fishing, and auto restoration. He is married, with two children, ages nineteen and twenty two. His wife is currently unemployed but worked previously as a receptionist. Gus is a hard working and effective supervisor, although some of his employees view him as too inflexible and moody. His performance reviews are generally very good. Gus has traveled internationally to Romania and France.

Discussion Questions

1. What additional information about the candidates might be

useful?

2. What questions would you ask each candidate, if you were interviewing them for the assignment?

3. Which candidate would you select? Explain.

Experiential Exercise

DESIGNING AN EXPATRIATE COMPENSATION PACKAGE

Purpose: The purpose of this exercise is to gain familiarity with the challenges of designing an effective compensation program for an international assignment.

Procedure: Read the background information below, research the country to which the expatriate will be sent, and design what you consider an equitable compensation package.

Background Information:

Jack Simon, a middle manager for a medium-sized American firm is being sent to
Brussels for a three-year assignment. Jack will be moving with his wife and three children, ages eleven, fourteen, and sixteen. Jack lives in Cincinnati, Ohio with his family in a four-bedroom house and currently earns $102,500. In addition to his salary, Jack receives a number of benefits including health insurance for the entire family. In Belgium Jack will be paid his salary in euros.

The HR department of Jack’s company is attempting to develop a compensation package which will fairly compensate Jack during his three years in Brussels. An investigation into international assignment compensation has uncovered issues such as foreign service premium, educational allowances, hardship allowances, housing allowances, and tax equalization. The department is seeking your advice
(be specific) on how Jack should be compensated.

CHAPTER 10

Developing a global Management Cadre

LECTURE OUTLINE

General Outline
Opening Profile: Foreign from the Start
Expatriate Career Management
Global Management Teams
The Role of Women in International Management Management Focus: Japan’s Neglected Resource; Female Workers
Working Within Local Labor Relations Systems Management Focus: China Drafts Law to Empower Unions and End Labor Abuse Comparative Management in Focus: Labor Relations in Germany
Discussion Questions
Application Exercise
Experiential Exercise
End-of-Chapter Case Study: Avon in Global Markets 2007
Additional Case: There’s No “Aye” in Team Kidnapped in Colombia
Student Stimulation Questions and Exercises

Opening Profile: Foreign from the Start

The opening segment tells of Philip Shearer, Group President, Clinque Estee Lauder, N.Y. Mr. Shearer’s mother was French, his father was British, and he grew up in Morocco. After graduating from college in France he attended graduate school in the U.S. and began a career that involved many international assignments. He offers advice and provides stories from his childhood and career.

I. Expatriate Career Management

A. A crucial factor in global competitiveness is the ability of the firm to maximize long-term its global human resources. To do this, attention must be paid to several important areas: 1. To maximize long-term retention and use of international cadre through career management so that the company can develop a top management team with global experience 2. To develop effective global management teams 3. To understand, value, and promote the role of women and minorities in international management in order to maximize those underutilized resources 4. To maximize the benefits of an increasingly diverse workforce in various locations around the world 5. To work with the host country labor relations system to effect strategic implementation and employee productivity

II. Preparation, Adaptation, and Repatriation

A. Effective human resources management of a company’s international cadre does not end with the overseas assignment. It ends with the successful repatriation of the executive into company headquarters. However, a survey of companies belonging to the American Society of Personnel Administration International (ASPAI) revealed that only 31 percent had formal repatriation programs for executives and only 35 percent of those included spouses.

B. Reverse culture shock is the culture shock that occurs when an expatriate re-enters his or her home culture and occurs primarily because of difficulty of reintegration into the organization.

C. For companies to maximize the long-term use of their international cadre, they need to make sure that the foreign assignment and the reintegration process are positive experiences. This means careful career planning, support while overseas, and the use of the increased experience and skills of returned managers to benefit the home office.

D. Tung suggests these support systems be used for a successful repatriation program:

1. A mentor program to monitor the expatriate’s career path while abroad and upon repatriation

2. The establishment of a special organizational unit for the purposes of career planning and continuing guidance

3. A system of supplying information and maintaining contacts with the expatriate so that he or she may continue to feel a part of the home organization.

E. The Role of the Expatriate Spouse

1. A number of companies are beginning to recognize the importance of providing support for spouses and children. Firms often use informal means, such as inter-company networking, to help find the trailing spouse a position in the same location. They know that with the increasing number of dual-career couples (65% in the U.S.), if the spouse does not find a position the manager will very likely turn down the assignment.

2. Recent research on 321 American expatriate spouses around the world shows Research on 321 American expatriate spouses around the world shows that effective cross-cultural adjustments by spouses is more is more likely (1) when firms seek the spouse’s opinion about the international assignment and the expected standard of living, and (2) when the spouse initiates his or her own pre-departure training (thereby supplementing the minimal training given by most firms).

F. Expatriate Retention

1. Support services provide timely help for the manager and therefore are part of the effective management of an overseas assignment. The overall transition process experienced over time is shown in Exhibit 10-1. It comprises three phases of transition and adjustment that must be managed for successful socialization to a new culture and resocialization back to the old culture. These phases are: (1) the exit transition from the home country, (2) the entry transition to the host country; and (3) the entry transition back to the home country or to a new host country.

III. The Role of Repatriation in Developing a Global Management Cadre

1. One purpose of the international assignment is that both the manager and the company benefit from the enhanced skills and the experience gained by the expatriate. Many returning executives report an improvement in their managerial skills and self-confidence.

2. In addition to the managerial and cross-cultural skills acquired by expatriates, the company benefits from the knowledge and experience those managers gain about how to do business overseas, and what new technology, local marketing, and competitive information they acquire. At least, the company should benefit from the enhanced management knowledge if it wants to develop a globally-oriented and experienced management cadre—an essential ingredient for global competitiveness—in particular where there is a high degree of shared learning among the organization’s global managers.

Teaching Resource: Welcome Home Stranger—Video presents the problems faced by expatriate workers upon their return to their home countries. Available from Copeland-Griggs film distribution.

IV. Global Management Teams

A. Global management teams are collections of managers from several countries who must rely upon group collaboration if each member is to experience the optimum of success and goal achievement. The role of and importance of international teams increases as the firm progresses in its scope of international activity. B. For global organizations and alliances, we find the same cross-cultural interactions as in MNCs and, in addition, considerably more interaction with the external environment at all levels of the organization (as indicated by the arrows extending into and out of the organization). Therefore, worldwide international teamwork is vital, as are the pockets of cross-cultural teamwork and interactions that take place at many boundaries.

C. Exhibit 10-2 shows the response of international teams in the modern global enterprise. When a firm responds to its global environment with a global strategy and then organizes with a networked “glocal” structure, various types of international teams are necessary for global integration and local differentiation. These include headquarters-subsidiary teams and those coordinating alliances outside the organization. In joint ventures, in particular, multicultural teams work at all levels of strategic planning and implementation, and on the production and assembly floor. Increasingly, people around the world conduct meetings and exchange information using the Internet, resulting in virtual global teams.

Virtual Transnational Teams are teams comprised of members who interact through computer-mediated communicating systems, are linked together across time, space, and organizational boundaries. Increasingly technology is allowing for virtual global teams. Exhibit 10-3 shows the operational challenges of such teams.

D. Building and Managing Global Teams

1. The ability to develop effective transnational teams will become essential in light of the increasing proliferation of foreign subsidiaries, joint ventures, and other transnational alliances. Multinational team management skills are necessary to maximize the potential synergy available through the activities of international teams. Many of the breakdowns in international alliances have been attributed to the inability of management to develop the benefits, which can accrue to cross-border teams. Exhibit 10-4 shows the training needs of virtual teams.

2. The advantages of synergy include: greater opportunity for global competition by being able to share experiences, technology, and a pool of international managers; and opportunities for cross-cultural understanding and exposure to different viewpoints. The disadvantages of international teams include problems resulting from differences in language, communication, and varying management styles; complex decision-making processes; fewer promotional opportunities; personality conflicts; and greater complexity in the workplace.

a. Indrei Ratiu of the Intercultural Management Association in Paris has proposed six criteria for the evaluation of intercultural work teams:

1. Do members work toward a common purpose? 2. Has the team developed a common language or procedure?

3. Does the team accentuate the positive; build on what works?

4. Does the team attempt to spell things out within the limits of cultural differences?

5. Do team members recognize the impact of their own cultural programming on individual and group behavior?

6. Does the team have fun?

Important variables in building global teams according to Govindarajan and Gupta can be seen in Exhibit 10-5.

V. The Role of Women in International Management

A. Opportunities for female indigenous employees to move up the managerial ladder in a given culture depend on the values and the expectations regarding the role of women in that society. Exhibit 10-6 lists some of the top global female managers.

B. A significant change is underway in the role of women in management. The text considers the case of Japanese women. The younger generation and increased global competitiveness have brought some changes to traditional values regarding women’s roles in Japan. Over 60 percent of Japanese women are now employed, including half of Japanese mothers.

C. Where one finds limitations on managerial opportunities for women in one’s own country, there are obviously even more limitations on their opportunities as expatriates. Overall, more managerial opportunities are available for American women than for women in most other countries. But, even for American women, who now fill over 25 percent of the managerial positions at home, commensurate opportunities are not available to them abroad: about 6 percent of North American expatriate managers are women. Traditionally Japanese women have not be seen as a significant force in the Japanese labor market. Change does seem to be occurring and now 60% of Japanese women work. Not many of them, however, are in managerial positions. Exhibit 10-5 shows how women are fairing in the labor market in Japan and some other countries.

Management Focus: Japan’s Neglected Resource: Female Workers

When Yuko Suzuki, a Japanese woman, went into business for herself, she found that customers only pretended to listen to her. She was often asked by potential customers about her boss, so she hired a man to go along with her on sales calls. Having a man by her side helped Yuko increase sales.

While 40 percent of Japanese women work, only about 9 percent hold managerial positions. A recent World Economic Forum report ranks Japan 69th of 75 member countries empowering women. Women in Japan are often hired only for clerical and service positions. Despite Japan’s economic troubles, women remain a neglected resource.

D. It is difficult for women to get expatriate assignments because firms are afraid the women will suffer from cultural biases. However, Adler showed that foreigners are seen as foreigners. A woman who is a foreigner is not expected to act like a local woman. She recommends that companies avoid assuming that a female executive will fail and that a woman will not want to go overseas.

VI. Working Within Local Labor Relations Systems

A. Differences in economic, political, and legal systems result in considerable variation in labor relations systems across countries.

B. The term labor relations refers to the process through which managers and workers determine their workplace relationships. This process may be through verbal agreement and job descriptions, or through a union written labor contract which has been reached through negotiation in collective bargaining between workers and managers. The labor contract determines rights regarding workers’ pay, benefits, job duties, firing procedures, retirement, layoffs, and so on.

C. The importance to the international manager of the prevailing labor relations system in a country is that it can constrain the strategic choices and operational activities of a firm operating there. The three main dimensions of the labor-management relationship, which the manager will consider are (1) the participation of labor in the affairs of the firm, especially as this affects performance and well-being; (2) the role and impact of unions in the relationship; and (3) specific human-resource policies in terms of recruitment, training, and compensation.

D. Constraints take the form of: (1) wage levels which are set by union contracts and leave the foreign firm little flexibility to be globally competitive; (2) limits on the ability of the foreign firm to vary employment levels when necessary; (3) limitations on the global integration of operations of the foreign firm because of incompatibility and the potential for industrial conflict.

E. Organized Labor Around the World

1. The percentage of workers in the industrialized world that belong to labor unions has declined in the last decade, especially in Europe. It does not show the nature of the system in each country. In most countries, a single dominant industrial relations system applies to almost all workers; but in both Canada and the United States there are two systems—one for the organized and one for the unorganized.

2. The traditional trade union structures in Western industrialized societies have been in the following categories: industrial unions, representing all grades of employees in a specific industry, and craft unions, based on certain occupational skills. More recently, the structure has been conglomerate unions, representing members in several industries—for example, the Metal Workers unions in Europe, which cut across industries, and general unions, open to most employees within a country. The system of union representation varies among countries. In the United States most unions are national and represent specific groups of workers—for example, truck drivers or airline pilots—so a company may have to deal with several different national unions. A single U.S. firm—rather than an association of firms representing a worker classification—engages in its own negotiations. In Japan, on the other hand, it is common for a union to represent all workers in a company. In China, by law, any firm with over 100 employees must open a branch of the national union, however, the law is frequently ignored.

Teaching Resource: The AFL-CIO is a federation of 78 labor unions represents some 13.6 million working men and women. Through organizing, collective bargaining and legislative/political action, the unions of the AFL-CIO work to advance and defend the rights of working people everywhere. http://www.aflcio.org/

3. Industrial labor relations systems across countries can only be understood in the context of the variables in their environment and the sources of origins of unions. These include government regulation of unions, economic and unemployment factors, technological issues, and the influence of religious organizations. Any of the basic processes or concepts of labor unions, therefore, may vary across countries, depending on where and how the parties have their power and achieve their objectives, such as through parliamentary action in Sweden. For example, collective bargaining in the United States and Canada refers to negotiations between a labor union local and management; but in Europe collective bargaining takes place between the employer’s organization and a trade union at the industry level.

F. Convergence versus Divergence in Labor Systems

1. Although no clear direction is evident at this point, political changes, external competitive forces, increased open trade, and frequent moves of MNCs around the world are forces working towards convergence in labor systems. Convergence occurs as the migration of management and workplace practices around the world results in the reduction of workplace disparities from one country to another. This occurs primarily as MNCs seek consistency and coordination among their foreign subsidiaries, and as they act as catalysts for change by “exporting” new forms of work organization and industrial relations practices. It also occurs as harmonization is sought, such as for the EC countries, and as competitive pressures in free-trade zones, such as the NAFTA countries, eventually bring about demands for some equalization of benefits for workers.

2. Other pressures towards convergence of labor relations practices around the world come from the activities and monitoring of labor conditions worldwide by various organizations. One of these is the International Labor Organization (ILO)—comprising union, employer, and government representation—whose mission is to ensure that humane conditions of labor are maintained. Other associations of unions in different countries include various international trade secretariats representing workers in specific industries. These include the International Confederation of Free Trade Unions (ICFTU), and the World Confederation of Labor (WCL).

Teaching Resource: Learn about world labor practices at LaborNet www.labornet.org.

3. Although there are forces for convergence in labor relations systems around the world as discussed above, for the most part, MNCs still adapt their practices to a great extent to the traditions of national industrial relations systems, and there is considerable pressure to do so. Those companies, in fact, act more like local employers, subject to local and country regulations and practices. While the reasons for continued divergence in systems seem fewer, they are very strong; not the least of these are political ideology and the overall social structure and history of industrial practices. Exhibit 10-8 shows the major forces for and against convergence in labor relations systems.

Management Focus: China Drafts Law to Empower Unions and End Labor Abuse

China is planning on adopting new laws that provide better protection for worker’s rights and ending the abusive practices of some employers. While the laws will apply to both domestic and international companies, the emphasis will be on foreign companies and their suppliers. The new laws are the result of an increasing government concern over the growing income disparity and civil unrest developing in the country. The laws make it more difficult to fire poorly performing employees and appear to some as a return to China’s “iron rice bowl” mentality of the 1950s and 1960s. “This is really two steps backwards after three steps forward” states Kenneth Tung, Asia-Pacific director of legal affairs at Goodyear Tire and Rubber Company in Hong Kong who is a legal advisor to the American Chamber of Commerce in China. With costs already rising in China, the new laws worry some companies already doing business in China. They feel that the country will begin to look less attractive as a place to do business, and may cause the price of labor to rise by fifty percent or more. Some feel that if current labor laws were to be enforced, which often they are not, the problem of worker abuse would be stopped. Some migrant workers complain that they are sometimes not paid or that their pay is delayed. The new laws would impose heavy fines, and the state-controlled union will be given greater power, making it very difficult to fire an employee. While the American Chamber of Commerce is lobbying against the new laws, others, including the Global Labor Strategies group, feel that new laws are needed and represent only modest reform in Chinese labor law.

G. The NAFTA and Labor Relations in Mexico

1. About 40 percent of the total work force in Mexico is unionized, with about 80 percent of workers in industrial organizations which employ over 25 workers, unionized. However, government control over union activities is very strong, and although there are some strikes, union control over members remains rather weak. Multinational Corporations are required by government regulation to hire Mexican nationals for at least 90 percent of their workforce; preference must be given to Mexicans and to union personnel. However, in reality, the government permits hiring exceptions.

2. Currently, the only labor issues that are subject to a formal tri-national review under the NAFTA labor side pact are minimum wages, child labor, and safety issues. But, as illustrated in the end-of-chapter case, foreign firms like Honeywell operating in Mexico are faced with pressures from various stakeholders in their dealings with unions.

3. Many foreign firms set up production in Mexico, at least in part for the lower wages and overall cost of operating there (utilizing the advantages of the NAFTA), and the Mexican government wants to continue to attract that investment, as it had for many years before NAFTA; but Mexican workers claim that some of the large U.S. companies in Mexico violate the basic labor rights and cooperate with pro-government labor leaders in Mexico to break up independent unions.

Comparative Management in Focus: Labor Relations in Germany

Germany’s codetermination law (mitbestimmung)—which refers to the participation of labor in the management of a firm—mandates representation for unions and salaried employees on the supervisory boards of all large companies and “works councils” of employees at every work site. Unions are well integrated into managerial decision-making and can make a positive contribution to corporate competitiveness and restructuring.

Codetermination has clearly helped to modify German managerial style, from authoritarian to something more akin to humanitarian, without altering its capacity for efficiency and effectiveness. This system compares to the lack of integration and active roles for unions in the U.S. auto industry, for example, conditions that limit opportunities for change. However, the practice of codetermination, and the “works council,” which gives increased power to employees is under attack.

Increasingly German companies are seeking alternatives to these traditional labor relations procedures as they feel increased global pressure. Some companies are sidestepping the restrictions by registering their companies as public limited companies in the U.K. With huge membership loses in Germany, German labor unions are increasingly making concessions in order to avoid the loss of even more jobs.
Foreign companies also recognize the high labor costs of Germany, including the cost of terminating an employee. Companies can incur costs that include severance pay, retraining costs, costs to find another job, and other termination expenses.

In an effort to retain the high wage levels, German auto firms have begun to adopt the Japanese model of reducing supplies and other costs to remain competitive.

Note: DaimlerChrysler no longer exists. In 2007 Chrysler unit was sold.

Teaching Tip: Have your students consider how their university might change if it employed codetermination. Ask what would change if students had 25% of the votes on the governing board of their school.

Chapter Discussion Questions

1. What steps can the company’s IHRM department take to maximize the effectiveness of the expatriate’s assignment and the long-term benefit to the company?

Companies benefit from the knowledge and experience expatriate managers gain about how to do business overseas, managerial and cross-cultural skills, and knowledge of new technology, local marketing, and competitive information. The company can best use these benefits by emphasizing shared learning among global managers. Of course, if a company cannot retain these managers, such benefits are not realized. Black and Gregersen conducted research of 750 U.S., European, and Japanese firms. They found that companies which reported high job satisfaction and performance, and low turnover among their expatriates utilized these practices:
1) focus on knowledge creation and global leadership development, 2) assign overseas posts to people whose technical skills are matched or exceed by their cross-cultural abilities, and 3) end expatriate assignments with a deliberate repatriation process.

2. Discuss the role of reverse culture shock in the repatriation process. What can companies do to avoid this problem? What kinds of skills do managers learn from a foreign assignment, and how can the company benefit from them? What is the role of repatriation in the company’s global competitive situation?

Management of the reentry phase of the career cycle is as vital as management of the cross-cultural entry and training. Many expatriates and their families have a difficult time readjusting to their old culture and its different behavioral expectations. The longer the person is away, the more difficult it is for him/her to reintegrate into the organization and to get back into the swing of things. The family may have lost social contacts or jobs and may feel out of step with its contemporaries. There may be feelings of alienation from what was perceived as home. A mentor program is perhaps the best method for companies to use in avoiding the reverse culture problem. Expatriates learn about different markets, cultures, and environments. This can be important to companies as they seek to integrate the different geographic operations of a firm. Organizations must successfully repatriate these employees though if it is to benefit from their knowledge and experience.

3. What are the reasons for the small numbers of American female expatriates? What more can companies do to use women and minorities as a resource for international management?

Acceptable norms for the professional role of women in most other cultures greatly restrict the number of job opportunities available to them. In addition, women are expected to closely adapt themselves to the cultural norms for women that exist in any particular culture. Many cultures have much more restrictive norms for women than they do for men, making the foreign assignment appear less attractive. Perhaps the biggest hurdle, however, to females taking on expatriate assignments is the perception of management in the home country. Given some of the restrictions found in the world based on gender, and the perception that females are less interested in such assignments, management may be overlooking this important human asset. Most of the restrictions found abroad can be accommodated and management should not assume that females are not interested in such assignments.

4. Discuss the role of international management teams as relative to the level of a company’s global involvement. Give some examples of the kinds of teams which might be necessary and what tasks they would face.

International management teams are collections of managers from several countries who must rely upon group collaboration if each member is to experience the optimum success in goal achievement. The ability to develop effective transnational teams will become essential in light of the increasing proliferation of foreign subsidiaries, joint ventures and other transnational alliances. Teams have commonly become involved in such essential activities as strategic planning, engineering design, production, and marketing.

5. Discuss the reasons behind the growing convergence and interdependency of labor unions around the world.

The refrain of the communist movement “workers of the world unite” has never become a reality, however, there is increased convergence and interdependency in global labor activity. Political changes, external competitive forces and more open borders and markets have produced some of this convergence. Increased pressure for convergence has also resulted from the activities of outside monitoring organizations such as the International Labor Organization (ILO). The market for labor is becoming more global and labor organizations are attempting to respond to this trend.
Application Exercise

The detailed material in the chapter can help students plan this exercise. Before students conduct the interviews, it is important that they review the information on female expatriates and focus their questions based on the research finding. The material in the chapter can provide a guide to directing the interviews.

Experiential Exercise

This exercise is intended to highlight the difference found between German and Mexican unions and labor relations. It is important that students review the chapter material on comparative labor relations in order to successful complete the exercise.

End-of-Chapter Case: Avon in the Global Markets 2007: Managing and Developing A Global Workforce

Case Objectives and Use

This case discusses Avon’s global operations in 2007 within the areas of management of a far-flung and culturally-diverse workforce and client base and direct selling. The primary objective of this case is to evaluate Avon’s expanding business in emerging markets by recruiting productive cadres who are critical in the company’s future international business. The case is appropriate for use in international management, marketing strategy, international business strategy, and business policy courses. The case is suitable for use in undergraduate and graduate classes.

Case Synopsis

Avon is the largest direct seller of personal care products and one of the best selling cosmetics brands in the world. The company targets young as well as middle-aged customers in over 100 countries. In 2006, Avon had over 5 million independent representatives worldwide. In 2005, Avon’s revenue surpassed $8.15 billion, with profits of $847.6 million. The company is one of the well-established brands in the $90 billion toiletries/cosmetics and household nondurables industry. In global markets, a company’s workforce and sales people are the main representatives, taking orders and dealing with customers on a daily basis in consumer and industrial markets. Avon’s major asset is its sales force that is located in over 100 countries. For companies, it is critical to become aware of cross-cultural differences by providing the appropriate training and development. In the case of Avon, global markets are an important part of the company’s strategy since it maintains over 4 million independent representatives and associates. Like other companies, Avon cannot operate efficiently without having the best and well-trained workforce since the turnover rate is high in direct selling. Avon runs leadership programs and on-the job training seminars on a regular basis. The company particularly maintains high standards in four areas dealing with sales force productivity and future retention, i.e. compensation, fringe benefits, professional development, and workforce environment.

Discussion Questions

1. Evaluate Avon’s operations in global markets regarding the use of international cadre development and building company associates and independent representatives.

As stated earlier, Avon is one of the oldest and best brands in the emerging markets as well as developing countries. Being in direct selling, the company is known for the use of its efficient and well-organized sales force which demands consistent training and customer support. The brand is well recognized among the masses in developed and developing countries because of affordable pricing and year-round availability. The company runs training programs and other activities that are compatible with its goals and strategies.

2. Since 70 percent of Avon’s revenues are generated outside the U.S., what recommendations do you provide to the company regarding dealing with culturally diverse workforce and multicultural marketplace in the coming years?

Avon should keep doing what it is known for over the 40 years. Since 2000, the company has witnessed major changes in emerging markets because of growing demand and population growth. Understanding cultures from a sales force point of view and becoming aware of the workforce needs are two of the most important areas that should be pursued by Avon. The company should devise a plan that deals with local rules and regulations by becoming part of the markets. Also needed is an effective public relations campaign. Other issues include a well- planned cultural sensitivity/cross-cultural training, dealing with local labor relations/laws, relationship marketing, and managing diversity/multiculturalism.

3. In the coming years, Avon’s future global expansion is contingent on hiring and retaining the best workforce and sales people in global markets. What training and cross-cultural strategies do you recommend to the company to deal with this area?

In this question, students should be asked to discuss Table 2 (Issues of market entry and workforce management) from the case. Avon’s sales force training will be determined by two types of plans: pre-market entry/short-term strategies and post-market entry/short-term strategies. In a pre-market entry plan, Avon needs to look at strategies such as: availability of local management and workforce, expatriate recruiting, recruitment methods and selection, sales force training, cultural sensitivity/cross-cultural training, cost issues, dealing with labor relations/laws, intercultural considerations, perceptions of equality and equal opportunity issues, and dealing with local labor relations/laws sales force strategy (territorial, product, and customer). In the post-market entry plan, the company should concentrate on job training/professional development, sales force productivity issues, control, trust, and commitment issues, implanting organizational culture, relationship marketing, acculturation/adaptation issues, supervision/mentoring (motivation and ethical perceptions), building global/local management teams, and managing diversity/multiculturalism.

4. China is expected to be a major market for Avon. If you were to

advise Avon, how would you develop a competitive HR plan for the company?

According to Andrea Jung, China will be the largest overseas market for Avon because of emerging consumer class, changing demographics, and growth potential (see Table 3). The Chinese market is growing at a fast pace and is expected to generate handsome revenues in the coming years. In 2004, Avon maintained 5,500 beauty boutiques in China and over 700,000 members. The company announced opening 500 additional boutiques and will acquire its Chinese partner Masson for $50 million. To explore further, students should be asked to research and gather additional data on China’s demographics and consumer markets from the Internet.

5. What is the role of IT in Avon’s markets, particularly developing areas? What are the implications for training its representatives?

Information technology is an important part of Avon’s success, including its use in developing markets. The use of IT for Avon is necessary in order to keep both the representatives, as well as the company, informed on issues such as new products, inventory management, and sales. Avon must continue to train its representatives in the use of IT, just as they have in the areas of product features and marketing techniques. Avon is not unlike any other global company in that information management is an increasingly important component of competitive advantage.

6. What do you think of Avon’s prospects in India, given that per capita spending on beauty there is only $1, compared to $100-200 in developed markets?

India offers great promise to Avon. While per capita spending on beauty products is small, the population is large, and the middle class of India is increasing its income. As employment opportunities rise in India, especially for women, it is likely that per capita consumption of beauty products will increase. India is also a stable democracy and less likely to experience rapid changes in governmental policy towards business. A few years ago China enacted laws concerning direct marketing and sales activity that adversely effected Avon. Recently the laws have been scaled back, however, the situation in China is still confusing and worrisome. India does not have the same level of political risk found in China.

Courses and Levels

B.B.A.: International Management; Marketing Strategy; International Marketing or International Business.
M.B.A.: International Management; Seminar in International Business Strategy; Business Policy/Strategic Management.

Analysis

The Avon case is an interesting case regarding the workforce development and sales force training. Companies in the areas of direct selling should pay attention to the issues of recruitment, training, and retention. In international markets, Avon faces the problem of finding an educated and trained sales force. A comprehensive plan is needed to deal with these problems. In addition, well-thought-out strategies are also required when hiring sales force in international markets. In direct selling, effective sales people are even more valuable when pursuing door-to-door selling and dealing with regional markets and diverse segments. Organizing the workforce and understanding a variety of industrial labor relations around the world can be a daunting task. Equally important are the issues of hiring, training, and above all, retaining the best employees.

Additional Case

There’s No ‘Aye’ in Team: A case in cross-cultural team management

As joint ventures go, it seemed like a perfect match. Three highly respected technology firms – one each from the United States, France and Japan – would collaborate on designing ahead-of-the-curve telecommunications software. Their joint offspring, InSite, would first begin with a research and development team incorporating engineers and IT specialists from each firm. The American company, SemiSweet, was the largest of the three and quickly took the lead in organizing the team, appointing Brent Eggers as its chief. Considered one of SemiSweet’s finest young minds, the 32-year-old Eggers had dropped out of college but quickly ascended SemiSweet’s ranks because of his technological wizardry and creativity. Still, he felt overwhelmed by the idea of managing the multicultural group. He considered himself helpful and friendly, but he knew he wasn’t the best “people person,” and only recently had he half-heartedly accepted a promotion because of the management responsibilities it would entail. Sticking to IT seemed a lot more interesting to him than managing people. But his bosses at SemiSweet, a bit afraid of looking outsmarted by their partners at Energié (French) and Okayama (Japanese), thought his top-notch technical skills would be crucial in helping the group develop a potentially breakthrough product. For all his worries, Eggers was excited about the prospects. He had always wanted to learn more about foreign people and places, and while he remembered only a few greetings from his high school French class and spoke no Japanese, he was certain that the cross-cultural challenges ahead could be overcome as they focused on their similarities. “Hey, we all speak IT,” Eggers kept telling himself reassuringly.

The First Meeting Within days after accepting the assignment, Eggers was being pressured by SemiSweet executives to come up with a software design – and fast. Eggers in turn urged the foreign partners to assemble their delegations quickly and meet within the month at SemiSweet’s headquarters in Miami. As much as he hoped to get to know French and Japanese culture as they worked together, Eggers knew the deadlines would dictate fast action and plenty of work in between meetings. At the InSite group’s first meeting, the Japanese and French team members were whisked into a windowless conference room, where they were given coffee, bagels and an agenda that included a half-hour break during the morning session for “socializing.” The morning began cordially enough. After going around the table with introductions and pleasantries, Eggers said: “So, we all speak English then?” Everyone nodded, but it was clear that communication would be a challenge, especially for the Japanese, most of whom seemed particularly self-conscious speaking in their broken English. While the French spoke nearly flawless English, they nonetheless seemed bugged about having to cater to their hosts. Eggers read over the two-day meeting’s agenda, item by item, to make sure everyone was “on the same page,” and then the Americans launched into a PowerPoint presentation about what they believed the group’s mission should be. To help bring the group together, Eggers passed around T-shirts emblazoned with InSite’s logo on the front and an inspirational slogan on the back. The French reluctantly put them on. As the day dragged on, Eggers noticed that the Japanese rarely spoke up – and even fell asleep, but he figured that was just a result of jet lag. But if the Japanese seemed detached, the French were practically argumentative, often interrupting the speaker to debate a point or pontificate. In reading up on the French members before the meeting, Eggers had noticed that they made a point of outlining their educational qualifications in exhausting detail (he vaguely remembered something about grandes écoles). Now at the meeting, he thought they were trying to show off their intellect, and they seemed especially keen on challenging his knowledge. Eggers thought the French frequently went off-topic and talked around in circles, and when he brought up the agenda and tried to steer the group back on schedule, the French seemed annoyed by his clock-watching rigidity. Eggers couldn’t understand the silence from the Japanese and the surliness from the French, but he hoped things would improve by the time the team met again the next day.

The Second Meeting Eggers grew impatient as the clocked ticked past 9 a.m. Eventually the French sauntered in, swapping stories about their swinging night on South Beach. The second meeting was no better than the first. Eggers pushed to stay on task. The French resisted. And the Japanese were more quiet and uncomfortable than ever. And they brought the biggest group of people, Eggers thought in exasperation. Doesn’t one of them talk! Eggers led the group in a brainstorming session, hoping that would encourage the Japanese to open up, but he found that trying to “force” their participation only resulted in awkward silence. Before the group split up with plans to meet again in two months, Eggers gave assignments and set deadlines for when certain parts of the project had to be completed. Weeks went by, deadlines passed, and Eggers received few of the software designs he asked for. His e-mails to the French went unanswered, and when he eventually spoke to them, they said they had been on holiday all month. Eggers also was increasingly annoyed with the Japanese. “They’re not pulling their share of the load,” he mused, ticking off in his mind how they were lagging in the group: offering few comments (or sleeping!) in meetings, reluctantly taking part in decision-making, and avoiding personal responsibility for assignments.

The Final Meeting When the team met again, it was more of the same, and Eggers felt the group had been spinning its wheels long enough. They did have some preliminary software designs – mostly the work of the Americans, he noted – and he figured a decision needed to be made quickly if the joint venture was ever to get off the ground. The French were just filibustering, he thought, arguing and counter-arguing over several topics at once. They thought choosing a software design wasn’t the group’s decision to make, and the Japanese seemed uneasy about deciding so soon. But Eggers pressed on anyway, and at the end of the day he called for a vote on the chosen software design. “All in favor say aye,” Eggers said. “Aye,” said his American colleagues. A few of the French murmured their acceptance. The Japanese said nothing. “All opposed say nay,” Eggers said. A few of the French raised objections, but Eggers wasn’t paying attention. He was staring at the Japanese, waiting. They avoided his gaze, shifting uneasily in their chairs. After an awkward silence, Eggers spoke. “Well, the ayes have it.”

* * *

In the weeks that followed, several of the French quit the team, and Eggers lost hope of reconnecting with the Japanese, who always had excuses for backing out of group work and further meetings. The team’s work so far had been paltry at best, and Eggers was feeling growing pressure from his superiors. With his failed team putting the entire joint venture in jeopardy, Eggers wondered what he could have done differently.

Sources
Rarick, C (2004). Au Revoir, Mrs. Williamson. Cases and Exercises in International Management. CD-ROM.
Scarborough, J. (1998). The Origins of Cultural Differences and Their Impact on Management. Westport, CT: Quorum.
Schneider, S. and Barsoux, J. (2003). Managing Across Cultures. Second edition. Prentice Hall.

Case written by Seth Lewis; MBA student, Barry University. July 2004.

Additional Case

Kidnapped in Colombia

Although Melissa Woodruff still felt compassion for the people of Colombia, she now realized that she made the biggest mistake of her life when she encouraged her husband to accept a temporary assignment in Medellin. As she reflected on that decision, she felt as if she would never recover from the Colombian experience.

An International Opportunity Melissa and Dan Woodruff met in college and married as soon as Dan graduated. although the couple wanted to start a family, they decided that it would be best to wait until Dan became more established in his career as a marketing manager with Carolina Textiles. The couple settled into a nice home in South Carolina and Melissa was able to complete her undergraduate degree in fashion merchandising. Melissa wanted to design women's clothing, but she had difficulty securing a position with an established company. She instead began to design and manufacturer her own line and sold the garments on ebay. Although she didn't make much money, she greatly enjoyed the challenge of designing a piece of clothing and seeing its actual completion. Dan did well in his career at Carolina Textiles and the couple thought that they might spend their entire lives in the tranquil surroundings of the small South Carolina town where Carolina Textiles was headquartered. However, that vision was not to be. After working for Carolina Textiles for only five years, Dan was offered an opportunity which he never envisioned. The firm offered Dan the opportunity to manage a large manufacturing arrangement, which the firm had recently established in Colombia. In an effort to reduce labor costs, Carolina Textiles had contracted with a local textile manufacturer in Medellin, and the company needed someone to manage the day-to-day operations, and to protect Carolina Textiles interests in Colombia. Colombia was seen as one of the desirable locations for foreign manufacturing in that Colombia, along with Bolivia, Peru, and Ecuador were part of the Andean Trade Preferences Act. The Act was amended in 2003, which provided for textiles to be brought into the United States, duty-free, provided that the products were manufactured with U.S. cloth. The city of Medellin seemed like a good choice in that the city had a long history in textile manufacturing. Many of the local manufacturing facilities in Medellin operate in free trade zones, or “Plan Vallejo,” and they export much of their output to the United States. The industry was well developed and accustomed to exporting. Dan, and especially Melissa were at first hesitant about spending two to three years in Colombia. Not only would they miss their friends in South Carolina, but they were aware of the political violence in Colombia. After a visit to Medellin, and after much discussion, the couple decided to give it a try. Melissa reasoned that the experience would be good for Dan's career, and he would be getting a promotion along with the assignment. The couple was still young and could start a family after the assignment. The fact that the couple could easily afford to have a maid who would also cook for them was appealing. Melissa also felt that she could continue her design business, and perhaps, even expand it with the abundant manufacturing facilities in Medellin. The couple sold their home in South Carolina, said good-bye to friends, and headed for the challenges that awaited them in Colombia.

Life in Colombia Dan and Melissa settled into a rented three-bedroom home in the suburbs of Medellin. For the most part the couple enjoyed living in the "City of Eternal Spring," however, life in Medellin was also stressful. Without much international travel experience, and only a very basic proficiency in Spanish, the couple experienced a significant degree of culture shock. Melissa would email friends about how different it was living in Colombia; from seeing all the armed guards at the mall, to the ability to purchase medicine at a pharmacy without a prescription. Everyday presented its own set of challenges for Dan and Melissa but the couple adjusted fairly well. Dan was busy with work and Melissa was scouting out new ways to establish her design business. Dan and Melissa had been warned about the political troubles and violence in Colombia. Before leaving the United States they read much on the history of Colombia. They were especially interested in the revolutionary groups that operated against the government. Dan and Melissa learned that Colombia was still a divided country with the smaller, but dominate population of European descent often in conflict with the larger population of mixed ethnicity. The two rival political groups which developed in Colombia, the Conservatives and Liberals had fought in a bloody civil war called "La Violencia" which began in 1948. The main revolutionary group, the Revolutionary Armed Forces of Colombia or FARC developed out of the frustration of some members of the Liberal party. In the 1980's FARC began to fund its revolutionary cause by taxing the illegal drug industry of Colombia. The group continued to control an increasingly larger share of the country and now claims over 40% of Colombia. FARC also began to diversify its source of funding through the kidnapping of prominent Colombians and expatriates. While the kidnapping threat worried Dan and Melissa, they reasoned that neither one of them was a likely target for kidnapping since they were "just average people." They did not limit their outings and generally tried to blend into Colombian society including frequent attendance at the bullfighting events in the city. The couple felt acclimated to the culture, for the most part, after about six months. Melissa enjoyed getting dressed up and shopping. She enjoyed buying gifts to send back home to friends. The couple developed a daily routine in which Dan would leave for work every weekday morning at 8:30 A.M. driving himself, and Melissa would begin her day on the Internet, answering emails and developing business ideas. Although the couple did not have the opportunity to make many American friends, they did enjoy the company of a few Colombian couples from Dan's work. Melissa truly enjoyed these friendships and developed a degree of sympathy for the less fortunate members of Medellin society. Sometimes she would open her wallet and drop a large cash roll (large by Colombian standards) into the hat or canister of street beggars. This made her feel as if she was making a big difference in someone's life, something she felt she could not do in the United States. The compassion she felt towards the Colombian people was not tempered even when her purse was snatched in the local market. While she had the equilivant of about $200 U.S. in the purse, she was more concerned about replacing her credit cards and identification. This made shopping difficult in that she would have to carry cash for all transactions, including larger transactions. The purse snatching worried Dan, but he reassured himself that petty crime was a problem in Colombia and that the couple would just have to be more careful. The event passed quickly, and was almost forgotten when a very impressive article was written in the local newspaper profiling Dan and Carolina Textiles. The article was clipped and mailed back to a number of friends in the United States. The couple felt as if they were making new friends in Colombia and that Dan's career was heading in a very positive direction.

Taken Hostage All of this, however, was about to change. On a particularly spring-like day, as Dan left for work he had much on his mind. There were a number of improvements he hoped to suggest to the contract manufacturer, including the addition of a more efficient computerized layout pattern for cutting cloth. As he drove the usual route to his office he was reviewing the different supplier options for the new software, and he kept thinking about the recent article about himself in the newspaper. Suddenly his thoughts were interrupted as the vehicle in front of him came to a stop and the driver opened the hood of the car. A second vehicle moved very and very closely behind Dan's new 700 series BMW, so close in fact that Dan was concerned that the two vehicles would crash. Dan motioned to the driver of the van behind him to move back. Instead four armed men wearing handkerchiefs over their noses and mouths got out of the van, grabbed Dan, and placed a cloth sack over his head. They pushed him into the back of the van and quickly took off. Dan, unable to see what was happening, and unable to understand much of what was being said was confused and scared. Surely he thought to himself, "I'm not being kidnapped. They must have made a mistake." Unable to see, and having some difficulty breathing Dan tried to speak to his captors in English, but he got no response. Dan kept asking them "what's going on" and trying to assure them that they must be making a mistake. After a few hours of riding in the back of the hot van and having no water, Dan was hopeful when the van stopped and the door opened. He hoped the ordeal was coming to an end. Unfortunately for Dan, the ordeal was just beginning. He was placed inside another vehicle and it was the beginning of a very long drive into the remote areas of Colombia - an area Dan and Melissa had planned on visiting some day, although under very different circumstances. Back at home, Melissa was very busy planning her day when someone knocked at the door. Adriana, the housekeeper answered the door as usual and came very quickly calling for Senora Woodruff. She said a man had left this note for her and she seemed very upset. Melissa was confused as she opened the paper she had been given. The note, written in broken English, stated that her husband had been kidnapped and that she should get a short-wave radio. The note indicated a frequency to use with the radio and the times to use it. It was signed "Gabino." Melissa asked Adriana what this all meant and she told her that Senor Woodruff had been taken by FARC and that he was in great danger. Melissa was beginning to become very upset, however, she retained her composure and called Dan's office, hoping it wasn't true. When Dan’s assistant told her that he had not yet arrived, she immediately called his mobile phone. There was no answer. Melissa was now frantic. She called Dan's assistant again and explained what had happened. The assistant, Manuel Chacon told her to stay calm and that he would immediately come to the house. Melissa asked Adriana if she should call the police and Adriana told her that it would not be advisable.

When Manuel arrived he told Melissa to remain calm. He had already contacted Carolina Textiles and told them what had happened. Manuel told Melissa that, unfortunately, kidnapping of foreigners was common in Colombia, but that Dan would be released as soon as Carolina Textiles paid the ransom that would be demanded by FARC. Manuel assured Melissa that no harm would come to Dan and that he would be released very soon. Manuel told Melissa that there was nothing that they could do at this time but purchase the short-wave radio and wait for the designated time to contact the kidnappers. He also advised her to pray for a safe and quick return of her husband. Melissa decided to call her parents whom she had little contact with since moving against their wishes to Colombia. It would be a difficult call but she needed their support. In quick time Manuel purchased the short-wave radio and set it up in the Woodruff's home. He was in constant contact with Carolina Textiles and he relayed their concern to Melissa. Manuel also had to report to Melissa that Carolina Textiles did not have ransom insurance and that this made the situation more difficult. He reassured Melissa that once the kidnappers learned of this fact they would release Dan, maybe with a "token ransom payment." Melissa, after contacting her parents got their pledge to help pay the ransom.

Negotiations Begin Three very long days passed before Melissa and Manuel were able to make contact with Gabino, the FARC negotiator. Manuel explained how Dan was not a wealthy man and that the company he worked for did not carry ransom insurance. Gabino told Manuel that unless a $2,000,000 US ransom was paid for Dan they would never see him alive again. Manuel again insisted that this was not possible, however, Gabino was unsympathic. The first contact ended without any hope of agreement. Manuel was instructed to try again, once he had arranged for the money transfer. Manuel assured Melissa that the demands were just typical bargaining and that if she could raise about $50,000 US the matter could be settled. Melissa knew that she could raise that much with their savings and the help of her parents. Dan's parents were deceased. Manuel told Melissa that he would seek the help of Carolina Textiles. With the help of Manuel, Carolina Textiles decided that they should contact a kidnapping and ransom expert to help with the negotiations. Since they did not carry kidnapping and ransom insurance they would have to pay the costs of the negotiator but it was felt that this was a small price to pay for their employee's safety. The external negotiator would not arrive in Medellin for three days, enough time for Manuel to try again with Gabino. On the second attempt at negotiation the same situation arose. Manuel told the kidnappers that they should release Dan since he was not able to pay the ransom and Gabino continued to make threats. Manuel offered the $50,000 with an expectation that the negotiators would agree to a quick resolution. Gabino told Manuel, with Melissa listening, that for $50,000 he would cut off a certain body part from Dan and mail it to Dan's wife. Melissa became frantic and the second session ended very badly. During all this time, Dan was still traveling with his captors deeper into the Colombian jungle. The first few days he was riding in several vehicles but afterwards he was on foot, always chained to his captors. Dan tried repeatedly to explain that he was not an important person and that no sizable ransom could be paid. He truly believed that the captors would release him, even if in the middle of a jungle, once they believed their effort would not result in a ransom. Although Dan was optimistic that he would be released, he felt very helpless and vulnerable. He worried how Melissa would be handling the news of his abduction. Although exhausted and poorly fed, Dan continued to insist that he be released. Each day brought increasing frustration for Dan, and Melissa. Melissa began searching the Internet for information about kidnapping. She learned that on an average day 10 people are kidnapped in Colombia. She also learned that in most cases the kidnappers would eventually settle for 10-20% of the original demands. The prospects for a safe return of the hostage were not very good if the negotiation was not conducted properly. Further searching revealed that many companies, which operate in countries with a high probability of kidnapping, carry kidnapping and ransom (K&R) insurance. The policies typically cover the ransom payment, consultant fees, and transportation needed to deliver the ransom and return of the hostage. It appeared that many companies which carry K&R insurance do not advertise the fact for fear that their employees will more likely become targets of kidnapping. Melissa began to wonder if Carolina Textiles did in fact have K&R insurance but it was not being disclosed at this time.

The Security Consultant Melissa heard a knock at the door and a man entered. It was Charles Griffith, a security consultant hired by Carolina Textile to help negotiate the release of Dan. Charles introduced himself and appeared to have great confidence in his abilities. He told Melissa not to worry, and that he had successfully handled the negotiations for two other expatriates, one in Mexico and one in Venezuela. He did state that because Carolina Textiles had no K&R insurance it would make the negotiations more difficult. Melissa told Charles that she had read on the Internet that the typical settlement was between 10-20% of the initial demand and that she could probably raise that amount with the help of the company. Charles just responded by saying "we will see." Charles began the negotiation process with Gabino and the first session did not go well. Gabino at first refused to talk to him and asked to speak with Manuel. Charles informed him that he, Charles, would be handling the negotiations from now on. The communication ended when Charles asked for proof that the rebels did in fact have Dan and that he was alive. Melissa began to worry that Charles was not the right choice for the negotiation sessions and confided this to Manuel. Days went by and there was no response from Gabino. Feeling frustrated, Melissa asked Manuel to once again attempt to contact Gabino. He agreed and they decided that they would tell Charles that he should defer to Manuel, at least for a while. Charles strongly opposed this suggestion but agreed to let Manuel do the next session due to the strong insistence of Melissa. He encouraged Manuel to explain that a new negotiator was working for the family. For Dan, boredom was becoming a major issue. He spent his days at a rebel camp, chained either to a tree or to his bed. Dan would often think of Melissa and the various trips they took together back in the United States. He sometimes replayed movies he had seen in his head to relieve the boredom. The heat, lack of food and water, and constant boredom were beginning to fray his nerves. His frequent outburst caused some guerrillas to threaten him with death. All the rebels carried assault rifles and machetes, and some of them appeared to enjoy the possibility of doing harm to Dan. On a couple of occasions Dan attempted to befriend some of the younger rebels by explaining, in broken Spanish, that he and his company were trying to help the Colombian people by creating jobs. It didn't seem that this mattered to the rebels. Back in Medellin, with Manuel again doing the negotiations it appeared that progress was being made. Gabino told Manuel that it might be possible to release Dan if $1,500,000 could be paid quickly. While it was impossible for Melissa to raise that much money, even with the offer of $100,000 from Carolina Textiles, at least the kidnapper’s demands were being reduced. Manuel also was able to have proof delivered, via a photo of Dan holding a copy of El Tiempo (a daily Colombian newspaper) and he seemed to be developing some rapport with Gabino. Charles, while listening to the negotiations offered suggestions to Manuel, but he was becoming increasingly dissatisfied with the role he was playing. Charles reported back to Carolina Textiles and expressed his concerns with the fact that Melissa was insisting on having Manuel do the negotiating. Charles expressed his doubts that Manuel could ever reach a settlement. The CEO of Carolina Textiles, Ben Goodin called Melissa to persuade her to allow Charles to take over the negotiations. Melissa insisted that Manuel was better suited for the negotiations and that the life of her husband was at stake. Mr. Goodin was not about to press the issue further, and so he wished Melissa luck and asked that he be kept informed. When news got back to Charles that he was not going to be doing the negotiations he decided to leave Colombia. He did offer suggestions to Manuel and told both Manuel and Melissa that the process could take some time. Every third day Manuel attempted to contact Gabino. Most of the time there was only static over the airways. The process continued for five long months and it was clear that Melissa was feeling the strain. While Carolina Textiles continued to pay Dan's salary, Melissa felt as if they could do more. Not much progress was being made, however, Gabino did agree to reduce the ransom to $1,000,000. This amount was still much more than Melissa could raise. It appeared to her that time was running out and that there was little hope of rescuing Dan.

A Sign of Hope It was during one of the darkest periods when a bright spot developed for Melissa. A reporter from the BBC was doing a story on Colombian kidnappings and he interviewed her for the story. Once the article was published, Carolina Textiles developed an increased interest in Dan's safety. Mr. Goodin told Melissa that the company was prepared to help with the ransom to the tune of $250,000 and that he would be sending yet another security expert down to Colombia to help in the negotiations. Melissa felt that the $250,000 may be enough for the rebels, and she could even add more from their savings and the contributions from her parents, if needed. Mr. Goodin insisted that the new security expert would be making the new offers and that he would be more successful than Manuel had been. Upon hearing the good news, Manuel and Melissa contacted Gabino and told him that the company was prepared to make a final offer of $250,000 and that a new negotiator would be contacting him to arrange for the transfer of funds and delivery of the hostage. Gabino did not share the excitement of Manuel and Melissa and all he said to them was that the amount was "not sufficient." Although somewhat surprised by the reaction, Melissa and Manuel maintained their optimism and awaited the arrival of the new negotiator. Melissa and Manuel met the new security expert at the airport. Frederick Hervitz was a very experienced hostage negotiator and he wasted no time in telling Manuel and Melissa what they would be doing. Frederick insisted that he, and he alone, would be talking to Gabino. Melissa felt confident in Frederick's abilities and was optimistic that the ordeal would soon be over. Manuel agreed that Frederick should take over the negotiations. He was impressed with Frederick and besides; the whole process was becoming a strain on him personally. Manuel and Melissa told Frederick what they had done and what they had accomplished. He told them that they had made many mistakes.

Bringing Dan Home Frederick attempted many times to reach Gabino, but each time all he heard was static. Frederick at first assumed that Gabino was just making it difficult on him in order to raise the ransom, and lower the expectations of Melissa and the company; however, the long silence did begin to worry Frederick. Weeks went by and there was no communication with Gabino. Mr. Goodin telephoned Melissa and told her not to worry, that Frederick would be bringing Dan home soon. The words of Mr. Goodin were all too true. After six months of enduring the ordeal, Melissa received a call from the American embassy in Bogotá. It was bad news. Melissa was informed that a body, that appeared to be her husband had been discovered in a remote northern province of Colombia. Melissa was devastated. She couldn't speak. She thought, surely it is a mistake, but deep down she feared it was true. Frederick arranged a flight to Bogotá for Melissa, Manuel, and himself. Melissa positively identified the body, although Dan looked much different to her than the last time she saw him. He was dirty, had a long beard, and he looked much older. The cause of death was not readily apparent. It deeply saddened Melissa that the last days of Dan's life were spent in such dire conditions. As Melissa prepared to take the body of her dead husband back to the United States for burial, she couldn't help wonder what went wrong and why the negotiations were unsuccessful. She loved the Colombian people she had met, and she hated the country. Melissa deeply regretted the decision to become an expatriate in Colombia.

Sources
DuBois, J. (1994). Cultures of the World: Colombia. New York: Marshall Cavendish.
McDermott, J. (2002). Colombia’s Most Powerful Rebels. BBC News. January 7.
McDermott, J. (2002). Analysis: Colombia’s Security Crisis. BBC News. May 4. www.countrywatch.com/colombia. Accessed on July 22, 2003.

Instructor’s Note: This case is a fictionalized account of an actual situation. The case shows the unfortunate dangers that can occur with expatriate assignments in some parts of the world. The two Americans made a number of mistakes when living in Colombia, including maintaining a high visibility. Driving expensive cars, using large amounts of cash, and having your picture in the newspaper were mistakes. The company also made a number of mistakes in terms of training and preparation. This case can also be useful for a discussion of the material in Chapter 9.

Student Stimulation

Group or Class Learning Activities

1. Labor agreement: Your company, an auto parts manufacturer currently operating in Sweden, has decided to move to the U.S. To supply the U.S. automakers, you need to reach an agreement with the local union. The union is very concerned that while the Swedish system appears to provide good working conditions, it may offer the potential to bypass the union and let management work with labor directly. Divide the class into an even number of teams, half representing the Swedish automaker and half, members of the U.S. union. Working separately, have each team identify a set of issues it will want to include in any formal agreement. Each team should work for about 20-30 minutes, followed by a 10-20 minute negotiation session followed by a debriefing. Some suggested debriefing questions are:

a. What were the union demands? Management demands? b. How realistic was the union’s concern that it would be bypassed? c. What differences did the Swedish firm encounter compared to its home culture? d. How might U.S. workers respond to the Swedish style of management? e. Given this experience, what general principles or processes would be important in establishing a cross-national, cross-cultural labor policy?

Additional Stimulation Discussion Questions

1. Imagine you are an expatriate. Your organization wants to develop a program to aid expatriates in repatriation based on the recommendations of Tung: 1) mentor program, 2) special career planning and guidance unit, or 3) network system to keep the expatriate connected with the home organization. Which of the three recommendations would you prefer? Why?

2. As an expatriate spouse, what concerns and requests would you have prior to joining your spouse on an assignment abroad? Are there benefits the company could offer to ease your concerns?

3. The three largest trading areas are Asia, Europe and NAFTA, each with its own labor practices. Which labor practices do you envision becoming more universal? Justify your answer.

4. If you were to develop a checklist of key issues to remember when negotiating a labor agreement across borders, what would the checklist include?

5. How might culture determine the extent of union participation in a country?

6. If you are assigned a team project with students of a different culture, in what ways could you manage your team’s diversity to gain a higher grade?

7. If the organization you worked for needed someone to voluntarily train to become the coordinator of a culturally-diverse work team, what initial actions would you take?

CHAPTER 11

MOTIVATING and LEADING

LECTURE OUTLINE

General Outline
Opening Profile: Fujitsu Uses Pay Cuts as a Motivational Tool
Motivating
Cross-Cultural Research on Motivation The Meaning of Work The Need Hierarchy in International The Intrinsic-Extrinsic Dichotomy in the International Context Comparative Management in Focus: Motivation in Mexico Reward Systems
Leading
The Global Leader’s Role and Environment Management Focus: Leadership in a Digital World Cross-Cultural Research on Leadership Contingency Leadership—The Culture Variable The GLOBE Project Comparative Management in Focus: Leadership in the EU
Chapter Discussion Questions
Application Exercises
Experiential exercises
End-of-Chapter Case Study: Sir Richard Branson’s Planes, Trains, Resorts, and Colas in 2007
Additional Case: Trying to do Business in Mexico, Gringo Style
Student Stimulation Questions

Opening Profile: Fujitsu Uses Pay Cuts as a Motivational Tool

Fujitsu Ltd. is using a rather unusual approach to motivate the rank and file of its company. In order to return the company to profitability, the company is cutting the pay of managers. It is felt that this will motivate their subordinates to work harder. In Japan, with a strong spirit of kinship and team spirit, it is felt that employees will work harder if they see their bosses sacrificing. Do you think this approach would work in the U.S.?

Teaching Resource: Stay current on Fujitsu by viewing their web site http://www.fujitsu.com/global/

I. Motivating

A. The stated objective in this chapter is to consider motivation and leadership in the context of diverse cultural milieus. We need to know what, if any, differences there are in the societal factors that elicit and maintain behaviors that lead to high employee productivity and job satisfaction. Are effective motivational and leadership techniques universal or culturally based?

B. Cross-Cultural Research on Motivation

1. Motivation is very much subject to the context of a person’s work and personal life.

2. Based on Hofstede’s work on motivation, we can make some generalized assumptions about cross-cultural motivation.

a. High uncertainty avoidance suggests the need for job security, whereas people with low uncertainty avoidance would probably be motivated by more risky opportunities for variety and fast-track advancement.

b. High power distance suggests motivators in the relationship between subordinates and their boss, whereas low power distance implies that people would be more motivated by teamwork and relations with their peers.

c. High individualism suggests people would be motivated by opportunities for individual advancement and autonomy; collectivism (low individualism) suggests that motivation will more likely work through appeals to group goals and support.

d. High masculinity suggests that most people would be more comfortable with the traditional division of work and roles; in a more feminine culture, the boundaries could be looser, motivating people through more flexible roles and work networks.

e. No matter what their nationality or cultural background, people are driven to fulfill needs and to achieve goals.

Teaching Resource: Lives—Original video produced by NATO to focus on the similarities and differences in feelings of citizens in the 15 NATO countries. Available from Motorola Teleprograms, Deerfield, IL.

C. The Meaning of Work

1. For most people, the basic meaning of work is tied to economic necessity (money for food, housing, and so forth) for the individual and for society. However, the additional connotations of work are more subjective, especially about what work provides other than money—achievement, honor, social contacts, or whatever.

Another way to view work, though, is through its relationship to the rest of a person’s life.

2. Exhibit 11-1 compares the relative meaning of work (MOW) in eight countries based on the research by George England. This research sought to determine a person’s idea of the relative importance of work compared to that of leisure, community, religion, and family. England called this concept work centrality, defined as “the degree of general importance that working has in the life of an individual at any given point in time.”

a. The obvious general implication from these findings is that the higher the mean work centrality score, the more motivated and committed the workers would be. Of even more importance to managers (as an aid to understanding culture-based differences in motivation) are the specific reasons for valuing work.

b. The MOW research team provided some excellent insights into this question when it asked people in the eight countries to what extent they regarded work as satisfying six different functions. The six functions were as follows: work 1) provides a needed income, 2) is interesting and satisfying, 3) provides contacts with others, 4) facilitates a way to serve society, 5) keeps one occupied, and 6) gives status and prestige.

Teaching Tip: Have your students answer the question, “If I could afford it, at what age would I retire?” After five minutes, divide the class into teams of four to five students to compare their answers. Ask each group to feed back its answers to the class and then, as a large group, try to reach a consensus on the meaning of work for your class’ culture.

Exhibit 11-2 summarizes the perceived utility of work. Note the similarities of some of these functions with Maslow’s need categories and Herzberg’s categories of motivators and maintenance factors.

3. In the Middle East, religion plays a major role in all aspects of life, including work. The Islamic work ethic is a commitment toward fulfillment, and so business motives are held in the highest regard. The origin of the Islamic work ethic is in the Muslim holy book, the Qur’an, and the words of the Prophet Mohammed: “On the day of judgment, the honest Muslim merchant will stand side by side with the martyrs.”

Exhibit 11-3 summarizes the Islamic work ethic

4. Other variables affect the perceived meaning of work and how it satisfies various needs, such as the relative wealth of a country. When people have a high standard of living, work can take on a different meaning other than simply to provide the basic economic necessities of life.

All in all, research shows a considerable cultural variability affecting how work meets employees’ needs.

D. The Need Hierarchy in the International Context

1. Some researchers have used Maslow’s hierarchy of needs to study motivation in other countries. A classic study by Haire, Ghiselli, and Porter surveyed 3,641 managers in 14 countries. It concluded that Maslow’s needs, in particular the upper-level ones, are important at the managerial level, although the managers reported that the degree to which their needs were fulfilled did not live up to their expectations.

2. In a similar study, Ronen investigated whether work-related values and needs are similar across nationalities and whether the motivation categories of Maslow and Herzberg apply universally. He found that such similarities do exist and that there are common clusters of needs and goals across nationalities. These clusters include: 1) job goals, such as working area, work time, physical working conditions, fringe benefits, and job security; 2) relationships with co-workers and supervisors; and 3) work challenges and opportunities for using skills. Ronen concludes that need clusters are constant across nationalities and those clusters confirm Maslow’s need hierarchy. In addition, he claims that the cross-national need clusters in his study confirm Herzberg’s categories. Managers around the world have similar needs but show differing levels of satisfaction of those needs derived from their jobs. Exhibit 11-4 compares the motivational components of various jobs.

3. Many companies that have started operations in other countries have experienced differences in the apparent needs of the local employees and how they expect work to be recognized. Mazda of Japan experienced this problem in its Michigan plant. Japanese firms tend to confer recognition in the form of plaques, attention, and applause. Japanese workers are likely to be insulted by material incentives because such rewards imply that they would work harder to achieve them than they would otherwise. Instead, Japanese firms focus on group-wide or company-wide goals, compared with the American emphasis on individual goals of achievement and reward.

4. When considering the cross-cultural applicability of Maslow’s theory, it is not the needs that are in question as much as the ordering of those needs in the hierarchy. The hierarchy reflects the Western culture where Maslow conducted his study. Nevis proposes that a hierarchy more accurately reflecting the needs of the Chinese would comprise four levels: 1) belonging, 2) physiological needs, 3) safety, and 4) self-actualization in the service of society. It is difficult to measure the individual needs of a Chinese person because, from childhood, they are intermeshed with the needs of society. Along with culture, the political beliefs at work in China dominate many facets of motivation. As the backbone of the industrial system, cadres and workers are given exact and detailed prescriptions of what is expected of them as members of a factory, workshop, or work unit. This results in conformity at the expense of creativity. Workers are accountable to their group. Exhibit 11-5 compares Western and Russian employees in terms of participation importance.

Teaching Tip: Most Japanese companies, and some American companies, use group rallies at the beginning of the workday to stimulate and motivate employees to identify with the mission of the company. Ask your students if they feel this is “corny,” or do they feel it can have a positive motivating effect? Would it motivate you personally?

E. The Intrinsic-Extrinsic Dichotomy in the International Context

1. The intrinsic-extrinsic dichotomy is another useful model (researched by a number of authors) for considering motivation in the workplace. Herzberg’s research, for example, found two sets of needs: 1) motivational factors (intrinsic) and 2) maintenance factors (extrinsic).

2. Clearly, there is a need for more cross-cultural research on motivation, but one can draw the tentative conclusion that managers around the world are motivated more by intrinsic than by extrinsic factors. Considerable doubt remains, however, about the universality of Herzberg’s or Maslow’s theories because of the inability to take into account all of the relevant cultural variables when researching motivation. Different factors have different meaning within the entire cultural context and must be taken into account on a situation-by-situation basis.

Comparative Management in Focus: Motivation in Mexico

To understand the cultural milieu in Mexico, we can draw on research that concludes that Latin American societies, including Mexico, rank high on power distance (the acknowledgment of hierarchical authority) and on uncertainty avoidance (a preference for security and formality over risk). In addition, they rank low on individualism, preferring collectivism, which values the good of the group, family, or country over individual achievement. In Mexico, the family is of central importance; loyalty and commitment to the family frequently determines employment, promotion, or special treatment for contracts. Unfortunately, it is this admirable cultural norm that often results in motivation and productivity problems on the job by contributing to very high absenteeism and a turnover rate, especially in the maquiladoras. This high turnover and absenteeism are costly to employers, thereby offsetting the advantage of relatively low labor cost per hour. “Family reasons” (taking care of sick relatives or elderly parents) are the most common reasons given for absenteeism and for failing to return to work.

Most managers in Mexico find that the management style that works best there is authoritative and paternal. In fact, paternalism is expected; the manager is regarded as the “el patron” (pahtrone), or father figure, whose role it is to take care of the workers as an extended family. Employees expect managers to be the authority; they are the “elite”—power rests with the owner or manager and other prominent community leaders. For the most part, if not told to do it, the workers won’t do it; nor will they question the boss or make any decisions for the boss. Nevertheless, employees perceive the manager as a person, not as a concept or a function, and success often depends on the ability of a foreign manager to adopt a personalized management style, such as by greeting all the workers as they come in for their shift.

Generally speaking, many Mexican factory workers doubt their ability to personally influence the outcome of their lives; they are apt to attribute events to the will of God, or to luck, timing, or relationships with higher authority figures.

A context of continuing economic problems and a relatively low standard of living for most workers helps explain why Maslow’s higher order needs (self-actualization, achievement, status) are generally not very high on most Mexican workers’ list of needs. In discussing compensation, Mariah de Forest, who consults for American firms in Mexico, suggests that:

Rather than an impersonal wage scale, Mexican workers tend to think in terms of payment now for services rendered now. A daily incentive system with automatic payouts for production exceeding quotas, as well as daily/monthly attendance bonuses, works well.

Teaching Resource: A great links page of resources on Mexico can be found at http://www.lanic.utexas.edu/la/mexico/. The page has sub-lists on culture, the economy, trade, politics, literature and history of Mexico among others.

While self-managed teams require individual risk-taking of leaders to spearhead team initiatives, those behaviors contrast with the behavioral norms of the paternalistic and hierarchical tradition of managers and employees in the workplace. The business culture in Mexico is attributable to prevailing conditions in Mexico’s economy of low levels of education, training, and technical skills. A group of Mexican executives who were surveyed gave some suggestions for implementing work teams but cautioned that the process of implementation will take a long time. This list is from their list of suggestions:

• Foster a culture of individual responsibility among team members • Anticipate the impact of changes in power distributions • Provide leadership from the top throughout the implementation process • Provide adequate training to prepare workers for teamwork • Develop motivation and harmony through clear expectations • Encourage an environment of shared responsibility

The role culture plays in the motivational process is seen in Exhibit 11-6.

F. Reward Systems

1. Incentives and rewards are another cultural manifestation, although in all cultures rewards can be considered from five categories: 1) financial, 2) social status, 3) job content, 4) career, and 5) professional. The relative emphasis on these aspects varies from country to country.

II. Leading

A. The task of helping employees realize their highest potential in the workplace is the essence of leadership. The goal of every leader is to achieve the organization’s objectives while achieving those of each employee. Today’s global managers realize that increased competition requires them to be open to change and to rethink their old, culturally conditioned modes of leadership.

Teaching Tip: Most leadership training programs don’t address the issue of cultural differences. To drive that point home, have your students go online and search for leadership training programs. Have them bring the agendas and training outlines back to class for review in small groups.

B. The Global Leader’s Role and Environment

1. Effective leadership involves the ability to inspire and influence the thinking, attitudes, and behavior of people. The cumulative effects of one or more weak managers can have a significant negative impact on the ability of the organization to meet its objectives.

2. There are four personal develop strategies used to meet requirements for effective global leadership: 1) travel, 2) teamwork, 3) training, and 4) transfers.

3. The global leader tries to maximize leadership effectiveness by juggling several important, and sometimes conflicting, roles as: 1) a representative of the parent firm, 2) the manager of the local firm, 3) a resident of the local community, 4) a citizen of either the host country or of another country, 5) a member of a profession, and 6) a member of a family.

4. The leader’s role comprises the interaction of two sets of variables—the content and the context of leadership. The content of leadership comprises the attributes of the leader and the decisions to be made; the context of leadership comprises all those variables related to the particular situation. The increased number of variables (political, economic, and cultural) in the context of the managerial job abroad requires astute leadership.

Exhibit 11-7 displays some of the variables in the content and context of the leader’s role in foreign settings.

Management Focus: Leadership in a Digital World

Is leadership in e-business different from that in traditional organizations? Yes. There are three key differences. First, decisions are made fast. Second, leaders in e-business must be highly flexible. Third, leaders must create a vision of the future and focus on that vision.

C. Cross-Cultural Research on Leadership

1. Numerous leadership theories variously focus on individual traits, leader behavior, interaction patterns, role relationships, follower perceptions, influence over followers, influence on task goals, and influence on organizational culture.

2. While the functions of leadership are similar across cultures, anthropological studies, such as those by Mead, indicate that leadership is a universal phenomenon and that effective leadership varies across cultures.

3. In addition to research studies that indicate variations in leadership profiles, the generally accepted image that people in different countries have about what they expect and admire in their leaders tends to become a norm over time, forming an idealized role for these leaders.

4. Most research on American leadership styles describes managerial behaviors on, essentially, the same dimension, variously termed autocratic versus democratic, participative versus directive, relations-oriented versus task-oriented, or initiating structure versus consideration continuum.

D. Contingency Leadership—The Culture Variable

1. Modern leadership theory recognizes that no single leadership style works well in all situations. A considerable amount of research, directly or indirectly, supports the notion of cultural contingency in leadership.

2. Hofstede concludes that the participative management approaches recommended by many American researchers can be counter-productive in certain cultures. The crucial fact to grasp about leadership in any culture, he points out, is that it is a complement to subordinateship (employee attitudes toward leaders). In other words, perhaps we concentrate too much on leaders and their unlikely ability to change styles at will; much depends on subordinates and their cultural conditioning, and it is that subordinateship to which the leader must respond.

3. The GLOBE Project

a. The GLOBE Project sought to understand the impact of cultural variables on leadership and organizational practices. Using data from 18,000 managers in 62 countries, the researchers studied which leadership behaviors are universally accepted and which are culturally contingent. The universal traits included being trustworthy, encouraging, effective at bargaining, being a skilled administrator, communicator, and team builder. Those traits which were found to be culturally contingent are charismatic, team-oriented, self-protective, participative, humane, and autonomous. Exhibit 11-8 shows the results for countries. Further conclusions can be drawn by viewing Exhibit 11-9 which shows leadership behavior which is universally effective, ineffective, and contingent on culture. 4. Hofstede and Leadership

a. Hofstede’s dimensions also aid in understanding leadership differences. For instance, countries that rank high on power distance are more likely to prefer an autocratic leadership style while countries that rank low on power distance will likely have managers with a preference for consultative, participative leadership styles. Hofstede points out that leadership should be a complement to subordinateship—employee attitudes towards leaders.

Exhibit 11-10 describes the types of subordinateship a leader can expect in societies with three different levels of power distance.

b. Exhibit 11-11 provides a rank ordering of many countries on the dimension of the willingness of their managers to delegate. In the Middle East, there is little delegation. A successful company there must have strong managers who make all the decisions and who go unquestioned; much emphasis is placed on the use of power through social contacts and family influence, and the chain of command must be rigidly followed. A comparison of these and other management dimensions between Middle Eastern and Western managers is shown in Exhibit 11-12.

c. The effects of participative leadership can vary even in one location when the employees are from different cultural backgrounds—from which we can conclude that a subordinate’s culture is usually a more powerful variable than other factors in the environment. Research that supports this conclusion includes a study conducted in Saudi Arabia that found participative leadership to be more effective with American workers than with Asian and African employees, and a study in a U.S. plant that found that participative leadership resulted in greater satisfaction and communication in American employees than in Mexican employees.

d. Exhibit 11-13 depict the text’s integrative model of the leadership process—pulling together the variables described in this book and in the research on culture, leadership, and motivation—showing the powerful contingency of culture as it affects the leadership role.

e. Clearly, then, international managers should take seriously the culture contingency in their application of the contingency theory of leadership—meaning that they must adjust their leadership behaviors according to the context, norms, attitudes, and other variables in that society.

Comparative Management in Focus: Leadership in the EU

Can one style of leader work in all countries in the EU? At the present time it appears that there are still very different leadership styles cutting across the European Union. The EU is a very diverse group of countries with differing languages, religions, histories, educational systems, and culture. The French for example are known for being autocratic leaders, where as the Germans are known for being assertive and primarily focused on the task. Issues of the importance of human relations in leadership vary from country to country. Leaders in Europe who cut across national cultures must still consider the context and cultures of those countries and attempt to maintain a flexible leadership style.

E. Leadership refers not just to the manager-subordinate relationship, but to the important task of running the whole company, division, or unit for which the manager is responsible. In Japan, for example, in spite of recent economic distress, many companies there continue to provide a model for quality control techniques. One executive, who has worked ten years for Japanese companies, says that a key to Japanese-style success is “to take many small steps, consistently, every day.” One of the areas in which Japanese managers use this process of continuous improvement—or kaizen—is quality control, which has been the hallmark of success for many Japanese industries.

F. For some time, American companies have studied successful Japanese companies for the purpose of emulating management styles to improve productivity, in particular the practice of employee involvement. Recently, increased global competitiveness and further exposure to Western culture and managerial practices have led Japanese firms to adopt more American practices. This partial blending of management practices indicates a trend towards convergence of leadership styles. Nevertheless, management processes, while ostensibly similar, will usually manifest themselves differently as a function of the entire cultural context in which they are enacted.

Chapter Discussion Questions

1. Discuss the concept of work centrality and its implications for motivation. Use specific countries and examples and discuss the relative meaning of work in those countries.

The meaning of work research showed that the higher the mean work centrality score, the more motivated and committed people would be to work. Results showed the following national rankings in terms of centrality of work scores (in descending order): Japan, Germany, Belgium, Britain, Yugoslavia, and the U.S. Centrality of work relates to the extent to which work is a central motivator in an individual’s life.
2. What are the implications for motivation of Hofstede’s research findings on the dimensions of power distance, uncertainty avoidance, individualism, and masculinity?

Hofstede’s groundbreaking research has major implications for management in a cross-cultural setting. Essentially he is telling us that management does not transport across cultures well and that motivational approaches are culture-bound. Hofstede concluded that whereas achievement and productivity may reflect needs of workers in countries high on the masculinity dimension, in countries low in masculinity, people tend to be motivated more by social needs. Reward systems developed in individualistic cultures may not be very effective in collectivist cultures. All four dimensions will influence the motivational strategy of international managers and must be considered in a cross-cultural setting.

3. Explain what is meant by the need to design culturally-appropriate reward systems. Give some examples.

Differences in motivational patterns across cultures means that reward systems must also be culturally specific. In the United States, for example, rewards are generally based on financial, social status, or professional matters; in Japan, reward systems are based primarily on seniority and much emphasis is placed on the bonus system. In Taiwan, the most highly sought reward is affection and social recognition from the top. In some cases, managers in Mexico found that by introducing a piece-rate system of compensation merely allowed employees to leave work early, rather than achieving its intended result of more productivity. Workers in different cultures are motivated by different things and international management must recognize these different motivators.

4. Develop a cultural profile of workers in Mexico and discuss how you would motivate them.

Mexico is a “being culture” meaning that Mexicans are not primarily focused on work and career. This stereotype, of course, doesn’t apply to all Mexicans. There are significant differences between Mexicans living in the north and south, and differences between managers and nonmanagers. The Mexican managerial class is often seen as very hard working and career focused. Also, in Mexico, the family is of central importance, and the loyalty and commitment to the family frequently determines motivational factors. The authoritative/paternalistic style of management works best in Mexico and is expected. Motivation through participative decision-making or teamwork is not as effective in Mexico as autocratic methods.

5. Describe the variables of content and context in the leadership situation. What additional variables are involved in the cross-cultural situation?

Content comprises the attributes of the leader and the decisions to be made, while context comprises all those variables of a particular situation. Other relevant variables include attributes of the person, attributes of the job position, characteristics of the decision situation, and characteristics of the firm and business environment.

6. Explain the theory of contingency leadership and discuss the role of culture in that theory.

The contingency leadership model recognizes that no single leadership style works well in all situations. Numerous cultural variables affect leadership effectiveness including values, work norms, locus of control, and so on. As seen in the management focus on EU leaders, different cultures expect different behaviors from their leaders. While some leadership behaviors and traits have some universal application, effective leadership is still very much contingent on many variables, including cultural variables.

7. How can we use Hofstede’s four dimensions - power distance, uncertainty avoidance, individualism, and masculinity - to gain insight into leadership-subordinate relationships around the world? Give specific examples.

Some of Hofstede’s major conclusions are that employees in countries that rank high on power distance are more likely to prefer an autocratic leadership style and some paternalism. Employees in countries that rank low on power distance are more likely to prefer a consultative, participative leadership style and expect superiors to adhere to that style, such as found in Costa Rica.. This is also true of the related dimension of masculinity-femininity. Sweden, the most feminine culture studied by Hofstede allows for more employee autonomy and participation. Cultures with high uncertainty avoidance, such as Indonesia, generally like leaders to provide direction and to keep change at a low level. The variations found in cultures concerning individualism can be reflected in the expected leadership style and level of participation. In Germany, a country somewhat high on individualism, the leadership style is more individually-focus than in Japan, a highly collectivist culture.

8. Describe the autocratic versus democratic leadership dimension. Discuss the cultural contingency in this dimension and give some examples of research findings indicating differences among countries.

Research demonstrates that effects of participative leadership can vary even in one location when employees are from different cultural backgrounds. It would appear that autocratic leadership styles are appropriate for certain cultures and democratic styles for others. Generally in a high power distance culture, such as Mexico, leaders are expected to be more autocratic. In a low power distance culture, such as the United States, leaders are expected to seek input into their decision-making from subordinates.

9. Discuss how you would develop a profile of an effective leader from the research results from the GLOBE project? Give an example.

The GLOBE project found that certain leadership traits were universally positive such as being trustworthy, encouraging, being a skilled administrator and communicator, and being an effective bargainer and team builder. The study also found that certain traits were universally negative such as being dictatorial, ruthless, egocentric, and uncooperative. The study found that certain traits were contingent such as charismatic, team-oriented, self-protective, participative, humane, and autonomous.

When considering the appropriate leadership style it is important to see how the culture fits the leader’s behavioral style. For example, in Mexico, participative is generally not seen as being the most effective leadership trait.

10. Can there be an effective EU leader? Is this a realistic prospect? Discuss factors involved with this concept.

It is doubtful at this time that one style of leader can be effective in all 27 countries of the European Union. Even during the earlier stages of EU integration in which the union consisted of only 15 member states, significant cultures differences existed. Germans expect a different leadership style than do the French. With the expansion of the EU into Eastern Europe the feasibility of a universal leadership style became even more remote. There are some leadership characteristic and traits that can cut across cultural barriers, but leaders operating in the EU must be aware of the very significant cultural difference in those countries and adapt his/her style to match the needs and expectations of those cultures.

Application Exercises

1. With the narrative content, exhibits, and management focus segments, students should have the needed material to complete this exercise. Students should be sure to include a discussion of Hofstede’s value dimensions in their recommendations. 2. Students can begin their search by visiting the web site geert-hofstede.com for an initial look at cultural dimensions of their selected country. The web site executiveplanet.com can also be helpful with this exercise. 3. With the increasing diversity of the country, and the good international student representation found on many campuses, students should have no trouble identifying and contacting members of various subcultures. If the college or university has an office of intercultural affairs, it might be useful to contact that office for assistance.

Experiential Exercises

1. It is a common practice, and common mistake, to view the world through the lenses of our own culture. The self-reference criteria is a problem managers need to avoid. While Bill felt that higher wages and better housing conditions would be of value to the local workers, the Germans identified other values important to this group. One can only speculate on what those values may have been, since the reference source is dated and out-of-print. Since few students will find themselves recruiting Indians in remote locations in South America, the important point is that motivation should be viewed from the perspective of the people to be motivated, not the manager. 2. Students should use the information in the chapter to identify certain behaviors and traits of the other student and the needs and expectations of the different cultures identified in the text. The text provides enough information for completion of this exercise.

End-of-Chapter Case: Sir Richard Branson’s Planes, Trains, and Colas in 2007

Case Objectives and Use This case discusses and evaluates Virgin Group Chairman Sir Richard Branson’s leadership and management styles. Sir Branson has converted the company from an unknown entity into one of the most dynamic entrepreneurial empires in the world. The case is appropriate for use in international management, marketing strategy, international business strategy, and business policy courses. The case is suitable for undergraduate and graduate classes.

Case Synopsis

As a founder of the Virgin Group, Sir Branson continues to inspire and lead Virgin employees worldwide. His way of “doing things” and seeking corporate expansion has made Virgin one of the most visible global brands in the world. Under the leadership of Sir Branson, Virgin Group has over 200 companies, selling books, music, colas, mobile phones, and aggressively competing in large industries such as airlines, trains, and resorts. Virgin’s success can be attributed to Sir Branson’s charismatic personality and down to earth leadership style, often using common sense strategies and openness. Often called flamboyant and charismatic, Sir Branson is a highly effective leader and tough negotiator. His outward-oriented approach was a big plus in the establishment of the company. Recently, Sir Richard has been on a campaign to promote renewable sources of energy. The case is intended to have students evaluate Sir Branson’s leadership styles and his organizational skills regarding motivating and leading Virgin Group’s employees.

Discussion Questions

1. What are your views of Sir Richard Branson’s leadership style and his motivational skills?

Sir Branson is a legendary figure in the areas of entrepreneurship and global leadership. A brief history of the Virgin Group reveals that Sir Branson’s charismatic leadership and outward-oriented personality made the company a force to be reckoned with in the airline industry. In 2007, Virgin’s has revenues exceeding $8 billion and employs 36,000 workers worldwide. Without Sir Branson’s entrepreneurial yet common sense business approach, Virgin could not have achieved the market share and visibility that it has today. Sir Branson’s leadership style is a classic case study in global leadership. Often called flamboyant and charismatic, Sir Branson is a highly effective leader and tough negotiator. He is a “walking billboard” and a “one man brand” for the company. Branson’s ability to relate to a variety of people is very helpful in operating in some many countries and across so many industries.

2. Analyze and discuss the transformation of Virgin Group in global markets under the leadership of Sir Richard Branson. Do you agree with his overall strategy?

In the coming years, Virgin is expected to grow under the leadership of Sir Branson for two reasons: First, as a first-mover player, the company is always a challenger in the growing market. Brand visibility and grabbing new markets are the result of this strategy. Second, Sir Branson is a worldwide figure and a role model for other entrepreneurs. For example, Virgin Atlantic Airways carved a niche for itself when it pursued long haul routes. In the areas of trains, resorts, credit cards, phones and other products, the same strategy with a few modifications has worked for the group. Although, competition has heightened and Virgin did lose money in a few markets, its philosophy of first-mover advantage continues to work because of Sir Branson’s name and personal networks. Richard Branson is a tireless worker and is a good motivator for his employees. In addition, Sir Branson personally gets involved in the risky yet profitable ventures that Virgin starts. He always avoids large acquisitions and develops smaller companies for future growth in new industries. Virgin’s corporate culture keeps Sir Branson busy and well informed about the company’s global operations. Sir Branson has created a network of companies where cooperation rather than intra-company competition is encouraged. While not all students may agree with his overall strategy, Sir Branson’s management style has always been the savior for the company.

3. What do you think of Sir Richard’s pledge towards renewable energy sources? Is it all about charity alone?

Richard Branson, like many others, has recently become active in the mission to save the planet. As it evidence continues to grow concerning the warming of the planet and its possible causes, Branson is attempting to help provide a leadership role as it relates to his business units. Students may disagree with Branson’s pledge, or doubt its sincerity, however, weather it is charity or business related really isn’t eh issue. The “greening of business,” regardless of its motive is a good idea. It is reasonable to assume that renewable energy sources can be good for business, including those of Richard Branson.

Students can visit the web site of The Virgin Group www.virgin.com and access the latest developments in this area. Of particular interest is the link to Virgin Unite.

Courses and Levels

B.B.A.: International Management; Marketing Strategy; International Marketing or International Business (senior level).
M.B.A.: International Management; Seminar in International Business Strategy; Business Policy/Strategic Management.

Analysis Sir Branson and his Virgin Group is a classic case in global leadership and entrepreneurship. As a first-mover company, Virgin has done very well in those questionable industries where growth is difficult. Sir Branson’s emphasis on customer service and aggressive marketing tactics has brought the company phenomenal market fortunes. In the area of long haul airline, Sir Branson has set new standards and forced his competitors to follow Virgin’s model. Of course, some of Sir Branson’s ventures have not done well; he continues to get good industry ratings because of his charisma and leadership. The case provides two lessons in global leadership. First, to convert business opportunities into meaningful ventures, leaders need to act fast with the right skills and strategies. Second, visionary leaders tend to be risk-prone yet cautious when dealing with large projects.

Additional Case

Trying to Do Business in Mexico, Gringo Style

Ted Dorman was looking forward to his new assignment as plant manager at a newly formed American-Mexican joint venture in Guadalajara, Mexico. The American company, Sterling Metal, produced hardware and decorative fixtures for furniture manufacturers in the United States and Mexico. The new joint venture was an attempt to lower labor costs by operating in Mexico.

Ted and the Dorman Family Ted had worked at Sterling Metal since graduating from college with a degree in accounting. He had worked his way up in the company through accounting, and eventually shifted his career focus to production. Ted found the challenges of managing the production function very interesting, and he was successful in this area. His position at the new company, SterMexicana, would be a promotion for him, and he looked forward to the opportunity of building a new company. Although Ted had not worked outside the United States before, he felt confident that his managerial abilities would transfer “south of the border.” He and his wife enjoyed vacationing in Cancun and they both liked Mexican food, so the idea of spending a few years building a new company in Mexico appealed to him. Ted’s wife, Kim was not as excited about the move, since she and their two small children would have to leave family and friends. Kim would also probably not be working in Mexico, as she had done in the United States. Before the move, both Ted and Kim read travel books on Mexico and visited Guadalajara to select suitable housing. While Kim had reservations about the move, she felt that it would be a good opportunity for Ted and that she and the children would learn to adapt to their new surroundings. After all, she reasoned, they were only planning on living in Mexico for two years; just long enough for Ted to get the plant up and running and profitable. None of the Dorman's spoke Spanish fluently; however, Kim thought that she could get by, since she had taken three years of Spanish in high school. She had heard that Guadalajara was home to a large expatriate community, and that she could isolate herself and the children from Mexican culture if she felt the need. Ted would be working with English speakers mostly, and many people at the plant could do translating for him. A number of SterMexicana managers had been to the United States and were familiar with its culture. Ted and Kim concluded that cultural adaptation would not be difficult, and no matter how hard the assignment, its short duration was manageable. When the family arrived in Guadalajara, Manuel Angel Menendez Mata met them at the airport. Manuel would be Ted’s Mexican counterpart, acting in the official capacity of assistant plant manager, and unofficially as a cultural mentor. Ted and Kim were surprised by the warmth and friendliness of Manuel and his wife Adriana, and they felt very welcomed by their new Mexican friends. Over the next few days Manuel and Adriana helped the new expatriates get settled in and familiar with their new home. Ted appreciated the personal attention Manuel was giving him and his family; however, Ted was anxious to begin discussing the needs of the new business. It sometimes seemed to Ted that Manuel didn’t care to discuss the business or that he was not very excited about the new opportunity. Manuel seemed more interested in showing Ted and his family the city and discussing its history, politics, and culture.

The Formal Mexican Once the Dorman family had settled in, Ted was able to turn his attention toward the business. He had many matters to attend to, including a review of the preliminary work Manuel had done in securing the facility, hiring a work force, and establishing an organizational structure. Manuel explained what he had done and how it would work well. He predicted that the new plant would be fully functional in less than two weeks. Ted was very impressed with Manuel’s work and looked forward to the opening of the plant. During their many conversations, Ted felt that Manuel was very friendly and polite, but that he was a bit too formal and not very relaxed. Manuel wore a suit and tie, even when Ted told him that a more casual form of dress would be appropriate. Ted stated that he had no intention of ever wearing a tie the whole time he would be in Mexico. Manuel sometimes referred to Ted as “Mr. Dorman,” even though Ted had instructed him to call him by his first name. During their meetings with outside business associates, Ted noticed that Manuel was even more formal. Manuel, who had visited the United States many times and spoke English very well, understood that Americans were more relaxed when it came to such matters, but he was not happy when Ted began to call him “Manny.” Manuel was also unhappy with Ted's refusal to recognize his title, “Licenciado” (licensed one), and that he sometimes referred to him as Senor Mata. Although things seemed to be progressing toward the opening of the plant, Ted began to worry that Manuel’s estimate of when the plant would be functional was too optimistic. Manuel insisted that everything was on schedule and that there would be no problems. It did, however, become obvious as the days went by that the plant was not going to be ready, as Manuel had promised. Ted felt that he had been misled by Manny and that he would have to explain to his superiors back in the U.S. why the plant was not going to open on schedule. Manuel finally admitted that some problems had developed with work permits, but he assured Ted that the plant would be operational in an additional week’s time. The plant finally opened, five weeks past the scheduled date.

Gringo Style Management This delay had caused tension between Manuel and Ted, and Ted felt that he could not trust Manuel. Manuel felt that Ted was too impatient, and that he was not sensitive enough to the problems sometimes found in conducting business in Mexico. Manuel complained to a friend that Ted was trying to do business in Mexico, “gringo style.” He offered as an example the failed attempt Ted had made to establish a business relationship with a new supplier. Manuel had arranged for a business lunch between Ted, himself, and representatives from a well-respected metals supplier. Manuel explained how Ted offended the Mexican businessmen by attempting to get down to business quickly. The supplier's representatives felt that Ted was too concerned about business matters, especially price, and that he was rushing to close a deal. They were also offended when Manuel offered to take the visiting businessmen on a tour of the city and show them some important cultural sites and Ted refused to come along. Ted later told Manuel that he felt that the suppliers were not really serious about getting SterMexicana’s business, and that if they wanted to do business with the company, they would have to send only one representative to his office with samples and a price list. Ted told Manuel that he would no longer spend hours discussing politics, sports, and history without any consideration given to the actual business deal. The plant had been functioning for about six months without any serious problems when Ted received word from corporate headquarters that the plant needed to improve its efficiency. The quality of the product was considered acceptable, however, the American managers were disappointed with the productivity of the plant. Sterling's main incentive for investing in Mexico was the desire to reduce its labor costs and improve its overall operational efficiency. Ted worried that his career mobility was in serious jeopardy if he did not make major improvements. With this in mind, Ted began to look more carefully at Manuel’s work. From the beginning Ted had turned over to Manuel the day-to-day responsibility for running the plant, but he now felt that he would have to intervene and make some significant changes. After analyzing the situation Ted concluded that three major changes should be made. He proposed to Manuel that an incentive pay system be introduced, that a more participative approach to decision making be implemented, and that a number of workers be fired. The productivity level of the plant was considered low by American standards, and Ted felt that there was simply no incentive for workers to do more than the minimum level of work. He proposed a pay-for-performance plan in which workers would essentially be paid on a piece-rate basis. The workers would also be given more responsibility for planning and organizing their work, and, in some cases, even planning their own schedules. Ted felt that a more flexible scheduling system would eliminate the excessive time off requested by many workers to handle family matters. Ted also created a list of the lowest-performing workers and instructed Manuel to fire all of them immediately. Since the unemployment rate was much higher in Mexico than in the United States, Ted reasoned that he would have no problem replacing the workers.

Ted Pushes Harder Manuel was stunned by what he was hearing from Ted. Manuel was upset, first, that Ted had chosen to invade his areas of responsibility, and he was further upset by Ted's recommendations. Manuel felt that Ted was being too aggressive and insensitive in labor relations matters, and that his recommendations would not be successful in Mexico. He told Ted that there would be problems with these proposed changes; however, Ted did not seem to want to listen. Although Manuel did not agree with the recommendations, he did as Ted had instructed and began by firing some of the employees Ted had targeted as low performers. He then implemented the pay-for-performance plan and attempted to explain how it would work. Most workers felt confused by the complex, flexible working-hours plan, which involved basic quotas, a two-tiered pay system, and a time borrowing option, which could be used for personal time off, such as doctor’s appointments. Manuel simplified the plan so that workers could go home when they had met their quota, or they could continue to work for additional compensation at a slightly lower per-unit rate. Ted felt that workers would be willing to work longer hours even at a reduced rate if their total compensation would rise. After all, he reasoned, “Mexico is a dirt-poor country and people really need money.” Finally, Manuel told the plant supervisors about the plan to empower factory workers and allow them some of the decision-making authority that the supervisors had exercised in the past. Ted had high hopes that his recommendations for change would produce significant improvements at SterMexicana. He was aware that Mexican culture was different from his; however, he felt that business activities were for the most part universal and that efficiency was not a cultural issue. Ted felt that the proposed changes would result in an immediate improvement in overall operating efficiency. Slowly, however, Ted began to realize that problems were developing with his recommendations. The first problem he confronted was notification that severance pay would have to be paid to the employees he had recently fired. Ted was unaware, and Manuel did not mention, that Mexican law does not operate the same way as U.S. law, in which workers are considered to be hired at will and subject to at-will termination. Ted was also surprised to learn that not all the employees he had targeted for termination had, in fact, been fired. After investigating the situation further, he discovered that five of the employees whom he had instructed to be fired were still working for the company. Ted was shocked to learn that the five employees were close relatives of Manuel. When confronted with this fact, Manuel just shrugged his shoulders and told Ted that he could not bring himself to fire them. Although Ted was upset with Manuel’s insubordination, he was far more concerned with the lack of any productivity gains at the plant. He was told that most workers did complete their tasks more quickly under the incentive plan; however, they elected to go home rather than work additional hours for more money. Ted was confused by this behavior so he asked some of the supervisors to explain it. They didn’t provide satisfactory answers so Ted decided that he should conduct interviews with the employees themselves. Working through an interpreter, Ted asked workers about their jobs and what he could do to make them more productive. He was frustrated by the lack of responses he was getting from the employees. When Ted probed more deeply he discovered that the supervisors had not implemented the participative management practices he had ordered. Faced with poor operating results during the first year of operation, Ted wondered if the decision to take the job in Mexico had been a mistake. To make matters worse, Ted’s family was very unhappy about living in Mexico. Ted had been working long hours at the plant and had basically discounted the complaints he had heard from his wife and children. At this point he began to feel that perhaps they were right in their frequent criticisms of Mexican culture. With over a year left in his assignment in Mexico Ted felt frustrated and wondered what he should do next.

Sources
R. Malat, Passport Mexico. (1996). San Rafael, CA: World Trade Press.
R Sanyal. (2001). International Management: A Strategic Perspective. Upper Saddle River, NJ: Prentice Hall.
J. Scarborough. (2001). The Origins of Cultural Differences and Their Impact on Management. Westport, CT: Quorum.

Instructor’s Note: This case can be used for a discussion of the difficulties sometimes found in cross-cultural motivation and leadership. Clearly there were different perspectives in the case concerning these concepts. The case could also be used in a number of other parts of a course on international management.

Student Stimulation

Group or Class Learning Activities

1. Benchmark your work ethic: Prior to the class, make a copy of Exhibit 11-3. White out the results so that only the questions remain (not the means, std. dev. or item correlation). Have the students complete the survey using the following scale. 5 = strongly agree, 4 = agree, 3 = neutral, 2 = disagree, 1 = strongly disagree. Quickly tabulate the student results and put them on an overhead. Divide the class into small groups and have them discuss the following questions.

a. In what areas are your answers very similar to Saudi Arabian managers? b. In what areas are your answers very different from Saudi Arabian managers? c. What do those differences mean to you as a cross-cultural manager?

2. Building a contingency model: Divide the class into four groups. Each group needs to identify and rank the top five leadership skills for the leadership situation they have been given. Each group is given one and only one leadership situation. The situations are:

a. symphony conductor b. field commander of an army unit in active combat c. labor organizer d. fraternity president e. elementary school teacher The student teams are then asked to present their lists. The discussion should explore the similarities and especially the differences. Differences can be in the skills needed, or in the relative importance of the skills. The final question is, “Based on what you have just experienced, write a one or two sentence definition of contingency leadership.”

Additional Stimulation Discussion Questions

1. Consider the average workweeks for different countries. For instance, France has an average full-time workweek of 35 hours; U.S. of 40 hours; Korea of 50 hours. What does the length of the work week say about what motivates people in those cultures?

2. To what extent do you view yourself to be an effective leader within your own home culture? Is it possible that your success as a leader might be increased or decreased in another culture? In what sort of cultural setting do you imagine that your leadership effectiveness might actually be increased? Where do you think it would probably be diminished?

3. Do you feel you are personally more motivated by the type of work you do or by the results you achieve in your work? Based on your answer, would you prefer to work as a “lone wolf” or as an integral member of a work team? What would it take to get you to begin your job each day at 4:30 in the morning, as is expected of many Japanese workers?

4. If you were to function as a leader in a different cultural setting from that of your home culture, what leadership habits might you have to unlearn? Do you think leadership effectiveness comes more from who the leader is, or from what the leader does?

5. What kind of subordinates would you be most comfortable leading? What does this suggest about your leadership style? Can you think of a real or hypothetical example of a situation where someone was an ineffective leader in his/her home culture, but became an effective leader in a different culture that called for different leadership behavior and characteristics?

6. Consider the following leaders: Osama Bin Laden, Saddam Hussein, Fidel Castro, Kim Jung-Il, George W. Bush, Adolf Hitler, John F. Kennedy, and Margaret Thatcher. How would you characterize the different leadership styles represented? Would each be as successful under different circumstances and in different cultures? Explain your answer.

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Teaching Tip: Assume you are married. Have each student identify what it would take for his/her spouse to come with him/her on an overseas assignment